Urban Edge Properties — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Urban Edge Properties (UE) consolidates Urban Edge Properties LP (UELP), through which substantially all business is conducted; UE owned approximately 89.9% of UELP. The portfolio comprised 85 shopping centers, four malls and a warehouse park totaling 16.7 million square feet.
Financial performance
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2016 period.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $94.1 | $80.0 | $309.7 | $242.5 |
| Operating income | $33.2 | $33.4 | $131.0 | $99.6 |
| Net income | $19.2 | $20.5 | $88.8 | $76.4 |
| Net income attributable to UE common shareholders | $17.2 | $19.3 | $81.3 | $71.8 |
| Diluted earnings per common share | $0.15 | $0.19 | $0.77 | $0.72 |
| FFO applicable to diluted common shareholders | $40.0 | $34.8 | $152.1 | $102.2 |
| Cash NOI | $60.8 | $52.9 | $175.4 | $157.6 |
| Same-property cash NOI | $47.8 | $46.0 | $143.0 | $136.5 |
Revenue rose 17.7% in Q3 and 27.7% year to date. Q3 net income attributable to common shareholders fell despite higher revenue; diluted EPS declined to $0.15 from $0.19. Year-to-date net income rose 16.3%, while EPS increased to $0.77 from $0.72. Same-property cash NOI increased 3.9% in Q3 and 4.7% year to date. Reported operating margin, calculated as operating income divided by revenue, was approximately 35.3% in Q3 versus 41.8% and 42.3% year to date versus 41.1%.
Year-to-date results include $39.2 million of income from an acquired leasehold interest related to Shops at Bruckner. Q3 revenue growth reflected acquisitions, tenant expense reimbursements and rent commencements; operating costs, depreciation and interest expense also increased. FFO is a non-GAAP measure and is not a substitute for net income or operating cash flow.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $114.5 million, investing cash outflow was $262.3 million and financing cash inflow was $396.4 million. Cash and restricted cash ended the period at $388.8 million, including $380.4 million of unrestricted cash.
- Investing outflows included $211.4 million for real estate acquisitions and $55.9 million for development and capital improvements. Financing included $348.2 million of common-share proceeds and $225.5 million of borrowings, offset by $88.6 million of debt repayments and $77.1 million of distributions.
- Mortgages payable were $1.416 billion principal, or $1.408 billion net of deferred financing costs. The company reported covenant compliance. Its $600 million revolving facility was undrawn and matures in March 2021, with two six-month extension options.
- Debt included $127.8 million variable-rate and $1.288 billion fixed-rate principal. A hypothetical 1% increase in base rates was estimated to increase annual interest expense by $1.3 million, subject to the disclosed LIBOR floor. No hedges were in place. Approximately $517.3 million of principal is scheduled for 2020.
- UE declared dividends of $0.22 per share and OP unit in each of the first three quarters; the stated annualized rate was $0.88. Management said cash on hand, operating cash flows, the revolver and capital-market access were expected to fund operations and requirements over the next 12 months.
Material changes, outlook and risks
- Acquisitions and financing: UE acquired assets with aggregate stated purchase prices of $463.7 million, including a seven-property, 1.5-million-square-foot portfolio that was 83% leased at acquisition. Consideration included cash, assumed and newly issued debt, and OP units. In May and August, UE issued shares that generated $348.2 million net proceeds in total; outstanding common shares rose from 99.8 million at year-end 2016 to 113.8 million at September 30, 2017.
- Puerto Rico hurricane: Hurricane Maria damaged the company’s two Puerto Rico malls. UE recorded a $2.2 million casualty charge and estimated repair costs of $6.5 million, with estimated deductibles of about $2.5 million. It had received a $1.0 million insurance advance, but total recovery and timing were undetermined. Most anchor tenants were open except Marshalls at Montehiedra; full operations depended in part on restoration of continuous power.
- Tenant and property risks: Toys “R” Us filed for Chapter 11 in September. UE reported leases at nine locations with $5.0 million annualized base rent and said the outcome was not yet estimable. The Englewood property remained in default and receivership; UE no longer manages it and reported $12.4 million in assets and $14.6 million in liabilities there.
- Development commitments: Sixteen active projects had estimated total costs of $199.4 million. The filing states both $109.4 million and $114.4 million of remaining spending in different sections; management expected remaining project spending over approximately two years and identified cash, dispositions, debt and equity as possible funding sources.
- Other items: Year-to-date casualty and impairment losses totaled $5.6 million, including a $3.5 million Eatontown impairment. A $1.3 million loss on extinguishment of debt followed the Tonnelle Commons refinancing. Environmental remediation accruals were $1.2 million. Management reported no material expected adverse effect from ordinary-course litigation and no material change to previously disclosed risk factors. No specific earnings or FFO guidance was provided.
Important facts for investors to verify
- Confirm the amount, timing and accounting treatment of Hurricane Maria repairs, insurance recoveries, deductibles and business-interruption proceeds.
- Assess Toys “R” Us lease exposure and any subsequent lease rejections, closures or rent collection changes.
- Reconcile the filing’s $109.4 million versus $114.4 million remaining development-spend figures, and monitor project costs, timing and expected returns.
- Review the 2020 debt maturity concentration, refinancing options, covenant headroom and variable-rate exposure.
- Evaluate acquisition performance and occupancy, including the acquired portfolio’s 83% leased status, alongside share dilution and the use of equity proceeds.