Urban Edge Properties — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Urban Edge is a REIT focused on retail properties in high-barrier-to-entry markets. Its portfolio comprised 79 shopping centers, three malls and a warehouse park totaling 14.7 million square feet. The 2015 six-month comparison includes carved-out Vornado operations before Urban Edge’s January 15, 2015 separation, so it is not fully comparable.
Financial highlights
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $79.5 million | $78.7 million | $162.5 million | $162.5 million |
| Operating income | $32.8 million | $30.8 million | $66.2 million | $34.5 million |
| Net income | $36.1 million | $17.2 million | $55.9 million | $5.1 million |
| Net income attributable to common shareholders | $33.9 million | $16.2 million | $52.5 million | $4.7 million |
| Diluted EPS | $0.34 | $0.16 | $0.53 | $0.05 |
| FFO applicable to diluted common shareholders | $33.8 million | $31.3 million | $67.4 million | $32.8 million |
| Same-property cash NOI | $46.7 million | $44.9 million | $92.8 million | $89.8 million |
Q2 same-property cash NOI grew 4.2%; six-month growth was 3.3%. Total cash NOI was $52.5 million for Q2 and $104.7 million for the six months. These are non-GAAP measures, not substitutes for GAAP income or cash flow.
Net income benefited from a $15.6 million gain on the Waterbury property sale. Six-month 2015 results included $22.3 million of separation-related transaction costs and $17.4 million of non-cash separation costs paid by Vornado. Accordingly, the large reported earnings increase does not represent solely recurring operating improvement. Revenue was essentially flat year over year for the six-month period; property rental growth was offset largely by lower tenant reimbursements.
Six-month operating cash flow was $66.7 million, versus $62.5 million in 2015. Investing activities used $7.6 million, including $27.5 million of real estate additions and $19.9 million of sale proceeds. Financing activities used $71.5 million, including $39.6 million of shareholder dividends, $29.7 million of debt repayments and $2.5 million of distributions to noncontrolling interests. Cash declined $12.3 million from year-end to $156.7 million.
Debt, liquidity and capital spending
- Mortgages payable were $1.214 billion before, and $1.205 billion after, $9.0 million of unamortized issuance costs; year-end net debt was $1.234 billion. Cash was $156.7 million.
- The company had a $500 million revolving credit facility with no borrowings outstanding. It disclosed compliance with debt covenants at June 30 and access to cash flows and existing cash to fund anticipated needs over the next 12 months.
- Scheduled principal repayments include $99.7 million in 2018 and $513.9 million in 2020. The largest 2020 amount includes the $565.1 million cross-collateralized mortgage, due September 2020.
- Variable-rate debt was $38.8 million; a 1% change in base rates was estimated to affect interest expense by approximately $388,000. No hedging instruments were in place.
- Active development, redevelopment and anchor repositioning projects totaled approximately $131.4 million, with $81.2 million remaining to fund over the next three years. Anticipated 2016 maintenance capital, tenant improvements and leasing commissions totaled $28.5 million.
- The board declared $0.20 per share and OP unit for each of the first two quarters of 2016, an indicated annual rate of $0.80. Future dividends remain at the board’s discretion.
Developments, risks and contingencies
- In June, the company sold its Waterbury, Connecticut shopping center for $21.6 million, recording a $15.6 million gain and prepaying $21.2 million of variable-rate cross-collateralized debt to maintain covenant compliance. There were no acquisitions in the first half of 2016.
- The Englewood mortgage was in default after tenant departures weakened property cash flow. The loan remained with the special servicer, and the company was discussing possible lender possession of the property.
- Montehiedra in Puerto Rico had a restructured $120 million mortgage, extended to 2021. The company committed $20 million for leasing and building expenditures, of which $11.8 million had been funded by June 30.
- Environmental remediation accruals were $1.4 million for two properties; actual costs could exceed the estimate. Master-lease commitments totaled approximately $2.7 million. The company also cautioned that insurance deductibles, uncovered losses and future insurance availability could pose risks.
- Management reported no known tenant bankruptcy or announced store closing expected individually to cause a material revenue reduction. Legal matters were not expected to have a material adverse effect. No material risk-factor changes were reported from the 2015 Form 10-K.
- Vornado transition services for certain IT, risk management and health-benefit services were extended through July 31, 2018, subject to earlier termination.
- Management provided no quantified earnings or FFO guidance. It said operating cash flows and cash balances were expected to cover operations, debt amortization and recurring capital expenditures over the next 12 months; development funding may also use dispositions, credit facilities, secured debt or equity.
Key facts for investors to verify
- How much of reported earnings growth reflects the Waterbury gain and unusually high 2015 separation costs, versus recurring property performance?
- What is the outlook for resolving the Englewood default, and could lender possession affect results or asset value?
- Can redevelopment projects be completed within the remaining $81.2 million funding estimate and expected timetable?
- How will the 2020 debt maturity be refinanced or repaid, and what is the company’s effective liquidity after planned capital spending and dividends?
- Are tenant occupancy, rent collections and reimbursement trends sustaining same-property NOI growth?