Urban Edge Properties

and welcome to the Urban Edge Properties fourth quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ethan Blumen. Please go ahead, sir.

Good morning, and welcome to Urban Edge Properties Year-End Earnings Conference Call. Joining me today are Jeff Olson, Chairman and Chief Executive Officer, Jeff Mualem, Chief Operating Officer, Mark Langer, Chief Financial Officer, Danielle DeVita, Executive Vice President of Development, Rob Milton, General Counsel, Scott Oster, Senior 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. 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-GAAP financial measures. Reconciliations of these measures to GAAP results are available in our earnings release and supplemental disclosure package in the investor section of our website. At this time, it is my pleasure to introduce our Chairman and Chief Executive Officer, Jeff Olson.

Jeff Olson Great. Thank you, Eitan, and good morning, everyone. I am pleased to announce that we finished 2022 with another strong quarter. FFO as adjusted was $0.33 per share for the quarter and $1.21 for the year. A 22% increase over the fourth quarter of last year and an 11% increase for the full year. This increase is primarily attributed to rent commencements from anchor repositioning projects completed during the year, including ShopRite at Huntington, Uncle Giuseppe's at Briarcliff Commons, Kohl's at Bergen Town Center, and AAA Wholesale at Lodi. Our prior acquisitions of Woodmore Town Center outside of Washington, D.C., and the shops at Riverwood in Boston also contributed to this growth. Same property NOI was up significantly at 6.2%. primarily due to new rent commencements, higher recoveries, and higher percentage and specialty rents. Our leasing momentum was robust during the fourth quarter, setting a company record of more than 1 million square feet of new leases for the year, including 575,000 square feet in the fourth quarter alone. Special thanks to Scott Oster, and all members of our leasing, legal, and administrative teams for generating these record results. The volume was outstanding, but it is equally noteworthy to highlight the quality of tenants being added to the portfolio. Our assets continue to attract best-in-class retailers that drive traffic to our centers and enhance the value of adjacent spaces. This quarter, we signed new leases with Target, TJ Maxx, Golf Galaxy, Kava, Crumble Cookies, and medical users, including BondVet and DaVita Dialysis. During the past year, we increased our consolidated occupancy from 92% to 95%, a notable growth rate following the pandemic. Most importantly, we have visibility to grow our net operating income by 18% or $44 million annually. Las Catalinas, Walgreens at Monte Hedra, Total Wine at Cherry Hill, Nemours Children's Health at Brewmall, and Aldi at Bruckner. On a macro level, the shopping center industry has remained resilient in the face of economic uncertainty and higher inflation. Retailers have recognized the importance of brick-and-mortar stores and the critical role the store plays in omnichannel fulfillment. This has led many retailers to expand their store count, driving U.S. shopping center vacancy to its lowest level since 2007, according to Cushman and Wakefield, which bodes well for our ability to continue to increase occupancy and rents. Of course, Tenant turnover is an expected part of our business. Notable at-risk tenants for us today include Bed Bath & Beyond, Regal Cinema, and Party City. We are comfortable that we will generate strong backfill opportunities should any of them vacate as our properties are in many of the most densely populated supply-constrained markets throughout the Northeast. It is important to note that housing demand in the New York metro area, our largest market, remains strong relative to the rest of the country. A recent Bloomberg article noted that home asking prices increased by more than 10 percent year over year in Westchester County and in northern New Jersey, where home bidding wars still occur due to the area's dense population with high-earning professionals and lack of inventory. This further supports the trend we have seen throughout our suburban shopping centers, where work-from-home policies have resulted in more frequent shopping trips. On that point, foot traffic within our portfolio increased by 6% in 2022 as compared to 2019. We expect this trend will continue as new anchor tenants like Target, ShopRite, and TJ Maxx open in spaces previously occupied by Kmart, Toys R Us, and other underperforming retailers. Our goals for 2023 include achieving at least $1.14 per share in FFO, successfully addressing the $300 million mortgage maturing at Bergen Town Center, commencing $15 million of annualized gross rent included in our $29 million executed lease pipeline, activating another $50 to $75 million in new redevelopment projects at a 10% or greater incremental return on cost, obtaining entitlements for approximately 450 residential units at Burgantown Center, and advancing our redevelopment plans at Sunrise Mall. We look forward to seeing many of you at the City Conference in early March and at our Investor Day on April 18th at the New York Stock Exchange. Lastly, I am delighted that Jeff Muellem, our new Chief Operating Officer, started with us in January. As I previously mentioned on our last earnings call, Jeff worked with me and Mark during our time at Equity One, and it is wonderful to see him hit the ground running. I will now turn the call over to Jeff so that he can share a few thoughts about his first month at Urban Edge. Jeff?

