Urban Edge Properties (NYSE:UE) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Greetings! And welcome to the Urban Edge Properties earnings call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Etan Bluman. Please go ahead.

Etan Bluman: Good morning and welcome to Urban Edge Properties 2023 first quarter earnings conference call. Joining me today are Jeff Olson, Chairman and Chief Executive Officer; Jeff Mooallem, Chief Operating Officer; Mark Langer, Chief Financial Officer; Rob Milton, General Counsel; Scott Auster, Executive Vice President and Head of Leasing; and Andrea Drazin, Chief Accounting Officer. Please note today’s discussion may contain forward-looking statements about the company’s views of future events and financial performance, which are subject to numerous assumptions, risks and uncertainties, and which the company does not undertake to update. Our actual future results, financial condition and business may differ materially. Please refer to our filings with the SEC, which are also available on our website for more information about the company.

In our discussion today, we will refer to certain non-GAAP financial measures. Reconciliations of these measures to GAAP results are available in our earnings release and supplemental disclosure package in the Investors section of our website. At this time, it is my pleasure to introduce our Chairman and Chief Executive Officer, Jeff Olson.

Jeff Olson: Great. Thank you, Etan, and good morning everyone. I am pleased to announce that we finished the first quarter with strong results. FFO as adjusted was $0.32 per share for the first quarter, up 13% compared to last year and same property NOI was up significantly at 6.3%. The increases are primarily attributed to new rent commitments and lower operating and G&A expenses. Before I get into the details of the quarter, I want to thank all of you that were able to attend our Investor Day a couple of weeks ago. The New York Stock Exchange provided a great venue and we were thrilled to have the opportunity to engage with so many analysts and investors. Our first quarter results demonstrate continued momentum and successful execution of the growth pillars we outlined during our Investor Day presentation.

We opened our presentation with the quote from Willa Cather that reads, “We come and go, but the land is always here”. Our 1,400 acres of land in densely populated urban areas will constantly be a source of revenue growth as we continue to improve and densify our properties. A great example of this occurred last week when we received site plan approval from the Paramus Planning Board to develop 456 multi-family units on the east side of Bergen Town Center. This project features an impressive architectural design, vast landscaping, and numerous amenities. We are currently evaluating offers for the sale or joint venture of this exceptional piece of land. Highlights for the quarter include our signed, but not open pipeline, which is grown for the fourth consecutive quarter, increasing to $31 million or 13% of NOI up from $29 million in the fourth quarter of 2022.

We have another 600,000 square feet of leases in our pipeline, representing $14 million or 6% of NOI. As highlighted in our Investor Deck, we expect to grow NOI by more than 20% over the next three years, 80% of which is coming from signed but not open leases and contractual rent bumps. Jeff Mooallem will provide you with an update on our Bed Bath exposure, and the tremendous backfill opportunities we are discussing with a range of quality tenants at rents that are at least 30% higher than those in place. We currently have $218 million of active redevelopment projects underway that are expected to generate a healthy 12% unleveraged return, of which 95% of the total project GLA has been pre-leased. We look forward to seeing new anchor stores open in 2023, including Sector 66 at Las Catalinas, Walgreens at Montehiedra, Total Wine at Cherry Hill, Nemours Children‘s Health at Broomall and Aldi at Bruckner.

Once we complete our redevelopment and progress, nearly 70% of our portfolio value will have undergone a substantial repositioning and will require less capital in the future. These property upgrades have resulted in stronger, more stable cash flows as we have focused on tenant quality and improved cotenancy as part of our re-leasing efforts. In fact, 65% of our assets are anchored by grocers, 10% by Home Depot or Lowe’s, and 7% by Industrial and self-storage uses with the remaining 18% anchored by discounters such as T.J. Maxx, Burlington, and Ross. We believe the strength of our tenancy provides great stability. Finally, we are proud of our balance sheet, especially after the seven year, $290 million, 6.3% fixed rate Bergen refinancing announced in April.

