UE - NYSE

Greetings and welcome to the Urban Edge Properties' Second Quarter of 2023 Earnings Conference 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, Mr. Etan Bluman. Sir, you may begin.

Good morning and welcome to Urban Edge Properties' 2023 second 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.

Great. Thank you, Etan, and good morning. Our results this quarter reflect our continued progress towards achieving our 2023 net operating income growth and FFO goals, giving us further confidence in attaining our three-year growth targets we outlined at our Investor Day in April, including growing net operating income by at least 20% compared to 2022 and achieving FFO of a $1.35 per share in 2025. Our conviction stems from the fact that approximately 80% of our expected NOI growth is derived from executed leases and contractual rent bumps. On that point, we disclosed that $6 million of annualized gross rents commenced during the second quarter on previously signed leases. Our current pipeline of signed, but not opened leases amounts to $28 million of annual gross rents, representing 11% of current annual NOI, the highest percentage in the shopping center sector. Our strong performance this year has exceeded our plan supporting our decision to raise guidance again this quarter. Our new FFO as adjusted range is $1.16 to $1.19 per share, an increase of $0.015 at the midpoint. This follows the $0.02 per share increase we announced in the first quarter. We continue to see strong demand from a variety of retail categories, especially grocers, discounters, quick-service restaurants, health and beauty and medical services. This strong demand combined with limited supply and manageable bankruptcy risk has created a favorable environment for most landlords. According to Cushman & Wakefield, retail shopping center vacancy is currently at an all-time low of 5.4% and new retail construction is significantly constrained by high construction and capital costs, especially in the D.C. to Boston corridor, the most densely populated supply constrained corridor in the country. Our same-property occupancy rate is now 95.5%, the highest level since 2018, but still well below our 98% three-year occupancy average from 2016 to 2018. We are pleased to have recaptured a 184,000 square feet of the 206,000 square feet of Bed, Bath & Beyond space we had at the beginning of the year, as it will allow us to upgrade our tenants at higher rents and increased traffic at these centers. We are making great progress on our active redevelopment and anchor repositioning projects. During the quarter, we completed three projects, which included a new Walgreens at Montehiedra, Nemours Children's Health at Broomall and Total Wine at Cherry Hill. We have approximately $200 million of active redevelopment projects currently underway that are expected to generate a healthy 12% unleveraged return, of which 98% of the total project GLA has been pre-leased. We remain confident in our long-term strategy due to the favorable supply and demand dynamics of the shopping center industry, particularly in our markets. Our signed but not open leasing pipeline is the fuel that will help us achieve our goal of increasing net operating income by at least 20% over the next three years. This NOI growth combined with our strong balance sheet, abundant liquidity and well-laddered debt maturities gives us confidence in reaching our 2025 FFO target of a $1.35 per share. We are proud to have been named One of New Jersey's Best Places to Work by NJBI