Thanks, Jeff, and good morning, everyone. As Jeff mentioned, I started at Urban Edge in January, and in many ways, it has felt like coming home, not only because of my prior working relationship with Jeff and Mark from our days together at Equity One, one of the most fun and productive periods of my career, but also because I've been following the company for the last several years and already have a strong understanding of the assets and opportunities here. After one month at the company, I can tell you that the team and the culture is first class. The leasing team did a fantastic job closing out 2022 and is off to a strong start in 2023 with a robust pipeline of established retailers and new to market tenants. The development team is focused on completing some exciting projects, such as the redevelopment of Bruckner Commons and Huntington Commons, with more projects expected in 2023. And I have found our property management team to be thorough, experienced, and efficiently operating our assets for the short and the long term. I have now walked roughly two thirds of the portfolio and will have visited all of the properties by quarter end. I see tremendous opportunity to create value at many of these centers, whether it be by enhanced leasing, expansions, renovations, entitlements, property operations, or selective acquisitions and dispositions. The Urban Edge portfolio is filled with large parcels of low density surface park uses in supply constrained and dense infill communities. And I am most excited about the chance to unlock some of that inherent and underutilized land value. I look forward to sharing more information about our growth opportunities at our Investor Day in April. I will now turn it over to our Chief Financial Officer, Mark Langer.

Thanks, Jeff. Good morning. I will discuss drivers of our fourth quarter results, comment on our balance sheet in liquidity, and we'll close with an outline of the key assumptions impacting our 2023 guidance. Our results for the fourth quarter were stronger than expected, with FFO as adjusted at $0.33 per share as compared to the fourth quarter of last year. For the full year, we generated FFO as adjusted of $1.21 per share, two cents per share above the high end of our guidance range. Half of this outperformance pertained to real estate tax settlements and a lease termination payment, and the other half pertained to recoveries of amounts previously deemed uncollectible, better non-cash revenues from straight-line rents, and better percentage rent. Same property NOI growth, including redevelopment, increased 6.2 percent compared to the fourth quarter last year. driven by new rent commencements and higher percentage in specialty rents. Turning to leasing, same property leased occupancy increased 110 basis points year-over-year, and consolidated portfolio leased occupancy increased 300 basis points year-over-year. As compared to the third quarter, the same property leased occupancy rate increased 200 basis points. predominantly due to the execution of 187,000 square foot lease at a vacant industrial building that we acquired in 2021 that is adjacent to our existing East Hanover warehouses. During the quarter, total portfolio shop occupancy increased 80 basis points to 84.5%. Very good growth, but still at a level far below our peak same property shop occupancy nearly 91% in the second quarter of 2018. We expect further shop occupancy growth as our anchor repositioning projects continue to come online and stimulate demand for adjacent space. One side note on our same property occupancy, given the redevelopment taking place at Bruckner Commons and the outlets at Montehedra, these assets are not currently in the same property pool. Accordingly, The target in TJ Maxx leases executed at these properties during the quarter contributed to a 100 basis point increase in consolidated occupancy that is not reflected in the same property result. Overall leasing spreads this quarter were positive 31%. The large spread was driven by the execution of new leases with Target at Bruckner Commons, TJ Maxx at the outlets at Monahedra, Golf Galaxy at Goucher Commons, in the industrial lease at East Hanover. Full year spreads realized in 2022 were 12% and are more in line with expectations going forward, especially considering our current leasing pipeline that reflects new spreads in excess of 15%. In terms of our balance sheet, we ended the quarter with total liquidity of more than $900 million. including our $800 million undrawn line of credit and total cash of approximately $129 million. We are pursuing several options regarding Bergen's upcoming loan maturity. Given the very active state of these negotiations, I won't get into any specifics at this time, but we expect to have a favorable resolution to this shortly. Looking ahead, we have minimal and very manageable maturities in 2024 and 2025, amounting to $144 million and $52 million, respectively. In terms of leverage, our net debt to annualized EBITDA dropped to 6.9 times in the fourth quarter, and we expect this to continue to decline to the 6.5 times range as our leasing pipeline is converted into commenced rents. Turning to our expectations for 2023, our initial 2023 FFO as adjusted per share guidance range is $1.11 to $1.17 and incorporates the following key assumptions. We expect same property NOI growth, including properties in redevelopment, to range from negative 1% to positive 2%. The midpoint of our guidance assumes a general credit loss of 100 basis points of gross revenues, or approximately $4 million, and an additional 125 basis points of credit loss, or approximately $5 million, for tenants that have filed or are expected to file bankruptcy. The additional reserve covers $3.5 million of the $4.6 million gross rents attributable to all of our Bed Bath & Beyond spaces. This $3.5 million reserve includes $1 million related to a Bed Bath store that had a natural lease expiration in January for which the store is now closed. The remaining $2.5 million pertains to future potential fallout of other Bed Bath locations. In addition to Bed Bath, our guidance incorporates a $1 million reserve covering 50% of our exposure to Regal Cinema, where we have one location and a half million dollars of reserve related to Party City. In terms of collections on past amounts deemed uncollectible, our guidance at the midpoint assumes we will receive an additional one and a half million dollars during 2023, which compares to approximately six and a half million dollars we received in 2022. Annual G&A expenses are expected to be $35.5 million to $37.5 million, which compares to $40.5 million in 2022 when excluding all of the one-time related costs for the executive transition we announced in the fourth quarter of last year. We continue to evaluate opportunities to extract efficiencies in our operating platform in an effort to further reduce G&A. Interest and debt expense is expected to increase $11 to $14 million in 2023, primarily due to our mortgages that are maturing during the year and the forward rates on our variable rate debt, which represents about 9% of our total debt. No new acquisitions or dispositions and no other material capital or refinancing activity is assumed. In closing, we are grateful for the dedication and execution provided by the UE team again this quarter. And we look forward to meeting with many investors in three weeks at the City Conference in Hollywood, Florida. I will now turn the call over to the operator for questions.

