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spk00: Welcome to the Urban Edge Properties and Calls. 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, Eitan Bluman. Please go ahead.
spk06: Good morning and welcome to Urban Edge Properties 2023 First Quarter Earnings Conference Call. Joining me today are Jeff Olson, Chairman and Chief Executive Officer, Jeff Mualem, Chief Operating Officer, Mark Langer, Chief Financial Officer, Rob Milton, General Counsel, Scott Oster, 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. 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 investors section of our website. At this time, it is my pleasure to introduce our Chairman and Chief Executive Officer, Jeff Olson.
spk05: Great. Thank you, Eitan, and good morning, everyone. I am pleased to announce that we finished the first quarter with strong results. FFO as adjusted was 32 cents per share for the first quarter, up 13% compared to last year. And same property NOI was up significantly at 6.3%. The increases are primarily attributed to new rent commencements and lower operating and G&A expenses. Before I get into the details of the quarter, I want to thank all of you that were able to attend our Investor Day a couple weeks ago. The New York Stock Exchange provided a great venue, and we were thrilled to have the opportunity to engage with so many analysts and investors. Our first quarter results demonstrate continued momentum and successful execution of the growth pillars we outlined during our Investor Day presentation. We opened our presentation with a quote from Willa Cather that reads, we come and go, but the land is always here. Our 1,400 acres of land in densely populated urban areas will constantly be a source of revenue growth as we continue to improve and densify our properties. A great example of this occurred last week when we received site plan approval from the Paramus Planning Board to develop 456 multifamily units on the east side of Burgantown Center. This project features an impressive architectural design, vast landscaping, and numerous amenities. We are currently evaluating offers for the sale or joint venture of this exceptional piece of land. Highlights for the quarter include our signed but not open pipeline, which has grown for the fourth consecutive quarter, increasing to $31 million, or 13% of NOI, up from $29 million in the fourth quarter of 2022. We have another 600,000 square feet of leases in our pipeline, representing $14 million or 6% of NOI. As highlighted in our investor deck, we expect to grow NOI by more than 20% over the next three years, 80% of which is coming from signed but not open leases and contractual rent bumps. Jeff Muellem will provide you with an update on our bed-bath exposure and the tremendous backfill opportunities we are discussing with a range of quality tenants at rents that are at least 30% higher than those in place. We currently have $218 million of active redevelopment projects underway that are expected to generate a healthy 12% unleveraged return of which 95% of the Total Project GLA has been pre-leased. We look forward to seeing new anchor stores open in 2023, including Sector 66 at Las Catalinas, Walgreens at Monte Hadra, Total Wine at Cherry Hill, Nemours Children's Health at Brewmall, and Aldi at Bruckner. Once we complete our redevelopments in progress, Nearly 70% of our portfolio value will have undergone a substantial repositioning and will require less capital in the future. These property upgrades have resulted in stronger, more stable cash flows as we have focused on tenant quality and improved co-tenancy as part of our releasing efforts. In fact, 65% of our assets are anchored by grocers, 10% by Home Depot or Lowe's, and 7% by industrial and self-storage uses, with the remaining 18% anchored by discounters such as TJ Maxx, Burlington, and Ross. We believe the strength of our tenancy provides great stability. Finally, we are proud of our balance sheet. especially after the seven-year $290 million, 6.3% fixed-rate Bergen refinancing announced in April. Only 15% of our debt matures through 2025. We believe the lowest percentage in the sector. In addition, our secure debt strategy sets us apart from our peers and protects our balance sheet in the best possible way as we have no corporate debt obligations. I would like to reiterate the key takeaways from our three-year growth plan that I mentioned during Investor Day. One, we own an irreplaceable $4 billion portfolio primarily situated in the DC to Boston corridor, the most densely populated and supply constrained region in the country. Our tenants generate high sales as evidenced by the more than $900 per square foot our grocers generate in these markets. Two, we are positioned to grow our net operating income by more than 20% over the next three years, nearly 80% of which is derived from executed leases and contractual rent bumps. Three, we are executing a high yielding, low risk anchor repositioning and redevelopment program with $218 million of active projects expected to generate a 12% return. Four, we have a strong balance sheet with substantial liquidity and very limited debt maturing over the next three years. Five, Our three-year FFO as adjusted target is $1.35 per share in 2025, a 16% increase compared to our updated 2023 guidance. And six, we believe that our stock is undervalued as measured by FFO multiple, implied cap rate, and land and building value. Our land is valued at a little over $2 million an acre. Our buildings are valued at approximately $185 per square foot, which is probably half of the replacement cost before any value attributed to our land. This is even more pronounced on a forward-looking basis given our projected growth through 2025 and the low-risk nature of our plan to achieve it. We are excited to see many of you at ICSE and at the upcoming NARIC conference. I will now turn it over to our Chief Operating Officer, Jeff Muellem.
