Q2 2022 Urban Edge Properties Earnings Call
Greetings and welcome to the urban edge properties second quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
I'd now like to turn this conference over to your host MS. John Holmes, Chief Accounting Officer. Thank you Ma'am you may begin your presentation at this time.
Morning, and welcome to urban edge properties second quarter earnings Conference call. Joining me today are Jeff Olson, Chairman and Chief Executive Officer, Mark Langer, Chief Financial Officer, Chris Lemasters, Chief Operating Officer, Danielle Davita EVP of development, Herb I'll Bird Chief investment Officer and Rob.
Milton General Counsel.
Please note today's discussion may contain forward looking statements about the companys 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 and.
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 John and good morning, everyone.
We had a great second quarter with <unk> as adjusted of 30 cents per share up 7% compared to prior year and also up 7% year to date.
Our results were driven by positive same property NOI growth.
And approximately $285 million of acquisitions completed over the past year.
Our NOI performance is notable considering we are comping off a 25% increase in the second quarter of last year.
Our properties are predominantly situated throughout the densely populated first ring suburbs of the DC to Boston corridor.
And benefit from the continued work from home trend.
In fact total visits to our centers increased 7% during the second quarter of 2022 as compared to the second quarter of 2019.
Our grocery store sales are up 13% compared to 2019 and average approximately $900 a foot.
The highest reported number in the REIT sector.
Approximately 65% of our asset value is anchored by a grocer.
We expect traffic and sales trends will continue to grow as we realize the benefits from upgrading our centers with better tenants through our redevelopment program.
We had our most productive leasing quarter in over six years with approximately 290000 square feet of new leases executed at a blended spread of 7%.
This broad future rents from signed but not open tenants to $23 million, representing 10% of our annualized NOI.
One of the best indicators of future NOI growth.
We believe it has the highest percentage amongst our peers.
Our same property leased occupancy increased to 94, 9%.
Up nearly 300 basis points compared to prior year, and up 100 basis points compared to prior quarter.
Think about that.
Growing occupancy by almost 300 basis points over 12 months is an incredible accomplishment.
And is a testament to the quality of our real estate.
And our entire team.
We remain optimistic that we can continue to drive occupancy and rents.
Our leasing pipeline remains strong with approximately 1 million square feet of leases under negotiation with spreads exceeding 20%.
We remain on track to reach our occupancy goal of 96% by year end.
Recall, our occupancy rate averaged 98% in 2017 and 2018.
We have $206 million of active redevelopment projects underway.
Expected to generate a 10% unlevered yield.
Over 90% of this redevelopment pipeline has executed leases and most of the costs are locked in through fixed construction contracts.
Turning to acquisitions.
We completed the $33 million purchase of the shops at Riverwood.
78000 square foot grocery anchored shopping center in Boston.
This asset is located in a dense infill area with 181000 people within three miles with average household incomes of $113000.
We finance the asset with a seven year 'twenty, one and a half million dollars nonrecourse mortgage with fixed interest at 4.25%.
Providing an attractive 9% in place cash on cash return.
This was a great opportunity to expand our footprint in the Boston MSA.
It will likely be more challenging to find acquisitions that meet our current return thresholds, considering higher debt and equity cost.
We expect cap rates will increase modestly, but theres limited deal activity to validate pricing.
History tells us that market cycles create opportunities and we will be ready to act at the appropriate time, if we can source deals at attractive returns.
We are hosting an investor day on November nine and look forward to seeing many of you there.
Finally, we are honored to have been awarded one of the best places to work in New Jersey by NJ Biz magazine.
We have worked tirelessly over the years to build a culture that invest in our people and I applaud our management team and all of our employees for this well deserved recognition.
I will now turn it over to our Chief operating officer, Chris while Monster.
Thank you, Jeff and good morning, everyone.
The leasing volume during the second quarter was robust we executed 37, new leases renewals and options totaling over 700000 square feet at an average cash rent spread of 10%.
These transactions increased same property leased occupancy to 94, 9% and set the stage for us to achieve our goal of 96% by year end.
The work completed by the team was certainly impressive and reflects the manner in which everybody is hitting their stride.
Some of the significant transactions. We completed this quarter include at multi Hadrian, we leased 81000 square feet of the 107000 square foot Kmart box to two retailers routes food warehouse and island based full service grocery store and urology hub, a medical user that will provide a great.
US occupied in the back portion of the former Kmart space.
At Burnside Commons located in and when New York, which serves the affluent five towns of southwest NASA, Nassau County, and the dentist Queens neighborhoods.
Rockaway and Bayswater, we have leased 62000 square feet of bingo wholesale.
