Real estate investment trust (REIT) UMH Properties (NYSE: UMH) owns manufactured-housing communities. But it stands out from its public peers because of its geographic focus. That won't completely change over the next five years, but the differences could start to shrink. Here's why that's a good plan.
A different makeup
Owning a manufactured-home community isn't an exciting business, but it is a pretty reliable one. The big reason is that these types of properties provide affordable housing, often in areas where housing options are limited. For example, industry giant Sun Communities (NYSE: SUI) shows that in the areas where it operates, its properties provide 25% more space for roughly 50% of the cost of other rental options. The numbers also look good for those buying a manufactured home (in which case they rent the plot on which it sits), with a new manufactured home costing roughly two times the median income versus seven times for a more traditional house. These are averages, but the direction is pretty clear.
When most people think of manufactured homes, the image of retired people and Florida probably comes to mind. In the case of Sun Communities that's not far off, given that 30% of its sites are located in the state. Indeed, it has a heavy focus on the U.S. Sunbelt, even though it operates across 39 states. UMH Properties does things a little differently: Its largest states are Pennsylvania (33% of the portfolio), Ohio (28%), and Indiana (17%). This is right in the heart of fracking country in the Northeast.
When fracking was a booming growth business, that was seen as a benefit. With the ongoing shift toward renewable power, that's not as big a selling point. Which is why some of its most recent purchases have been in Alabama and South Carolina. It's not that the company's other properties are somehow bad, but the bigger trend to follow now is probably human migration to warmer southern states. So one of the biggest things to monitor over the next five years will be the company's acquisition-led growth plans. And that's likely to spell an increasing exposure to states where people go to retire.
Some other things to watch
The interesting thing here, however, is that acquisition growth isn't the only plan. Often a manufactured-home community has vacant plots and raw land that can be developed. UMH has around 3,500 plots that it wants to fill and land that can be upgraded to hold another 7,200 homes. It currently has roughly 23,000 home sites across its 122 properties. So the internal development opportunity (as much as 10,700 sites) is quite large. In other words, look for the company to keep building out its existing portfolio as it adds new properties in southern states.
There's one more twist here, however, and it's an odd one. UMH Properties also owns a fairly large portfolio of investments in other REIT. At roughly $100 million, it's not a huge piece of the puzzle for the roughly $1 billion market cap REIT. But it isn't exactly small, either. One thing it is, however, is controversial, since there are some who believe the REIT should stick to owning properties and jettison these financial assets. That said, there appears to be material value here should UMH ever need cash. This issue pops up every so often and could come to a head in the next five years.
That might seem like enough to monitor over the next five years, but don't count on it. The company's founding family still runs UMH Properties. Another REIT the family started and operates, industrial player Monmouth REIT (NYSE: MNR), recently came under fire from dissident investors and wound up agreeing to sell itself. It isn't that far-fetched to think that something similar could happen here. So, in five years, UMH could also cease to exist altogether.
A lot to think about
At its core, UMH Properties operates a pretty boring and reliable business. But when you step back and look a bit more closely there are some complications, including the location of its properties, the odd REIT portfolio, and its founding family ties. In five years the company could look slightly different, with an increased geographic footprint, or it could end up being bought out. Meanwhile, the dividend yield today is around 3.4%, which is near the lowest levels in the REIT's history and suggests the shares are expensive. Given the uncertainty here, most long-term investors would probably be better off watching this show from the sidelines.