Thanks, Jeff, and good morning, everyone. The leasing environment is the best we have seen in the last 15 years. Our portfolio has just nine vacant spaces that are 20,000 square feet or larger, including two that we just got back yesterday from Bed, Bath & Beyond. We are actively negotiating deals on eight of those nine vacancies, with multiple retailers bidding on seven of the eight. With more choices, we are able to extract higher rent and better terms. Our focus is on selecting the right tenant for each asset and generating the most attractive capital adjusted returns. Data coming out of the recent Bed, Bath bankruptcy is another indication of the healthy state of the industry. Of a 109 leases that were auctioned off in the first grouping of stores, 71 were awarded to retailers, with the backup bidder in many cases also being a retailer. This exemplifies the strong demand and the limited supply for Box space in shopping centers today. The second quarter new leasing activity was light, with 11 leases aggregating 28,000 square feet. Spreads were negative compared to prior tenants as most of these spaces were interior mall locations in Puerto Rico that have been vacant for more than two years. We expect increased activity in the second half of 2023, as we have about 400,000 square feet of leases in the pipeline, at a spread in excess of 40%. On the development side, we delivered three projects in the second quarter and continued to work through our sector-leading signed but not open pipeline. As we deliver to tenants, we've seen some construction savings from budgeted numbers as supply chain concerns have eased and material and labor prices have stabilized. We also continued to work on monetizing some of our non-core land parcels, the most notable of which is our residential opportunity at Bergen Town Center. In the second quarter, we received final site plan approvals for 456 multifamily units, a credit to our entire development team, who got this approved with an unanimous vote, ahead of our projected timeline. We are actively engaged with several residential developers to maximize value and we hope to announce a deal soon at a valuation on a price per unit basis that we believe will be one of the highest ever for Bergen County. Lastly, I want to add a few comments about the transaction market today. The second quarter has seen a real pickup in offerings, and there are probably more assets in the market now than at any time in the last 12 months, with the bid/ask spread narrowing. Sellers are prioritizing the certainty of closing to a higher degree than what we have historically seen during other parts of the cycle. As a well-capitalized buyer with deep lending relationships, this provides us with a strong competitive advantage and we're using that advantage to spend more time looking at deals in our core markets. We also believe there is a very attractive cap rate spread right now between potential retail acquisitions and a number of the high-quality, low-cap rate assets that we own, including excess land at Bergen, our industrial portfolio and self-storage properties. As a result, we may look to dispose of a certain low-cap non-retail assets and recycle proceeds into higher yielding, and in our mind, undervalued retail properties in our core markets. This aligns with our strategic plan to simplify our business and grow earnings. I will now turn it over to our Chief Financial Officer, Mark Langer.

Thanks, Jeff. Good morning. I will discuss drivers of our second quarter results, comment on our balance sheet and liquidity, and we'll close with an update on our 2023 guidance. Starting with our results for the quarter. We reported FFO as adjusted of $0.30 per share and same-property NOI growth, including redevelopment, of 3.5% compared to the second quarter of 2022. The increase was primarily due to rent commencements on new leases and higher net recovery income driven by lower operating expenses. Excluding the collection of amounts previously deemed uncollectible in both periods, same-property NOI growth would have increased by 6.6%. In terms of our balance sheet, we ended the quarter with $93 million of cash and no amounts drawn on our $800 million line of credit. We have been busy on the financing front. In addition to the successful refinancing we announced on our call last quarter, regarding Bergen Town Center's new $290 million, 6.3%, seven-year mortgage, we closed three other mortgage financings in the second quarter. We refinanced our $9 million mortgage at shops at Bruckner with a new six-year $38 million loan at a fixed rate of 6%, a portion of the proceeds was used to pay off our $29 million variable rate mortgage on the Plaza at Cherry Hill that was bearing interest at 8.75%. We also obtained a new 10-year $16 million mortgage at a fixed rate of 6% secured by our Newington Commons property. We now have only one remaining maturity in 2023 limited to a $21 million 5% mortgage at Hudson Mall. Looking forward, we feel very comfortable with our six mortgages maturing in 2024 and 2025, which aggregate only 10% of our total debt amounting to a $173 million at a weighted average in-place rate of 5.3%. These are secured by high-quality assets that we believe are financeable at rates in the 6% to 6.5% range today. Considering the financing activity we have announced this year, less than 5% of our total debt is now unhedged variable rate debt, and all of it relates to 2024 maturities. In short, we feel very good about the way our balance sheet is positioned. Turning to our outlook for 2023, as previously announced, we increased our 2023 FFO as adjusted guidance to a new range of $1.16 to $1.19 per share, which when compared to our prior guidance increases the lower end of the range by $0.02 a share and increases the upper end by a $0.01 a share. The increase reflects our better-than-expected performance year-to-date and our increased guidance for same-property NOI growth, including redevelopment with a new midpoint of 2%, up from the prior midpoint of 1%. The new midpoint assumes a general credit loss of a 100 basis points of gross revenues and incorporates $1 million of loss rent for the remainder of the year on the two Bed, Bath & Beyond anchor leases that we recaptured. In addition, our guidance assumes operating expenses normalize to levels similar to the third quarter of 2022. As this quarter benefited from the timing of certain deferred maintenance projects, which will likely start in the third quarter. In terms of collections on past amounts deemed uncollectible, our updated 2023 guidance at the midpoint assumes we will receive $2.5 million during 2023, an increase of $0.5 million above our prior plan based on some payments that we received from bankrupt tenants that vacated in 2020. We have received about $1.7 million in the first half of 2023 and expect another $800,000 for the remainder of the year. Note, that collections on amounts deemed uncollectible during the third and fourth quarter of 2022 were materially higher as we received about $4.5 million in the second half of last year. This will be a headwind to our NOI growth for the remainder of this year. Recurring G&A this quarter was $8.9 million. This is in line with our G&A guidance, which we did not change from last quarter when we updated and lowered it to reflect our expectation that full year recurring G&A will be between $34.5 million to $36.5 million, a 5% reduction from 2022. We are continuing our efforts to evaluate ways we can extract savings and become more efficient and are pleased with the progress we have made. In closing, our team is focused on executing the growth plan we outlined in April at our Investor Day. We are grateful for the dedication and execution provided by the entire UE team, who has made our success possible. I will now turn the call over to the operator for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Samir Khanal with Evercore ISI.

