2023-05-21 05:44:16 ET
Summary
- Regency Centers is a strong REIT which focuses on grocery-anchored properties.
- The company is doing just fine on an operational basis, and announced the purchase of Urstadt Biddle in a deal set to grow the portfolio by about 10%.
- This deal looks fair and will not change the investment thesis, which looks largely fair.
Time to pick up coverage on Regency Centers ( REG ) after the REIT announced a substantial deal for Urstadt Biddle Properties ( UBA ) , in a deal which did not trigger a big change in its share price.
Before trying to factor in the impact of the deal and its rationale, let's first take a look at the standalone business.
About Regency
Regency was founded in 1963 and is a REIT which is heavily focused on grocery properties. The company has grown to a portfolio which surpasses 50 million square feet, consisting out of more than 400 properties and nearly 9,000 tenants.
Typical properties are grocery-anchored properties, being a necessity, convenient and service-oriented to the typically suburban region being served. The company does have a nationwide portfolio, although heavily focused on urbanized areas. The state of California and Florida is responsible for nearly half of rents, complemented by exposure to the North East, mid-Atlantic and Texas region. With average rents of about $24 per square foot, the portfolio is focused on typically higher-valued markets.
Despite the focus on grocery tenants, Regency's largest tenant is responsible for just over 3% of rent, including names like Publix, Kroger, Safeway, Whole Foods, TJX, CVS, Trader Joe's, Ahold Delhaize and even Chase. Specifically note that despite the fact that 80% of properties are grocery-anchored, that does not mean that the same percentage of rents is received from these categories as other tenants include names like Chipotle, Home Depot, Costco, among many (regional) others.
In fact, in terms of actual rents, about half of rents are collected from grocery tenants, about 25% from home, apparel and accessories, with other categories responsible for the remainder of rents.
Despite a prominent retail part of the property, Regency believes that it is well positioned to even benefit from all the trends impacting the retail shopping experience, including well located stores, curbside pick-up, making creative use of common spaces and benefitting from work-from-home trends, with more properties located in such areas.
The 2022 Base Performance
In February, Regency reported its 2022 results. Full year revenues rose 5% to $1.22 billion, predominantly generated from straight lease income of course. Operating expenses rose by a similar percentage to $751 million, albeit that it includes a huge non-cash $320 million depreciation expense of course. This left $473 million in operating income, but that is ahead of a flattish $146 million interest expense and ahead of a $109 million gain on dispositions.
Adding back depreciation charges the core NAREIT Funds From Operations came in at $4.10 per share, up eight cents on the year before based on 172 million shares.
A $10.9 billion balance sheet mostly consists out of net real estate investments valued at $9.8 billion. The REIT is relatively conservatively financed with $6.2 billion in equity and $4.7 billion in liabilities, of which $3.7 billion are straight financial liabilities (read: debt). Based on the equity position of the business, the reported book value comes in around $35 per share, while the market trades at a premium of course.
That is not strange as the gross rental income divided by the book value of the assets comes in around 12.5%. With shares trading at $57, marking a $22 premium to the book value, the market is adding a $3.8 billion premium to these assets, for still a respectable 8.3% gross yield.
For 2023 the company guided for flattish NAREIT FFO at a midpoint of $4.07 per share, down three cents from the year before. This is not necessarily due to higher interest expenses, but mostly lack of rental growth.
Starting Steady And Announcing A Deal
After the first quarter earnings report , which were solid, the company hiked the midpoint of the NAREIT FFO guidance to $4.11 per share, up four cents from the previous guidance as the balance sheet composition remained largely similar compared to the fourth quarter.
In May, Regency announced the purchase of Urstadt Biddle in a $1.4 billion deal (based on the enterprise value), equal to about 10% of the enterprise value of Regency at this point in time. The deal is structured as an all-stock deal in which owners of Regency will obtain 0.347 shares of Regency, valued at $20.40 per share. With a roughly $1 billion equity contribution (financed with new shares) and about $400 million in net debt, leverage ratios will not change meaningfully as Regency will simply get 10% bigger.
The deal is driven by scale, avoidance of duplicated corporate costs and a lower cost of capital. Except for the geographical focus (more on the North East for Urstadt Biddle and the fact that its ¨stores¨ on average are much smaller) is that both firms look remarkably alike in terms of their portfolio composition.
While shares of Urstadt ticked up from the $16s to $19 and change, shares of Regency hardly reacted as the lack of reaction makes perfect sense. The deal takes place at reasonably similar valuations, the capital structure will not change in a huge way, as marginal financial and strategic synergies are seen, making this quite frankly a small deal.
What Now?
For investors investing in REITs is a lot about collecting those dividends, which now trend at $2.60 per share per annum, translating into a 4.6% dividend yield, which actually trails short term risk free rates. The good thing is that the REIT is relatively conservatively financed which is a big plus given the state of financial markets and notably interest rates, while some real estate categories are not just hurt from high leverage, but lower commercial traction as well, not really evident in the portfolio of Regency here.
For me Regency looks like a fair, perhaps a bit richly priced REIT in this rate environment as investors have endured quite wild share price swings. During the 2007 consumer spending boom shares peaked in their $80s to trade in the $20s the year thereafter. Shares peaked again at $80 in 2016, traded at $60 pre-pandemic, high a high at $70 in 2021 and now trade at $57.
For me, given the historical share price range, I think that the shares trade at largely fair value, but see no immediate compelling case for the shares given the underlying risks in the economy and higher interest rates, as the Urstadt deal seems fair, but is not a game changer to the investment thesis.
For further details see:
Regency Centers: Looking Fair With Urstadt Biddle