Q3 2023 Urban Edge Properties Earnings Call
Greetings and welcome to the urban edge properties third quarter 2023 earnings conference call.
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A brief question and answer session will follow the formal presentation.
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Good morning, and welcome to urban edge properties 2023 third quarter earnings Conference call.
Joining me today are Jeff Olson, Chairman and Chief Executive Officer, Jeff <unk>, Chief Operating Officer, Mark Langer, Chief Financial Officer, Rob Milton General Counsel, Scott Lobster, Executive Vice President and head of leasing and Andrea Rosen 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.
The company does not undertake to update.
Our actual future results and financial condition and business may differ materially. Please.
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 a time and good morning.
Today, we are excited to be holding our earnings call from Puerto Rico.
At our Investor Day in April this year, we had a slide noting the sun is shining in Puerto Rico.
That is true on many levels, including the transformation underway on our two properties here on the island. In addition to our overall operating performance and the progress we have needs on our capital recycling initiatives.
Starting with our results.
We had one of the most productive quarters in our company's history.
There are at least seven noteworthy accomplishments.
<unk>.
We reported <unk> as adjusted of 32 cents per share.
7% compared to last year, and well above our budget driven.
Driven by higher rent.
Lower operating costs and lower G&A.
Second.
Leasing activity remains strong with same property occupancy up 130 basis points over last year, and new leasing spreads of 26%.
Are signed but not yet open pipeline amounts to $27 million or 11% of net operating income one of the highest rates in the industry.
Third we acquired two of the most prominent shopping centers in Boston.
Shoppers World and Gateway center for $309 million.
The cap rate.
Proximately, 7%.
It is rare to have the opportunity to acquire assets of this quality and scale.
Actually in Boston, which now represents approximately 10% of our total down yet.
Shoppers World. It's one of the most frequented open air shopping centers in the northeast.
With over 11 million site visits in 2022.
It is a large property encompassing 92 acres and 758000 square feet of course leasable area.
The property is in the center of the Golden Triangle, a dominant retail node in the Boston area.
It is anchored by best buy Nordstrom rack T. J Maxx, Marshalls home sense, CR trading Coles and C and a new grocer, which is expected to open in July 2025.
Heatwave Center comprised of 639000 square feet and has a three mile population of over 417000 people with annual average household incomes of $106000.
The property is only three miles from downtown Boston.
And sits on an 89 acre site with over 3000 parking spaces in a rapidly densify area.
Tenants include target Costco and home depot.
Our fourth accomplishment when selling our east Hanover warehouse portfolio for $218 million and a 1.9% cap rate based on 2024 and O Y in a 10 31 transaction using net proceeds for the Boston acquisition.
Yes, we are.
Are in advanced negotiations on the sale of over $100 million of industrial self storage and single tenant retail properties at attractive pricing with cap rates in the mid to high 5% range.
We are also in discussions to sell our residential land and urban town Center.
Thanks.
We obtained a new 10 year $82 million, six 6% mortgage unless catalina as well exercising a discounted payoff option on the prior $107 million mortgage resulting in a $43 million gain.
And finally.
We increased our earnings guidance for 2023, SSO as adjusted by <unk> <unk> per share at the midpoint based on our strong third quarter results.
And our expectations for the balance of the year.
This list.
Flex tremendous execution from every one of our business units I.
I am proud of our team's accomplishments.
These results and our continued momentum in the fourth quarter gives us confidence that we are on track to achieve our targeted assets of $1 35 in 2025 as outlined at our Investor Day in April.
I will now turn it over to our Chief operating Officer, Jeff Miller.
Thanks, Jeff and good morning, everyone.
It is so exciting to be here in Puerto Rico, where last week, we celebrated the opening of sector 66, our new 123000 square foot entertainment anchor tenant at Las Colinas sector.
Sector 66 attracted over 15000 customers this weekend alone.
At monarch, Adra T J Maxx, and Ralphs food warehouse are under construction and we just signed a lease with Burlington.
Our success in Puerto Rico was the result of both strong fundamental trends throughout the island and the hard work and dedication of our team to transform these two assets. Both previously anchored by Kmart into busy in driving properties.
Special Thanks to our Puerto Rico team led by the some niche Paul shipper in Lenexa Rosato, who oversee our committed an outstanding group that is a very important part of the urban edge family.
Turning to our third quarter results.
Our leasing team had a very strong quarter with 46 deals executed for a total of 568000 square feet and same space deals generating average cash rent spreads of 12, 5% of the 46, we executed 17, new leases for a strong same space average spread of 26% and two.
29 renewals at a spread of 10%.
National tenants signing leases this quarter included Burlington, Starbucks five guys Wingstop and Orange theory.
