UMH Properties: Our Make America Great Again Pick
- Our Strong Buy rating is only used for defining the REITs that we believe have the catalysts to deliver 25% annual returns.
- It has taken a while for the broader market to come to appreciate the tremendous growth characteristics in the manufactured housing industry.
- Supply and demand will weigh heavily and therefore I consider UMH to my top “make America great again” REIT pick.
In May, our Small Cap REIT Portfolio bounced back, shares returned around 5.5% led by the top three picks: Global Medical (GMRE), Uniti Group (UNIT), and UMH Properties (UMH). The May performance was solid, but the results were just enough to earn the portfolio “break-even” status (year-to-date), and a long way from our all-star 22% Small Cap results in 2017.
As I have pointed out in the past, “small cap REITs are riskier than large caps, because they do not have the diverse revenue streams or stable cash flows.” This means shares are more volatile and “more susceptible to wide swings in price due to lower trading volumes and this greater volatility deters action and often invites selling.”
When we seek small-cap REITs, we function more like miners who spend countless hours filtering out the gems, always looking for the diamond in the rough. It’s worthwhile (as mentioned, our small-cap REIT portfolio returned 22% in 2017), because the small-cap names usually offer better potential for growth over the long haul.
Back in March I wrote an article titled This Small Cap REIT Is Poised To Profit, in which I analyzed the pros and cons for investing in UMH. In that article I explained,
I am upgrading UMH from a BUY to a STRONG BUY. This REIT is POISED to PROFIT!”
Our Strong Buy rating is only used for defining the REITs that we believe have the catalysts to deliver 25% annual returns. Given the pullback in the REIT sector year-to-date, we have witnessed a growing number of Strong Buy picks, so we decided to create a customized Strong Buy portfolio (called the New Money portfolio).
We believe that UMH has promise as an investment. We also believe there are issues that the REIT must deal with in order to “unlock the value” of its portfolio.”
In that article we laid out the blueprint that included a “focus on right-sizing the balance sheet and driving occupancy and NOI.” We acknowledged the promise for UMH and since that time we have been gobbling up shares (+59.9%).
With tax reform now a “done deal,” every income group should see a tax cut, and the manufactured housing REITs, including UMH, are well positioned to participate in the ongoing recovery of the U.S. housing market.
Annual housing demand is estimated at 1.7 million new needed units. This is composed of 1.2 million new family formations a year. Replacement of obsolete homes requires 325,000 new units per year. The second home market requires 175,000 new units a year.
The difference between annual demand and annual supply is estimated at 500,000 needed units. There is a shortage of affordable housing, and the shortage grows larger each year. As evidenced below, the manufactured housing sector is well positioned to participate in the ongoing recovery of the US housing market:
On the manufactured housing side, the strong and stable cash flow characteristics of community ownership have made the radar screens of some of the leading sovereign wealth funds and financial investment firms. These institutional investors place a premium on investments that can provide a reliable income stream for their pensioners, partners and investors.
It has taken a while for the broader market to come to appreciate the tremendous growth characteristics in the manufactured housing industry, that fundamental characteristics of high consumer demand and constricted supply result in a steady cash flow with opportunity for continued growth.
The appearance of Dr. Ben Carson, the U.S. Secretary of HUD, as the featured speaker at the recent Annual MHI Congress & Expo indicates government recognition of manufactured housing as quality affordable housing. Dr. Carson explained,
“According to the economists, we are experiencing the biggest jump in housing prices in four years – prices are rising while the supply of housing is getting smaller. It’s basic supply and demand. That’s why everyone in this audience and the manufactured housing industry is so important – and that’s why I am here today. You are a big part of the solution to providing unsubsidized, quality, affordable housing.”
Secretary Carson recognized the work the industry is doing to make homes more affordable, while creating good jobs and he noted that the Trump Administration appreciates all the efforts underway in the industry, specifically citing the use of a number of American suppliers and products when constructing manufactured homes.
HUD is now positioned to usher in a new era of cooperation and coordination with your industry. Make no mistake, we understand how you are vital to our economy and to our agency’s goal of making safe, quality, desirable and affordable homes for millions of hard working Americans.”