Urban Edge Properties — 2018 Form 10-K
Reporting period: Year ended December 31, 2018; filed February 13, 2019. This is an annual report, not a standalone fourth-quarter filing. Urban Edge is a retail-focused REIT, with substantially all operations and assets held through its majority-owned operating partnership. Its portfolio comprised 83 shopping centers, four malls and a warehouse park, totaling approximately 16.3 million square feet.
Financial and operating performance
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $414.2 million | $407.0 million |
| Operating income | $121.9 million | $161.8 million |
| Net income | $117.0 million | $72.9 million |
| Net income attributable to common shareholders | $105.2 million | $67.1 million |
| Diluted EPS | $0.92 | $0.61 |
| FFO attributable to diluted common shareholders* | $168.5 million | $157.6 million |
| Cash NOI* | $227.0 million | $233.3 million |
| Same-property cash NOI* | $191.2 million | $189.9 million |
| Cash from operating activities | $137.0 million | $157.9 million |
| Dividends declared per common share | $0.88 | $0.88 |
*Non-GAAP measures; the filing cautions that FFO is not a substitute for net income or cash flow, and NOI measures are not directly comparable to GAAP results.
- Revenue rose about 1.7%, while operating income fell about 24.7%. Net income and EPS increased, but results were materially affected by property-sale gains and debt-related items, as well as differing unusual items in 2017.
- Same-property cash NOI increased 0.7%; total cash NOI declined about 2.7%. Retail occupancy fell to 92.6% from 96.0%; same-property retail occupancy was 93.2%, down from 96.6%.
- Cash and cash equivalents, including restricted cash, were $457.5 million at year-end. The company had no borrowings on its $600 million revolving facility, all of which was available. Management reported net debt, net of cash, to total market capitalization of 30.1%.
- Mortgage principal outstanding was $1.562 billion ($1.550 billion net of unamortized issuance costs); weighted average interest rate was 4.12%. Variable-rate debt totaled $169.5 million. The company reported compliance with debt covenants.
- Cash used in investing activities was $64.8 million, including $118.8 million of development and capital-improvement outlays offset by property-sale proceeds. Cash used in financing activities was $115.6 million, including $100.2 million of common-share dividends and $11.1 million of distributions to noncontrolling interests.
Material changes and unusual items
- Revenue included a $22.4 million increase from writing off below-market lease liabilities, largely after recapturing Toys “R” Us leases. The prior-year comparison included $39.2 million of income from acquiring the Shops at Bruckner leasehold interest.
- Operating expenses included $15.5 million paid to recapture two Toys “R” Us leases. Depreciation and amortization also increased, partly due to write-offs associated with recaptured or terminated leases.
- The company recognized $52.6 million in gains on real estate sales, principally the Allentown property sale, and a $2.5 million gain on extinguishment of debt after the Englewood property foreclosure and forgiveness of $11.5 million of mortgage debt. In 2017, it recorded a $35.3 million debt-extinguishment loss.
- Operating cash flow decreased by $20.9 million, with management citing the Toys “R” Us lease recapture payments and timing of operating receipts and payments. Cash and restricted cash fell by $43.3 million year over year.
- The annual dividend remained $0.88 per share, paid at $0.22 quarterly. The board retains discretion over future distributions.
Outlook, risks and contingencies
- No quantified earnings, FFO or occupancy guidance is provided. Management’s stated priorities include leasing vacant and expiring space, commencing rent on signed leases, pursuing redevelopment and anchor repositioning, and disposing of non-core properties.
- Active development, redevelopment and anchor-repositioning projects represented approximately $196.5 million of expected investment. The filing generally cites about $50.5 million remaining to fund over the next two years, although another section states $51.5 million.
- Tenant bankruptcies are a central operating risk. Sears/Kmart had four leases covering about 547,000 square feet and generating approximately $8.5 million in annual rent; the filing says it was unclear whether the leases would be assumed or rejected. National Wholesale Liquidators rejected a lease generating about $3.1 million annually. Several Toys “R” Us spaces were rejected and remained subject to leasing efforts.
- More than 70% of annualized base rent came from the New York metropolitan area, creating geographic concentration. The two Puerto Rico malls represented approximately 9% of NOI and remain exposed to the island’s economic and fiscal conditions and hurricane-related disruption.
- Other material risks include e-commerce and retail tenant weakness, lease expirations and vacancy, redevelopment costs and execution, interest-rate and refinancing exposure, secured debt covenants, environmental remediation, natural disasters and possible uninsured losses. The company had $1.7 million accrued for environmental remediation and stated that additional Hurricane Maria insurance recoveries were uncertain.
- The company expected operating cash flow, cash on hand and available financing to fund operations, debt service and capital expenditures over the next 12 months. It reported no debt maturities scheduled in 2019. The revolving facility matures in March 2021, with two six-month extension options.
Key facts for investors to verify
- Progress in re-leasing bankruptcy-related vacancies, particularly Sears/Kmart locations and rejected Toys “R” Us and National Wholesale Liquidators spaces.
- Whether occupancy and same-property NOI stabilize, and how reported GAAP earnings compare with recurring cash operating performance after sale gains and lease-related write-offs.
- Final redevelopment funding needs and project returns; the filing cites both $50.5 million and $51.5 million of remaining project costs.
- Debt maturities, refinancing terms and exposure to floating LIBOR rates, alongside the availability of the revolver and ATM equity program.
- Puerto Rico property operations, hurricane recovery and any additional insurance proceeds; also monitor environmental remediation costs and the possible impact of insurance limitations.