Urban Edge Properties — 2015 Form 10-K
Reporting period: Year ended December 31, 2015. This was the company’s first year as an independent, publicly traded REIT following its January 15, 2015 spin-off from Vornado Realty Trust. The 2015 results combine pre-separation carve-out figures with post-separation consolidated results; 2014 and earlier are Vornado-era combined results and may not be directly comparable with stand-alone results.
Business context
Urban Edge owns and operates retail real estate concentrated in urban, high-barrier-to-entry markets, primarily in the New York metropolitan area and Northeast. At year-end, its portfolio comprised 80 shopping centers, three malls and a warehouse park totaling 14.8 million square feet. Retail occupancy was 96.2%; occupancy across the total portfolio, including warehouses, was 95.1%.
Financial results and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $322.9 million | $315.7 million |
| Operating income | $98.1 million | $122.4 million |
| Net income | $41.3 million | $65.8 million |
| Net income attributable to common shareholders | $38.8 million | $65.8 million |
| Diluted earnings per share | $0.39 | $0.66 |
| FFO applicable to diluted common shareholders | $98.0 million | $119.0 million |
| Cash from operating activities | $138.1 million | $105.7 million |
Revenue rose 2.3%, while operating income and common-shareholder net income declined. Higher general and administrative costs and transaction costs associated largely with the separation were significant factors. General and administrative expense increased $14.2 million to $32.0 million; transaction costs increased $15.4 million to $24.0 million. The company identified $30.0 million of 2015 items affecting FFO comparability, principally transaction costs, one-time equity awards, and environmental remediation, partly offset by settlement income. FFO is a non-GAAP measure and is not a substitute for net income or operating cash flow.
Same-property NOI increased $7.1 million, or 4.1%, to $183.1 million. Retail occupancy improved from 95.8% to 96.2%, and same-property occupancy rose from 96.3% to 97.2%. New and renewed same-space leases achieved reported average rent spreads of 8.8% and 8.3%, respectively.
Operating cash flow was $138.1 million; investing activities used $65.5 million, including property additions and acquisitions. Financing activities provided $93.8 million, including $227.7 million of net Vornado contributions in connection with the spin-off, partly offset by dividends and debt repayments. Year-end cash was $169.0 million, compared with $2.6 million at year-end 2014.
Mortgages payable were $1.242 billion gross ($1.234 billion net of unamortized issuance costs), versus $1.289 billion gross at year-end 2014. The company had a $500 million revolving credit facility, with no borrowings outstanding at year-end. Net debt to total market capitalization was 28.9%. Reported equity was $471.5 million and total assets were $1.919 billion.
The board declared dividends of $0.20 per share each quarter in 2015, or $0.80 for the year; all 2015 distributions were reported as ordinary dividends. A $0.20 quarterly dividend was declared for payment in March 2016.
Material changes and notable items
- The spin-off made Urban Edge an independent public company and introduced stand-alone expenses, new equity compensation and transition-service arrangements with Vornado. Vornado contributed $225 million in cash at separation and paid certain separation costs.
- Urban Edge acquired three properties for an aggregate $30.1 million, including Pan Bay Center in Queens, and expanded its active development and redevelopment program. Projects underway had an estimated total investment of $122.8 million, with $91.0 million remaining to fund.
- The Montehiedra, Puerto Rico mortgage was restructured in January 2015: maturity was extended to 2021, with $90 million of senior debt bearing 5.33% current interest and $30 million of junior debt accruing interest at 3.0%. A separate $20 million intercompany funding commitment for redevelopment had $9.4 million funded by year-end.
- The Englewood property mortgage, with $11.5 million outstanding, was in default at year-end after tenant departures impaired debt-service cash flow. The loan was with a special servicer, and discussions included possible restructuring or lender possession of the property.
- Puerto Rico malls represented approximately 15% of NOI. Four properties in New Jersey and Puerto Rico together generated more than 25% of NOI, creating property and regional concentration risk.
Outlook, risks and contingencies
Management provided qualitative priorities rather than quantified 2016 earnings or FFO guidance: lease vacant space and renewals at higher rents, commence rent from signed leases, pursue redevelopment and development, and selectively dispose of non-core assets. Management stated that operating cash flows and existing cash were expected to fund operations, debt amortization and recurring capital expenditures over the next 12 months. Planned 2016 capital expenditures and leasing commissions totaled $28.5 million; the remaining $91.0 million for active projects was expected to be spent over three years and funded through cash, dispositions, borrowing or equity issuance.
Key risks include tenant defaults and bankruptcies, lease rollover, retail competition and e-commerce, redevelopment execution and financing, interest-rate and refinancing exposure, and geographic concentration. The filing highlights Puerto Rico’s weak economy and potential tax changes. REIT qualification and distribution requirements, and possible tax indemnification obligations tied to the Vornado separation, also warrant attention. Transition services from Vornado were scheduled to last up to two years, and stand-alone costs may differ from historical allocated costs.
The company accrued $1.4 million for potential environmental remediation at two properties; no amounts had been spent and actual costs could exceed the accrual. Ordinary-course legal proceedings were not expected by management to have a material adverse effect. The company reported compliance with debt covenants at year-end, notwithstanding the Englewood loan default disclosure. Independent auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Track the Englewood mortgage default, special-servicer negotiations and potential property transfer or restructuring.
- Assess Puerto Rico operations and tax exposure, including Montehiedra’s redevelopment, funding requirements and debt performance.
- Reconcile 2015 reported earnings and FFO with the $30.0 million of identified comparability items and the costs of operating independently.
- Review the $91.0 million remaining development commitment against available cash, the undrawn credit facility, dispositions and potential financing needs.
- Monitor lease expirations, tenant credit and concentration, occupancy, rent spreads, and whether signed leases commence and generate cash rent as planned.
- Confirm ongoing REIT qualification, dividend capacity and any material obligations under separation, tax or indemnification agreements.