Urban Edge Properties Q2 FY2025 Earnings Call

Greetings, and welcome to the Urban Edge Properties Second Quarter 2025 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Areeba Ahmed, Investor Relations Associate.

Good morning, and welcome to Urban Edge Properties Second 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; Heather Ohlberg, 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, and 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 delivered great second quarter results, increasing FFO as adjusted by 12% over last year and 8% year-to-date. Same-property net operating income increased by 7.4% for the quarter and 5.6% year-to-date. The demand for space in our shopping centers remains strong. There are a few high-quality vacancies remaining in our markets, often leading to multiple bids on available space, which is driving upward pressure on rents and lease terms. Our same-property occupancy increased to 96.7%, up 10 basis points from the prior quarter, and our shop occupancy rate increased to a record high of 92.5%, up 270 basis points over the prior year. Given that we are now nearly 97% leased and our properties have undergone significant improvements, including new anchors, parking lots, facades, and roofs, we anticipate a substantial decrease in future capital expenditures. The investment sales market for retail assets is thriving, driven by both public and private buyers. One of our Board members recently described the current shopping center landscape as the 'revenge of the nerds,' highlighting that retail is back in demand driven by solid operating fundamentals, increased debt availability, and increased capital flows. Year-to-date, we have sold $66 million of assets at a blended cap rate of 4.9%. This includes the sale of 2 high-value, lower-growth properties, Kennedy Commons and MacDade Commons for $41 million and the previously announced sale of a 44,000-square-foot building across from Bergen Town Center for $25 million. Looking ahead, based on the strong results we have achieved to date, we increased our 2025 FFO as adjusted guidance by $0.02 per share to a new range of $1.40 to $1.44 per share, reflecting growth of 5% over 2024 at the midpoint. We remain confident in our strategy, which is anchored by 5 key strengths: one, a portfolio concentrated in the densely populated, supply-constrained D.C. to Boston corridor; two, highly visible future net operating income growth, supported by our $24 million signed but not open pipeline, representing 8% of current NOI; three, a $142 million redevelopment pipeline expected to yield a 15% return; four, strategic capital recycling. Since October 2023, we have acquired $552 million of high-quality shopping centers at a 7.2% cap rate and sold $493 million of noncore low-growth assets at a 5.2% cap rate. And five, a resilient balance sheet with $1.5 billion in nonrecourse mortgages and 42 unencumbered properties valued at nearly $2 billion. We only have $139 million or 9% of our total debt maturing through 2026. Our continued momentum and success are driven by our dedicated team. I'm grateful for their passion and commitment to execute our strategic plan while working in such a collaborative manner to achieve outstanding results. I will now turn it over to our Chief Operating Officer, Jeff Mooallem.

Thanks, Jeff, and good morning, everyone. It was another strong quarter for leasing and development as we continue to hit on our goals of increasing occupancy, generating double-digit leasing spreads, completing development projects at or ahead of budgeted timelines, and adding new developments at double-digit returns. Let's get into it. We executed 42 deals totaling 482,000 square feet in the second quarter. This included 27 renewals totaling 394,000 square feet at a 12% spread and 15 new leases totaling 88,000 square feet at a 19% spread. New leasing activity included 2 Boot Barns, Fidelity Investments, Just Salad, and Wonder. With these executions, over 95% of our S&O pipeline is now comprised of national and regional tenants, providing further assurance that our NOI growth is derived from a stronger credit platform than what we used to see in years past. Our same-property leased rate is now 96.7%, reflecting an increase of 10 basis points from last quarter. Leading the way in occupancy, again, was shop leasing, which reached a new record high of 92.5%, a 10 basis point increase from last quarter and a 270 basis point increase from the same period last year. We have an excellent pipeline for the second half of the year as we close in on our goal of exceeding 93% shop occupancy in 2025. Anchor occupancy remained steady, moving from 97.2% to 97.4% despite the bankruptcies of Big Lots and Party City earlier this year. Just as we were expecting those 2 bankruptcies, we were not surprised when At-Home filed last month. We have 2 At-Home stores, both paying single-digit rents, and we expect to get one location back this year. As we've said before, tenant bankruptcies are a reality of this business. And in times like this, we can embrace that reality as an opportunity. Removing dated stores that generate minimal traffic from our centers and replacing them with higher credit and better concept operators has consistently had a positive ripple effect on the rest of the property. On the development front, we continue to progress on multiple projects, delivering spaces and getting stores open. During the quarter, we completed 5 redevelopment projects, enabling new tenant openings at Montehiedra, Marlton, Brick, Walnut Creek, and Huntington. Adding national tenants like Burlington, Cava, First Watch, Starbucks, and Sweetgreen to these properties has strengthened credit and increased traffic. We also activated new projects at Bergen Town Center, where we continue to improve the food options at one of the busiest assets in our portfolio. Tatte Bakery, Capon's Burgers, and Tommy's Tavern will complement 4 other new food concepts we previously announced, giving this newly renovated property one of the best dining lineups in all of Bergen County. With the 5 projects that came off our development pipeline and the 2 new projects added, active redevelopment now totals $142 million and maintains a strong expected return of 15%. With that, I'll hand it over to our CFO, Mark Langer.