Regional kosher grocer sick.
Securing bingo wholesale is a great example of attracting an operator that caters to the local community.
We have seen meaningful media buys over this operator coming to amyloid.
We are confident bingo wholesale will be a catalyst of rebranding that's the rebranding in the center that will drive the lease up of the remaining small shop vacancy.
Our promo comments outside of Philadelphia.
We leased 19300 square feet to numerous children's health a highly regarded medical service provider, which continues the positive leasing momentum at the strategic redevelopment that includes our first Amazon fresh in the portfolio.
We signed a deal with Aldi grocery stores to take over 23000 square feet.
Currently operated by a thrift store Greenville comments and watch on New Jersey.
Audi has a solid upgrade to the centers in Mexico will be a strong daily draw co chairman for the existing shop retailers.
We executed our second lease with rent kitchens to take the 11000 square foot Pier one vacancy at Yonkers Gateway Center rent kitchens is the perfect used to serve the affluent dense customer based shopping the highly productive central Avenue quarter, and lower Westchester County.
Finally, we completed a 15100 square foot lease with a lot less a regional value price retailer offering a wide selection of apparel electronics housewares in more with this deal the shops at <unk> is now 100% leased.
We also had significant rent commencements in the second quarter, including the 127000 square foot AAA wholesale industrial conversion and Lodi, New Jersey, the 45000 square foot Amazon fresh after them all comments and a 9500 square foot five below and 7100 square foot schedule.
<unk> at tunneling comments, bringing that asset back to 100% physical occupancy.
We have not seen a slowdown in demand for new sites from retailers, although we are mindful of rising inflation and pressures on consumer spending.
Our leasing pipeline is near an all time high with approximately 1 million square feet of leases in active negotiation with average rent spreads exceeding 20%.
This pipeline includes important anchor regenerating deals are broken or comments Hudson mall, and Monte Hagia, which we expect to execute during the third and fourth quarters of 2022.
Anchor retailer demand continues to be driven by grocers general merchandisers wholesale clubs discount off price retailers and home improvement operators and shop leasing momentum continues with restaurants medical tenants and health and beauty service providers.
Overall retailers continue to express the importance of bricks and mortar stores and well located in relevant projects as being an integral piece to their operating platform that increasingly uses the store to fulfill online orders.
I just returned from Puerto Rico tour in the island and our properties with our team. There is no question. The island has rebounded significantly comp store sales were up 25% at last Kathleen S and 15% at Monte Hazer over the past year compared to 2019, which is no surprise when seeing the customers and full shopping bags in person. This.
Even more impressive when you consider the current anchor vacancies at both malls.
The fed recently noted in his comments that total employment in Puerto Rico was up 5% from pre pandemic levels and is it a nine year high and the unemployment rate is at a record low. They also noted that tourism is up with hotel occupancy rates, reaching 75% being.
The increased economic activity has attracted national tenants to expand on the island, especially from a discount retailers, including T J X and Burlington and others.
With two Kmart vacancy is now leased to highly relevant and exciting retailers. We are laser focused on increasing occupancy from 84% to the high ninety's, while pushing rents on new deals and renewals at both assets.
We look forward to providing further updates on our leasing progress at our upcoming Investor Day Mark.
Thank you Chris good morning.
I will comment on our second quarter results, including an update on business fundamentals and will close with comments on our balance sheet and liquidity stock.
Starting with our results for the quarter.
We reported <unk> as adjusted of 30, a share which was better than our expectations, primarily due to higher NOI growth driven by collections on amounts previously reserved.
And better rental income across a number of properties, including new rent commencements for leases that started during the quarter.
Headline same property NOI growth of one 2% or zero percent when including development properties was tempered by year over year changes in reversals of uncollectible receivables.
Same property NOI growth in the second quarter of last year was 25%, which benefited from approximately $4 $7 million of bad debt reversals compared to $2 $3 million in the second quarter of this year.
Excluding the impact of reversals in each quarter same property NOI growth would have been 6% and same property NOI growth, including properties in redevelopment would have been four 2%.
Based on collection trends. This year, we currently estimate that we could recover another half a million to one $5 million per quarter in the second half of this year.
Overall collection trends remained strong as we collected 99% of second quarter rents and have collected close to 100% of all rents subject to deferral agreements.
In terms of future NOI growth are signed but not open pipeline now includes $23 million of gross rents.
On page 22 of our supplement we've updated the table showing the expected timing of when this revenue should come online over the next four years.
We have also added disclosure, noting that more than 70% of this revenue is coming from national and regional tenants.