spk03: Thanks, Jeff, and good morning, everyone. I would like to start with a few comments on the macro environment, then cover the details of our leasing and development activity, and finally say a few words about our bed-bath locations. As you heard us say at Investor Day and have heard many of our peers say as well, the supply and demand balance in our industry is the best we have seen in at least the last 15 years. Despite the economic uncertainty and higher inflation of the last few months, we have not seen a meaningful change in demand from our retailers. We believe this is because there is now an inherent understanding and acceptance from all retailers that the store is where the highest profit margins reside. Whether you are measuring by customer acquisition expense, the cost to deliver the product to the customer, add-on sales, or brand recognition value, the brick and mortar store outperforms the online platform on a consistent basis. While the steady macro demand is not unique to Urban Edge, our portfolio, mostly located in supply-constrained first-string suburbs, is a differentiator. These are the markets that benefit most from less product being built, more people moving in, and more people working from home. It is these two factors together, stronger demand and limited supply, that has improved our pricing power, not only in the form of starting rents, but also in the increases in other lease provisions that are a critical part of every lease negotiation. In the first quarter, we picked up right where we left off with strong leasing activity. 42 leases were executed for a total of 430,000 square feet. with same space leases totaling 412,000 square feet and generating an average cash rent spread of 7.5%. The story on new leases was even better. 14 new leases for 111,000 square feet and on the same space deals, a spread of 18%. National tenants who signed new leases this quarter included Burlington, UFC Gym, Journeys, Crumble Cookies, and Boot Barn. Turning to occupancy, Our same property leased occupancy increased 240 basis points year over year and was down 20 basis points from the prior quarter, as expected. Our consolidated portfolio leased occupancy, excluding Sunrise Mall, increased 420 basis points year over year and now stands at 94.6%. During the quarter, total portfolio shop occupancy increased to 85%, up 50 basis points compared to fourth quarter 2022. As some of you heard us say at Investor Day, we are on a mission to bring our overall occupancy number from 94.6% today to between 97 and 98%, matching the historical high at Urban Edge. Our pipeline of deals is the roadmap to get us there. We have roughly 600,000 square feet in our leasing pipeline at expected rent spreads of about 15%. This includes anchor re-tenanting opportunities at Bruckner, Burgantown Center, Totowa, Manalapan, Towson, Amherst, and Newington in categories such as fitness, medical, discounters, and sporting goods. Though not all of this anchor pipeline represents spaces that are vacant today, the successful execution of this activity would still increase our retail anchor occupancy by about 200 basis points and our overall retail occupancy by 160 basis points. Of course, momentum on anchor leasing drives demand for shop spaces. At Huntington Commons, we have now executed leases with Prime Urgent Care, Phoenix Salon, and Golf Tech on the heels of the new anchor deals with ShopRite in Burlington, and we're nearly out of space. At Las Catalinas in Puerto Rico, our new anchor tenant, Sector 66, should open in the next 60 days, and that has helped generate new deals with Puma, Hot Topic, and many others currently under negotiation. And at Bruckner, the new anchor deal with Target has already led to execution of leases with Teriyaki One and Salon Centric. and we are finalizing lease negotiations on two other shop deals at spreads north of 20%. Looking at our first quarter deals and the ones still in our pipeline, we believe we can reach our shop leased occupancy goal of 90% by the end of this year, which along with the anchor activity mentioned above, would push our overall same property occupancy to 96%. Getting leases executed is only half the battle though. Our development and tenant coordination teams are extremely busy these days, and we're seeing success on several projects. Jeff mentioned our recent site plan approval for 456 residential units at Bergen Town Center. We also recently received all approvals to construct an 80,000 square foot medical building for Hackensack Meridian Health at Bergen, a project we hope to begin later this year. On the construction side, we believe prices for most materials have leveled off and supply chain concerns have eased. perfectly timed to deliver on our extensive S&O pipeline. In Cherry Hill, New Jersey, for example, we had a four-month timeline projected for delivery and install of mechanical equipment to an anchor tenant. We were able to get it done in a little over a month, and we are now delivering 60 days earlier than our budgeted delivery date. Finally, let me address our exposure to Bed Bath & Beyond. We started the year with seven stores across all of their brands, three Bed Bath & Beyonds, one Bye Bye Baby, and three Harmon face value stores. One of the bed bath stores in Manalapan, New Jersey had a natural lease expiration in January 2023, and we are actively engaged with several prospects at spreads that will more than justify the incremental capital investment. Our other two bed bath locations and our Bye Bye Baby location are also located in New Jersey, have paid rent for April and May, and have not been rejected. However, If we get those spaces back, we are confident we have both single-tenant and demising options at spreads between 20% and 