Urban Edge Properties — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Urban Edge, a retail-property REIT, was spun off from Vornado on January 15, 2015; 2015 results combine pre-separation carved-out operations with post-separation results, which limits comparability with 2014. Portfolio at quarter-end: 79 shopping centers, three malls and a warehouse park, totaling 14.8 million square feet.
Financial results and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $78.7m | $76.8m | $162.5m | $159.5m |
| Operating income | $30.8m | $31.5m | $34.5m | $63.2m |
| Net income attributable to common shareholders | $16.2m | $18.0m | $4.7m | $35.9m |
| Diluted EPS | $0.16 | $0.18 | $0.05 | $0.36 |
| FFO attributable to common shareholders | $31.3m | $31.6m | $32.8m | $63.0m |
| Same-property NOI | $45.5m | $43.7m | $91.0m | $88.0m |
Q2 revenue rose 2.5%, primarily from higher tenant reimbursements associated with occupancy and more management fees; property rental revenue was slightly lower. Same-property NOI increased 4.2% for Q2 and 3.4% for the six-month period. Q2 net income attributable to common shareholders declined about 10%. First-half results included $22.3m of transaction costs, including $21.9m related to the separation, and elevated share-based compensation; the filing identifies $30.6m of first-half items affecting FFO comparability.
Six-month operating cash flow was $62.5m, investing cash outflow was $19.2m, and financing cash inflow was $147.5m, including $231.5m of net Vornado contributions related to the spin-off. Cash and cash equivalents were $193.4m at June 30, versus $2.6m at year-end 2014. Real estate additions were $15.3m and acquisitions were $3.1m.
Mortgages payable totaled $1.25bn, down from $1.29bn at year-end. The company reported compliance with debt covenants. Its $500m revolver was undrawn; current borrowing terms are LIBOR plus 1.15%, subject to leverage-based changes. A 1% change in base rates would affect annual interest on its $60m variable-rate debt by approximately $0.6m. A $535.2m principal maturity is scheduled for 2020. The company paid $0.40 per common share in dividends during the first half; the indicated annual rate was $0.80.
Material developments, outlook and risks
- The Montehiedra, Puerto Rico mortgage was modified and extended to 2021: $90m senior debt bears 5.33% current interest and $30m junior debt accrues interest at 3%. Urban Edge committed up to $20m for redevelopment-related leasing and building costs, of which $8m had been funded at quarter-end.
- The Englewood mortgage was transferred to a special servicer after tenant departures left property cash flow insufficient for debt service. Discussions over restructuring continued; lender possession was a possibility.
- Redevelopment projects totaled approximately $79.5m, with $57.3m remaining to fund over the next three years. Planned work includes converting Montehiedra to an outlet-focused mall, targeted for completion in late 2016. The company also cited approximately $200m of planned expansions and renovations over several years.
- Management expected operating cash flows over the next 12 months, together with cash on hand, to cover operations, debt amortization and recurring capital expenditures. Estimated 2015 maintenance capital expenditures, tenant improvements and leasing commissions totaled $23m. No earnings guidance was provided.
- The company planned to elect REIT status for tax year 2015, subject to meeting the requirements. Environmental remediation costs of $1.4m were accrued for two properties; actual costs could exceed the estimate. A tenant arbitration claim of approximately $3m was ongoing, with no loss accrued because management considered a loss neither probable nor estimable.
- A second-quarter classification correction moved redeemable noncontrolling interests into permanent equity and increased reported total equity by $143.7m; the filing said it did not affect net income, cash flow or EPS and was not material to the periods presented.
Important facts for investors to verify
- Progress and leasing at Montehiedra, the remaining redevelopment funding needs, and whether the late-2016 completion target remains achievable.
- Resolution of the Englewood special-servicing process and any effect on the property or its mortgage.
- Actual remediation costs and the outcome of the tenant arbitration claim.
- Standalone corporate costs, post-spin operating performance, and the company’s ability to maintain REIT qualification and its dividend.
- Debt maturity and refinancing exposure, particularly the 2020 maturities, and available liquidity under the undrawn revolver.