UMH - UMH Properties: Good Days Ahead But Watch Red Flags

2023-06-22 03:42:28 ET

Summary

• UMH Properties, Inc., a real estate investment trust, offers manufactured homes as a solution to the US affordable housing crisis, with potential for growth due to rising demand and a growing senior population.
• The company has entered into new debt with a term loan and revolving line of credit, which is secured and has a mix of fixed and variable rates, suggesting a sustainable debt-acquisition strategy.
• Despite some profitability concerns, UMH's sustainable finance framework has received a positive independent second-party opinion from Sustainalytics, boosting its reputation and investor confidence.

Investment Thesis

UMH Properties, Inc. ( UMH ) is a real estate investment trust ((REIT)). The company's principal business is the ownership and operation of manufactured home communities, including the annual or monthly leasing of manufactured home spaces to residents. Although some red flags could dishearten investors, I am optimistic about the company's long-term prospects because of its competitive pricing.

Affordable housing is becoming an issue in the United States, yet manufactured homes seem to be the answer because of their low cost. This, in my view, bodes well for the company's prospects. In a bid to expand its developments, the company has entered into new debt, which in my view, has been acquired technically to safeguard its creditworthiness. On another positive note, the company has obtained an independent second-party opinion [SPO] from Sustainalytics on its sustainable finance framework. I believe this lends credence to my assertion that debt financing is carefully acquired and should motivate investors. Considering these aspects, this company is promising but I think it's safe to wait for the warning signs to be subsidized before cashing in.

Warning Signs

UMH's short-term financial outlook is blurred upon evaluating some current trends on its profitability front. The company possesses traits previously linked to subpar future stock performance. Comparing UMH to other Real Estate equities, we can see that it is less profitable and that EPS revisions are declining. It also has a Levered FCF Margin [TTM] of -9.44%, compared to the Real Estate sector median of 39.51%.

Based on these criteria, the company looks to be trailing the sector in terms of profitability. Although I agree that this phenomenon warrants a sell rating when viewed in isolation, I believe it is vital to consider other factors before reaching a conclusion.

Manufactured Homes: The Solution to Affordable Housing

Since the Great Recession, Americans have been afflicted by the affordable housing issue in the US, and it is only getting worse. Estimates show that by 2022, the United States will require four to five million more homes for sale than it currently possesses. Both renters and buyers find housing expenses to be unbearable; over 40% of renters are cost-burdened, which means they spend more than 30% of their income on housing expenditures, and in 80% of US markets, home prices are rising more quickly than wages. The COVID-19 pandemic's effects on the supply chain and the rise in work-from-home opportunities have worsened the problem. Demand grew as more Americans relocated to the suburbs, but supply fell due to labor and building material constraints.

With this problem persisting, manufactured houses appear to solve this challenge. Manufactured homes can be created with all the same high-quality materials as site-made homes and still be sold for a fraction of the price because of the economical and effective manufacturing procedure. According to the US Census Bureau, 70% of all new homes in the US that cost less than $150,000 are prefabricated homes. Thus, most low- and middle-income American homes are manufactured. Despite a decade of growth, manufactured homes house less than 10% of the US population.

Fortunately, things can quickly alter. Custom-built mobile houses can be made accessible to consumers in as little as six weeks thanks to the possibility of speedy construction. Homes might be offered as long as there is available land. Overall, as more people appreciate the affordability, safety, and livability of manufactured housing, there is a fantastic solution to the affordable housing dilemma.

In the US, after the epidemic, demand for manufactured homes is still high , especially given the country's growing senior population and the industry's restricted building pipelines. In my opinion, this rising demand and affordability advantage bodes well for this company. I expect that the interplay of the two aspects will improve the company's top line in the future and translate to expanding margins, improving the company's long-term profitability crisis.

UMH Enters Into New Term Loan And Revolving Line Of Credit

UMH announced that it signed a $25 million term loan with FirstBank on May 11, 2023. The term loan has a competitive fixed interest rate and five years. A $15.1 million debt from the prior line of credit has been carried over into the new term loan. Rental properties and their leases in various communities within their portfolio serve as security for the term loan.

They also signed a new $25 million line of credit backed by rental properties and the leases on those properties. The duration for this new line of credit is five years, with a variable rate based on Prime. Looking at the terms of this credit facility, I believe it has been effected wisely because of the following reasons;

• It is secured: A secured loan mostly attracts a lower interest rate than an unsecured one, and thus, I believe this is why the company is talking about a competitive interest rate.
• Fixed and variable rates: For the fixed rates, the company obtained the facility using a competitive interest rate, possibly through securing the loan, hence a bargain interest rate at the prevailing conditions. Further, for the variable rates, I believe the company anticipates lower interest rates in the future, which could lower the interest payment. On the contrary, the fact that the variable rate is pegged to a prime makes it secure more than it could be if it weren't pegged. Adopting fixed and variable rates further spreads the risk of adopting one method.

I believe the aforementioned aspects contribute to this company's effective debt-acquisition strategy, which I feel aids in its ability to get external financing sustainably. I think this debt financing will enable them to boost productivity and seize the opportunity presented by the increased demand for affordable housing.

UMH Obtains An Independent Second-Party Opinion: Earning Reputation

UMH reported that its April 2023 Sustainable Finance Framework had received an impartial second-party opinion [SPO] from Sustainalytics. The April 2023 framework for UMH offers more flexibility in the kinds of ESG finance that it might entice. The April 2023 framework was created to adhere to the International Capital Markets Association's 2021 Sustainable Bond Guidelines, 2021 Green Bond Principles, and 2021 Social Bond Principles.

Sustainalytics gave UMH credit for its ability to provide affordable housing, noting that 97% of low-income households (those making between 50 and 80% of the median income in their area) could afford the company's portfolio, an increase from the 94% of the previous year. The company's efforts to conserve water, energy, and money were validated by Sustainalytics, as were its purchases of EnergyStar-constructed homes.

In my view, Sustainalytics' opinion has given the company a strong reputation, which should further inspire investors' faith in its use of credit and give them hope that positive performance would soon follow the newly obtained loans.

My Final Thoughts

Despite several red flags, I think UMH has some strong foundations that can help the business turn things around. The company's financial prognosis is positive since it offers manufactured homes, which appear to be the answer to the problems with home affordability, especially given the rising demand for these homes. Additionally, its existing debt funding, which I feel was acquired properly, gives me hope that good things are on the horizon, especially in light of the favorable implications of Sustainalytics' assessment. To sum up, I think the future is promising, but given the red flags, I think it's prudent to wait for the situation to improve before investing.

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