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Is UMH Properties a Millionaire-Maker REIT?

Oct 25, 2020 by Matthew DiLallo
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Manufactured housing communities don't usually top the list of the most desirable real estate investments. Because of that, investors have missed out on some fantastic returns. That has certainly been the case for UMH Properties (NYSE: UMH), a residential real estate investment trust (REIT) focused on manufactured housing. Investors who had the foresight to invest $10,000 into its IPO in 1985 would have seen that investment grow into a remarkable $957,960 if they held it to this day. Because of that, it's well on its way to turning those long-term investors into millionaires.

Clearly, the REIT has had millionaire-making potential in the past. Here's a look at whether it still has enough running room to mint future millionaires.

UMH Properties' past success

UMH Properties has a long history of steadily growing its portfolio of communities. When it went public in 1985, it had 13 communities with 2,675 homesites. By 2001, the company, which converted into a REIT in 1992, owned 25 communities with almost 6,000 homesites and a sales and finance operation to help sell and finance quality manufactured homes. The company has since grown its portfolio to 124 communities consisting of 23,400 sites in eight states across the northeast.

The upward climb in the REIT's community count has enabled it to steadily grow its earnings. When combined with its dividend, that growth has helped it produce an average annual total return of 13.6% since its IPO.

UMH Properties growth potential

Despite the REIT's steady expansion and significant total returns, it's relatively small compared to its two publicly traded peers. Manufactured housing sector leader Sun Communities (NYSE: SUI) currently owns interests in 426 manufactured housing and RV communities with more than 143,000 sites across 32 states and Ontario, Canada. Meanwhile, Equity Lifestyle Properties (NYSE: ELS) owns 199 manufactured home communities and 197 RV resorts. As a result of their larger portfolios, those two peers have much bigger market caps of $13.8 billion for Sun and $11.2 billion for Equity Lifestyle, which are many times more than UMH Properties' roughly $550 million market cap.

That trio currently owns a small fraction of the highly fragmented manufactured community market. According to the Manufactured Housing Institute, there are almost 40,000 land-lease communities in the U.S. with an estimated 4.2 million home sites. As a result, there's a lot of consolidation potential for these three REITs to continue gobbling up communities, especially for UMH Properties, since it currently operates in only eight states. Meanwhile, the company could join its larger peers in consolidating other highly fragmented sectors, like RV communities and marinas.

In addition to that, UMH has lots of embedded upside potential within its existing portfolio to drive additional earnings growth. For example, occupancy was 83.9% at the end of the second quarter, which trailed Sun Communities' 96.5% occupancy and Equity Lifestyle's 92.2% core occupancy within their manufactured home communities. That's due in part to its value-add strategy as it will buy communities with low occupancy rates and then make the investments needed to increase occupancy and rental rates. The company also has a significant land position to continue expanding its existing communities. Finally, it can steadily raise rental rates, especially as it increases occupancy.

The REIT certainly has the financial flexibility to capture these growth opportunities. It has a much-improved leverage ratio, which ended the second quarter at 5.6 times debt-to-EBITDA, a significant improvement from its 6.5+ times ratio in recent years. Meanwhile, it has minimal debt maturing over the next few years. Further, it holds a $91.7 million portfolio of publicly traded REIT shares that it can monetize for additional liquidity to fund growth.

This compounding machine's growth engine still has lots of fuel in the tank

UMH Properties has enriched investors since its IPO by steadily growing its manufactured housing portfolio. That upward trend seems likely to continue, given the manufactured housing industry's consolidation potential and the embedded upside of UMH's portfolio. Because of that, the REIT appears to have more millionaire-maker potential ahead for those who invest a modest sum and hold for a few decades.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool recommends UMH Properties. The Motley Fool has a disclosure policy.