A strong quarter is indicative of the limited supply and strong demand within our core northeast portfolio.
Our same property occupancy rate decreased 50 basis points from the prior quarter to 95% as expected from the recapture of our last two bed bath and beyond boxes. We.
We have a signed letter of intent on one of the two bed Bath boxes, which we expect to convert into a lease in the fourth quarter and are negotiating with several tenants on the other these.
These two vacancies will allow us to upgrade tenancy at healthy rent spreads and increased traffic at both centers. We also increased total portfolio shop occupancy this quarter by 80 basis points, our highest shop occupancy rates since 2019.
The fourth quarter pipeline is moving along nicely with another four anchor deals and 15 shop spaces already executed or in late stage negotiations.
We are hoping to end the year with a same property leased occupancy rate of 96% up 60 basis points from the end of 2022.
On the development side, one change to highlight from last quarter is the removal of the 80000 square foot ground up project for Hackensack Meridian health at Bergen Town Center.
Earlier this year, we visited the project and we decided the returns were not high enough to justify this investment.
Tenant paid us a substantial lease termination fee and we are now exploring alternative uses for this parcel which sits directly in front of Bergen Town Center, along the busy route four corridor.
Finally, I want to add a few comments about the transactions, Jeff announced at the beginning of the call. Our 309 million purchase of two shopping centers in Boston and our $218 million industrial sale in New Jersey.
I believe Boston is one of the most supply constrained markets in the country for what we do high density infill surface parked large format retail shopping centers.
The opportunity to acquire one asset like this and Boston much less to rarely comes along as the assets are few and far between and mostly institutionally owned.
Very excited to add these to our portfolio and to grow our presence in Boston a market we were underweight in until this transaction.
The fact that we were able to also close on the sale of our industrial portfolio at a sub 5% cap rate at effectively the same time in this volatile interest rate environment is a credit to our entire investments team. In addition, as Jeff mentioned, we are currently negotiating the sale of over $100 million of other non core assets at a weighted.
Average cap rate in the mid to high 5% range.
The sum of all of these transactions because a more geographically diversified and a more product simplified urban edge unit at an accretive spread positioning us well to achieve both our short and long term objectives.
I will now turn it over to our Chief Financial Officer, Mark Langer.
Thanks, Jeff.
Good morning, I will address the factors contributing to our better than expected third quarter performance provides insights on our balance sheet and liquidity and conclude with comments on our updated 2023 guidance star.
Starting with our results for the quarter, we reported <unk> as adjusted of 32 per share 7% above the third quarter of last year same property NOI growth, including redevelopment was up three 3% compared to the third quarter of 2020 to the.
The increase in SSO exceeded our plan due to a combination of factors on the revenue side growth came from higher percentage rent improved net recovery income driven by lower operating expenses and from lease termination income related to H M. H on.
On the expense side recurring G&A expenses were down over $300000 from last quarter, and we received better than expected collections on amounts previously deemed uncollectible.
During the third quarter Kingswood Center was formally transferred to receivership and our management agreement to operate and lease the property was terminated.
As a result, we no longer have any operational responsibilities and no obligations our financial interest in the property, while we await the formal foreclosure process to conclude.
Accordingly, as we highlighted in the supplement on page seven we have removed the $1 1 million dollar dilutive earnings impact of Kingswood Center from SSL as adjusted which includes both regular and default interest that is accrued but that will not be paid.
The asset will be removed from our books when title is transferred upon the completion of the foreclosure process.
In terms of our balance sheet, we recognize that we are living in a world of increasing uncertainty. The 10 year Treasury has reached levels not seen in 16 years.
We don't try to predict rate movements, but we carefully manage our debt maturities using long term single asset fixed rate mortgage debt that is well lathered through September 30, we have executed four new mortgage financings aggregating $426 million and a weighted average.
Rate of six 3% with a weighted average duration of seven two years.
This includes large financings at Bergen Town Center, and our recent mortgage at Las Colinas Mall here in Puerto Rico.
Given the state of the debt markets today, we feel good about the execution on those transactions and the way our balance sheet is positioned today with only 19% of total debt maturing through 2026 at a weighted average interest rate of 4.8%.
By way of comparison, our peers have about 40% of their debt coming due during this time period at a rate of 4%.
We continue to see the benefits of our secured debt strategy and we value the flexibility it provides us.
Regarding our overall leverage levels the capital recycling efforts, we have underway are expected to reduce our net debt to EBITDA from six nine times at quarter end to six six times.
We expect this level to decrease below six five times as EBITDA growth continues from the rent commencements embedded in our S. N O pipeline and as the keys with mortgage is removed.
