UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
|
| | |
x | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2017March 31, 2018
|
| | |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________to__________
Commission File Number: 001-36523 (Urban Edge Properties)
Commission File Number: 331-212951-01333-212951-01 (Urban Edge Properties LP)
URBAN EDGE PROPERTIES
URBAN EDGE PROPERTIES LP
(Exact name of Registrant as specified in its charter)
|
| | |
Maryland (Urban Edge Properties) | | 47-6311266 |
Delaware (Urban Edge Properties LP) | | 36-4791544 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
| | |
888 Seventh Avenue, New York, New York | | 10019 |
(Address of Principal Executive Offices) | | (Zip Code) |
|
| |
Registrant’s telephone number including area code: | (212) 956‑2556 |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Urban Edge Properties YES x NO o Urban Edge Properties LP YES x NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Urban Edge Properties YES x NO o Urban Edge Properties LP YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Urban Edge Properties:
|
| | | | |
Large Accelerated Filer x | Accelerated Filer o | Non-Accelerated Filer o | Smaller Reporting Company o | Emerging Growth Company o |
Urban Edge Properties LP:
|
| | | | |
Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer x | Smaller Reporting Company o | Emerging Growth Company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 139a)13(a) of the Exchange Act.
Urban Edge Properties o Urban Edge Properties LP o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Urban Edge Properties YES o NO x Urban Edge Properties LP YES o NO x
As of July 28, 2017,April 27, 2018, Urban Edge Properties had 107,564,687113,933,724 common shares outstanding.
URBAN EDGE PROPERTIES AND URBAN EDGE PROPERTIES LP
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED MARCH 31, 2018
TABLE OF CONTENTS
|
| | | | |
| | | | |
| | | | |
| | Financial Statements | | |
| | Consolidated Financial Statements of Urban Edge Properties: | | |
| | Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017 (unaudited) | | |
| | Consolidated Statements of Income for the Three Months Ended March 31, 2018 and 2017 (unaudited) | | |
| | Consolidated Statement of Changes in Equity for the Three Months Ended March 31, 2018 (unaudited) | | |
| | Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (unaudited) | | |
| | Consolidated Financial Statements of Urban Edge Properties LP: | | |
| | Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017 (unaudited) | | |
| | Consolidated Statements of Income for the Three Months Ended March 31, 2018 and 2017 (unaudited) | | |
| | Consolidated Statement of Changes in Equity for the Three Months Ended March 31, 2018 (unaudited) | | |
| | Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (unaudited) | | |
| | Urban Edge Properties and Urban Edge Properties LP | | |
| | Notes to Consolidated Financial Statements (unaudited) | | |
Item 2. | | Management’s Discussion and Analysis of Financial Condition and Results of Operations | | |
Item 3. | | Quantitative and Qualitative Disclosures about Market Risk | | |
Item 4. | | Controls and Procedures | | |
| | | | |
| | PART II | | |
| | | | |
Item 1. | | Legal Proceedings | | |
Item 1A. | | Risk Factors | | |
Item 2. | | Unregistered Sales of Equity Securities and Use of Proceeds | | |
Item 3. | | Defaults Upon Senior Securities | | |
Item 4. | | Mine Safety Disclosures | | |
Item 5. | | Other Information | | |
Item 6. | | Exhibits | | |
| | Signatures | | |
| | | | |
EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended June 30, 2017March 31, 2018 of Urban Edge Properties and Urban Edge Properties LP. Unless stated otherwise or the context otherwise requires, references to “UE” and “Urban Edge” mean Urban Edge Properties, a Maryland real estate investment trust (“REIT”), and references to “UELP” and the “Operating Partnership” mean Urban Edge Properties LP, a Delaware limited partnership. References to the “Company,” “we,” “us” and “our” mean collectively UE, UELP and those entities/subsidiaries consolidated by UE.
UELP is the entity through which we conduct substantially all of our business and own, either directly or through subsidiaries, substantially all of our assets. UE is the sole general partner and also a limited partner of UELP. As the sole general partner of UELP, UE has exclusive control of UELP’s day-to-day management.
As of June 30, 2017,March 31, 2018, UE owned an approximate 89.3%89.9% ownership interest in UELP. The remaining approximate 10.7%10.1% interest is owned by limited partners. The other limited partners of UELP are Vornado Realty L.P., members of management, our Board of Trustees, and contributors of property interests acquired. Under the limited partnership agreement of UELP, unitholders may present their common units of UELP for redemption at any time (subject to restrictions agreed upon at the time of issuance of the units that may restrict such right for a period of time). Upon presentation of a common unit for redemption, UELP must redeem the unit for cash equal to the then value of a share of UE’s common shares, as defined by the limited partnership agreement. In lieu of cash redemption by UELP, however, UE may elect to acquire any common units so tendered by issuing common shares of UE in exchange for the common units. If UE so elects, its common shares will be exchanged for common units on a one-for-one basis. This one-for-one exchange ratio is subject to specified adjustments to prevent dilution. UE generally expects that it will elect to issue its common shares in connection with each such presentation for redemption rather than having UELP pay cash. With each such exchange or redemption, UE’s percentage ownership in UELP will increase. In addition, whenever UE issues common shares other than to acquire common units of UELP, UE must contribute any net proceeds it receives to UELP and UELP must issue to UE an equivalent number of common units of UELP. This structure is commonly referred to as an umbrella partnership REIT, or UPREIT.
The Company believes that combining the quarterly reports on Form 10-Q of UE and UELP into this single report provides the following benefits:
enhances investors’ understanding of UE and UELP by enabling investors to view the business as a whole in the same manner as management views and operates the business;
eliminates duplicative disclosure and provides a more streamlined and readable presentation because a substantial portion of the disclosure applies to both UE and UELP; and
creates time and cost efficiencies throughout the preparation of one combined report instead of two separate reports.
The Company believes it is important to understand the few differences between UE and UELP in the context of how UE and UELP operate as a consolidated company. The financial results of UELP are consolidated into the financial statements of UE. UE does not have any other significant assets, liabilities or operations, other than its investment in UELP, nor does it have employees of its own. UELP, not UE, generally executes all significant business relationships other than transactions involving the securities of UE. UELP holds substantially all of the assets of UE. UELP conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for the net proceeds from equity offerings by UE, which are contributed to the capital of UELP in exchange for units of limited partnership in UELP, as applicable, UELP generates all remaining capital required by the Company’s business. These sources may include working capital, net cash provided by operating activities, borrowings under the revolving credit facility,agreement, the issuance of secured and unsecured debt and equity securities and proceeds received from the disposition of certain properties.
Shareholders’ equity, partners’ capital and noncontrolling interests are the main areas of difference between the consolidated financial statements of UE and UELP. The limited partners of UELP are accounted for as partners’ capital in UELP’s financial statements and as noncontrolling interests in UE’s financial statements. The noncontrolling interests in UELP’s financial statements include the interests of unaffiliated partners in consolidated entities. The noncontrolling interests in UE’s financial statements include the same noncontrolling interests at UELP’s level and limited partners of UELP. The differences between shareholders’ equity and partners’ capital result from differences in the equity issued at UE and UELP levels.
To help investors better understand the key differences between UE and UELP, certain information for UE and UELP in this report has been separated, as set forth below: Item 1. Financial Statements (unaudited) which includes specific disclosures for UE and UELP, Note 15,14, Equity and Noncontrolling InterestsInterest and Note 16 thereto, Earnings Per Share and Unit.
This report also includes separate Part I, Item 4. Controls and Procedures sections and separate Exhibits 31 and 32 certifications for each of UE and UELP in order to establish that the requisite certifications have been made and that UE and UELP are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934 and 18 U.S.C. §1350.
URBAN EDGE PROPERTIES AND URBAN EDGE PROPERTIES LP
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED JUNE 30, 2017
TABLE OF CONTENTS
|
| | | | |
| | | | |
| | | | |
| | Financial Statements | | |
| | Consolidated Financial Statements of Urban Edge Properties: | | |
| | Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016 | | |
| | Consolidated Statements of Income for the Three and Six Months Ended June 30, 2017 and 2016 (unaudited) | | |
| | Consolidated Statement of Changes in Equity for the Six Months Ended June 30, 2017 (unaudited) | | |
| | Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 (unaudited) | | |
| | Consolidated Financial Statements of Urban Edge Properties LP: | | |
| | Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016 | | |
| | Consolidated Statements of Income for the Three and Six Months Ended June 30, 2017 and 2016 (unaudited) | | |
| | Consolidated Statement of Changes in Equity for the Six Months Ended June 30, 2017 (unaudited) | | |
| | Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 (unaudited) | | |
| | Urban Edge Properties and Urban Edge Properties LP | | |
| | Notes to Consolidated Financial Statements (unaudited) | | |
Item 2. | | Management’s Discussion and Analysis of Financial Condition and Results of Operations | | |
Item 3. | | Quantitative and Qualitative Disclosures about Market Risk | | |
Item 4. | | Controls and Procedures | | |
| | | | |
| | PART II | | |
| | | | |
Item 1. | | Legal Proceedings | | |
Item 1A. | | Risk Factors | | |
Item 2. | | Unregistered Sales of Equity Securities and Use of Proceeds | | |
Item 3. | | Defaults Upon Senior Securities | | |
Item 4. | | Mine Safety Disclosures | | |
Item 5. | | Other Information | | |
Item 6. | | Exhibits | | |
| | Signatures | | |
| | | | |
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
URBAN EDGE PROPERTIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
| | | June 30, | | December 31, | March 31, | | December 31, |
| 2017 | | 2016 | 2018 | | 2017 |
ASSETS |
| | |
|
| | |
|
Real estate, at cost: | |
| | |
| |
| | |
|
Land | $ | 522,098 |
| | $ | 384,217 |
| $ | 523,798 |
| | $ | 521,669 |
|
Buildings and improvements | 1,992,386 |
| | 1,650,054 |
| 2,005,590 |
| | 2,010,527 |
|
Construction in progress | 123,009 |
| | 99,236 |
| 165,403 |
| | 133,761 |
|
Furniture, fixtures and equipment | 5,591 |
| | 4,993 |
| 5,996 |
| | 5,897 |
|
Total | 2,643,084 |
| | 2,138,500 |
| 2,700,787 |
| | 2,671,854 |
|
Accumulated depreciation and amortization | (568,980 | ) | | (541,077 | ) | (601,729 | ) | | (587,127 | ) |
Real estate, net | 2,074,104 |
| | 1,597,423 |
| 2,099,058 |
| | 2,084,727 |
|
Cash and cash equivalents | 248,407 |
| | 131,654 |
| 462,774 |
| | 490,279 |
|
Restricted cash | 14,422 |
| | 8,532 |
| 10,817 |
| | 10,562 |
|
Tenant and other receivables, net of allowance for doubtful accounts of $2,947 and $2,332, respectively | 13,299 |
| | 9,340 |
| |
Receivable arising from the straight-lining of rents, net of allowance for doubtful accounts of $324 and $261, respectively | 85,737 |
| | 87,695 |
| |
Identified intangible assets, net of accumulated amortization of $26,140 and $22,361, respectively | 94,964 |
| | 30,875 |
| |
Deferred leasing costs, net of accumulated amortization of $14,910 and $13,909, respectively | 19,771 |
| | 19,241 |
| |
Deferred financing costs, net of accumulated amortization of $1,228 and $726, respectively | 3,755 |
| | 1,936 |
| |
Tenant and other receivables, net of allowance for doubtful accounts of $5,854 and $4,937, respectively | | 21,564 |
| | 20,078 |
|
Receivable arising from the straight-lining of rents, net of allowance for doubtful accounts of $528 and $494, respectively | | 85,727 |
| | 85,843 |
|
Identified intangible assets, net of accumulated amortization of $36,629 and $33,827, respectively | | 82,787 |
| | 87,249 |
|
Deferred leasing costs, net of accumulated amortization of $15,390 and $14,796, respectively | | 20,422 |
| | 20,268 |
|
Deferred financing costs, net of accumulated amortization of $1,998 and $1,740, respectively | | 2,985 |
| | 3,243 |
|
Prepaid expenses and other assets | 9,245 |
| | 17,442 |
| 17,244 |
| | 18,559 |
|
Total assets | $ | 2,563,704 |
| | $ | 1,904,138 |
| $ | 2,803,378 |
| | $ | 2,820,808 |
|
| | | | | | |
LIABILITIES AND EQUITY | |
| | |
| |
| | |
|
Liabilities: | | | | | | |
Mortgages payable, net | $ | 1,412,397 |
| | $ | 1,197,513 |
| $ | 1,552,543 |
| | $ | 1,564,542 |
|
Identified intangible liabilities, net of accumulated amortization of $60,937 and $72,528, respectively | 187,223 |
| | 146,991 |
| |
Identified intangible liabilities, net of accumulated amortization of $66,866 and $65,832, respectively | | 176,770 |
| | 180,959 |
|
Accounts payable and accrued expenses | 63,388 |
| | 48,842 |
| 71,061 |
| | 69,595 |
|
Other liabilities | 16,627 |
| | 14,675 |
| 15,574 |
| | 15,171 |
|
Total liabilities | 1,679,635 |
| | 1,408,021 |
| 1,815,948 |
| | 1,830,267 |
|
Commitments and contingencies |
|
| |
|
|
|
| |
|
|
Shareholders’ equity: | | | | | | |
Common shares: $0.01 par value; 500,000,000 shares authorized and 107,564,687 and 99,754,900 shares issued and outstanding, respectively
| 1,075 |
| | 997 |
| |
Common shares: $0.01 par value; 500,000,000 shares authorized and 113,923,724 and 113,827,529 shares issued and outstanding, respectively | | 1,139 |
| | 1,138 |
|
Additional paid-in capital | 683,889 |
| | 488,375 |
| 947,815 |
| | 946,402 |
|
Accumulated deficit | (10,479 | ) | | (29,066 | ) | (61,975 | ) | | (57,621 | ) |
Noncontrolling interests: | | | | | | |
Redeemable noncontrolling interests | 209,202 |
| | 35,451 |
| |
Noncontrolling interest in consolidated subsidiaries | 382 |
| | 360 |
| |
Operating partnership | | 100,036 |
| | 100,218 |
|
Consolidated subsidiaries | | 415 |
| | 404 |
|
Total equity | 884,069 |
| | 496,117 |
| 987,430 |
| | 990,541 |
|
Total liabilities and equity | $ | 2,563,704 |
| | $ | 1,904,138 |
| $ | 2,803,378 |
| | $ | 2,820,808 |
|
See notes to consolidated financial statements (unaudited).
