Urban Edge Properties — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Urban Edge was spun off from Vornado Realty Trust on January 15, 2015; Q1 2015 results combine pre-separation carved-out operations with post-separation consolidated results. Comparisons with Q1 2014 may therefore not reflect a like-for-like standalone-company cost structure.
Business context
The company owns, manages, develops and redevelops retail real estate in high barrier-to-entry markets. At quarter-end, its portfolio comprised 79 shopping centers, three malls and a warehouse park, totaling 14.8 million square feet.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Total revenue | $83.8 million | $82.6 million |
| Net income (loss) attributable to common shareholders | $(11.5) million; $(0.12) per share | $17.9 million; $0.18 per share |
| Operating income | $3.7 million | $31.8 million |
| FFO attributable to common shareholders | $1.5 million; $0.01 per diluted share | $31.4 million; $0.30 per diluted share |
| Same-property NOI | $45.5 million | $44.4 million; up 2.7% |
| Cash from operating activities | $30.6 million | $25.9 million |
| Cash and cash equivalents | $199.0 million | $2.6 million at December 31, 2014 |
| Mortgages payable | $1,253.9 million | $1,288.5 million at December 31, 2014 |
Operating margin was approximately 4.4%, versus 38.4% in Q1 2014, reflecting the substantial increase in separation-related expenses. Interest and debt expense was $15.2 million, up from $13.1 million. Net cash used in investing was $6.7 million; financing provided $172.5 million, including $231.5 million of net Vornado contributions connected with the spin-off. The company paid $19.9 million in common dividends during the quarter.
Material changes and unusual items
- Revenue increased $1.2 million, primarily from a $1.2 million tenant settlement.
- Q1 2015 included $21.9 million of separation transaction costs, paid by Vornado, and $7.1 million of one-time LTIP compensation expense related to executive awards.
- The company accrued $1.4 million for potential environmental remediation at two properties. It also reported $1.0 million of debt restructuring expenses and $1.3 million of tenant settlement income among FFO comparability items. Management said these items collectively increased reported FFO by $30.2 million.
- Reported FFO fell to $1.5 million from $31.4 million; the period’s unusual costs and income materially affect the comparison. Same-property NOI, by contrast, increased 2.7%.
Liquidity, debt, outlook and risks
- Urban Edge reported $199.0 million of cash and an undrawn $500 million revolving credit facility. The facility has a four-year term, two six-month extension options, and covenants including maximum leverage of 60% and minimum fixed-charge coverage of 1.5. Management said cash balances and expected operating cash flows should cover operations, debt amortization and recurring capital expenditures for the next 12 months.
- Debt was principally mortgage financing; $60 million was variable-rate debt. A hypothetical 1% change in base rates would affect annual interest expense by approximately $0.6 million. No interest-rate hedges were in place. The company stated it was compliant with debt covenants.
- Montehiedra’s $120 million mortgage was restructured and extended to July 2021: $90 million senior debt bears 5.33% current interest and $30 million junior debt accrues interest at 3%. Urban Edge committed $20 million for redevelopment funding, of which $8 million had been funded by quarter-end.
- The Englewood mortgage was transferred to a special servicer after tenant departures left property cash flow insufficient for debt service. Restructuring discussions were ongoing, with no assurance as to timing or outcome.
- Redevelopment projects totaled approximately $65.8 million, with $51.6 million remaining to fund over an anticipated five years. The Montehiedra outlet-focused mall conversion was scheduled for completion in late 2016. Planned 2015 capital expenditures, tenant improvements and leasing commissions totaled $23 million.
- Management planned to elect REIT status with its 2015 tax return, subject to meeting qualification requirements. A $0.20-per-share dividend was declared for payment June 30, 2015.
- Risks include potential remediation costs above the $1.4 million accrual, insurance deductibles and losses beyond coverage, and an ongoing tenant arbitration claim of approximately $3.0 million. No loss was accrued for the arbitration because management considered a loss not probable or estimable. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of the earnings and FFO decline reflects nonrecurring separation, compensation, environmental and debt-restructuring items, and what recurring standalone costs will be.
- Progress and funding needs for Montehiedra and other redevelopment projects, including the expected completion schedule and returns.
- Resolution of the Englewood loan restructuring and the property’s leasing and operating outlook.
- Whether environmental remediation costs or the tenant arbitration claim exceed current estimates or result in additional liabilities.
- Ability to meet REIT qualification and distribution requirements while funding capital needs and servicing mortgage debt.