New Retailers Like Trader Joe's Will Lift Occupancy, But Bankruptcies May Weaken Future Earnings

Key Takeaways

• Strategic partnerships with high-quality retailers aim to enhance rent growth, occupancy, and value creation, positively affecting revenue and net margins.
  
• Focus on development projects, occupancy rate increases, and strategic capital recycling is expected to boost NOI growth, optimizing long-term earnings.
  
• Rising tenant bankruptcies, competitive cap rates, and potential construction costs could hinder earnings, margin maintenance, and profitability growth for Urban Edge Properties.

Catalysts

A NYSE listed real estate investment trust focused on owning, managing, acquiring, developing, and redeveloping retail real estate in urban communities, primarily in the Washington, D.C.

• The addition of high-quality retailers like Trader Joe's and BJ's Wholesale Club is expected to drive higher rent growth, improved occupancy, and value creation through cap rate compression, positively impacting revenue and net margins.
  
• The company's active development projects with expected unlevered returns of 15% to 16% are anticipated to significantly increase earnings and net operating income (NOI), contributing to future revenue growth.
  
• Urban Edge Properties plans to utilize their $163 million anchor repositioning and redevelopment projects to bolster NOI growth, which is forecasted to increase by 3.5% in 2025, enhancing the company's earnings trajectory.
  
• By increasing leased occupancy rates towards 97% to 98%, the company is aiming to improve revenue stability and growth prospects, directly impacting future earnings.
  
• Strategic capital recycling—investing in high-growth assets and disposing of lower-growth properties at favorable cap rate spreads—is expected to optimize net margins and bolster long-term earnings growth.

Urban Edge Properties Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Urban Edge Properties's revenue will decrease by 0.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.3% today to 12.3% in 3 years time.
• Analysts expect earnings to reach $55.4 million (and earnings per share of $0.19) by about March 2028, down from $72.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 82.9x on those 2028 earnings, up from 32.4x today. This future PE is greater than the current PE for the US Retail REITs industry at 32.4x.
• Analysts expect the number of shares outstanding to grow by 5.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.42%, as per the Simply Wall St company report.

Urban Edge Properties Future Earnings Per Share Growth

Risks

• The company's expectation of a 75 to 100 basis points credit loss from tenant bankruptcies, such as Party City and Big Lots, could impact same-property NOI growth, affecting overall earnings.
  
• The increasingly competitive cap rate environment, especially for acquisitions, poses a challenge for capital recycling and acquisition strategies, potentially impacting future revenue growth.
  
• The reliance on capital recycling for acquisitions combined with high competition and compressed cap rates might limit the company's ability to maintain or enhance its net margins and earnings.
  
• Potential rising construction costs could offset any rental income growth from new developments, reducing expected returns on redevelopment projects and impacting overall profitability.
  
• The pressure on G&A to achieve further cost reductions may lead to potential operational challenges and could indirectly affect profit margins if not managed carefully.

Valuation

• The analysts have a consensus price target of $23.25 for Urban Edge Properties based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $26.0, and the most bearish reporting a price target of just $20.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $451.2 million, earnings will come to $55.4 million, and it would be trading on a PE ratio of 82.9x, assuming you use a discount rate of 8.4%.
• Given the current share price of $18.75, the analyst price target of $23.25 is 19.4% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.