It was less than 90 days ago during our second quarter earnings call that we introduced the concept of selling certain low cap rate noncore assets and redeploying that capital into higher cap rate core product.
It's highly encouraging to see how much progress has been made in such a short period of time.
The Boston assets, we are acquiring are among the best in that market and the sale of east Cana ever warehouses and pending sale of other noncore assets at an overall weighted average cap rate in the low 5% range is extraordinary especially in this environment.
As we noted in our release the capital recycling efforts. We have outlined are expected to increase S. F O as adjusted by four cents per share in 2024, and five cents per share in 2025.
This growth more than offsets the threep per share dilution net of tax from our loss Catalina This refinancing.
Turning to our outlook for the remainder of 2023.
We increased our 2023 <unk> as adjusted guidance by six cents a share.
The increase reflects our better than expected performance year to date accretion from our capital recycling transactions and our expectations for same property NOI growth, including redevelopment with a new midpoint of $2, 75% up from the prior midpoint of 2%.
Our updated guidance at the midpoint implies fourth quarter F O <unk> 30, a share that.
The two cents a share decline from Q3 reflects higher interest expense and no assumed termination fee income in the fourth quarter, we have assumed a general credit loss of $1 million for the fourth quarter and a decrease of approximately $1 million in collections on amounts previously deemed <unk>.
Collectable as compared to the fourth quarter of last year. These.
These headwinds are partially offset by the capital recycling activity, we announced.
To conclude our team is committed to execute the growth strategy, we outlined at our Investor day in April of achieving $1 35 per share and <unk> as adjusted in 2025, and we are on track to achieve that we.
We appreciate the hard work exhibited by the entire UE team and their efforts have been instrumental in driving our success.
We are excited about the progress that has been made and the significant potential we see to build on our momentum.
Thank you for your continued support and interest in UAE.
I will now turn the call over to the operator for questions.
Thank you.
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Our first question comes from Floris Van <unk> with Compass point. Please proceed.
Hey, Thanks, guys for taking my question.
Good morning Floris.
Good morning, good morning, it looks like.
Now you're benefiting just like everybody else here from these you know great operating fundamentals.
You talk a little bit about your year end occupancy target.
Maybe if you could touch on you know what that could look like going forward as well, where you have the greatest ability to push obviously you you have the signed not open pipeline, that's going to boost your growth and it's pretty visible for people, but where incremental growth could come from and and maybe also touch upon I.
Notes the recovery ratio.
This past quarter was down I think about almost 200 basis points is that you know maybe talk about the presumably that's the the bed Bath <unk> beyond boxes, and bankruptcies that you've taken back maybe talk about how that you know.
We'll progress going forward.
Sure, let me start and I'll turn it over to Jeff, but as you remember.
During Investor day, we talked about maintaining occupancy rates of 97% to 98% historically, we've had many years, where we've been above 98% and this type of market. We think our portfolio should be around that level. So we think theres still more uplift coming from occupancy and is probably more on.
<unk> in the portfolio to upgrade tenancy as we've been doing.
And then we're looking for more opportunities for Densification, Jeff Yeah. Good morning Floris.
As we said on the call you know, we're hoping to be 96% by the end of the year and as Jeff said, we definitely have a path towards getting to that 90 798. When you get up into this area you can play a little more offense and defense and be a little bit more selective and wait for the right tenant for the center. So we're not necessarily managing to a final number but our goal.
We're getting to that 90 798 range up by 2025, it's still there and we still feel it's very realistic will hit it.
And on your question Floris on recovery ratios.
Our intuition was right.
Second quarter rate dip, we were running year to date to 84%. This quarter around 82, we had an 80 basis point decline in physical box physical occupancy, which was driven by the bed Bath that you highlighted and as you know recoveries tend to mirror the physical occupancy based on what we can bill so as we look out into next year and see to your <unk>.
Question on occupancy as the physical spaces come online.
We would expect this to first revert back to the mid eighties, and if you look at our legacy portfolio when we've gotten to the occupancy at the levels at Jetblue Elm was mentioning 90 698 that rate actually should go up closer to 90%, but it's just going to be a function of time.
Operator: Reading and welcome to the Urban Edge Properties 3rd quarter 2023 earnings conference call. At this time, all speakers are in a participant mode. A brief question and suggestion will follow the formal presentation.
Operator: If anyone should require an offer, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.
Great. If I can have one follow up maybe I know one of your peers, obviously sold their one of their crown jewels, which you guys picked up and looks at it.
Etan Bluman: It is down my pleasure to introduce your hosts, Aintan Bluman, thank you, you may begin.
Like at a pretty actually two of their crown jewels at pretty attractive cap rates.
Etan Bluman: Good morning and welcome to Urban Edge Properties 2023 3rd 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 Olsler, Executive Vice President and Head of Leasing, and Andrea Drazen, 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.
