UE - NYSE

Greetings, and welcome to the Urban Edge Properties Second Quarter 2025 Earnings Call. [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. You may begin.

Great. Thank you, Areeba, and good morning, everyone. We delivered great second quarter results, increasing FFO as adjusted by 12% over last year and 8% year-to-date. Same-property net operating income increased by 7.4% for the quarter and 5.6% year-to-date. The demand for space in our shopping centers remains strong. There are a few high-quality vacancies remaining in our markets, often leading to multiple bids on available space, which is driving upward pressure on rents and lease terms. Our same-property occupancy increased to 96.7%, up 10 basis points from the prior quarter, and our shop occupancy rate increased to a record high of 92.5%, up 270 basis points over the prior year. Given that we are now nearly 97% leased and our properties have undergone significant improvements, including new anchors, parking lots, facades and roofs, we anticipate a substantial decrease in future capital expenditures. The investment sales market for retail assets is thriving, driven by both public and private buyers. One of our Board members recently described the current shopping center landscape as the revenge of the nerds, highlighting that retail is back in demand driven by solid operating fundamentals, increased debt availability and increased capital flows. Year-to-date, we have sold $66 million of assets at a blended cap rate of 4.9%. This includes the sale of 2 high-value, lower-growth properties, Kennedy Commons and MacDade Commons for $41 million and the previously announced sale of a 44,000 square foot building across from Bergen Town Center for $25 million. Looking ahead, based on the strong results we have achieved to date, we increased our 2025 FFO as adjusted guidance by $0.02 per share to a new range of $1.40 to $1.44 per share, reflecting growth of 5% over 2024 at the midpoint. We remain confident in our strategy, which is anchored by 5 key strengths: one, a portfolio concentrated in the densely populated supply-constrained D.C. to Boston corridor; two, highly visible future net operating income growth, supported by our $24 million signed but not open pipeline, representing 8% of current NOI; three, a $142 million redevelopment pipeline expected to yield a 15% return; four, strategic capital recycling. Since October 2023, we have acquired $552 million of high-quality shopping centers at a 7.2% cap rate and sold $493 million of noncore low-growth assets at a 5.2% cap rate. And five, a resilient balance sheet with $1.5 billion in nonrecourse mortgages and 42 unencumbered properties valued at nearly $2 billion. We only have $139 million or 9% of our total debt maturing through 2026. Our continued momentum and success are driven by our dedicated team. I'm grateful for their passion and commitment to execute our strategic plan while working in such a collaborative manner to achieve outstanding results. I will now turn it over to our Chief Operating Officer, Jeff Mooallem.

Thanks, Jeff, and good morning, everyone. It was another strong quarter for leasing and development as we continue to hit on our goals of increasing occupancy, generating double-digit leasing spreads, completing development projects at or ahead of budgeted time lines and adding new developments at double-digit returns. Let's get into it. We executed 42 deals totaling 482,000 square feet in the second quarter. This included 27 renewals totaling 394,000 square feet at a 12% spread and 15 new leases totaling 88,000 square feet at a 19% spread. New leasing activity included 2 Boot Barns, Fidelity Investments, Just Salad and Wonder. With these executions, over 95% of our S&O pipeline is now comprised of national and regional tenants, providing further assurance that our NOI growth is derived from a stronger credit platform than what we used to see in years past. Our same-property leased rate is now 96.7%, reflecting an increase of 10 basis points from last quarter. Leading the way in occupancy, again, was shop leasing, which reached a new record high of 92.5%, a 10 basis point increase from last quarter and a 270 basis point increase from the same period last year. We have an excellent pipeline for the second half of the year as we close in on our goal of exceeding 93% shop occupancy in 2025. Anchor occupancy remained steady, moving from 97.2% to 97.4% despite the bankruptcies of Big Lots and Party City earlier this year. Just as we were expecting those 2 bankruptcies, we were not surprised when At-Home filed last month. We have 2 At-Home stores, both paying single-digit rents, and we expect to get one location back this year. As we've said before, tenant bankruptcies are a reality of this business. And in times like this, we can embrace that reality as an opportunity. Removing dated stores that generate minimal traffic from our centers and replacing them with higher credit and better concept operators has consistently had a positive ripple effect on the rest of the property. On the development front, we continue to progress on multiple projects, delivering spaces and getting stores open. During the quarter, we completed 5 redevelopment projects, enabling new tenant openings at Montehiedra, Marlton, Brick, Walnut Creek and Huntington. Adding national tenants like Burlington, Cava, First Watch, Starbucks and Sweetgreen to these properties has strengthened credit and increased traffic. We also activated new projects at Bergen Town Center, where we continue to improve the food options at one of the busiest assets in our portfolio. Tatte Bakery, Capon's Burgers and Tommy's Tavern will complement 4 other new food concepts we previously announced, giving this newly renovated property one of the best dining lineups in all of Bergen County. With the 5 projects that came off our development pipeline and the 2 new projects added, active redevelopment now totals $142 million and maintains a strong expected return of 15%. With that, I'll hand it over to our CFO, Mark Langer.