Thank you.

We will now begin the 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 the question queue. You may press star 2 if you would like to remove yourself from the questioning queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Please hold while we gather your query requests. Our first question is from Forrest Van De Kamp with Compass Point.

Morning, guys. Thanks for taking my question. I wanted to get into the pipeline, the leasing pipeline, maybe in some more detail. And perhaps, Mark, if you could just outline how you, I believe most of that incremental NOI, which is actually quite substantial, is going to hit in 24. Maybe if you can talk through the timing of when you expect the $29 million to hit earnings. And then also, I guess part of when you do the big anchor repositionings, there is an ancillary benefit of the small shop occupancy. You mentioned the 84% current rate, lease rate for your shop occupancy, which is about 700 basis points away from your peak, when can we expect that you're going to get back to those peak levels of occupancy going forward?

Hi, Flores. It's Jeff. I'll let Mark take the details. But as I outlined in one of our goals for 2023, I mean, overall, our objective is to increase our NOI by 18%. About two-thirds of that comes from our SNO pipeline, which is $29 million. And another goal we have for 23 is out of that 29 is to activate about 50% of it this year, which is $15 million on an annualized basis. But, Mark, why don't you take the details?

Yeah, so on that, Floris, the SNO, you know, while we've given you that annual – of that 15 million, 6 million will hit in 23. It starts in the second quarter and then builds commensurate with how we show the stabilization dates in our supplement. So about 80% of it is back end weighted in 23 with the start of it coming in the second quarter. In terms of your question on the shops, as I said, we've had good growth getting us to that 85. We believe we can pick up 300 to 400 basis points over the next 12 to 18 months, call it, exactly to your point. What we're seeing is as these anchors open, the leasing team is obviously marking the space continuously, but demand for those type of local operators really stimulates when they see what's happening because the whole center becomes more vibrant. Your first question was on the tenants and in the leasing pipeline, and I'll ask Jeff Muehl in the comment on what he's seeing in terms of leasing velocity.

Yeah, hey, Flores, good morning. Yeah, we're seeing really still good activity. I mean, as you know, we completed the fourth quarter with some really solid results, and the momentum hasn't really shifted in the first quarter. I think the retailers are feeling some easing of pressure on the supply chain, and that's helped margins a bit. So they're still talking to us about new locations. We haven't really seen any change. And as Jeff mentioned in his comments, we have 800,000 feet of our leasing pipeline that we're hoping to get done this year. So it should still be another good year, and we're digging into it right now.