Any thoughts about going further south on I, 95, and and and picking up one of their other assets that I believe your C O O knows pretty well.
Okay.
I think it's it's it's not right to.
Speculate at this time on anything.
We've got a lot to digest right now and we're delighted with this transaction.
We're open to new markets, Yes, we can gain critical mass in those markets and if those markets share the characteristics of what we see in the DC to Boston corridor, which is primarily <unk>.
Etan Bluman: 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-gap financial measures. Reconciliation of these measures to gap results are available in our earnings release, and supplemental disclosure package in the Investors section of our website.
Highly dense supply constrained areas.
I would echo the same thing.
Thanks, guys.
Our next question comes from severe but now with Evercore ISI. Please proceed.
Hey, good morning, everyone I guess, Jeff.
Going back to the Boston assets clear.
Clearly very strong and great demographics, but as you think about sort of the long term growth of the assets. If you look at the adds a lot of anchors a lot of boxes right.
Jeffrey Olson: At this time, it is my pleasure to introduce our Chairman and Chief Executive Officer, Jeff Olson. Great, thank you Aintan and good morning. Today, we are excited to be holding our earnings call from Puerto Rico. At our investor day in April of this year, we had a slide noting the sun is shining in Puerto Rico. That is true on many levels, including the transformations underway on our two properties here on the island, in addition to our overall operating performance and the progress we have made on our capital recycling initiatives.
So I guess, how do you think about the ability to sort of push rents higher.
On anchors given sort of the low supply there. Thanks.
Yeah, I mean, you got to get into the details behind all of this but we think that within these two properties, we should be able against 3% to 4% growth over the next five years and that's before any opportunities that might come to us on better just unexpected on Jeff do you want to add anything yes, I mean, some of your like the one thing.
We've learned over many years of doing this is when you buy a large format properties you know things come up opportunities show up that you can't possibly underwrite and a 60 or 90 day initial review period for.
Jeffrey Olson: Starting with our results, we had one of the most productive quarters in our company's history. There are at least seven noteworthy accomplishments. First, we reported FFO as adjusted of $0.32 per share, up 7% compared to last year and well above our budget, driven by higher rent, lower operating costs, and lower G&A. Second, leasing activity remains strong, with same property occupancy, up 130 basis points over the last year, and new leasing spreads of 26%.
So whether it's expansion or densification on part with one or more of both of these parcels are just anchor repositioning we think will have visibility to some growth beyond what's in our model, but as Jeff said, we do believe we'll be at 3% to 4% CAGR over the next five years, just based upon some embedded rent increases and some on some new occupancy.
Coming online.
Got it and then I guess my second question I know you talked about sort of.
The leasing being strong the business trending better than you kind of reiterated that.
That's sort of 131 to $1 39 for Investor Day that you provide I mean is there.
Jeffrey Olson: Our signed but not yet open pipeline amounts to $27 million, or 11% of net operating income, one of the highest rates in the industry. Third, we acquired two of the most prominent shopping centers in Boston. Shoppers World in Geekway Center for $309 million at a capri of approximately 7%. It is rare to have the opportunity to acquire assets of this quality and scale, especially in Boston, which now represents approximately 10% of our total value.
Given the strength of the business I mean could.
Could we see you sort of even go towards the high end of that range. I mean, how do you think about that at this point, we're not prepared to go there yet.
I mean, obviously since April interest rates have gone up a lot. So that's a factor and even though we only have less than 20% of our debt maturing between now and 2026, we're still going to have some rollover and it's really still impossible to determine where the consumer is going and what the demand is going to what the demand is going to look like.
Going into 'twenty, four and 'twenty five so at this point, we feel very good about getting to that dollars 35, and we're reiterating that on the call.
Thanks, a lot guys.
Jeffrey Olson: Shoppers World is one of the most frequented, open-air shopping centers in the Northeast with over 11 million site visits in 2022. It is a large property encompassing 92 acres and 758,000 square feet of gross leasable area. The property is in the center of the Golden Triangle, a dominant retail node in the Boston area. It is anchored by Best Buy, Nordstrom Rack, TJ Maxx, Marshalls, Homesense, Sierra Trading, Coles, ANC, and a new groucher which is expected to open in July 2025.
Thank you.
Once again to ask a question Thats Star one at this time. Our next question comes from Tom <unk> with Morgan Stanley. Please proceed.
Hey, just two quick ones. So obviously this was a good recycling. If you are selling at you know end up in the high fours.
And sort of buying it at a seven.
Just trying to figure out as you sort of look at the remaining out of the portfolio, where it gets sort of a next sort of interesting recycling opportunity come from is it is it Puerto Rico, there's other assets and that maybe a little bit more color on the 100 million dollar.
