Q3 2022 Urban Edge Properties Earnings Call
Good morning, and welcome to the urban edge properties third quarter 2022 earnings call.
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Brief question and answer session will follow the formal presentation.
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It is now my pleasure to introduce your host Tony Lumen. Please go ahead Sir.
Good morning, and welcome to urban edge properties third quarter earnings conference call joining.
Joining me today are Jeff Olson, Chairman and Chief Executive Officer, Mark Langer, Chief Financial Officer, Danielle Davita Executive Vice President of development, Rob Milton General Counsel.
Oster Senior Vice President and head of leasing and Andrea <unk> and 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 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.
At this time it is my pleasure to introduce our chairman and Chief Executive Officer, Jeff Olson.
Alright, Thank you Tom and good morning, everyone.
I am pleased to announce another strong quarter with <unk> as adjusted of <unk> 30 per share an 8% increase over the third quarter of last year, and a 7% increase year to date.
This increase is primarily attributed to NOI growth.
The acquisitions of Woodborer town center outside of Washington, DC, and the shops at Riverwood in Boston.
The shopping center industry continues to benefit from strong demand from a broad set of retailers, especially throughout the suburbs around New York City.
Just in the past year, we have increased our occupancy from 93% to 95% are notable growth rate following the pandemic.
We have visible NOI growth coming from our signed but not yet open pipeline, which has increased to $28 million, representing approximately 12% of our current NOI.
We also have 1 million square feet of leases under negotiation, representing an additional 10% of annualized NOI.
Our team is energized and committed to getting our portfolio back to our prior occupancy levels of 97% to 98%.
Our properties are predominantly situated in the first ring suburbs within the DC to Boston corridor.
Most densely populated supply constrained market in the United States.
Leading retailers continue to expand and are focused on growing their omnichannel offerings within our core markets.
We are thrilled that target recently executed a 139000 square foot lease at Bruckner comments in the Bronx.
Over the past five years, we have transformed a deeded 19 seventies era shopping center previously anchored by Kmart toys R us and a local grocery store into a dominant destination that will be anchored by target shop rate Burlington Marshalls.
Five below.
We have redesigned the facades walkways and outdoor seating areas, making this property one of the most attractive shopping centers in the area.
Target will solidify the center's position as one of the most important retail nodes in the Bronx, and we have more upside coming from leasing the remaining 41000 square feet of space adjacent to target and a 43000 square foot former toys box.
We currently have $261 million of active redevelopment projects underway and expect to generate a 10% Unlevered return on this investment.
Our tenant coordination team is the busiest they've been in years preparing to open over 50, new stores within our portfolio.
As approximately 90% of these projects are associated with executed leases there is minimal speculative risk.
Notably the $26 million project to relocate coals into Bergen Town Center is two quarters ahead of its original schedule as Kohl's will hold its grand opening tomorrow.
Store looks great and we are excited to reactivate a 134000 square feet of space that has been vacant for almost two years.
We look forward to seeing other new anchor stores open in the coming quarters, including shop, right and marshals at Huntington sector 66 at <unk> Catalina US Nemours children's health at <unk> Mall, and Ralphs grocery store and Walgreens at Monte Hadrian.
We are keeping a close eye on inflationary pressures and the potential impact on consumer spending.
The macroeconomic environment and the associated rising cost of capital will make the prospect of near term acquisitions challenging.
We are also cognizant of the impact of these same pressures could have on our retail tenants.
Mmm leasing construction legal and development.
He's a great leader and values or culture of transparency community and growth.
We look forward to having Jeff meet with the investment community and the new year. After he starts and we will certainly have him with us during our Investor day, we plan to hold this spring on.
On the governance side, we continued to refresh our board with outstanding talent.
Hi, I'm pleased to welcome Mary bag, Leveaux, and Kathy Sandstrom to our board of Trustees <unk>.
Mary was previously the CEO of the Americas for Saatchi, and Saatchi and Kathy was a senior managing director at Heitmann, one of the largest real estate investors in the United States, both on the private and public side.
