Urstadt Biddle: Requiem For A Long Dividend Streak, And Hope For The Future

Summary

• "Stock prices are only opinions, but dividends are facts." That was stated back in October, 2019. The situation has changed since then.
• What are the facts surrounding UBA's 75% dividend cut? How long can it be expected to remain in the doldrums before bouncing back?
• Things weren't as been as one would have guessed in Q2, which included both March and April for UBA.
• I view the dividend cut as being due to management's desire to maintain the strength of the balance sheet as well as for financial flexibility during this difficult and uncertain period.
• There are good reasons to hang onto shares and perhaps even to buy more.

Investment Thesis

On the investors webpage of shopping center REIT, Urstadt-Biddle Properties (NYSE:UBA, UBP), the phrase "uninterrupted dividends since 1969" is proudly and prominently displayed. And in the REIT's 2019 annual report, the first page boasts "50 years of uninterrupted dividends" and "26 consecutive years of increased dividends."

Sadly, the dividend growth streak has come to an end, and if we define "uninterrupted" as equating to "uncut," that streak has ended, too. Though the company paid their regular Q1 dividend, they have decided to slash their Q2 dividend by 75%, from 28 cents per share to 7 cents per share (100% of taxable income). Management has stated that the Board's intention is to only pay out the REIT's taxable income (net income) for the foreseeable future, which means that UBA almost certainly won't be able to make up its reduced dividend in the second half of the year.

Thus marks another long, time-honored dividend streak ended by the ravages of the coronavirus pandemic.

"Stock prices are only opinions," says the first page of the latest annual report, "but dividends are facts."

Well, what are the facts surrounding this dividend cut? Should it prompt dividend-focused investors to sell shares and move on to other opportunities? Have the fundamentals of the company irreversibly deteriorated due to COVID-19?

In what follows, I will explain why I do not believe UBA's fundamentals have permanently deteriorated as well as why I do not believe shareholders should sell shares. On the contrary, I have been buying over the last few days.

Source: 2019 Annual Report

Urstadt Biddle in The Midst of a Pandemic

UBA primarily owns shopping centers but also a few net leased restaurants, bank branches, office buildings, and one child care center, all located in "in the suburban, high demographic, high barrier to entry communities surrounding New York City" (quoting the website's Corporate Overview). This region is sometimes called the "New York tri-state" area, spanning New Jersey, New York, and Connecticut.

Source: 2019 Annual Report

UBA targets grocery-anchored shopping centers in particular, with 84% of all properties (by square footage) anchored by grocery stores, wholesale clubs, or pharmacies. Occupancy fell about one percentage point from the end of FY 2019 to the end of April, 2020. UBA's portfolio was 91.9% leased in Q2, compared to 92.9% at the end of fiscal 2019.

As of May 22nd, 72 of UBA's 74 shopping centers, restaurants, and bank branches were open, with the two locations still closed being restaurants. A little over two-thirds (68.7%) of its tenants were deemed "essential businesses" and allowed to remain open in some capacity during the lockdowns. However, only 62.7% of its tenants (by gross leasable area) actually were open and operating by May 22nd.

Unsurprisingly, the company was hit by a huge wave of rent relief requests from its tenant base. Over one-third (339) of their total tenants (roughly 900) made such requests, and management had made agreements with 50 of them by late May. Like other shopping center REITs, management recognizes the need to work with tenants to ensure mutual success. Not all relief requests will be granted.

As of June 1st, 68.7% (the exact same percentage as businesses deemed "essential") of April rent had been collected and 60.3% of May rent had been collected. While this may sound low, it is actually on the higher end for high-quality shopping center REITs. For instance, Hawaiian landlord Alexander & Baldwin (ALEX) collected 57% of April rent at its retail properties, while Dividend King Federal Realty Trust (FRT) collected just 53%.

Then again, UBA management deemed $1.5 million (or $0.04 per share) of normal rent uncollectible in Q2, meaning that they are already sure that this rent will not be deferred and collected at a later date. Uncollectible rent is to be expected, as some estimates put the percentage of restaurants permanently closed due to the pandemic at 25%. Likewise, according to one survey, 6.6% of small retailers do not expect to make a full recovery coming out of the pandemic, which likely means that many of them will close.

Despite the doom and gloom above, FFO per share came in at $0.27 in Q2, which ended April 30th for UBA. That includes a 4 cent one-time charge from compensation expenses due to the passing of UBA Chairman Emeritus and de facto company co-founder Charles Urstadt in March, 2020. Compare this year's Q2 FFO per share to last year's Q2 FFO/sh of $0.35. Likewise, same-property NOI fell 5.9% YoY.

At the end of April, UBA held $33.9 million in cash plus $64 million available on its credit facility, compared to $1.15 billion in total real estate assets and total quarterly operating expenses of roughly $21.5 million. Add in interest expenses and quarterly expenses come to around $25 million. Now pile on the quarterly common and preferred dividends of roughly $14 million and you get to $39 million going out the door each quarter. If UBA paid no dividend, it could last a little less than four quarters with no revenue. If it kept paying the dividend, it could last about 2.5 quarters before it burned through all cash and credit facility availability.

