Urban Edge Properties — 2016 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2016, not a standalone fourth quarter. Urban Edge Properties is a REIT focused on retail real estate, primarily in the New York metropolitan region; substantially all operations and assets are held through Urban Edge Properties LP. At year-end, the portfolio comprised 79 shopping centers, three malls and a warehouse park, totaling approximately 14.8 million square feet. Retail occupancy was 97.2%.
Financial and operating performance
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $326.0 million | $322.9 million |
| Operating income | $133.0 million | $98.1 million |
| Net income | $96.6 million | $41.3 million |
| Net income attributable to common shareholders | $90.8 million; $0.91 per diluted share | $38.8 million; $0.39 per diluted share |
| Operating margin | 40.8% | 30.4% |
| Net cash from operating activities | $137.2 million | $138.1 million |
| FFO applicable to diluted common shareholders | $136.5 million | $98.0 million |
| Same-property cash NOI | $188.0 million | $180.6 million |
FFO and cash NOI are non-GAAP measures; the company cautions that FFO is not a measure of liquidity or cash available for distributions. Same-property cash NOI increased 4.1%.
- Cash and cash equivalents were $131.7 million; including restricted cash, total cash was $140.2 million. No amounts were drawn on the $500 million revolving facility.
- Mortgage principal was $1.206 billion ($1.198 billion net of unamortized debt issuance costs). Approximately $38.8 million was variable-rate debt. The company reported compliance with debt covenants.
- Net debt to total market capitalization was 26.0%. The estimated fair value of debt was $1.2 billion.
- Operating cash flow was nearly flat year over year. Investing used $59.2 million; financing used $115.9 million, including $86.3 million of shareholder and OP-unit distributions and $38.5 million of debt repayments.
- Dividends declared were $0.82 per share for 2016, versus $0.80 in 2015. The board retains discretion over future distributions.
- Retail occupancy rose from 96.2% to 97.2%; average annual base rent per square foot increased from $16.64 to $17.07. Warehouse occupancy rose from 79.1% to 91.7%.
Material changes versus the prior comparable period
- Revenue grew $3.0 million, primarily from rent commencements, improved occupancy, contractual rent increases and specialty leasing, partly offset by lower tenant bankruptcy settlement income.
- Net income increased substantially, but the comparison reflects unusual and non-recurring items: 2016 included a $15.6 million gain on the Waterbury property sale; 2015 included $24.0 million of transaction costs, including separation-related costs, and elevated share-based compensation. The 2015 results also include pre-spin-off carved-out results and may not be directly comparable with stand-alone operations.
- Property operating expenses fell $5.3 million and general and administrative expenses fell $4.6 million, while real estate taxes increased $2.1 million. Interest and debt expense decreased $3.7 million.
- Development and redevelopment cash spending rose to $51.6 million from $20.6 million. Total capital expenditures increased to $69.9 million from $36.3 million.
- The company sold its Waterbury, Connecticut shopping center for $21.6 million, recording a $15.6 million gain, and acquired a small North Bergen outparcel for $2.7 million.
Outlook, commentary, risks and contingencies
- Management provided no specific numerical earnings or FFO guidance. Its stated growth priorities include leasing vacant space, renewing leases at higher rents, bringing executed leases into service, redevelopment and development, and selective acquisitions and dispositions.
- Active development, redevelopment and anchor repositioning projects totaled approximately $191.7 million, with $110.5 million remaining to fund, expected over three years. Management expects to fund them through cash, dispositions, borrowing, secured debt or equity issuance.
- Management said cash from operations, cash on hand, the ATM program, the revolving facility and access to capital markets should fund operations, debt service and capital expenditures over the next 12 months. The ATM program authorizes up to $250 million in share sales; 307,342 shares were sold in 2016 for $8.7 million gross proceeds.
- Three acquisitions closed after year-end: Yonkers Gateway Center for $51.7 million, Shops at Bruckner for $32.0 million and Hudson Mall for $43.7 million. Consideration included assumed debt and, for Yonkers, OP units. Final purchase-price allocations and pro forma results were not yet available.
- Key risks include retail tenant health and store closures, e-commerce, lease rollover, anchor-tenant departures, redevelopment execution and cost overruns, rising interest rates, and the company’s geographic concentration. Four properties generated more than 25% of NOI; the two Puerto Rico malls generated approximately 11% of NOI and face persistent economic and tax pressures.
- Montehiedra’s mortgage was restructured in 2015 following financial difficulties; the company had committed $20 million for leasing and capital costs, of which $16.9 million had been funded. Englewood was in mortgage default and receivership at year-end; the company remained title owner pending disposition.
- Environmental remediation accruals were $1.4 million for two properties, with only $0.1 million expended at year-end; actual costs could exceed the estimate. Ordinary-course legal proceedings were not expected to have a material adverse effect.
- Vornado continued providing certain IT, risk-management and health-benefit services through July 31, 2018, unless terminated earlier. The company disclosed risks of higher stand-alone operating costs after transition services end.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. The audit report notes that pre-separation expense allocations from Vornado may not represent the costs of an independent company.
Important facts for investors to verify
- Reconcile the reported $1.206 billion mortgage principal and debt maturity schedule with the MD&A statement that no debt matures in 2017; the filing’s maturity table lists $17.1 million of 2017 principal repayments.
- Assess the sustainability of earnings and FFO after excluding the Waterbury gain and accounting for the unusually high 2015 separation and compensation costs.
- Track leasing spreads, occupancy, tenant credit and renewal exposure, particularly at the four properties contributing more than 25% of NOI and at the Puerto Rico malls.
- Monitor remaining project commitments, sources of funding, project returns and the impact of potential ATM share issuance and acquisition-related OP units on dilution.
- Review the Englewood receivership and Montehiedra redevelopment and debt position, as well as environmental remediation estimates and insurance coverage limits.