UBP - REG Vs. FRT: What Is The Best REIT To Buy Today?

2023-07-07 08:05:00 ET

Summary

• Retail REITs are today heavily discounted.
• We think that Regency Centers and Federal Realty are both attractive.
• But which one is the best buying opportunity today?

Regency Centers ( REG ) recently made headlines after it announced that it would buy out one of its smaller peers, Urstadt Biddle Properties ( UBA / UBP ).

This is a popular REIT that owns mainly service-oriented, grocery-anchored strip centers that generate very consistent and predictable cash flow:

This has led many of you to ask me if Regency Centers is a good buying opportunity right now. And secondly, many of you also asked me to compare it with Federal Realty Investment Trust ( FRT ), which is one of its close peers.

Which is the best REIT to buy today?

Firstly, let me start by saying that I am bullish on both.

They share many similarities and are commonly perceived to be the blue-chip retail REITs because:

• They own Class A properties that generate steady cash flow.
• They have fortress investment-grade rated balance sheets.
• They are well-managed and have attractive growth prospects.

But if I had to pick one, it would be Federal Realty Trust ( FRT ) because of three simple reasons:

Reason #1: Much Better Track Record

FRT has one of the best track records of the entire REIT ( VNQ ) sector. Its management has a multi-decade history of significant market outperformance and it has the longest dividend growth streak of any REIT at 55 years:

REG, on the other hand, doesn't have a bad track record, but it is nowhere comparable. It has cut its dividend in the past and its FFO per share growth has been a lot slower on average:

This is not a coincidence.

I believe that this significant outperformance is the result of having better management and a superior business model that creates more value for shareholders. FRT is much more active in its investment approach.

Reason #2: Slightly Better Assets

Another reason for this outperformance is the quality of the assets.

FRT invests in prime locations of strong markets and as a result, its properties enjoy the best demographics of its sector. (Note that REG's average population density will decline further following its recent acquisition of UBA)

The high average household income is especially important today because these are the consumers that will suffer the least in a recession.

The CEOs of Macy's ( M ) and Dollar Tree ( DLTR ) have both recently noted that households with incomes of less than $75,000 per year are already trading down to less expensive purchases.

FRT has the least exposure to these lower-income households:

This superior asset quality is also reflected in the quality of its tenants and leases. To give you an example: FRT has 3% annual rent hikes in most of its leases, but peers like REG typically have closer to 2% rent hikes.

Reason #3: Valuation

Despite having slightly better assets and a much stronger track record, FRT is today priced at a slightly lower valuation:

I suspect that this is because 12% of FRT's annual rent comes from offices.

Offices REITs are today hated and their share prices have crashed to historically low levels. Just look at the share prices of Boston Properties ( BXP ) and SL Green ( SLG ), which are down over 50%!

I suspect that FRT may have also traded down because of this. It is clear when you compare its recent share price performance to that of REG:

But I think that this is unwarranted because of three reasons:

• These are modern Class A mixed-use office buildings in prime locations.
• Less than 5% of its office leases will expire by 2030.
• FRT also generates 12% of its rent from apartment units, which makes up for the office space since apartments are performing well and trade at very low cap rates.

Despite that, FRT is now slightly cheaper than REG when in reality, it should be the opposite in my opinion: it has slightly better assets, a slightly better balance sheet, and a much better track record, which also means that it has a better business model that creates more value for shareholders.

For this reason, I prefer Federal Realty Investment Trust at this time.

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