Rental Home Occupancy And Housing Shortage Will Drive Steady Long-Term Performance

Catalysts

About UMH Properties

UMH Properties owns, operates and expands manufactured housing communities that provide affordable rental and for sale homes across multiple U.S. markets.

What are the underlying business or industry changes driving this perspective?

• Although UMH has a sizable runway with roughly 3,500 vacant sites and 600 recently constructed expansion lots to fill, the pace of converting inventory into occupied rentals may slow. The company already operates at over 94% rental home occupancy, which could moderate the current double digit growth in rental and related income and temper net operating income expansion.
• Despite benefiting from a national housing shortage and a cost advantage versus traditional single family and multifamily construction, UMH’s strategy of adding 700 to 800 new rental homes annually requires continued access to low cost capital. Rising long term interest rates or tighter credit could compress spreads and limit future FFO per share growth.
• While demand around energy infrastructure, data centers and industrial projects in the Marcellus and Utica regions is driving interest in UMH’s 4,000 acres and 12,300 homesites, the timing and magnitude of monetizing oil and gas rights and land appreciation remain uncertain. This may delay anticipated contributions to earnings and property value growth.
• Although joint ventures and greenfield developments such as the Nuveen communities and Honey Ridge expand UMH’s footprint in high growth markets, ramping occupancy from low initial levels and absorbing higher operating costs could weigh on margins. This could slow the recent 11% community NOI growth as these projects season.
• Despite management’s intention to fund growth through asset sales, preferred issuance and government sponsored entity borrowings, reliance on higher leverage and preferred equity to support ongoing expansions raises the risk that interest and preferred dividends grow faster than rental and sales revenues. This could pressure net margins and limit accretive earnings growth.

Assumptions

This narrative explores a more pessimistic perspective on UMH Properties compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming UMH Properties's revenue will grow by 8.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.5% today to 6.5% in 3 years time.
• The bearish analysts expect earnings to reach $21.4 million (and earnings per share of $0.23) by about December 2028, up from $6.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 81.8x on those 2028 earnings, down from 209.0x today. This future PE is greater than the current PE for the US Residential REITs industry at 28.0x.
• The bearish analysts expect the number of shares outstanding to grow by 3.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.39%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company highlights a large, already funded growth runway with 3,500 vacant sites, 600 recent expansion lots, 400 homes on site, 200 more on order and multiple low occupancy acquisitions such as Albany Dunes and the Georgia community at 32% occupancy. If these locations lease up as management expects, the resulting higher occupancy and rent roll could drive sustained revenue and FFO per share growth, putting upward pressure on the share price and challenging the view that it will remain flat, with a direct positive impact on rental and related income and earnings.
• Management repeatedly emphasizes powerful secular tailwinds from the national housing shortage, the structural cost advantage of manufactured housing relative to single family and multifamily construction and demographic demand from downsizing older households. If these long-term housing trends continue to intensify, UMH could achieve above consensus rent growth, sales volumes and property value gains, boosting net operating income, net margins and long term earnings beyond what a flat share price would imply.
• UMH is actively shifting its Southern portfolio toward a rental model in underpenetrated markets like Georgia, South Carolina and Alabama, where recent revenue growth has reached 469% in Georgia, 37% in South Carolina and 23% in Alabama. If this Southern strategy scales as management intends, the company could unlock substantial incremental growth in rental revenue and sales profits, leading to higher net income and a materially higher equity valuation over time.
• The company is increasing its use of fixed rate debt and preferred equity while preserving significant borrowing capacity with government sponsored entities and has just issued 5.85% Series B bonds to fund growth. If UMH successfully deploys this capital into high return expansions, turnaround acquisitions and home sales financing, the resulting operating leverage could accelerate FFO per share growth and drive multiple expansion, pushing the share price higher in line with improving earnings and returns on equity.
• Management points to underappreciated optionality from 4,000 acres in the Marcellus and Utica shale regions, increasing inquiries for oil and gas rights, and 2,300 acres of vacant land that can be developed or sold. If energy demand, data center build outs and infrastructure projects continue to expand in these regions, monetization of these assets could create a step change in non recurring and recurring income, materially improving total revenues, boosting net margins and lifting long term earnings and asset values in ways not consistent with a flat share price expectation.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for UMH Properties is $15.0, which represents up to two standard deviations below the consensus price target of $18.75. This valuation is based on what can be assumed as the expectations of UMH Properties's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $23.5, and the most bearish reporting a price target of just $15.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $328.4 million, earnings will come to $21.4 million, and it would be trading on a PE ratio of 81.8x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $15.94, the analyst price target of $15.0 is 6.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.