On Thursday, Compass Point increased its price target on UMH Properties (NYSE:UMH) to $21.50, up from the previous target of $20.00, while maintaining a Buy rating on the stock. The adjustment reflects the firm's expectations for the company's net asset value (NAV) in 2024, without anticipating any capitalization rate (cap rate) compression, despite a projected increase in occupancy and efficiency from the addition of over 1,000 new units.
The price target is based on a 6.12% cap rate, which is derived from the current share price in relation to the 2023 community net operating income (NOI). With this cap rate, Compass Point calculates the NAV to be $21.50. The firm believes that this price target aligns with the forward NAV and still underestimates the liquidation value of the over 26,000 homesites UMH is expected to own and operate by the end of 2024.
Compass Point noted that before the Federal Reserve's tightening cycle began, they had anticipated UMH shares could surpass $30. However, the company's high cost of capital and the strategy to inventory 1,000 new homes going into 2023 hindered improvements in the top line from impacting the bottom line.
Despite these challenges, Compass Point anticipates a potential inflection point in 2024, where top line growth may significantly contribute to the bottom line. The maintained Buy rating is justified by Compass Point's view that UMH Properties offers an attractive total return, even with a conservative price target. The firm's outlook for UMH Properties remains optimistic, expecting the company's strategic additions and operational improvements to drive value in the near term.
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