Thank you, Jeff, and good morning. We were pleased to deliver another strong quarter, marked by solid earnings performance and continued leasing momentum. FFO as adjusted came in at $0.36 per share and our same-property NOI, including redevelopment, increased 7.4% compared to the second quarter of 2024. The outperformance was driven in part by higher rental revenue from tenant rent commencements, higher net recoveries and year-end CAM reconciliation billings, of which approximately $0.01 per share is nonrecurring. Same-property NOI growth would have been 5.6%, excluding the $1.2 million of nonrecurring tenant billings, still a very strong result, reflecting growth from our S&O pipeline. FFO as adjusted also benefited from lower recurring G&A expenses. I will comment on our favorable trend on G&A in a moment when I provide an update on guidance. On the financing front, at the end of June, we paid off our $50 million mortgage loan on the Plaza at Woodbridge, which had an effective interest rate of 6.4% and was due to mature in June 2027. Payment was made in part using our line of credit, which has a current interest rate of approximately 5.4%. Our $800 million line now has $90 million drawn. Our balance sheet remains in excellent shape with total liquidity of approximately $800 million, including $118 million in cash. As Jeff highlighted, we have just 9% of our outstanding debt coming due through 2026. Our cash flow has improved steadily as we have added high-quality anchors and strong regional shop tenants to our portfolio. We have carefully managed our debt during our growth cycle the past few years. Our adjusted EBITDA to interest expense has increased to 3.7x, up nearly 30% from 2.9x a year ago. Our net debt to annualized EBITDA was 5.5x in the second quarter, positioning us well to capitalize on future growth opportunities. Looking ahead to the remainder of 2025, we are increasing our FFO as adjusted guidance by $0.02 per share to a new range of $1.40 to $1.44 and projecting same-property NOI growth, including redevelopment, to be in the range of 4.25% to 5%. Our assumptions for uncollectible revenue remain unchanged at 75 to 100 basis points of gross rent and incorporate the expected impact of At-Home. Our $24 million S&O pipeline continues to be a key growth driver with $3.9 million in annualized gross rent already commenced in the second quarter, and we expect to recognize another $1.7 million in new commencements in the remainder of the year, which will predominantly come online in Q4. Based on results year-to-date and our future expectations, we have lowered our recurring G&A forecast for 2025 by $500,000, bringing the midpoint to $35 million, which implies a reduction of 3% from 2024. This is due to a combination of factors, including lower headcount and the expected timing to backfill open positions in addition to other cost-saving measures. In closing, we remain focused on executing our strategic plan, driving leasing and occupancy, delivering new tenant spaces on schedule and carefully managing expenses. We're confident in our ability to continue delivering sector-leading growth. With that, I'll turn the call over to the operator for questions.

The first question is from Ronald Kamdem from Morgan Stanley.