URBAN EDGE PROPERTIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except share and per share amounts)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 |
REVENUE | | | | | | | | | | |
Property rentals | $ | 64,708 |
| | $ | 58,683 |
| | $ | 127,206 |
| | $ | 117,612 |
| $ | 69,722 |
| | $ | 62,498 |
|
Tenant expense reimbursements | 23,881 |
| | 19,879 |
| | 47,652 |
| | 42,386 |
| 28,672 |
| | 23,771 |
|
Management and development fees | | 342 |
| | 479 |
|
Income from acquired leasehold interest | — |
| | — |
| | 39,215 |
| | — |
| — |
| | 39,215 |
|
Management and development fees | 351 |
| | 526 |
| | 830 |
| | 981 |
| |
Other income | 561 |
| | 369 |
| | 662 |
| | 1,546 |
| 317 |
| | 101 |
|
Total revenue | 89,501 |
| | 79,457 |
| | 215,565 |
| | 162,525 |
| 99,053 |
| | 126,064 |
|
EXPENSES | | | | | | | | | | |
Depreciation and amortization | 23,701 |
| | 13,558 |
| | 39,529 |
| | 27,473 |
| 21,270 |
| | 15,828 |
|
Real estate taxes | 14,711 |
| | 12,723 |
| | 28,103 |
| | 25,972 |
| 15,775 |
| | 13,392 |
|
Property operating | 11,088 |
| | 9,840 |
| | 24,456 |
| | 22,699 |
| 16,667 |
| | 13,368 |
|
General and administrative | 7,709 |
| | 7,535 |
| | 15,790 |
| | 14,255 |
| 7,641 |
| | 8,132 |
|
Real estate impairment loss | 303 |
| | — |
| | 3,467 |
| | — |
| |
Casualty and impairment (gain) loss, net | | (1,341 | ) | | 3,164 |
|
Ground rent | 2,436 |
| | 2,483 |
| | 5,106 |
| | 5,021 |
| 2,736 |
| | 2,670 |
|
Transaction costs | 132 |
| | 34 |
| | 183 |
| | 84 |
| |
Provision for doubtful accounts | 906 |
| | 494 |
| | 1,099 |
| | 845 |
| 1,236 |
| | 193 |
|
Total expenses | 60,986 |
| | 46,667 |
| | 117,733 |
| | 96,349 |
| 63,984 |
| | 56,747 |
|
Operating income | 28,515 |
| | 32,790 |
| | 97,832 |
| | 66,176 |
| 35,069 |
| | 69,317 |
|
Gain on sale of real estate | — |
| | 15,618 |
| | — |
| | 15,618 |
| |
Interest income | 336 |
| | 177 |
| | 463 |
| | 344 |
| 1,524 |
| | 127 |
|
Interest and debt expense | (13,627 | ) | | (12,820 | ) | | (26,742 | ) | | (26,249 | ) | (15,644 | ) | | (13,115 | ) |
Loss on extinguishment of debt | — |
| | — |
| | (1,274 | ) | | — |
| |
Gain (loss) on extinguishment of debt | | 2,524 |
| | (1,274 | ) |
Income before income taxes | 15,224 |
| | 35,765 |
| | 70,279 |
| | 55,889 |
| 23,473 |
| | 55,055 |
|
Income tax benefit (expense) | (304 | ) | | 306 |
| | (624 | ) | �� | (30 | ) | |
Income tax expense | | (434 | ) | | (320 | ) |
Net income | 14,920 |
| | 36,071 |
| | 69,655 |
| | 55,859 |
| 23,039 |
| | 54,735 |
|
Less (net income) loss attributable to noncontrolling interests in: | | | | | | | | |
Less net income attributable to noncontrolling interests in: | | | | |
Operating partnership | (1,326 | ) | | (2,201 | ) | | (5,464 | ) | | (3,355 | ) | (2,328 | ) | | (4,138 | ) |
Consolidated subsidiaries | (11 | ) | | (2 | ) | | (22 | ) | | 2 |
| (11 | ) | | (11 | ) |
Net income attributable to common shareholders | $ | 13,583 |
| | $ | 33,868 |
| | $ | 64,169 |
| | $ | 52,506 |
| $ | 20,700 |
| | $ | 50,586 |
|
| | | | | | | | | | |
Earnings per common share - Basic: | $ | 0.13 |
| | $ | 0.34 |
| | $ | 0.63 |
| | $ | 0.53 |
| $ | 0.18 |
| | $ | 0.51 |
|
Earnings per common share - Diluted: | $ | 0.13 |
| | $ | 0.34 |
| | $ | 0.63 |
| | $ | 0.53 |
| $ | 0.18 |
| | $ | 0.50 |
|
Weighted average shares outstanding - Basic | 104,063 |
| | 99,274 |
| | 101,863 |
| | 99,270 |
| 113,677 |
| | 99,639 |
|
Weighted average shares outstanding - Diluted | 104,260 |
| | 99,668 |
| | 111,224 |
| | 99,592 |
| 113,864 |
| | 100,093 |
|
See notes to consolidated financial statements (unaudited).
URBAN EDGE PROPERTIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited)
(In thousands, except share and per share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Shares | | | | | | Noncontrolling Interests (“NCI”) | | |
| Shares | | Amount |
| | Additional Paid-In Capital | | Accumulated Earnings (Deficit) | | Redeemable NCI | | NCI in Consolidated Subsidiaries | | Total Equity |
Balance, December 31, 2016 | 99,754,900 |
| | $ | 997 |
| | $ | 488,375 |
| | $ | (29,066 | ) | | $ | 35,451 |
| | $ | 360 |
| | $ | 496,117 |
|
Net income attributable to common shareholders
| — |
| | — |
| | — |
| | 64,169 |
| | — |
| | — |
| | 64,169 |
|
Net income attributable to noncontrolling interests
| — |
| | — |
| | — |
| | — |
| | 5,464 |
| | 22 |
| | 5,486 |
|
Limited partnership units issued | — |
| | — |
| | — |
| | — |
| | 171,084 |
| | — |
| | 171,084 |
|
Common shares issued
| 7,820,295 |
| | 78 |
| | 193,624 |
| | (186 | ) | | — |
| | — |
| | 193,516 |
|
Share-based awards withheld for taxes
| (10,508 | ) | | — |
| | (287 | ) | | — |
| | — |
| | — |
| | (287 | ) |
Dividends on common shares ($0.44 per share)
| — |
| | — |
| | — |
| | (45,435 | ) | | — |
| | — |
| | (45,435 | ) |
Share-based compensation expense
| — |
| | — |
| | 2,177 |
| | 39 |
| | 1,143 |
| | — |
| | 3,359 |
|
Distributions to redeemable NCI ($0.44 per unit)
| — |
| | — |
| | — |
| | — |
| | (3,940 | ) | | — |
| | (3,940 | ) |
Balance, June 30, 2017 | 107,564,687 |
| | $ | 1,075 |
| | $ | 683,889 |
| | $ | (10,479 | ) | | $ | 209,202 |
| | $ | 382 |
| | $ | 884,069 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Shares | | | | | | Noncontrolling Interests (“NCI”) | | |
| Shares | | Amount |
| | Additional Paid-In Capital | | Accumulated Earnings (Deficit) | | Operating Partnership | | Consolidated Subsidiaries | | Total Equity |
Balance, December 31, 2017 | 113,827,529 |
| | $ | 1,138 |
| | $ | 946,402 |
| | $ | (57,621 | ) | | $ | 100,218 |
| | $ | 404 |
| | $ | 990,541 |
|
Net income attributable to common shareholders
| — |
| | — |
| | — |
| | 20,700 |
| | — |
| | — |
| | 20,700 |
|
Net income attributable to noncontrolling interests
| — |
| | — |
| | — |
| | — |
| | 2,328 |
| | 11 |
| | 2,339 |
|
Limited partnership interests: | | | | | | | | | | | | | |
Units redeemed for common shares | 10,000 |
| | — |
| | 79 |
| | — |
| | — |
| | — |
| | 79 |
|
Reallocation of noncontrolling interests | — |
| | — |
| | 484 |
| | — |
| | (563 | ) | | — |
| | (79 | ) |
Common shares issued
| 102,353 |
| | 1 |
| | 40 |
| | (65 | ) | | — |
| | — |
| | (24 | ) |
Dividends on common shares ($0.22 per share) | — |
| | — |
| | — |
| | (24,997 | ) | | — |
| | — |
| | (24,997 | ) |
Distributions to redeemable NCI ($0.22 per unit) | — |
| | — |
| | — |
| | — |
| | (2,786 | ) | | — |
| | (2,786 | ) |
Share-based compensation expense | — |
| | — |
| | 1,173 |
| | 8 |
| | 839 |
| | — |
| | 2,020 |
|
Share-based awards retained for taxes | (16,158 | ) | | — |
| | (363 | ) | | — |
| | — |
| | — |
| | (363 | ) |
Balance, March 31, 2018 | 113,923,724 |
| | $ | 1,139 |
| | $ | 947,815 |
| | $ | (61,975 | ) | | $ | 100,036 |
| | $ | 415 |
| | $ | 987,430 |
|
See notes to consolidated financial statements (unaudited).
URBAN EDGE PROPERTIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2017 | | 2016 | 2018 | | 2017 |
CASH FLOWS FROM OPERATING ACTIVITIES | |
| | |
| |
| | |
|
Net income | $ | 69,655 |
| | $ | 55,859 |
| $ | 23,039 |
| | $ | 54,735 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| |
| | |
|
Depreciation and amortization | 39,440 |
| | 27,989 |
| 21,430 |
| | 16,160 |
|
Income from acquired leasehold interest | (39,215 | ) | | — |
| — |
| | (39,215 | ) |
Real estate impairment loss | 3,467 |
| | — |
| |
Loss on extinguishment of debt | 1,274 |
| | — |
| |
Casualty and impairment loss | | — |
| | 3,164 |
|
(Gain) loss on extinguishment of debt | | (2,524 | ) | | 1,274 |
|
Amortization of deferred financing costs | 1,451 |
| | 1,382 |
| 722 |
| | 864 |
|
Amortization of below market leases, net | (4,107 | ) | | (3,749 | ) | (2,633 | ) | | (2,036 | ) |
Straight-lining of rent | 520 |
| | (225 | ) | 66 |
| | 144 |
|
Share-based compensation expense | 3,359 |
| | 2,721 |
| 2,020 |
| | 1,484 |
|
Gain on sale of real estate | — |
| | (15,618 | ) | |
Provision for doubtful accounts | 1,099 |
| | 845 |
| 1,236 |
| | 193 |
|
Change in operating assets and liabilities: | |
| | |
| |
| | |
|
Tenant and other receivables | (4,994 | ) | | 1,425 |
| (5,320 | ) | | (2,748 | ) |
Deferred leasing costs | (2,047 | ) | | — |
| (938 | ) | | (669 | ) |
Prepaid and other assets | 1,596 |
| | 1,425 |
| 1,295 |
| | (1,336 | ) |
Accounts payable and accrued expenses | 9,953 |
| | (6,790 | ) | (4,777 | ) | | 3,786 |
|
Other liabilities | 1,847 |
| | 1,454 |
| 385 |
| | 1,426 |
|
Net cash provided by operating activities | 83,298 |
| | 66,718 |
| 34,001 |
| | 37,226 |
|
CASH FLOWS FROM INVESTING ACTIVITIES | |
| | |
| |
| | |
|
Real estate additions | (35,994 | ) | | (27,545 | ) | |
Real estate development and capital improvements | | (29,272 | ) | | (11,151 | ) |
Acquisition of real estate | (211,393 | ) | | — |
| (3,965 | ) | | (36,552 | ) |
Proceeds from sale of operating properties | 4,790 |
| | 19,938 |
| |
Insurance proceeds received | | 1,000 |
| | — |
|
Net cash used in investing activities | (242,597 | ) | | (7,607 | ) | (32,237 | ) | | (47,703 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | |
| |
| | |
|
Debt repayments | (83,845 | ) | | (29,699 | ) | (844 | ) | | (79,428 | ) |
Dividends paid to shareholders | (45,435 | ) | | (39,589 | ) | (24,997 | ) | | (21,869 | ) |
Distributions to redeemable noncontrolling interests | (3,940 | ) | | (2,474 | ) | |
Distributions to noncontrolling interests in operating partnership | | (2,786 | ) | | (1,770 | ) |
Debt issuance costs | (3,567 | ) | | — |
| — |
| | (3,567 | ) |
Taxes withheld for vested restricted shares | (287 | ) | | (33 | ) | (363 | ) | | (260 | ) |
Proceeds from issuance of common shares | 193,516 |
| | 326 |
| |
Payments related to the issuance of common shares | | (24 | ) | | (29 | ) |
Proceeds from borrowings | 225,500 |
| | — |
| — |
| | 100,000 |
|
Net cash provided by (used in) financing activities | 281,942 |
| | (71,469 | ) | |
Net increase (decrease) in cash and cash equivalents and restricted cash | 122,643 |
| | (12,358 | ) | |
Net cash used in financing activities | | (29,014 | ) | | (6,923 | ) |
Net decrease in cash and cash equivalents and restricted cash | | (27,250 | ) | | (17,400 | ) |
Cash and cash equivalents and restricted cash at beginning of period | 140,186 |
| | 178,025 |
| 500,841 |
| | 140,186 |
|
Cash and cash equivalents and restricted cash at end of period | $ | 262,829 |
| | $ | 165,667 |
| $ | 473,591 |
| | $ | 122,786 |
|
See notes to consolidated financial statements (unaudited).
| | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2017 | | 2016 | 2018 | | 2017 |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | | | | |
Cash payments for interest (includes amounts capitalized of $1,946 and $1,631, respectively)
| $ | 26,051 |
| | $ | 25,773 |
| |
Cash payment for interest, includes amounts capitalized of $1,154 and $940, respectively | | $ | 17,253 |
| | $ | 13,119 |
|
Cash payments for income taxes | 1,237 |
| | 1,249 |
| 618 |
| | 22 |
|
NON-CASH INVESTING AND FINANCING ACTIVITIES | | | | | | |
Accrued capital expenditures included in accounts payable and accrued expenses | | 23,074 |
| | 12,270 |
|
Mortgage debt forgiven in foreclosure sale | | 11,537 |
| | — |
|
Write-off of fully depreciated assets | | 689 |
| | — |
|
Acquisition of real estate through issuance of OP units | 171,084 |
| | — |
| — |
| | 48,800 |
|
Acquisition of real estate through assumption of debt | 69,659 |
| | — |
| — |
| | 36,492 |
|
Accrued capital expenditures included in accounts payable and accrued expenses | 13,344 |
| | 10,093 |
| |
Write-off of fully depreciated assets | 910 |
| | 683 |
| |
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | | | | | | |
Cash and cash equivalents at beginning of period | $ | 131,654 |
| | $ | 168,983 |
| $ | 490,279 |
| | $ | 131,654 |
|
Restricted cash at beginning of period | 8,532 |
| | 9,042 |
| 10,562 |
| | 8,532 |
|
Cash and cash equivalents and restricted cash at beginning of period | $ | 140,186 |
| | $ | 178,025 |
| $ | 500,841 |
| | $ | 140,186 |
|
| | | | | | |
Cash and cash equivalents at end of period | $ | 248,407 |
| | $ | 156,672 |
| $ | 462,774 |
| | $ | 110,974 |
|
Restricted cash at end of period | 14,422 |
| | 8,995 |
| 10,817 |
| | 11,812 |
|
Cash and cash equivalents and restricted cash at end of period | $ | 262,829 |
| | $ | 165,667 |
| $ | 473,591 |
| | $ | 122,786 |
|
See notes to consolidated financial statements (unaudited).
URBAN EDGE PROPERTIES LP
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except unit and per unit amounts)
| | | June 30, | | December 31, | March 31, | | December 31, |
| 2017 | | 2016 | 2018 | | 2017 |
ASSETS |
| | |
|
| | |
|
Real estate, at cost: | |
| | |
| |
| | |
|
Land | $ | 522,098 |
| | $ | 384,217 |
| $ | 523,798 |
| | $ | 521,669 |
|
Buildings and improvements | 1,992,386 |
| | 1,650,054 |
| 2,005,590 |
| | 2,010,527 |
|
Construction in progress | 123,009 |
| | 99,236 |
| 165,403 |
| | 133,761 |
|
Furniture, fixtures and equipment | 5,591 |
| | 4,993 |
| 5,996 |
| | 5,897 |
|
Total | 2,643,084 |
| | 2,138,500 |
| 2,700,787 |
| | 2,671,854 |
|
Accumulated depreciation and amortization | (568,980 | ) | | (541,077 | ) | (601,729 | ) | | (587,127 | ) |
Real estate, net | 2,074,104 |
| | 1,597,423 |
| 2,099,058 |
| | 2,084,727 |
|
Cash and cash equivalents | 248,407 |
| | 131,654 |
| 462,774 |
| | 490,279 |
|
Restricted cash | 14,422 |
| | 8,532 |
| 10,817 |
| | 10,562 |
|
Tenant and other receivables, net of allowance for doubtful accounts of $2,947 and $2,332, respectively | 13,299 |
| | 9,340 |
| |
Receivable arising from the straight-lining of rents, net of allowance for doubtful accounts of $324 and $261, respectively | 85,737 |
| | 87,695 |
| |
Identified intangible assets, net of accumulated amortization of $26,140 and $22,361, respectively | 94,964 |
| | 30,875 |
| |
Deferred leasing costs, net of accumulated amortization of $14,910 and $13,909, respectively | 19,771 |
| | 19,241 |
| |
Deferred financing costs, net of accumulated amortization of $1,228 and $726, respectively | 3,755 |
| | 1,936 |
| |
Tenant and other receivables, net of allowance for doubtful accounts of $5,854 and $4,937, respectively | | 21,564 |
| | 20,078 |
|
Receivable arising from the straight-lining of rents, net of allowance for doubtful accounts of $528 and $494, respectively | | 85,727 |
| | 85,843 |
|
Identified intangible assets, net of accumulated amortization of $36,629 and $33,827, respectively | | 82,787 |
| | 87,249 |
|
Deferred leasing costs, net of accumulated amortization of $15,390 and $14,796, respectively | | 20,422 |
| | 20,268 |
|
Deferred financing costs, net of accumulated amortization of $1,998 and $1,740, respectively | | 2,985 |
| | 3,243 |
|
Prepaid expenses and other assets | 9,245 |
| | 17,442 |
| 17,244 |
| | 18,559 |
|
Total assets | $ | 2,563,704 |
| | $ | 1,904,138 |
| $ | 2,803,378 |
| | $ | 2,820,808 |
|
| | | | | | |
LIABILITIES AND EQUITY | |
| | |
| |
| | |
|
Liabilities: | | | | | | |
Mortgages payable, net | $ | 1,412,397 |
| | $ | 1,197,513 |
| $ | 1,552,543 |
| | $ | 1,564,542 |
|
Identified intangible liabilities, net of accumulated amortization of $60,937 and $72,528, respectively | 187,223 |
| | 146,991 |
| |
Identified intangible liabilities, net of accumulated amortization of $66,866 and $65,832, respectively | | 176,770 |
| | 180,959 |
|
Accounts payable and accrued expenses | 63,388 |
| | 48,842 |
| 71,061 |
| | 69,595 |
|
Other liabilities | 16,627 |
| | 14,675 |
| 15,574 |
| | 15,171 |
|
Total liabilities | 1,679,635 |
| | 1,408,021 |
| 1,815,948 |
| | 1,830,267 |
|
Commitments and contingencies |
|
| |
|
|
|
| |
|
|
Equity: | | | | | | |
Partners’ capital: | | | | | | |
General partner: 107,564,687 and 99,754,900 units outstanding, respectively | 684,964 |
| | 489,372 |
| |
Limited partners: 12,830,232 and 6,378,704 units outstanding, respectively | 209,308 |
| | 37,081 |
| |
General partner: 113,923,724 and 113,827,529 units outstanding, respectively | | 948,954 |
| | 947,540 |
|
Limited partners: 12,840,764 and 12,812,954 units outstanding, respectively | | 105,771 |
| | 105,495 |
|
Accumulated deficit | (10,585 | ) | | (30,696 | ) | (67,710 | ) | | (62,898 | ) |
Total partners’ capital | 883,687 |
| | 495,757 |
| 987,015 |
| | 990,137 |
|
Noncontrolling interest in consolidated subsidiaries | 382 |
| | 360 |
| 415 |
| | 404 |
|
Total equity | 884,069 |
| | 496,117 |
| 987,430 |
| | 990,541 |
|
Total liabilities and equity | $ | 2,563,704 |
| | $ | 1,904,138 |
| $ | 2,803,378 |
| | $ | 2,820,808 |
|
See notes to consolidated financial statements (unaudited).
URBAN EDGE PROPERTIES LP
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except unit and per unit amounts)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 |
REVENUE | | | | | | | | | | |
Property rentals | $ | 64,708 |
| | $ | 58,683 |
| | $ | 127,206 |
| | $ | 117,612 |
| $ | 69,722 |
| | $ | 62,498 |
|
Tenant expense reimbursements | 23,881 |
| | 19,879 |
| | 47,652 |
| | 42,386 |
| 28,672 |
| | 23,771 |
|
Management and development fees | | 342 |
| | 479 |
|
Income from acquired leasehold interest | — |
| | — |
| | 39,215 |
| | — |
| — |
| | 39,215 |
|
Management and development fees | 351 |
| | 526 |
| | 830 |
| | 981 |
| |
Other income | 561 |
| | 369 |
| | 662 |
| | 1,546 |
| 317 |
| | 101 |
|
Total revenue | 89,501 |
| | 79,457 |
| | 215,565 |
| | 162,525 |
| 99,053 |
| | 126,064 |
|
EXPENSES | | | | | | | | | | |
Depreciation and amortization | 23,701 |
| | 13,558 |
| | 39,529 |
| | 27,473 |
| 21,270 |
| | 15,828 |
|
Real estate taxes | 14,711 |
| | 12,723 |
| | 28,103 |
| | 25,972 |
| 15,775 |
| | 13,392 |
|
Property operating | 11,088 |
| | 9,840 |
| | 24,456 |
| | 22,699 |
| 16,667 |
| | 13,368 |
|
General and administrative | 7,709 |
| | 7,535 |
| | 15,790 |
| | 14,255 |
| 7,641 |
| | 8,132 |
|
Real estate impairment loss | 303 |
| | — |
| | 3,467 |
| | — |
| |
Casualty and impairment (gain) loss, net | | (1,341 | ) | | 3,164 |
|
Ground rent | 2,436 |
| | 2,483 |
| | 5,106 |
| | 5,021 |
| 2,736 |
| | 2,670 |
|
Transaction costs | 132 |
| | 34 |
| | 183 |
| | 84 |
| |
Provision for doubtful accounts | 906 |
| | 494 |
| | 1,099 |
| | 845 |
| 1,236 |
| | 193 |
|
Total expenses | 60,986 |
| | 46,667 |
| | 117,733 |
| | 96,349 |
| 63,984 |
| | 56,747 |
|
Operating income | 28,515 |
| | 32,790 |
| | 97,832 |
| | 66,176 |
| 35,069 |
| | 69,317 |
|
Gain on sale of real estate | — |
| | 15,618 |
| | — |
| | 15,618 |
| |
Interest income | 336 |
| | 177 |
| | 463 |
| | 344 |
| 1,524 |
| | 127 |
|
Interest and debt expense | (13,627 | ) | | (12,820 | ) | | (26,742 | ) | | (26,249 | ) | (15,644 | ) | | (13,115 | ) |
Loss on extinguishment of debt | — |
| | — |
| | (1,274 | ) | | — |
| |
Gain (loss) on extinguishment of debt | | 2,524 |
| | (1,274 | ) |
Income before income taxes | 15,224 |
| | 35,765 |
| | 70,279 |
| | 55,889 |
| 23,473 |
| | 55,055 |
|
Income tax benefit (expense) | (304 | ) | | 306 |
| | (624 | ) | | (30 | ) | |
Income tax expense | | (434 | ) | | (320 | ) |
Net income | 14,920 |
| | 36,071 |
| | 69,655 |
| | 55,859 |
| 23,039 |
| | 54,735 |
|
Less: (net income) loss attributable to NCI in consolidated subsidiaries | (11 | ) | | (2 | ) | | (22 | ) | | 2 |
| |
Less: (net income) attributable to NCI in consolidated subsidiaries | | (11 | ) | | (11 | ) |
Net income attributable to unitholders | $ | 14,909 |
| | $ | 36,069 |
| | $ | 69,633 |
| | $ | 55,861 |
| $ | 23,028 |
| | $ | 54,724 |
|
| | | | | | | | | | |
Earnings per unit - Basic: | $ | 0.13 |
| | $ | 0.34 |
| | $ | 0.63 |
| | $ | 0.53 |
| $ | 0.18 |
| | $ | 0.51 |
|
Earnings per unit - Diluted: | $ | 0.13 |
| | $ | 0.34 |
| | $ | 0.63 |
| | $ | 0.53 |
| $ | 0.18 |
| | $ | 0.50 |
|
Weighted average units outstanding - Basic | 113,847 |
| | 105,372 |
| | 110,682 |
| | 105,353 |
| 126,123 |
| | 107,483 |
|
Weighted average units outstanding - Diluted | 114,044 |
| | 106,041 |
| | 110,870 |
| | 105,866 |
| 126,582 |
| | 108,254 |
|
See notes to consolidated financial statements (unaudited).