Good morning, everyone. I'm just curious, Jeff, on the leases that you've executed what do these annual rent bumps look like? I mean, in the past you get these 1% annual bumps for boxes, you clearly talked about the strong demand. There's not a lot of supply out there, right. So I guess, what does that economics look like at this point. Thanks.

Hi, Samir. Good morning. It's Jeff Mooallem. Yes, so we're - obviously, that's a focal point of all the new leases we're executing and we are seeing better increases now than we were historically. Our rent growth in general on the new leases we're signing now is north of 2%, that's a combination of shop and box deals. So in the ones that we did this quarter I think we're about between 2.25% and 2.5%. It was a small quarter for us leasing wise, volume wise, but our pipeline is pretty extensive and we expect to be able to extract a lot of new leases in the third quarter.

Okay. Got it. And then you talked about the transaction market that's opening up. I know there was an article yesterday about the industrial property in the East Hanover. I don't know how much you can provide a bit more color on that. And maybe just sort of maybe what has been sort of the initial interest?

Look, the assets in the market, we can't get into too many details on it, but we're certainly excited about this concept of selling low cap rate assets and redeploying capital more accretively play. It's early in the process for that asset but the interest level is very strong. I want to say there are a 100 CAs that have been signed.

That are 125, yes.

Yes. So and that's increasing. It was a 100 just a couple of days ago. And in addition to the industrial asset, as Jeff mentioned, we also have excess land at Bergen, we've excess land at other assets, we own a couple of self-storage facilities that we developed several years ago that have now been stabilized. We own a number of single-tenant assets anchored by credit retailers that would include Home Depot, who happens to be our largest retailer that could be up for consideration. So we're evaluating our entire pool of assets to see where we might be able to make some trades.

Got it. And then my last one is for Mark. And similarly, your expense recoveries were up again in the second quarter. Maybe talk around that and how we should be thinking about that kind of what's that stable number to think about it maybe in the - you know, for the remainder of the year and into '24? Thanks.

Sure. As I think I've messaged previously we did expect a message that we expected the recovery ratio to improve as we were bringing this SNO pipeline on - into income producing, and so recoveries went from 83.5% on a same-property basis to 85.5% this quarter. And while this quarter did benefit from - some lower levels of expenses. I would say that because of the continuation of how we see the S&L pipeline, I think our run rate can be around this 85% elevated level and then picking up next year modestly.

That's it for me. Thanks so much.

Great. Thank you, Samir.

