Urstadt Biddle's 50-Year Dividend Streak Faces Off Against COVID-19

Urstadt Biddle Properties (UBA) owns over 80 neighborhood and community shopping centers located in the suburbs surrounding New York City.

The small-cap REIT has paid uninterrupted dividends since its founding in 1969 and increased its dividend for 26 consecutive years.

However, the coronavirus pandemic poses arguably the biggest challenge Urstadt Biddle has ever faced, creating an unusual amount of uncertainty for the firm.

Non-essential stores have been forced to temporarily close, and a growing number of tenants are unable or unwilling to pay rent.

On April 3, the Wall Street Journal cited a survey which found that about half of U.S. small businesses hadn't paid their full rent or mortgage yet this month due to the pandemic.

Some bigger businesses are taking a similar stance. Earlier today, office supply retailer Staples, which accounts for 1.4% of Urstadt Biddle's rent, said it refused to pay rent on all of its U.S. stores. Restaurant chain Cheesecake Factory and apparel retailer Urban Outfitters have made similar pledges.

State governments have further escalated the uncertainty facing landlords.

In New York, the hardest hit area by the virus and where Urstadt Biddle generates almost all of its income, a recently introduced bill to suspend (rather than temporarily defer) rent payments for residents and small businesses is gaining momentum.

Given this backdrop, it's very challenging to forecast Urstadt Biddle's cash flow.

The good news is that 85% of the company's square footage is anchored by supermarkets, warehouse clubs selling food, and drugstores selling prescription drugs and convenience items. These are essential businesses that bring in traffic.

Looking at Urstadt Biddle's largest tenants, it would seem reasonable to expect supermarkets and large companies like CVS and Walgreens to continue paying rent.

Despite the firm's strong anchor tenants, a significant portion of rent comes from industries that have had to temporarily close down.

Restaurants (12% of rent), fitness (5%), clothing / accessories / jewelry (5%), department stores (5%), and bedding (2%) are among the troubled industries Urstadt Biddle has meaningful exposure to.

The data below is from 2017 (the company hasn't updated the information since then), but Urstadt Biddle's business mix hasn't changed much.

Turning to the financials, Urstadt Biddle's common and preferred stock dividends historically consumed most of the firm's cash flow (80% to 90% adjusted funds from operations payout ratio in fiscal 2018 and 2019), leaving little cushion.

The firm's predictable rental income (focuses on stable industries), slow pace of expansion (small acquisitions reduce dependence on external capital), and conservative use of leverage (see below) made this a sustainable practice.

Urstadt Biddle's revenue is generated from base rents (about $100 million), reimbursements from tenants ($32 million) for operating expenses and property taxes, and other revenue sources ($5 million) such as early lease terminations.

If we assume half of Urstadt Biddle's tenants stop paying for three months before business returns to normal, then the REIT would be out around $17 million of revenue (12% of total annual sales), and its dividend would at least temporarily no longer be covered by cash flow (a deficit of around $15 million to $20 million).

Assuming Urstadt Biddle wanted to maintain its dividend but couldn't issue equity given its weak stock price, the REIT would have to raise cash by selling properties (seems unlikely) or turning to debt markets until its cash flow stream recovered.

Fortunately, Urstadt Biddle appears to have capacity to borrow. In its annual reports, management focuses on the company's total debt to total assets ratio, which sat near 30% last quarter.

Urstadt Biddle has in the past highlighted that other shopping center REITs have a debt to assets ratio around 40%, and even its ratio has sat near 35% at times.

We estimate that Urstadt Biddle could borrow around $40 million to increase its debt to assets ratio to 35%. This would, in theory, be enough to cover a sizable cash flow shortfall for at least a few quarters. 

Urstadt Biddle could draw on its $100 million revolving credit facility, which doesn't expire until August 2021. The company also has small mortgage rollover risk, with no significant debt maturities until 2022. Liquidity isn't an issue for now.

But it's hard to say what "normal" business conditions will look like going forward and how that could influence management's capital allocation decisions. 

There are many unanswered questions:

With so much uncertainty surrounding the severity and duration of this unprecedented downturn, and the lingering impact it could have on Urstadt Biddle's cash flow, management may want to be especially conservative with cash.

Coupled with the firm's relatively small size, concentrated operations in ground zero of the pandemic, and signs that more tenants may skip their rent, we are downgrading Urstadt Biddle's Dividend Safety Score to Borderline Safe.

With that said, a dividend cut would be surprising at this stage. Management already declared a regular dividend on March 19, and the firm's longstanding commitment to the payout suggests Urstadt Biddle may be more willing to flex its balance sheet to keep its 50-year dividend streak alive.

A lot of bad news is already in Urstadt Biddle's stock price, but conservative income investors may want to wait for more clarity from management on both tenant rent negotiations and future plans for the dividend before taking any actions. We will continue monitoring the situation.