Urban Edge Properties (UE) was spun-off of Vornado Realty (VNO) in January 2015. At $20 billion, VNO is one of the most followed REIT’s in the world. Since the separation however, Yahoo Finance still does not list any Wall Street coverage on UE shares, despite 16 analysts following its former parent company. Is this lack of coverage leading to an undervalued share price?
The Business
UE owns 79 strip shopping centers, 3 malls and one Warehouse Park that were previously under Vornado’s ownership.
Vornado and UE had been together for legacy reasons but with no real operating synergies. Vornado has been subject to criticism over the years for venturing into too many sectors. After the spin, Vornado can now focus exclusively on office properties and retail shops in Washington and Manhattan.
Meanwhile, UE can focus on its shopping centers and malls, spanning over 15 million square feet across 10 states and Puerto Rico, with concentrations in New Jersey, New York and Pennsylvania. 71 of the company’s 83 properties are situated in the DC to Boston corridor, representing ~85% of Net Operating Income. Their properties are primarily located in the most heavily urbanized region in the US, containing 50 million people and 931 people per square mile (over 10x higher than the US average).
History
Competitive Advantages
In comparison to its urban REIT peers, UE’s properties are more desirable based on their nearby population.
In their regions of operation, the nearby population also has a significantly higher than average income level.
It would follow that their properties as a whole would be higher trafficked, leading to higher rents and a higher subsequent value for UE as a company.
All of these advantages have also lead to a consistently stable occupancy rate, reducing the impact of any overall macroeconomic risks.
Looking at UE’s customer base, it is clearly skewed towards large, multi-national, credit-worthy companies. This is yet another factor in stabilizing rents and occupancy rates for the company.
Growth Opportunities
Management believes they have significant remodeling and property upgrade opportunities available to them. Looking at the company’s financial position, they are in an enviable position to take on these additional, value-creating projects. Amongst its peers, UE has the lowest cost of financing and the least amount of near-term debt maturities. Indeed, their only major payment is due in 2020.
Management
Jeff S. Olson - Chairman and Chief Executive Officer
Mr. Olson was CEO and a Director of Equity One, Inc. from 2006 until 2014. From 2002 to 2006, he was president of the Eastern and Western Regions of Kimco Realty Corporation. Mr. Olson worked on Wall Street from 1996 to 2001 as a REIT analyst with Salomon Brothers, CIBC and UBS.
Robert Minutoli - Chief Operating Officer
Mr. Minutoli was responsible for Vornado’s mall portfolio since 2009 and its combined mall and strip center portfolio since 2012. Prior to joining Vornado, he spent 27 years with The Rouse Company in construction, development and new business positions, departing as Executive Vice President-New Business and member of the company’s five-person Executive Committee when it was sold.
Matthew Iocco - Interim Chief Financial Officer
Mr. Iocco oversees Vornado’s company-wide accounting policies and procedures and its external financial reporting. From 1991 to 1999, he was a senior manager in Arthur Andersen’s Real Estate Services Group.
Ownership
Institutional ownership is still quite low at roughly 31%. Peter Lynch prefers to buy companies with low institutional ownership levels as it allows more opportunity for mispricing.
Insiders: It’s a bit concerning that insiders own such a small portion of the company, but the company was only recently separated and none of the current management team has the benefit of founding shares.
Valuation
UE lists its pre-spin pro-forma EBITDA at $175.5 million. At its current Enterprise Value, this would imply that the shares trade at an EV/EBITDA of ~22x. This would result in the company trading near the bottom range of its larger, slower growing, higher debt peers.
Conclusion
There is still a large lack of awareness of this new, relatively small spin-off, with no major sell-side firm research coverage. UE meanwhile has strong and sustainable competitive advantages. While the growth profile should be better ascertained as the company matures post-spinoff, it appears as if they have the existing properties and dry powder to support growth projects for years to come.
For more ideas like this one, check out GuruFocus’ Spin-Off List or the rest of R. Vanzo’s Articles.
