Urban Edge Properties Q1 FY2025 Earnings Call

Greetings and welcome to the Urban Edge Properties First Quarter 2025 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Areeba Ahmed. Please go ahead.

Good morning and welcome to Urban Edge Properties first quarter 2025 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 Auster, EVP and Head of Leasing; and Andrea Drazin, 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 in which the company does not undertake to update our actual results, financial condition and business may differ. 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 our supplemental disclosure package. At this time, it is my pleasure to introduce our Chairman and Chief Executive Officer, Jeff Olson.

Great. Thank you, Areeba, and good morning everyone. We had a great first quarter, generating results that exceeded our expectations, reporting FFO as adjusted of $0.35 per share, a 6% increase over the first quarter of last year and the highest quarterly earnings result in UE’s 10-year history. Same-property NOI increased 3.8% compared to the first quarter of last year and benefited from rents commenced from our signed but not open pipeline, improved recovery ratios, and better-than-expected collections. Leasing momentum continued at a good pace in the first quarter, with the execution of 42 leases, totaling 434,000 square feet. This included 18 new leases in the quarter, amounting to 118,000 square feet with same-space cash leasing spreads of 34%. Our tenant retention ratio remains high at 95%. Our progress in attracting a desirable mix of shop tenants continued as our shop occupancy grew to a new record of 92.4%. Our leasing pipeline remains strong. Since the tariffs were announced in early April, we have not seen any changes in retailer demand at our properties. However, the investment sales market is showing early signs of slowing down. On the debt side, there has been limited CMBS issuance since April. Life insurance companies and banks are still actively lending on shopping centers, generally with spreads that have increased 10 to 30 basis points. On the equity side, many REITs and foreign investors are pausing. Transactions with private buyers remain active. This is highlighted by our successful $25 million sale of 8 acres of land at Bergen Town Center, which has been approved for 460 residential units. Additionally, we are under contract to sell 2 more properties for $41 million, which will bring our total dispositions to $66 million this year at a 5% weighted average cap rate. We plan to reinvest this capital into accretive acquisitions that will enhance our portfolio quality and growth rate. Now turning to our 2025 outlook, we are reiterating our 2025 full year guidance of achieving FFO as adjusted of $1.37 to $1.42 per share, reflecting growth of 4% at the midpoint. We would have likely increased our guidance by $0.02 a share, if not for the economic volatility in April. While we had a stronger start to the year than we expected, the economic uncertainty has led us to project a more conservative outlook for the back half of the year. We will revisit our assumptions again next quarter to see if an increase in guidance is appropriate. Our five points of differentiation should continue to drive our growth. First, our properties are concentrated in the D.C. to Boston corridor, the most densely populated supply-constrained region of the country. Our average 3-mile population density of approximately 200,000 people is the highest in the sector. Second, our forecasted growth in net operating income is one of the most visible in the sector, rooted in our $25 million signed but not open pipeline, representing 9% of our current net operating income. Third, we have a large redevelopment pipeline, totaling $156 million of projects expected to generate a 14% return. Fourth, we are actively recycling capital by selling some of our non-core lower cap assets and redeploying that capital into accretive acquisitions. Over the past 18 months, we have acquired over $550 million in assets at a 7.2% cap rate and sold approximately $450 million at a 5.2% cap rate. And finally, our balance sheet is conservatively built for market disruption, considering we have no corporate debt other than $50 million currently drawn on our line. We have 31 individual non-recourse mortgages totaling $1.6 billion, isolating market risk to individual assets rather than at the corporate level. Our remaining 43 properties are unencumbered. I will now turn it over to our Chief Operating Officer, Jeff Mooallem.

Thanks, Jeff, and good morning, everyone. We had an excellent first quarter of leasing, signing 42 deals for over 430,000 square feet, 24 renewals at a 6% spread, and 18 new leases at an impressive 34% spread. That spread was driven by deals with best-in-class retailers like Trader Joe’s, Sephora, and Sweet Green providing both economic and merchandising upgrades at our assets. Our same-property lease rate now stands at 96.6%, a 50 basis point decrease over the previous quarter and a 10 basis point decrease over the first quarter of 2024. This occupancy decrease was primarily a result of recapturing anchor spaces from Big Lots, Party City, and buybuy Baby. We had 7 leases with those retailers: 2 were acquired through the bankruptcy process by tenants we wanted in our properties and 5, we took back willingly with better replacements in mind. We are negotiating deals on those 5 spaces at better overall terms with tenants that we think are a better fit for those properties than the prior occupants. We also continue to improve our shop occupancy, which is now up to 92.4%, a 150 basis point increase since the last quarter and a 400 basis point increase over the prior year. Despite a bumpy economy in April, our leasing pipeline remains strong. We still expect to end 2025 with anchor occupancy of at least 97% and shop occupancy between 93% and 94%, with healthy leasing spreads of 20% or more. On the development side, we completed redevelopment projects at Montenegro, Amherst Commons, Bergen Town Center, and Manalapan at an aggregate cost of $22 million. These projects provided not only a healthy return on our investment, but also set us up for future rent growth as tenants like T.J. Maxx, Ross, First Watch, and Nordstrom Rack all bolster the lineup at those properties. We commenced two redevelopment projects in the first quarter, totaling $14 million at Yonkers Gateway Center and at our Target-anchored Kingswood Crossing in Brooklyn. Our total active redevelopment pipeline is now $156 million at an expected 14% return. Jeff already touched on some of the dislocation in the transaction market. So I won’t add much more there other than to say any volatility should give us a chance to transact at more attractive returns. The stability of our portfolio, along with the accretive redevelopment opportunities embedded throughout it allows us to be patient. I will now turn it over to our Chief Financial Officer, Mark Langer.

