Urban Edge Properties (NYSE:UE) Q1 2024 Earnings Call Transcript

Urban Edge Properties (NYSE:UE) Q1 2024 Earnings Call Transcript May 7, 2024

Urban Edge Properties misses on earnings expectations. Reported EPS is $0.03074 EPS, expectations were $0.3. UE isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Urban Edge Properties First Quarter 2024 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, Areeba Ahmed, Investor Relations Associate. Thank you, Areeba. You may begin.

Areeba Ahmed: Good morning, and welcome to Urban Edge Properties first quarter 2024 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, EVP 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 results, financial condition and business may differ. 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, including reference to our 2025 FFO as adjusted target. Reconciliations of these measures to GAAP results are available in our earnings release, supplemental disclosure package, and our April 2023 investor presentation in the investors section of our website. At this time, it is my pleasure to introduce our Chairman and Chief Executive Officer, Jeff Olson.

Jeffrey Olson: Great. Thank you, Areeba, and good morning everyone. We are off to a great start in 2024 and we are excited to build on our momentum executing the growth strategy we outlined at our 2023 Investor Day. First quarter FFO as adjusted was $0.33 per share, a 4.4% increase compared to prior year. We executed our plan primarily due to higher NOI growth which was up 3.7% for our same property pool. We acquired two shopping centers within our core New Jersey markets, Heritage Square and Ledgewood Commons for $117 million at an approximate cap rate of 8%. We finance these acquisitions with approximately $77 million of 6.1% fixed rate mortgage debt, $38 million of asset sales at a 5% cap rate and $18 million of equity issued under our ATM.

These two transactions reflect ongoing momentum from the accretive deals we announced last year including Shoppers World and Gateway Center in Boston as Jeff will discuss momentarily. Since October of 2023, we have acquired four high quality retail properties for $426 million at a weighted average cap rate of 7.2%, while disposing of non-core properties aggregating $356 million at a weighted average 5.2% cap rate. Based on our better than expected results, strong retail fundamentals and our recent acquisitions and dispositions, we have increased our 2024 FFO as adjusted guidance by $0.03 per share at the midpoint to $1.30 per share implying 4% growth for this year and we expect 2025 FFO as adjusted will be towards the high end of the $1.31 to $1.39 range implying 5% to 6% earnings growth.

Leasing activity remains strong with same property occupancy up 140 basis points over last year with cash leasing spreads of 23% on new leases and overall leasing spreads of 10% when including renewals and options. Our signed but not open pipeline amounts to $27 million or 10% of net operating income. Our $166 million redevelopment pipeline is expected to generate a 15% return. Over 90% of the GLA Incorporated in this investment is pre-leased. Our balance sheet is in great shape and our interest expense is more predictable, because we completed almost $500 million of fixed rate refinancings over the past year and now have only 11% of our total debt maturing through 2026. Our unencumbered asset pool has increased by $400 million to $1.5 billion in the past year.

Our secured debt strategy eliminates risk at the corporate entity and the debt is easily assumable. Now is a good time to invest in the shopping center sector and Urban Edge in particular. Considering the leverage that retail landlords have today coupled with our ability to create meaningful growth given our company’s size where even $117 million of acquisitions at an 8% cap rate moves the needle. Our high quality portfolio is concentrated in the most densely populated supply constrained markets of the country. The quality of our real estate coupled with a scarcity of new supply and strong demand should serve as a tailwind for the foreseeable future. I will now turn it over to our Chief Operating Officer, Jeff Mooallem.

Jeffrey Mooallem: Thanks, Jeff, and good morning, everyone. 2024 has started in much the same way that 2023 finished with all three of our operating components leasing, development, and investment activity firing on all cylinders. Let’s get into some of the details. First on the acquisitions and dispositions front. Jeff highlighted the significant volumes we’ve closed, since October 2023 with $426 million of purchases and $356 million of dispositions. With all of these transactions, we’ve acquired stronger assets for our business in markets we know well at yields that are 200 basis points higher than what we sold. But beyond the math and accretion of these deals, the assets we acquired this quarter like the Boston assets we acquired last year continue our theme, a simple business plan grounded in strong tenancy, first string locations and large controllable land parcels acquired below land and below building replacement cost.