URBAN EDGE PROPERTIES LP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited)
(In thousands, except unit and per unit amounts)
|
| | | | | | | | | | | | | | | | | | | |
| General Partner | | Limited Partners(1) | | Accumulated Earnings (Deficit) | | NCI in Consolidated Subsidiaries | | Total Equity |
Balance, December 31, 2016 | $ | 489,372 |
| | $ | 37,081 |
| | $ | (30,696 | ) | | $ | 360 |
| | $ | 496,117 |
|
Net income attributable to unitholders | — |
| | — |
| | 69,633 |
| | — |
| | 69,633 |
|
Net income attributable to noncontrolling interests | — |
| | — |
| | — |
| | 22 |
| | 22 |
|
Common units issued as a result of common shares issued by Urban Edge | 193,702 |
| | — |
| | (186 | ) | | — |
| | 193,516 |
|
Limited partnership units issued | — |
| | 171,084 |
| | — |
| | — |
| | 171,084 |
|
Distributions to Partners ($0.44 per unit) | — |
| | — |
| | (49,375 | ) | | — |
| | (49,375 | ) |
Share-based compensation expense | 2,177 |
| | 1,143 |
| | 39 |
| | — |
| | 3,359 |
|
Share-based awards withheld for taxes | (287 | ) | | — |
| | — |
| | — |
| | (287 | ) |
Balance, June 30, 2017 | $ | 684,964 |
| | $ | 209,308 |
| | $ | (10,585 | ) | | $ | 382 |
| | $ | 884,069 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| Total Units | | General Partner | | Limited Partners(1) | | Accumulated Earnings (Deficit) | | NCI in Consolidated Subsidiaries | | Total Equity |
Balance, December 31, 2017 | 126,640,483 |
| | $ | 947,540 |
| | $ | 105,495 |
| | $ | (62,898 | ) | | $ | 404 |
| | $ | 990,541 |
|
Net income attributable to unitholders | — |
| | — |
| | — |
| | 23,028 |
| | — |
| | 23,028 |
|
Net income attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | 11 |
| | 11 |
|
Common units issued as a result of common shares issued by Urban Edge | 102,353 |
| | 41 |
| | — |
| | (65 | ) | | — |
| | (24 | ) |
Limited partnership units issued, net | 37,810 |
| | 563 |
| | (563 | ) | | — |
| | — |
| | — |
|
Distributions to Partners ($0.22 per unit) | — |
| | — |
| | — |
| | (27,783 | ) | | — |
| | (27,783 | ) |
Share-based compensation expense | — |
| | 1,173 |
| | 839 |
| | 8 |
| | — |
| | 2,020 |
|
Share-based awards withheld for taxes | (16,158 | ) | | (363 | ) | | — |
| | — |
| | — |
| | (363 | ) |
Balance, March 31, 2018 | 126,764,488 |
| | $ | 948,954 |
| | $ | 105,771 |
| | $ | (67,710 | ) | | $ | 415 |
| | $ | 987,430 |
|
(1) Limited partners have a 10.7%10.1% common limited partnership interest in the Operating Partnership as of June 30, 2017March 31, 2018 in the form of units of interest in the Operating Partnership (“OP Units”) and Long-Term Incentive Plan (“LTIP”) units.
See notes to consolidated financial statements (unaudited).
URBAN EDGE PROPERTIES LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2017 | | 2016 | 2018 | | 2017 |
CASH FLOWS FROM OPERATING ACTIVITIES | |
| | |
| |
| | |
|
Net income | $ | 69,655 |
| | $ | 55,859 |
| $ | 23,039 |
| | $ | 54,735 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
| | |
|
Depreciation and amortization | 39,440 |
| | 27,989 |
| 21,430 |
| | 16,160 |
|
Income from acquired leasehold interest | (39,215 | ) | | — |
| — |
| | (39,215 | ) |
Real estate impairment loss | 3,467 |
| | — |
| |
Loss on extinguishment of debt | 1,274 |
| | — |
| |
Casualty and impairment loss | | — |
| | 3,164 |
|
(Gain) loss on extinguishment of debt | | (2,524 | ) | | 1,274 |
|
Amortization of deferred financing costs | 1,451 |
| | 1,382 |
| 722 |
| | 864 |
|
Amortization of below market leases, net | (4,107 | ) | | (3,749 | ) | (2,633 | ) | | (2,036 | ) |
Straight-lining of rent | 520 |
| | (225 | ) | 66 |
| | 144 |
|
Share-based compensation expense | 3,359 |
| | 2,721 |
| 2,020 |
| | 1,484 |
|
Gain on sale of real estate | — |
| | (15,618 | ) | |
Provision for doubtful accounts | 1,099 |
| | 845 |
| 1,236 |
| | 193 |
|
Change in operating assets and liabilities: | |
| | |
| |
| | |
|
Tenant and other receivables | (4,994 | ) | | 1,425 |
| (5,320 | ) | | (2,748 | ) |
Deferred leasing costs | (2,047 | ) | | — |
| (938 | ) | | (669 | ) |
Prepaid and other assets | 1,596 |
| | 1,425 |
| 1,295 |
| | (1,336 | ) |
Accounts payable and accrued expenses | 9,953 |
| | (6,790 | ) | (4,777 | ) | | 3,786 |
|
Other liabilities | 1,847 |
| | 1,454 |
| 385 |
| | 1,426 |
|
Net cash provided by operating activities | 83,298 |
| | 66,718 |
| 34,001 |
| | 37,226 |
|
CASH FLOWS FROM INVESTING ACTIVITIES | |
| | |
| |
| | |
|
Real estate additions | (35,994 | ) | | (27,545 | ) | |
Real estate development and capital improvements | | (29,272 | ) | | (11,151 | ) |
Acquisition of real estate | (211,393 | ) | | — |
| (3,965 | ) | | (36,552 | ) |
Proceeds from sale of operating properties | 4,790 |
| | 19,938 |
| |
Insurance proceeds received | | 1,000 |
| | — |
|
Net cash used in investing activities | (242,597 | ) | | (7,607 | ) | (32,237 | ) | | (47,703 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | |
| |
| | |
|
Debt repayments | (83,845 | ) | | (29,699 | ) | (844 | ) | | (79,428 | ) |
Distributions to partners | (49,375 | ) | | (42,063 | ) | (27,783 | ) | | (23,639 | ) |
Debt issuance costs | (3,567 | ) | | — |
| — |
| | (3,567 | ) |
Taxes withheld for vested restricted units | (287 | ) | | (33 | ) | (363 | ) | | (260 | ) |
Proceeds from issuance of units | 193,516 |
| | 326 |
| |
Payments related to the issuance of common shares | | (24 | ) | | (29 | ) |
Proceeds from borrowings | 225,500 |
| | — |
| — |
| | 100,000 |
|
Net cash provided by (used in) financing activities | 281,942 |
| | (71,469 | ) | |
Net increase (decrease) in cash and cash equivalents and restricted cash | 122,643 |
| | (12,358 | ) | |
Net cash used in financing activities | | (29,014 | ) | | (6,923 | ) |
Net decrease in cash and cash equivalents and restricted cash | | (27,250 | ) | | (17,400 | ) |
Cash and cash equivalents and restricted cash at beginning of period | 140,186 |
| | 178,025 |
| 500,841 |
| | 140,186 |
|
Cash and cash equivalents and restricted cash at end of period | $ | 262,829 |
| | $ | 165,667 |
| $ | 473,591 |
| | $ | 122,786 |
|
See notes to consolidated financial statements (unaudited).
| | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2017 | | 2016 | 2018 | | 2017 |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | | | | |
Cash payments for interest (includes amounts capitalized of $1,946 and $1,631, respectively)
| $ | 26,051 |
| | $ | 25,773 |
| |
Cash payment for interest, includes amounts capitalized of $1,154 and $940, respectively | | $ | 17,253 |
| | $ | 13,119 |
|
Cash payments for income taxes | 1,237 |
| | 1,249 |
| 618 |
| | 22 |
|
NON-CASH INVESTING AND FINANCING ACTIVITIES | | | | | | |
Accrued capital expenditures included in accounts payable and accrued expenses | | 23,074 |
| | 12,270 |
|
Mortgage debt forgiven in foreclosure sale | | 11,537 |
| | — |
|
Write-off of fully depreciated assets | | 689 |
| | — |
|
Acquisition of real estate through issuance of OP units | 171,084 |
| | — |
| — |
| | 48,800 |
|
Acquisition of real estate through assumption of debt | 69,659 |
| | — |
| — |
| | 36,492 |
|
Accrued capital expenditures included in accounts payable and accrued expenses | 13,344 |
| | 10,093 |
| |
Write-off of fully depreciated assets | 910 |
| | 683 |
| |
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | | | | | | |
Cash and cash equivalents at beginning of period | $ | 131,654 |
| | $ | 168,983 |
| $ | 490,279 |
| | $ | 131,654 |
|
Restricted cash at beginning of period | 8,532 |
| | 9,042 |
| 10,562 |
| | 8,532 |
|
Cash and cash equivalents and restricted cash at beginning of period | $ | 140,186 |
| | $ | 178,025 |
| $ | 500,841 |
| | $ | 140,186 |
|
| | | | | | |
Cash and cash equivalents at end of period | $ | 248,407 |
| | $ | 156,672 |
| $ | 462,774 |
| | $ | 110,974 |
|
Restricted cash at end of period | 14,422 |
| | 8,995 |
| 10,817 |
| | 11,812 |
|
Cash and cash equivalents and restricted cash at end of period | $ | 262,829 |
| | $ | 165,667 |
| $ | 473,591 |
| | $ | 122,786 |
|
See notes to consolidated financial statements (unaudited).
URBAN EDGE PROPERTIES AND URBAN EDGE PROPERTIES LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Urban Edge Properties (“UE”, “Urban Edge” or the “Company”) (NYSE: UE) is a Maryland real estate investment trust that owns, manages, acquires, develops, redevelopsfocused on managing, developing, redeveloping, and operatesacquiring retail real estate in high barrier-to-entry markets.urban communities, primarily in the New York metropolitan area. Urban Edge Properties LP (“UELP” or the “Operating Partnership”) is a Delaware limited partnership formed to serve as the Company’sUE’s majority-owned partnership subsidiary and to own, through affiliates, all of the Company’sour real estate properties and other assets. Unless the context otherwise requires, references to “we”, “us” and “our” refer to Urban Edge Properties and UELP and their consolidated entities/subsidiaries.
The Operating Partnership’s capital includes general and common limited partnership interests in the operating partnership (“OP Units”). As of June 30, 2017,March 31, 2018, Urban Edge owned approximately 89.3%89.9% of the outstanding common OP Units with the remaining limited OP Units held by Vornado Realty L.P., members of management, our Board of Trustees and contributors of property interests acquired. Urban Edge serves as the sole general partner of the Operating Partnership. The third partythird-party unitholders have limited rights over the Operating Partnership such that they do not have characteristics of a controlling financial interest. As such, the Operating Partnership is considered a variable interest entity (“VIE”), and the Company is the primary beneficiary which consolidates it. The Company’s only investment is the Operating Partnership. The VIE’s assets can be used for purposes other than the settlement of the VIE’s obligations and the Company’s partnership interest is considered a majority voting interest.
As of June 30, 2017,March 31, 2018, our portfolio consisted of 8584 shopping centers, four malls and a warehouse park totaling 16.6approximately 16.7 million square feet.
| |
2. | BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION |
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions of Form 10-Q. Certain information and footnote disclosures included in our annual financial statements have been condensed or omitted. In the opinion of management, the consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position of the Company and the Operating Partnership and the results of operations and cash flows for the interim periods presented. Operating results for the three and six months ended June 30, 2017March 31, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017.2018. Accordingly, these consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016,2017, as filed with the Securities Exchange Commission (“SEC”).