I will now turn it over to our Chief Financial Officer, Mark Langer.
Thanks, Jeff Good morning, I will discuss drivers of our third quarter results.
Outlined key assumptions within our newly announced guidance for 2022 and will close with comments on our balance sheet and liquidity.
First in terms of our third quarter results.
We had a very good quarter with <unk> is adjusted or 30 per share achieving same property NOI growth of 3.4% compared to the third quarter of last year or 1.5% when including properties and redevelopment.
NOI growth this quarter benefited from the recovery of amounts deemed uncollectible and prior periods of 2.5 million versus one $9 million, we received in the third quarter of last year.
Turning to the fundamentals same property leased occupancy increased 180 basis points year over year likely one of the highest growth rates in the strip sector.
As compared to the second quarter.
The same property leased occupancy rate is down 20 basis points for.
Predominantly due to the anticipated exploration of 145000 square foot anchor lease at our well located property in total in New Jersey.
Having anticipated this vacancy we are already in discussions with multiple users to backfill the space.
During the quarter total portfolio shop occupancy increased 40 basis points to 83.7% as we executed deals with quality tenants, including Shake Shack first watch golf Tech and Duncan among many others.
One side note on our same property occupancy given the redevelopment taking place at Bruckner comments. The acid is not currently in the same property pool, but the target lease will increase consolidated occupancy by 90 basis points.
Overall leasing spreads this quarter were negative one 1% the.
The negative spread was driven by the renewal of a strong anchor at one of our assets, where we agreed to accept a lower rent in exchange for control rights and renewable terms, we obtained at some of our other locations with this tenet.
As we have mentioned in the past are smaller portfolio size makes our spreads more volatile to this point spreads on new leases, we have executed since the end of the third quarter, including the target lease or slightly above 100% given target is paying twice what kmart was paying on <unk>.
Parable space.
Jeff noted the $28 million of gross friends, we expect to realize from leases signed but not yet rent commenced.
This is up from $23 million, we reported last quarter and reflect seven $3 million of new rents from recently executed leases, including targeted brockner, while $1.8 million of rents commenced during the period, resulting in a net increase of five $5 million.
We have updated our disclosure related to the timing of the signed but not open pipeline highlighting that we expect about $600000 in Q4 of this year with an additional $10 $9 million coming next year.
Details can be found on page 22 of our supplement.
In terms of our balance sheet and liquidity, we ended the quarter with total cache of $152 million and have no amounts drawn on our recently expanded and recast $800 million line of credit, which has a new maturity date of February 2000 2007.
We continue to explore all options related to refinancing our $300 million Bergen mortgage maturing in April which is the bulk of our total $329 million of Maturity's coming due in 2023.
We are currently evaluating a range of options, including a new mortgage using our line of credit obtaining a term loan are using a combination of unsecured debt along with secured financing on other unencumbered assets.
About 9% of our total debt aggregating $160 million is floating rate.
Of which 6% or $107 million is currently unhedged, we have minimal and very manageable maturity's in 2024, and 2025 amounting to $144 million and $52 million respectively.
As Jeff mentioned at the outset, we have issued guidance for 2022 and expect to continue issuing annual guidance in the future.
For full year 2022, we expect SFO as adjusted to range from $1 17 per share to $1.19 per share.
This range considers rents commencing from our side, but not open pipeline higher interest expense from our variable rate debt and recoveries from amounts deem uncollectible and prior periods.
We have outlined are key assumptions.
Related to our <unk> guidance and our earnings release.
We plan to provide guidance for 2023, when we report our full year results in early 2000 2003.
However at this time I'll note a few items that should be considered.
Based on our mortgages maturing next year and the unhedged portion of variable rate that we expect interest expense on in place that will increase tend to $11 million next year, considering the current sofa curve.
The ultimate increase will largely depend on the financing obtained for Bergen Town Center.
Looking at our receivables, we expect only minimal collections. During 2000 2003 on accounts previously deem uncollectible as we now believe that the bulk of collections. We were estimating have been realized including another $1 million to $2 million, which we are expecting in the fourth quarter of this year.
