UMH - UMH Properties Near 52-Week Low Is A Buy

2023-03-11 08:05:00 ET

Summary

• UMH Properties is positioned to benefit from strong demand for manufactured housing.
• Inflationary pressures are a near term headwind, but could ease throughout this year, and it has new developments coming online.
• Recent drop in share price presents a good opportunity to pick up this income stock.

Market volatility is back in full swing, with it being topped off by the stunning implosion Silicon Valley Bank ( SIVB ) this week, which shocked Wall Street.

Ironically, SVB actually put depositor money into supposedly safe, long-duration U.S. Treasury Bonds, but as it turns out, there is no such thing as a 100% risk-free asset, especially when it comes to duration risk in a high interest rate environment.

REITs have also fallen in sympathy, and this includes UMH Properties ( UMH ). While UMH does carry debt, it also has the ability to reprice its rents in an inflationary environment.

As shown below, UMH stock is now trading just shy of its 52-week low, and now yields 5.5% on share price weakness. Let’s explore what makes now a good opportunity to layer into the stock.

Why UMH?

UMH Properties is a growing manufactured housing REIT that's been around since 1968 (since 1985 as a public company). At present, it has 135 communities containing 26K developed home sites, representing an increase of 7 communities totaling 1,500 sites from a year ago.

UMH benefits from long-term drivers in the affordable housing space, especially in the current high rate environment, which has priced out many would be buyers from owning traditional single family homes.

Also, UMH’s locations are primarily in the energy rich regions of the Marcellus and Utica shale formations in Pennsylvania and Ohio, home to one of the largest sources of natural gas in the world. This results in efficient scale, as having properties clustered results in lower property management overhead. Also, energy has been rather resilient as amidst economic uncertainty, as reflected by the strong relative performance of the Energy Select Sector SPDR ETF ( XLE ), as shown below.

UMH is seeing healthy demand, as it saw rental revenue increase by 7% YoY and community NOI rise by 4% YoY during 2022. Occupancy is also healthy at 93.3%. However, UMH isn’t immune to the current inflationary environment, as Normalized FFO per share declined by $0.02 YoY to $0.85 for the full year 2022. This was largely a result of 13.5% increase in expenses.

Looking ahead, inflationary pressures may ease, with Fed actions to raise interest rates, and management sees plenty of growth opportunities ahead, as it recently diversified by entering Alabama, South Carolina, Georgia and Florida markets. In addition, last year was affected by backlogs, including over 1,000 homes in various stages of setup.

Management expects these homes to be able to meaningfully contribute to top line growth by a material $10.8 million this year. Moreover, rents are expected to increase by 5% this year, which would add another $8 million and holding expenses the same, same property NOI could increase by $11 million for the full year 2024.

Fellow Marketplace contributor, Armada ETF Advisors, also sees long-term potential in UMH’s business model, as highlighted in a recent article :

While operating earnings were flat for the quarter due to inflationary pressures on expenses and interest rate pressure on the balance sheet, there is some reason for optimism in 2023. The UMH business model is more reliant on company owned and installed housing units to attract residents and keep communities fresh and updated. Supply constraints and backlogs in home deliveries over the past 18 months have thwarted this process. Going into 2023, deliveries are expected to be normalized and this will greatly enhance the ability to stabilized existing and expanded communities.

Admittedly, UMH is more leveraged than some of its manufactured housing peers, with a net debt less securities portfolio to adjusted EBITDA ratio of 7.7x. However, this ratio could trend down as the aforementioned backlog comes online and starts to contribute to EBITDA. In the meantime, UMH maintains adequate interest coverage of 3.1x and fixed charge coverage of 1.7x.

Lastly, while dividend coverage is currently tight at a 96% payout ratio (based on 2022 NFFO/share of $0.85), coverage is expected to improve as analysts expect 7.5% to 15.6% annual FFO/share growth over the next two years.

UMH’s share price has also come back down to earth at the current price of $14.80 with a forward P/FFO of 16.3, sitting comfortably below its normal P/FFO of 18.3. Analysts have a consensus Strong Buy rating with an average price target of $20 , which translates to potentially strong double-digit annual growth over one or two years.

Investor Takeaway

UMH Properties is solidly positioned to benefit from the strong demand for manufactured housing. Its properties have healthy occupancy and are mostly clustered around energy producing regions which provides efficient scale and cost savings through lower property management overhead.

While inflationary pressures are a near term headwind, this could ease throughout this year, and new construction coming online this year could be a growth kicker. Admittedly, UMH isn't a sleep well at night stock at present due to leverage, but this could improve with time. Considering all the above, the recent material drop in price could be a good opportunity for income investors to layer into the stock.

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