Only 15% of our debt matures through 2025, we believe the lowest percentage in the sector. In addition, our secured debt strategy sets a support from our peers and protects our balance sheet in the best possible way as we have no corporate debt obligations. I would like to reiterate the key takeaways from our three-year growth plan that I mentioned during Investor Day. One, we own an irreplaceable $4 billion portfolio, primarily situated in the DC to Boston corridor, the most densely populated and supply constrained region in the country. Our tenants generate high sales as evidence by the more than $900 per square foot our grocers generate in these markets. Two, we are positioned to grow our net operating income by more than 20% over the next three years, nearly 80% of which is derived from executed leases and contractual rent funds.

Three, we are executing a high yielding low risk, anchor repositioning and redevelopment program with $218 million of active projects expected to generate a 12% return. Four, we have a strong balance sheet with substantial liquidity and very limited debt maturing over the next three years. Five, our three year FFO as adjusted target is $1.35 per share in 2025, a 16% increase compared to our updated 2023 guidance. And six, we believe that our stock is undervalued as measured by FFO multiple, implied cap rate and land and building values. Our land is valued at a little over $2 million an acre. Our buildings are valued at approximately $185 per square foot, which is probably half of the replacement cost before any value attributed to our land.

This is even more pronounced on a forward-looking basis given our projected growth through 2025 and the low risk nature of our plan to achieve it. We are excited to see many of you at ICSA and at the upcoming Nareit Conference. I will now turn it over to our Chief Operating Officer, Jeff Mooallem.

Jeff Mooallem: Thanks Jeff and good morning everyone. I would like to start with a few comments on the macro environment, then cover the details of our leasing and development activity and finally say a few words about our Bed Bath locations. As you heard us say it Investor Day and have heard many of our peers say as well, the supply and demand balance in our industry is the best we have seen in at least the last 15 years. Despite the economic uncertainty and higher inflation of the last few months, we have not seen a meaningful change in demand from our retailers. We believe this is because there is now an inherent understanding and acceptance from all retailers that the store is where the highest profit margins reside. Whether you are measuring by customer acquisition expense, the cost to deliver the product to the customer, add-on sales or brand recognition value, the brick and mortar store outperforms the online platform on a consistent basis.

While the steady macro demand is not unique to Urban Edge our portfolio, mostly located in supply constraint first spring suburbs is a differentiator. These are the markets that benefit most from less product being built, more people moving in, and more people working from home. It is these two factors together, stronger demand and limited supply that has improved our pricing power. Not only in the form of starting rents but also in the increases and other lease provisions that are a critical part of every lease negotiation. In the first quarter we picked up right where we left off with strong leasing activity. 42 leases were executed for a total of 430,000 square feet with same space leases totaling 412,000 square feet and generating an average cash rent spread of 7.5%.

The story on new leases was even better, 14 new leases for 111,000 square feet and on the same space deals a spread of 18%. National tenants who sign new leases this quarter included Burlington, UFC Jim, Journeys, Crumbl Cookies, and Boot Barn. Turning to occupancy, our same property lease occupancy increased 240 basis points year-over-year and was down 20 basis points from the prior quarter as expected. Our consolidated portfolio leased occupancy excluding Sunrise Mall increased 420 basis points year-over-year and now stands at 94.6%. During the quarter total portfolio shop occupancy, increased to 85%. Up 50 basis points compared to fourth quarter 2022. As some of you heard us say at Investor Day, we are on a mission to bring our overall occupancy number from 94.6% today to between 97% and 98%, matching the historical high at Urban Edge.