The next question comes with Floris van Dijkum, Compass Point.

Hi, Floris.

Hi guys. Thanks and good morning. And so I think it's actually really interesting this idea of selling low-cap rate assets and buying higher-yielding retail assets that presumably had some attractive growth here as well. Maybe if you could, I know it's a little early, and you've got at least one asset in the market right now. You've got two big New Jersey Industrial and obviously, you've got your potential industrial development in Long Island at Sunrise as well. Maybe if you can touch upon, does this impact your plans with Sunrise and maybe getting out of that? And also, what kind of spreads on sales versus acquisitions do you expect to get on some of this recycling?

Yes, I mean, it's a little early to talk about the spreads, but it's sizable. And so I mean, I think on many of these assets as it was reported it's sub-5% cap rates and you can buy shopping centers at a much larger spread than that. I'll let Jeff answer the Sunrise question

Yes, I mean, Floris, good morning. Just like our East Hanover property where there's just such great demand for space in these real infill Metro New York locations, Sunrise shares many of those same qualities and that obviously makes it a very attractive site for the industrial development community. And so the pickup in demand that we see across the area is going to benefit us. Too early to really tell you whether that project gets built as an industrial project, a retail project, a residential, some combination and our role in that we're actively working through the plan with the town of Oyster Bay. We're actively working through with our existing retailers and it's definitely moving in the right direction, both in terms of numbers. And in terms of getting clarity on what we're going to do. But I would say that the metrics we're seeing in industrial today that led us to put East Hanover on the market are also going to help us at Sunrise. If we move forward with an industrial project there.

Thanks. And I saw that you bought a - there's a ground rents at part of the Sunrise properties as that just simplifies the ownership and the structure of that

Yes, they was in a state sale asset that had declared that's been in the works for a while and we had to wait for something to pass through probate to get that done. But yes, that's just a way of simplifying and consolidating our holdings into one entity.

So Floris, let me just add one thing.

Yes.

Floris, let me just add one thing here because as I thought this morning about some of the unique characteristics of UE, I sort of put them into the three different buckets. The first is what we've clearly communicated in terms of our NOI trajectory, which leads to FFO growth getting to this $1.35 in 2025 and that's all rooted in this SNO pipeline, which is about $28 million and our $200 million redevelopment pipeline that's yielding around 12%. So that's sort of one. Number 2 is this ability of ours to trade out of some low-cap rate assets into higher-cap rate assets, which we're beginning to test the market. And then the third point really has more to do with the unique structure of our balance sheet, which as you know is all centered around non-recourse mortgage debt. And we do have an ability to remove about a $110 million of debt between the DPO at Las Catalinas, which is about $40 million in the foreclosure at Kingswood, which is around $70 million. So I think those three things are unique to UE.

Thanks. No, and I - you know, my next question, I guess, is the follow-up question on your balance sheet because I do think that's one of the other things that sets you guys apart. Your mortgage structure. I found it unique in some ways that you are actually able to save money by refinancing assets today, obviously, the Bruckner loan was pretty cheap. And maybe Mark, if you could comment a little bit on the, you know, what you're seeing in the financing market 6% appears even for 10-year money in Newington is very attractive, for six-year money at Bruckner appears attractive and then you're paying down debt, actually that's at 8.75%. So that's, if you can walk through that a little bit more and give a little bit more of a color.

