Much has been said about the ominous outlook for the shopping mall industry. Rents are volatile, cyclical and overdependent on the overall health of the economy. And as anyone with an Amazon Prime account would most likely attest, our visits to shopping malls have become fewer and fewer. For over three decades, Malthusian predictions of the eventual demise of shopping malls have been foretold. So, you can imagine how surprising it is to find a shopping mall REIT trading at over 5 times its book value.
Let me walk you through the math. In its recent annual report, Urban Edge Properties (NYSE:UE) showed $5 in equity book value per share, $1.29 per share in funds from operations and $1.99 per share in net operating income. And so, with a share price of $28, we are left with a hefty valuation of over 5 times the book value, 22 times the funds from operations, and an implied capitalization rate of 7%. It is an extravagant valuation, especially when looking at the market valuation of peer companies such as Equity One, Retail Properties of America, Kite Realty Group, Retail Opportunity Investment Corporation and Saul Centers.
The peer companies did not trade above 17 times the funds from operations or two times the book value. I came up with three reasons for the difference in value between Urban Edge and the peer companies. First, capital markets estimate that Urban Edge management is superior to other management teams. Second, capital markets find the shopping mall portfolio to be superior compared to peer holdings. And third, capital markets estimate the divestiture (read: spin off, in investing lingo) from Vornado Realty Trust was a great opportunity yet to unfold.