Thanks. Maybe one follow-up, and maybe this is for you, Mark. Your $300 million mortgage for Burgantown Center, is one of the options to use part of your existing cash and pay down part of that? Or do you think that because the mortgage is somewhat older and, you know, the value presumably has increased that you could actually take out an incremental capital when you put new debt on the, on Burgantown Center?

Yeah, I don't think it's, the cash out is not on the table. We may consider putting a small amount of cash in to get attractive refinancing, but all of this is very live now. So, I won't get into too much detail, but I'd say it's possible that there's some cash in. Great.

Thanks, Mark. Yep. Thank you. Our next question is from Samir Canal with Evercore ISI.

Good morning, everybody. I guess, Mark, when I look at your guidance, I mean, how do you get to the low end of guidance here, the 110? Because when I listen to your commentary, you're baking in quite a bit of fallout to sort of get to the midpoint as it relates to bed, bath, party, city, and then other sort of potential fallout. So maybe just walk us through how you get to the low end at this point.

Yeah, it's really a function of several things. So it's basically taking, from an NOI perspective, a full fallout on a more accelerated basis. as well as getting less collections from the prior recoveries. And then having interest expense hit the high end. And so really, it's mostly driven by fallout above and beyond. While I've isolated some tenants, Samir, there are several others that we have kind of on a watch list that could get incorporated into the year. So some of it is for losses that I just didn't highlight.

Okay, got it. And Jeff, you know, in your opening comments, you've mentioned about 800,000 square feet of negotiations that are underway. Can you expand on that a little bit more? What does the leasing economics look like for that bucket, given sort of the macro concerns out there?

Yeah, I mean, it's very robust. I'm going to let Scott Oster, who's our head of leasing, who's with us this morning, talk about that pipeline, because he's on the front line. We are very excited about the prospects. And importantly, as we bring on tenants like Target and TJ Maxx into our centers, I mean, what I'm seeing in the pipeline is just better credit because they're following these anchor positions that were previously occupied by tenants that were not doing very well. But Scott?

Yeah. Hey, Samir. It's really running the gamut. I remember talking about this on our last call. of all the different categories that are out there expanding, it's anchors, it's shops, there's definitely the QSRs are definitely very active right now. That's a big category for us. Fitness is another one that's really busy with us right now, both in the boutique sizes and the full line gym guys out there. Excuse me, Samir. The medical category is the other one that's really active for us right now. So it's really all across the board, shops, anchors, the general merchandise retailers, the discount retailers out there right now are still very active as well. So we're really happy with both the activity and the level of NOI growth that we're going to see coming out of the other side of this.

And Samir, I think what excites me the most is the fact that You know, and I said in my comments that vacancy rates throughout the shopping center industry are at all-time lows relative to, I think the last data point was 2007, where vacancy rates were at this level. So now is the time for us to really push rents, which we could not do when we were at 91 percent, 92 percent, 93 percent. But we are confident that, you know, we will ultimately stabilize back up to that 96% to 98% occupancy level that we were at before. And at that point, we will push rents a lot harder than we have in the past.

And last one for me, if I may. This has come up with some investors as sort of the sunrise mall. What is the current thinking or strategy behind that property? Thanks.

Yeah, I mean, we're continuing to work with the community. We have five remaining tenants left at the mall, so we're also working with them on a plan that makes sense for everyone. We like our basis in the property. It's about a million dollars an acre, and we do look forward to sharing our plans with everyone once those plans have been developed. Jeff is rolling up his sleeves on it, and we do hope to share more at our Investor Day in April.

Thanks, everyone. Thank you.

As a reminder, if you wish to ask a question, please press star 1. Our next question is from Ronald Camden with Morgan Stanley.

Hey, just a couple quick ones. I think you mentioned the dollar amount for the reserves for some of those tenants, but Do you just translate that into sort of a basis points drag on the same store and why guidance for adjusted for non-collection? So that 0.5 to 3.5, what's sort of the drag from bad debt?

It's about 400 basis points, Ron.