Thank you, Jeff, and good morning. We were pleased to deliver another strong quarter, marked by solid earnings performance and continued leasing momentum. FFO as adjusted came in at $0.36 per share and our same-property NOI, including redevelopment, increased 7.4% compared to the second quarter of 2024. The outperformance was driven in part by higher rental revenue from tenant rent commencements, higher net recoveries, and year-end CAM reconciliation billings, of which approximately $0.01 per share is nonrecurring. Same-property NOI growth would have been 5.6%, excluding the $1.2 million of nonrecurring tenant billings, still a very strong result, reflecting growth from our S&O pipeline. FFO as adjusted also benefited from lower recurring G&A expenses. I will comment on our favorable trend on G&A in a moment when I provide an update on guidance. On the financing front, at the end of June, we paid off our $50 million mortgage loan on the Plaza at Woodbridge, which had an effective interest rate of 6.4% and was due to mature in June 2027. The payment was made in part using our line of credit, which has a current interest rate of approximately 5.4%. Our $800 million line now has $90 million drawn. Our balance sheet remains in excellent shape with total liquidity of approximately $800 million, including $118 million in cash. As Jeff highlighted, we have just 9% of our outstanding debt coming due through 2026. Our cash flow has improved steadily as we have added high-quality anchors and strong regional shop tenants to our portfolio. We have carefully managed our debt during our growth cycle the past few years. Our adjusted EBITDA to interest expense has increased to 3.7x, up nearly 30% from 2.9x a year ago. Our net debt to annualized EBITDA was 5.5x in the second quarter, positioning us well to capitalize on future growth opportunities. Looking ahead to the remainder of 2025, we are increasing our FFO as adjusted guidance by $0.02 per share to a new range of $1.40 to $1.44 and projecting same-property NOI growth, including redevelopment, to be in the range of 4.25% to 5%. Our assumptions for uncollectible revenue remain unchanged at 75 to 100 basis points of gross rent and incorporate the expected impact of At-Home. Our $24 million S&O pipeline continues to be a key growth driver with $3.9 million in annualized gross rent already commenced in the second quarter, and we expect to recognize another $1.7 million in new commencements in the remainder of the year, which will predominantly come online in Q4. Based on results year-to-date and our future expectations, we have lowered our recurring G&A forecast for 2025 by $500,000, bringing the midpoint to $35 million, which implies a reduction of 3% from 2024. This is due to a combination of factors, including lower headcount and the expected timing to backfill open positions in addition to other cost-saving measures. In closing, we remain focused on executing our strategic plan, driving leasing and occupancy, delivering new tenant spaces on schedule, and carefully managing expenses. We're confident in our ability to continue delivering sector-leading growth. With that, I'll turn the call over to the operator for questions.

The first question is from Ronald Kamdem from Morgan Stanley.

I have two quick questions. First, can you discuss the record occupancy in the in-line space and how much more potential you see for that occupancy number? Second, how is this affecting your lease contracts or your pricing power in the business?

Jeff, go ahead.

Yes. Yes, listen, we're really happy with where we are on the shop space. I'll take that first. But as I said in my prepared comments, we think we can get to between 93% and 94% shop occupancy, which requires us to get another 50,000, 60,000, 70,000 square feet and also account for some vacates as the year goes on, although we don't expect much of that. The nice thing about the shop occupancy right now is that we do have, as you said, real pricing power. And of course, pricing power today is not just charging a higher rent or asking for better interest rates, but it's on things like exclusive use provisions, radius restrictions, opening dates, landlord contributions, tying things to permitting. We've been able to extract much better terms on all of the shop leasing we've been doing. So there's a little bit of run rate there in terms of occupancy growth and certainly better economic and other terms in the leases. On the anchor side, we have a name circled next to pretty much every anchor vacancy in the portfolio. Some of those deals should happen in the next few weeks to a couple of months, and we'll announce them in Q3. And some of them might take longer. But there's certainly more activity on all of our spaces than we've seen in years past, and we're not really too worried about having a lot of space that's going to be sort of static inherent long-term anchor vacancy. So that's pretty good news as well.

Great. And then my second one, a little bit of a 2-parter, but just you guys have had a lot of success on sort of the capital recycling front. Maybe just talk a little bit about what you're seeing sort of in terms of cap rates and opportunities going forward? And then the second part is the At-Home update was helpful, but any sort of update on Kohl's as well?