On that point, we are increasingly receiving investor inquiries about our local tenant exposure as these tenants tend to be the most vulnerable during economic downturns.
Our local tenant exposure is only 13% of our total annualized base rents likely among the lowest in the sector. Our updated disclosure on page 20 of the supplement includes the breakdown of local regional and national tenants on both an ABR and GLA.
Basis.
We know the retail sector will always be volatile and the risk of some fallout seems to be increasing but as we look at the chart on page 20, as well as the ABR generated from our top 25 tenants, we feel good about the strength and stability of our tenancy.
Turning to our balance sheet and liquidity, we refinanced our two mortgages that mature during this year.
Our next notable maturity is not until April of 2023, when the $300 million mortgage on Bergen Town Center matures.
We are exploring potential refinancing sources for this debt, including a term loan and other mortgage financings.
In an effort to enhance our overall liquidity we are in the market now expecting to increase the size of our line of credit from 600 million to $800 million, while extending its maturity to the first quarter of 2027.
This will provide us significant flexibility.
Increased liquidity and very attractively priced capital.
Our cash position at the end of the quarter was $170 million, which we.
Spec to use to fund our redevelopment projects and for any opportunistic acquisition opportunities should they arise.
Our commitment to ESG continues to grow.
We published our most recent annual ESG report during the second quarter.
The report highlights the significant reductions in scope, one and two carbon emissions that we have achieved as well as our success at expanding partnerships with the communities. We serve were urban edge employees give generously of their time and financial resources.
The wellness development and success of our employees remains a top priority and.
And we couldnt be more proud of the collaboration and teamwork that made urban edge one of the best places to work in New Jersey.
I will now turn the call over to the operator for questions.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two to remove your question from the queue for participants using speaker equipment. It may be necessary for you to pick up your handset before pressing the star.
Keith one moment, while we poll for questions.
Our first question comes from the line of Samir Khanal with Evercore ISI you May proceed with your question.
Good morning, everyone, Hey, Chris or Jeff you talked about the 1 million of leases under negotiation maybe to.
It's taken a little bit further on that.
I guess, what changes have you seen during the negotiation process.
But let's say three to six months ago, our deals taking longer to get done or opening dates getting pushed out it seems like you're still getting the rent spreads there, but just trying to understand with sort of what's going on sort of the macro world and higher costs, what changes have you seen.
Yes, let me start off Samir and then ill turn it over to Chris, but I think what's important on our leasing pipeline is.
First of all the spreads at 20% or higher than the spreads that we've been achieving previously so what that demonstrates is that rents are increasing across the portfolio.
I think they are increasing for several reasons. One is just market rents are getting higher too.
As we went from 91% up to 95% we have less space available. So we're asking more for that space.
And three I mean really for the first time, we have multiple tenants bidding on our vacant space. So when we can auction it off and they know they might lose it.
<unk> starts to increase.
And then lastly.
And this wasn't.
Exactly related to your question, but if I became an analyst again. This is the question I would ask which is on that million square feet. So what's the incremental revenue that should be produced from it because we do have an S. N O pipeline, which we talk about and I believe that number is $23 million, which gives us.
Another 10% on top of our existing NOI, but the net value of the leases that are under negotiation that amounts to $35 million annually. That's net of existing tenants in place. So I would simply take the <unk>.
$3 million, and then I'd add to it the $35 million and we've got visibility for another $58 million of incremental NOI, which is more than a 25% increase Chris.
What would you add I would just add that Sameer regarding your question about what tenants are looking for I think it's more time on build out just because of the supply factors of getting there.
The necessary materials to build out their spaces.
We are seeing some tenants push hard for for Covid or a pandemic related protection, if that occur and should arise again.
Aside from that it's pretty much business as usual we are seeing.
We're seeing.
Interest from the categories that I mentioned in my remarks.
At a pretty robust level and then the other thing that I would just mentioned, which we are seeing is on the term factor tenants are pushing for shorter terms to control their ability to manage their pipeline of stores I'm over over a long period of time I remember back in the old days gap had a real long average of five year leases so that they can.
20% of their fleet every year and you see that happening more with tenants across the board and that's why on the anchor side side from that don't see much of a difference people are still trying to get.
Quality real estate in great locations and as the supply fills up that continues to continues to be more pressure on these retailers as Jeff mentioned to fight for those spaces and pay more.
And I guess the sort of a second question here is on maybe any color you can provide.
What youre seeing on the transaction market I mean, clearly you've seen bond yields move higher here I mean, what what have you seen with cap rates.
Any color you can provide would be great.
Yes, I'd say volumes have moved lower.
And basically what we're seeing is.