Got it. Okay. That's helpful. And then the... Sort of the second question is going back to, again, this is another sort of leasing question, leasing activity. We are hearing sort of across the group that leasing has been sort of very strong in the sector. If you take a step back, I mean, given the challenge macro, any sort of idea what's driving that? What are tenants saying? It doesn't seem like anything that's going on with inflation or the economy is really, really impacting it, which is good. Just on the ground, what are you hearing from the tenants?

I think they're concerned that if they don't act soon, there won't be much space left for them to get later because there is very little new supply that's being built. So again, as occupancy rates increase throughout the country and stabilize maybe at 95%-ish, there's just less quality space that's available.

And I would add, Ron, that for our portfolio in particular, that's especially the case because we are in such supply-constrained markets relative to the rest of the country, and we do hear from retailers all the time that that New York, New Jersey, D.C. to Boston corridor is one of their most difficult ones to penetrate. Great.

And then my last quick one was just on the GNA guy. Should we take that as sort of the recurring rate going forward in the model? Because I Obviously, the GNA is a lot lower than it was previous years. Is that sort of the new steady state? Is that a fair assumption?

Yeah, that's a fair assumption. The only thing that could happen that we would adjust if there was, you know, we exclude any outsized one-time litigation type matters. But from a recurring standpoint, the guide, I think, gives you a good run rate.

Excellent.

Thanks so much. That's it for me. Great. Thank you. Thank you. Our next question is from Paulina Rojas with Green Street. Good morning. Hi, good morning, Paulina.

This question is for Jeff in his new position. So in your prepared remarks, you highlighted some of the positive aspects you see of the Urban Edge portfolio in general, and you covered a lot of things. My question is from a strategic level. Where do you think there is the most juice to be squeezed in this portfolio? Or said in another way, if you could highlight one thing, what is the opportunity that you're most excited about?

Good morning, Paulina. Well, you know, with 75 properties all in sort of dense markets, there's a lot of different things we can activate, right? But it all kind of comes down to what is, I think, an inherently strong land value at an attractive basis. So on certain properties, I do think there's going to be an opportunity through entitlements and, you know, the municipal approval processes to increase the size of the assets. On other properties, it might be renovations where we can possibly grow rents from adding new tenants as a result of a better-looking property. In some cases there might be out parcels to dispose or adjacent land to acquire. And certainly across the board leasing is our main focus. But for me it all comes down to, you know, having worked on several portfolios at different parts of the country over my career, it all really comes down to, you know, your basis in the land and your ability to do things at an attractive land value. And I think the Urban Edge portfolio is really second to none in the REIT space at that. So I'm really kind of excited to get into the specific weeds on each of these assets and see where we're going to pull these different buttons. But there's certainly a lot of opportunities.

Thank you. And then regarding the transaction market, what are you seeing? Any change at the margin? How are you seeing the pool of buyers? How deep is that today?

I'd say there's still not that much liquidity in the market. There's a wide ask between what sellers want and what buyers are willing to pay. And I think a lot of that just has to do with where interest rates are. I mean, if you can get financing in the 5.5% to 6.25% range for high-quality strip shopping centers, most buyers, including us, are going to want to spread above that. And then when you look at the REIT sector in particular, and UE in particular, where I think according to your numbers, Paulina, we're probably trading at an implied cap rate of around 7.5%. It's really hard to make the numbers work.

And what's your appetite to dispose assets?

I think we're open-minded to it, but again, I think because of the lack of liquidity, we want to make sure that we would be smart sellers.

That makes sense.

But there are a handful of assets. I think it's safe to assume that we'll probably dispose of about $50 million a year.

Okay. Thank you. And then one... maybe modeling questions. So this year, your same property NOI including redevelopments grew less than excluding redevelopments. I assume that the contribution of redevelopments for next year should be positive given everything that you have leased and scheduled to to come online. Is that a fair review of what you're saying?

Yes, Pauline, you're exactly right. Next year it would be a contributor.

Is there any ballpark number for that contribution?

No, we haven't broken it out separately, but it's flipping positive and even more so as you go to 24 and 25. Okay, thank you.

Yep, great, thank you. Thank you. As a reminder, if you wish to ask a question, please press star 1. Please hold while we collect new questions. Ladies and gentlemen, there are no further questions at this time.

I would like to turn the floor back over to Jeff Olson for closing comments.

Oh great, I hope everyone has a great Valentine's Day and we'll look forward to seeing you at the city conference and then at our upcoming investor day. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for participation.