We believe these assets will continue to provide the best opportunity for Urban Edge given the attractive going in cap rates, a limited buyer pool, strong tenant credit profile and our ability to extract value. Our newest acquisition, Ledgewood Commons in Ledgewood, New Jersey is a perfect example. It sits on over 50 acres at the best intersection in the trade area and it’s anchored by Walmart Supercenter, Marshalls and Burlington and includes shop tenants like Starbucks, Chipotle, Ulta, and J. Crew. Like the Heritage Square property we acquired in February, we own all the outparcels at Ledgewood Commons including two currently vacant pads that we will develop. With a going in cap rate of 7.9% embedded growth from shop leasing and outparcel development and the great financing that we procured will generate double-digit levered returns on this property, exceptional for a Walmart anchored asset in any economic cycle.

We’d love to find more assets like Ledgewood and our team is busy evaluating anything that could be a fit. The current interest rate volatility greatly benefits buyers like us who are both well capitalized and highly trusted by sellers, brokers, and lenders. I believe we are at the top of that list in our markets. On the leasing side, we’ve executed 44 deals for a total of 805,000 square feet, a very strong first quarter pace. Of those 44 deals, 17 were new leases with an average spread of 23%. A result we believe of the strong leasing fundamentals we’ve been talking about now for several quarters. Our same property leased occupancy rate increased by 30 basis points from the prior quarter and now sits at 96.2% with anchor lease occupancy at nearly 98% and shop occupancy up 70 basis points since last quarter to 88.4%.

As we mentioned at the beginning of the year, we are laser focused on increasing our shop occupancy back to and above our historical high watermark of 91%. We are on track to achieve this goal in 2024, perhaps even by the end of the third quarter based on shop leases currently in negotiations. These deals are coming from all industries including food and beverage, medical, health and beauty, and apparel. They are a byproduct of both market conditions and the heavy lifting we’ve done with anchor repositioning in the past several years. And while our anchor occupancy of 98% is already healthy, we have good visibility to improving not only this percentage, but the quality of some of our anchors by the end of 2024. And finally on the development side, we continue to execute on a very simple and low risk business plan of building out space for committed leases delivering one anchor space this past quarter at our Yonkers Gateway asset.

Our $166 million development pipeline is 90% comprised from signed leases and will generate an expected 15% unlevered yield on cost. So that’s the what and how of the quarter. As to why our business is so strong right now, I think there are a couple of reasons. First, we’ve talked for several quarters now about shopping center fundamentals. Vacancy remains at historic lows, store openings continue to outpace store closures and new retail construction is virtually non-existent in our markets. These market conditions put upward pressure on market rents and allow us to extract better terms in our leases. But the second reason we’re so optimistic about our business plan is one of the key points of differentiation about Urban Edge. Our portfolio has an average property size of almost 20 acres and 215,000 square feet.

Based on our current stock price, that is a value of approximately $2 million per acre or $215 per built square foot, numbers that are significantly below current land values and current building replacement costs. As we continue to build a portfolio of assets with similar attributes like Shoppers World and Gateway Center in Boston and now with our acquisition of Ledgewood Commons, we believe we are positioning this company extremely well for the long-term. A low building basis and intrinsic land value in highly supply constrained markets will allow us to push rents and accretively redevelop and expand our assets. We are seeing some of the fruits of that labor in 2024 and 2025 and the opportunities for growth in a portfolio like this should extend well into the future.

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

Mark Langer: Thanks, Jeff. Good morning. I will comment on our first quarter results, our balance sheet and liquidity and conclude with comments on our updated guidance. Starting with our results, we reported FFO as adjusted of $0.33 per share in the first quarter. Same-property NOI growth including redevelopment was up 3.7% compared to the first quarter of 2023. The increase was primarily attributed to new rent commencements, lower bad debt and better than expected recoveries on amounts previously deemed uncollectible. We collected about $1 million on older past due receivables. NOI also benefited from our retention rate in the quarter which was almost 100%. G&A came in lower than expected primarily due to some timing factors which we expect will normalize during the remainder of the year as reflected in our full-year guidance.