The consolidated balance sheets as of June 30, 2017March 31, 2018 and December 31, 20162017 reflect the consolidation of wholly-owned subsidiaries and those entities in which we have a controlling financial interest. The consolidated statements of income for the three and six months ended June 30,March 31, 2018 and 2017 and 2016 include the consolidated accounts of the Company and the Operating Partnership. All intercompany transactions have been eliminated in consolidation.
Our primary business is the ownership, management, redevelopment, development and operation of retail shopping centers.centers and malls. We do not distinguish our primary business or group our operations on a geographical basis for purposes of measuring performance. We reviewThe Company’s chief operating decision maker reviews operating and financial information for each property on an individual basis and therefore, each property represents an individual operating segment. None of our tenants accounted for more than 10% of our revenue or property operating income. We aggregate all of our properties into one reportable segment due to their similarities with regard to the nature and economics of the properties, tenants and operations, as well as long-term average financial performance.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates —The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Literature
In May 2017, the FASB issued an update (“ASU 2017-09”) Scope of Modification Accounting, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification
accounting will not apply if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. ASU 2017-09 is effective for annual periods beginning after December 15, 2017, with early adoption permitted. We expect to adoptadopted the standard beginningon January 1, 2018. Once adopted, if2018, which resulted in no impact. If we encounter a change to the terms or conditions of any of our share-based payment awards we will evaluate the need to apply modification accounting based on the
new guidance. The general treatment for modifications of share-based payment awards is to record the incremental value arising from the change as additional compensation cost.
In February 2017, the FASB issued an updated (“ASU 2017-05”) Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets, to clarify the scope and accounting for derecognition of nonfinancial assets. ASU 2017-05 eliminated the guidance specific to real estate sales and partial sales. ASU 2017-05 defines “in-substance nonfinancial assets” and includes guidance on partial sales of nonfinancial assets. ASU 2017-05 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017, with early adoption permitted. We are evaluatingadopted the standard on January 1, 2018, which resulted in no impact this standard will have onto our consolidated financial statements.
In January 2017, the FASB issued an update (“ASU 2017-01”) Clarifying the Definition of a Business, which changes the definition of a business to exclude acquisitions where substantially all of the fair value of the assets acquired are concentrated in a single identifiable asset or a group of similar identifiable assets. While there are various differences between the accounting for an asset acquisition and a business combination, the largest impact is that transaction costs are capitalized for asset acquisitions rather than expensed when they are considered business combinations. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, with early adoption permitted. We elected to early adopt ASU 2017-01 effective January 1, 2017. The adoption of this standard has resulted in asset acquisition classification for the real estate acquisitions closed in the three and six months ended June 30, 2017, and accordingly, acquisition costs for these acquisitions have been capitalized (refer to Note 4 Acquisitions and Dispositions).
In February 2016, the FASB issued an update (“ASU 2016-02”) Leases, which revises the accounting related to lease accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases with terms greater than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The provisions of ASU 2016-02 are effective for fiscal years beginning after December 15, 2018 and should be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. We expect to adopt the standard beginning January 1, 2019. This standard will impact our consolidated financial statements by the recording of right-of-use assets and lease liabilities on our consolidated balance sheets for operating and finance leases where we are the lessee. We are currently in the process of evaluating the inputs required to calculate the amount that will be recorded on our consolidated balance sheets for these leases. In addition, leases where we are the lessor that meet the criteria of a finance lease will be amortized using the effective interest method with corresponding charges to interest expense and amortization expense. Leases where we are the lessor that meet the criteria of an operating lease will continue to be amortized on a straight-line basis. Lastly,Further, internal leasing department overheadcosts previously capitalized will be expensed within general and administrative expenses. Historical capitalization of internal leasing costs were $0.2 million for each of the three months ended March 31, 2018 and March 31, 2017, respectively. ASU 2016-02 originally stated that companies would be required to bifurcate certain lease revenues between lease and non-lease components, however, the FASB issued an exposure draft in January 2018 (2018 Exposure Draft) which, if adopted as written, would allow lessors a practical expedient by class of underlying assets to account for lease and non-lease components as a single lease component if certain criteria are met. ASU 2016-02 originally required a modified retrospective method of adoption, however, the 2018 Exposure Draft indicates that companies may be permitted to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company will continue to evaluate the impact of this guidance until it becomes effective.
In May 2014, the FASB issued an update (“ASU 2014-09”) Revenue from Contracts with Customersto ASC Topic 606, which supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition. ASU 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. During the year ended December 31, 2016, the FASB issued the following updates to ASC Topic 606 to clarify and/or amend the guidance in ASU 2014-09: (i) ASU 2016-08 Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations, (ii) ASU 2016-10 Identifying Performance Obligations and Licensing, which clarifies guidance related to identifying performance obligations and licensing implementation guidance and (iii) ASU 2016-12 Narrow-Scope Improvements and Practical Expedients, which amends certain aspects of ASU 2014-09. In August 2015, the FASB issued an update (“ASU 2015-09”) Revenue from Contracts with Customers to ASC Topic 606, which defers theWe adopted this standard effective date of ASU 2014-09 for all entities by one year. ASU 2015-09 is effective beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted only for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We have commenced the process of adopting ASU 2014-09 for reporting periods beginning after December 15, 2017January 1, 2018 using the modified retrospective approach including evaluatingwhich requires applying the new standard to all sourcesexisting contracts not yet completed as of the effective date. We have completed our evaluation of the standard’s impact on the Company’s revenue we expect will be impacted by thestreams, specifically management and development fee income. The adoption of ASU 2014-09. We expectthis standard did not have a material impact on our consolidated financial statements but has resulted in additional qualitative disclosures for the impact, if any,three months ended March 31, 2018 and 2017 (refer to be to the presentation of certain lease and non-lease components of revenue from leases (upon the adoption of ASU 2016-02 Leases) and not the total revenue recognized overtime.Note 4 Revenues).
Any other recently issued accounting standards or pronouncements not disclosed above have been excluded as they are not relevant to the Company or the Operating Partnership, or they are not expected to have a material impact on our consolidated financial statements.
We have the following revenue sources and revenue recognition policies. The table below presents our revenues disaggregated by revenue source for the quarters ended March 31, 2018 and 2017, respectively:
|
| | | | | | | | |
| | Three Months Ended March 31, |
(in thousands) | | 2018 | | 2017 |
Property rentals | | $ | 69,722 |
| | $ | 62,498 |
|
Tenant expense reimbursements | | 28,672 |
| | 23,771 |
|
Management and development fees | | 342 |
| | 479 |
|
Income from acquired leasehold interest | | — |
| | 39,215 |
|
Other income | | 317 |
| | 101 |
|
Total Revenue | | $ | 99,053 |
|
| $ | 126,064 |
|
Property Rentals
We generate revenue from minimum lease payments from tenant operating leases. These rents are recognized over the noncancelable terms of the related leases on a straight-line basis which includes the effects of rent steps and rent abatements under the leases in accordance with ASC 840. We satisfy our performance obligations over time, under the noncancelable lease term, commencing when the tenant takes possession of the leased space and the leased space is substantially ready for its intended use. In addition, in circumstances where we provide a lease incentive to tenants, we recognize the incentive as a reduction of rental revenue on a straight-line basis over the remaining term of the lease. The underlying leased asset remains on our consolidated balance sheet and continues to depreciate.
Tenant expense reimbursements
In accordance with ASC 840, revenue arises from tenant leases, which provide for the recovery of all or a portion of the operating expenses, real estate taxes and capital improvements of the respective property. This revenue is accrued in the same periods as the expenses are incurred.
Other Income
Other income is generated in connection with certain services provided to tenants for which we earn a fee. This revenue is recognized as the services are transferred in accordance with ASC 606.
Management and development fees
We generate management and development fee income from contractual property management agreements with third parties. This revenue is recognized as the services are transferred in accordance with ASC 606.
| |
5. | ACQUISITIONS AND DISPOSITIONS |
During the sixthree months ended June 30, 2017,March 31, 2018, we closed on the following acquisitions:
|
| | | | | | | | | | | | | |
Date Purchased | | Property Name | | City | | State | | Square Feet | | Purchase Price(1) |
| | | | | | | | | | (in thousands) |
January 4, 2017 | | Yonkers Gateway Center | | Yonkers | | NY | | — |
| (2) | $ | 51,902 |
|
January 17, 2017 | | Shops at Bruckner | | Bronx | | NY | | 114,000 |
| | 32,269 |
|
February 2, 2017 | | Hudson Mall | | Jersey City | | NJ | | 383,000 |
| | 44,273 |
|
May 24, 2017 | | Yonkers Gateway Center | | Yonkers | | NY | | 437,000 |
| (2) | 101,825 |
|
May 24, 2017 | | The Plaza at Cherry Hill | | Cherry Hill | | NJ | | 413,000 |
| | 53,535 |
|
May 24, 2017 | | Manchester Plaza | | Manchester | | MO | | 131,000 |
| | 20,162 |
|
May 24, 2017 | | Millburn Gateway Center | | Millburn | | NJ | | 102,000 |
| | 45,583 |
|
May 24, 2017 | | 21 E Broad St / One Lincoln Plaza | | Westfield | | NJ | | 22,000 |
| | 10,158 |
|
May 25, 2017 | | The Plaza at Woodbridge | | Woodbridge | | NJ | | 411,000 |
| | 103,962 |
|
| | | | | | | | Total | $ | 463,669 |
|
|
| | | | | | | | | | | | | | |
Date Purchased | | Property Name | | City | | State | | Square Feet | | Purchase Price | |
| | | | | | | | | | (in thousands) | |
January 26, 2018 | | 938 Spring Valley Road | | Maywood | | NJ | | 2,000 |
| | $ | 719 |
| |
February 23, 2018 | | 116 Sunrise Highway | | Freeport | | NY | | 4,750 |
| | 447 |
| |
February 28, 2018 | | 197 West Spring Valley Road | | Maywood | | NJ | | 16,300 |
| | 2,799 |
| |
| | | | | | | | Total | $ | 3,965 |
| (1) |
| |
(1) | Includes $11.3The total purchase prices for the properties acquired in the three months ended March 31, 2018 include $0.1 million of transaction costs incurred since January 1, 2017. |
| |
(2)
| On January 4, 2017, we acquired fee and leasehold interests, includingin relation to the lessor position under an operating lease for the whole property. On May 24, 2017, we purchased the remaining fee and leasehold interests not previously acquired, including the lessee position under the operating lease for the whole property.transactions. |
On January 4, 2017, we acquired fee and leasehold interests in Yonkers Gateway Center for $51.9 million.The properties purchased during the quarter are all adjacent to existing centers owned by the Company. Consideration for this purchasethese purchases consisted of the issuance of $48.8 million in OP units and $2.9 million of cash. The total number of OP units issued was 1.8 million at a value of $27.09 per unit. Transaction costs associated with this acquisition were $0.2 million.
On January 17, 2017, we acquired the leasehold interest in the Shops at Bruckner for $32.3 million, consisting of the assumption of existing debt of $12.6 million and $19.4 million of cash. The property is an 114,000 sf retail center in the Bronx, NY directly across from our 376,000 sf Bruckner Commons shopping center. We own the land under the Shops at Bruckner and had been leasing it to the seller under a ground lease that ran through September 2044. Concurrent with the acquisition, we wrote-off the unamortized intangible liability balance related to the below-market ground lease as well as the existing straight-line receivable balance. As a result, we recognized $39.2 million of income from acquired leasehold interest in the six months ended June 30, 2017. Transaction costs associated with this acquisition were $0.3 million.
On February 2, 2017, we acquired Hudson Mall, a 383,000 sf retail center in Jersey City, NJ adjacent to our existing Hudson Commons shopping center. Consideration for this purchase consisted of the assumption of the existing debt of $23.8 million and $19.9 million of cash. Transaction costs associated with this acquisition were $0.6 million.
On May 24 and 25, 2017, we acquired a portfolio of seven retail assets (the "Portfolio”) comprising 1.5 million sf of gross leasable area, predominantly in the New York City metropolitan area, for $325 million. The Portfolio was privately owned for more than three decades and was 83% leased as of June 30, 2017. Consideration for this purchase consisted of the issuance of $122 million in OP units, the assumption of $33 million of existing mortgage debt, the issuance of $126 million of non-recourse, secured mortgage debt and $44 million of cash. The total number of OP units issued was 4.5 million at a value of $27.02 per unit. Transaction costs associated with this acquisition were $10.2 million.
All acquisitions closed during the six months ended June 30, 2017 were accounted for as asset acquisitions in accordance with ASU 2017-01, adopted January 1, 2017. Accordingly, transaction costs incurred since January 1, 2017 related to these transactions were capitalized as part of the asset’s purchase price. The purchase prices for all acquisitions were allocated to the acquired assets and liabilities based on their relative fair values at date of acquisition.