Just 2 quick ones. I guess, starting with the record occupancy in the in-line space. Maybe can you talk a little bit about what -- how much more upside do you think is that number -- that occupancy number? And number two, how is that translating into either better lease contracts or pricing power for you guys in the business?

Jeff, go ahead.

Yes. Yes, listen, we're really happy with where we are on the shop space. I'll take that first. But as I said in my prepared comments, we think we can get to between 93,000 and 94,000 square feet -- 93% and 94% shop occupancy, which requires us to get another 50,000, 60,000, 70,000 square feet and also account for some vacates as the year goes on, although we don't expect much of that. The nice thing about the shop occupancy right now is that we do have, as you said, real pricing power. And of course, pricing power today is not just charging a higher rent or asking for better interest rates, but it's on things like exclusive use provisions, radius restrictions, opening dates, landlord contributions, tying things to permitting. We've been able to extract much better terms on all of the shop leasing we've been doing. So there's a little bit of run rate there in terms of occupancy growth and certainly better economic and other terms in the leases. On the anchor side, we have a name circled next to pretty much every anchor vacancy in the portfolio. Some of those deals should happen in the next few weeks to a couple of months, and we'll announce them in 3Q. And some of them might take longer. But there's certainly more activity on all of our spaces than we've seen in years past, and we're not really too worried about having a lot of space that's going to be sort of static inherent long- term anchor vacancy. So that's pretty good news as well.

Great. And then my second one, a little bit of a 2-parter, but just you guys have had a lot of success on sort of the capital recycling front. Maybe just talk a little bit about what you're seeing sort of in terms of cap rates and opportunities going forward? And then the second part is the At-Home update was helpful, but any sort of update on Kohl's as well?

Ron, it's Jeff. Let me start with the acquisition market, which has been heating up even over the last several months. And I think what's happened sort of in this post-COVID environment, investors have realized that in the shopping center space, the cash flows are durable and there's actually a fair amount of growth coming going forward. In addition, the lenders have really stepped up, in particular, the banks. So we're starting to see them become much more active in the market. And as you know, the banks are much more flexible than CMBS lenders and the pricing is very competitive. In fact, we're negotiating a bank loan right now where the equivalent spread is 135 basis points over treasuries. That would be a record low for us. And remember, this is nonrecourse debt. So overall, as financing becomes more attractive in the space, there certainly are more buyers now willing to pay higher prices. I think the sellers overall generally recognize what's happening. So they are putting more product into the market, and they're also asking a whole lot of money for that product, too. So pricing expectations are awfully high. At the moment, we're evaluating lots of deals, and we do hope to find some opportunities for more capital recycling. I think we're going to test the market this fall for more dispositions. And again, we're sort of hoping to place that disposition capital into higher- yielding acquisitions that have higher long-term growth rates as well. But in the meantime, we've got plenty of growth to mine from our existing assets including from our S&O pipeline, which is, as we said, 8% of total NOI, which I think may be the highest in the space and also from redevelopment. In terms of pricing, Ron, I think what you're seeing for higher quality assets today are cap rates sort of in that 5.5% to 6% range, if the CAGRs are able -- the NOI CAGRs are able to get 3% growth. That would imply unleveraged IRRs in the 8% to 9% range and leveraged IRRs in the 10% to 12% range. As I sort of reflect on those numbers, Ron, and look at our stock at $20, which is implying a cap rate that starts with a 7. And then when I overlay that on top of our expected NOI growth, which we think will be probably at least 4% over the next several years, which is driven largely by this S&O pipeline, it seems to us that our stock is relatively inexpensive.

Great. And then the update on Kohl's?

Jeff, why don't you take that one?