Ron, it's Jeff. Let me start with the acquisition market, which has been active over the past few months. In this post-COVID environment, investors have recognized that cash flows in the shopping center sector are stable and there is potential for growth ahead. Additionally, banks have become more involved in the market, demonstrating flexibility compared to CMBS lenders and offering competitive pricing. Currently, we are negotiating a bank loan that features a spread of 135 basis points over treasuries, which would be a historic low for us. This is nonrecourse debt. As financing options improve, there are more buyers willing to pay higher prices, and sellers are adding more products to the market with high price expectations. We are currently assessing numerous deals and intend to explore more dispositions this fall. Our aim is to reinvest that capital into higher-yielding acquisitions with better long-term growth prospects. In the meantime, we still have significant growth potential from our existing assets, including our S&O pipeline, which accounts for 8% of total NOI, likely the highest in the industry, as well as from redevelopment efforts. Regarding pricing, for higher quality assets, cap rates are currently in the 5.5% to 6% range, assuming NOI CAGRs can achieve 3% growth. This implies unleveraged IRRs of 8% to 9% and leveraged IRRs of 10% to 12%. When I consider these figures and look at our stock priced at $20, this suggests a cap rate beginning with a 7. Coupled with our expected NOI growth of at least 4% over the coming years, largely driven by the S&O pipeline, it appears that our stock is relatively undervalued.

Great. And then the update on Kohl's?

Jeff, why don't you take that one?

Yes. I mean, Ron, obviously, Kohl's is on our radar screen. They're on everyone's radar screen. But at this point in the process, and we've met with everybody there, Mark and his team have done a very good job of understanding both their current maturity debt profile and where the stock is trading and interest in the company. You saw it was a meme stock last week and had a really nice spike for a little while. We're really still playing offense when it comes to Kohl's, meaning we are talking to them about locations where they have term that we'd like to get back. And we've approached them about 2 of those locations already and having some conversation, but we're not seeing a great sense of urgency from them to close stores. They've told us that they are 4-wall profitable in almost all of their stores. Obviously, they're keeping an eye on the declining sales environment as are we. But right now, they don't seem to be too concerned that they can't be a profitable ongoing business. And most of their stores in the Northeast, which is where our stores with them are located, are generally amongst their best performers in the portfolio. So what I would say is while we're tracking Kohl's, we don't think of it as a 2025 or even really a 2026 decision we're going to have to make. If we can get some stores back and play offense and re-tenant them, we will. But in the meantime, we're just kind of keeping an eye on it, and we don't think it's imminent.

The next question is from Floris Van Dijkum from Ladenburg Thalmann.

So this accretive recycling has been incredibly profitable for you guys in the past. Are you running out of runway? How much more in terms of volume do you think you can sell? I know you've got some California assets. You got an asset in Missouri and New Hampshire potentially and obviously, some other boxier assets. And would you consider if there is pressure on cap rates in your core markets in New York and in Boston and D.C., maybe expanding your reach going forward?

Yes. Floris, I think everything is on the table, including centers that we own in the New York Metro market, provided pricing is there. There is a price for every asset at which we would be willing to transact. So I don't want to put a number on it, but we absolutely will be testing the market this fall to see what we might be able to achieve just given the demand that's taking place in the market. We would have never anticipated a couple of years ago that we'd be able to buy and sell $0.5 billion of properties at a 200 basis point spread. I would have never said that on an earnings call. But we realized that it really has supercharged this company. And given the size of our company, we are highly focused on trying to make things like that happen going forward.

Maybe a follow-up. I mean, does the improvement in the markets also make you think about your redevelopment plans on some of your existing assets? I'm thinking of assets like Hudson Mall, which as last look is still 75% leased or something like that and make you more confident about deploying capital into assets like that to reposition them?

We do. I mean, that's largely driven by tenant demand, which is also much stronger than it was earlier. So there are many large big box tenants that are underrepresented throughout our markets, including names like Walmart and BJ's and Ross and TJX, all are looking for new space and all are having a hard time finding space, which is putting upward pressure on rents.

The next question is from Michael Griffin from Evercore ISI.

Maybe just first hitting on the balance sheet. Just some commentary around the mortgage loan payoff in the quarter says that it's maturing June of 2027, but you've got a couple more maturities before that. Just I don't know maybe, Langer, if you could comment on that, why pay off that mortgage relative to the stuff that's coming due earlier?

Yes. Sure, Michael. It's actually pretty easy. That was a loan that had no prepayment penalty, and we were able to use our line at 100 basis points lower than that rate. So we took advantage. We've looked at our upcoming maturities, and there was just an opportunity there where it made a lot of sense.

