Urban Edge Properties (NYSE:UE) Q3 2023 Earnings Call Transcript
Urban Edge Properties (NYSE:UE) Q3 2023 Earnings Call Transcript October 31, 2023
Operator: Greetings, and welcome to the Urban Edge Properties Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Etan Bluman. Thank you. You may begin.
Etan Bluman: Good morning, and welcome to Urban Edge Properties 2023 third 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 in 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. Today, we are excited to be holding our earnings call from Puerto Rico. At our Investor Day in April of this year, we had a slide noting the sun is shining in Puerto Rico. That is true on many levels, including the transformations underway on our two properties here on the island, in addition to our overall operating performance and the progress we have made on our capital recycling initiatives. Starting with our results. We had one of the most productive quarters in our company's history. There are at least seven noteworthy accomplishments. First, we reported FFO as adjusted of $0.32 per share, up 7% compared to last year and well above our budget, driven by higher rent, lower operating cost and lower G&A.
Second, leasing activity remained strong with same property occupancy up 130 basis points over last year and new leasing spreads of 26%. Our signed but not yet open pipeline amounts to $27 million or 11% of net operating income, one of the highest rates in the industry. Third, we acquired two of the most prominent shopping centers in Boston, Shoppers World and Gateway Center, for $309 million, at a cap rate of approximately 7%. It is rare to have the opportunity to acquire assets of this quality and scale, especially in Boston, which now represents approximately 10% of our total value. Shoppers World is one of the most frequented open-air shopping centers in the Northeast, with over 11 million site visits in 2022. It is a large property encompassing 92 acres and 758,000 square feet of gross leasable area.
The property is in the center of the Golden Triangle, a dominant retail node in the Boston area. It is anchored by Best Buy, Nordstrom Rack, T.J. Maxx, Marshalls, HomeSense, Sierra Trading, Kohl's, [AMC] (ph), and a new grocer which is expected to open in July 2025. Gateway Center comprises 639,000 square feet and has a three-mile population of over 417,000 people with annual average household incomes of $106,000. The property is only three miles from downtown Boston and sits on an 89-acre site with over 3,000 parking spaces in a rapidly densified area. Tenants include Target, Costco and Home Depot. Our fourth accomplishment was selling our East Hanover Warehouse portfolio for $218 million at a 4.9% cap rate based on 2024 NOI, in a 1031 transaction using net proceeds for the Boston acquisition.
Fifth, we are in advanced negotiations on the sale of over $100 million of industrial, self-storage and single-tenant retail properties at attractive pricing, with cap rates in the mid to high 5% range. We are also in discussions to sell our residential land at Bergen Town Center. Sixth, we obtained a new 10-year $82 million, 6.6% mortgage on Las Catalinas while exercising a discounted payoff option on the prior $117 million mortgage, resulting in a $43 million gain. And finally, we increased our earnings guidance for 2023 FFO as adjusted by $0.06 per share at the midpoint based on our strong third quarter results and our expectations for the balance of the year. This lift reflects tremendous execution from every one of our business units. I am proud of our team's accomplishments.
These results and our continued momentum in the fourth quarter give us confidence that we are on track to achieve our targeted FFO of $1.35 in 2025, as outlined at our Investor Day in April. I will now turn it over to our Chief Operating Officer, Jeff Mooallem.
Jeff Mooallem: Thanks, Jeff, and good morning, everyone. It is so exciting to be here in Puerto Rico where, last week, we celebrated the opening of Sector 66, our new 123,000 square foot entertainment anchor tenant at Las Catalinas. Sector 66 attracted over 15,000 customers this weekend alone. At Montehiedra, T.J. Maxx and Ralph's Food Warehouse are under construction, and we just signed a lease with Burlington. Our success in Puerto Rico is the result of both strong fundamental trends throughout the island and the hard work and dedication of our team to transform these two assets, both previously anchored by Kmart, into busy and thriving properties. A special thanks to our Puerto Rico team, led by Bassam Mhich, Paul Schiffer and Lineth Rosado who oversee a committed and outstanding group that is a very important part of the Urban Edge family.
Turning to our third quarter results. Our leasing team had a very strong quarter, with 46 deals executed for a total of 568,000 square feet and same-space deals generating average cash rent spreads of 12.5%. Of the 46, we executed 17 new leases for a strong same-space average spread of 26%, and 29 renewals at a spread of 10%. National tenants signing leases this quarter included Burlington, Starbucks, Five Guys, Wingstop and Orange Theory. The strong quarter is indicative of the limited supply and strong demand within our core Northeast portfolio. Our same-property occupancy rate decreased 50 basis points from the prior quarter to 95%, as expected from the recapture of our last two Bed Bath & Beyond boxes. We have a signed letter of intent on one of the two Bed Bath boxes, which we expect to convert into a lease in the fourth quarter, and are negotiating with several tenants on the other.
These two vacancies will allow us to upgrade tenancy at healthy rent spreads and increased traffic at both centers. We also increased total portfolio shop occupancy this quarter by 80 basis points, our highest shop occupancy rate since 2019. Fourth quarter pipeline is moving along nicely with another four anchor deals and 15 shop spaces already executed or in late-stage negotiations. We are hoping to end the year with a same-property leased occupancy rate of 96%, up 60 basis points from the end of 2022. On the development side, one change to highlight from last quarter is the removal of the 80,000 square foot ground-up project for Hackensack Meridian Health at Bergen Town Center. Earlier this year, we revisited the project, and we decided the returns were not high enough to justify this investment.