Yes. I mean, Ron, obviously, Kohl's is on our radar screen. They're on everyone's radar screen. But at this point in the process, and we've met with everybody there, Mark and his team have done a very good job of understanding both their current maturity debt profile and where the stock is trading and interest in the company. You saw it was a mean stock last week and had a really nice spike for a little while. We're really still playing offense when it comes to Kohl's, meaning we are talking to them about locations where they have term that we'd like to get back. And we've approached them about 2 of those locations already and having some conversation, but we're not seeing a great sense of urgency from them to close stores. They've told us that they are 4-wall profitable in almost all of their stores. Obviously, they're keeping an eye on the declining sales environment as are we. But right now, they don't seem to be too concerned that they can't be a profitable ongoing business. And most of their stores in the Northeast, which is where our stores with them are located, are generally amongst their best performers in the portfolio. So what I would say is while we're tracking Kohl's, we don't think of it as a 2025 or even really a 2026 decision we're going to have to make. If we can get some stores back and play offense and re-tenant them, we will. But in the meantime, we're just kind of keeping an eye on it, and we don't think it's imminent.

The next question is from Floris Van Dijkum from Ladenburg Thalmann.

So this accretive recycling has been incredibly profitable for you guys in the past. Are you running out of runway? How much more in terms of volume do you think you can sell? I know you've got some California assets. You got an asset in Missouri and New Hampshire potentially and obviously, some other boxier assets. And would you consider if there is pressure on cap rates in your core markets in New York and in Boston and D.C., maybe expanding your reach going forward?

Yes. Floris, I think everything is on the table, including centers that we own in the New York Metro market, provided pricing is there. There is a price for every asset at which we would be willing to transact. So I don't want to put a number on it, but we absolutely will be testing the market this fall to see what we might be able to achieve just given the demand that's taking place in the market. We would have never anticipated a couple of years ago that we'd be able to buy and sell $0.5 billion of properties at a 200 basis point spread. I would have never said that on an earnings call. But we realized that it really has supercharged this company. And given the size of our company, we are highly focused on trying to make things like that happen going forward.

Maybe a follow-up. I mean, does the improvement in the markets also make you think about your redevelopment plans on some of your existing assets? I'm thinking of assets like Hudson Mall, which as last look is still 75% leased or something like that and make you more confident about deploying capital into assets like that to reposition them?

We do. I mean that's largely driven by tenant demand, which is also much stronger than it was earlier. So there are many large big box tenants that are underrepresented throughout our markets, including names like Walmart and BJ's and Ross and TJX, all are looking for new space and all are having a hard time finding space, which is putting upward pressure on rents.

[Operator Instructions] The next question is from Michael Griffin from Evercore ISI.

Maybe just first hitting on the balance sheet. Just some commentary around the mortgage loan payoff in the quarter says that it's maturing June of 2027, but you've got a couple more maturities before that. Just I don't know maybe, Langer, if you could comment on that, why pay off that mortgage relative to the stuff that's coming due earlier?

Yes. Sure, Michael. It's actually pretty easy. That was a loan that had no prepayment penalty, and we were able to use our line at 100 basis points lower than that rate. So we took advantage. We've looked at our upcoming maturities, and there was just an opportunity there where it made a lot of sense.

Great. That's helpful. And then maybe just stepping back, kind of thinking about the leasing environment in the portfolio now. Obviously, you're about 97% leased, that lease to occupied spread continues to narrow. I mean, Jeff, as you kind of talk about pricing power from a landlord perspective, is this more the ability to push base rents? Are you -- do you have better negotiating power when it comes to concessions? I'm just trying to get a sense of kind of the landlord tenant relationship here and how best you can utilize that position of being very highly leased to maximize revenues.

Jeff, go ahead.

Yes, it's a little of everything, right? Each deal is kind of its own animal in terms of finding the soft spots to push down on. I will tell you that one of the areas that we have had much greater success in the past is on increases. The concept of 10% every 5 years only really happens if it's a national tenant who's absolutely dug in on it and is willing to pay a face rent and agree to capital and other things that they never would have agreed to in the past. But most often, we find that our nationals are willing to negotiate much better increases than before. The other place that it really comes in for us that's very important is in the delivery conditions. In the past, you would always have a situation where the landlord was doing a bunch of work prior to the tenant getting into the space and that required 2 permits and extended time and maybe took another 3, 4 months to get the tenant open for business. Very often now, we're able to say you're taking it as is. Not only does that provide a better economic result for us, but it allows the tenant to get open faster because it's one permitting time. So those are 2 areas that our leasing team has really drilled down on in their negotiations and had really good success in. But they're really pushing on everything else. It's things like exclusives. It's things like not giving too many options, and it's things like co- tenancy requirements. We're trying to just negotiate better terms across the board, economic and noneconomic, and we're having good success.