Is higher quality assets are still trading, but a number of assets that were taken to market or being dropped over pricing because that is hard to get specifically in the MBS market. So I'd say I mean.
If you ask the major brokerage firms, what's happened to asset pricing I think that most of them would tell you that pricing is down about 10% to 20% since the beginning of the year.
And less so for the highest quality assets Herb would you add anything to that no I think you know that.
Thank.
That's right velocity has certainly slowdown in the market, we expect loss less trade in the short term the things that were tied up in the first quarter generally traded without major discounts.
But what we're hearing is that pricing is down.
Sort of in that range that Jeff discussed.
Great.
Everybody. Thank.
Thank you.
Our next question comes from the line of floor has been Dicom with Compass point you May proceed with your question.
Thanks Scott.
So.
Jeff I'm surprised you didn't actually put this in your press release with the additional.
A million square feet under negotiation, that's a pretty heady number the additional $35 million.
It's a big number right.
It's a huge number it's a huge number presumably this is further.
Further out in the future I would imagine yeah. It is it is further add I'd say $23 24 and 25.
But that's a that's a that's a massive number.
One of the things I guess.
Why don't you put it together for all the strip center Reits and through the percentages floors.
I think I've done that in the past as Mark and I can certainly update that but.
<unk>.
One of the concerns that the investors tend to have as well geez demand is really strong right now.
But you keep your.
Youre commenced rent was $5 one youre executed new leases was $6 five to keep filling the back filling the pipeline and keep expanding it.
I guess at some point when Youre at 90, 798% occupancy.
We'll stop is that is that sort of where you think.
Youre going to go back to the 98% occupancy I know your official target is 96%, but it seems like with all of this.
Leasing in the pipeline.
You could get there, but maybe perhaps quicker than certainly in terms of our leased occupancy quicker than what people were expecting.
I mean, what we've guided is 96% by year end and we're reiterating that guidance. This morning.
And we've also referenced that I mean, we averaged 98% occupancy before and so yes, I expect that we'll be back at that 97% to 98% range at some point in the future.
And hopefully it is.
Maybe if you can give.
The us a little bit of an update on what's happening at.
At Sunrise mall as well as Bruckner those are two of your bigger.
Projects that.
And potentially can create some significant value maybe you can give us a little bit of an update on what the leasing status is an and.
And Sunrise, what the status is on the on the zoning and entitlements et cetera, Yes. So let me just start with with Sunrise. We don't have any specific comments because we're in active negotiations right now with the remaining tenants and also in discussions with the municipality, but we will provide more details.
When it's appropriate.
Very excited about what's happening there I just can't give any specific comments at this time.
As it relates to Bruckner, Chris I'll, let you handle that yes, we are we're well along the way are brought in there with regard to backfill a significant portion of the vacant Kmart box tenant that will occupy approximately 150000 square feet of that space hopefully with within the next 30 to 45.
Days will be able to put something out to market about what we've got going on we've got and I think it's the best possible tenant you could possibly imagine for that correct. We're very excited about it. We're excited about what that will do with regard to our future ability to turnover leases and backfill with stronger tenants.
And we have lots of interest on the remaining space, which gives us about 30000 square feet 35000 feet remaining in the Kmart box and then.
Toys R. US box, we are in negotiation with a handful of tenants on that as well so lots of good news lots of interest in that very unique.
Location as far as our other property across the street as I mentioned with lot less being done we are now 100% waste across the street and that was a combination without a lot less and we've got five below coming and so youll see that asset fully leased very excited about the future for <unk>.
And in terms of broker if I if I could just follow up just so one tenant is going to take the bulk of the space. The other 35000 square feet basically was 115000 or something like that and the other 35% is that going to be split up into small shops or is that going to be one tenant or maybe two tenants.
That take the rest of it then and presumably what does that mean in terms of rents because I.
There should be a massive I don't know whether you include that in your spreads because it it might not be comparable space, but it's significantly more even more.
Why that would come off of that space.
Yes.
Your thoughts are on point, you will see a significant.
Rent spread with regard to the backfill of the box is actually closer to 180, plus thousand square feet. So when <unk> got the large tenant taking the entire second floor and half of the ground floor. We've got some shallow space that we're considering small shop tenants floor, but there probably will be some form of.
An anchor tenant that's anywhere from call it 15% to 25000 square feet, depending on how the box breaks up and then the toys R. US boxes 42000 feet and we think that we're just going to draft off of the announcement of a large anchor tenant to get that push we're being patient on that toys R. Us box backhaul to make sure we can drive rents to its maximum potential we have.
