Summary
- Urban Edge Properties owns a portfolio of shopping centers and other assets, located primarily in the D.C. to Boston corridor.
- The company reported a strong finish to the 2022 fiscal year, marked with record new lease signings.
- Shares are off to a good start in 2023, but they are unlikely to advance significantly higher.
- The rollover of a large upcoming debt maturity is still pending, which creates one element of uncertainty.
- And in a market with inherently higher hurdle rates, the company's results didn't inspire enough for new initiation.
Urban Edge Properties ( UE ) has an interest in a portfolio of 69 shopping centers, five malls, and two industrial parks, located primarily in the Washington D.C. to Boston corridor.
The company's top twenty-five tenants represent nearly half of their total annualized base rents ("ABR"). At approximately 5.5% of total ABR, The Home Depot ( HD ) is UE's single largest tenant. Other notable tenants within their top five include The TJX Companies ( TJX ) and Lowe's Companies ( LOW ), to name two.
Q4FY22 Investor Supplement - Breakout of Top 5 Tenants
Shares have rallied higher to start 2023, up 7.3% YTD. Even over the past one year, the stock has fared relatively well. While it's still down 15%, the decline was smaller than other select names within the sector. Acadia Realty Trust ( AKR ), for example, is down over 30% over the same one-year period.
Seeking Alpha - Basic Trading Data Of UE
In 2022, the company did turn in strong operating results, overall. But at current trading levels, shares offer limited enticement to prospective investors.
Recent Earnings and Current Portfolio Metrics
In 2022, UE signed a record number of new leases totaling over 1M SF. And 575K of this total was signed in Q4, alone. This came as U.S. shopping center vacancy fell to its lowest level since 2007, according to management , citing data from Cushman and Wakefield ( CWK ).
In their same-property portfolio, leased occupancy increased 110 basis points ("bps") YOY. On a consolidated basis, it was up 300bps. Occupancy also gained on a sequential basis, up 200bps due to one notable signing of a vacant industrial building acquired in 2021.
A few larger lease signings during the quarter also contributed to a 31% rental spread. But on a full year basis, it was 12%. This is more in-line with management expectations moving forward.
The robust leasing activity contributed to growth in same-property net operating income ("NOI") of 6.2% and full year funds from operations ("FFO") of $1.21/share, which was above the high end of their guidance range, due primarily to stronger than expected results in Q4.
Looking ahead, the company has a +$29M pipeline of pending commencements. Of this +$15M is expected to commence in 2023. Expected FFO/share, however, is expected to land in a range of $1.11/share to $1.17/share.
The weaker figure in relation to the current year is due to lackluster expectations for same-property NOI growth. Weighing on NOI growth are higher reserves pertaining to their weaker tenants, such as Bed Bath & Beyond ( BBBY ), Party City, and Regal Cinemas. While the losses of these tenants will create a drag on earnings in the near-term, it should serve as a net-benefit overall, due to the resulting mark-up opportunities associated with the newly vacant space.
Liquidity and Debt Profile
At the end of 2022, the company had over +$900M in available liquidity . This includes a cash balance of just under +$130M and full availability on their +$800M revolving credit facility. In addition, UE generated about +$140M in operating cash flows during the year.
The combination of their existing liquidity sources and their reoccurring cash flows is believed to be sufficient to cover all reoccurring expenses and debt servicing costs.
They do also have 25 active development and repositioning projects with total estimated costs of +$216M, of which +$160M remains to be funded.
In addition to their funding requirements on their ongoing projects, UE also has $329M of debt maturing within the next 12 months relating to mortgage loans encumbering three of their properties.
Q4FY22 Investor Supplement - Debt Maturity Schedule
Presently, management is pursuing several options relating to their most immediate and significant maturity at Bergen Town Center. Given the status of negotiations, management revealed little regarding the ongoing talks.
Q4FY22 Investor Supplement - Upcoming Debt Maturities In 2023
Including the upcoming maturity, UE's total load on a net basis amounted to 6.9X EBITDA at the end of Q4. Over time, that is expected to fall to 6.5x. And following a successful rollover of their near-term obligations, UE would face a much more manageable debt ladder in 2024 and 2025.
Dividend Safety
UE suspended their dividend in early 2020 at the height of the pandemic. Prior to then, they were consistently paying a quarterly rate of $0.22/share for several years. Following the suspension, the payout was ultimately reinstated , albeit at a 32% lower rate.
Seeking Alpha - UE Recent Dividend Payout History
Since then, the payout was increased by about 6.7% to its present form of $0.16/share. At current pricing, this represents a yield in the low 4s. Though this is comparable to some within the sector, others provide several more points of opportunity.
Seeking Alpha - Dividend Yield of UE Compared To Peers
The current payout does, however, benefit from strong coverage levels. At year end, the payout ratio stood at about 50%. This compares favorably to the unadjusted sector average of about 65%.
While investors could see a higher payout at some point in the future, their higher debt load does limit their capital availability, especially in the current rate environment.
Final Thoughts
Despite a volatile operating environment in 2022, UE fared relatively well due to the continuing strength of their tenant base. Though the overall portfolio exhibits a higher degree of concentration, it is anchored by The Home Depot, which is their single largest tenant and one of the top retailers in the country. And HD's top competitor, Lowe's, is also among UE's top tenants.
The high quality nature of these two tenants is one reason that total sales reported by UE's collective tenant base increased on a YOY basis. Higher sales at these retailers then translated to greater demand for space. This was evidenced by the record number of new leases signed in 2022.
The company's geographic operating presence in some of the most supply-constrained and densely populated markets also worked in their favor by allowing them to remain in the driver's seat on rental rates on new signings and renewals.
Looking ahead, the company is likely to add value via continued leasing momentum and progress on their active development and repositioning projects, as well as lease commencements.
At present, the stock does trade at a lower multiple of just 13.3x FFO. Others, however, trade even lower than that. Brixmor ( BRX ), for example, commands just 11.1x. Acadia Realty Trust isn't far off that, at 11.9x. In addition, UE's dividend offers a comparatively lower yield than sector averages. While there is room for growth, the company does operate on higher overall leverage levels, which will constrain capital to debt servicing.
While the company can point to their strong results in 2022 as one reason to be bullish, the strength was largely comparable to the figures posted by similar peers. For investors seeking to put capital to work, UE didn't offer enough of an earnings surprise to justify any new or further initiation.
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Urban Edge: Unlikely To Edge Significantly Higher In 2023