Just one more point on that issue because I do think there's been a fair amount of discussion on CapEx. And what I'd say is that the last decade of CapEx spending is not representative of future spending. And it's in part because our portfolio is now 97% leased. It's in part because the retail market is much, much stronger, as Jeff just outlined. And it's also in part because by 2027, we will have redeveloped or repositioned about 70% of our portfolio. So we feel that's going to be a great thing going forward for CapEx.

The next question is from Paulina Rojas from Green Street.

My question was actually about CapEx, and you touched on that at the end of the prior question. Thank you for adding that disclosure. It's very helpful. Can you maybe elaborate on the idea of CapEx declining in the future? It seems to me that in general, CapEx has been related to redevelopments, which have in turn been triggered by tenant churn. So given that we know that tenant churn is a constant in the industry, why wouldn't we expect future turnover not just in the short term, but in the next few years, driven by an expected tenant fallout continue to drive CapEx at similar levels, perhaps a little lower. But yes, basically, I'm trying to gain confidence on the very low levels that you are forecasting at the end of that period in your chart.

Paulina, I think the main point is that the tenants that we replaced -- we replaced tenants that were struggling for years. This is like Toys "R" Us and Kmart and so many others that barely made it, but they made it over an extended time period. And we put in very high-quality credit tenants to replace them, tenants like ShopRite, tenants like TJX, tenants like Ross and many others. So we're not expecting as much dislocation going forward in part because of the high-quality retailers that we put in place and also in part because the retail market overall is just much healthier than it was 10 years ago.

Yes. And Paulina, I would add, in addition to the fact that when it comes to leasing CapEx, we can negotiate better terms and we have better tenants than we've had in years past. The other component of CapEx, fixing your roofs in your parking lots or renovating your shopping centers, that piece of it, we've mostly done all the heavy lifting on. So we have -- as Jeff said in his comments, we've renovated about 70% of the portfolio already. So we don't think we're going to have that same recurring run rate of maintenance CapEx. And then when it comes to renovating shopping centers with new facades and signs and things that the customer sees, so to speak, we believe there's a yield on that. We believe that the work we do on that will pay itself -- pay for itself in the form of better rents. So on all elements of CapEx, whether it's the defensive deferred maintenance CapEx, the offensive renovation CapEx or the leasing CapEx, the metrics are a lot better than they were.

And I'll just end, Pauline, for you with some numbers behind that. So our maintenance CapEx, as Jeff was saying, where we've done a lot of this heavy lifting was about $36 million in 2022. We think it's going to be $20 million to $22 million this year and then will gradually decline closer to $15 million as these remaining projects come online. So that shows you by order of magnitude what we're seeing.

[Operator Instructions] The next question is from Ken Billingsley from Compass Point.

Just a numbers question here on G&A from guidance and then what was in the third -- second quarter here. I see you lowered obviously, G&A expense range to $34 million to $35.5 million. The line item was up year-over-year was about $11.7 million. Can you just talk about maybe what's different in that number? And was it just increased for the second quarter and going to come down for the second half? Or just add a little color there?

Sure. I think you're looking at the gross versus what we call the net recurring items. So in the quarter, the elevation that you saw was primarily we had $2 million of severance expense and then $1 million of some nonrecurring transaction costs. So when you look at on a recurring run rate basis, which is what we guided on, that's how you get to the lower number.

There are no further questions at this time. I would like to turn the floor back over to Jeff Olson for closing comments.

Great. Thank you for your interest, and we look forward to talking to you on our next call.