Q4 2024 Urban Edge Properties Earnings Call
Everett Collection
Speaker Change: Greetings. Welcome to Urban Edge Properties' fourth quarter 2024 earnings 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, please press star zero on your telephone keypad.
Speaker Change: As a reminder, this conference is being recorded. It is now my pleasure to introduce Ariba Ahmed from Investor Relations. Thank you. You may begin.
Speaker Change: Good morning and welcome to Urban Edge Properties' 2024 Year-End Earnings Conference Call.
Speaker Change: 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 Oster, EVP and Head of Leasing, and Andrea Drazen, Chief Accounting Officer.
Speaker Change: Please refer to our filings with the SEC which are also available on our website for more information about the company.
Speaker Change: In our discussion today, we will refer to certain non-GAAP financial measures, including reference to our 2025 FFO as Adjusted Target.
Speaker Change: Reconciliations of these measures to gap results are available in our earnings release, Supplemental Disclosure Package, and our April 2023 Investor Presentation in the Investor section of our website.
Speaker Change: At this time, it is my pleasure to introduce our Chairman and Chief Executive Officer, Jeff Olson. Great. Thank you, Ariba, and good morning, everyone.
We continued to outperform expectations and delivered outstanding results.
Speaker Change: Notably, increasing FFO is adjusted by 8% for the year to $1.35 per share, allowing us to achieve our three-year earnings target one year ahead of plan.
Speaker Change: The strong performance has been fueled by our creative capital recycling, record leasing volumes, and new rent commencements.
Speaker Change: In 2024, we executed a record 79 new leases, totaling 485,000 square feet, with a same-space cash rent spread of 26%.
Speaker Change: and achieved a new record for shop occupancy at 91 percent.
Same property portfolio occupancy grew to 96.6 percent.
Speaker Change: Our signed but not open pipeline is expected to generate $25 million of future annual gross rent representing 9% of NOI.
Speaker Change: Our centers are benefiting from improved co-tenancy as we add retailers like Trader Joe's, BJ's Wholesale Club.
TGX
Burlington, and Ross.
Speaker Change: which stimulate higher quality shop tenants and QSRs like First Watch, Chipotle, Dave's Hot Chicken, Starbucks, and Tate Bakery and Cafe.
Speaker Change: These structural shifts in tenancy have lasting benefits in the form of higher rent growth,
Speaker Change: improved occupancy and notable value creation as cap rate compression occurs with new dominant anchors and the addition of high quality shop tenants.
Speaker Change: We expect the same pattern to occur if we recapture some of the at-risk names in the headlines today.
Our development and construction team had a very productive year.
We completed $30 million of redevelopment projects.
Speaker Change: expected to generate a 16% unlevered return and we ended the year with 163 million dollars of anchor repositioning and redevelopment projects expected to generate a 15% unlevered return.
Speaker Change: 2025 marks the 10-year anniversary of the formation of Urban EDGE.
Speaker Change: It has been rewarding to see us carry out our mission to improve shopping centers located in and on the edge of urban communities.
Speaker Change: Over the past decade, we have built an exceptional team that has significantly improved our portfolio, adding top retailers who drive traffic and rents while replacing underperforming tenants.
Speaker Change: Our portfolio is now 80% grocery anchored, with grocers generating average sales of $900 per square foot, which we believe is the highest in the sector.
Thank you. Thank you. Thank you.
Speaker Change: Since our spin, we have increased portfolio ABR by almost 30%.
Speaker Change: achieved record leasing volumes in the past three years, simplified our portfolio through capital recycling, and expanded our concentration in the Boston and Washington DC metro markets.
and Ariba Ahmed.
Speaker Change: These accomplishments have significantly improved the strength and stability of our cash flows, and we are optimistic about our growth plans in the next 10 years to continue to add value through disciplined capital allocation and operational excellence.
Now, turning to our 2025 outlook.
Speaker Change: Our goals for the year include achieving FFO as adjusted growth of 4% or better, while generating same property NOI growth of at least 3.5%.
We expect to generate $8 million of gross rents.
Speaker Change: during 2025 from our $25 million signed-but-not-open pipeline and increase our lease occupancy back to our historical high levels of 97 to 98 percent.
Speaker Change: As a result of our higher earnings and taxable income, we are increasing our dividend by 12 percent.
Speaker Change: While we do not include any acquisitions or dispositions in our guidance, we are on the hunt for opportunities.
Speaker Change: and we are hopeful that we will find deals that make sense for our company.
Speaker Change: Our track record is strong. Over the last 16 months, we have acquired over $550 million in assets at a 7% cap rate funded in part through $427 million of dispositions at a 5% cap rate.
Speaker Change: We are proud of our performance over the past decade and we look forward to continuing our success in 2025.
Speaker Change: I will now turn it over to our Chief Operating Officer, Jeff Mooallem.
Speaker Change: Thanks, Jeff, and good morning, everyone. Fourth quarter, like all of 2024, was a strong one for Urban Edge.
Speaker Change: We executed on our business plan by improving deal economics, increasing occupancy, recycling capital into better assets, and delivering projects at accretive returns.
Speaker Change: That brought our total for the year up to 79 new leases, totaling just under half a million square feet, and 86 renewals for almost two million square feet.
Thank you. Thank you. Thank you.
Speaker Change: The overall leasing volume for 2024 was on the high end of our budget and the spreads of 26% and 9% on new leases and renewals respectively were strong.
Speaker Change: Those rent spreads along with other critical deal points like providing less tenant allowance capital and generating higher average annual rent increases than in years past
Speaker Change: demonstrate our ability to identify and capitalize on the below market rents embedded throughout our portfolio when those leases come back to us.
Speaker Change: As Jeff mentioned, in the fourth quarter, those results included new deals with a national grocer, soft good retailers, QSRs, and fitness users, as well as our first pickleball concept lease.
Thank you. Thank you. Thank you.
Speaker Change: After gaining 320 basis points in SHOP occupancy in 2024, we have a clear path in 2025 to an additional 200 to 250 basis points. Bring SHOP occupancy between 93 and 94 percent for the year and overall occupancy between 97 and 98 percent by year end.
Speaker Change: Demand continues to well outpace supply in our markets, and foot traffic continues to increase, up 3% over last year at our grocery-anchored centers. In the Northeast, retail occupancy is at a 10-year high of 95%, and new shopping center construction is at a near-record low, only 0.2% of total supply.
Speaker Change: Tenant bankruptcies are a reality of our business and will remain so, but increasingly, they are more opportunity than risk.
Speaker Change: In the locations where we have Party City and Big Lots, for example, we have replacement tenants identified at spreads up to 90%.
Speaker Change: If we're able to get all those spaces back, some replacement tenants will generate strong incremental returns, while some, because of the capital and time, will be a modest return. But all of them will enhance portfolio quality and adjacent leasing as we cycle out older concepts and bring in better operators.
Speaker Change: We balance all these factors, economic return, quality of operator, tenant mix, cross-shopping appeal, when we look at how a tenant bankruptcy will impact our properties.
Speaker Change: More often than not, getting space back early is a net positive.
Thank you.
Speaker Change: On the development side, we ended 2024 with a strong in-place pipeline of $163 million at a 15% return, nearly all of it tied to executed leases.
Speaker Change: Our development plans at Sunrise Mall in Massapequa, New York, gained some traction this quarter as well with the announcement from Macy's that they would be closing their store there, leaving only one tenant remaining at the mall.
Speaker Change: Finally, while we did not acquire or dispose of any assets in the fourth quarter other than the previously announced Village at Waugh Chapel deal in October, we remain very active on both fronts. Cap rates for acquisitions have compressed, with higher quality assets now trading below six percent.
Speaker Change: driven in part by institutional investors aggressively entering the retail space and solving for IRRs that are lower than retail historically commanded.
Speaker Change: On the disposition side, we are under contract to sell a freestanding building and parking field at Bergentown Center in Paramus to a multifamily developer for a price of $25 million, representing an approximate 4% cap rate on the current in-place NOI.
Speaker Change: I will now turn it over to our Chief Financial Officer, Mark Langer.
Thanks, Jeff. Good morning.
Mark Langer: As you just heard, we had another excellent quarter, marking a strong end to the year.
Mark Langer: We reported FFO as adjusted at $0.34 per share for the fourth quarter and $1.35 per share for the full year, representing 8% growth.
Mark Langer: likely among the highest rate in our peer group. As expected, our same property NOI growth, including redevelopment, was very strong, up 7.4% compared to the fourth quarter of 2023.
Mark Langer: The increase in FFO and NOI this year was also due to accretive capital recycling, contractual rent bumps, and a 180 basis point increase in same property physical occupancy during the year.
Mark Langer: Our balance sheet remains strong with over $800 million of total liquidity, including $91 million of cash,
Mark Langer: Our debt maturity profile is in great shape, as only 9% of outstanding debt matures through 2026, with only $24 million maturing in December of this year and $116 million maturing in December of 2026.
Mark Langer: As a result, our earnings have a lot less volatility attributable to interest rates.
Mark Langer: Additionally, we have made great progress reducing our leverage. Our net debt to annualized adjusted EBITDA is six times, below the six and a half times target we outlined at our April 2023 Investor Day.
Thank you. Thank you. Thank you.
Turning to our outlook for 2025.
Mark Langer: Our initial $2,025 FFO as adjusted per share guidance is $1.37 to $1.42.
Mark Langer: Key assumptions include our expectation that NOI, including properties and redevelopment, will increase 3.5% at the midpoint of our range.
Mark Langer: In terms of the NOI guidance, we assume total credit losses of 75 to 100 basis points of gross rents, which incorporates expected rent loss from tenants who have already filed for bankruptcy, including Party City, Big Lots, and Blink Fitness.
Mark Langer: Our NOI growth assumes $8 million of gross rent is recognized in 2025 from our S&O pipeline.
Mark Langer: I will point out that almost 75% of this revenue is expected to come online in the second half of the year.
Mark Langer: Year-over-year NOI growth is also impacted by the outsized collections of more than $1 million we obtained in the first quarter of last year that will not be a recurring item this year.
Mark Langer: In terms of capital spending, page 29 of our supplement identifies our active redevelopment and re-anchoring projects, which stabilize over the next two years.
Mark Langer: As I have messaged on prior calls, we expect this level to decline as our anchor repositioning projects come online, and we have budgeted $15 to $20 million of spend for 2025 related to that capital.
Mark Langer: We continue to carefully manage our internal operating costs. We assume recurring G&A will be $36 million in 2025, flat compared to prior year and down 4% compared to 2022.
Mark Langer: We are pleased with the progress we have made streamlining processes and seeking efficiencies, and will continue to evaluate ways to lower costs.
Mark Langer: In terms of factors influencing our guidance range, the biggest variables are likely to be actual bad debt and tenant fallout levels, shop leasing activity, and delivering the S&O pipeline to achieve our targeted rent commencement dates.
Mark Langer: We have not included any lease termination fees or any material non-cash adjustments related to straight line rents in guidance.
Mark Langer: As announced in our press release, our board recently approved a 12% increase in our dividend to an annualized rate of 76 cents a share.
Mark Langer: We have previously stated that we expect the dividend to grow as earnings and taxable income grow While we focus on preserving free cash flow to fund our active redevelopment pipeline that is generating healthy returns
Mark Langer: This new dividend reflects the projected growth in our taxable income in 2025.
Mark Langer: To conclude, we are pleased with the outstanding results we achieved during 2024.
and I've turned our focus.
Mark Langer: to our leasing pipeline and assessing ways we can achieve our goal to generate earnings and cash flow growth that is distinguished among our peer group.
Mark Langer: I will now turn the call over to the operator for questions.
Speaker Change: Thank you. 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 the question queue.
Mark Langer: You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: Our first question is from Ronald Kamden with Morgan Stanley. Please proceed.
Speaker Change: Hey, congrats on a great year. Just starting with, I think a little bit on the same story on why, I think you talked about the 75 to 100 basis points.
Speaker Change: sort of bad debt. That sort of baked into that. Just wondering how much visibility you have into that. Have you already sort of seen some of the bad debt come through and how that assumption came about? Thanks.
Speaker Change: Forty basis points in the provision is kind of the general reserve, and then partially offsetting that is we assume $150,000 to $200,000 each quarter for some collections on some old receivables. So that nets out and gets you right to our guidance range.
great helpful color and then my second one is just
Speaker Change: Just to love a little bit more commentary on the acquisition pipeline, you guys have had sort of a great 12 to 18 months. I think you talked about the cap rates are getting pretty competitive, but just wondering what you guys are looking at and what could be done this year. Thanks.
Hi Ron, it's Jeff.
Speaker Change: So yeah, I mean, we are seeing more product than we saw last year, and we do expect that there will be more trades that will occur across the country.
Speaker Change: But it is challenging to make the deals pencil, just given the expected cap rates relative to financing costs. We think the best way to leverage this environment, at least for us, is through capital recycling.
Speaker Change: So, when we compare an acquisition with a disposition at a spread and sell some of our lower growth assets, exchange those for higher growth assets, we think those are the types of trades that make the most sense.
Speaker Change: And again, if you sort of look back over the last 16 months, we've done about $550 million of acquisitions at an average cap of 7.2%. That CAGR is about 2.5% over the next five years.
Speaker Change: principally funded with dispositions, that's 427 million dollars of dispositions over the last 16 months at a cap rate of 5.2 which had a CAGR of about 1%. So those types of deals make a lot of sense and we are hoping that we're going to find some of those in 2025.
Great, that's it for me, thank you.
Speaker Change: Our next question is from Floris Van Dikkem with Compass Point. Please proceed.
Thank you. Bye-bye.
Speaker Change: Thanks, good morning guys. Capital recycling, it's a creative capital recycling is obviously very very attractive. Maybe if you could talk a little bit about some of the other, I think you still have six Lowe's boxes, you've got a Kohl's, I think, single-tenant asset, maybe
talk about what the demand is for that.
Speaker Change: Obviously, cap rates have compressed a little bit based on your commentary. What do you think the spread would be today if you were to...
Speaker Change: sell some of those drier assets and recycle? Is that gonna be as attractive as what you've achieved over the last, call it 24 months?
Speaker Change: Yeah, I mean it was so attractive, it was almost 200 basis points in the last 24 months. I do think it will be more difficult to get that 200 basis points.
Speaker Change: But we are exploring several deals right now on the disposition front, mostly single-tenant assets that we think will get a cap rate somewhere around, call it in the fives.
Speaker Change: And there may be some larger stable power centers that we own that have great credit but lower growth.
Speaker Change: And maybe we'll be in the six-ish percent cap rate on those. So the decision really will be made based on what's in our acquisition pipeline and how attractive those assets are relative to what we might be able to dispose of, Floris.
Speaker Change: So is that $100 million? Is it $200 million? I hope so.
Speaker Change: Fair enough. Fair enough. Let me ask you another question on your...
Speaker Change: Redevelopment. I noticed, obviously, you announced the Macy's termination at Sunrise. I don't know if you can make any comments on where that project stands today. And then also talk maybe a little bit about
Speaker Change: the Bergen Town Center apartments or the sale to an apartment developer and how you're thinking about mixed-use in your portfolio.
Speaker Change: Yeah, so on Sunrise, I mean, we're very excited about our progress. We can't get into more details just because of the confidential nature of our discussions that ultimately will allow us to redevelop the property. We do hope to disclose more later this year on it.
Speaker Change: In terms of the residential sale, we created a lot of value by entitling that land for about 450 residential units.
Speaker Change: And we felt that the best way to monetize that value was to sell it to a local developer and we will redeploy that capital in a 1031 on an acquisition that we've already made.
Speaker Change: Right, and maybe the last question that I that I have, as you guys are
Speaker Change: still continuing to spend on, in particular, Bruckner, as the market strengthens.
Speaker Change: What happens to your expected returns as the vacancy continues to drop and space gets tighter? Are you seeing more attractive returns or are the returns being offset by rising costs in construction as well?
Jeff Mooallem: Hey, good morning, Floris. It's Jeff Mooallem. You know, yes and yes.
Jeff Mooallem: But definitely capital costs erode into some of that return. I would say we feel very good about the 15%.
Jeff Mooallem: Unleveraged yield that we're targeting in our development pipeline right now. If anything, we're hoping that comes in a little higher And when we look further out past 2025, we don't see a reason why that would come down materially But we're always watching costs and you know right now. We're in an interesting time and place with costs There's a lot of concern about
Jeff Mooallem: You know, where those are going to go with various government policies. And I'd say we feel good that we're going to do better than what we budgeted, but costs are definitely hitting the numbers a bit.
Thanks, Jeff.
That's it for me.
Thank you, Floris.
Speaker Change: Yes, good morning. Mark, on on GNA, I mean you've done a good job bringing that down over the last several years.
Speaker Change: I think the midpoint, when you look at that in 25, it's also down versus last year. And I think in your opening remarks, you talked about streamlining the processes. Maybe expand on that a little bit as we kind of think about GNA not only for 25 and maybe even years beyond. Thanks.
Speaker Change: Secondly is, you know, what we spend on third parties. We did a deep dive on all consultancy, third party outsourcing vendors.
Speaker Change: everything you can imagine which you know amounts to big dollars.
Speaker Change: That helped. And in terms of streamlining, we are, like many companies, you know, exploring ways and using AI and other RPA-type tools where we're trying to automate things that we were spending 20, 30, 40 hours of manpower on, and we're seeing some very good results. I'm very encouraged what we're seeing, and that's why I said in my prepared remarks, we're not done. We're continuing to evaluate it, but there are, at this point, going to be smaller gradual changes and not any one big outsized event.
Speaker Change: Okay, got it. Thank you for that. And then I guess on...
Jeff, on Sunrise, I mean with Macy's
Speaker Change: Will that continue to be sort of retail or are you considering various uses, alternatives? It's just any, I don't know, any initial comments would be great. Thanks.
Hey, good morning Samir. It's Jeff Mooallem. I'll take it.
Speaker Change: Look, I think what we've said before, and what's still consistent, is the 78-acre parcel of land. So it's important that we all think about it as potentially more than one category of use. We're exploring a lot of different things right now. We're very encouraged, as Jeff has said, by the progress we've made. Macy's closing their store there is a big step forward in our development plans, and we're excited for what's to come. Nothing more that we can really say beyond that at this point.
Thank you. Thank you. Thank you.
Thank you.
Speaker Change: Our next question is from Paulina Rojas with Green Street Advisors. Please proceed.
Paulina Rojas: Good morning and you mentioned in your prepared remarks that high-quality centers in your markets are trading below a 6% cap rate.
Paulina Rojas: and number of boxes whether it has or not a grocer and a little more color around that
Jeff Mooallem: Hey, good morning Paulina. Yeah, I think having a grocer is an important component of what we would call maybe a core plus type asset
Speaker Change: Certainly, all the investors today, and we're no different, are looking for growth.
Speaker Change: So, when you combine a good grocer doing good sales and with a reasonable amount of lease term left, call it at least seven to ten years of lease term, and growth opportunities through shop space, maybe adding pads, things like that, those are the assets that are really most desirable right now in the market. There's not a lot of them that get circulated, and when they do, there's quite a frenzy over them.
Speaker Change: So we're hearing guidance from brokers and we're seeing deals ourselves that are being quoted, you know, between a five and a half and a six cap rate range. And there is capital out there now that's solving for, you know, high single-digit or low double-digit levered IRRs that can afford to pay those prices.
Speaker Change: It's definitely gotten compressed on the buy side. We did not see those at all a year ago, and to Jeff's point earlier about the 7.2 percent
Speaker Change: return on the deals we've been able to buy, we bought really, really well. We bought some assets that today would trade, we're very sure, 50 to 100 basis points lower than the cap rates at which we purchased them. So the buying has gotten tougher and there are some assets now that are definitely going to be in the fives.
Mark Langer: And Paulina, maybe one of the best examples is a company that's based out your way, which was four billion dollars of a company. So I think that that certainly had an impact on the market.
Yes, yes, of course.
Speaker Change: And then, more big picture, how are you seeing your cost of equity today?
And is an idea, issuing equity, would you consider that?
as a source of funding for certain acquisitions.
Speaker Change: I think modestly, I think that clearly the best funding source is selling low cap rate, low growth assets, and also some of our non-core assets that could include excess land. That is what we're focused on.
Speaker Change: But, you know, is there room for a modest amount of equity? Maybe, depending upon the deal.
Okay, thank you. Thank you.
Thank you. Thank you. Thank you.
Speaker Change: With no further questions in the queue, I would like to turn the call back over to management for closing remarks.
Speaker Change: Great, well thank you for your interest in Urban Edge. We look forward to seeing many of you in Florida at the City Conference next month. Thank you very much.
Speaker Change: Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.