Urban Edge Properties — Q3 2021 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2021. Urban Edge is a REIT focused on retail real estate, primarily in the New York metropolitan area. Its portfolio comprised 68 shopping centers, five malls and two industrial parks totaling approximately 16.4 million square feet. The filing combines Urban Edge Properties and its operating partnership; Urban Edge owned approximately 96% of the partnership.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $106.8 million | $75.8 million | $296.5 million | $242.8 million |
| Net income (loss) | $30.1 million | $(5.8) million | $63.8 million | $78.0 million |
| Net income (loss) attributable to common shareholders | $27.8 million | $(5.6) million | $60.2 million | $74.6 million |
| Diluted EPS | $0.24 | $(0.05) | $0.51 | $0.63 |
| NOI | $56.8 million | $46.0 million | $167.6 million | $151.0 million |
| Same-property NOI | $55.7 million | $43.9 million | $159.9 million | $140.1 million |
| FFO applicable to diluted common shareholders | $45.3 million | $16.9 million | $112.5 million | $107.3 million |
For the nine months, operating cash flow was $93.1 million versus $74.8 million; investing cash outflow was $66.5 million versus $56.0 million; and financing cash outflow was $123.1 million, compared with $167.0 million of financing inflow in 2020. Cash and restricted cash totaled $322.8 million at September 30, 2021, including $269.0 million of unrestricted cash.
Mortgage principal was $1.582 billion ($1.574 billion net of debt issuance costs), with a 3.92% weighted-average rate: fixed-rate debt was $1.420 billion at 4.15% and variable-rate debt $162.3 million at 1.83%. No borrowings were outstanding on the $600 million revolver. Debt maturities include $98.9 million in 2022 and $349.8 million in 2023. The company reported covenant compliance.
Material changes versus the prior comparable period
- Q3 revenue rose $31.0 million year over year, while nine-month revenue rose $53.7 million. Management cited improved rent collectibility, higher tenant reimbursements and percentage rent, and $12.5 million of accelerated below-market lease amortization tied to Kmart and Sears lease terminations.
- Same-property NOI increased 26.7% in Q3 and 14.2% for the nine-month period. Management attributed improvement in part to lower uncollectible rent and stronger collections; Q3 2020 operations were affected by pandemic disruptions.
- Nine-month net income declined despite higher revenue. The 2020 comparison included a $34.9 million debt-extinguishment gain and a $13.1 million income-tax benefit; 2021 also had lower property-sale gains ($18.6 million versus $39.8 million).
- Interest and debt expense fell $9.7 million for the nine months, primarily reflecting the 2020 revolver draw and the 2020 Las Catalinas debt restructuring. Property operating expenses increased $12.0 million, partly as 2020 pandemic-related spending reductions unwound.
- Operating cash flow improved, but cash and restricted cash fell $96.5 million from year-end 2020, mainly reflecting distributions and investment spending. Nine-month shareholder distributions were $106.4 million; the company declared $0.15 per share per quarter in the first three quarters of 2021.
Outlook, risks and unusual items
- No formal earnings or operating guidance was provided. Management said cash on hand, available revolver capacity and expected capital-market access should be sufficient for operations, debt service and capital expenditures for at least the next 12 months. No debt was scheduled to mature until Q2 2022.
- Sixteen development, redevelopment and anchor-repositioning projects had estimated costs of $152.4 million; $61.3 million had been incurred and $91.1 million remained to fund, expected over six to eighteen months. Projects and timing remain subject to market conditions and possible construction constraints.
- The company agreed to pay $20 million to terminate its remaining Kmart and Sears leases at three properties, effective October 15, 2021. The amount was accrued at quarter-end and capitalized as construction in progress. The terminations also caused accelerated amortization that increased Q3 rental revenue.
- Las Catalinas Mall’s $129 million non-recourse mortgage was modified in 2020 to interest-only payments and provides for a possible discounted payoff beginning in 2023, subject to conditions including property performance. The company had accrued $5.4 million of related interest. A separate guarantee for the Montehiedra mortgage had $10.3 million of remaining exposure.
- COVID-19 remains a risk to tenants’ ability to pay rent and to future occupancy and operating performance. The company reported collecting 97% of rents and tenant reimbursements billed in the first nine months of 2021; it had collected 92% of Q3 2020 billings as of October 29, 2021. Tenant bankruptcies, lease rejection, inflation, rising insurance costs, environmental remediation and interest-rate exposure are additional risks.
- The company is litigating in New Jersey to recover COVID-related rent losses under insurance policies. The outcome is uncertain. Environmental remediation accruals were $1.7 million; actual costs could be higher. Ordinary-course legal matters were not expected by management to have a material adverse effect.
Important facts for investors to verify
- How much of Q3 revenue and earnings growth reflects recurring rent and collections versus the $12.5 million accelerated lease-intangible amortization and other noncash adjustments.
- Whether rent collections and tenant credit quality continue to improve, including the repayment of deferred rents and the impact of tenant bankruptcies.
- Progress, total costs, leasing prospects and returns on the $91.1 million remaining project commitment and the three recaptured anchor spaces.
- Refinancing plans and covenant capacity ahead of the 2022–2023 maturities, particularly the 2023 maturity concentration and the Las Catalinas loan conditions.
- Potential cash needs from the $20 million lease-termination payment, insurance litigation, environmental matters and future distributions; reported FFO is a non-GAAP measure and is not operating cash flow.