Interest expense was down $2 million from the prior quarter due to the repayment of three variable rate loans in early January aggregating $76 million that were bearing interest at 7.34% as well as the elimination of Freeport’s $43 million mortgage when that property was sold in December. On the financing front, we refinanced Yonkers Gateway Center with a new five year $50 million non-recourse mortgage at a fixed rate of 6.3% executed at a spread of 205 basis points. A portion of the proceeds were used to pay off the previous $23 million mortgage. After the quarter, we financed Ledgewood Commons with a new five-year $50 million non-recourse mortgage at a fixed rate of 6% executed at a spread of 180 basis points. We continue to be in active discussions with a variety of debt providers and are encouraged by the interest and availability of capital focused on high quality retail shopping centers.

While the benchmark treasury rate has been volatile, we are seeing spreads compress as competition from life companies, CMBS and select regional banks has helped offset some of the increase in treasury rates. Our net debt-to-annualized EBITDA is now 6.6x and should decline further as EBITDA grows as more rents from our S&O pipeline commence. We expect this level to be in the 6x to 6.5x range in the future post the full stabilization of rent commencements. In addition, leverage levels are expected to be helped in the future from a decline in future CapEx funding requirements as we complete our current anchor repositioning projects. Turning to our outlook for 2024. We increased our 2024 FFO as adjusted per share guidance by $0.03 a share to a new midpoint of $1.30 a share.

The increase reflects our better than expected performance in the first quarter, accretion from our capital recycling transactions including the purchase of Ledgewood and our expectations for same property NOI growth including redevelopment to achieve our new midpoint of 5% up from the prior midpoint of 4%. As previously mentioned, our NOI growth is driven by $6 million from the S&O pipeline of which $2 million rent commenced in the first quarter and an additional $4 million is expected to be recognized in the remainder of 2024 of which 90% is weighted to the second half of this year. Additionally, this midpoint assumes a credit loss of 75 to 100 basis points of gross revenues or approximately $3.5 million and an additional $500,000 of collections on past amounts deemed uncollectible for the remainder of the year.

Moving to transactions, our guidance includes the $117 million acquisitions of Heritage Square and Ledgewood Commons and the non-core dispositions that we announced in our release today. Guidance does not assume any additional acquisitions or dispositions. We updated our guidance assumptions related to interest expense to reflect the new $50 million mortgage on Ledgewood Commons and the new $50 million mortgage on Yonkers as well as the other financing activity we announced this quarter. The only variable rate exposure we have is related to our line of credit which currently bears interest at SOFR+ 110 basis points. As Jeff mentioned, given the success of our capital recycling, our recent acquisition of Ledgewood and the strong fundamentals we are experiencing, we expect to achieve the higher end of the 2025 FFO as adjusted per share range of $1.31 to $1.39 per share that we outlined at our Investor Day last year.

We expect to provide more details on all of the underlying assumptions in the future. And while it is too early for us to go through that now, we do believe that leasing fundamentals and a lack of available space in high quality locations provide a good buffer against some of the volatility that may arise. We are now reaping the benefits of the portfolio transformation that has been underway since the pandemic as we have replaced poor performing over leveraged weak operators with highly sought after grocers, discounters, restaurants, health and beauty concepts and desirable shop tenants. This has directly contributed to a more stable cash flow stream that is being helped by increasing market rents, which we have seen reflected in strong leasing spreads.

Fundamentals are also being helped by omnichannel strategies being used by retailers as nearly 42% of e-commerce orders last year involved stores, up from 27% in 2015 according to a recent Wall Street Journal article. Retailers are on track to open more stores than they close in 2024 for the third consecutive year, a testament to the strength in lower cost of distribution that high quality brick-and-mortar locations offer. In summary, we are pleased with our continued momentum and look forward to further executing the business plan we outlined at Investor Day. I will now turn the call over to the operator for questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Steve Sakwa with Evercore ISI. Please proceed with your question.

Steve Sakwa: Yes, thanks. Good morning. I guess Jeff or Jeff Mooallem, could you maybe just talk a little bit about the pricing dynamic, and I guess how aggressive or how much upside do you think you have on both, I’d say the anchor spreads and over time your blended spreads given the tightness of the market. I’m just wondering how much upside you think there is in spreads moving forward?

Jeffrey Mooallem: On leasing spreads, Steve?

Steve Sakwa: Yes.

