Urban Edge Properties

Moat: 1/5

Understandability: 3/5

Balance Sheet Health: 3/5

Urban Edge Properties is a real estate investment trust (REIT) focused on the acquisition, development, and management of retail properties, mainly grocery-anchored centers located in densely populated suburban communities in the U.S.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Description and Overview: Urban Edge Properties (UE) operates as a real estate investment trust (REIT), specializing in the ownership, management, development, and redevelopment of retail real estate, with a focus on grocery-anchored centers. Their portfolio primarily comprises properties located in densely populated suburban communities in the United States, targeting tenants that cater to everyday needs and services. While primarily focused on retail, the company has some exposure to office, industrial, and other properties as well.

Revenue Distribution: UE generates revenue primarily through rental income from its tenants.

The revenue stream is fairly consistent as they mainly acquire stable, grocery anchored shopping centers.
 - Tenant base includes: retailers, restaurants, service-based operators.    - They have a diverse portfolio, with no single tenant representing an especially large portion of total revenues. * **Industry Trends:**
 -The retail sector has seen significant changes over the past years, due to the effects of the pandemic (which drove down the occupancy) and the rise of e-commerce, which has forced brick-and-mortar stores to adapt, or close.
 -Grocery-anchored centers have exhibited more resilience than pure retail properties due to the essential nature of grocery stores and their ability to drive traffic for nearby tenants. *  **Margins:**
 - Operating margins for UE are relatively high for an REIT. Operating costs are largely fixed, making additional revenue very profitable.
 - While their margins are relatively high for an REIT, these are pretty average for property management companies. * **Competitive Landscape**:

The retail real estate sector is highly competitive, with many other national and regional REITs as well as private real estate companies in the market.
-  They differentiate themselves through their concentrated focus on well-established, grocery-anchored centers.   - Scale and efficiency in management play a key role in being competitive in this market. * **Unique Aspects**:
 - While many REITs also invest in grocery anchored centers, very few focus almost exclusively on these and in high growth / densely populated suburban areas, making Urban Edge a bit more unique.
 - In response to a difficult 2020 and 2021, many of the initiatives have focused on creating diverse revenue streams from existing assets.

Financial Analysis:

Income Statement:
Total revenues have improved year-over-year as the company has recovered from the COVID-19 pandemic.
The company has improved its management and decreased operating expenses.
Overall net income remains relatively consistent at ~$100 million.
There is good consistent income over time.
Balance Sheet:
They have a large amount of debt, over $2.5 billion, which is typical in the REIT industry. The debt has been relatively stable over the past couple of years, indicating the company’s reluctance to assume more risk.
Most of its assets are tied into real estate, with limited liquid assets.
The company has increased the net assets portion of their capital significantly, mainly by reducing liabilities.
They have low amounts of intangible assets, with the majority being goodwill, indicating the large number of acquisitions they have made.
Cash Flow Statement:
The cash flow from operations is generally stable and positive, with the bulk coming from operations (sales of rentals), and capital expenditures.
As a REIT they must pay the large majority of profits as dividends, which makes cash flow generation extremely important. -The company has decreased the net cash used in financing activities.
Overall, the cash flow from operations is positive, but slightly smaller than the overall net income, indicating consistent and real cash flows.
Key Metrics:
Price to earnings is above the industry average. This is due to relatively stable growth and the expectation of consistent returns over time.
Dividend yield is around 5%, typical of an REIT and in line with other similar types of companies.

Moat Assessment:

Sources of Moat: While UE has a strong position in a specific type of retail property, they have no meaningful moat.

Real estate is a very competitive field, and it is unlikely that any individual firm will have the ability to completely restrict competition. There are very low barriers of entry, but the primary drivers are scale and quality of management. They have no differentiation that could provide them with pricing power, and they also compete with other REITs.

While they have a brand as a large owner and operator of grocery-anchored shopping centers, it isn’t unique enough to attract customers, because most customers care more about the specific stores within the centers than the name of who owns the property.
Moat Rating: 1/5 -UE operates in an extremely competitive market with very low barriers to entry, so their competitive advantage is quite low. -The main source of an “advantage” is geographic concentration within their markets, giving them local knowledge and relationships-which doesn’t provide them with pricing power nor a truly sustainable competitive advantage.

Risks and Resilience:

Risks:
The primary risk facing Urban Edge stems from potential changes in consumer spending patterns and the continued rise of e-commerce. They must find ways to attract tenants and retain the tenants they currently have.
- Changes in consumer habits, such as the shift to e-commerce, might decrease demand for traditional shopping centers.
Rising interest rates may limit access to debt capital and lower the value of their properties. They are exposed to changes in the economy and their high leverage ratio can hurt profitability if rates increase considerably.
Competition from similar REITs and other real estate companies in attracting tenants.
Resilience:
Grocery-anchored centers have shown more resilience than other kinds of retail real estate.
Their long-term leases help provide stability in cash flow and their concentration on densely populated areas means strong demand for their properties.
Management has displayed the ability to effectively reduce operating costs, making them more profitable, but profitability has been stable at a very average rate over the past few years.

Understandability:

While the underlying business of Urban Edge is a simple concept, it can be hard to properly evaluate all the risks to their business and predict future outcomes.
- Their financial reports are easy to review but they are still an REIT which does not follow traditional accounting practices.
  - Their business is affected by both macroeconomic conditions (interest rates, inflation) and microeconomic conditions (tenants, local economic factors), making it hard to isolate the variables affecting value.
Understandability Rating: 3/5

Balance Sheet Health:

They have a lot of debt on their balance sheet, which is typical for an REIT. However, their equity has increased due to better management and cost cutting.
Their liquidity is okay but should be improved as they have only $44 million of cash.
Their coverage ratio is average, so the profitability is good but not great.
Balance Sheet Rating: 3/5

Recent Concerns and Management Comments

In their most recent reports and calls, management has highlighted the difficult macro conditions due to high interest rates and lower discretionary spending.
The CEO stated that they have focused on securing high-quality tenants that will pay long-term rents.
The company has also begun to try and diversify revenue sources.
There are no major red flags and they seem to be moving towards a leaner and more flexible management system. They seem content with slow growth and are not taking on any extra risk to accelerate growth.