The aggregate purchase priceprices of the above property acquisitions have been allocated as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Property Name | | Land | | Buildings and improvements | | Identified intangible assets | | Identified intangible liabilities | | Debt premium | | Total purchase price |
(in thousands) | | | | | | | | | | | | |
Yonkers Gateway Center | | $ | 40,699 |
| | $ | — |
| | $ | 25,858 |
| | $ | (14,655 | ) | | $ | — |
| | $ | 51,902 |
|
Shops at Bruckner | | — |
| | 32,979 |
| | 12,029 |
| | (12,709 | ) | | (30 | ) | | 32,269 |
|
Hudson Mall | | 15,824 |
| | 37,593 |
| | 9,930 |
| | (17,344 | ) | | (1,730 | ) | | 44,273 |
|
Yonkers Gateway Center | | 22,642 |
| | 110,635 |
| | 38,162 |
| | (68,694 | ) | | (920 | ) | | 101,825 |
|
The Plaza at Cherry Hill | | 14,602 |
| | 33,666 |
| | 7,800 |
| | (2,533 | ) | | — |
| | 53,535 |
|
Manchester Plaza | | 4,409 |
| | 13,756 |
| | 3,256 |
| | (1,259 | ) | | — |
| | 20,162 |
|
Millburn Gateway Center | | 15,783 |
| | 25,387 |
| | 5,360 |
| | (947 | ) | | — |
| | 45,583 |
|
21 E Broad St / One Lincoln Plaza | | 5,728 |
| | 4,305 |
| | 679 |
| | (554 | ) | | — |
| | 10,158 |
|
The Plaza at Woodbridge | | 21,547 |
| | 75,017 |
| | 11,596 |
| | (4,198 | ) | | — |
| | 103,962 |
|
Total | | $ | 141,234 |
| | $ | 333,338 |
| | $ | 114,670 |
| | $ | (122,893 | ) | | $ | (2,680 | ) | | $ | 463,669 |
|
|
| | | | | | | | | | | | |
Property Name | | Land | | Buildings and improvements | | Total Purchase Price |
(in thousands) | | | | | | |
938 Spring Valley Road | | $ | 519 |
| | $ | 200 |
| | $ | 719 |
|
116 Sunrise Highway | | 151 |
| | 296 |
| | 447 |
|
197 West Spring Valley Road | | 1,768 |
| | 1,031 |
| | 2,799 |
|
Total | | $ | 2,438 |
| | $ | 1,527 |
| | $ | 3,965 |
|
DispositionsReal Estate Held for Sale
On June 30, 2017, we completed the sale ofAt March 31, 2018, our property previouslyin Allentown, PA was classified as held for sale in Eatontown, NJ, for $4.8 million, net of selling costs. Prior to the sale, the book value of this property exceeded its estimated fair value less costs to sell, and as such, an initial impairment charge of $3.2 million was recognized as of March 31, 2017. Our determination of fair value was based on the executed contract of sale with a third-party buyer and our intent to dispose of the third-party buyer.property. The carrying amount of this property is $3.3 million, net of accumulated depreciation of $14.3 million, which is included in prepaid expenses and other assets in our consolidated balance sheets as of March 31, 2018 and December 31, 2017, respectively. We recognized a $0.3 million impairment charge at closing on June 30, 2017, based on the final net sales price.
On June 9, 2016, we completed the sale of a shopping center located in Waterbury, CTthe property on April 26, 2018 for $21.6$54.3 million, resulting in a gainnet of $15.6 million. The sale completed the reverse Section 1031 tax deferred exchange transaction with the acquisition of Cross Bay Commons.
| |
5. | RELATED PARTY TRANSACTIONS |
In connection with the separation, the Company and Vornado Realty Trust (“Vornado”) entered into a transition services agreement under which Vornado provided transition services to the Company including human resources, information technology, risk management, tax services and office space and support. The fees charged to us by Vornado for those transition services approximated the actual cost incurred by Vornado in providing such services. On June 28, 2016, the Company executed an amendment to the transition services agreement, extending Vornado’s provision of information technology, risk management services and the portion of the human resources service related to health and benefits through July 31, 2018, unless terminated earlier. Fees for these services remain the same except that they may be adjusted for inflation. As of June 30, 2017 and December 31, 2016, there were no amounts due to Vornado related to such services.
During the three and six months ended June 30, 2017, there were $0.4 million and $0.9 million, respectively, of costs paid to Vornado included in general and administrative expenses, which consisted of $0.2 million and $0.5 million, respectively, of rent expense for two of our office locations and $0.2 million and $0.4 million, respectively, of transition services fees. For the three and six months ended June 30, 2016, there were $0.5 million and $0.9 million, respectively, of costs paid to Vornado included in general and administrative expenses, which consisted of $0.3 million and $0.5 million, respectively, of rent expense for two of our office locations and $0.2 million and $0.4 million of transition services fees, respectively.
Management and Development Fees
In connection with the separation, the Company and Vornado entered into property management agreements under which the Company provides management, development, leasing and other services to certain properties owned by Vornado and its affiliates, including Interstate Properties (“Interstate”) and Alexander’s, Inc. (NYSE:ALX). Interstate is a general partnership that owns retail properties in which Steven Roth, Chairman of Vornado’s Board and Chief Executive Officer of Vornado, and a member of our Board of Trustees, is the managing general partner. Interstate and its partners beneficially owned an aggregate of approximately 7.1% of the common shares of beneficial interest of Vornado as of December 31, 2016. As of, and for the three and six months
ended June 30, 2017, Vornado owned 32.4% of Alexander’s, Inc. During the three and six months ended June 30, 2017, we recognized management and development fee income of $0.3 million and $0.8 million, respectively, and $0.5 million and $1.0 million for the same periods in 2016. As of June 30, 2017 and December 31, 2016, there were $0.3 million of fees due from Vornado included in tenant and other receivables in our consolidated balance sheets.selling costs.
6. IDENTIFIED INTANGIBLE ASSETS AND LIABILITIES
Our identified intangible assets (acquired in-place and above and below-market leases) and liabilities (acquired below-market leases), net of accumulated amortization were $95.0$82.8 million and $187.2$176.8 million as of June 30, 2017,March 31, 2018, respectively, and $30.9$87.2 million and $147.0$181.0 million as of December 31, 2016,2017, respectively.
Amortization of acquired below-market leases, net of acquired above-market leases resulted in additional rental income of $2.1$2.6 million for the three months ended March 31, 2018 and $4.1$2.0 million and for the three and six months ended June 30, 2017, respectively, and $1.9 million and $3.8 million for the same periodsperiod in 2016.2017.
Amortization of acquired in-place leases and customer relationships resulted in additional depreciation and amortization expense of $2.1 million and $3.1$2.8 million for the three and six months ended June 30, 2017, respectively,March 31, 2018 and $0.4 million and $0.8$0.9 million for the same periodsperiod in 2016.2017.
Certain shopping centers were acquiredare subject to ground leases or ground and building leases. Amortization of these acquired below-market leases resulted in additional rent expense of $0.1 million and $0.5$0.2 million for the three and six months ended June 30, 2017, respectively,March 31, 2018 and $0.2 million and $0.5$0.4 million for the same periodsperiod in 2016.2017.
The following table sets forth the estimated annual amortization expense related to intangible assets and liabilities for the five succeeding years commencing January 1, 2018:2019:
| | (Amounts in thousands) | | Below-Market | | Above-Market | | | | Below-Market | | Below-Market | | Above-Market | | | | Below-Market |
Year | | Operating Lease Income | | Operating Lease Expense | | In-Place Leases | | Ground Leases | | Operating Lease Income | | Operating Lease Expense | | In-Place Leases | | Ground Leases |
2018 | | $ | 12,074 |
| | $ | 1,574 |
| | $ | 11,285 |
| | $ | 972 |
| |
2019 | | 11,620 |
| | 1,294 |
| | 8,592 |
| | 972 |
| | $ | 11,544 |
| | $ | 1,294 |
| | $ | 8,556 |
| | $ | 972 |
|
2020 | | 11,453 |
| | 1,016 |
| | 7,325 |
| | 972 |
| | 11,377 |
| | 1,016 |
| | 7,284 |
| | 972 |
|
2021 | | 11,251 |
| | 803 |
| | 6,013 |
| | 622 |
| | 11,185 |
| | 803 |
| | 5,968 |
| | 622 |
|
2022 | | 10,802 |
| | 426 |
| | 4,224 |
| | 590 |
| | 10,744 |
| | 426 |
| | 4,176 |
| | 590 |
|
2023 | | | 10,482 |
| | 327 |
| | 3,762 |
| | 590 |
|
7. MORTGAGES PAYABLE
The following is a summary of mortgages payable as of June 30, 2017March 31, 2018 and December 31, 2016.2017. |
| | | | | | | | | | | | |
| | | | Interest Rate at | | June 30, | | December 31, |
(Amounts in thousands) | | Maturity | | June 30, 2017 | | 2017 | | 2016 |
Cross-collateralized mortgage loan: | | | | | | |
| | |
|
Fixed Rate | | 9/10/2020 | | 4.38% | | $ | 511,739 |
| | $ | 519,125 |
|
Variable Rate(1) | | 9/10/2020 | | 2.36% | | 38,756 |
| | 38,756 |
|
Total cross collateralized | | | | | | 550,495 |
| | 557,881 |
|
First mortgages secured by: | | | | | | | | |
Englewood(3) | | 10/1/2018 | | 6.22% | | 11,537 |
| | 11,537 |
|
Montehiedra Town Center, Senior Loan(2) | | 7/6/2021 | | 5.33% | | 86,658 |
| | 87,308 |
|
Montehiedra Town Center, Junior Loan(2) | | 7/6/2021 | | 3.00% | | 30,000 |
| | 30,000 |
|
Plaza at Cherry Hill(8)(10) | | 5/24/22 | | 2.82% | | 28,930 |
| | — |
|
Westfield - One Lincoln(8)(10) | | 5/24/22 | | 2.82% | | 4,730 |
| | — |
|
Plaza at Woodbridge(8)(10) | | 5/25/22 | | 2.82% | | 55,340 |
| | — |
|
Bergen Town Center | | 4/8/2023 | | 3.56% | | 300,000 |
| | 300,000 |
|
Shops at Bruckner(6) | | 5/1/2023 | | 3.90% | | 12,443 |
| | — |
|
Hudson Mall(7) | | 12/1/2023 | | 5.07% | | 25,333 |
| | — |
|
Yonkers Gateway Center(9) | | 4/6/2024 | | 4.16% | | 33,967 |
| | — |
|
Las Catalinas | | 8/6/2024 | | 4.43% | | 130,000 |
| | 130,000 |
|
North Bergen (Tonnelle Avenue)(5) | | 4/1/2027 | | 4.18% | | 100,000 |
| | 73,951 |
|
Manchester Plaza(10) | | 6/1/2027 | | 4.32% | | 12,500 |
| | — |
|
Millburn Gateway Center(10) | | 6/1/2027 | | 3.97% | | 24,000 |
| | — |
|
Mount Kisco (Target)(4) | | 11/15/2034 | | 6.40% | | 14,672 |
| | 14,883 |
|
| | Total mortgages payable | | 1,420,605 |
| | 1,205,560 |
|
| | Unamortized debt issuance costs | | (8,208 | ) | | (8,047 | ) |
Total mortgages payable, net of unamortized debt issuance costs
| | $ | 1,412,397 |
| | $ | 1,197,513 |
|
|
| | | | | | | | | | | | |
| | | | Interest Rate at | | March 31, | | December 31, |
(Amounts in thousands) | | Maturity | | March 31, 2018 | | 2018 | | 2017 |
First mortgages secured by: | | | | | | | | |
|
Variable rate | | | | | | | | |
Plaza at Cherry Hill(1) | | 5/24/2022 | | 3.26% | | $ | 28,930 |
| | $ | 28,930 |
|
Westfield - One Lincoln Plaza(1) | | 5/24/2022 | | 3.26% | | 4,730 |
| | 4,730 |
|
Plaza at Woodbridge(1) | | 5/25/2022 | | 3.26% | | 55,340 |
| | 55,340 |
|
Hudson Commons(2) | | 11/15/2024 | | 3.56% | | 29,000 |
| | 29,000 |
|
Watchung(2) | | 11/15/2024 | | 3.56% | | 27,000 |
| | 27,000 |
|
Bronx (1750-1780 Gun Hill Road)(2) | | 12/1/2024 | | 3.56% | | 24,500 |
| | 24,500 |
|
Total variable rate debt | | | | | | 169,500 |
| | 169,500 |
|
Fixed rate | | | | | | | | |
Montehiedra Town Center, Senior Loan | | 7/6/2021 | | 5.33% | | 86,094 |
| | 86,236 |
|
Montehiedra Town Center, Junior Loan | | 7/6/2021 | | 3.00% | | 30,000 |
| | 30,000 |
|
Bergen Town Center | | 4/8/2023 | | 3.56% | | 300,000 |
| | 300,000 |
|
Shops at Bruckner | | 5/1/2023 | | 3.90% | | 12,017 |
| | 12,162 |
|
Hudson Mall(5) | | 12/1/2023 | | 5.07% | | 24,832 |
| | 25,004 |
|
Yonkers Gateway Center(6) | | 4/6/2024 | | 4.16% | | 32,848 |
| | 33,227 |
|
Las Catalinas | | 8/6/2024 | | 4.43% | | 130,000 |
| | 130,000 |
|
Brick | | 12/10/2024 | | 3.87% | | 50,000 |
| | 50,000 |
|
North Plainfield | | 12/10/2025 | | 3.99% | | 25,100 |
| | 25,100 |
|
Middletown | | 12/1/2026 | | 3.78% | | 31,400 |
| | 31,400 |
|
Rockaway | | 12/1/2026 | | 3.78% | | 27,800 |
| | 27,800 |
|
East Hanover (200 - 240 Route 10 West)
| | 12/10/2026 | | 4.03% | | 63,000 |
| | 63,000 |
|
North Bergen (Tonnelle Ave)(4) | | 4/1/2027 | | 4.18% | | 100,000 |
| | 100,000 |
|
Manchester Plaza | | 6/1/2027 | | 4.32% | | 12,500 |
| | 12,500 |
|
Millburn | | 6/1/2027 | | 3.97% | | 24,000 |
| | 24,000 |
|
Totowa | | 12/1/2027 | | 4.33% | | 50,800 |
| | 50,800 |
|
Woodbridge Commons
| | 12/1/2027 | | 4.36% | | 22,100 |
| | 22,100 |
|
East Brunswick | | 12/6/2027 | | 4.38% | | 63,000 |
| | 63,000 |
|
East Rutherford | | 1/6/2028 | | 4.49% | | 23,000 |
| | 23,000 |
|
Hackensack | | 3/1/2028 | | 4.36% | | 66,400 |
| | 66,400 |
|
Marlton | | 12/1/2028 | | 3.86% | | 37,400 |
| | 37,400 |
|
East Hanover Warehouses | | 12/1/2028 | | 4.09% | | 40,700 |
| | 40,700 |
|
