Urban Edge Properties — Q2 2020 Form 10-Q
Business and period: Urban Edge is a retail REIT focused primarily on the New York metropolitan area. At June 30, 2020, its portfolio comprised 73 shopping centers, four malls and a warehouse park totaling approximately 15.1 million square feet. This summary covers the quarter and six months ended June 30, 2020; financial statements are unaudited.
Financial results and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $73.6 million | $102.7 million | $167.0 million | $200.5 million |
| Consolidated net income | $32.5 million | $28.1 million | $83.8 million | $56.0 million |
| EPS, diluted | $0.27 | $0.22 | $0.67 | $0.44 |
| FFO attributable to diluted common shareholders | $55.7 million | $57.6 million | $90.5 million | $94.1 million |
| Same-property NOI | $44.0 million | $54.8 million | $98.5 million | $110.0 million |
| Cash from operating activities | Not presented quarterly | Not presented quarterly | $42.0 million | $76.8 million |
- Q2 same-property NOI fell 19.7%; six-month same-property NOI fell 10.4%. The filing does not provide a clear operating margin figure.
- At June 30, total assets were $3.13 billion, total equity $1.03 billion and total debt outstanding $1.83 billion, including $250 million drawn on the revolving facility. Weighted-average debt interest rate was 3.77%.
- Cash and cash equivalents were $615.6 million, with $24.3 million restricted cash; $350 million remained available under the $600 million revolver. Management said liquidity was expected to cover operations, debt service and capital expenditures for at least 12 months.
- Six-month investing cash outflow was $48.9 million; financing cash inflow was $161.6 million. Total cash and restricted cash increased $154.7 million from year-end 2019.
Material changes and unusual items
- Revenue declined 28% in Q2, principally reflecting COVID-19-related rent deemed uncollectible, write-offs of straight-line rent receivables, lower tenant reimbursements and portfolio dispositions, partly offset by rent commencements and contractual increases.
- Reported earnings included a $34.9 million gain from refinancing the Montehiedra mortgage, mainly because a $30 million junior loan and accrued interest were forgiven. The refinancing replaced the senior loan with an $82 million, 10-year fixed-rate mortgage at 5.00%.
- A $13.7 million Q2 income tax benefit reflected Puerto Rico refinancing and entity-restructuring tax effects. These items materially contributed to higher GAAP net income; FFO declined year over year.
- General and administrative expense rose $8.0 million in Q2, including $5.6 million of accelerated equity-award amortization associated with an executive transition.
- The company acquired Kingswood Center and Kingswood Crossing in Brooklyn for $167.3 million including transaction costs, and sold three properties for net proceeds of $58.1 million, recognizing a $39.8 million gain.
- The company repurchased 5.9 million shares for $54.1 million cumulatively under a $200 million authorization. It temporarily suspended its quarterly dividend and declared no Q2 dividend.
Outlook, risks and contingencies
- COVID-19 materially disrupted tenant operations and rent collections. As of August 4, 2020, 94% of portfolio gross leasable area was open; the company had collected approximately 72% of Q2 rent billed and 73% of July rent billed. Tenants representing about 49% of annualized base rent had requested relief. Management anticipated further concessions; amounts granted at that date included $0.7 million of deferrals and $0.1 million of abatements.
- The company expected to execute approximately 65 rent deferrals totaling $4.2 million. It stated that the scale and duration of further impacts remained uncertain and anticipated lower percentage rent during 2020.
- The $129 million non-recourse Las Catalinas Mall mortgage in Puerto Rico was in default from April 2020. The interest rate increased from 4.43% to 7.43%; the lender may accelerate the balance. The company was negotiating with the special servicer, had accrued $2.8 million of interest, and was not in compliance with covenants related to this mortgage. No resolution timetable was given.
- Eleven active development, redevelopment or anchor-repositioning projects had estimated costs of $94.7 million, with $55.8 million remaining to fund. Stabilization dates were delayed or being monitored. A further approximately $300 million pipeline was under reevaluation, with no obligation to proceed.
- Management cited risks from tenant failures and bankruptcies, prolonged closures and rent relief, weaker leasing and redevelopment economics, covenant compliance and capital-market access, interest-rate and LIBOR changes, and uninsured or environmental costs. 24 Hour Fitness filed for bankruptcy; its Paramus lease represented approximately 54,000 square feet and $3.1 million in annual rent.
- No formal earnings guidance was stated. The company said acquisition and disposition activity could decline for the remainder of 2020. Ordinary-course legal proceedings were not expected to have a material adverse effect; environmental remediation accruals were $1.0 million at quarter-end.
Important facts for investors to verify
- Subsequent rent collections, tenant relief granted, reopening levels and the ultimate collectibility of billed rents.
- Developments in the Las Catalinas default, lender negotiations, accrued interest and any effect on other debt covenants or liquidity.
- Whether earnings and cash generation excluding the Montehiedra debt-forgiveness gain and tax benefit support ongoing operations and distributions.
- The pace of dividend reinstatement, share repurchases and funding of the $55.8 million remaining active-project commitments.
- Tenant bankruptcy outcomes, leasing of vacated space and any further impairment, rent write-offs or concessions.