That's helpful. Looking at the leasing environment in the portfolio, you're currently around 97% leased, and the lease to occupied spread is narrowing. Jeff, when you discuss pricing power from a landlord's perspective, is this mainly about your ability to increase base rents or do you feel you have improved negotiating power regarding concessions? I'm trying to understand the landlord-tenant relationship and how you can leverage your high leasing rate to increase revenues.

Jeff, go ahead.

Yes, it's a little of everything, right? Each deal is kind of its own animal in terms of finding the soft spots to push down on. I will tell you that one of the areas that we have had much greater success in the past is on increases. The concept of 10% every 5 years only really happens if it's a national tenant who's absolutely dug in on it and is willing to pay a face rent and agree to capital and other things that they never would have agreed to in the past. But most often, we find that our nationals are willing to negotiate much better increases than before. The other place that it really comes in for us that's very important is in the delivery conditions. In the past, you would always have a situation where the landlord was doing a bunch of work prior to the tenant getting into the space and that required 2 permits and extended time and maybe took another 3, 4 months to get the tenant open for business. Very often now, we're able to say you're taking it as is. Not only does that provide a better economic result for us, but it allows the tenant to get open faster because it's one permitting time. So those are 2 areas that our leasing team has really drilled down on in their negotiations and had really good success in. But they're really pushing on everything else. It's things like exclusives. It's things like not giving too many options, and it's things like co-tenancy requirements. We're trying to just negotiate better terms across the board, economic and noneconomic, and we're having good success.

Just one more point on that issue because I do think there's been a fair amount of discussion on CapEx. And what I'd say is that the last decade of CapEx spending is not representative of future spending. And it's in part because our portfolio is now 97% leased. It's in part because the retail market is much, much stronger, as Jeff just outlined. And it's also in part because by 2027, we will have redeveloped or repositioned about 70% of our portfolio. So we feel that's going to be a great thing going forward for CapEx.

The next question is from Paulina Rojas from Green Street.

My question was actually about CapEx, and you touched on that at the end of the prior question. Thank you for adding that disclosure. It's very helpful. Can you maybe elaborate on the idea of CapEx declining in the future? It seems to me that in general, CapEx has been related to redevelopments, which have in turn been triggered by tenant churn. So given that we know that tenant churn is a constant in the industry, why wouldn't we expect future turnover not just in the short term, but in the next few years, driven by an expected tenant fallout continue to drive CapEx at similar levels, perhaps a little lower. But yes, basically, I'm trying to gain confidence on the very low levels that you are forecasting at the end of that period in your chart.

Paulina, the key point is that we replaced tenants who had struggled for years, such as Toys 'R' Us and Kmart, which barely survived over a long period. We have brought in strong, high-quality credit tenants like ShopRite, TJX, and Ross to take their place. Therefore, we do not anticipate significant dislocation going forward, partly due to the high-quality retailers we have introduced and also because the retail market overall is much healthier than it was a decade ago.

Yes. Additionally, in terms of leasing capital expenditures, we can negotiate more favorable terms and currently have better tenants than in previous years. Regarding other capital expenditures like roof repairs, parking lot fixes, or shopping center renovations, most of the major work has already been completed. As noted by Jeff, we've renovated around 70% of our portfolio. Therefore, we do not anticipate maintaining the same level of ongoing maintenance capital expenditures. Moreover, when it comes to shopping center renovations involving new facades and signs, we believe these efforts will generate a return through higher rents. In all aspects of capital expenditures—whether for essential maintenance, renovation, or leasing—the metrics are significantly improved compared to the past.

And I'll just end, Pauline, for you with some numbers behind that. So our maintenance CapEx, as Jeff was saying, where we've done a lot of this heavy lifting was about $36 million in 2022. We think it's going to be $20 million to $22 million this year and then will gradually decline closer to $15 million as these remaining projects come online. So that shows you by order of magnitude what we're seeing.

The next question is from Ken Billingsley from Compass Point.

I have a question regarding the G&A guidance compared to what was reported in the second quarter. I noticed that you've reduced the G&A expense range to $34 million to $35.5 million. The year-over-year increase was about $11.7 million. Could you explain what's behind that number? Was there a rise in the second quarter that will decrease in the second half, or is there more detail you can provide?

Sure. I think you're looking at the gross versus what we call the net recurring items. So in the quarter, the elevation that you saw was primarily we had $2 million of severance expense and then $1 million of some nonrecurring transaction costs. So when you look at on a recurring run rate basis, which is what we guided on, that's how you get to the lower number.

There are no further questions at this time. I would like to turn the floor back over to Jeff Olson for closing comments.

Great. Thank you for your interest, and we look forward to talking to you on our next call.

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