That's mark to be sold any sort of cap rate color there would be helpful.
Jeffrey Olson: Geekway Center comprises $639,000 square feet and has a three-mile population of over 417,000 people with annual average household incomes of $106,000. The property is only three miles from downtown Boston and sits on an 89-acre site with over 3,000 parking spaces in a rapidly-densifying area. Tenants include Target, Costco, and Home Depot.
I mean, I mean on the on the $100 million that's in the market now I mean, we're generally in the mid 5% cap rate range and it's in a collective group of assets that includes another industrial property. There is a self storage facility. There is a single tenant asset included in there.
Too early to tell on the next round.
And much of it will depend upon the opportunities that are out there to buy.
As you know our tax basis in a lot of our properties is pretty low the beauty of the east Hanover, Boston trade is we're able to do to make our spread is about 200 basis points, but we did it in a 10 31 transaction, where we were able to defer I believe of $150 million net otherwise would've been.
Jeffrey Olson: Our fourth accomplishment was selling our East Hanover Warehouse portfolio for $211,000,000 at a 4.9% temporary based on 2021 for NOI in a 1031 transaction using net proceeds for the Boston acquisition. We are in advanced negotiations on the sale of over $100,000,000 of industrial, self-storage, and single-tenant retail properties at attractive pricing with cap rates in the mid-to-high 5% range. We are also in discussions to sell our residential land at Bergen Town Center. Six, we obtained a new 10-year, $82 million, $6.6 percent mortgage, unless Catalina, while exercising a discounted payoff option on the prior $172 million mortgage resulting in a $43 million gain.
Pete on had we had we not done the 10 31 transactions.
Got it and then my second one so.
So the guidance raise on <unk> I think you mentioned due to the external growth transactions, but I also thought you know the guidance range. Obviously on the same store is there anything specific that drove that or is it just generically Beverly saying better occupancy just what does the same store guidance anything to call out there. Thanks.
The biggest piece Ron This is mark is really just the lift we've already gotten for the first nine months. So if you just do the math from where we were a year to date plus what we're seeing there is some continued growth that we expect just normally in the fourth quarter and the big variables that are outside of just what I would say, our everyday or fourth quarter.
The percentage rent and specialty leased income, we certainly expect to have some benefit from so that's embedded in the guidance as well.
Jeffrey Olson: And finally, we increased our earnings guidance for 2023, FFO as adjusted by six cents per share at the midpoint based on our strong third quarter results and our expectations for the balance of the year. This list reflects tremendous execution from every one of our business units. I am proud of our team's accomplishments. These results in our continued momentum in a fourth quarter give us confidence that we are on track to achieve our targeted FFO of a $1.35 in 2025 as outlined at our investor day in April.
Great. That's it for me thank you.
Alright, thank you.
Once again to ask a question Thats star one on your telephone keypad at this time.
There are no further questions in queue I would like to turn the call back over to management for closing comments great. Thank you. We appreciate your interest in UAE and we look forward to.
He was talking to you next year happy Halloween.
Okay.
This does concludes today's teleconference. You may disconnect your lines at this time.
Thank you for your participation and have a great day.
Jeffrey Mooallem: I will now turn it over to our chief operating officer, Jeff Mulan. Thanks Jeff and good morning everyone. It is so exciting to be here in Puerto Rico, where last week we celebrated the opening of sector 66, our new 123,000 square foot entertainment anchor tenant at Las Catalinas, sector 66 attracted over 15,000 customers this weekend alone. At Monahedra, TJ Maxx and Ralph's food warehouse are under construction and we just signed a lease with Burlington.
Jeffrey Mooallem: Our success in Puerto Rico is the result of both strong fundamental trends throughout the island and the hard work and dedication of our team to transform these two assets, both previously anchored by Kmart into busy and thriving properties. A special thanks to our Puerto Rico team led by the Sammich, Paul Schiffer and Lynette Rosado, who oversee a committed and outstanding group that is a very important part of the Urban Edge family.
Jeffrey Mooallem: Turning to our third quarter results, our leasing team had a very strong quarter with 46 deals executed for a total of 568,000 square feet and fame space deals generating average cash rent spreads of 12.5 percent. Of the 46, we executed 17 new leases for a strong, same space average spread of 26 percent and 29 renewals at a spread of 10 percent. National tenants signing leases this quarter included Burlington, Starbucks, Five Guys, Wingstop and Orange Theory.
Jeffrey Mooallem: The strong quarter is indicative of the limited supply and strong demand with an hour core northeast portfolio. Our same property occupancy rate decreased 50 basis points from the prior quarter to 95 percent as expected from the recapture of our last two bedbath and beyond boxes. We have a signed letter of intent on one of the two bedbath boxes which we expect to convert into a lease in the fourth quarter and are negotiating with several tenants on the other.
Jeffrey Mooallem: These two vacancies will allow us to upgrade tenancy at healthy rent spreads and increase traffic at both centers. We also increased total portfolio shop occupancy this quarter by 80 basis points, our highest shop occupancy rate since 2019. The fourth quarter pipeline is moving along nicely with another four anchor deals and 15 shop spaces already executed or in late-stage negotiations. We are hoping to end the year with a same property lease occupancy rate of 96 percent of 60 basis points from the end of 2022.
Jeffrey Mooallem: On the development side, one change to highlight from last quarter is the removal of the 80,000 square foot ground up project for Hackensack Meridian Health at Bergen Town Center. Earlier this year we revisited the project and we decided the returns were not high enough to justify this investment. The tenant paid us a substantial lease termination fee and we are now exploring alternative uses for this parcel which sits directly in front of Bergen Town Center along the busy route for it, of Florida.
Jeffrey Mooallem: Finally, I want to add a few comments about the transactions Jeff announced at the beginning of the call. Our 309 million purchase of two shopping centers in Boston and our 218 million industrial sale in New Jersey. I believe Boston is one of the most supply constrained markets in the country for what we do. High density, infill, surface parked, large format retail shopping centers. The opportunity to acquire one asset like this in Boston much less to where it comes along as the assets are few and far between and mostly institutionally owned.
Jeffrey Mooallem: We're very excited to add these to our portfolio and to grow our presence in Boston, a market we were under weighed in on total transaction. The fact that we were able to also close on the sale of our industrial portfolio at a sub five percent cap rate at effectively the same time in this volatile interest rate environment is a credit to our entire investment scheme. In addition, as Jeff mentioned, we are currently negotiating the sale of over 100 million of other non-core assets at a weighted average cap rate in the mid to high five percent range. Some of all of these transactions is a more geographically diversified and a more product simplified urban edge and add an accretive spread positioning us well to achieve both our short and long term objectives.
Mark Langer: I will now address the factors contributing to our better than expected third quarter performance, provide insights on our balance sheet and liquidity and conclude with comments on our updated 2023 guidance. Starting with our results for the quarter, we reported FFO as adjusted a 32 cents per share, 7 percent above the third quarter of last year. Same property NOI growth including redevelopment was up 3.3 percent compared to the third quarter of 2022.
Mark Langer: The increase in FFO exceeded our plan due to a combination of factors. On the revenue side, growth came from higher percentage rent, improved net recovery income driven by lower operating expenses and from least termination related to HMH. On the expense side, recurring G&A expenses were down over $300,000 from last quarter and we received better than expected collections on amounts previously deemed uncollectable.
Mark Langer: During the third quarter, Kingswood Center was formally transferred to receivership and our management agreement to operate and lease the property was terminated. As a result, we no longer have any operational responsibilities and no obligations are financial interest in the property while we await the formal foreclosure process to conclude. Accordingly, as we highlighted in this supplement on page 7, we have removed the $1.1 million dilutive earnings impact of Kingswood Center from FFO as adjusted, which includes both regular and default interest that is accrued, but that will not be paid.
Mark Langer: The asset will be removed from our books when Kitalis transferred upon the completion of the foreclosure process.
Mark Langer: In terms of our balance sheet, we recognize that we are living in a world of increasing uncertainty. The 10-year Treasury has reached levels not seen in 16 years. We don't try to predict rate movements, but we carefully manage our debt maturities using long-term, single-asset, fixed-rate mortgage debt that is well-lattered. Through September 30, we have executed four new mortgage financings, aggregating 426 million at a weighted average rate of 6.3 percent, with a weighted average duration of 7.2 years.
Mark Langer: This includes large financings at Bergen Town Center in our recent mortgage at Las Catalinas Mall here in Puerto Rico. Given the state of the debt markets today, we feel good about the execution on those transactions and the way our balance sheet is positioned today, with only 19 percent of total debt maturing through 2026 at a weighted average interest rate of 4.8 percent. By way of comparison, our peers have about 40 percent of their debt coming due during this time period at a rate of 4 percent.
Mark Langer: We continue to see the benefits of our secure debt strategy, and we value the flexibility it provides us. Regarding our overall average levels, the capital recycling efforts we have underway are expected to reduce our net debt to EBITDA from 6.9 times at quarter end to 6.6 times. We expect this level to decrease below 6.5 times as EBITDA growth continues from the rent commencement embedded in our SNO pipeline, and as the Keyeswood Mortgage is removed.
Mark Langer: It was less than 90 days ago during our second quarter earnings call that we introduced the concept of selling certain low cap rate non-core assets and redeploying that capital into higher cap rate core product. It's highly encouraging to see how much progress has been made in such a short period of time. The Boston assets we are acquiring are among the best in that market, and the sale of East Canada River warehouses and pending sale of other non-core assets at an overall weighted average cap rate in the low 5 percent range is extraordinary, especially in this environment.
Mark Langer: As we noted in our release, the capital recycling efforts we have outlined are expected to increase FFO as adjusted by 4 cents per share in 2024 and 5 cents per share in 2025. This growth more than offsets the 3 cents per share dilution net of tax from our lost Catalina's refinancing.
Mark Langer: Turning to our outlook for the remainder of 2023, we increased our 2023 FFO as adjusted guidance by 6 cents a share. The increase reflects our better than expected performance year to date, accretion from our capital recycling transactions, and our expectations for same property and a high growth, including redevelopment with a new midpoint of 2.75 percent up from the prior midpoint of 2 percent. Our updated guidance at the midpoint implies 4th quarter FFO of 30 cents a share.
Mark Langer: The 2 cents a share declined from Q3 reflects higher interest expense in no assumed termination fee income in the 4th quarter. We have assumed a general credit loss of $1 million for the 4th quarter in a decrease of approximately $1 million in collections on amounts previously deemed uncollectable as compared to the 4th quarter of last year. These headwinds are partially offset by the capital recycling activity we announced.
Mark Langer: To conclude, our team is committed to execute the growth strategy we outlined at our investor day in April of achieving a $1.35 per share in FFO as adjusted in 2025. And we are on track to achieve that.
Mark Langer: We appreciate the hard work exhibited by the entire UE team as their efforts have an instrumental in driving our success. We are excited about the progress that has been made and the significant potential we see to build on our momentum.
Mark Langer: Thank you for your continued support and interest in UE.
Operator: I will now turn the call over to the operator for questions. Thank you.
Operator: We will now conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in a question queue. You may press star 2 if you would like to remove your question from the queue for participants to choose and speak equipment. It may be necessary to pick up your handset before pressing our keys. Once again, that star 1 to ask a question at this time. One moment while we pull for our first question.
Floris Dijkum: Our first question comes from Floor Readsband.
Jeffrey Olson: Leave them with the compass point. Please proceed. Thanks, Scott, for taking my question. Good morning, Floor. Good morning. It looks like you are benefiting just like everybody else here from these great operating fundamentals. You talk a little bit about your year-end occupancy target. Maybe if you could touch on what that could look like going forward as well. Where you have the greatest ability to push, obviously you have this sign not open pipeline that is going to boost your growth.
Jeffrey Olson: It is pretty visible for people. Where incremental growth could come from. Maybe also touch upon, I note the recovery ratio, this past quarter was down. I think about almost 200 basis points. Maybe talk about presumably that is the bedbat and beyond boxes and bankruptcies that you have taken back. Maybe talk about how that will progress going forward.
Jeffrey Olson: Sure, let me start in turn over to Jeff. As you remember during the investor day, we talked about maintaining occupancy rates of 97-98%. Historically, we have had many years where we have been above 98%. In this type of market, we think our portfolio should be around that level. We think there is still more uplift coming from occupancy. There is probably more opportunity in the portfolio to upgrade tenancy as we have been doing.
Jeffrey Olson: Then we are looking for more opportunities for densification. Jeff, as we said on the call, we are hoping to be 96% by the end of the year. As Jeff said, we definitely have a path towards getting to that 97-98. When you get up into this area, you can play a little more offense than defense and be a little bit more selective and wait for the right tenant for the center. We are not necessarily managing to a final number, but our goal of getting to that 97-98 range job by 2025 is still there and we still feel it is very realistic.
Jeffrey Olson: On your question, Floris, on Recovery Ratios, your intuition was right. Second quarter rate dip, we were running a year to date, 84% this quarter, around 82%. We had an 80 basis point decline in physical occupancy, which was driven by the bed baths that you highlighted. And as you know, recoveries tend to mirror the physical occupancy based on what we can bill. So as we look out into next year and see to your question on occupancy.
Jeffrey Olson: As the physical spaces come online, we would expect this to first revert back to the mid 80s. And if you look at our legacy portfolio, when we've gotten to occupancy at the levels that Jeff Malellum is mentioning 9698, that rate actually should go up closer to 90%. But it's just going to be a function of time.
Jeffrey Olson: Right, if I can have one follow up, maybe I know one of your peers, obviously, sold, you know, they're one of their crown jewels, which you guys picked up and looks at, like at a pretty, actually two of their crown jewels at pretty attractive cap rates.
Jeffrey Olson: Any thoughts about going further south on I 95 and picking up one of their other assets that I believe your COO knows pretty well? I think it's not right to speculate at this time on anything. We've got a lot to digest right now, and we're delighted with this transaction. We're open to do markets if we can be in critical mass in those markets, and if those markets share the characteristics of what we see in the DC to Boston quarter, which is primarily highly dense supply constrained areas. I would echo the same thing.
Floris Dijkum: Thanks, guys.
Samir Khanal: Our next question comes from Samir, but now with F core ISI, please proceed. Hey, good morning, everyone. I guess Jeff, you know, going back to the Boston assets, you know, clearly very strong and great demographics. But if you think about sort of the long term growth of the assets, you know, if you look at the asset, a lot of anchors, a lot of boxes, right. So I guess, how do you think about the ability to sort of push rents higher on anchors given sort of the low supply there?
Samir Khanal: Thanks. Yeah, I mean, you got to get into the details behind all this, but we think that within these two properties, we should be able to get 3 to 4% growth over the next five years. And that's before any opportunities that might come to us that are just unexpected. Jeff, do you want to add anything? Yeah, I mean, some of you are like the one thing we've learned over many years of doing this is when you buy large format properties, you know, things come up.
Samir Khanal: Opportunities show up that you can't possibly underwrite in a 60 or 90 day, you know, initial review period. So whether it's, you know, expansion or densification on part of one or more go to these parcels or just anchor repositioning, we think we'll have visibility to some growth beyond what's in our model. But as Jeff said, we do believe will be it, you know, 3 to 4% keger over the next five years just based upon some embedded rent increases and some new occupancy coming online.
Samir Khanal: Got it, and then I guess my second question, I know you talked about sort of, you know, the leasing being strong, the business trending better and you kind of reiterated that that sort of 131 to 139 for investor day that you provide. Given the strength of the business, I mean, could we see you sort of even go towards the high end of that range? I mean, how do you think about that at this point?
Samir Khanal: We're not prepared to go there yet. I mean, obviously since April interest rates have gone up a lot, so that's a factor. And even though we only have less than 20% of our debt return between now and 2026, we're still going to have some rollover. And it's really still impossible to determine where the consumers going and what the demand's going to look like going into 24 and 25. So at this point, we feel very good about getting to that $1.35 and we're iterating that on the call. Thanks a lot, guys. Thank you.
Operator: Once again, so ask a question that's star one at this time.
Ronald Kamdem: Our next question comes from Ron, came in with Morgan Stanley, please proceed. Hey, just two quick ones. So obviously this was a good recycling if you're falling at, you know, in the high fours and sort of buying it at a seven. Just trying to figure out, as you sort of look at the remaining of the portfolio, where it could sort of a next sort of interesting recycling opportunity come from. Is it Puerto Rico?
Ronald Kamdem: Is it other assets? And then maybe a little bit more color on the hundred million dollar. That's marked to be sold any sort of cafe color there would be helpful. I mean, on the hundred million dollars that's in the market now, I mean, we're generally in the mid five percent cap rate range. And it's in a collected group of assets that includes another industrial property. There's a self-storage facility. There's a single tenant asset included in there too early to tell on the next round.
Ronald Kamdem: And much of it will depend upon the opportunities that are out there to buy. As you know, our tax basis and a lot of our properties is pretty low. The beauty of the east handover Boston trade is we're able to make a spread of about 200 basis points. But we did it in a 1031 transaction, where we were able to defer. I believe a hundred and fifty million dollar gain that otherwise would have been paid on had we had we not done the 1031 transaction. Got it.
Mark Langer: And then my second one. So the guidance raised on FFO, I think you mentioned due to the external growth transactions. But I also saw, you know, the guidance raised obviously on the same store. Is there anything specific that drove that or is it just generically better leasing, better occupancy, just what the same store guidance, anything to call out there? Thanks. The biggest piece from Mrs. Mark is really just the lift we've already gotten for the first nine months.
Mark Langer: So if you just do the math from where we were a year to date, plus what we're seeing. There is, you know, some continued growth that we expect is normally in the fourth quarter. And the big variables, you know, that are outside of just what I would say are every day or fourth quarter percentage rent and specialty leased income. We certainly expect to have some benefit from so that's embedded in the guidance as well. Great. That's it for me. Thank you.
Operator: Once again, to ask a question, that's Star, one on your telephone keypad at this time.
Mark Langer: There are no further questions and queue, I would like to turn the call back over to management for closing comments. Great, thank you. We appreciate your interest in you, and we look forward to talking to you next year.
Operator: Happy Halloween. Thank you.
Operator: This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation in having...