We have chosen UMH Properties as an undervalued stock because it trades at a discount to peers after its significant price drop, implying that it is a relatively attractive pickup.
UMH stands for United Mobile Homes, a concept that may appear alien to Singapore investors. UMH Properties is a REIT which owns and operates 135 manufactured home communities with approximately 25,700 developed homesites.
Manufactured homes in the US are descendants of mobile homes which in turn are an improvement on trailer homes. In the 1920s, “trailer coaches” provided Americans with a ready-made place to stay as they moved from place to place. The trailers were also used during World War II to house factory workers, and eventually military veterans. In the 1960s, amenities and appliances were included in these mobile homes.
UMH, which started operating in 1968 and was listed as a REIT in 1985, owns around 25,700 sites on which the REIT provides manufactured homes for tenants or sites for manufactured homeowners. These manufactured homes are located in UMH’s communities — that is UMH owns the sites for the manufactured homes and provides amenities including gyms and swimming pools.
UMH also has an ownership interest in and operates two communities in Florida containing 363 sites through its joint venture with Nuveen Real Estate. In addition, UMH owns approximately 2,100 acres of land for the development of new sites.
In 1976, the Housing and Urban Development Code was enacted to regulate and improve the construction of mobile homes. By 1980, Congress adopted the term manufactured housing and manufactured housing is now considered a building and not a vehicle. There are different types of manufactured home communities.
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UMH trades at a 1% and 4% discount to its forward price cash flow from operations (FFO) compared to domestic and regional peers respectively. Although UMH’s total year-to-date and one-year returns were 6.4% and 34.7% respectively, its fundamentals are very much intact, with positive FFO over more than five years, enabling it to pay attractive dividends.
The market for manufactured homes appears somewhat niche with only 5% to 6% of the US population living in manufactured homes. The cost to buy these homes ranges from US$60,000 ($80,025) to US$100,000 per home while average rents are at US$873 per month.
UMH’s sites are mainly in Pennsylvania, Ohio, Indiana, Tennessee, New Jersey, upstate New York, and a few smaller sites in Michigan, Georgia, Alabama, Maryland and South Carolina.
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As at end-December 2022, UMH’s portfolio comprises 9,100 rental homes that are 93% occupied. “We plan to grow our portfolio of rental homes by 800- 900 units annually. Our rental investments generate unleveraged returns of approximately 10%,” says UMH’s annual report issued in March.
UMH has two main sources of revenue, from the rental home operations, and sales & finance of manufactured homes.
In 2022, UMH formed a joint venture with Nuveen Real Estate. Nuveen has a 60% equity position while UMH has a 40% share in the joint venture. UMH earns fees from assets under management, management fees and a favourable promote percentage for exceeding IRR targets. UMH will also have the right to purchase these communities from the joint venture.
That same year, UMH formed an Opportunity Zone Fund (OZ Fund) to develop and redevelop manufactured housing communities located in qualified opportunity zones or distressed zones.
Although UMH has not recorded any free cash flow in either FY2021 or FY2022, we like the stock for its stability. Dividends have risen each year over the last three consecutive years by 13.9% from a US$0.18 quarterly dividend in 2020 to a current quarterly dividend of US$0.205 in January. This translates into a yield of 5.4%.
In addition, our intrinsic valuation for the stock is US$16.36 compared to its current share price of US$14.83. There are seven “buy” calls, one “hold” call and no “sell” calls among analysts, with a target consensus price of 30% above its current trading price.
Disclaimer: This company is for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This stock does not take into account the investor’s financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor’s own discretion and/ or after consulting licensed investment professionals, at their own risk.
