UBP - Urstadt Biddle Properties' Preferred Stocks: Defensive 7% Yields With 15-20% Upside

2023-03-06 09:00:00 ET

Summary

• UBA is a slow-growing but defensive, family-run REIT focused on grocery-anchored retail centers in the New York tri-state area.
• The REIT has two preferred stocks that both yield over 7% and offer upside to par value of 15-20%.
• I go over the REIT's capitalization as well as preferred dividend coverage.

As interest rates have rebounded higher again since the beginning of February, preferred stock prices have sold off, causing preferred stock yields to follow the movement of interest rates.

Consider, for instance, the almost perfectly inverse correlation between the 10-year Treasury yield and the price of the iShares Preferred & Income Securities ETF ( PFF ):

Preferred stocks are a hybrid security class that are higher in the priority hierarchy than common stock but lower than debt. But the fixed, coupon-like dividend and set par/redemption value (typically of $25) cause preferreds to trade more like corporate bonds than common equity.

Recently, I pitched the preferred stocks of Global Net Lease ( GNL ), both the 7.25% Series A ( GNL.PA ) and the 6.875% Series B ( GNL.PB ), in an article highlighting why GNL's preferreds are an attractive income opportunity despite the common stock's poor performance record.

Before that, I wrote a separate article on Urstadt Biddle Properties ( UBA , UBP ) with almost the same premise: the higher-yielding preferred stocks look more attractive than either class of common stock. Unlike GNL, UBA is internally managed with a strongly shareholder-aligned management team (the REIT is still a family business with Urstadts and Biddles involved) and also enjoys a strong balance sheet and low cost of debt.

A commenter on that article asked for additional details on the preferreds that I neglected to provide in the piece. Instead of primarily being about UBA, this article will cover the REIT's preferreds, including call date information as well as coverage ratios.

I consider each of UBA's preferreds a buy today. It only depends on whether investors prefer slightly higher yield and lower upside or slightly higher upside and lower yield.

Urstadt Biddle Preferred Shares

UBA has two preferreds outstanding right now:

• Series H 6.25% Cumulative Redeemable ( UBP.PH )
• Series K 5.875% Cumulative Redeemable ( UBP.PK )

As the alphabetical nature of the naming implies, UBP.PH is the older of the two. Its call date of September 18th, 2022 has already passed, so theoretically it could be called/redeemed at $25 per share at any time. But it would require $115 million to redeem the entire amount outstanding, which is about 7.5x the amount of cash on UBA's balance sheet. In fact, even putting cash of $15 million and credit facility availability of $94 million together still would not provide enough liquidity to redeem the entire amount.

UBP.PH offers a dividend yield of 7.16% and upside to par value of 14.7%.

Meanwhile, UBP.PK is the more recently issued of the two and has the later call date of October 1st, 2024 - about a year and a half from the time of this writing. UBP.PK has the exact same number of shares, and thus the same capitalization of $115 million at redemption value, outstanding.

UBP.PK offers a dividend yield of 7.1% and upside to par value of 20.8%.

The combined capitalization of both preferreds of $230 million equates to about 18% of total enterprise value for the REIT.

By my calculation of UBA's EBITDA, the grocery-anchored shopping center REIT's net debt to EBITDA currently stands at 3.6x, while net debt plus preferred stock to EBITDA is higher at 6.4x.

In other words, UBA's preferred dividends don't have much competition for UBA's EBITDA from debt. Moreover, the example of the mortgage refinance for UBA's property "The Dock" shown in the image above is illustrative of the heavy refinancing activity that UBA did during the period of ultra-low interest rates in 2021 and early 2022. UBA has no debt maturing in 2023 and only 6% of total debt maturing in 2024.

When it comes to fixed charge and preferred dividend coverage, the preferreds are sitting pretty with ~3x fixed charge coverage and >5x preferred dividend coverage ratios.

*Please note that UBA does not report EBITDA, so this is my own calculation, which may not be precisely accurate but is pretty close. If anything, I believe this calculation may undershoot EBITDA, because it may include certain non-cash expenses like stock-based compensation.

In short, then, not only is EBITDA increasing as UBA raises rents and fills vacant spaces, but interest expenses should largely remain stable over the next year or so. This should keep preferred dividend coverage from slipping much, if at all, in the next year. In fact, if EBITDA continues to rise, then preferred dividend coverage should only improve this year.

Bottom Line

I like the fact that UBA is basically a family-owned and -controlled business in which investors can invest via the public shares. They know their area of expertise in the Tri-State suburbs well, and they've never strayed from it.

But I will be the first to admit that UBA is by no means a high-growth REIT. It's more of a cash cow. That's what makes its preferreds look more appealing. Between their 7% dividend yields and 15-20% upside to par, I find them to be an attractive way to tap into the REIT's defensive, grocery-anchored retail cash flows.

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