70% of the existing rents and from best-in-class credit users. The three Harmons account for only 18,000 square feet, and we expect to have all three released this year. In sum, we view the filing as a good-news scenario for most landlords and especially for Urban Edge. In prior retailer bankruptcies, we have had to pound the pavement and make extensive calls to generate one or two interested takers or price large vacancies for a use other than retail. But I can tell you that in the case of this bankruptcy, even before we have control of spaces, inbound inquiries are coming from all categories, high-end car dealerships to grocery chains to discounters to sporting goods. Instead of just having to fill the space, we can focus on making not only the right economic deal, but also the right deal to position that asset for many years to come. It's a good position to be in, and it leads me back to where I started. The supply and demand fundamentals of this business are the best we've seen in a really long time. I will now turn it over to our Chief Financial Officer, Mark Langer.
spk04: Thanks, Jeff. Good morning. I will discuss drivers of our first quarter results comment on our balance sheet and liquidity, and we'll close with our 2023 guidance. Starting with our results for the quarter, we reported FFO as adjusted of 32 cents per share and same property NOI growth, including redevelopment of 6.3% compared to the first quarter of 2022. The results were better than our expectations, primarily due to lower credit losses, favorable expense trends with significantly lower snow removal costs this year and lower G&A due to our continued cost-cutting efforts. In terms of our balance sheet, we ended the quarter with total liquidity of approximately $911 million, including our $800 million undrawn line of credit and total cash of $111 million. As Jeff mentioned, subsequent to the quarter, we successfully refinanced our mortgage loan at Bergen Town Center with a new seven-year $290 million loan at a fixed rate of 6.3%. With this refinancing, we have now reduced our company's debt maturities through 2025 to $235 million, less than 15% of our current outstanding indebtedness. Looking ahead, we have minimal and very manageable maturities in 2024 and 2025. We continue to expect our net debt to forward EBITDA to decline to the six and a half times range as our sizable SNO and leasing pipeline is converted to commenced rents. As set forth in our release, we recognized a non-cash impairment charge on Kingswood Center of approximately $34 million, or 28 cents per share. Kingswood Center is located in Brooklyn, New York, and was purchased in February 2020, one month prior to the COVID pandemic. It is a 130,000 square foot property of which two thirds of the GLA is office space. Towards the end of the quarter, we were informed that two tenants accounting for over half of the property's leasable area will be vacating. At the end of April, we notified the servicer of the CMBS loan that the annualized cash NOI of $1.4 million would be insufficient to continue funding debt service payments of $3.4 million and that we were unwilling to fund the shortfall. The loan has been transferred to special servicing for modification discussions with the lender. Our equity today in the property is limited to $25 million, as we assumed a $65.5 million, 5.1% non-recourse interest-only mortgage as part of the acquisition. Our 2023 guidance and the three-year FFO growth targets we outlined at Investor Day reflect the negative cash flow expected to be generated by this asset. Whether we obtain a successful debt modification or the lender forecloses on the asset, our earnings will be higher. This is another example of the benefit of our secure debt strategy. Turning to our outlook for 2023, as previously announced, we are reiterating our revised 2023 FFO as adjusted per share guidance range, which is up two cents per share at the midpoint as compared to our originally issued guidance. The increase reflects our better than expected first quarter performance and our expectation that we can further reduce recurring G&A expenses by a penny per share as compared to our original plan. The updated FFO guidance also reflects the increase in our expectation for same property and OI growth, including redevelopment where the midpoint is now positive 1%. This midpoint assumes a general credit loss of 100 basis points of gross revenues, or approximately $4 million. We have also incorporated tenant-specific reserves for retailers who have filed for bankruptcy. Our guidance incorporates $2 million of potential lost rent for our Bed Bath and Harmon locations. We assume our Bed Bath and Bye Bye Baby stores will stop paying rent at the end of the second quarter. In addition to Bed Bath, Our guidance incorporates $1 million of lost rent for our exposure to Regal Cinema and other smaller tenant bankruptcies. In terms of collections on past amounts deemed uncollectible, our 2023 guidance at the midpoint assumes that we will receive $2 million during the year. We received about $1 million in the first quarter of this year and expect another million dollars for the remainder of the year. Note that collections on past amounts deemed uncollectible during the second and third quarter of 2022 were materially higher, as we benefited from $2.3 million to $2.5 million in those quarters respectively, which will be a headwind for our second and third quarter NOI growth this year. There are no new acquisitions or dispositions or other material capital or early refinancing activity assumed in guidance. In closing, we are grateful for the dedication and execution provided by the UE team again this quarter. I will now turn the call over to the operator for questions.