About just Bruckner and you drive by that asset it has surface parking, which just does not exist in the boroughs everything else is structured parking is very unique of a traditional shopping center such a densely populated area and that's what's attracting these retailers interest and again as Jeff noted.
Thrilled about the tenant that where we are.
Most to completing a transaction with them and we think they will be transformational to that asset for the foreseeable future.
Thanks, guys.
Thank you Floris.
Our next question comes from the line of Paulino Rojas Schmidt with Green Street, You May proceed with your Washington.
Good morning.
Good morning.
Yes.
When you think about the breakdown of your <unk>.
Hi.
Hi, Charles Robbins page 20.
I know the norm is to think that small shop and local tenants for something.
Yes.
But based on your knowledge of the portfolio do you agree there is where are the highest.
Three sites.
I'm thinking about the anchor.
The cohorts, sometimes into large panels national tenants.
You'll have filtering businesses that may not go bankrupt, but close stores in the very end and then they had a scenario of course.
Yes.
It all depends of course.
On what the economic scenario is I remember during the great recession, when we owned a large portfolio of.
Grocery anchored strips that had a lot of shop exposure, we were more exposed on the shop side than we were on the anchor side and and my sense is.
When you look at the credit behind our existing tenants and compare that to the credit behind just local shops in general and then specifically I would say.
There is a recession.
Likely more risk on the shop side than there is on the anchor side with a couple of exceptions.
Mhm.
And then on that point Paulina. This is mark I would just add that's why I mean, I think the premise of your question is fair that it isn't just binary that shops.
Have disproportionate rigs, it's why I highlighted also our top 25 tenant exposure, which gets maybe to the other side youre, saying on some of the anchor and when we look at the risk of our tenancy today, especially compared to a few years ago, we don't feel much better it isn't that we're immune theres a few names that would jump out at you.
That all strip owners have but as a percentage, we just feel better about that risk. So I would just say that the flip side as highlighted in our top 25 exposure.
Got it.
And then yeah.
Yeah.
<unk> talked about the signed but not open pipeline.
Pipeline and yes, it's one Ben.
But I think what's more notable is.
It does something.
We presented by rents coming online in 'twenty three.
Some of your peers.
Phil.
And most of it is coming online in 'twenty two.
Thinking about that.
How likely do you see today that your same property NOI growth next year is.
Strong and even stronger than this year.
Despite the slowdown in the economy.
Yes, I mean, we're not providing specific guidance at this point.
But I think you can roll all of this math in your numbers and get a pretty good feel as to what the ranges could be.
But.
I would hope.
That we would be able to do better next year than this year.
Thank you.
Thank you.
Our.
Question comes from the line of Chris Lucas with capital One Securities. You May proceed with your question.
Hey, good morning, guys. Thanks for a lot of the detail.
And the.
Update on sort of your pipeline I guess I just wanted one clarification, the 20% spread that you are quoting is that a cash or a straight line.
Yes, Brett.
Cash cash spread.
Fantastic.
Then as it relates to the.
The million square feet of pipeline I'm, assuming a lot of it is that mostly anchor space or is there is the shop space.
Leasing starting to catch up or is it still so heavily weighted to the Yang.
Mostly anchor space.
Okay and then.
Then just as it relates to the tenant fallout, you're seeing first half of the year.
Was it and how does that compare to sort of Jeff youre sort of.
Previous experience, both at urban edge and prayer prior.
Operators.
It was pretty light.
Did have a couple of anchors fall out, which we have replacement tenants identified.
But overall it was pretty light and.
And where we had fall out again.
There's good demand on those boxes.
Okay and then last question for me just as it relates to the balance sheet leverage.
We've talked about this on prior calls, but just sort of maybe update us on how youre thinking about the leverage levels, where they are and how you're expecting them to trend over the next couple of years and what your goals are in terms of sort of stabilize.
Leverage levels.
Yeah, I think as we have mentioned in the past Chris.
The levels. We're at now in the Sevens are elevated as a function of having the fallout that is now being rebuilt through that <unk> pipeline. So we really do see us trending back to seven and below as that income as you just refer to the chart showing all of that EBITDA and income coming online over the next few years.
In addition to Sunrise, which is currently a drag today, we expect will ultimately monetize that as a $4 million to $5 million headwind and so as we get this lease up to start commencing.
We do see this getting back below to our target levels of 700 and under so it's just a function of time.
Great. Thank you that's all I had this morning, Thank you Chris.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call back over to Mr. Jeff Olson for closing comments.
Great well please call us if you have any further questions and we look forward to seeing everybody in New York at our Investor Day on November 9th Thank you very much.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation during the rest of your day.
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