Urban Edge Properties — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Urban Edge Properties is a retail-property REIT focused primarily on the New York metropolitan area. Its portfolio included 83 shopping centers, four malls and a warehouse park, totaling approximately 16.3 million square feet. Urban Edge owned approximately 89.9% of its operating partnership.
Financial performance and position
Amounts below are in millions of dollars, except per-share data; results are unaudited.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $102.0 | $89.5 | $201.0 | $215.6 |
| Operating income | $23.2 | $28.5 | $58.2 | $97.8 |
| Net income | $59.8 | $14.9 | $82.8 | $69.7 |
| Net income attributable to common shareholders | $53.7 | $13.6 | $74.4 | $64.2 |
| Diluted EPS | $0.47 | $0.13 | $0.65 | $0.63 |
| FFO applicable to diluted common shareholders | $39.6 | $38.7 | $83.7 | $112.1 |
| Cash NOI | $54.7 | $58.5 | $114.7 | $113.6 |
| Same-property cash NOI | $49.0 | $49.0 | $95.4 | $94.0 |
- Operating trends: Same-property cash NOI increased 0.1% for Q2 and 1.5% for the first half. Q2 cash NOI fell despite higher revenue, including a $6.0 million Toys “R” Us lease-termination payment classified in property operating expense.
- Cash flow: First-half operating cash flow was $76.7 million, down from $83.3 million. Investing used $5.9 million, versus $242.6 million in the prior-year period; financing used $57.6 million, compared with $281.9 million provided in 2017. Cash, including restricted cash, rose to $514.0 million from $500.8 million at year-end.
- Debt and liquidity: Mortgages payable were $1.565 billion gross ($1.552 billion net of issuance costs), with a 4.08% weighted-average rate: 4.12% fixed and 3.72% variable. The company had $169.5 million of variable-rate debt and reported a $1.695 million annual interest-cost sensitivity to a 1% increase in base rates. No revolver borrowings were outstanding; the $600 million facility and $241.3 million of ATM equity capacity were available. The company reported compliance with debt covenants and no debt maturities scheduled in 2018.
- Distributions: The Board declared $0.22 per share and OP unit for each of the first two quarters, or an annualized $0.88 rate. First-half distributions were $0.44 per share/unit.
Material changes and unusual items
- Q2 revenue grew 13.9% year over year, primarily due to acquisitions net of dispositions, recaptured Toys “R” Us leases and rent commencements/increases. First-half revenue declined 6.7%, principally because the prior-year period included $39.2 million of non-cash income from acquiring the Shops at Bruckner ground lease.
- Q2 and first-half net income benefited from a $50.4 million gain on the April sale of the Allentown property for $54.3 million net of selling costs. First-half results also included a $2.5 million debt-extinguishment gain following the Englewood, New Jersey foreclosure and forgiveness of $11.5 million of mortgage debt.
- FFO declined 25.4% for the first half, in part reflecting the prior-year comparison and changes in property earnings; the Allentown sale gain is excluded from FFO. Q2 FFO was up modestly.
- Interest and debt expense rose to $31.3 million for the first half from $26.7 million, reflecting new mortgage financings, partly offset by paydowns and refinancing.
- The company acquired four adjacent properties for $4.9 million in the first half and had 17 development, redevelopment or anchor-repositioning projects with estimated costs of $206.6 million. It reported $119.5 million incurred and $87.1 million remaining in one disclosure; another MD&A disclosure estimated $88.7 million remaining.
Outlook, risks and contingencies
- Management said cash from operations, cash on hand, available credit, potential ATM issuance and capital-market access were expected to fund operations, debt service and capital expenditures over the next 12 months. No specific earnings or FFO guidance was provided.
- Management expects to spend the remaining project costs over approximately two years, funded through cash, dispositions, secured debt or equity. The filing’s two estimates of remaining project costs differ ($87.1 million and $88.7 million).
- Hurricane Maria-related tenant disruption continued in Puerto Rico. First-half net casualty gains were $1.3 million after $1.5 million of insurance proceeds and $0.2 million of costs; business-interruption insurance recovery timing and total amounts were undetermined.
- A June tornado damaged approximately 13% of the Wilkes-Barre property’s GLA. The company estimated repairs of $6.4 million, expected insurance to cover costs subject to approximately $0.1 million in deductibles, and estimated full operations for affected tenants would resume in about a year. Insurance recovery was not yet determined.
- Toys “R” Us had leases at nine locations with annual gross rent of $7.0 million. In July 2018, after quarter-end, it rejected four leases with approximately $4.0 million annual gross rent; the company was seeking replacement tenants. Three other leases remained subject to ongoing bankruptcy proceedings. Sears and Staples represented 2.0% and 1.5% of annualized base rent, respectively.
- Environmental remediation accruals were $1.8 million; actual costs could exceed estimates. The company also cited potential uninsured losses, insurance deductibles and rising premiums as risks. It reported no material changes to previously disclosed risk factors and no off-balance-sheet arrangements.
Most important facts for investors to verify
- Underlying property performance and the drivers of modest same-property NOI growth versus reported earnings and FFO.
- The nonrecurring Allentown sale gain, Englewood debt forgiveness, and Toys “R” Us lease costs and rejected leases when assessing recurring results and tenant exposure.
- Development funding needs: reconcile the filing’s $87.1 million and $88.7 million estimates of remaining project costs.
- Actual repair costs, tenant reopening progress and insurance recoveries related to Hurricane Maria and the Wilkes-Barre tornado.
- Debt maturities, variable-rate exposure, covenant compliance, and the company’s use of its revolver or ATM capacity to fund projects and distributions.