spk00: Thank you. We will now be conducting 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 the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your headset before pressing the star key. One moment, please, while we pull for questions. And our first question comes from Samir Canal with Evercore ISI.
spk01: Good morning, everyone. Hey, guys. Just curious, on the same store guide that you've provided, to get you to the low end, that 0% for same store, can you maybe provide a little bit more on kind of what's driving that? Even if you sort of incorporate, Mark, kind of your comments about some of the reserves and the bad debt assumption, it's hard to kind of get to that low end. So I'm just trying to Understand I'm not missing anything to get to kind of that flat NOI growth at the low end. Thanks.
spk04: Yeah, well, I think just to start with, the magnitude of those reversals that I mentioned of 2.3 to 2.5, we actually had in the fourth quarter another 1.8 million. So if you think about that on a quarterly basis, that's about a 300 to 350 basis point headwind right there, Samir, And then in terms of what other factors drive that low end, while we highlighted some of the known names of at-risk, Bed Bath and Regal, there are other tenants that are on our watch list that we have built into the low end of the range that get there. I just didn't call them all out. So it's really some more at-risk fallout and the headwinds of prior period collections that get to the low end.
spk01: Got it. And then I guess on this Kingswood, the impairment it took, I mean, what is the NOI drag that's factored into guidance at this point? I know it doesn't impact the guidance for this year or even 25, but just curious what the NOI drag is.
spk04: Yeah, well, the NOI, what I've noted in my comments is we're generating 1.4 million of NOI. This year is our projection, but that compares to about 3.4 million of of interest expense on the debt service. So it's a $2 million cash drag.
spk05: The point on that is whether we get a debt modification or if the lender forecloses on the asset, it should all be accretive to earnings.
spk01: Got it.
spk05: And my last question is... Which is not in our budget or in our three-year plan.
spk01: Right, right. Okay. And then my last question is on the expense recovery ratio. It was up about 200 basis points from what I saw from last quarter. Do you expect recoveries to sort of continue to move up with occupancy moving up, or how should we be thinking about this ratio?
spk04: Yeah, we do, Samir. The first quarter, we did get some benefit from As I said, snow removal was incredibly, you know, reduced this period, but it's a high recovery item anyway. And so when we look at the trajectory, as we look at these rent commencements, kind of commensurate with our S&O pipeline, we do think that the recovery ratio should stay in the range you're seeing and then tick up and even get into the high 80s as we go out to 24 and 25. Thank you. Yep.
spk10: Thank you.
spk00: Our next question comes from Flores Van Dyke with Compass Point.
spk02: Morning, guys. Just following up on Kingswood a little bit. So you took a $34 million impairment. You had mentioned originally you put $25 million of equity into the asset above the value of the mortgage. So essentially you've written it down below the value of the mortgage. It would be positive whether you lose the assets in terms of earnings or whether it gets modified. Can you tell us a little bit about the discussions and the appetite for lenders to take control of assets in this environment?
spk05: Well, because we're sort of in the midst of all this negotiation, it would be premature for us to comment on it at this point. We're optimistic we're going to have a successful outcome here.
spk02: Right. Maybe if I could follow up as well. One of the other things which I noticed was your leasing costs were pretty low for your new leases. Maybe if you can tell – or maybe if – If Jeff can comment on sort of the environment now that the supply and demand is in your favor, are you seeing benefits accrued to lower TIs as well as your ability to drive higher fixed rent bumps?
