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Down 42% in 2020. Is it Time to Buy Urban Edge Properties?

Jul 22, 2020 by Marc Rapport

Urban Edge Properties (NYSE: UE) rolled into 2020 with a history of generous dividends, a strong balance sheet, and a portfolio of shopping centers in major urban markets, primarily on the East Coast.

Then the pandemic struck, the REIT’s dividends were stopped, and the stock price fell from $18.57 a share on Jan. 2 to a bottom of $6.98 in April before recovering to the $10.73 it closed at on Friday (July 17).

So, is Urban Edge a buy? Let’s take a look.

Big commitment to the Big Apple

Urban Edge owns 78 properties totaling 15.1 million square feet of gross leasable area, the vast majority in and around New York City, with the rest in the Washington, D.C., and Philadelphia areas, along with a few near St. Louis, the San Francisco Bay area, and in Charleston, S.C., and Puerto Rico.

The REIT’s "property capsule" page helpfully includes what’s anchoring these shopping centers, and they include a who’s who of retailers that so far are handling the pandemic recession fairly well, including Best Buy, Home Depot, Target, Costco, Aldi, and other brand names that have stayed off the casualty list of bankrupt and closing retailers and other major tenants, such as fitness centers.

Many of those stores remained open as essential businesses during shutdowns in many areas, and they may presumably do the same if the continuing health crisis forces rollbacks of re-openings in the company’s markets.

Suspended dividends may be a warning sign

Urban Edge has been paying a quarterly dividend of 88 cents a share, or something close to it, for the past several years, for a nice yield of 8.20% at the end of the first quarter, when it paid out 76% of its earnings as a dividend. But that quarterly report released April 29 also contained this announcement:

As a result of COVID-19 and the future uncertainties it has generated, the company has temporarily suspended quarterly dividend distributions. The company’s Board of Trustees will continue to monitor the company’s financial performance and economic outlook and, at a later date, intends to reinstate a regular quarterly dividend of at least the amount required to continue qualifying as a REIT for U.S. federal income tax purposes.

That "of at least the amount" may not feel like a guarantee of enough income in return for the risk of buying a stock so heavily vested in the performance of brick-and-mortar retail.

Share buybacks continue, debt burden spaced out

On the other hand, the company was confident enough in itself that it authorized buying back up to $200 million of its own shares. Authorizing, of course, is not the same as buying, but Urban Edge said that as of April 29, it did buy $54.1 million of it at an average weighted share price of $9.22. That’s out of a market cap of about $3 billion ($1.1 billion in shares and $1.9 billion in debt).

Debt, however, does not appear to be a significant issue. After refinancing a $119 million loan on the Outlets at Montehiedra in San Juan, P.R., Urban Edge said this: "With the completion of this refinancing, the company does not have any other debt maturities until May 2022. Post this refinancing, the weighted average remaining term for all secured mortgage debt outstanding increases from approximately five years to six years, further enhancing an already strong and liquid balance sheet."

That sounds like some time to wait out a recovering market that hopefully will further solidify rental income streams, while keeping an eye open for opportunities to pick up properties from REITs and other operators with less cash and more burdensome debt.

Here’s what Jeff Olson, Urban Edge chairman and CEO, said in the first quarter announcement: "Looking ahead, our strong balance sheet, significant liquidity of $1 billion and low leverage structure consisting of single asset, non-recourse mortgages on only 32 of our 78 properties position us well to weather the disruption in our sector."

Income up, occupancy held steady Urban Edge nearly doubled net income in 1Q2020 from the 1Q2019, rising from 22 cents per share to 40 cents per diluted share, the company said in a supplemental disclosure package released on March 31. Funds from operations were down a penny per share, to 28 cents from the year-ago quarter.

Occupancy was down a percentage point to 92.8% as of March 31 from a year ago, but Urban Edge said it executed 34 new leases, renewals, and options totaling 588,000 square feet during the quarter. It also bought a property in New York and sold a few, the report said.

The REIT also reported that it had $52.8 million of active redevelopment projects underway, of which $16 million remains to be funded, but because of COVID-19, it's now re-evaluating its previous plans to spend approximately $100 to $125 million annually over the next three years on redevelopment initiatives, that report said.

More uncertainty there.

In for the long run, the CEO says. New data on Aug. 6.

"We have a strong and diversified tenant base that is anchored by high-volume, value, and essential retailers. Our experienced management team is cycle-tested, having been through many downturns, and is tackling the challenges in front of us, while taking prudent steps to preserve liquidity, reduce expenses, and best position the company for the long term," CEO Olson said in that April 29 announcement.

That was at the end of the first quarter. Urban Edge has announced it will release second-quarter earnings after market close on Thursday, Aug. 6.

If that report indicates a return to its dividend yield, especially at recent levels, and at least tolerable decay in its revenue, then this issue may indeed be a buy, especially if you’re comfortable with the prospects for pandemic recovery in the greater New York City area.

And if you’re really confident, you might consider picking some shares up before that date, when a positive report might send the stock back up toward historical levels, removing it from the list of potentially cheap REITs.

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Marc Rapport has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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