Urban Edge Properties — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Urban Edge Properties is a retail REIT focused primarily on the New York metropolitan area. At quarter-end, its portfolio comprised 72 shopping centers, four malls and two warehouse parks, totaling approximately 15.1 million square feet. Figures below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $75.8 | $91.2 | $242.8 | $291.7 |
| Net income (loss) | $(5.8) | $56.7 | $78.0 | $112.7 |
| FFO attributable to diluted common shareholders | $16.9 | $38.2 | $107.3 | $132.4 |
| NOI | $46.0 | $57.4 | $151.0 | $176.9 |
| Same-property NOI | $43.5 | $54.4 | $141.7 | $164.3 |
- Q3 revenue fell 16.9% year over year; nine-month revenue fell 16.8%. Management attributed the declines mainly to rent deemed uncollectible, straight-line rent receivable write-offs, lower tenant reimbursements, and property dispositions net of acquisitions.
- Same-property NOI declined 20.1% in Q3 and 13.8% for the nine-month period. FFO fell 55.9% in Q3 and 18.9% for the nine months.
- Q3 net loss contrasts with prior-year income that included a $39.7 million property-sale gain. Nine-month 2020 net income included a $34.9 million gain on debt extinguishment from the Montehiedra refinancing and $39.8 million in property-sale gains. The nine-month comparison also includes $68.2 million in property-sale gains and $9.1 million in casualty and impairment losses in 2019.
- Nine-month operating cash flow was $74.8 million, down from $115.6 million. Investing activities used $56.0 million, versus $60.1 million provided in 2019; financing activities provided $167.0 million, primarily reflecting the revolving-credit draw and mortgage borrowing.
- At September 30, cash and cash equivalents were $646.4 million, restricted cash was $24.6 million, and total assets were $3.13 billion. Total debt was $1.84 billion, including $1.59 billion of net mortgage debt and $250 million drawn on the revolving facility. Total equity was $1.02 billion.
- Of outstanding debt, $1.43 billion was fixed-rate and $169.8 million variable-rate mortgage debt; the reported weighted-average rate on total debt was 3.76%. The company had $350 million of unused revolver capacity at quarter-end. It reported repaying the $250 million revolver balance after quarter-end, increasing available capacity to $600 million.
- Q3 basic and diluted loss per share was $0.05; nine-month earnings per share was $0.63. No formal earnings guidance was provided in the supplied filing text.
Material changes, outlook and risks
- COVID-19 and rent collection: At November 3, 2020, 98% of portfolio gross leasable area was open. The company had collected approximately 83% of Q3 rent billed and 86% of October rent billed. It expected further tenant relief discussions and warned that additional concessions or tenant defaults could reduce revenue and cash flow.
- For the nine months, $21.5 million of rental revenue was deemed uncollectible and $10.7 million of straight-line rent receivables was written off. Q3 amounts were $8.4 million and $4.7 million, respectively.
- Dividend: The quarterly dividend was temporarily suspended beginning in Q2 2020; no Q2 or Q3 dividend was declared. Management said the board would monitor performance and intended to reinstate a regular dividend at a level sufficient to maintain REIT qualification, subject to circumstances.
- Las Catalinas Mall default: The $129 million non-recourse Puerto Rico mortgage was in default from April 2020 after the company advised that property cash flow would not cover debt service and it would not fund shortfalls. The rate increased to 7.43%, the lender may accelerate the balance, and $5.3 million of related interest was accrued. Negotiations with the special servicer continued, with timing and outcome uncertain. The company was not in compliance with covenants related to this loan; it reported compliance with other debt covenants.
- Montehiedra refinancing: A $30 million junior loan plus accrued interest was forgiven, contributing to the $34.9 million debt-extinguishment gain. The senior mortgage was refinanced as an $82 million, 10-year fixed-rate loan at 5.00%. Related tax restructuring produced a reported $13.1 million income-tax benefit for the nine months.
- The company acquired two Brooklyn properties for $167.3 million, including transaction costs, and sold three properties for net proceeds of $58.1 million. It had 13 active development, redevelopment or anchor-repositioning projects estimated at $132.4 million, with $91.3 million remaining to fund; project timing and the future pipeline were being reassessed amid pandemic conditions.
- Century 21 filed for bankruptcy; its Paramus lease represented about 157,000 square feet and $4.4 million in annual rent. 24 Hour Fitness also filed for bankruptcy; its Paramus lease represented about 54,000 square feet and $3.1 million in annual rent. After quarter-end, 24 Hour Fitness indicated it intended to continue operating at the location.
- Key risks include prolonged pandemic disruption, tenant insolvency and rent nonpayment, retail leasing and re-leasing conditions, redevelopment delays or lower returns, covenant and refinancing risks, insurance availability and costs, and potential environmental remediation costs. Management believed available cash, revolver capacity and capital-market access should fund operations and obligations for the next 12 months, but noted uncertainty and covenant dependence.
Important facts for investors to verify
- Subsequent-period rent collections, tenant concessions, delinquency trends and actual cash recovery of deferred rent.
- Resolution and potential lender remedies for the Las Catalinas default, including accrued interest and any effect on other debt or liquidity.
- Reinstatement timing and amount of dividends, and the company’s capacity to fund distributions while meeting debt service and capital needs.
- Progress, remaining costs and expected stabilization of the $132.4 million project portfolio, alongside leasing and occupancy at acquired Brooklyn properties.
- Tenant bankruptcy outcomes, particularly replacement leasing and rent impacts at the Paramus properties.
- The quality and sustainability of reported nine-month earnings, distinguishing recurring property operations from asset-sale gains, debt forgiveness and tax benefits.