REG - Urban Edge: Pick Up This Real Estate Gem While It's Undervalued

2024-01-05 10:00:00 ET

Summary

• Urban Edge is a quality real estate pick that's given market-beating returns over the past year.
• The company benefits from its locations in population-dense first-ring suburbs of metro New York City and low retail supply competition.
• It's effectively recycling capital and has made material property acquisitions that should drive results in 2024.

There's value to be had in covering underfollowed names, as the market often falls asleep on such stocks. This creates plenty of opportunities for value investors who are willing to do their homework to capitalize on market mispricing.

Such I found the case to be with Urban Edge ( UE ), which I last covered here in January 2021, noting an attractive portfolio profile, redevelopment opportunities, and relative undervaluation.

The stock has done very well for patient investors who adopt a buy-and-hold strategy, giving 27% in share price appreciation and a 43% total return including dividends since my last piece, surpassing the 22% rise in the S&P 500 ( SPY ) over the same timeframe. In fact, UE's total return (and share price return) has "edged" out even the S&P 500 over the past year, as shown below.

In this article, I provide an update on the stock and discuss whether if it remains a buy at present, so let's get started!

Why UE?

Urban Edge is a retail REIT that owns both closed and open air shopping destinations along the Washington D.C. to Boston corridor. At present, it has 76 properties spanning 17 million gross leasable square feet.

This includes 44 properties (representing 80% of UE's total value) that are located in the population-dense first-ring suburbs of metro New York City, where demand for housing and real estate is significantly higher than in other parts of the country. These first-ring suburbs have largely benefited from increased remote and hybrid work since the pandemic, as consumers spend more time at where they live. As shown below, UE's 3-mile population sits higher than that of even Federal Realty Investment Trust ( FRT ).

UE also benefits from low retail supply competition in its markets. As shown below, its locations lead peers in having the most households per square while also having one of the lowest amounts of retail space per household.

Moreover, most of UE's annual base rent comes from tenants in recession-resilient categories, with grocery, discount, home improvement, other necessity-based goods and services, and warehouse stores, medical office, pet stores, and restaurants comprising 60% of its ABR.

Notably, 85% of ABR comes from national, regional, and industrial tenants, with Home Depot ( HD ), TJ Maxx ( TJX ), Lowe's ( LOW ), Walmart ( WMT ), Target ( TGT ), and Whole Foods ( AMZN ) being among its top 10 tenants, as shown below.

Meanwhile, UE is seeing solid operating fundamentals, as same-property NOI including properties under redevelopment rose by 3.3% YoY during the third quarter, and 4.5% YoY for the first nine months of the year. Same property occupancy also remains solid and growing by 130 basis points YoY to 95.0%.

While UE did see a decline of 50 bps sequentially, that was due to the closing of Bed Bath & Beyond stores, which management is gathering interest from prospective tenants to fill the gap. That shouldn't be too big of an issue, considering that tenant demand for space drove a healthy cash rent spread of 12.5% on new and renewal leases.

Looking ahead, UE's top- and bottom-line growth could be materially driven in 2024 by the addition of Shoppers World and Gateway Center in Boston for $309 million at an attractive cap rate of 7%. These are sizable assets that now represent 10% of UE's total value and represent a "dominant" retail node in Boston, as highlighted by management during the last conference call :

Shoppers World is one of the most frequented open-air shopping centers in the Northeast, with over 11 million site visits in 2022. It is a large property encompassing 92 acres and 758,000 square feet of gross leasable area. The property is in the center of the Golden Triangle, a dominant retail node in the Boston area. It is anchored by Best Buy, Nordstrom Rack, T.J. Maxx, Marshalls, HomeSense, Sierra Trading, Kohl's, AMC, and a new grocer which is expected to open in July 2025.

Gateway Center comprises 639,000 square feet and has a three-mile population of over 417,000 people with annual average household incomes of $106,000. The property is only three miles from downtown Boston and sits on an 89-acre site with over 3,000 parking spaces in a rapidly densified area. Tenants include Target, Costco and Home Depot.

UE's management has also demonstrated their ability to recycle capital to fund growth, as it was able to dispose of an industrial property last year at a low 4.9% cap rate (sitting well below the 7% acquisition cap rate mentioned above). In 2024, I would look for more such dispositions, as UE plans to dispose of non-core properties in the industrial, self-storage, and single-tenant categories amounting to $100 million in the high 5% cap rate range.

Risks to UE include the potential for macroeconomic challenges this year, as consumer spending has slowed down in recent months, presenting potential challenges to UE's retail tenants in the near term.

Additionally, UE carries slightly higher leverage than I'd like to see with the full-year 2023 expected to land at a net debt to EBITDA of 6.6x, sitting above the 6x level generally considered safe by ratings agencies. However, management expects for leverage to decline below 6.5x this year with rents commencing on its redevelopment pipeline. UE's debt maturities are also well staggered, with just 19% of debt coming due between now and 2026, comparing favorably to the 40% peer average.

Importantly for dividend investors, UE pays a 3.5% dividend yield that's well-covered by a 52% payout ratio, leaving plenty of room for debt paydown or reinvestment into the business.

I also see value in UE at the current price of $17.95 with a forward P/FFO of 14.5, sitting below its normal P/FFO of 16.9. While analysts expect just 2.2% FFO/share growth this year, I see the potential for UE to generate a long-term annual FFO/share growth at least in the mid-single digit range, considering its strong lease spreads in desirable locations, portfolio recycling, and lease-up potential through redevelopments. Analysts also expect to see 7.5% FFO/share growth in 2025.

UE also trades below that of its peers despite its quality portfolio. Using an apples-to-apples comparison with EV/EBITDA (since EV includes debt), UE's 17.3x valuation compares favorably to more expensive peers Federal Realty Investment Trust, Kimco Realty ( KIM ), Regency Centers ( REG ), and Simon Property Group ( SPG ), as shown below.

Investor Takeaway

Urban Edge is a promising investment option for those looking to diversify their portfolio with exposure to in-demand retail real estate. With its focus on necessity-based goods and services, along with national and regional tenants, UE has demonstrated solid operating fundamentals and growing occupancy. Looking ahead, the addition of two sizable properties last year and redevelopments present incremental growth opportunities for UE. Lastly, with limited debt maturities over the next two years and undervaluation compared to peers, UE remains a 'Buy' at the current price.

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