Urban Edge Properties — FY2017 Form 10-K
Reporting period: Year ended December 31, 2017; this is an annual filing, not a standalone fourth-quarter report. Urban Edge Properties is a retail REIT focused mainly on the New York metropolitan area. Its portfolio included 85 shopping centers, four malls and a warehouse park, totaling 16.7 million square feet; retail occupancy was 96.0% and total portfolio occupancy was 96.3%.
Financial and operating performance
| Metric | FY2017 | FY2016 | Change / context |
|---|---|---|---|
| Total revenue | $407.0 million | $326.0 million | Up $81.1 million, or about 24.9% |
| Operating income | $161.8 million | $133.0 million | Up $28.7 million |
| Net income | $72.9 million | $96.6 million | Down $23.7 million |
| Net income attributable to common shareholders | $67.1 million | $90.8 million | Diluted EPS fell to $0.61 from $0.91 |
| Cash from operating activities | $157.9 million | $137.2 million | Up $20.6 million |
| Cash used in investing activities | $295.7 million | $59.2 million | Primarily acquisitions and property investment |
| FFO applicable to diluted common shareholders | $157.8 million | $136.5 million | Up about 15.6%; non-GAAP measure |
| Same-property cash NOI | $187.6 million | $179.1 million | Up 4.7% across 74 properties |
| Cash and restricted cash at year-end | $500.8 million | $140.2 million | Included $10.6 million restricted cash |
| Mortgage debt, principal | $1.578 billion | $1.206 billion | Net carrying value was $1.565 billion |
The company declared dividends of $0.88 per common share for 2017, versus $0.82 in 2016. The 2017 dividend included $0.37 per share classified as long-term capital gains for tax purposes.
Material changes versus the prior period
- Revenue growth reflected acquisitions, higher tenant expense reimbursements and $39.2 million of income recognized when the company acquired the ground-lease interest at Shops at Bruckner and wrote off an unamortized below-market lease liability. This item materially boosted reported revenue and should not be assumed recurring.
- Net income declined despite higher revenue and operating income. FY2017 included a $35.3 million loss on debt extinguishment, $7.4 million of casualty and impairment losses, higher depreciation and amortization, and lower gains on property sales than in 2016.
- Urban Edge acquired nine retail assets for approximately $463.7 million, including transaction costs, and issued common shares and operating partnership units to help fund growth. Retail portfolio occupancy decreased to 96.0% from 97.2%, principally because acquired centers had lower occupancy; same-property occupancy edged up to 98.3%.
- Management reported same-space leasing spreads of 13.8% on a GAAP basis and 3.2% on a cash basis for new leases; renewals produced spreads of 9.3% GAAP and 5.8% cash.
- Cash from financing was $498.5 million, driven by borrowings and $348.4 million of net common-share proceeds. Cash used in investing increased substantially, including $211.4 million net cash for acquisitions and $89.3 million for development and capital improvements.
Debt, liquidity and capital plans
At year-end, principal mortgage debt was $1.578 billion, with a weighted-average rate of 4.03%; $169.5 million was variable-rate debt. The company had no balance drawn on its $600 million revolving facility, which matures March 7, 2021 and has two six-month extension options. It reported compliance with debt covenants. Management stated that cash, operating cash flow, the revolver, the ATM program and capital-market access were expected to fund operations and near-term requirements.
In the fourth quarter, the company refinanced a $544 million cross-collateralized mortgage with 18 non-recourse mortgages totaling $710 million, at a weighted-average rate of 4.0% and approximately 10-year weighted-average maturity. The refinancing generated $120 million of additional cash proceeds net of refinancing costs, but resulted in a $34.1 million debt-extinguishment loss. Active development, redevelopment and anchor-repositioning projects totaled approximately $195.5 million; the filing cites $104.9 million remaining to fund in one section and $111.4 million in another estimate. Investors should reconcile these differing project-funding figures.
Outlook, risks and unusual items
- No quantified earnings or FFO guidance is provided in the supplied filing text. Management’s stated priorities include leasing vacant space, renewing leases at higher rents, completing redevelopment and development projects, repositioning anchors, and selectively disposing of non-core assets.
- Hurricane Maria damaged the company’s two Puerto Rico malls, which represented approximately 10% of NOI. At year-end, about 86% of stores previously open were operating. The company recorded $7.4 million in casualty and impairment losses and reported $2.2 million of business-interruption losses; it expected significant insurance recovery in 2018, subject to deductibles and claim resolution. Total recovery and timing were undetermined.
- Toys “R” Us filed for Chapter 11 in September 2017; Urban Edge had leases at nine locations representing $5.0 million of annualized base rent. Sears and Staples represented 2.0% and 1.5% of annualized base rent, respectively, and were closing stores.
- Approximately 16% of annualized base rent was scheduled to expire within three years. The company also cited e-commerce, tenant credit and bankruptcy risk, concentration in the New York metropolitan area, Puerto Rico economic conditions, natural disasters, rising interest rates, refinancing and REIT-qualification risks.
- One property in Englewood, New Jersey, was transferred to a receiver and sold at foreclosure in January 2018; removal of related assets and liabilities was pending the court’s approval and discharge of the receiver.
- Environmental remediation accruals were $1.2 million for two properties. Ordinary-course litigation was not expected by management to have a material adverse effect. The auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Reconcile the $39.2 million acquired-leasehold income and $35.3 million debt-extinguishment charge to reported earnings, including the $15.9 million fourth-quarter net loss.
- Track Puerto Rico property reopening, tenant collections, hurricane-related insurance proceeds and the final net cost after deductibles.
- Assess leasing and occupancy at acquired properties, upcoming lease expirations, and exposure to Toys “R” Us, Sears and Staples store closures.
- Confirm the remaining redevelopment funding requirement, project completion timing and expected returns; the filing gives differing remaining-cost estimates.
- Monitor debt maturities, variable-rate exposure, covenant headroom, use of the $600 million revolver and the effect of share issuance on per-share results and dividend capacity.
- Review the Allentown property sale and related taxable REIT subsidiary taxes, as well as any material changes in REIT tax treatment under the Tax Cuts and Jobs Act.