Urban Edge Properties — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts below are in U.S. dollars; financial statement amounts are generally in millions. Urban Edge is a REIT focused on retail real estate, primarily in the New York metropolitan area. Its portfolio comprised 70 shopping centers, five malls and two industrial parks, totaling approximately 16.2 million square feet.
Financial performance and position
- Revenue: Q2 revenue was $94.0 million, up $20.4 million from $73.6 million a year earlier. Six-month revenue was $189.7 million, up $22.7 million. Management attributed much of the growth to lower rental revenue deemed uncollectible and noncash rent adjustments, alongside portfolio changes and tenant reimbursements.
- Profit: Q2 net income was $13.0 million, versus $32.5 million; diluted EPS was $0.11 versus $0.27. Six-month net income was $33.7 million, versus $83.8 million; diluted EPS was $0.28 versus $0.67. The prior-year periods included a $34.9 million debt-extinguishment gain and a $13.7 million Q2 income-tax benefit. 2021 six-month results also included an $11.7 million property-sale gain.
- Operating measures: Same-property NOI increased 24.8% to $56.4 million in Q2 and 8.5% to $106.2 million for six months. FFO applicable to diluted common shareholders was $35.4 million for Q2 and $67.2 million for six months, compared with $55.7 million and $90.5 million, respectively, in 2020. NOI and FFO are non-GAAP measures and are not substitutes for net income or operating cash flow.
- Margins: The filing does not provide a single headline operating or net margin measure. Property operating expenses increased to $15.9 million in Q2 from $11.9 million; six-month expenses increased to $36.2 million from $26.4 million.
- Cash flow: Six-month operating cash flow was $53.6 million, up from $42.0 million. Investing activities provided $3.8 million, versus using $48.9 million in 2020. Financing activities used $97.7 million, versus providing $161.6 million. Cash and restricted cash totaled $379.0 million at June 30, down from $419.3 million at year-end 2020.
- Debt and liquidity: Net mortgages payable were $1.58 billion. Debt principal totaled $1.59 billion before debt issuance costs and held-for-sale debt; the weighted-average interest rate was 3.91%. Fixed-rate debt was $1.42 billion at 4.16%; variable-rate debt was $168.3 million at 1.83%. No borrowings were outstanding on the $600 million revolver, which matures January 2024. The company reported compliance with debt covenants and no scheduled debt maturity until Q2 2022.
- Capital returns: The company declared a Q2 distribution of $0.15 per common share and OP unit, equivalent to an annualized $0.60 if maintained. No shares were repurchased during the first six months of 2021. A $250 million at-the-market share program was established in May; no shares had been issued under it by June 30.
Material changes and management commentary
- Rental revenue growth reflected, among other factors, a $14.7 million Q2 decrease in rent deemed uncollectible versus 2020 and a $5.8 million increase in noncash straight-line rent adjustments. Management also cited lease modifications, tenant closures and expirations as offsets.
- Management reported that substantially all portfolio gross leasable area was open and that approximately 96% of Q2 rental revenue had been collected. It reported collection of 97% of rent and tenant expense reimbursements billed in the first half. Collection of Q2 2020 billings had reached 84% as of July 30, 2021.
- One property and one property parcel were sold in the first half for net proceeds of $23.6 million, generating an $11.7 million gain. No acquisitions closed. The company was under contract to acquire two industrial properties totaling 275,000 square feet for $55.5 million. A Westfield, New Jersey property was sold in July 2021.
- Thirteen active development, redevelopment or anchor-repositioning projects had estimated total costs of $134.1 million; $89.7 million remained to be funded. Management expected completion spending over the following six to eighteen months, subject to construction restrictions, and said future pipeline projects were being reevaluated in light of market conditions.
- Management said cash on hand, revolver availability and expected capital-market access should be sufficient for operations, debt service and capital expenditures over the next 12 months. No formal earnings or operating guidance is provided in the supplied filing text.
Risks, contingencies and unusual items
- COVID-19 effects remain uncertain, including tenant solvency, rent collections, concessions and possible renewed operating restrictions. Rent deferrals and abatements have been granted; additional concessions and uncollectible deferred rent could reduce revenue and net income. Certain tenants have filed for bankruptcy, and lease rejections or vacancies could reduce revenue.
- The Las Catalinas Mall mortgage in Puerto Rico was modified in December 2020 to interest-only payments, with a discounted repayment option beginning in August 2023. The company had accrued $5.4 million of interest related to this mortgage at June 30, 2021.
- A limited corporate guarantee related to the Montehiedra mortgage could be triggered by specified events involving the Kmart lease; the potential guarantee was approximately $10.8 million at June 30, 2021. Kmart had announced a store closure, but the lease remained in effect and rent was being paid.
- The company is litigating in New Jersey to recover COVID-related uncollected rents under insurance policies with a stated $50 million aggregate limit for pollution-related losses. Recovery is uncertain; the filing does not quantify any expected proceeds.
- Environmental remediation accruals were $1.8 million. The company cautioned that actual costs could exceed the accrual. It also cited insurance cost and availability, tenant bankruptcies, interest rates and LIBOR transition, refinancing, redevelopment returns, inflation and broader economic conditions as risks.
- The filing reported no material impairment charges in the periods presented, no material off-balance-sheet arrangements, and no material adverse expectation for ordinary-course legal proceedings.
Important facts for investors to verify
- Whether rental collections remain strong and deferred rent or tenant receivables are ultimately collected.
- How much of reported revenue and same-property NOI growth is recurring cash performance versus noncash rent adjustments and changes in collectibility.
- Progress on the $89.7 million of remaining project funding and the expected return, leasing and completion timing of redevelopment projects.
- Debt maturities, covenant headroom, variable-rate exposure and the status of the Las Catalinas and Montehiedra loan-related risks.
- Whether the proposed $55.5 million industrial acquisition closes and how it is funded, and whether the ATM program is used.
- Outcomes of the COVID-related insurance litigation, tenant bankruptcies and any further rent relief or operating restrictions.