UMH Properties, a REIT specializing in manufactured home communities, has been quietly building an intriguing strategy: the "horizontal apartment." While other REITs scramble to maintain occupancy in a challenging market, UMH has been steadily adding rental homes to its communities, achieving impressive occupancy rates and driving substantial same-property NOI growth. Could this unique approach be the key to unlocking significant value for UMH in the coming years?

The traditional manufactured home community operates on a resident-owned model, with individuals owning their homes and leasing the land beneath. UMH, however, recognized a significant opportunity in the rental market. By acquiring communities with existing vacancies, often at attractive prices due to deferred maintenance or needed capital improvements, UMH strategically installs and rents out manufactured homes. This allows them to capture both lot rent and rental income, essentially creating "horizontal apartments" – a cost-effective alternative to traditional multi-family housing.

This strategy isn't just a response to the current housing crisis; it's a long-term play that has been in development for years. CEO Samuel Landy pointed out during the Q1 2024 earnings call that UMH began its rental home program a decade ago, renting homes for $8,000 annually. Today, with replacement costs rising to $70,000 per home, the strategy has proven its resilience. Even during the upheaval of COVID, when other rental markets suffered, UMH maintained a 95% rental occupancy rate and a 98% rent collection rate. This stability stems from the inherent affordability of the product: a high-quality, energy-efficient three-bedroom, two-bath home on a spacious lot, renting for around $1,000 per month.

UMH currently owns over 10,000 rental units, with 95.1% occupancy. They are on track to install and rent 800 homes in 2024, a number that could be easily surpassed given the strong demand. Brett Taft, EVP and COO, revealed that property managers are clamoring for more rental homes, with waiting lists forming in many communities.

While other REITs grapple with rising interest rates and a potential economic downturn, UMH remains remarkably confident in its ability to continue this growth trajectory. Their confidence rests on several key pillars:

Unmet Demand: The affordable housing crisis shows no signs of abating, driving demand for UMH's product, particularly as traditional homebuilders pull back and construction costs rise. Equity Leverage: UMH has effectively utilized equity leverage, raising capital through ATM programs and debt to fuel its rental home strategy. The return on these investments is compelling, with each $70,000 rental home generating a 9% unlevered return and potentially a 13-14% levered return. Favorable Financing: UMH has access to attractive financing through government-sponsored entities (GSEs). Even in the current high-interest rate environment, they recently secured a GSE loan at under 6% for a pool of eight communities. Notably, these communities, acquired in 2012 and 2013, have seen their value double since then.

Looking ahead, UMH has laid out a compelling roadmap for future growth. They have 3,300 vacant sites ready to be filled with rental homes, representing a potential $39.6 million in annual rental income. This, coupled with annual rent increases of 5%, should contribute to sustained double-digit same-property NOI growth over the next few years.

Furthermore, UMH has an additional 2,100 acres of vacant land that could potentially accommodate 8,500 more homes. While developing these lots takes time and capital, the long-term payoff is substantial. As CEO Landy points out, these vacant lots and land holdings represent significant unrealized value that will become increasingly valuable as the affordable housing crisis intensifies.

The company also hints at intriguing opportunities for further value creation. They are exploring a potential joint venture with a homebuilder to develop 130 acres of land in Vineland, New Jersey, adjacent to a new golf course being designed by Tiger Woods and Mike Trout. This project, if successful, could generate significant income for UMH, providing further fuel for their "horizontal apartment" strategy.

UMH Properties presents a compelling case for investors seeking exposure to the resilient and growing affordable housing market. Their unique "horizontal apartment" strategy, combined with a conservative capital structure, strong operating performance, and a pipeline of future growth opportunities, positions UMH to potentially outperform in the coming years. While the broader REIT market navigates uncertainty, UMH is poised to capitalize on the fundamental need for affordable housing, making their "horizontal apartment" strategy a potentially lucrative vertical leap for shareholder value.

Hypotheses & Numbers:

UMH's "horizontal apartment" strategy will continue to drive significant same-property NOI growth, even in a challenging economic environment. Supporting Evidence: Q1 2024 same-property NOI growth of 16% Historical double-digit growth in 2020 and 2021 Strong demand for rental units with waiting lists forming in many communities Potential Impact: Continued double-digit same-property NOI growth should lead to substantial property value appreciation and increased earnings. Equity leverage will continue to be accretive to earnings as UMH expands its rental home portfolio. Supporting Evidence: 9% unlevered return and 13-14% levered return on each $70,000 rental home Access to attractive financing through GSEs Potential Impact: Accretive returns on new investments should lead to increased FFO per share and potentially support further dividend increases. UMH's vacant lots and land holdings represent significant unrealized value that will be unlocked as the affordable housing crisis intensifies. Supporting Evidence: 3,300 vacant sites ready to be filled with rental homes 2,100 acres of land with potential for 8,500 more homes Joint venture with a homebuilder to develop land in Vineland, New Jersey Potential Impact: As these development projects come to fruition, UMH should realize substantial property value appreciation and increased rental and sales income, further driving earnings growth.

UMH's Occupancy and Revenue Growth

The following chart illustrates UMH Properties' consistent occupancy and revenue growth, highlighting the company's successful business strategy.

"Fun Fact: The term "horizontal apartment" is a creative way to describe UMH Properties' strategy. By focusing on single-family manufactured homes within a community setting, they offer a unique blend of affordability, spaciousness, and community living."