Our pipeline of deals is the road map to get us there. We have roughly 600,000 square feet in our leasing pipeline at expected rent spreads of about 15%. This includes anchor retenanting opportunities at Bruckner, Bergen Town Center, Totowa, Manalapan, Towson, Amherst, and Newington, in category such as fitness, medical, discounters, and sporting goods. Though not all of this anchor pipeline represents spaces that are vacant today, the successful execution of this activity would still increase our retail anchor occupancy by about 200 basis points and our overall retail occupancy by 160 basis points. Of course, momentum on anchor leasing drives demand for shop spaces. At Huntington Commons, we have now executed leases with Prime Urgent Care, Phoenix Salon, and GOLFTEC, on the heels of the new anchor deals with ShopRite in Burlington and we’re nearly out of space.

At Las Catalinas, in Puerto Rico, our new anchor tenant Sector 66 should open in the next 60 days, and that has helped generate new deals with Puma, Hot Topic, and many others currently under negotiation. And at Bruckner, the new anchor deal with Target has already led to execution of leases with Teriyaki One and Salon Center. And we are finalizing leasing negotiations on two other shop deals at spreads north of 20%. Looking at our first quarter deals and the ones still in our pipeline, we believe we can reach our shop least occupancy goal of 90% by the end of this year, which along with the anchor activity mentioned above would push our overall same property occupancy to 96%. Getting leases executed is only half the battle though. Our development and tenant coordination teams are extremely busy these days, and we’re seeing success on several projects.

Jeff mentioned our recent site plan approval for 456 residential units at Burlington Center. We also recently received all approvals to construct an 80,000 square foot medical building for Hackensack Meridian Health at Bergen. A project we hope to begin later this year. On the construction side, we believe prices for most materials have leveled off and supply chain concerns have ease, perfectly timed to deliver on our extensive S&O pipeline. In Cherry Hill, New Jersey for example, we had a four-month timeline projected for delivery and install of mechanical equipment to an anchor tenant. We were able to get it done in a little over a month, and we are now delivering 60 days earlier than our budgeted delivery date. Finally, let me address our exposure to Bed Bath & Beyond.

We started the year with seven stores across all of their brands, three Bed Bath & Beyond, one buybuy Baby, and three Harmon Face Values stores. One of the Bed Bath stores in Manalapan, New Jersey had a natural lease expiration in January 2023, and we are actively engaged with several prospects at spreads that will more than justify the incremental capital investments. Our other two Bed Bath locations, and our buybuy Baby location, are also located in New Jersey, have paid rent for April and May, and have not been rejected. However, if we get those spaces back, we are confident we have both single tenant and demising options at spreads between 20% and 70% of the existing rents, and from best-in-class credit users. The three Harmon’s account for only 18,000 square feet, and we expect to have all three released this year.

In some we do the filing as a good news scenario for most landlords, and especially for Urban Edge. In prior retailer bankruptcies, we have had to pound the pavement and make extensive calls to generate one or two interested takers or price large vacancies for a use other than retail. But I can tell you that in the case of this bankruptcy, even before we have control of spaces, inbound inquiries are coming from all categories, high-end car dealerships, to grocery chains, to discounters, to sporting goods. Instead of just having to fill the space, we can focus on making not only the right economic deal, but also the right deal to position that asset for many years to come. It’s a good position to be in, and it leads me back to where I started, the supply and demand fundamentals of this business are the best we’ve seen in a really long time.

I will now turn it over to our Chief Financial Officer, Mark Langer.

Mark Langer: Thanks Jeff. Good morning. I will discuss drivers of our first quarter results, comment on our balance sheet and liquidity, and we’ll close with our 2023 guidance. Starting with our results for the quarter, we reported FFO as adjusted at $0.32 per share, and same property NOI growth, including redevelopment of 6.3% compared to the first quarter of 2022. The results were better than our expectations, primarily due to lower credit losses, favorable expense trends with significantly lower snow removal costs this year, and lower G&A due to our continued cost cutting efforts. In terms of our balance sheet, we ended the quarter with total liquidity of approximately $911 million, including our $800 million undrawn line of credit and total cash of $111 million.

