Urban Edge Properties — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; unaudited. Urban Edge Properties is a retail-property REIT, with substantially all operations and assets held through Urban Edge Properties LP. At quarter-end, the portfolio comprised 85 shopping centers, four malls and one warehouse park, totaling 16.6 million square feet.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $89.5 million | $79.5 million | $215.6 million | $162.5 million |
| Operating income | $28.5 million | $32.8 million | $97.8 million | $66.2 million |
| Net income | $14.9 million | $36.1 million | $69.7 million | $55.9 million |
| Net income attributable to common shareholders | $13.6 million | $33.9 million | $64.2 million | $52.5 million |
| Diluted EPS | $0.13 | $0.34 | $0.63 | $0.53 |
| FFO attributable to diluted common shareholders | $38.7 million | $33.8 million | $112.1 million | $67.4 million |
| Same-property cash NOI | $48.6 million | $46.3 million | $96.7 million | $91.8 million |
Revenue rose 12.6% in Q2 and 32.6% for the first half. Same-property cash NOI increased 5.0% and 5.3%, respectively. Calculated operating margin was approximately 31.9% in Q2 2017 versus 41.3% in Q2 2016, and 45.4% for the first half versus 40.7%. FFO and cash NOI are non-GAAP measures and are not substitutes for net income or operating cash flow.
- Cash flow: First-half operating cash flow was $83.3 million; investing cash outflow was $242.6 million; financing cash inflow was $281.9 million. Cash and restricted cash increased $122.6 million to $262.8 million, including $248.4 million of unrestricted cash.
- Debt and liquidity: Mortgages payable were $1.421 billion gross, or $1.412 billion net of deferred financing costs, versus $1.206 billion gross at year-end 2016. The $600 million revolving facility was undrawn and matures in 2021, with two six-month extension options. The company reported compliance with debt covenants and no debt scheduled to mature in 2017.
- Capital returns: The quarterly dividend/distribution was $0.22 per share/unit, or $0.44 for the first half. The company issued 7.7 million common shares in May, generating $193.5 million net proceeds.
Material changes and unusual items
- Q2 net income and EPS declined versus 2016, when results included a $15.6 million gain on sale of the Waterbury property. Q2 2017 also had higher depreciation and amortization, taxes and interest expense, partly reflecting acquired properties.
- First-half revenue included $39.2 million of income from the acquired Shops at Bruckner leasehold interest, arising from write-offs of lease-related balances. This was a significant non-recurring contributor to reported results; cash flow reconciliation removes this income.
- First-half results included a $3.5 million impairment on the Eatontown property, which was sold for $4.8 million net on June 30, and a $1.3 million loss on extinguishment of debt following refinancing of the North Bergen mortgage.
- The company acquired multiple properties, including a seven-asset portfolio for $325 million. Total purchase price reported for 2017 acquisitions was $463.7 million, including capitalized transaction costs. The portfolio was 83% leased at June 30. Acquisitions were funded with cash, assumed and new secured debt, and OP units.
- Gross mortgage debt increased partly due to acquisitions and a refinancing that raised the North Bergen loan from $74 million to $100 million, while reducing its rate from 4.59% to 4.18%. The company also completed a $193.5 million net common-share offering.
Outlook, risks and contingencies
- Management expected operating cash flow over the following 12 months, together with cash, the revolving facility and capital-market access, to be sufficient for operations, debt service and capital expenditures. No specific earnings or NOI guidance was provided.
- Active development, redevelopment and anchor-repositioning projects were estimated at $173.7 million. The filing reports differing remaining-funding estimates: approximately $94.0 million in one disclosure and $96.8 million in another; management anticipated spending the remaining amounts over about two years.
- Englewood remained in mortgage default and receivership following tenant departures; Urban Edge no longer manages the property. The company continued to consolidate it, reporting $12.4 million of assets and $14.5 million of liabilities.
- Environmental remediation accruals were approximately $1.4 million for two properties; only $0.1 million had been spent, and actual costs could exceed the accrual. Management said ordinary-course legal matters were not expected to have a material adverse effect.
- Risks include tenants’ ability to pay rent or reject leases in bankruptcy, potential insurance gaps or higher insurance costs, and interest-rate exposure. Variable-rate debt totaled $127.8 million; a hypothetical 1% base-rate change was estimated to affect annual interest by $1.3 million, subject to the disclosed LIBOR floor. No hedges were in place.
- Management reported no material change in previously disclosed risk factors and concluded disclosure controls were effective.
Important facts for investors to verify
- How much of first-half earnings growth reflects recurring property operations versus the $39.2 million acquired-leasehold income, and how the acquisition affects future depreciation and rent.
- The acquired portfolio’s leasing progress from its 83% quarter-end occupancy, and the expected returns and funding needs for acquisitions and redevelopment projects.
- Debt maturity and refinancing exposure, particularly the $517.3 million scheduled principal amount in 2020, variable-rate exposure, and the Englewood default and receivership outcome.
- The cash funding estimate for remaining development and redevelopment commitments; the filing gives both $94.0 million and $96.8 million figures.
- Whether same-property NOI and FFO trends continue, while considering their non-GAAP definitions and the effects of acquisitions, dispositions, impairments and share issuance.