Urban Edge Properties — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; unaudited. Urban Edge Properties is a REIT focused on retail real estate, primarily from Washington, D.C. to Boston. Its portfolio comprised 69 shopping centers, five malls and two industrial parks totaling approximately 17.2 million square feet. Urban Edge owned approximately 95.9% of its operating partnership.
Financial results and key metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $98.3 million | $106.8 million | $296.3 million | $296.5 million |
| Net income | $11.5 million | $30.1 million | $33.0 million | $63.8 million |
| Net income attributable to common shareholders | $11.4 million | $27.8 million | $32.5 million | $60.2 million |
| Diluted earnings per share | $0.10 | $0.24 | $0.28 | $0.51 |
| NOI (non-GAAP) | $59.6 million | $56.8 million | $176.3 million | $167.6 million |
| Same-property NOI (non-GAAP) | $52.8 million | $51.0 million | $155.8 million | $150.8 million |
| FFO applicable to diluted common shareholders (non-GAAP) | $35.9 million | $45.3 million | $106.3 million | $112.5 million |
For Q3, same-property NOI increased 3.4%; for the nine-month period it increased 3.3%. Reported net income fell substantially in both comparisons. Q3 revenue declined 8.0%, while nine-month revenue was nearly flat. The filing does not provide a single consolidated operating-margin measure.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $98.7 million, compared with $93.1 million in 2021. Investing used $110.9 million, mainly for development, capital improvements and acquisitions; financing used $55.3 million.
- Cash and cash equivalents were $108.4 million at September 30; restricted cash was $44.0 million, for combined cash and restricted cash of $152.4 million.
- Mortgage debt was $1.696 billion net of unamortized issuance costs ($1.704 billion gross). Approximately 91% was fixed-rate and 9% variable-rate. A 1% increase in base rates was estimated to raise annual interest expense on variable-rate debt by approximately $1.6 million.
- The $800 million revolving credit facility was undrawn and matures February 9, 2027, with two six-month extension options. The company reported compliance with debt covenants.
- The debt maturity schedule lists $351.5 million due in 2023. Separately, management said approximately $309 million of debt would mature within the next 12 months and that it was exploring refinancing options.
- The quarterly dividend was $0.16 per share and OP unit, equivalent to an indicated annual rate of $0.64 if maintained. The board retains discretion over future distributions.
Material changes and management commentary
- Comparative results were affected by 2021 items: Q3 2021 included a $6.9 million property-sale gain and accelerated amortization of below-market lease liabilities; nine-month 2021 included $18.6 million of property-sale gains. These items contributed to the lower reported earnings in 2022.
- Operating costs increased: nine-month property operating expenses rose $4.6 million and general and administrative expenses rose $3.3 million. Management cited higher common-area maintenance costs, utilities, payroll, bonuses and professional fees.
- Interest expense for Q3 rose $0.6 million year over year, including higher borrowing costs on variable-rate loans and debt for acquisitions, partly offset by more interest capitalized into development projects.
- Urban Edge acquired The Shops at Riverwood, a fully leased, 78,000-square-foot grocery-anchored center, for approximately $33.3 million, and a 12,000-square-foot outparcel adjacent to Sunrise Mall. No property dispositions were completed in the first nine months of 2022.
- There were 23 active development, redevelopment or anchor-repositioning projects with estimated total costs of $260.9 million; $174.9 million remained to be funded. Management noted schedules could be affected by economic conditions, tenants, vendors and supply chains.
- The company amended its revolver in August, increasing capacity from $600 million to $800 million and extending maturity to 2027. It also authorized a new ATM program for up to $250 million; no shares had been sold under it by September 30.
- Management stated that operating cash flow, cash on hand, the revolver, potential refinancing and capital-markets access should be sufficient for short- and long-term obligations. This is an expectation, not a guarantee.
Risks, contingencies and unusual items
- Interest-rate increases may raise borrowing costs; the company uses an interest-rate cap and swap as cash-flow hedges. The cap on the Plaza at Woodbridge loan limits SOFR to 3% and expires in July 2023.
- The Las Catalinas Mall mortgage had been modified to interest-only payments, with a possible discounted repayment option beginning August 2023 subject to conditions. The company had accrued $5.4 million of related interest.
- A limited corporate guarantee associated with The Outlets at Montehiedra had $8.5 million of remaining exposure.
- Environmental remediation accruals were $1.6 million. The company cautioned that actual costs could exceed its estimate.
- The company is pursuing insurance litigation in New Jersey seeking recovery of COVID-related uncollected rents and other amounts. Management did not expect ordinary-course legal matters to have a material adverse effect; outcomes remain uncertain.
- Management highlighted tenant bankruptcies, lease renewals and re-leasing, e-commerce, inflation, capital-market access, redevelopment costs, climate and weather events, cybersecurity, and REIT qualification among forward-looking risks. No tenant bankruptcy was identified as likely to have a material adverse effect as of September 30.
Most important facts for investors to verify
- Reconcile the $351.5 million listed as 2023 maturities with management’s approximately $309 million of debt maturing within 12 months, and assess refinancing progress and terms.
- Track leasing, occupancy, rent collections and same-property NOI; reported earnings and FFO declined despite same-property NOI growth.
- Assess whether the $174.9 million remaining project funding and rising construction and operating costs can be supported without weakening liquidity or returns.
- Monitor variable-rate exposure, refinancing rates and the maturity or replacement of interest-rate hedges.
- Review the performance and debt-service prospects of Las Catalinas Mall, including the conditions attached to its discounted repayment option.
- Evaluate the sustainability of the $0.16 quarterly dividend against operating cash flow, debt service and capital commitments; FFO is non-GAAP and is not a measure of cash available for distributions.