spk03: Yeah. Hey, good morning, Flores. I mean, yes, we're seeing benefits in both areas. On the cost side first, You know, it's mostly just about we're in now a period more of normalization than escalation, which is a rare thing to be in in the construction cost world. You know, typically we only see a moving in one direction, but right now it's much easier for us to get price certainty because, number one, material costs have leveled off, and number two, supply chain issues have eased. So we are doing better with our negotiations with tenants on allowances, but a lot of the savings are coming from the fact that projects we budgeted you know, a little bit earlier are now coming in less than we expected them to, and we're able to budget more precisely going forward. The second piece of it on increases is something we talk about literally every day around here, and, you know, Scott's sitting next to me, and he knows this story well. We're generally seeing a lot more success than we have in the past. In one particular case with one anchor tenant, we were able to extract 15% increases over five years instead of the normal 10%. And I think us, along with some of our peers, are trying to change the language around increases and make them more consistent with inflation. And the economics and the metrics that are going on right now are helping us do that. Thanks.
spk02: Maybe a last question here for me. You have six Lowe's leases, which... appear to have only 4.8 years of term, and they're really the lowest anchor rents that you have in your portfolio at 9.16. I presume Lowe's has a number of options that extend that, but what kind of increases would those extension options typically have? Or is this an opportunity to get back that space and really drive rents?
spk05: So, Flores, indeed, they do have options. I don't know what the increases are off the top of my head. I presume that they're 10% every five, but we can take it offline and .
spk10: Thanks. That's it for me.
spk09: Our next question comes from Ronald Condon with Morgan Stanley.
spk07: Great. Just a couple of quick ones on the approval for the apartment. Congrats on that. What's the plan there? Is it to bring in a third party to do it in-house? And are there other sort of opportunities to unlock sort of multifamily assets and the rest of the portfolio, given all the land you have?
spk05: Yeah, I mean, I think our decision on whether selling it or putting it in a JV is all dependent upon you know, final pricing and terms we get from the bidders that are underway. And, you know, obviously the benefits of an all-cash deal would allow us to immediately redeploy that capital into income-producing real estate. And a joint venture, it would likely limit our investment either to the land or maybe even less than the land because we could probably take some money out, but it might provide a higher return than selling for cash. So we're evaluating both options. I think by the next call we'll probably have more clarity on it. I can tell you that the buyer pool is large and consists of some of the most reputable multifamily developers in the region because they all share our view that this site is one of the best residential development opportunities in Bergen County. In terms of other properties, I mean, there are many that we're evaluating. It's early stages, but as we look at places like Garfield and Woodbridge and Yonkers and Jersey City and Milburn, we think all have opportunities for residential densification and other types of uses.
spk07: Great. And then my second question was just in the footnote on the supplemental on that. Three and a half
spk04: percent of ABR on cash basis if you talk about sort of how that's trending and is there a potential for those to come off or how do you guys think about that yeah it's been trending down as you would expect I think we were a little over five and six percent last year and it's just a function Ron of those tenants that are on it you continuing to pay you know based on our internal screening criteria and their consistency of them being able to meet current rent payments. So I think the number is going to continue to get smaller by the end of the year, be, you know, 1% or 2%.
spk07: Got it. And then my last one, just sorry to keep hitting on Kingswood, but, you know, it was in the value-add bucket. I clearly understand the cash flow dynamic of it being accretive if you give it back. But has anything changed in terms of the potential – value-add opportunity? Like, has your thinking changed there in terms of what this project could have potentially been, putting sort of the cash flow situation aside, which is just economics?
spk05: Yeah, I mean, we literally closed on this a month before COVID. And because two-thirds of it was office, and we ended up losing our largest office tenant, and we ended up losing a gym, which was New York Sports Club, which also was COVID-related, I think that's what changed. And so now we're looking to potentially restructure the loan, just given where the NOI is relative to the current debt service.
spk07: Got it. That's it for me. Thank you.
spk05: Thank you.
spk00: Excuse me, ladies and gentlemen. If you would like to pose a question, please press star 1. We are closing our question and answer session. Now, I would like to turn the floor back over to Jeff Olson for closing comments. Please go ahead.
spk05: Okay, well, thank you. We all appreciate you being here, and we'll look forward to seeing you at NERID or ICSE. Thank you very much.
spk00: This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
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