Urban Edge Properties — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Urban Edge is a REIT focused on retail properties in high-barrier-to-entry markets. Its portfolio comprised 80 shopping centers, three malls and one warehouse park, totaling 14.9 million square feet.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $83.1 million | $83.8 million |
| Operating income | $33.4 million | $3.7 million |
| Net income (loss) attributable to common shareholders | $18.6 million | $(11.5) million |
| Diluted EPS | $0.19 | $(0.12) |
| FFO attributable to common shareholders | $33.5 million | $1.5 million |
| Same-property NOI | $46.3 million | $45.2 million |
| Cash from operating activities | $32.4 million | $30.6 million |
Revenue declined about 0.9%; same-property NOI increased 2.4%. Operating margin was approximately 40.2%, versus 4.4% in Q1 2015, though the comparison is substantially affected by prior-year separation costs. FFO and NOI are non-GAAP measures and are not substitutes for net income or cash flow.
Cash and cash equivalents were $162.4 million at quarter-end, down $6.6 million from year-end. Investing activities used $13.9 million, principally for $14.8 million of real estate additions; financing activities used $25.2 million, including $19.8 million of common dividends and $4.1 million of debt repayments. The quarterly dividend was $0.20 per share.
Mortgages payable were $1.240 billion gross, or $1.230 billion net of unamortized issuance costs. The $500 million revolving credit facility was undrawn. One mortgage has a variable rate; the filing estimates a 1 percentage-point base-rate increase would raise annual interest expense by about $0.6 million. The company reported compliance with debt covenants.
Changes and notable items
- Net income improved from a loss to profit, but the comparison is not fully like-for-like: Q1 2015 included the pre-separation carved-out business and $21.9 million of separation transaction costs, including $17.4 million contingent on completion of the spin-off.
- Lower property operating expenses reflected $2.2 million less snow-removal expense and the absence of $1.4 million in prior-year environmental remediation expense. Lower G&A reflected prior-year one-time share-based compensation; reduced transaction costs and lower interest expense also aided results.
- Property rentals rose $1.3 million, supported by rent commencements from higher occupancy and contractual increases, but tenant expense reimbursements fell $1.7 million.
- Active development, redevelopment and anchor repositioning projects totaled approximately $131.0 million, with $92.8 million remaining to fund. The company expects to spend approximately $28.5 million in 2016 on maintenance capital, tenant improvements and leasing commissions.
- Waterbury, Connecticut shopping-center sale for $21.6 million was expected to close in Q2 2016 after post-quarter-end resolution of due-diligence contingencies. A Cherry Hill land sale for $3.5 million was expected in Q2 2017.
Outlook, risks and contingencies
Management said operating cash flows over the next 12 months, together with existing cash, should be adequate for operations, debt amortization and recurring capital expenditures. It expects to fund remaining redevelopment spending with cash, asset-sale proceeds, credit-line or secured borrowing, and/or equity. No specific earnings or FFO guidance was provided.
- The $11.5 million Englewood mortgage was in default after tenants vacated and property cash flow became insufficient for debt service. It was with a special servicer, and restructuring discussions included the possibility that the lender could take possession of the property.
- Montehiedra’s restructured debt includes a $90 million senior tranche bearing 5.33% current interest and a $30 million junior tranche accruing 3.0%. The company committed $20 million for redevelopment-related leasing and building costs; $10.1 million had been funded by quarter-end.
- Potential environmental remediation costs, tenant bankruptcies, insurance availability and costs, and the ability to maintain REIT status are disclosed risks. Management said ordinary-course legal matters were not expected to materially affect results; no material changes to previously reported risk factors were identified.
Important facts for investors to verify
- Progress and final proceeds/timing for the Waterbury and Cherry Hill property sales.
- Status of the Englewood loan default, special-servicer negotiations and possible property loss.
- Leasing, returns and remaining funding needs for the $131.0 million project pipeline, including the Montehiedra commitment.
- Whether same-property NOI growth and cash generation continue after accounting for unusual prior-year spin-off costs and expense items.
- Debt maturities, covenant headroom, refinancing requirements and availability/cost of insurance.