Urban Edge Properties (UE) is a real estate investment trust (REIT) that owns, manages, acquires, develops, and redevelops retail real estate, primarily in the Washington, D.C. to Boston corridor. The company has demonstrated its ability to navigate the evolving retail landscape, delivering strong financial performance and positioning itself for continued growth.

For the full year 2023, UE reported annual net income of $248.5 million, annual revenue of $416.9 million, annual operating cash flow of $169.3 million, and annual free cash flow of $53.6 million. In the first quarter of 2024, the company reported net income of $2.4 million and revenue of $109.6 million.

Business Overview

UE's portfolio consists of 71 shopping centers, two outlet centers, two malls, and one industrial building, totaling approximately 17.1 million square feet. The company's properties are strategically located in densely populated, supply-constrained markets along the Washington, D.C. to Boston corridor, providing a strong competitive advantage.

UE's business model is focused on acquiring high-quality retail assets at attractive valuations, actively managing and repositioning its portfolio, and selectively developing and redeveloping properties to drive long-term growth. The company's experienced management team has a proven track record of executing this strategy, as evidenced by its recent acquisition and disposition activity.

Acquisition and Disposition Activity

In the first quarter of 2024, UE acquired two shopping centers within its core New Jersey markets: Heritage Square and Ledgewood Commons. The company acquired these properties for a combined $117 million at an approximate 8% capitalization rate, funded through a combination of mortgage debt, asset sales, and equity issuance.

Since October 2023, UE has acquired four high-quality retail properties for $426 million at a weighted average capitalization rate of 7.2%, while disposing of non-core properties aggregating $356 million at a weighted average 5.2% capitalization rate. These transactions reflect the company's ability to recycle capital and acquire accretive assets that align with its strategic priorities.

The acquisition of Ledgewood Commons, for example, is a prime example of UE's disciplined approach. The property is anchored by a Walmart Supercenter, Marshalls, and Burlington, with additional shop tenants such as Starbucks, Chipotle, Ulta, and J.Crew. With a going-in capitalization rate of 7.9%, embedded growth opportunities from shop leasing and outparcel development, and favorable financing, this acquisition is expected to generate double-digit levered returns.

Leasing and Operational Performance

UE's leasing activity remains strong, with same-property occupancy up 140 basis points year-over-year and cash leasing spreads of 23% on new leases. The company's signed but not open pipeline amounts to $27 million, or 10% of net operating income, further bolstering its growth prospects.

The company's same-property net operating income (NOI), including properties in redevelopment, increased by 3.7% in the first quarter of 2024 compared to the same period in 2023. This growth was driven by new rent commencements, lower bad debt, and better-than-expected recoveries on previously uncollectible amounts.

UE's focus on anchor repositioning and redevelopment has also contributed to its operational success. The company's $166 million redevelopment pipeline is 90% preleased and expected to generate a 15% unlevered yield on cost.

Balance Sheet and Liquidity

UE's balance sheet is in a strong position, with only 11% of its debt maturing through 2026. The company has completed approximately $500 million of fixed-rate refinancings over the past year, reducing its interest expense exposure and providing greater visibility on its financial performance.

As of March 31, 2024, UE had cash and cash equivalents, including restricted cash, of $95.1 million and approximately $616.9 million available under its revolving credit facility. This ample liquidity, combined with the company's access to the capital markets, positions UE to continue executing its growth strategy.

Guidance and Outlook

Based on its better-than-expected first quarter results, strong retail fundamentals, and recent acquisition and disposition activity, UE has increased its 2024 FFO as adjusted guidance by $0.03 per share at the midpoint to $1.30 per share. This implies 4% growth for the year.

Furthermore, the company expects its 2025 FFO as adjusted to be towards the high end of the $1.31 to $1.39 per share range, implying 5% to 6% earnings growth. This optimistic outlook is supported by the company's successful capital recycling efforts, accretive acquisitions, and the strong leasing fundamentals in its markets.

Risks and Challenges

While UE's outlook is positive, the company faces risks and challenges common to the retail real estate industry. These include macroeconomic conditions, the impact of e-commerce on tenant performance, the ability to retain and attract tenants, and the potential for increased competition in its markets.

Additionally, UE's focus on the Washington, D.C. to Boston corridor exposes the company to regional economic and demographic trends, which could impact its performance. The company also faces the ongoing challenge of managing its redevelopment and anchor repositioning projects, which require significant capital investment and can be subject to construction and leasing risks.

Conclusion

Urban Edge Properties has demonstrated its ability to navigate the evolving retail landscape, delivering strong financial and operational performance. The company's strategic acquisitions, active portfolio management, and focus on high-quality, supply-constrained markets position it for continued growth.

With its increased 2024 guidance and positive outlook for 2025, UE appears well-positioned to capitalize on the resurgence of the retail sector. Investors should closely monitor the company's ability to execute its growth strategy, maintain its strong balance sheet, and manage the risks inherent in the retail real estate industry.