The past few years haven't been particularly kind to retail real estate investment trusts (REITs). Not only did the COVID-19 pandemic cause some high-profile retail bankruptcies but many brick-and-mortar retailers had already been struggling for years due to the surge in e-commerce we've seen over the past decade or so.
Urban Edge Properties (NYSE: UE) is a retail REIT that focuses on open-air shopping centers in the New York metro area. In this article, we'll explore Urban Edge's portfolio, investment strategy, recent developments, performance history, and more.
Urban Edge Properties company profile
Urban Edge Properties is a REIT focused on retail properties. The company was formed in early 2015 as a spinoff from Vornado Realty Trust (NYSE: VNO). The company was initially formed with a portfolio of 79 strip shopping centers, three malls, and one warehouse park, and its portfolio is roughly the same size today.
Urban Edge currently owns 77 properties with just over 15 million square feet of retail space and 1.1 million square feet of industrial (warehouse) space. All but two are wholly-owned by the company. While the company does have some degree of geographical diversification, with a presence in the Boston, Philadelphia, and Washington, D.C., areas, the bulk of the portfolio -- about 80% -- is concentrated in the New York metropolitan area. The company sees this area as its core competence, as it is the most densely populated region in the country.
The company focuses on open-air properties anchored by "high-performing essential retailers." About 60% of the portfolio is anchored by grocery stores, while Home Depot and Lowe's are major anchors at the company's properties as well. Urban Edge's properties also have a significant amount of surrounding land that can be used to add densification over time. In fact, 75% of Urban Edge's land currently consists of parking lot space, not buildings.
Urban Edge grows through both acquisitions and redevelopment of its existing properties, although it seems to prioritize the latter. The company has several large redevelopment projects in progress and anticipates another $75 million to $100 million in projects to activate later in 2021 as well as $1 billion in projects over the longer run. And on the acquisition side, Urban Edge looks for assets that have some unique potential for value creation. For example, it may target properties that have vacant space to lease up or properties that could benefit from significant redevelopment.
While the portfolio is leased to many tenants, Urban Edge's tenant base is quite concentrated in some of its larger ones. The top 20 tenants make up 47% of the rental income, but don't be too worried about this concentration. Top tenants include a who's who of essential businesses and rock-solid retail giants. Just to give you an idea of what I mean, Urban Edge's five largest tenants are Home Depot, TJX Companies, Lowe's, Best Buy, and Walmart.
Not only are many of the company's major tenants doing well, but there are quite a few that are expanding, too. ShopRite (one of the top grocery tenants), Target, Starbucks, Chipotle, and Sephora are just a few examples of major Urban Edge tenants that are aggressively growing their store counts.
Urban Edge Properties news
Like most of the retail real estate industry, Urban Edge's business wasn't spared by the COVID-19 pandemic. While grocery stores and home improvement retailers generally did well, that isn't the case for the rest of Urban Edge's tenant base. Bankruptcies accelerated, and that's a primary reason why Urban Edge's occupancy is currently at 90%, well below its peak of 98%.
The company has recently reported that lease activity has accelerated, with especially strong demand from grocers, home improvement, and discount retailers. And during the pandemic, Urban Edge has done a great job of improving its balance sheet and buying back stock at deeply discounted valuations. In fact, the company's net debt is just 31% of its market capitalization, one of the lowest ratios among retail REITs.
While things have certainly improved, it's important for investors to realize that the business isn't going to completely recover overnight. Urban Edge doesn't anticipate its income reaching pre-pandemic levels until 2023.
One particularly interesting component of the company's strategy is that Urban Edge recognizes and embraces the overlap between retail and industrial real estate. As e-commerce grows, many retailers are increasingly using their physical footprints for online fulfilment. Urban Edge is currently in the process of doing a retail-to-industrial conversion at one of its properties, and it likely won't be the last.
Urban Edge Properties stock price
We aren't going to sugarcoat it. Urban Edge hasn't been a good performer since spinning off from Vornado in January 2015. In fact, since becoming an independent company, Urban Edge's stock price has declined by about 12%. Even when factoring in dividends, Urban Edge has only managed a 14% total return over more than six years as a separate company. Here's a quick look at how the company has performed over certain time intervals: