Urban Edge Properties — Q1 2019 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2019. Urban Edge Properties is a REIT focused on retail real estate, primarily in the New York metropolitan area. Its portfolio comprised 82 shopping centers, four malls and a warehouse park, totaling approximately 16.1 million square feet. Urban Edge owned approximately 94.4% of its operating partnership.
Financial results and liquidity
Unless otherwise noted, amounts are in millions. Comparisons are with Q1 2018 for operating results and December 31, 2018 for balance-sheet figures.
| Metric | Q1 2019 / March 31, 2019 | Comparable period |
|---|---|---|
| Total revenue | $97.7 | $99.1 |
| Net income | $27.9 | $23.0 |
| Net income attributable to common shareholders | $25.5; diluted EPS $0.22 | $20.7; diluted EPS $0.18 |
| FFO applicable to diluted common shareholders | $36.5 | $44.1 |
| Cash NOI / same-property cash NOI | $59.3 / $53.2 | $59.9 / $54.4 |
| Cash from operating activities | $29.4 | $34.0 |
| Cash and restricted cash | $448.8 | $457.5 at year-end 2018 |
| Total assets / total liabilities | $2,874.4 / $1,868.3 | $2,799.0 / $1,793.0 |
Same-property cash NOI decreased 2.2% year over year. Gross mortgage principal was $1,560.9 million, comprising $1,391.4 million fixed-rate debt at a 4.12% weighted-average rate and $169.5 million variable-rate debt at 4.23%. Net mortgages payable were $1,549.5 million. The $600 million revolving facility was undrawn; management reported compliance with debt covenants. The company declared a quarterly dividend of $0.22 per share and OP unit.
Material changes and unusual items
- Net income rose year over year, largely reflecting a $17.0 million gain on the sale of the Chicopee, Massachusetts property. FFO fell to $36.5 million from $44.1 million; cash NOI and same-property cash NOI also declined.
- Revenue declined $1.3 million, primarily from dispositions and credit losses, partly offset by rent commencements, lease changes and contractual rent increases. General and administrative expense rose $2.9 million to $10.6 million, including increased share compensation and professional fees.
- A $4.0 million impairment was recorded for a Westfield, New Jersey property after the loss of a significant tenant. The Chicopee sale generated $18.2 million net proceeds. A Glen Burnie, Maryland sale for $16.2 million was contracted after quarter-end; a $7.1 million Maywood, New Jersey acquisition was expected by year-end.
- Adoption of ASC 842 on January 1, 2019 resulted in recognition of $96.5 million of right-of-use assets and $91.9 million of lease liabilities at quarter-end, and a $2.9 million cumulative adjustment to accumulated deficit. Comparative periods were not restated.
- Operating cash flow was $29.4 million; investing activities used $8.5 million and financing activities used $29.7 million. Cash and restricted cash declined $8.7 million during the quarter.
Outlook, risks and contingencies
No specific earnings or NOI guidance was provided. Management said cash from operations, cash on hand, the ATM equity program, the undrawn revolver and access to capital markets were expected to be sufficient for operations, debt service and capital expenditures over the next 12 months. There was no debt scheduled to mature in 2019. Active development, redevelopment and anchor repositioning projects were estimated at $121.2 million; the filing cites differing remaining funding estimates of $34.8 million and $42.8 million, which investors may wish to clarify.
Sears bankruptcy proceedings pose leasing risk: four Kmart leases represented approximately 547,000 square feet and $8.5 million annual rent. Las Catalinas’ Kmart lease was rejected as of April 30, 2019; the status of the other leases was uncertain. The company also cited potential uninsured losses and rising insurance costs, environmental remediation exposure (a $1.7 million accrual), and an unresolved Hurricane Maria insurance claim with no determined additional recovery. A 1% change in base rates would affect annual interest expense on variable-rate debt by approximately $1.7 million. No hedging instruments were in place. Management reported disclosure controls were effective and no material change in risk factors from the 2018 Form 10-K.
Important facts for investors to verify
- How Kmart lease rejections or assumptions affect occupancy, rental income and re-leasing costs.
- Whether same-property cash NOI weakness and lower FFO persist, separating recurring operations from the Chicopee sale gain and other unusual items.
- The scope and reconciliation of the $34.8 million and $42.8 million remaining project-funding estimates.
- Completion and proceeds from the planned Glen Burnie sale, and the Maywood purchase timing and terms.
- Future refinancing needs, variable-rate exposure, redevelopment funding and the sustainability of the $0.22 quarterly dividend.