Urstadt Biddle Properties (NYSE:UBA) (NYSE:UBP) owns a concentrated portfolio of grocery anchored purchasing facilities within the prosperous suburbs of NYC. With this footprint, it boasts a few of the finest catchment space metrics amongst all REITs with supremely excessive family earnings. The REIT has an extended observe document of robust efficiency and I consider its enterprise is nicely positioned for development. At simply over 13X AFFO I feel Urstadt Biddle is considerably undervalued.
Let me start by taking a look at truthful worth and observe with why it could be priced so cheaply regardless of elementary energy.
Grocery anchored purchasing facilities are in a fantastic place basically as they’ve a continuing stream of foot site visitors from grocery shops which fuels the adjoining small retailers. The problem to investing on this space is that the market appears to already know it’s a nice space and has assigned most of the names a excessive valuation.
For essentially the most half I feel the excessive valuation is warranted so I might not name issues like Regency Facilities (REG) overvalued, relatively I see the outliers on the cheaper finish as opportunistic.
One thing like an RPT Realty (RPT) has a 10X FFO a number of and a 13X AFFO a number of making it fairly low cost, however I’m not satisfied that it has the extent of high quality I’m looking for. Particularly, its leverage could be too excessive for the present setting.
Given the place rates of interest are, I discover it essential to regulate uncooked multiples for leverage. As soon as that is finished, I feel it’s clear that UBA is an outlier to the undervalued facet.
The REITs largely observe the sample you’d count on with larger leverage buying and selling at decrease multiples. UBA, nevertheless, has the bottom leverage but it trades at near the bottom a number of. This magnitude of deviation warrants additional investigation and I see 2 potential explanations.
1) It’s someway decrease high quality/development/security
2) It’s undervalued and may commerce larger.
After finding out UBA I consider its total high quality is above common in its peer set for the next causes:
Property areas – superior Leasing prospects – robust Stability sheet – superior
Let me elaborate a bit on every of those subjects. Whereas most REITs diversify their properties throughout the nation, UBA is concentrated within the suburbs of NYC.
The benefit of this location is that it’s remarkably excessive family earnings. These are already excessive earnings states, however UBA’s particular areas are even larger with a mean family earnings of about $150K of their catchment radii.
Retailers like accessing rich clients, which makes UBA’s areas fairly fascinating to hire.
Retailer openings have began to considerably outweigh retailer closures resulting in web absorption within the area. UBA is positioned to seize the incremental demand. In its 1Q23 earnings report (interval ending 1/31/23), occupancy ticked as much as 94.1% as rents had been renewed at 4.6% above expiring hire and new tenants paid 10.3% greater than expiring. Many of the retail REITs had nice leasing on this quarter, however extra spectacular to me is UBA’s ahead leasing pipeline. Per the earnings launch:
Our leasing and administration groups are very busy working to ship area for our new tenants, and we’ve got a powerful pipeline of recent leases that features 69,500 sq. toes within the lease negotiation part and one other 124,000 sq. toes within the letter of intent part.”
That’s virtually 200,000 sq. toes of further future leasing that has but to hit the underside line and take into accout UBA solely has 5.3 million sq. toes. That might be a major bounce in occupancy.
Improved revenues from new leases ought to filter by to the underside line properly as UBA has considerably low debt and most of it’s mounted charge.
I feel most analysts would see these identical strengths when taking a look at UBA, so why would the corporate commerce at such a reduction to friends?
Nicely, I feel it’s largely a matter of impartial variations which might be being perceived as dangerous.
Components holding UBA/UBP down out there
I feel there are 4 principal components inflicting it to commerce nicely under truthful worth.
1) Lack of communication
2) Small dimension
3) Misunderstanding about inhabitants density in catchment radius
4) Twin share class construction
UBA looks like a personal firm that simply occurs to be publicly traded. They do not do earnings calls. They do not do the business convention circuit. There’s little to no schmoozing of buyers or analysts of any kind.
As such, it’s harder to get to know UBA. With fewer potential buyers taking a look at it, there are of course going to be fewer buyers shopping for it. This lack of communication is compounded by its small dimension at a market cap of about $650 million. The sub $1B stature precludes many of the bigger institutional buyers from even contemplating it.
I additionally consider UBA is being unfairly punished for low inhabitants density in its catchment radii. It’s among the many lowest.
That is broadly considered as a detrimental, however the metric as a standalone is meaningless.
What truly issues is the ratio of inhabitants to the sq. toes of retail area. UBA’s catchment radii has a considerably low inhabitants, nevertheless it additionally has a low provide of purchasing facilities. All in I feel that may be a favorable state of affairs as a result of purchasing facilities being additional aside means clients are going to be extra loyal to their proximally situated facilities.
Lastly, and it is a large one, buyers actually dislike bizarre buildings and UBA’s twin class construction is about as bizarre because it will get.
UBP is the frequent share
UBA is the Class A standard share.
Any type of distributions that UBP will get, UBA will get 110% of that. So on the January dividend, UBA bought $0.25 per share whereas UBP bought $0.225 per share. The two lessons of shares will usually commerce at proportional costs to make their dividend yields roughly equal. On the time of this writing UBP is cheaper by about 0.61% after adjusting for relative payouts.
Earlier this morning, UBP was cheaper by about 3% so there may be fairly a little bit of fluctuation. In my view, when they’re priced proportionally, UBA is the higher method to go as a result of it’s considerably extra liquid, but when the hole exceeds a 1% benefit for UBP I might lean towards shopping for UBP. It does have considerably stronger voting rights. For the 10-Okay wording on the variations between the two share lessons see under:
Every share of Frequent Inventory entitles the holder to 1 vote. Every share of Class A Frequent Inventory entitles the holder to 1/20 of 1 vote per share. Every share of Frequent Inventory and Class A Frequent Inventory have equivalent rights with respect to dividends besides that every share of Class A Frequent Inventory will obtain not lower than 110% of the common quarterly dividends paid on every share of Frequent Inventory.”
Together, the supervoting shares and lack of communication with the general public may elevate issues about administration alignment with shareholders. That’s in all probability the principle purpose for UBA buying and selling at 65% of NAV.
Why it is not truly dangerous
Public firms do all types of issues for the sake of appearances that may not be the very best choices for the long run well being of their firms. When so extremely scrutinized there’s a tendency to do what appears to be like good relatively than what is definitely good. Maybe such motivations are behind the flood of REITs into industrial actual property AFTER it grew to become sizzling and costs had been already prohibitively excessive.
UBA operates otherwise. They’re wanting on the 30 yr horizon and never caring a lot concerning the subsequent quarter. It has led to robust outcomes over time in what has usually been a difficult retail setting. Revenues have been climbing steadily for over 30 years. There are hiccups for recessions and COVID, however that may be a nice development.
FFO/share has climbed at a slower tempo, however the same upward trajectory is noticeable.
One other key distinction between UBA and friends is that they’re content material to remain small. Regardless of being solely $650 million in market cap they’re executing a relatively giant share buyback.
Such a transfer exhibits clear alignment with shareholders. They’re prepared to shrink the corporate to enhance worth per share by shopping for inventory again at 65% of NAV. Every share purchased is instantly accretive to NAV and to FFO/share.
I’ve additionally met with UBA administration and so they struck me as straight ahead, trustworthy operators who actually perceive their submarkets.
The opacity and lack of communication is misinterpreted by the market as misalignment. I see it extra as an organization simply buckling down and doing the work with out placing on a present.
If I am proper and UBA is the truth is a top quality REIT, it’s deeply mispriced and fairly opportunistic.