In actuality, the situation is not nearly so bad for UBA. The second quarter FFO per share of 27 cents was only one cent shy of the normal quarterly dividend of 28 cents. If we "normalize" FFO by omitting the one-time share-based compensation expense, FFO per share would have been 31 cents in Q2 for a payout ratio of 90.3%. Assuming lockdowns are not reinstituted later in the year, fiscal Q2 (February, March, and April) should be the worst quarter for UBA this year.

My assumption about the dividend cut, then, is that it was done in order to preserve the balance sheet by preventing the need to raise debt in order to pay it, and also to maintain as much flexibility as possible during this difficult period.

Another casualty of COVID-19 is the UBA Acquisitions Department, which has been retooled to focus on tenant negotiations for the time being. I would not expect any acquisitions in 2020, save perhaps in the 4th quarter.

One bit of good news is that there are no meaningful debts maturing for the next 21 months, giving the REIT plenty of time to get back on its feet before needing to worry about rolling over debt. What's more, from October 31st, 2019, to April 30th, 2020, total liabilities fell from $414.7 million to $381.9 million.

Why Hang On To Shares?

It would be natural at this point to ask why investors should hang on to their shares in UBA. On the one hand, the dividend has been sharply cut, leaving shareholders with a 2.08% yield as of the time of writing. And management has not signaled that they will try to make up the lost ground in the second half of the year, as far as the payout is concerned. But on the other hand, what should prove to be the worst quarter of 2020 for UBA wasn't that bad. The dividend cut will free up over $8 million per quarter to provide increased flexibility during these strange and uncertain times.

There are three reasons why I am hanging on to my shares (and even buying more on dips):

(1) Location, Location, Location

Recall the description of UBA's areas of operations above as "high demographic, high barrier to entry communities surrounding New York City." These is a densely populated region that has scarce available land for new development. This increases consumer demand for existing retail space, benefiting incumbent landlords like UBA. It also opens up the possibilities of densification, potentially adding residential space above the retail space at some locations.

As Willing Biddle and Charles D. Urstadt, UBA's President/CEO and Chairman, respectively, put it in the 2019 annual report:

Not only is there a scarcity of nearby suitable land zoned to permit a shopping center, but the high cost of land and construction makes it very difficult to build a competing shopping center at an adequate return on investment.

What's more, these New York City suburbs are also wealthier than most other parts of the country. According to Biddle and Urstadt:

The median household income within a 3-mile radius of our properties averages approximately $112,000, much higher than the national average. This metric is one of the highest of all shopping center REITs.

And, of course, it must be noted that management has restricted itself only to the New York tri-state area for a reason: they know the area well. Indeed, management says "we are confident that no one knows our submarkets like we do."

(2) Essential Businesses

Over time, UBA has veered away from apparel and other discretionary tenants in its properties and toward a more heavily necessity- and service-based tenant base. "Our properties are increasingly occupied by tenants who focus on food, basic necessities and services including supermarkets, warehouse clubs, drugstores, fitness centers, medical facilities and restaurants," say Biddle and Urstadt.

As I mentioned above, 84% of UBA's portfolio is anchored by a necessity-based tenant such as a grocery store, wholesale club, or pharmacy. Management has stated that they would like to continue raising this percentage each year.

(3) E-Commerce Resistance

Lastly, management is also focused on becoming increasingly internet-resistant. By focusing on retailers with strong omnichannel strategies, such as TJ Maxx & Marshalls (TJX), Ross (ROST), Target (TGT), and Bed Bath & Beyond (BBBY), the landlord is able to increase foot traffic at stores and lease renewal rates. When there is turnover of at-risk tenants, management is able to replace the vacant spaces with new, internet-resistant tenants.

What's more, Biddle and Urstadt add that "a majority of our small shop space is now leased to tenants that provide services as opposed to straight retailers." While service providers may suffer during a pandemic, they are more likely to thrive in the heavily e-commerce-saturated world to come after it.

Conclusion

UBA is a relatively low leverage retail REIT with strong alignment of interests between shareholders and management (as most executives are also heavy shareholders themselves) and a well-located portfolio of properties. The company is also something of a family business, with the sons of both co-founders now running the company as President/CEO and Chairman of the Board.

What's more, despite the sharp, 75% dividend cut in Q2, I am hopeful that the dividend will be at least 90% restored to its previous level in 2021. Assuming a 25 cent per quarter payout in 2021 instead of the previous 28 cent payout, buying in at today's price of $13.47 would render a yield-on-cost of 7.4% by next year.

What if the company restores only 75% of its former payout by 2021? Even in that case, buying today would result in a YoC of 6.2% next year. If the company returned to its previous, slow pace of dividend growth (~1.85% annually) thereafter, in ten years, that 2021 YoC of 6.2% would turn into a YoC of 7.35%.

It's hard to envision a plausible scenario in which buying UBA today would not render at least a 7% YoC in a decade. The coronavirus pandemic can't last forever, after all. Even if rent collection issues persist throughout 2020, I see UBA making a strong recovery in 2021. As such, shares look attractive at their current price.

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Analyst’s Disclosure: I am/we are long UBA, ALEX, 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.