Urban Edge Properties (NYSE:UE) just reported a stellar first quarter for 2024, exceeding expectations and even raising their FFO guidance. On the surface, it's a familiar story: strong retail fundamentals, favorable leasing spreads, and accretive acquisitions. But beneath the headlines, there's a hidden narrative, one that suggests Urban Edge may be onto something truly unique in the shopping center REIT sector.

Their secret? It's not just the grocery-anchored properties that everyone seems to be clamoring for. It's their strategic focus on land. Specifically, Urban Edge is amassing a portfolio of properties with large, controllable land parcels, acquired at prices significantly below both land and building replacement costs. This is where the real magic unfolds.

Think about it. In the densely populated, supply-constrained markets where Urban Edge operates, land is gold. They're not just buying shopping centers; they're acquiring valuable real estate with immense long-term potential. Their average property size is almost 20 acres, valued at approximately $2 million per acre based on their current stock price. Compare that to current land values, which are undeniably higher, and you start to see the value proposition.

This strategy provides Urban Edge with a level of flexibility that's simply unmatched by their peers. They can push rents higher, knowing that the intrinsic value of their land provides a solid foundation. They can redevelop and expand their properties accretively, leveraging the existing low basis. And perhaps most importantly, they can do all of this in a market where new supply is practically non-existent, further bolstering their pricing power.

Ledgewood Commons Acquisition: A Case Study

This land-centric approach is evident in their recent acquisitions. Ledgewood Commons, their newest purchase, sits on over 50 acres at a prime intersection. Anchored by Walmart, Marshalls, and Burlington, it also boasts a desirable mix of shop tenants like Starbucks, Chipotle, Ulta, and J. Crew. They snagged this gem at a 7.9% cap rate, and with embedded growth from shop leasing and outparcel development, they're looking at double-digit levered returns. That's exceptional performance in any economic environment, let alone the current one.

Strategic Capital Recycling

But the story goes beyond Ledgewood. Urban Edge has been actively recycling capital, acquiring four high-quality properties for $426 million at a weighted average cap rate of 7.2% since October 2023. Simultaneously, they've been shedding non-core assets, generating $356 million at a weighted average cap rate of 5.2%. That's a 200 basis point spread, a testament to their ability to identify undervalued assets with significant upside potential.

Projected Earnings Growth

This astute capital allocation strategy, coupled with the underlying strength of their land holdings, has put Urban Edge on a clear path to sustained earnings growth. They're already projecting to hit the high end of their 2025 FFO guidance, implying 5-6% earnings growth. And with a leasing pipeline representing 10% of their net operating income and a redevelopment pipeline expected to generate a 15% return, the future looks remarkably bright.

Land: The Silent Driver of Outperformance?

But here's the hypothesis that hasn't yet reached the market's ears: Urban Edge's land-driven strategy is a silent, potent force that will fuel their outperformance for years to come. While other REITs chase the grocery-anchored dream, Urban Edge is quietly building a fortress of value, rooted in the scarcity and inherent worth of their land. This hidden asset, coupled with their shrewd management and favorable market conditions, positions them to become a dominant force in the shopping center landscape.

Crunching the Numbers: The Power of Compounding

Let's crunch some numbers to illustrate this point. Assume Urban Edge continues to acquire properties at a 7% cap rate and dispose of non-core assets at a 5% cap rate. If they execute $200 million of such transactions annually, they'll generate an incremental $4 million in NOI annually just from the spread. That's not including the additional NOI generated from organic leasing growth, redevelopment, or the potential appreciation of their land holdings.

Now consider the fact that Urban Edge has a market cap of approximately $2 billion. That means a $4 million increase in NOI represents a 0.2% increase in their market cap, on a leverage-neutral basis. This might not sound like much, but compounded over time, it adds up to significant value creation.

Furthermore, as their land holdings appreciate in value, their cap rate will naturally compress, further boosting their earnings multiple. This creates a virtuous cycle, with their land-driven strategy acting as a powerful engine for long-term growth.

Analyzing Occupancy Trends

Looking at the occupancy trends from their earnings transcripts, we can see how Urban Edge has been consistently improving their performance.

Visualizing Occupancy Growth

The chart below illustrates the occupancy growth trend, especially the significant improvement in shop occupancy.

Conclusion: A Land of Opportunity

It's a story that's still unfolding, but the early chapters are already compelling. Urban Edge is demonstrating that in the world of shopping center REITs, land is king. And they're playing the game like true masters of the realm.

"Fun Fact: Urban Edge Properties owns and manages a diverse portfolio of properties, including some that are home to unique and unexpected tenants. For example, one of their properties in New York City is home to a popular indoor rock climbing gym, highlighting the company's adaptability and ability to cater to evolving consumer trends."