Sure, Floris. And I think one thing just as Jeff and you both pointed out, and that is if you step back and look among our public peers, we are unique in that, and this is kind of our sole mortgage - our sole debt strategy. And so when we go out and talk to the lenders having a well-capitalized public REIT like us, we're kind of differentiated from the get-go because of these, time sponsorship really does matter. And when you look at the three primary sources that we go to starting with CMBS, I would actually say that market has been more volatile recently and the retail pricing for assets that we have actually has been inefficient. And so when you go to the next prong of the regional banks, clearly, there's been a bifurcation given all the headline noise in some of the restructuring that they've done. They are - we found many of our regional relationships actually are still open for business. It is a relationship-driven type of transaction. They in turn want deposits. They play in smaller tiers of loan size, which is fine for many of our centers, but where we've seen the most traction and where myself and Etan and others on our team have really spent time is with the life companies. High-quality product like we have, still highly desired. Grocery still remains a top interest, but even outside of grocery just really well-located, well-anchored high-credit tenancy that we have has enabled us to get the debt rates you mentioned of, you know, 6% with real duration and 60% LTVs and higher. So in terms of the last part of your question, what I would say is the rates that we're seeing today. Spreads are probably in the 200 to 225 range, but really asset quality and the type of center matters. So I would tell you that, all in, those rates are about 6% to 6.5%. We're doing everything we can to push to the low end, but we've been very pleased with the appetite among life companies for our products.

Thanks, Mark. May - if I could, one final follow up on the debt side. I know you had an asset in Brooklyn, an office asset that I think you were thinking about handing back the keys on. Can you give us an update on that?

Sure. We did announce and disclose last quarter, and again, this quarter, Floris, that asset has been transferred to special servicing. It was transferred in May. I think you guys all know the volume of activity that special services are dealing with. It's quite large. So having said that, we are making very good progress. We're in very active discussions with the lender and Lenders Counsel going through the foreclosure process. But it is just too early and hard to predict when that would be completed, but we do expect that's where it's headed.

And Floris, when it's done, again, it should remove about $70 million of debt from our balance sheet and it should be accretive to earnings by a $0.01 to $0.02 a share.

Perfect. Thanks, Jeff. Thanks Mark.

Okay. Thank you.

Yes.

Our next question is from Ronald Kamdem, Morgan Stanley.

Hi. Just two quick ones. One, going back to Puerto Rico, if you've touched on it already, just maybe thoughts on what's happening on the ground there and maybe you're thinking of potentially selling that asset or getting a sale done there? Thanks.

Good morning, Ron. It's Jeff Mooallem. Yes, look, we've said it last quarter and we're reiterating it this quarter. Puerto Rico is hot. The market has really come back. We're seeing it in our leasing. A lot of the spaces that we have down there that are interior mall spaces that over the last several years, we've just been temping. We've been gradually converting to permanent leases, as tenants are willing to make a longer commitment to the island. And one big tenant in particular, who told us they only had two stores on the island, and about six months ago, we're thinking that they were going to just exit because it was very hard to service only two stores in all of Puerto Rico, came back to us in the last month and said they were going to exercise their option and stay longer and they were going to commit to building more stores on the island and that's one of the best soft good retailers in the world. So we feel very good about where Puerto Rico sits from a leasing standpoint. We're opening a good restaurant at our Las Catalinas property next week and then our Sector 66 entertainment user should follow within 30 days after that. And as far as sale, it's not something that's on the table right now. Mark talked a little bit about the refinancing that we're working through. And we're excited about that. And as values continued to increase there and occupancy continues to go up and we can push rents a little bit more, it's obviously something we'll continue to look at, but not in the short term.

Mark, do you want to talk a little bit about the financing market in Puerto Rico, just because...?

Yes, I would just add, Ron. Jeff Olson mentioned the fact that we have this discounted payoff option that's exercisable now for Las Catalinas, which would be able - which would enable us to purchase the existing debt for $72.5 million. So based on that we are in the market. Puerto Rico we find is best financed through the local market. We have had great success as you may remember in getting permanent financing at Montehiedra. We're talking to the same three primary lenders that are in Puerto Rico and trying to negotiate a new mortgage now. So stay tuned. But to Jeff and wellness point, I would just say fundamentals and both leasing activity have enabled the financing market to also remain an increasingly more attractive opportunity for us. So we are pursuing that right now.

