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Urstadt Biddle: 25 Years Of Dividend Increases Signals Strong Alignment Of Interest

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About: Urstadt Biddle Properties Inc. (UBA), Includes: UBP
by: Brad Thomas
Brad Thomas
Dividend growth investing, REITs, newsletter provider, value
Summary

Urstadt Biddle has one of the strongest demographic profiles in the shopping center REIT sector.

Over the years, the company has maintained a disciplined risk management profile and is one of the lowest-levered REITs.

We target the company to return low to mid double-digit returns over the next 12 months (10-15%).

A few days ago, I wrote an article on Federal Realty (FRT), a stalwart "Dividend King" with a record of paying and increasing dividends for over 50 years in a row. Believe me, it's no fluke that this REIT has delivered such an extraordinary record of performance by increasing dividends through multiple economic cycles.

We maintain a buy on Federal Realty, recognizing that shares are "currently about 7% undervalued for 2019" with one of "the best management teams in the industry." The dividend yield is 3.2%, albeit low for an income investor, but reasonably attractive for a value investor.

Today I want to provide readers with another alternative, that also has an enviable dividend-paying track record, with a current dividend yield of 4.70%. As Ralph Block wrote in the book, Investing in REITs,

"What makes REIT shares so attractive compared with other high yield investments like bonds and utilities is their significant capital appreciation potential and steadily increasing dividends."

And he went on to explain that "long-term investors should be looking at REITs with dividends that are not just safe but also have good growth prospects."

Photo Source

The Basics

Urstadt Biddle (UBA) (UBP) was founded in 1969 and listed shares on the New York Stock Exchange on July 6, 1969. The Greenwich-based company is a shopping center landlord owning a portfolio that includes 85 properties totaling 5.3 million square feet. Most of the properties are grocery-anchored and located in the high-density New York tri-state region.

Source: UBA website

UBA invests in one of the strongest demographic profiles among public shopping center REITs. The company's core portfolio is primarily centered in densely populated high-income regions of Fairfield County, CT, Westchester, Putnam, and Rockland counties, NY, and Bergen County, NJ.

These markets are considered high-barrier-to-entry due to the high land, entitlement and construction costs that make new development difficult. There's a limited amount of remaining developable land, with limited supply in these core markets.

Source: UBA Investor Presentation

Also, UBA has one of the strongest demographic profiles among public shopping center REITs, with median household income within a three-mile radius of approximately $105,800, close to 71% higher than the national average, and this metric is one of the highest of all retail REITs, and one of the highest for all REITs.

Source: UBA Investor Presentation

In addition to UBA's strong geographic profile, the copay also has a healthy concentration of supermarket (grocery-anchored) tenants. As you can see below, the company has a large number (around 82%) of its properties leased to supermarkets/wholesale clubs and 8% leased to neighborhood/convenience tenants.

Source: UBA Investor Presentation

Also, UBA invests in smaller properties that are below the radar for larger investors. The portfolio is comprised of tenants that are resistant to e-commerce such as grocery-anchored centers - here is a snapshot of IBA's top 10 tenants:

Source: UBA Investor Presentation

With such strong demographics, UBA is considered one of the top suburban retail landlords in the country, and that has allowed the company to generate high rent per square foot (the third best in the peer group shown in the chart below):

Source: UBA Investor Presentation

In the latest quarter, the consolidated properties were 93.0% leased and 91.5% occupied. The drop in the leased rate in the first nine months of fiscal 2019 predominantly resulted from the company's purchase of Lakeview Plaza Shopping Center, located in Brewster, NY, in December 2018.

Source: UBA Investor Presentation

Lakeview had 49,000 square feet vacant when the company purchased the property, which, once leased, will provide the company a significant additional return on its investment.

Photo Source (Lakeview Shopping Center)

UBA purchased Lakeview Shopping Center at auction as the result of a foreclosure, consists of five buildings on a 23-acre site. The company said that if it is "able to lease all of the vacant 49,000 square feet at Lakeview, it could add another $1-1.3 million to this property's net operating income", adding that it "would improve our investment return for this property to over 13%"

A Highly-Disciplined Risk Management Profile

Over the years UBA has maintained a very disciplined risk management profile and is one of the lowest-leveraged REITs, with aggregate mortgage debt equal to only 33% of total assets and a fixed charge coverage ratio was 3.6x.

Source: UBA Investor Presentation

UBA has small mortgage rollover risk: 2019: $27.1 million ‒ 2020: None ‒ 2021: None ‒ 2022: $54.5 million, and maintains access to diverse sources of capital including: Short-term bank credit line increased to $100 million in capacity in fiscal 2016 ($150 million with accordion) and long-term non-recourse fixed rate mortgages.

Source: UBA Investor Presentation

UBA has been successful with the formation of "DownREIT" joint ventures, in which the company effectively trades its stock for property interests in a structure that is tax-efficient for the contributing property owner.

This method of acquiring property interests is a great benefit to both UBA and contributing property owners, and it distinguishes the company in the competition to acquire desirable properties.

Notably, UBA's capital structure is uncommon, with two classes of common stock: UBA's "common stock" trades under the symbol UBP, has super voting rights and is held primarily by insiders.

"Class A common" trades under the symbol UBA and is held primarily by institutional investors. The company's dual share structure keeps control among insiders, while the public's Class "A" shares enjoy a higher dividend per share.

Source: UBA Investor Presentation

The Latest Earnings

In the latest quarter, UBA's net income applicable to Class A Common shares was $7,270,000 or $0.19 per share and $0.17 per diluted Common share. Funds from Operations (or FFO) was $0.37 per share. Here's a snapshot of our FFO per share model that includes analyst estimates for 2019 and 2020:

Source: iREIT / FAST Graphs

As you can see, UBA is expected to grow FFO per share by 6% in 2020, and over the last decade, the company has grown FFO per share by an average of 2.5%. Now let's take a closer look at the dividend growth, related to UBP:

Source: iREIT / FAST Graphs

As you can see, UBP has grown its dividend by an average of 1-2% per year and is expected to grow its dividend by around 3% in 2020. It also appears that the payout ratio is improving as viewed below:

Source: iREIT / FAST Graphs

A Closer Look at Valuation

When I think about Urstadt Biddle, one of the first things that come to mind is the 25-year dividend growth record. Although the dividend increases have been modest, the record of growth is exceptional. Now take a look at the company using our RINO tool - comparing the quality score with the P/FFO multiple:

As you see, UBA scores above average in terms of the RINO quality rating and also is trading in-line with the peers, based on the P/FFO. Now let's examine these REITs based on their dividend yield:

As you can see, UBP's dividend yield is 4.7%, just below the 5% plus yielding REITs, Kimco Realty (KIM), Weingarten (WRI), Kite Realty (KRG), Whitestone (WSR), Brixmor (BRX), and RPT Realty (RPT).

Keep in mind, none of these 5% yielders have maintained the same impressive 25-year dividend growth record as Urstadt Biddle.

In terms of year-to-date performance, you can see below that there are four REITs that returned 40% or more in 2019: Kite Realty, Retail Value, Brixmor, and Kimco.

In conclusion, and after careful analysis, we are maintaining a buy on Urstadt Biddle. The dividend appears safe and we like the high-quality income generated from the company's necessity-based shopping centers.

Given the fact that the portfolio is located in densely-populated markets, we believe the company is well positioned to continue growing its dividend. We target the company to return low to mid double digit returns over the next twelve months (10%-15%).

Source: FAST Graphs

Author's Note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.

Disclosure: I am/we are long UBA, FRT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.