Jeffrey Mooallem: Yes. I mean, look, it continues to be strong and moving in our favor. We’ve executed a few renewals and you can see from our first quarter numbers, we had a pretty high level of renewals from a square footage standpoint. So there were a couple of anchor deals in there. One of them was contractual. There wasn’t much we could do about it. But the other one we were able to negotiate a pretty good renewal. You’re still getting the pushback from anchors of anything that goes beyond the standard 10% every five years. That’s still the opening line out of the gate. But we’ve had some success in pushing that up higher and it’s not surprising. The other place where we’re seeing better traction with anchor renewals, not necessarily on spreads, but terms are coming a little bit more into our favor and we’re able to sort of get more control rights over outparcels.

We’re able to sort of maybe limit certain things that the anchors want to do. The conversations are very productive. I would not describe them as landlord controls the terms like it might have been way back when you and I started, but it’s no longer tenants controlling the terms the way it has been for the last 15 years. It’s a pretty even playing field right now.

Steve Sakwa: Okay, great. My second question maybe just on the transaction front. Could you just maybe talk a little bit about where you’re sourcing some of these deals from? Obviously, they’re very attractive going in yields with seemingly good upside. So I’m just curious who the sellers are in this environment given the positive trends we’re seeing in retail. I guess I’m a little surprised that cap rates are as good as they are. But maybe just talk about where you’re sourcing these from and how big is that pool?

Jeffrey Mooallem: Yes. I mean, look timing is everything first and foremost. We stay around the hoop on all the deals that are out there. We’re constantly talking to the brokers. They may tell us price guidance when they’re bringing something out and we may say that’s not for us at that price, but interest rates move and all of a sudden they’re not getting that price and they’re calling us back. That’s sort of what happened in the case of the asset we bought in New Jersey, Ledgewood Commons. In that particular case, the seller was a fund and that was the last asset in the fund and they were motivated to get it sold. We were competitive on our price. There were two or three others around the same price, but they believed we had the highest certainty to close and that’s why they awarded the deal to us.

So I would say some of it being timing, but other of it I’ll pat ourselves on the back a little bit. We kind of look through some of the noise on assets like if there is a tenant that’s struggling in a specific property. We do a lot of market intel with other tenants in the market and we quickly try to find out before we put an offer in how replaceable that risk might be. So we try to underwrite the risks maybe a little bit more aggressively than others and talk to a lot of the brokers. We also talk directly to a lot of sellers and we sometimes get deals thrown to us from lenders. But it’s mainly having an extensive brokerage network primarily from D.C. to Boston that’s helped us to generate a lot of our deals.

Jeffrey Olson: And, Steve, what I’d add to that is because we’ve closed on $426 million of acquisitions, since October. We had been the most active buyer in our market. So we’re also the most preferred buyer too, because potential sellers know that we are going to close.

Steve Sakwa: Okay. And just last question. Can you just remind us, I guess, what’s left on the disposition bucket list either from non-core or maybe retail assets that are in kind of the bottom part of the portfolio? Like how much is there left to sell?

Jeffrey Olson: Like my sense is that we’re probably always going to be selling $100 million to $200 million of property each year. We’ll be very opportunistic and how we do that. In many cases we were look to 1031 those assets. I do believe we have a large pool of assets that we can sell at a meaningful spread to our current cap rates. Okay. And then just that we can sell at a meaningful spread to where current cap rates are today.

Steve Sakwa: Great. That’s it for me. Thanks.

Jeffrey Olson: Great. Thank you.

Jeffrey Mooallem: Thanks, Steve.

Operator: Our next question comes from the line of Floris van Dijkum with Compass Point. Please proceed with your question.

Floris vanDijkum: Hey, good morning, guys.

Jeffrey Olson: Hi, Floris.

Floris vanDijkum: So I like how you cribbed Jim Taylor’s line about a low basis. That’s very intriguing, Jeff. I don’t disagree with you by the way, in terms of your land values. Let me — I have a question, I guess, two questions. First of all, I wanted to get an update maybe on Bruckner, what’s happening there. I know that that’s a property still where the least occupancy is really low and I know the target is moving in there, I think in end of this year or ’25. If you can give us an update also on what’s happening with Sunrise, where again, what’s going on there on the reimagining of that asset?