The tenant paid us a substantial lease termination fee, and we are now exploring alternative uses for this parcel, which sits directly in front of Bergen Town Center along the busy Route 4 corridor. Finally, I want to add a few comments about the transactions Jeff announced at the beginning of the call, our $309 million purchase of two shopping centers in Boston and our $218 million industrial sale in New Jersey. I believe Boston is one of the most supply-constrained markets in the country for what we do: high-density, infill, surface parked, large-format retail shopping centers. The opportunity to acquire one asset like this in Boston, much less two rarely comes along as the assets are few and far between and mostly institutionally owned. We're very excited to add these to our portfolio and to grow our presence in Boston, a market we were underweighted until this transaction.
The fact that we were able to also close on the sale of our industrial portfolio at a sub-5% cap rate at effectively the same time in this volatile interest rate environment is a credit to our entire investments team. In addition, as Jeff mentioned, we are currently negotiating the sale of over $100 million of other non-core assets at a weighted average cap rate in the mid to high 5% range. The sum of all of these transactions is a more geographically diversified and a more product simplified Urban Edge at an accretive spread, positioning us well to achieve both our short- and long-term objectives. I will now turn it over to our Chief Financial Officer, Mark Langer.
Mark Langer: Thanks, Jeff. Good morning. I will address the factors contributing to our better-than-expected third quarter performance, provide insights on our balance sheet and liquidity, and conclude with comments on our updated 2023 guidance. Starting with our results for the quarter. We reported FFO as adjusted of $0.32 per share, 7% above the third quarter of last year. Same-property NOI growth, including redevelopment, was up 3.3% compared to the third quarter of 2022. The increase in FFO exceeded our plan due to a combination of factors. On the revenue side, growth came from higher percentage rent, improved net recovery income driven by lower operating expenses, and from lease termination income related to HMH. On the expense side, recurring G&A expenses were down over $300,000 from last quarter, and we received better-than-expected collections on amounts previously deemed uncollectible.
During the third quarter, Kingswood Center was formally transferred to receivership, and our management agreement to operate and lease the property was terminated. As a result, we no longer have any operational responsibilities and no obligations or financial interest in the property while we await the formal foreclosure process to conclude. Accordingly, as we highlighted in the supplement on Page 7, we have removed the $1.1 million dilutive earnings impact of Kingswood Center from FFO as adjusted, which includes both regular and default interest that is accrued but that will not be paid. The asset will be removed from our books when title is transferred upon the completion of the foreclosure process. In terms of our balance sheet, we recognize that we are living in a world of increasing uncertainty.
The 10-year treasury has reached levels not seen in 16 years. We don't try to predict rate movements, but we carefully manage our debt maturities using long-term single-asset fixed rate mortgage debt that is well laddered. Through September 30, we have executed four new mortgage financings aggregating $426 million at a weighted average rate of 6.3%, with a weighted average duration of 7.2 years. This includes large financings at Bergen Town Center and our recent mortgage at Las Catalinas Mall here in Puerto Rico. Given the state of the debt markets today, we feel good about the execution on those transactions and the way our balance sheet is positioned today, with only 19% of total debt maturing through 2026 at a weighted average interest rate of 4.8%.
By way of comparison, our peers have about 40% of their debt coming due during this time period at a rate of 4%. We continue to see the benefits of our secured debt strategy, and we value the flexibility it provides us. Regarding our overall leverage levels, the capital recycling efforts we have underway are expected to reduce our net debt to EBITDA from 6.9 times at quarter-end to 6.6 times. We expect this level to decrease below 6.5 times as EBITDA growth continues from the rent commencements embedded in our S&O pipeline and as the Kingswood mortgage is removed. It was less than 90 days ago, during our second quarter earnings call, that we introduced the concept of selling certain low cap rate non-core assets and redeploying that capital into higher cap rate core product.
It's highly encouraging to see how much progress has been made in such a short period of time. The Boston assets we are acquiring are among the best in that market and the sale of East Hanover warehouses and pending sale of other non-core assets at an overall weighted average cap rate in the low 5% range is extraordinary, especially in this environment. As we noted in our release, the capital recycling efforts we have outlined are expected to increase FFO as adjusted by $0.04 per share in 2024 and $0.05 per share in 2025. This growth more than offset the $0.03 per share dilution net of tax from our Las Catalinas refinancing. Turning to our outlook for the remainder of 2023. We increased our 2023 FFO as adjusted guidance by $0.06 a share. The increase reflects our better-than-expected performance year-to-date, accretion from our capital recycling transactions, and our expectations for same property NOI growth, including redevelopment, with a new midpoint of 2.75%, up from the prior midpoint of 2%.
Our updated guidance at the midpoint implies fourth quarter FFO of $0.30 a share. The $0.02 a share decline from Q3 reflects higher interest expense and no assumed termination fee income in the fourth quarter. We have assumed a general credit loss of $1 million for the fourth quarter and a decrease of approximately $1 million in collections on amounts previously deemed uncollectible as compared to the fourth quarter of last year. These headwinds are partially offset by the capital recycling activity we announced. To conclude, our team is committed to execute the growth strategy we outlined at our Investor Day in April of achieving $1.35 per share in FFO as adjusted in 2025, and we are on track to achieve that. We appreciate the hard work exhibited by the entire UE team as their efforts have been instrumental in driving our success.
We are excited about the progress that has been made and the significant potential we see to build on our momentum. Thank you for your continued support and interest in UE. I will now turn the call over to the operator for questions.
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