Why Wunderlich Likes This NYC-Focused Retail REIT

While some investors may not be familiar with small cap shopping center REIT Urstadt Biddle Properties Inc UBA, UBP, this "old school" REIT stalwart has paid out an uninterrupted dividend for well over 40 years, and raised its dividend for the past 21 consecutive years.

On April 27, Wunderlich Securities published a research note raising UBA from Hold to Buy, primarily due to a current valuation below net asset value (NAV), and a belief that the recent sell-off in UBP shares was unwarranted.

Wunderlich also noted an April 6, agreement with leading homebuilder Lennar Corporation LEN to purchase a recently entitled White Plains, NY mixed-use property parcel as an additional catalyst for the rating upgrade.

Tale Of The Tape - UBP Recent Underperformance

The Vanguard REIT Index Fund VNQ is a good proxy for the broader REIT sector.

Urstadt Biddle - Overview

The UBP basic business plan "is to own open air shopping centers and retail properties in the New York Metro area with a focus on communities within commuting distance to New York City…"

Source: UBP - Pompton Lakes Towne Square, NJ

Urstadt Biddle owns 73 properties, primarily consisting of grocery and drugstore anchored retail centers, as well as some free standing retail and office, totaling just over 5 million square feet.

UBP has a market cap of $725 million and currently pays a dividend of $1.02 annually, currently yielding ~4.8 percent.

Wunderlich - Urstadt Biddle: Upgraded To Buy, $24 PT

The Wunderlich $24 price target "values UBA at 100% of $24.03 [its] NAV estimate (6.25% cap rate), in line with shopping center REIT peers trading at 99% of NAV."

Based upon a prior close of $21.06, the new Wunderlich price target represents a potential gain of ~14 percent, not including dividend yield.

The UBP $24 valuation was also consistent with the Wunderlich DDM (dividend discount model) of $24.24, derived by utilizing a 6.7 percent WACC (weighted average cost of capital), and terminal value growth rate of 1.5 percent.

Wunderlich - UBP Valuation Attractive Vs. Peers

The current UBP dividend would yield 4.3 percent at the Wunderlich target, in-line with smaller cap retail REIT sector peers.

UBP dividend increases have been a modest penny per year since 2008; however, Wunderlich believes that there may be larger increases in store for investors in the near term.

Wunderlich - UBP Upgrade Rationale

• Fundamentals improving: In the NYC market area where UBP operates, Wunderlich noted there was a 1.8 percent Y/Y increase in employment.
• White Plains resolved: Although UBP originally contemplated a JV with the REIT doing the retail development, current plans are to sell the entire project to Lennar; likely booking a profit, and resolving the disposition for an asset that has been carried on the books since 2002.
• Accretive Growth: During Q1 2015 UBA closed on four shopping centers in New Jersey with occupancy between 92 and 95 percent. Based on an acquisition cap rate of 6.25 percent, Wunderlich believes that these acquisitions will add $0.02 to FFO in FY 2015.

Wunderlich - Price Target Risks

• Occupancy risk: UBA is in the process of redeveloping a number of properties in its core markets that Wunderlich believes "will lead to improved occupancy," delays could negatively impact the model.
• Geographic concentration: The UBA portfolio is highly concentrated in four counties surrounding the greater New York City metropolitan area.