Business context and reporting period
Urban Edge Properties (UE) filed this combined Form 10-K with its operating partnership, Urban Edge Properties LP (UELP), for the fiscal year ended December 31, 2019. UE is a REIT focused on owning, managing, developing, redeveloping and acquiring retail properties, primarily in the New York metropolitan area. At year-end, the portfolio comprised 74 shopping centers, four malls and a warehouse park totaling approximately 15.2 million square feet. UE owned approximately 95.4% of UELP.
Financial and operating performance
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $387.6 million | $414.2 million |
| Net income | $116.2 million | $117.0 million |
| Net income attributable to UE common shareholders | $109.5 million; $0.91 per diluted share | $105.2 million; $0.92 per diluted share |
| FFO applicable to diluted common shareholders | $167.1 million | $168.5 million |
| Cash NOI | $234.3 million | $227.0 million |
| Same-property cash NOI | $199.9 million | $203.6 million |
| Cash provided by operating activities | $156.4 million | $137.0 million |
| Cash used in investing activities | $2.5 million | $64.8 million |
| Cash used in financing activities | $126.3 million | $115.6 million |
| Year-end cash and restricted cash | $485.1 million | $457.5 million |
| Mortgage debt, principal balance | $1,556.2 million | $1,562.2 million |
| Common dividend declared per share | $0.88 | $0.88 |
Cash NOI and FFO are non-GAAP measures; neither is a substitute for GAAP net income or cash flow. The company reported consolidated portfolio occupancy of 92.9%, down from 93.6%; same-property occupancy was 93.4%, down from 94.2%. Same-property cash NOI declined 1.8%. In 2019, new same-space leases generated average cash rent spreads of 4.0%, and renewals/extensions generated average cash rent spreads of 7.3%.
Material changes versus the prior comparable period
- Revenue fell $26.5 million, primarily due to lower below-market lease intangible amortization and dispositions net of acquisitions, partly offset by rent commencements and contractual increases.
- Net income was nearly unchanged, while common-shareholder net income increased and diluted EPS declined one cent. Gains on real estate sales were $68.6 million, versus $52.6 million in 2018; these gains materially contributed to reported earnings.
- FFO declined $1.4 million. Cash NOI rose $7.3 million, but same-property cash NOI fell $3.8 million.
- Operating cash flow increased $19.4 million. The company received $116.5 million from property sales and spent $47.4 million on acquisitions. Capital expenditures were $91.3 million, down from $117.0 million.
- Property operating expenses fell $14.3 million, largely because 2018 included $15.5 million in Toys “R” Us lease termination payments. Casualty and impairment losses, net, increased to $12.7 million; 2019 included $26.3 million of real estate impairments, offset in part by insurance recoveries.
Liquidity, debt, outlook and risks
At year-end, UE had $485.1 million of cash and restricted cash, no borrowings on its $600 million revolving credit facility, and $600 million of remaining capacity. The revolver was extended to January 2024, with two six-month extension options. Mortgage debt was predominantly fixed-rate, with $169.5 million variable-rate debt; the weighted-average mortgage rate was 4.04%. The company reported compliance with debt covenants and no scheduled debt maturity in 2020, though scheduled principal repayments were $7.5 million. Management said cash from operations, cash on hand, the revolver and access to capital markets should fund operations, debt service and capital expenditures over the next 12 months.
No numeric 2020 earnings or FFO guidance is provided in the supplied filing text. Management’s stated priorities include leasing vacancies and expiring space, commencing executed leases, pursuing redevelopment and anchor repositioning, and acquiring assets that meet investment criteria. Active development, redevelopment and anchor repositioning projects totaled $65.6 million, with $29.9 million remaining to be funded over approximately two years. The 2019 dividend was $0.88 per share; future dividends remain at the board’s discretion.
Key risks include retail disruption from e-commerce, tenant bankruptcies and lease expirations, anchor departures, economic concentration in the New York area, and Puerto Rico exposure. The two Puerto Rico malls represented approximately 8% of NOI and face continuing economic and natural-disaster risks. Other relevant exposures include refinancing and interest-rate risk, redevelopment cost and leasing uncertainty, environmental remediation, insurance limits and REIT qualification. Environmental remediation accruals were $2.7 million at year-end. Ordinary-course litigation was not expected by management to have a material adverse effect.
Unusual items include the $68.6 million property-sale gain, $26.3 million real estate impairment charges on four properties being marketed, and insurance gains related to Hurricane Maria and tornado damage. The company adopted ASC 842 lease accounting in 2019, recording operating lease right-of-use assets of $81.8 million and liabilities of $79.9 million at year-end, and a $2.9 million cumulative adjustment to accumulated deficit. Deloitte issued unqualified opinions on the financial statements and internal controls; real estate impairment valuation was identified as a critical audit matter.
Important facts for investors to verify
- Whether occupancy and same-property NOI stabilize, and whether announced leases commence and vacancies are relet at expected rents.
- How much reported earnings and cash flow depend on property-sale gains, insurance proceeds and other nonrecurring items; compare GAAP earnings with FFO and same-property cash NOI.
- The refinancing profile and covenant headroom for secured mortgages, including the 2021 Puerto Rico mortgage maturities and variable-rate debt exposure.
- Progress and remaining costs for redevelopment projects, and the expected returns and leasing pace for completed projects.
- Tenant-credit and concentration developments, Puerto Rico operating performance, and whether environmental remediation costs exceed recorded accruals.
- The board’s future dividend decisions and the cash available after recurring capital needs and required distributions.