How Should You Analyze REIT Stock UMH Properties, Inc. (NYSE:UMH)?
UMH Properties, Inc. is a US$525m small-cap, real estate investment trust (REIT) based in Freehold, United States. REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way. In this commentary, I’ll take you through some of the things I look at when assessing UMH.
View our latest analysis for UMH Properties
REIT investors should be familiar with the term Fund from Operations (FFO) – a REIT’s main source of cash flow from its day-to-day business activities. FFO is a higher quality measure of earnings because it takes out the impact of non-recurring sales and non-cash items such as depreciation. These items can distort the bottom line and not necessarily reflective of UMH’s daily operations. For UMH, its FFO of US$40m makes up 62% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether UMH has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take UMH to pay off its debt using its income from its main business activities, and gives us an insight into UMH’s ability to service its borrowings. With a ratio of 9.1%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take UMH 10.93 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.
Next, interest coverage ratio shows how many times UMH’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 2.5x, UMH is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.
In terms of valuing UMH, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. UMH’s price-to-FFO is 13.06x, compared to the long-term industry average of 16.5x, meaning that it is slightly undervalued.
Next Steps:
As a REIT, UMH Properties offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in UMH, I highly recommend taking a look at other aspects of the stock to consider:
Future Outlook: What are well-informed industry analysts predicting for UMH’s future growth? Take a look at our free research report of analyst consensus for UMH’s outlook.
Valuation: What is UMH worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether UMH is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