Great. And then just for the guidance, could you remind us how much bad debt is baked into it for this year and how much have you went through year-to-date would be one? And then the second part of that question is, as I'm - as you're sort of thinking about the 2025 target of $1.35 of FFO, and I think you've talked about the signed not open pipeline, talked about the $200 million redevelopment at a 12% yield. Maybe can you remind us what are the biggest sort of moving pieces to getting to that number? Right, because those first two are pretty clear. But is it bad debt? Is it sales just what could make you overshoot or undershoot that $1.35 in your mind right now? Thanks.

Sure. So in terms of the first question on bad debt, we had messaged that right now in guidance, we're assuming a 100 basis points of general credit loss reserve for the portfolio overall. We added and commented on the additional $1 million for Bed, Bath, but included in our guidance is also the all fallout for Bed, Bath that we've had that Jeff mentioned. So we fully provisioned in guidance our Bed, Bath exposure, and on top of that a 100 basis points in general credit loss. We've got about $1.7 million to answer your question of how much we deemed uncollectible for the first six months. So some of that's lumpy because of one-off tenant situations. But that's the general guidance. In terms of your question on the $1.35 target, I think the biggest components to that we're focused on is while that SNO pipeline has executed, we got to get those RCDs and those tenants opened and not face any fallout or delays. There is a small level of normal spec lease up. So that needs to come to fruition. And then really because we have very modest expectations on acquisitions and dispositions. That's not an element that I would say is moving the needle that much. So it's really just the fundamental pillars to NOI that are going to have, I think the biggest impact on that.

Yes. And Ron, I would add, in addition to the signed not open pipeline, which we're - as Mark said, we're focused on converting into rent commencement dates. There's a different pipeline that sits behind it of deals that we're negotiating. I mentioned we had 400,000 square feet in our pipeline at a roughly 40% spread. About 70% of that square footage is LOI executed. So if we just get that 70% that's under LOI executed into signed leases and convert that into the new signed, but not open pipeline. That's a big lift, combined with the existing signed, but not open to getting to the $1.35.

Excellent. Super helpful. Thank you.

Thank you.

Our next question is from Paulina Rojas, Green Street.

Good morning.

Good morning, Paulina.

Hi. It has been mentioned that there were some seasonal institutional interest that we're seeing along retail. Can you provide - on this topic based on your conversations?

Yes. I mean, clearly there is more institutional interest around retail. I think in part because many of these institutional investors have reduced their office allocation and they're looking to put it into other product types. And also in part, it's one of the few sectors where you can obtain positive leverage. So it's not like you're buying in the fours and hoping for rent growth that'll get you above your financing costs. Today, you can actually buy properties and finance it with non-recourse debt and get some type of spreads. So and given the resilience that you've seen in the shopping center space over the last several years I think institutions have taken interest. So no question about it. There is institutional interest in retail today and it is proving to be a group of investors that's providing some competition for us as we're going out and looking at assets.

Thank you. And then my last question is have you done the exercise of assessing what's the mark-to-market of the rents in your portfolio today?

I'm sorry. Say that one more time, Paulina.

Your line broke up.

Yes, sorry. I'm saying that given how good demand is, have you done the exercise of evaluating what's the mark-to-market upside of rents in your portfolio today - what's so around the releasing spreads that we talk every quarter.

We - yes, we think it's pretty significant. We have not going lease-by-lease-by-lease. We're going through that right now as part of our budgeting exercise. But I think the biggest indicator of what - where mark to market is just based on what leases are under negotiation and what is that spread? And we have about 400,000 square feet of leases under negotiation and the mark-to-market there is about 40%. Now there's some capital required for that too. But nonetheless, it's still a very high number, probably the highest we've had in years.

Yes.

Okay, thank you. That's all for me.

Okay. Thank you, Paulina.

[Operator Instructions] There are no further questions at this time. I would like to turn the floor back over to Mr. Jeff Olson for closing comments. Please go ahead.

We appreciate everyone's interest in UE, and please call us if you have any questions. Thank you so much.