As Jeff mentioned, subsequent to the quarter, we successfully refinanced our mortgage loan at Bergen Towne Center with a new seven year, $290 million loan at a fixed rate of 6.3%. With this refinancing, we have now reduced our company’s debt maturities through 2025 to $235 million, less than 15% of our current outstanding indebtedness. Looking ahead, we have minimal and very manageable maturities in 2024 and 2025. We continue to expect our net debt to forward EBITDA to decline to the 6.5x range as our sizable S&O and leasing pipeline is converted to commenced rents. As set forth in our release, we recognized a non-cash impairment charge on Kingswood Center of approximately $34 million or $0.28 per share. Kingswood Center is located in Brooklyn, New York, and was purchased in February 2020, one month prior to the COVID pandemic.

It is a 130,000 square foot property of which two-thirds of the GLA is office space. Towards the end of the quarter, we were informed that two tenants, accounting for over half of the properties leaseable area will be vacating. At the end of April, we notified the servicer of the CNBS loan that the annualized cash NOI of $1.4 million would be insufficient to continue funding debt service payments of $3.4 million, and that we were unwilling to fund the shortfall. The loan has been transferred to special servicing for modification discussions with the lender. Our equity today in the property is limited to $25 million. As we assumed a $65.5 million, 5.1% non-recourse interest-only mortgage as part of the acquisition. Our 2023 guidance, and the three year FFO growth targets we outlined at Investor Day, reflect the negative cash flow expected to be generated by this asset.

Whether we obtain a successful debt modification or the lender for closes on the asset, our earnings will be higher. This is another example of the benefit of our secure debt strategy. Turning to our outlook for 2023, as previously announced, we are reiterating our revised 2023 FFO as adjusted per share guidance range, which is up $0.02 per share at the midpoint, as compared to our originally issued guidance. The increase reflects our better than expected first quarter performance and our expectation that we can further reduce recurring G&A expenses by a penny per share as compared to our original plan. The updated FFO guidance also reflects the increase in our expectation for same property NOI growth, including redevelopment where the midpoint is now positive 1%.

This midpoint assumes a general credit loss of 100 basis point of gross revenues for approximately $4 million. We have also incorporated tenant-specific reserves for retailers who have filed for bankruptcy. Our guidance incorporates $2 million of potential loss rent for our Bed Bath and Harmon locations. We assume our Bed Bath and buybuy Baby stores will stop paying rent at the end of the second quarter. In addition to Bed Bath, our guidance incorporates $1 million of lost rent for our exposure to Regal Cinema, and other smaller tenant bankruptcies. In terms of collections on past amounts deemed uncollectable, our 2023 guidance at the midpoint assumes that we will receive $2 million during year. We received about $1 million in the first quarter of this year and expect another $1 million for the remainder of the year.

Note that collections on past amounts deemed uncollectable during the second and third quarter of 2022 were materially higher as we benefited from $2.3 million to $2.5 million in those quarters respectively, which will be a headwind for our second and third quarter NOI growth this year. There are no new acquisitions or dispositions or other material capital or early refinancing activity assumed in guidance. In closing, we are grateful for the dedication and execution provided by the UE team again this quarter. I will now turn the call over to the operator for questions.

Q&A Session

Operator: Thank you. [Operator Instructions]. And our first question comes from Samir Khanal with Evercore ISI.

Operator: Our next question comes from Floris Van Dijkum with Compass Point.

Operator: Our next question comes from Ronald Kamdem with Morgan Stanley.

Operator: [Operator Instructions]. We are closing our question-and-answer session. Now, I would like to turn the floor back over to Jeff Olson for closing comments. Please go ahead.

Jeff Olson : Okay. Well, thank you. We all appreciate you being here and we’ll look forward to seeing you at Nareit or ICSE. Thank you very much.

Operator: This concludes today’s conference call. You may disconnect your lines at this time. Thank you for your participation and have a great day!