Urban Edge Properties — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Urban Edge is a REIT focused on retail properties, primarily in the New York metropolitan area. Its portfolio included 83 shopping centers, four malls and a warehouse park, totaling approximately 16.3 million square feet. The filing combines Urban Edge Properties and its operating partnership; amounts below are consolidated.
Financial performance and position
- Third-quarter revenue: $112.2 million, up 19.2% from $94.1 million. Net income was $26.9 million versus $19.2 million; diluted earnings per share were $0.21 versus $0.15.
- Nine-month revenue: $313.2 million, up 1.2% from $309.7 million. Net income rose to $109.7 million from $88.8 million; diluted EPS was $0.86 versus $0.77.
- Reported operating income: Q3 was $39.2 million versus $33.2 million. Nine-month operating income was $97.4 million versus $131.0 million; the prior-year period included $39.2 million of acquired leasehold-interest income.
- Property-level measures: Cash NOI was $50.9 million for Q3 versus $60.4 million, and $165.5 million for nine months versus $174.0 million. Same-property cash NOI increased 0.7% in Q3 and 1.2% for nine months. FFO applicable to diluted common shareholders was $48.5 million for Q3 versus $40.0 million, but $132.2 million for nine months versus $152.1 million.
- Cash flow: Nine-month operating cash flow was $88.1 million, down from $114.5 million. Investing used $36.7 million, including $90.7 million for development and capital improvements, partly offset by $57.6 million of property-sale proceeds. Financing used $86.6 million, including $75.1 million in common dividends and $8.3 million in distributions to redeemable noncontrolling interests.
- Liquidity and debt: Cash and cash equivalents were $449.3 million, plus $16.3 million of restricted cash. Gross mortgage principal was $1.563 billion ($1.551 billion net of issuance costs), at a 4.09% weighted-average rate; $169.5 million was variable-rate debt. The $600 million revolver was undrawn, and $241.3 million remained available under the ATM equity program. The company reported compliance with debt covenants.
- Equity distributions: Dividends and OP-unit distributions were $0.22 per share/unit per quarter, or $0.66 for the first nine months.
Material changes and unusual items
- Q3 revenue benefited by $16.5 million from writing off below-market lease liabilities associated with recaptured Toys “R” Us leases. The company also incurred a $9.5 million Q3 lease-termination payment; total such payments were $15.5 million for nine months.
- Nine-month results included $52.6 million of gains on real estate sales, principally the $50.4 million gain on the Allentown property sale. They also included a $2.5 million gain from extinguishment of debt after the Englewood property foreclosure and forgiveness of $11.5 million of mortgage debt.
- Nine-month interest and debt expense rose to $48.1 million from $41.4 million, reflecting 2017 mortgage financings, partly offset by paydowns and refinancing. Property operating costs also increased, including Toys “R” Us lease costs and higher common-area maintenance expense.
- Q3 general and administrative expense increased to $9.7 million from $7.0 million, including costs related to hiring a new COO and President of Development and severance for a former executive.
Outlook, risks and contingencies
- Management said cash from operations, cash on hand, the revolver, the ATM program and capital-market access should be sufficient for the next 12 months’ operations, debt service and capital expenditures. No formal earnings or operating guidance was provided.
- Approximately $202.1 million of development, redevelopment and anchor-repositioning projects were active; roughly $74 million remained to be funded, expected over the next two years. The filing reports slightly different remaining-cost figures in separate sections.
- Retail tenant bankruptcies are a key risk. After quarter-end, Mattress Firm, Sears and National Wholesale Liquidators filed for Chapter 11. Their leases generated annual gross rents of $2.6 million, $8.5 million and $3.1 million, respectively; none of the company’s leases with Mattress Firm or Sears was then on an announced closure list. The National Wholesale Liquidators lease outcome was uncertain.
- Toys “R” Us rejected leases generating approximately $5.7 million in annual gross rent; the company said it was in discussions to re-lease the spaces. Hurricane-related rent abatements and insurance recoveries remain uncertain. Environmental remediation accruals were $1.7 million, and actual costs could exceed the estimate.
- Interest-rate exposure: a 1 percentage-point increase in variable base rates would increase annual interest expense by an estimated $1.7 million. The company had no hedging instruments in place. Management also cited potential uninsured losses and rising insurance costs as risks.
- The company planned to adopt the new lease-accounting standard on January 1, 2019; lessee arrangements will require recognition of right-of-use assets and lease liabilities, with the balance-sheet impact still under evaluation.
Important facts for investors to verify
- Whether the Toys “R” Us spaces and bankrupt tenants’ locations are re-leased, and at what rents and timing.
- How much of reported earnings reflects property operations versus asset-sale gains, debt forgiveness and noncash lease-accounting items; review FFO and NOI reconciliations alongside GAAP results.
- Progress, remaining funding needs and expected returns for the active redevelopment program.
- Debt maturities, refinancing conditions, variable-rate exposure and covenant headroom, particularly as rates change.
- Future cash flow and dividend coverage, including the effect of tenant vacancies, capital spending and insurance or environmental costs.