Urban Edge Properties — Q3 2015 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2015. Urban Edge owns and operates retail real estate; its portfolio comprised 79 shopping centers, three malls and a warehouse park totaling 14.8 million square feet. The company separated from Vornado on January 15, 2015. Accordingly, 2015 results combine pre-separation carved-out results with post-separation consolidated results, which limits comparability with 2014.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $79.8 million | $76.4 million | $242.3 million | $235.9 million |
| Operating income | $34.0 million | $28.5 million | $68.5 million | $91.7 million |
| Net income attributable to common shareholders | $18.9 million | $13.6 million | $23.6 million | $49.6 million |
| Diluted earnings per share | $0.19 | $0.14 | $0.24 | $0.50 |
| FFO attributable to common shareholders | $33.5 million | $26.7 million | $66.3 million | $89.7 million |
| Same-property NOI | $45.9 million | $44.1 million | $136.9 million | $132.1 million |
For Q3, same-property NOI increased 4.1%; for the nine-month period it increased 3.6%. FFO per diluted share was $0.32 for Q3 and $0.63 for nine months, versus $0.25 and $0.85, respectively, in 2014. The filing does not present a defined operating-margin metric.
Cash flow and liquidity. Nine-month operating cash flow was $99.9 million, investing cash outflow was $27.6 million, and financing cash inflow was $122.5 million. Cash was $197.3 million at September 30, compared with $2.6 million at year-end 2014. Financing cash flow included $231.5 million of net Vornado contributions related to the spin-off; it also included $59.4 million of shareholder dividends and $42.7 million of debt repayments. Management said cash and expected operating cash flows should be adequate for the next 12 months’ operations, debt amortization and recurring capital expenditures.
Debt and capital. Mortgages payable totaled $1.246 billion, down from $1.289 billion at December 31, 2014. The company had a $500 million revolving credit facility, with no borrowings outstanding. Mortgage covenants were reported in compliance. Variable-rate debt was $60 million; the filing estimates a $0.6 million annual interest-expense effect from a 1 percentage-point change in base rates. No hedges were in place. The board declared quarterly dividends of $0.20 per share for each of the first three quarters; a further $0.20 dividend was declared for payment December 31, 2015.
Material changes versus comparable periods
- Q3 revenue rose $3.4 million, primarily from $1.9 million of tenant bankruptcy settlement and lease termination income, higher expense reimbursements, and increased management and development fees.
- Q3 common-shareholder earnings increased to $18.9 million from $13.6 million. Lower property operating costs and lower interest expense contributed, while general and administrative costs rose as the company established itself as a stand-alone public company.
- Nine-month common-shareholder earnings fell to $23.6 million from $49.6 million. The 2015 period included $22.4 million of transaction costs, including $21.9 million related to the separation, as well as elevated share-based compensation and stand-alone company costs. 2014 also included a different pre-separation cost structure.
- Nine-month FFO declined year over year and included $29.0 million of net comparability items, principally separation transaction costs, one-time equity awards, environmental remediation costs and debt restructuring expenses, partly offset by tenant settlement income.
Outlook, risks and unusual items
- Management reported approximately $105.7 million of redevelopment projects underway, with an estimated $80.1 million still to fund over the next three years. The Montehiedra conversion to an outlet-focused mall remained scheduled for completion in late 2016; East Hanover warehouse renovations were ahead of schedule, with stabilization moved from 2018 to 2017. The company also cited approximately $175 million of planned future expansions and renovations.
- Englewood’s $11.5 million mortgage was transferred to a special servicer after tenant vacancies left property cash flow insufficient for debt service. Restructuring discussions continued, including the possibility that the lender could take possession of the property.
- Montehiedra’s $120 million mortgage was modified: the loan was extended to 2021 and divided into senior and junior tranches. The company committed $20 million for redevelopment-related leasing and building costs, of which $8 million had been funded by September 30.
- A&P filed for bankruptcy and planned store closures. A bankruptcy court approved the sale of the Mt. Kisco store to Stop & Shop; the North Bergen store sale remained in process. The filing said lease termination had not materially affected financial position, cash flows or results.
- The company accrued $1.4 million for possible environmental remediation at two properties; actual costs could exceed the estimate. Insurance deductibles and losses beyond coverage could also be material.
- Urban Edge intended to elect REIT status for 2015, subject to meeting applicable requirements. It also reported that disclosure controls were effective and that no material change in internal control occurred during the period.
Important facts for investors to verify
- Track Englewood’s special-servicer negotiations, property cash generation and any change in the lender’s remedies.
- Monitor leasing, occupancy, costs and funding needs for Montehiedra and the broader redevelopment pipeline, including whether estimated remaining costs change.
- Assess recurring operating performance separately from tenant settlements, separation costs, one-time awards and other FFO comparability items.
- Review A&P-related re-tenanting and lease outcomes, and any resulting effect on rent and expense recoveries.
- Confirm the company’s ability to meet REIT qualification and distribution requirements, maintain covenant compliance and fund planned capital needs.
- Consider the limitations of period comparisons: 2015 includes the transition from Vornado ownership, and pre-separation allocations may not represent costs as a stand-alone company.