Summary
- Urban Edge Properties posted financial results that were mixed, but generally promising, for the final quarter of its 2022 fiscal year.
- Guidance moving forward is a bit weak, but this isn't why the company is not a great play at this time.
- Shares are closer to fair value than they are undervalued, and upside is limited as a result.
Because of their ability to generate consistent and generally growing cash flows, REITs can be a very attractive place for investors to put their money. But not every REIT is the same. How they are managed can have an impact on their performance, just like with any company, and the types of assets they invest in can also play a significant role in how the investment in question turns out. Over the past year or so, one REIT that has underperformed the broader market is Urban Edge Properties ( UE ), an owner of shopping centers and malls. Interestingly though, this has come not from weak fundamental performance across the board. Instead, results have been somewhat mixed. Most recently, management reported some financial data that is encouraging. But even with this, I would say that shares aren't any better than a ‘hold’ at this time.
Mixed results are worth paying attention to
The last article I wrote about Urban Edge Properties was published in early August of 2021. In that article, I talked about how some of the firm’s then-recent financial performance had been strong, largely as a result of the COVID-19 pandemic winding down. This strong performance was broad-based, spanning not only the revenue generated by the company, but also most of its profitability measures. That did not change my opinion, however, that shares looked to be more or less fairly valued. Ultimately, this led me to keep the ‘hold’ rating I had on the stock, a rating that reflected my belief that shares should generate upside or downside that would more or less match with the broader market would experience moving forward. Since then, the company has underperformed my own expectations. But considering how volatile the market has been and how long a time frame we are looking at since the publication of that article, I wouldn't say that the underperformance was terribly significant. You see, while the S&P 500 is down 6.8%, shares of Urban Edge Properties resulted in downside for investors of 10.7%.
When looking at the company, the first thing that I noticed is that financial data has been somewhat mixed as of late. Consider how the company fared during its 2021 fiscal year. Sales then came in at $425.1 million. This was followed up by the $397.9 million in revenue the business reported in the 2022 fiscal year. This translated to a year-over-year decline of 6.4%. This decline in revenue actually came about as a result of multiple changes that the company experienced during the year. For instance, sales associated with property acquisitions, net of asset sales, actually increased by $16.2 million. The company also saw an extra $1.8 million in revenue associated with property rentals and tenant reimbursements due to rent commencements, contractual rent increases, and higher tenant sales. More than offsetting this, however, was a $47.5 million decrease in non-cash revenue that came about as a result of the accelerated amortization of below-market intangible liabilities that were in connection with certain lease terminations during the 2021 fiscal year.
It is worth mentioning at this point that the company's retail properties had an occupancy rate of 94.3% as of the end of its 2022 fiscal year. That's up from 91.1% seen at the end of 2021. Average annual base rent also improved year-over-year, rising from $19.70 per square foot to $19.89. For its industrial properties, occupancy remained flat year-over-year at 100%, but the average annual base rent per square foot rose from $6.04 to $8.89.
On the bottom line, the picture for the company looked better for the most part. In my opinion, net income is not all that important a metric when it comes to the world of REITs, but there are other metrics we should be paying attention to. For instance, operating cash flow went from $135.3 million in 2021 to $139.6 million in 2022. FFO, or funds from operations, fell from $180.3 million, down to $145.2 million. But if we use the adjusted FFO figure for the company, we would have seen an increase from $133.5 million to $148.6 million. Another important metric to pay attention to is NOI, or net operating income. This expanded from $223.8 million to $240.9 million. And finally, EBITDA for the business rose from $194 million to $210.4 million.
When it comes to the fourth quarter on its own, which management just reported on February 14th, results came in better than expected. Although revenue dropped from $128.6 million in the final quarter of 2021 to $101.6 million for the final quarter of 2022, sales were still higher than what analysts expected to the tune of $3.8 million. Adjusted FFO per share also beat expectations, coming in at $0.33 per share. That's $0.03 per share higher than what analysts thought it would come in at. That translates to $40.6 million, up from the $33.1 million the company reported only one year earlier. Actual FFO, meanwhile, dropped from $67.8 million to $38.8 million. Other than that, though, most of the profitability metrics for the company were rather robust. NOI, for instance, popped from $56.2 million to $64.6 million. Also on the rise was EBITDA, which grew from $47.9 million to $56.9 million. The only other profitability metric to show any sort of weakening was operating cash flow. It ticked down from $42.2 million to $40.9 million.
For 2023, management has revealed some guidance . FFO per share, for instance, should come in between $1.10 and $1.16. That implies a reading of between $135.1 million and $142.1 million. On an adjusted basis, we are looking at a per-share amount of between $1.11 and $1.17, translating to total dollar amounts of between $136 million and $143 million. Management said that same-property NOI should range between being down 1% and being up 2%. That's not great, but it's not awful either. Management has not provided guidance for other profitability metrics. But if we assume that they would change at the same rate that adjusted FFO should, then we should anticipate operating cash flow of $131.1 million and EBITDA of $197.5 million. NOI, meanwhile, should be around $226.1 million. When compared to the data reported for 2022, this does suggest a modest amount of weakening. But given the niche that Urban Edge Properties operates in and broader economic concerns, the picture could be worse.
Assuming that these estimates come to pass, the company looks to be trading at a forward price to operating cash flow multiple of 14.8. The price to NOI multiple should be around 8.6, while the price to FFO multiple should be 14. The adjusted figure for this comes in only marginally lower at 13.9, while the EV to EBITDA multiple totals 18. As part of my analysis, I also provided comparisons for the 2022 and 2021 fiscal years. These can be seen in the chart above. From here, I then took two of the metrics, the price to operating cash flow multiple and the EV to EBITDA multiple, and compared Urban Edge Properties, using these, to five similar firms. On a price to operating cash flow basis, these companies ranged from a low of 10.1 to a high of 16.7. Three of the five firms were cheaper than our target. Meanwhile, using the EV to EBITDA approach, the range was from 13.8 to 26.7. In this case, four of the five firms were cheaper than our target.
Company | Price / Operating Cash Flow | EV / EBITDA |
Urban Edge Properties | 13.9 | 16.9 |
Retail Opportunity Investments ( ROIC ) | 13.0 | 16.2 |
Tanger Factory Outlet Centers ( SKT ) | 10.1 | 13.8 |
Getty Realty Corp ( GTY ) | 16.7 | 14.8 |
InvenTrust Properties Corp ( IVT ) | 15.7 | 14.2 |
Acadia Realty Trust ( AKR ) | 10.4 | 26.7 |
Takeaway
Fundamentally speaking, Urban Edge Properties is a bit mixed. But to be honest, the picture of the firm, with a focus on shopping centers and malls, is better than I would have guessed had I known nothing about the business previously. I wouldn't say that the stock is particularly pricey. Because that's definitely not the case. But the stock isn't cheap either. This is true both on an absolute basis and relative to similar firms. Because of this, combined with management's own guidance, I do think the ‘hold’ rating I assigned the stock previously still makes sense.
For further details see:
Urban Edge Properties Q4 2022 Earnings Release: Still Not A Great Play