Description

UBP-K preferred

Credit re-rating arbitrage

Sub-$1mn liquidity

On May 18th, strip center REIT Urstadt Biddle (UBA/UBP) announced an all-stock deal to be acquired by REIT peer Regency Centers (REG).  Urstadt Biddle has two outstanding preferred securities: series-H & series-K.  The series-K, which we view as the more attractive of the two (though the same logic applies to series-H), has a 5.875% coupon, it immediately re-rated from $19.75 to $23.38 (79 to 93 on par), but it has since faded to under $22 (88 on par).

This is a tight deal: UBA/UBP votes are locked up by the controlling families, who we believe are seeking liquidity without triggering a tax event for all members; REG votes are not required (<10% expansion of sharecount); it is a fair & logical deal; and the arb in the common is sub-2%.

As part of the deal, REG will assume the preferreds, leading to a substantial re-rating in their credit quality: from a ~$500mn market cap entity to a ~$10bn market cap entity ($1.2bn EV to $15bn EV); and from an entity where the common equity represents ~50% of the stack to one where it represents >70%.  REG has no outstanding preferreds, but there are 2-3 high-quality comps suggesting that these UBP-K prefs should trade north of 95:

• Federal (FRT) is a $12bn strip center REIT w/ comparable-quality assets to Regency and slightly more leverage.  It has the same credit rating as REG, and its debt trades at the same yield.  It has one pref, which trades at 89 and a 5.6% yield.
• Kimco (KIM) is a $19bn strip center REIT w/ slightly lower-quality assets than Regency and slightly more leverage.  It has the same credit rating as REG, and its debt trades at the same yield.  It has two prefs, which both trade at ~90 and 5.6/5.7% yields
• All three of these trade at slightly higher prices on par and yields 100bps+ tighter than UBP-K, despite Regency being a similar-to-better credit.
• Based upon these comps, we think UBP-K should trade in the mid-90s and low-6% yield, which would still be 50bps wider than the comps (the yields would be in-line, assuming the pull-to-par for each were amortized over 5-10 years).  This represents ~8% capital appreciation & a 15% one-year total return.

Risks:

• Deal Break – we view this as remote, given how tight the deal is.  That said, the most likely (albeit still highly unlikely) break scenario would be an all-cash overbid from private equity, which would require the prefs be cashed out at par, an even better outcome for the pref.
• Interest rates – yup
• Slow to re-rate – trading in these securities has a high retail component, which we believe to be a key reason for the current mispricing.  My guess is that it will take a few months post- close to fully re-rate.
• Credit deterioration – Regency has a long track record, and it is probably the lowest-risk retail REIT.  The balance sheet is in excellent shape, and COVID washed out any potential fundamental issues.  We do not worry about the credit at all.
• Liquidity – yup, it’s terrible.

Catalyst

Deal Closing