In terms of at risk tenants top of the list for us given their bankruptcy filing is regal theaters, where we have one location generating approximately $2 million in annual gross rent.
Regal has not accepted or rejected the site yet, but we are proactively marketing the space given the uncertainty of their business.
Regarding bed Bath and beyond we learned that one location we have with in early 2000, 2003 exploration will not be renewed and we are actively in the market talking to potential replacements.
It is too early dimension, new tenant names, but we feel good that we will be able to replace the approximate $1 million in gross rent bed Bath generated at this property.
In closing we are grateful for the dedication and execution provided by the <unk> again this quarter and we look forward to meeting with many investors in two weeks at the <unk> conference in San Francisco.
I will now turn the call over to the operator for questions.
Thank you so.
Ladies and gentlemen, we will now be conducting a question and answer session.
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This last question we have.
Morgan Stanley .
Hey, just a couple of quick ones are just gone back to the comments on the 97 and 98% occupancy.
May I, just like to dig into that a little bit more what gives you confidence and that is in the pipeline is the activity.
What are you doing may be differently.
With the with the leasing team to have conviction they get there.
Historically, we have averaged in that range. So.
One is we've been there before and stabilize there before.
Two is that.
We do have 1 million square feet of leases under negotiation right now and that's really what gets you there and we feel good about where we are on executing many of those leases.
I should note that the rents spreads on the million square feet under negotiation are averaging about 20%.
Great.
And then just dawn on the earnings guidance, obviously appreciate.
Sort of providing that you just can you just talk a little bit about what the assumptions for bad that is in that in that same store in Hawaii.
And how would you think about that thanks.
Yeah sure on so as I said in my prepared remarks, we.
The biggest wildcard has been the amounts that were receiving on prior.
Uncollectable estimates and we think there'd be about 1 million or $2 million and that that will offset the normalized expense level that you've seen so the key assumption that is implied in guidance is that will collect about 1 million to $2 million on past due.
Okay got it and the last one is I could see that on the G&A. So the guidance for this year.
$46 million to $41.6 million you.
You talked about just re looking at the DNA can you just provide a little bit more color on that.
I know.
There has been some management changes just can you just dig into what are you guys thinking like what are you trying to take out.
We will definitely world when we provide guidance for 2023 will be more specific.
But just in terms of the management changes that were made there's probably a couple million dollars of G&A savings right there.
Okay, great. Thanks, so much for the guidance again.
Okay. Thank you.
Thank you.
Ladies and gentlemen, just a reminder, if you would like to ask a question can you start and then one now.
<unk> for the typical ISI.
Thanks.
I was wondering if there's any color you can provide just conversations you're having with retailers what your senses of how their viewing real estate expansion plans as we head into potential reception here.
Yes.
Conversations.
Have led us to believe that there is.
Still expanding at a rapid pace.
Our goal is to get this million square feet of leases that are under negotiation signed.
But so far the tenants had not given us any indication that they are planning to slow down their expansion plans.
You look at our pipeline of 1 million square feet under negotiation.
Some of the needs that are most notable would include TJ Max Ross for legal Burlington Bye Bye.
Others Bye Bye baby.
So Scott Scott austere here Who's our head of leasing and Scott maybe you can comment on it because you're more in the weeds on this and I am yes. Thanks, Jeff the only thing I would add to that as we did have a full leasing team meeting earlier this week on Tuesday, and at the top of the meeting we asked our regions.
Whether they have lost any particular deal just because of the macro economic headwinds.
We've only lost one and.
And that was a restaurant deal where the operator loss of their capital partner, because they were getting a little bit worried about the economy and that's across a pretty expensive and robust pipeline that we have in place right. Now so that suggests really that the retailers having pulled back at all method demand is still there and I would say also the demand is across all different category and classification.
It's anchors at shops, it's mom and Pops its franchisees, it's national tenants. So from my vantage point, there's no discernible soft spot in the leasing environment right now.
The consumer remains very strong today.
And as long as a consumer as strong I think retailers will continue to expand.
