Urban Edge Properties Q3 FY2024 earnings call

• FFO per share grew 9% in the third quarter and 7% year-to-date, driven by same property net operating income growth and capital recycling.
• Leasing activity was strong with 23 new leases at a same space cash spread of 15%, shop occupancy increased to 90.4%, and $6 million of annualized gross rent commenced in the third quarter.
• Redevelopment program remained a strong driver, with a $159 million redevelopment pipeline expected to generate a 14% return.
• Acquisition market saw increased activity and compressed cap rates, with the company having acquired over $550 million in the past year, 80% of which were off-market deals.

Urban Edge Properties had a strong third quarter with 9% FFO per share growth compared to the third quarter of last year and 7% growth year-to-date. Growth was driven by a 5.1% increase in same property net operating income and accretion from capital recycling activity. Over the past year, the company acquired $552 million of high-quality shopping centers at a 7% cap rate, funded mostly through $425 million of dispositions of non-core and single tenant assets at a 5% cap rate. For example, they acquired The Village at Waugh Chapel for $126 million and sold a freestanding Home Depot in Union, New Jersey for $71 million.

• Increased 2024 FFO as adjusted guidance to $1.32 to $1.35 per share, up $0.03 per share at the midpoint, reflecting 7% expected FFO growth for the year.
• Continues to believe in reaching the high end of the 2025 FFO target of $1.31 to $1.39 per share.
• Updated 2024 same property NOI growth guidance to a midpoint of 5.4%, implying 8.6% growth in the fourth quarter.

• Competition in the acquisition market making it more challenging to acquire targeted properties.
• Potential tenant bankruptcies like Big Lots, which could impact occupancy and rents in the short term but may present longer term opportunities.
• Bad debt risks related to uncollectible rental revenue, which can affect earnings.

Q: Encouraging results. Maybe if you could -- particularly I'm encouraged and Jeff, maybe if you can touch on the shop occupancy and everybody in the sector appears to be setting new records in terms of occupancy levels. Where do you see that popping out? Or do you think, I mean, is it -- some of your peers are getting 95% shop occupancy. Is that feasible in your portfolio in your view?

A: Yes, it's certainly feasible. We've gone up about 500 basis points in this quarter with a goal of getting another 60 basis points to 70 basis points by the end of the year to finish 2024 with 91% shop occupancy. 92% to 93% is realistic, 94% would be nice but we're trying not to manage to the number. If we get to 93% with the quality we've been getting, I'll be very happy.

Q: And maybe another question and this maybe is more in Mark's wheelhouse. You issued some equity during the quarter. As you look at the market, you talked about the fact that cap rates are probably heading lower in your markets. Are you seeing in the investment side greater assets on the market today, maybe portfolios on the market today and how would they be partially funded? It sounds like that you would consider partially funding some of these things with equity as well obviously as incremental asset sales as you've been doing over the last couple of years. Maybe if you can touch on your funding sources and how you look at your equity today relative to asset sales?

A: Yes, we look at a blend. Asset sales, especially at the cap rates that we're commanding is definitely one of the primary targeted sources. And the debt spreads are around 5.5% to 6%. Equity would be earmarked towards growth initiatives like acquisitions. We're definitely on the hunt for more acquisitions, with a number of assets underwriting in the D.C. to Boston corridor, leveraging our local sharpshooter mentality to source deals effectively.

Q: Jeff or Mark, can you provide a bit more color on the space you got back? I think you said from a national tenant. Just trying to I'm sure over time you'll be able to re-tenant that space at a much higher rent. But just how should we think about maybe the drag it can create or maybe even into revenues earnings over the next 12 to 18 months? Just want to make sure I get that right.

A: It's Jeff Mooallem. Yes, we've got some confidentiality provisions in that termination agreement with that tenant. We can't give a whole lot of information about who it was. What we can tell you is they had not started paying rent or open for business yet. We did receive a fee there and expect to have that re-tenanted probably the next couple of quarters. It was not an RCD tenant, so it's a little bit easy to take off the list.

Q: Two quick ones from me. Just on the acquisition and disposition front, just focusing on the disposition side as you sort of look at the portfolio, how much more opportunities is there to sort of sell out of these lower cap rate assets in these [10.31] fashions. Just -- are we through that pool? Is there more to come and so forth?

A: My guess is that in any given year, we're going to be selling a $100 million to $200 million of assets just across the board. We're definitely focused now on these single tenant properties. We own 21 Home Depot, Lowe's, Walmart and Targets, which generate about $33 million a year in total rent. We're hoping to see $100 million to $200 million of dispositions pretty consistently over the next four to five years, redeploying capital into higher quality shopping centers.

Q: And then my second question was just obviously you reiterated the 2025 target at the high end, so kudos to the team to getting there. But how does, what's the assumptions? What's the same store NOI and why assumption that's baked into that that was assumed into that, and how does that compare to the 5% you did this quarter?

A: The NOI growth assumptions embedded will be broken down and guided on like we did this year. You can take our SNO pipeline, roll it in, and healthy numbers like 5% type numbers are certainly achievable, comparable to the 5% we saw this quarter.

Q: You mentioned in your prepared remarks that the market has become more competitive that you have seen cap rates compressed. Can you talk about the magnitude of the compression you have observed? What time period you have in mind when you say they have compressed? And whether you have seen this across format?

A: Cap rates are down 50 basis points to 75 basis points over the last six to nine months. In terms of format, we're seeing more demand from some of the larger centers than in the past, but there's still a spread between buying a center with a grocery store and a couple boxes versus a neighborhood center with only a grocery store. We're focused on acquiring the types of assets where we can get a decent spread relative to our cost of capital and disposition activity.

Q: I know that shopping center construction has been very, very large but we have seen landlords pursue some outparcel development. So like the typical single store would drive through to capitalize on the great demand that we're seeing. So is this something that you can do more aggressively, your portfolio? And it's something that would interest you given the economics behind?

A: Absolutely. We are doing it, with several of those kinds of deals in the pipeline. We have off the top of my head at least five of those in some of our better shopping centers, whether they're ground leases or built to suit for single tenants. The redevelopment pipeline is really generating that 14% return.