A Growing 4% Dividend makes this a REIT to Shop For

Key Points

• Regency Centers' increased dividend in each of the last nine years speaks to management’s ability to navigate tough times and commitment to shareholder value.
• In August 2023, Regency wrapped up a $1.4 billion all-stock acquisition of Urstadt Biddle Properties, boosting its investment holdings by 20%.
• The Street appears to be warming up to Regency’s unique blend of defensive and cyclical properties plus turnaround potential.

Like other retail-focused real estate investment trusts (REITs), Regency Centers NASDAQ: REG is trading well off its 2022 high. Higher interest rates have dragged the group lower because they make it more expensive to purchase properties and borrow money for development. In the case of S&P 500 constituent Regency Centers, shares are down 25% from their post-pandemic peak. For patient income investors, this is a good thing.

The Jacksonville-based REIT’s dividend yield has climbed from 3.3% in January 2022 to 4.4% — and it's not the only thing on the rise. Regency’s dividend itself has been increased in each of the last nine years. Since this covers the crippling pandemic period, it speaks to management’s 1) ability to navigate tough times and 2) commitment to shareholder value. It also puts the company one year away from earning the Nasdaq’s coveted Dividend Achievers tag. 

On Friday, Regency announced that it will report third quarter financial results on November 2nd. It will look to extend another impressive streak by beating earnings expectations for the fourth consecutive quarter. Second quarter funds from operations (FFO) exceeded Wall Street’s forecast due to improved leasing activity and base rent hikes. While the market will be looking for further signs of recovery, management’s commentary around its latest acquisition will be just as important.  

What Is in Regency Centers’ Property Portfolio?

In August 2023, Regency wrapped up a $1.4 billion all-stock acquisition of Urstadt Biddle Properties, a shopping center REIT based in Connecticut. The buyout added 79 grocery-anchored properties located in the New York/New Jersey area, boosting Regency’s investment holdings by 20%. It gives the company a bigger presence in an affluent region that includes Greenwich, CT and New York City. 

The retail REIT is largely exposed to open-air grocery store centers in wealthy suburban towns, a formula that makes it more resistant to economic downturns than cyclical REITs. The addition of Urstadt Biddle gives Regency a bit of an urban flair but maintains the core investment strategy. The deal is expected to be immediately accretive to core operating earnings.

Regency now owns 480 properties nationwide, 80% of which are anchored by high-quality grocery stores like Whole Foods, Wegmans and Trader Joe’s. It has a heavy presence in California and Florida, which together account for almost 50% of annual base rent (ABR). Within a 3-mile radius of Regency centers, the average household income is $150,000 and the median home value is $587,000, both of which are above the average retail REIT. In turn, Regency is able to charge higher rents than most peers — thereby generating strong cash flow to support its growing dividend payments.

What Is the Growth Outlook for Regency Centers?

During the second quarter update, management raised its 2023 FFO guidance from $4.11 to $4.13 at the midpoints. The increase was minimal in nominal terms but actually a big deal because it marked the first time management predicted full-year FFO growth. With Urstadt Biddle in the fold, it also creates a solid base from which to grow in 2024 and beyond — hopefully when the interest rate environment is more favorable.

The credit crunch has put a monkey wrench in Regency’s near-term investing activity and slowed the development of future centers. Nevertheless, the company sits on an extensive development portfolio that represents the next wave of growth. Its pipeline includes 35 properties spread across the U.S., most of which are classified as re-developments. A handful of properties — including Sienna and Baybrook East in Texas — are brand-new developments that have greater exposure to discretionary spending categories like restaurants and clothes. 

The Street appears to be warming up to Regency’s unique blend of defensive and cyclical properties plus turnaround potential. Last month, the REIT received two sell-side upgrades, its first in over a year. Analysts at Raymond James and Argus Research took bullish positions and offered price targets of $69 and $70, respectively. Combined with the 4.4% forward yield, their targets suggest the stock can deliver a 25% total return over the next 12 months. 

Concerns of continued interest rate hikes are putting pressure on stock prices, but investors can use this to their advantage. Adding Regency Centers to the shopping list is a good place to start.