Union (2445 Springfield Ave) | | 12/10/2028 | | 4.01% | | 45,600 |
| | 45,600 |
|
Freeport (437 East Sunrise Highway)
| | 12/10/2029 | | 4.07% | | 43,100 |
| | 43,100 |
|
Garfield | | 12/1/2030 | | 4.14% | | 40,300 |
| | 40,300 |
|
Mt Kisco -Target(3) | | 11/15/2034 | | 6.40% | | 14,338 |
| | 14,451 |
|
Englewood(7) | | — | | —% | | — |
| | 11,537 |
|
Total fixed rate debt | | | | | | 1,396,329 |
| | 1,408,817 |
|
| | Total mortgages payable | | 1,565,829 |
| | 1,578,317 |
|
| | Unamortized debt issuance costs | | (13,286 | ) | | (13,775 | ) |
Total mortgages payable, net of unamortized debt issuance costs
| | $ | 1,552,543 |
| | $ | 1,564,542 |
|
| |
(1) | Subject to a LIBOR floor of 1.00%, bearsBears interest at one month LIBOR plus 136160 bps. |
| |
(2) | As part of the planned redevelopment of Montehiedra Town Center, we committed to fund $20.0 million for leasing and capital expenditures of which $19.3 million has been funded as of June 30, 2017.Bears interest at one month LIBOR plus 190 bps. |
| |
(3) | On March 30, 2015, we notified the lender that due to tenants vacating, the property’s operating cash flow would be insufficient to pay its debt service. As of June 30, 2017, we were in default and the property was transferred to receivership. Urban Edge no longer manages the property but will remain its title owner until the receiver disposes of the property. We have determined this property is held in a VIE for which we are the primary beneficiary. Accordingly, as of June 30, 2017, we consolidated Englewood and its operations. The consolidated balance sheet included total assets and liabilities of $12.4 million and $14.5 million, respectively. |
| |
(4)
| The mortgage payable balance on the loan secured by Mount Kisco (Target) includes $1.1$1.0 million of unamortized debt discount as of June 30, 2017both March 31, 2018 and December 31, 2016.2017, respectively. The effective interest rate including amortization of the debt discount is 7.34%7.28% as of June 30, 2017.March 31, 2018. |
| |
(5)(4)
| On March 29, 2017, we refinanced the $74 million, 4.59% mortgage loan secured by our Tonnelle Commons property in North Bergen, NJ, increasing the principal balance to $100 million at 4.18% with a 10-year fixed rate mortgage.mortgage, at 4.18%. As a result, we recognized a loss on extinguishment of debt of $1.3 million during the sixthree months ended June 30,March 31, 2017 comprised of a $1.2$1.1 million prepayment penalty and write-off of $0.1$0.2 million of unamortized deferred financing fees on the original loan. |
| |
(6)(5)
| On January 17, 2017, we assumed the existing mortgage secured by the Shops at Bruckner in connection with our acquisition of the property’s leasehold interest. |
| |
(7)
| On February 2, 2017, we assumed the existing mortgage secured by Hudson Mall in connection with our acquisition of the property. The mortgage payable balance on the loan secured by Hudson Mall includes $1.6$1.4 million and $1.5 million of unamortized debt premium as of June 30, 2017.March 31, 2018 and December 31, 2017, respectively. The effective interest rate including amortization of the debt premium is 3.11% 3.76%as of June 30, 2017.March 31, 2018. |
| |
(8)(6)
| Bears interest at one month LIBOR plus 160 bps. |
| |
(9)
| Reflects the $33 million existing mortgage assumed in connection with the acquisition of Yonkers Gateway Center on May 24, 2017. The mortgage payable balance on the loan secured by Yonkers Gateway Center includes $0.9$0.8 million of unamortized debt premium as of June 30, 2017.both March 31, 2018 and December 31, 2017, respectively. The effective interest rate including amortization of the debt premium is 0.8% 3.67%as of June 30, 2017.March 31, 2018. |
| |
(10)(7)
| ReflectsOn January 31, 2018, our property in Englewood, NJ was sold at a portionforeclosure sale and on February 23, 2018, the court order was received approving the sale and discharging the receiver of all assets and liabilities related to the $126 million non-recourse, secured debt issued to fund the Portfolio acquisition closed on May 24 and 25, 2017. Refer to Note 4 Acquisitions and Dispositions for further information.property. |
During 2017, our property in Englewood, NJ was transferred to a receiver. On January 31, 2018, our property in Englewood, NJ was sold at a foreclosure sale and on February 23, 2018, the court order was received approving the sale and discharging the receiver of all assets and liabilities related to the property. We recognized a gain on extinguishment of debt of $2.5 million as a result of the forgiveness of outstanding mortgage debt of $11.5 million, which is included in gain (loss) on extinguishment of debt in the consolidated statements of income for the three months ended March 31, 2018.
The net carrying amount of real estate collateralizing the above indebtedness amounted to approximately $1.3$1.2 billion as of June 30, 2017.March 31, 2018. Our mortgage loans contain covenants that limit our ability to incur additional indebtedness on these properties and in certain circumstances require lender approval of tenant leases and/or yield maintenance upon repayment prior to maturity. As of June 30, 2017,March 31, 2018, we were in compliance with all debt covenants.
As of June 30, 2017,March 31, 2018, the principal repayments for the next five years and thereafter are as follows:
| | (Amounts in thousands) | | | | |
Year Ending December 31, | | | | |
2017(1) | | $ | 9,647 |
| |
2018 | | 29,761 |
| |
2018(1) | | | $ | 2,441 |
|
2019 | | 20,397 |
| | 4,244 |
|
2020 | | 517,327 |
| | 7,571 |
|
2021 | | 123,003 |
| | 124,448 |
|
2022 | | 96,748 |
| | 100,899 |
|
2023 | | | 344,426 |
|
Thereafter | | 623,722 |
| | 981,800 |
|
(1) Remainder of 2017.2018.
On January 15, 2015, we entered into a $500 million Revolving Credit Agreement (the “Agreement”) with certain financial institutions. On March 7, 2017, we amended and extended the Agreement. The amendment increased the credit facility size by $100 million to $600 million and extended the maturity date to March 7, 2021 with two six-month extension options. Borrowings under the Agreement are subject to interest at LIBOR plus 1.15%1.10% to 1.55% and we are required to pay an annual facility fee of 2015 to 35 basis points which is expensed within interest and debt expense as incurred.points. Both the spread over LIBOR and the facility fee are based on our current leverage ratio and are subject to increase if our leverage ratio increases above predefined thresholds. The Agreement contains customary financial covenants including a maximum leverage ratio of 60% and a minimum fixed charge coverage ratio of 1.5x. No amounts have been drawn to date under the Agreement. Financing fees associated with the Agreement of $3.8$3.0 million and $1.9$3.2 million as of June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively, are included in deferred financing fees in the consolidated balance sheets.
The Company has elected to qualify as a REIT under sections 856-860 of the Internal Revenue Code of 1986, as amended, commencing with the filing of our tax return for the 2015 fiscal year. Under those sections, a REIT that distributes at least 90% of its REIT taxable income as a dividend to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. As a REIT, we generally will not be subject to federal income taxes, provided that we distribute 100% of taxable income. It is our intention to adhere to the organizational and operational requirements to maintain our REIT status. If we fail to qualify as a REIT for any taxable year, we will be subject to federal income taxes at regular corporate rates (including any alternative minimum tax) and may not be able to qualify as a REIT for the four subsequent taxable years.
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was signed into law. The Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. Effective January 1, 2018, for businesses, the Act reduces the corporate tax rate from a maximum of 35% to a flat 21% rate. Since UE has elected to qualify as a REIT under sections 856-860 of the Internal Revenue Code with intent to distribute 100% of its taxable income and did not have any activities in a Taxable REIT Subsidiary (“TRS”) prior to January 1, 2018, there was no impact to the Company’s financial statements.
On December 31, 2017, the Company elected, for tax purposes, to treat the wholly-owned limited partnership that holds its Allentown property as a taxable REIT subsidiary (“TRS”). A TRS is a corporation, other than a REIT, in which we directly or indirectly hold stock, which has made a joint election with us to be treated as a TRS under Section 856(l) of the Code. A TRS is required to pay regular U.S. federal income tax, and state and local income tax where applicable, as a non-REIT “C” corporation. The Company’s consolidated financial statements for the quarter ended March 31, 2018 reflect the TRS’ federal and state corporate income taxes associated with the operating activities at its Allentown property. The tax expense recorded in association with the operating activities of Allentown was $0.2 million for the quarter ended March 31, 2018.
The REIT and the other minority members are partners in the Operating Partnership. As such, the partners are required to report their share of taxable income on their tax returns. We are also subject to certain other taxes, including state and local taxes and franchise taxes which are included in general and administrative expenses in the consolidated statements of income.
Our two Puerto Rico malls are subject to a 29% non-resident withholding tax which is included in income tax expense in the consolidated statements of income. The Puerto Rico tax expense recorded was $0.6$0.2 million and $30.0 thousand for the six months ended June 30, 2017 and 2016, respectively, and $0.3 million for the quarterquarters ended June 30, 2017. There was a $0.3 million income tax benefit recorded for the quarter ended June 30, 2016.March 31, 2018 and 2017, respectively. Both properties are held in a special partnership for Puerto Rico tax reporting (the general partner being a qualified REIT subsidiary or “QRS”).
9. FAIR VALUE MEASUREMENTS
ASC 820, Fair Value Measurement and Disclosures defines fair value and establishes a framework for measuring fair value. The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 - quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 - observable prices based on inputs not quoted in active markets, but corroborated by market data; and Level 3 - unobservable inputs used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in our assessment of fair value.
Financial Assets and Liabilities Measured at Fair Value on a Recurring or Non-Recurring Basis
There were no financial assets or liabilities measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016.
Financial Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
There were no financial assets or liabilities measured at fair value on a non-recurring basis as of June 30, 2017March 31, 2018 and December 31, 2016.2017.
Financial Assets and Liabilities not Measured at Fair Value
Financial assets and liabilities that are not measured at fair value on the consolidated balance sheets include cash and cash equivalents and mortgages payable. Cash and cash equivalents are carried at cost, which approximates fair value. The fair value of mortgages payable is calculated by discounting the future contractual cash flows of these instruments using current risk-adjusted rates available to borrowers with similar credit ratings, which are provided by a third-party specialist. The fair value of cash and cash equivalents is classified as Level 1 and the fair value of mortgages payable is classified as Level 2. The table below summarizes the carrying amounts and fair value of these financial instruments as of June 30, 2017March 31, 2018 and December 31, 2016.2017.
| | | | As of June 30, 2017 | | As of December 31, 2016 | | As of March 31, 2018 | | As of December 31, 2017 |
(Amounts in thousands) | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Assets: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Cash and cash equivalents | | $ | 248,407 |
| | $ | 248,407 |
| | $ | 131,654 |
| | $ | 131,654 |
| | $ | 462,774 |
| | $ | 462,774 |
| | $ | 490,279 |
| | $ | 490,279 |
|
Liabilities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Mortgages payable(1) | | $ | 1,420,605 |
| | $ | 1,443,347 |
| | $ | 1,205,560 |
| | $ | 1,216,989 |
| | $ | 1,565,829 |
| | $ | 1,537,971 |
| | $ | 1,578,317 |
| | $ | 1,579,839 |
|
(1) Carrying amounts exclude unamortized debt issuance costs of $8.2$13.3 million and $8.0$13.8 million as of June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.
