Urban Edge Properties — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017. Urban Edge is a retail REIT focused primarily on the New York metropolitan area. Its portfolio comprised 84 shopping centers, four malls and a warehouse park totaling approximately 16.7 million square feet. Unless noted, financial amounts below are in millions.
Financial results and key metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $99.1 | $126.1 |
| Operating income | $35.1 | $69.3 |
| Net income | $23.0 | $54.7 |
| Net income attributable to common shareholders | $20.7 | $50.6 |
| Diluted earnings per share | $0.18 | $0.50 |
| Net cash from operating activities | $34.0 | $37.2 |
| Cash NOI | $59.9 | $55.1 |
| Same-property cash NOI | $47.8 | $46.7 |
| FFO applicable to diluted common shareholders | $44.1 | $73.5 |
GAAP operating margin was approximately 35.4%, versus 55.0% in Q1 2017; the comparison is heavily affected by a prior-year one-time item. Property rentals increased to $69.7 million from $62.5 million, and tenant reimbursements rose to $28.7 million from $23.8 million. Same-property cash NOI increased 2.4% year over year. FFO and cash NOI are non-GAAP measures and should not be treated as substitutes for GAAP earnings or operating cash flow.
Q1 2017 revenue included $39.2 million of income from an acquired leasehold interest; this did not recur in Q1 2018 and is the principal reason reported revenue, earnings and FFO fell. Q1 2018 also included a $2.5 million gain from extinguishment of debt following the Englewood foreclosure, and a $1.3 million net casualty gain related to Hurricane Maria. Interest and debt expense rose to $15.6 million from $13.1 million, while depreciation and amortization increased to $21.3 million from $15.8 million.
Balance sheet, debt and liquidity
- At March 31, 2018, total assets were $2.80 billion, total liabilities $1.82 billion and total equity $987.4 million.
- Mortgage principal was $1.566 billion ($1.553 billion net of unamortized financing costs), with a weighted-average rate of 4.04%. Fixed-rate debt was $1.396 billion at 4.12%; variable-rate debt was $169.5 million at 3.41%. The company reported compliance with debt covenants.
- Cash and cash equivalents were $462.8 million, plus $10.8 million of restricted cash. Cash and restricted cash together were $473.6 million, down $27.2 million from year-end 2017. The $600 million revolving credit facility was undrawn; the company also had $241.3 million remaining under its ATM equity program. No debt was scheduled to mature in 2018.
- Management stated that cash on hand, operating cash flow, available credit, the ATM program and access to capital markets were expected to fund operations, debt service and capital expenditures over the next 12 months. The quarterly dividend was $0.22 per share/unit, or $0.88 annualized.
- Operating cash flow was $34.0 million; investing activities used $32.2 million, principally for development and capital improvements ($29.3 million) and acquisitions ($4.0 million). Financing activities used $29.0 million, including $25.0 million of shareholder dividends and $2.8 million of partnership distributions.
Material developments, outlook and risks
- Development, redevelopment and anchor-repositioning projects had estimated total costs of $205.9 million. The filing gives differing estimates of remaining funding: $100.3 million in the notes and $104.5 million in MD&A. Management anticipated completing the projects over approximately two years and cited cash, asset-sale proceeds, debt or equity as potential funding sources.
- Three small properties adjacent to existing centers were acquired for $4.0 million. The Allentown property was classified as held for sale at quarter-end and was sold on April 26, 2018 for $54.3 million net of selling costs.
- After Hurricane Maria damaged the company’s two Puerto Rico malls, Q1 included $1.5 million of insurance proceeds, $0.2 million of related costs and $0.8 million of business-interruption losses. As of May 2, approximately 95% of stores previously occupied before the hurricane were open. The total amount and timing of further insurance recoveries remained undetermined.
- Tenant credit risk includes Toys “R” Us, which had leases at nine locations representing $5.2 million of annualized base rent as of March 31. Sears and Staples represented 2.0% and 1.5% of annualized base rent, respectively. The company said the outcome of the Toys “R” Us bankruptcy could not yet be estimated.
- Environmental remediation accruals were $1.5 million. Management said ordinary-course legal matters were not expected to have a material adverse effect. The company also cautioned that uninsured property losses, insurance costs, environmental findings, tenant failures and interest-rate movements could adversely affect results. A 1% increase in rates was estimated to add approximately $1.7 million to annual interest expense on variable-rate debt; no hedges were in place.
- No formal earnings or operating guidance was provided. Management noted that quarterly results are not necessarily indicative of full-year results. The company expected to adopt the new lease accounting standard in 2019 and was still assessing its balance-sheet impact.
Most important facts for investors to verify
- How much of the year-over-year earnings decline reflects the nonrecurring $39.2 million leasehold-interest income recorded in Q1 2017, versus underlying property performance.
- Whether same-property cash NOI growth continues, and how redevelopment and anchor-repositioning projects affect operating results and leasing.
- The final remaining funding requirement for active projects, given the filing’s $100.3 million and $104.5 million estimates, and the timing and proceeds of the Allentown sale.
- Puerto Rico recovery progress, outstanding insurance claims and any additional hurricane-related rent losses or costs.
- Exposure to tenant bankruptcies and store closures, especially Toys “R” Us, Sears and Staples, and the company’s capacity to fund dividends, investment and debt obligations under changing rates and capital-market conditions.