Thanks, Jeff. Good morning. As you just heard, we had another excellent quarter with strong earnings, continued progress on the leasing front, and good execution on our anchor repositioning projects. FFO as adjusted was $0.35 per share and our same-property NOI, including redevelopment, increased 3.8% compared to the first quarter of 2024. NOI growth was better than expected due in part to higher net recoveries, year-end CAM reconciliation billings, and collections from tenants in bankruptcy that continue to pay rent. FFO as adjusted also benefited from the impact of previous accretive capital recycling and lower recurring G&A. Our balance sheet remains strong, with approximately $800 million of total liquidity, including $98 million in cash. Our debt maturity profile is very manageable, with only 8% of outstanding debt maturing through 2026, comprised of one $24 million mortgage maturing in December of this year and a $116 million in maturities in 2026. Currently, our only variable rate debt pertains to our line of credit. Our net debt to annualized EBITDA now stands at 5.9x. Our balance sheet is well positioned to withstand the economic volatility that has recently emerged and we have significant liquidity to take advantage of opportunities that may arise in the future. Turning to our outlook for 2025, Jeff noted that we are reiterating full year FFO as adjusted guidance of $1.37 to $1.42 and same-property NOI growth, including properties and redevelopment of 3% to 4%. Our assumption for revenue deemed to be uncollectible is unchanged at 75 to 100 basis points of gross rent. As we have previously stated, our $25 million SNO pipeline remains a significant driver of NOI growth, with $4.4 million of annualized gross rent commenced in the first quarter and our expectation to recognize an additional $4.4 million from our SNO pipeline for the remainder of 2025, predominantly weighted to the second half of the year. Our same-property NOI growth was ahead of plan in the first quarter. We have built in more conservative assumptions for the remainder of the year, incorporating a contingency to cover potential volatility and rent collections, tenant fallout, and other income. We have reduced the high-end of our expected recurring G&A expense for 2025 by $500,000 to a new midpoint of $35.8 million, which is comparable to the amount incurred in the prior year. The reduction reflects our continued efforts to carefully manage third-party spending as well as internal costs, including headcount. We are pleased with the efforts our entire team is making to ensure we operate with speed and efficiency. To conclude, our team remains focused on executing our business plan to drive leasing and occupancy and deliver new tenant spaces on time, while carefully managing costs. We have a talented and seasoned team that has successfully navigated a variety of economic cycles. And we are confident that we can continue to drive sector-leading growth in the years ahead. I will now turn the call over to the operator for questions.

Thank you. Your first question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.

Hey. Sorry about that. I guess two quick ones. Just on, I think you guys have clearly had a lot of success sort of capital recycling over the past couple of years here. I am just wondering sort of post-tariff, post the slowing economy, does that create sort of more opportunities on the acquisition side, less opportunities? Just what are you seeing in the market? And any sort of early reads on cap rates?

I mean we are underwriting a handful of deals right now. I still think the bid-ask spread is pretty wide, and it’s probably going to take some time to sort out what true pricing is. So, most sellers today want yesterday’s price. So, we are going to be patient at the moment.

Makes sense. My second question, just on – I think you talked about sort of conservatism in the guidance. Can you just remind us what the bad debt assumption is now versus previous and even more specific, just ones the Kohl’s exposure, maybe give some thoughts on that space, is there opportunities to get that back sooner and so forth, so bad debt and Kohl’s? Thanks.

Great. Let me just start with Kohl’s, because I mean we don’t view Kohl’s as having near-term bankruptcy risk. I mean if you just look at the pricing of their public bonds that come to later this year, they are trading at about par. Many of our stores are the most productive stores in their portfolio, and they have relatively cheap rents at $11 a foot. So, we would love to get back many of those spaces. I doubt we will anytime soon, but the demand is strong for those boxes.

And in terms of bad debt, Ron, we reiterated our guide for bad debt to be 75 basis points to 100 basis points of gross rents. We were about 10 basis points lower than that in Q1. But as you heard us say, we have built in a little bit of additional contingency for the back half of the year. So, that’s where we stand with the reiterated guidance.

There are no further questions. I would like to turn the floor over to Jeff Olson for closing remarks.

Great. Well, we appreciate your interest and look forward to seeing everyone soon. Thank you.

This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.