I heard this great quote from a banker last week that all are mentioned here and he said quote Americans are watching the economic forecast for a thunderstorm.
But seeing it's still sunny outside they are headed out to surf the waves any way and that's the state of the consumer today, and let me be clear I mean, we as a company or not surfing.
Preparing for a slowdown were prioritizing our balance sheet as we recently expanded and renewed our line of credit and we're placing a high emphasis on getting these leases under negotiation executed.
Yeah, I guess just on the the 1 million square foot pipeline. That's I think that's consistent with the number from last quarter.
I guess, what I'm trying to understand are there any changes to the pipeline that the composition or deal taking longer to get done.
Just anything any change any noticeable changes in the negotiations there.
Mmm not right now.
Percent of the tenants in the pipeline are national and regional operators.
So I would say there are some ins announced the pipeline does change each quarter I mean, we we move some of the pipeline is leases are executed into SNL and some of the <unk> pipeline gets removed his leases are delivered to tenants, but but no material changes and it's across a variety.
80 of retail categories.
Got it Okay last one just on the transaction market and then I realized.
Deals are limited but.
Where do you think bidders are underwriting deal today I guess.
Our perspective.
Yes, I think some are underwriting unlevered returns close to the double digits.
To call it in a 9% to 10%.
Which is implying cap rates are probably up 75% to 150 basis points, but to your point, there's such little activity taking place.
And I think it's going to take some time for people to.
To recognize either that there is a new environment that we're in which which has a higher cost of capital.
Or that cost of capital goes down because interest rates.
Okay. Thanks very much.
Okay. Thank you.
Thank you.
And gentlemen, just a reminder, if you would like to ask a question. Please press star and then one now.
Next question, we have this from pulling that real hot some Green Street.
Good morning and morning.
So let's look releasing spreads were negative this quarter and you explain how it was driven by one anchor renewal.
So I get that it's very it's very volatile.
But taking a little more for longer and.
Prospective where where do you see the mark to market your portfolio.
Should we expect for average Lambert releasing spreads.
Alright, <unk> next quarter or necessarily next.
Let's think about maybe the next 12 to 24 months.
Yeah.
When you blend it all together I mean, you're probably somewhere in the 5% to 10% range.
Option exercises et cetera, but again I would point to the 1 million square feet of leases under negotiation.
Which are which are the ones that are most active at the moment and releasing spread there is 20%.
Okay.
And.
<unk>.
He'd only crime I think acreage points in the quarter.
Which.
Even how why you're not.
<unk> and <unk>, well, it's a little surprising to me.
And.
I know your portfolio difficult in the sense that.
Oh, let's see change doesn't necessarily correlate with and face rent increases, but how do you think about the candidates of physical occupancy going forward.
Yeah.
It's a good question because I will point out exactly to your question in terms of some of the nuances about our portfolio, we actually as we look going forward given that kohl's.
Jeff mentioned the opening of Cole's, we also have a shop rite of honey at Huntington opening in this fourth quarter. So we actually think you're going to see.
There is 150 basis points increase in physical occupancy from those but the new answers we have a vacant warehouse that we've purchased intentionally vacant to lease that's going to enter the same property pool in the fourth quarter. So we're we're hard at work just about working on and executing the lease but even if that lease gets executed.
It will come in with no physical occupancy in Q4, so the uplift youll see Paulina net net is maybe about 30 to 40 basis points on a physical basis, even though there is a 150 basis points.
A real <unk>.
Tailwind coming from the two anchors.
Got it.
Thank you very much.
Great. Thank you call in.
Thank you, ladies and gentlemen to define reminder, if you would like to ask a question. Please press star and then one now.
For the moment to see if we have any further questions.
At this stage that seemed to be no further questions I would now like to turn the film back over to Jeff Open for closing comments.
Great. Thank you very much we appreciate your interest in <unk> and look forward to seeing many of you in San Francisco.
Thank you ladies.
Ladies and gentlemen, that's been concludes today's conference. Thank you for joining US you may now disconnect your lines.
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