The following interest ratesmarket spreads were used by the Company to estimate the fair value of mortgages payable:
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
| Low | | High | | Low | | High |
Mortgages payable | 1.8% | | 2.2% | | 2.0% | | 2.3% |
|
| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
| Low | | High | | Low | | High |
Mortgages payable | 1.7% | | 2.1% | | 1.7% | | 2.1% |
10. COMMITMENTS AND CONTINGENCIES
There are various legal actions against us in the ordinary course of business. In our opinion, after consultation with legal counsel, the outcome of such matters will not have a material adverse effect on our financial condition, results of operations or cash flows.
Loan Commitments: In January 2015, we completed the modification of the $120.0 million, 6.04% mortgage loan secured by Montehiedra Town Center. As part of the planned redevelopment of the property, we committed to fund $20.0 million for leasing and building capital expenditures of which $19.3 million has been funded as of June 30, 2017.Redevelopment
Redevelopment: As of June 30, 2017,March 31, 2018, we had approximately $173.7$205.9 million of active development, redevelopment and anchor repositioning projects underway of which $94.0$100.3 million remains to be funded. Based on current plans and estimates we anticipate the remaining amounts will be expended over the next two years.
Insurance
We maintainThe Company maintains (i) general liability insurance with limits of $200 million for properties in the U.S. and Puerto Rico and (ii) all-risk property and rental value insurance coverage with limits of $500 million per occurrence and in the aggregate for properties in the U.S. and $139 million for properties in Puerto Rico, withsubject to the terms, conditions, exclusions, deductibles and sub-limits when applicable for certain perils such as floods and earthquakes on each of our properties. Ourand (iii) numerous other insurance policies including trustees’ and officers’ insurance, workers’ compensation and automobile-related liabilities insurance. The Company’s insurance includes coverage for certified acts of terrorism acts but excludes coverage for nuclear, biological, chemical or radiological terrorism events as defined by the Terrorism Risk Insurance Program Reauthorization Act, which expires in December 2020. In addition, we maintainthe Company maintains coverage for certain cybersecurity losses with limits of $5 million per occurrence and in the aggregate providing first and third partythird-party coverage including network interruption, event management, cyber extortion and claims for media content, security and privacy liability. Insurance premiums are typically charged directly to each of the retail properties and warehouses. We will bewarehouses but not all of the cost of such premiums are recovered. The Company is responsible for deductibles, and losses in excess of insurance coverage, and the portion of premiums not covered from retail properties, which could be material.
We continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism. However, we cannot anticipate what coverage will be available on commercially reasonable terms in the future.future and expect premiums across most property coverage lines to increase in light of recent events. The incurrence of uninsured losses, costs or uncovered premiums could materially and adversely affect our business, results of operations and financial condition.
Our mortgageCertain of our loans are non-recourse and other agreements contain customary covenants requiring adequatethe maintenance of insurance coverage. Although we believe that we currently have adequate insurance coverage for purposes of these agreements, we may not be able to obtain an equivalent amount of coverage at reasonable costs in the future. If lenders or other counterparties insist on greater coverage than we are able to obtain, itsuch requirement could materially and adversely affect our ability to finance our properties and expand our portfolio.
Hurricane-Related Charges
On September 20, 2017, Hurricane Maria made landfall, damaging our two properties in Puerto Rico. During the three months ended March 31, 2018, the Company received $1.5 million in insurance proceeds which were partially offset by $0.2 million of hurricane related costs, resulting in net casualty gains of $1.3 million included in casualty and impairment (gain) loss, net on the accompanying consolidated statements of income.
During the three months ended March 31, 2018, the Company recognized $0.8 million of business interruption losses. Losses of $0.6 million pertained to rent abatements due to tenants that have not reopened since the hurricane, recorded as a reduction of property rentals and tenant expense reimbursements, and $0.2 million was recorded as a provision for doubtful accounts for unpaid rents. As of May 2, 2018, approximately 95% of all stores previously occupied prior to the hurricane (as measured by GLA) are open, including Marshalls, which opened on April 12, 2018.
To the extent future insurance proceeds exceed the difference between the hurricane related expenses incurred and/or business interruption losses recognized, the excess will be reflected as a gain in the period those amounts are received or when receipt is deemed probable.
No determination has been made as to the total amount or timing of insurance payments that may be received as a result of the hurricane.
Environmental Matters
Each of our properties has been subjected to varying degrees of environmental assessment at various times. Based on these assessments and the projected remediation costs, we have accrued costs of $1.4$1.5 million and $1.2 million on our consolidated balance sheets as of March 31, 2018 and December 31, 2017, respectively, for potential remediation costs for environmental contamination at twocertain properties. While this accrual reflects our best estimates of the potential costs of remediation at these
properties, $0.1$0.3 million has currently been expendedaccrued during the quarter ended March 31, 2018 and there can be no assurance that the actual costs will not exceed this amount. With respect to our other properties, the environmental assessments did not reveal any material environmental contamination. However, there can be no assurance that the identification of new areas of contamination, changes in the extent or known scope of contamination, the discovery of additional sites, or changes in cleanup requirements would not result in significant costs to us.
11. PREPAID EXPENSES AND OTHER ASSETS
The following is a summary of the composition of the prepaid expenses and other assets in the consolidated balance sheets:
| | | Balance at | Balance at |
(Amounts in thousands) | June 30, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
Real estate held for sale | | $ | 3,285 |
| | $ | 3,285 |
|
Other assets | $ | 2,301 |
| | $ | 2,161 |
| 3,801 |
| | 3,771 |
|
Deposits for acquisitions | — |
| | 6,600 |
| 100 |
| | 406 |
|
Prepaid expenses: | | | | | | |
Real estate taxes | 3,822 |
| | 5,198 |
| 5,088 |
| | 7,094 |
|
Insurance | 1,622 |
| | 2,545 |
| 3,342 |
| | 2,793 |
|
Rent, licenses/fees | 1,500 |
| | 938 |
| 1,628 |
| | 1,210 |
|
Total Prepaid expenses and other assets | $ | 9,245 |
| | $ | 17,442 |
| $ | 17,244 |
| | $ | 18,559 |
|
12. OTHER LIABILITIES
The following is a summary of the composition of other liabilities in the consolidated balance sheets:
| | | Balance at | Balance at |
(Amounts in thousands) | June 30, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
Deferred ground rent expense | $ | 6,392 |
| | $ | 6,284 |
| $ | 6,517 |
| | $ | 6,499 |
|
Deferred tax liability, net | 3,859 |
| | 3,802 |
| 3,073 |
| | 2,828 |
|
Deferred tenant revenue | 4,743 |
| | 3,280 |
| 3,996 |
| | 4,183 |
|
Environmental remediation costs | 1,232 |
| | 1,309 |
| 1,482 |
| | 1,232 |
|
Other liabilities | 401 |
| | — |
| 506 |
| | 429 |
|
Total Other liabilities | $ | 16,627 |
| | $ | 14,675 |
| $ | 15,574 |
| | $ | 15,171 |
|
13. INTEREST AND DEBT EXPENSE
The following table sets forth the details of interest and debt expense:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
(Amounts in thousands) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 |
Interest expense | $ | 13,040 |
| | $ | 12,097 |
| | $ | 25,291 |
| | $ | 24,867 |
| $ | 14,922 |
| | $ | 12,251 |
|
Amortization of deferred financing costs | 587 |
| | 723 |
| | 1,451 |
| | 1,382 |
| 722 |
| | 864 |
|
Total Interest and debt expense | $ | 13,627 |
| | $ | 12,820 |
| | $ | 26,742 |
| | $ | 26,249 |
| $ | 15,644 |
| | $ | 13,115 |
|
14. EQUITY AND NONCONTROLLING INTEREST
At-The-Market Program
In 2016, the Company established an at-the-market (“ATM”) equity program, pursuant to which the Company may offer and sell from time to time its common shares, par value $0.01 per share, with an aggregate gross sales price of up to $250.0 million through a consortium of broker dealers acting as sales agents. As of June 30, 2017,March 31, 2018, $241.3 million of common shares remained available for issuance under this ATM equity program. During the six months ended June 30, 2017program and 2016, there were no common shares issued under thisthe ATM equity program.program during the three months ended March 31, 2018 and 2017, respectively. Actual future sales will depend on a variety of factors including, but not limited to, market conditions, the trading price of our common shares and our capital needs. We have no obligation to sell the remaining shares available under the active ATM equity program.
Underwritten Public Offering
On May 10, 2017, the Company issued 7.7 million common shares of beneficial interest in an underwritten public offering pursuant to the Company’s effective shelf registration statement previously filed on Form S-3 with the SEC on August 5, 2016. This offering generated cash proceeds of $193.5 million, net of $1.3 million of issuance costs.
Units of the Operating Partnership
The Operating Partnership issued 1.8 million OP units in connection with the acquisition of Yonkers Gateway Center on January 4, 2017, at a value of $27.09 per unit. On May 24 and 25, 2017, the Operating Partnership issued 2.6 million OP units and 1.9 million OP units, respectively, in connection with the Portfolio acquisition at a value of $27.02 per unit (refer to Note 4 Acquisitions and Dispositions).
Dividends and Distributions
During each of the three months ended June 30,March 31, 2018 and 2017, and 2016, the Company declared dividends on our common shares and OP unit distributions of $0.22 and $0.20 per share/unit, respectively. During the six months ended June 30, 2017 and 2016, the Company declared common stock dividends and OP unit distributions of $0.44 and $0.40 per share/unit, respectively.unit.
Redeemable Noncontrolling Interests in Operating Partnership
Redeemable noncontrolling interests reflected on the consolidated balance sheets of the Company are comprised of OP units and limited partnership interests in the Operating Partnership in the form of LTIP unit awards. In connection with the separation, the Company issued 5.7 million OP units, representing a 5.4% interest in the Operating Partnership to VRLPVornado Realty L.P. (“VRLP”) in exchange for interests in VRLP properties contributed by VRLP. LTIP unit awards were granted to certain executives pursuant to our 2015 Omnibus
Share Plan (the “Omnibus Share Plan”). OP units were issued to contributors in exchange for their property interests in connection with the Company’s acquisition of Yonkers Gateway Center and the Portfolio acquisition. The total of the OP units and LTIP units represent an 8.9% and 8.2%a 10.1% weighted-average interest in the Operating Partnership for the three and six months ended June 30, 2017, respectively.March 31, 2018. Holders of outstanding vested LTIP units may, from and after two years from the date of issuance, redeem their LTIP units for cash, or for the Company’s common shares on a one-for-one basis, solely at our election. Holders of outstanding OP units may, at a determinable date, redeem their units for cash or the Company’s common shares on a one-for-one basis, solely at our election.
Noncontrolling Interest in Consolidated Subsidiaries
The noncontrolling interest relates to the 5% interest held by others in our property in Walnut Creek, CA (Mount Diablo). The net income attributable to noncontrolling interest is presented separately in our consolidated statements of income.
15. SHARE-BASED COMPENSATION
2017 Outperformance2018 Long-Term Incentive Plan
On February 24, 2017,22, 2018, the Compensation Committee of the Board of Trustees of the Company approved the Company’s 2017 Outperformance2018 Long-Term Incentive Plan (“2017 OPP”("2018 LTI Plan"), a multi-year performance-based equity compensation program. Underprogram, comprised of both performance-based and time-based vesting awards. Equity awards granted under the 2017 OPP,2018 LTI Plan are weighted, in terms of grant date and fair value, 80% performance-based and 20% time-based.
For the performance-based awards under the 2018 LTI Plan, participants, including our Chairman and Chief Executive Officer, have the opportunity to earn awards in the form of LTIP unitsUnits if, and only if, we outperform a predeterminedUrban Edge’s absolute and relative total shareholder return (“TSR”) and/or outperform the market with respect to a relative TSR in any year during the requisite performance periods as described below. The aggregate notional amount of the 2017 OPP grant is $12.0 million.
Awards under the 2017 OPP may be earned if we (i) achieve a TSR level greater than 7% per annum, or 21%meets certain criteria over the three-year performance measurement period and/or (ii) achieve a(the “Performance Period”) beginning on February 22, 2018 and ending on February 21, 2021. The Company issued 328,107 LTIP Units under the 2018 LTI Plan.
Under the Absolute TSR component (25% of the performance-based awards), 40% of the LTIP Units will be earned if the Company’s TSR over the Performance Period is equal to 18%, 100% of the LTIP Units will be earned if the Company’s TSR over the Performance Period is equal to 27%, and 165% of the LTIP Units will be earned if the Company’s TSR over the Performance Period is equal to or above, thatgreater than 36%. The Relative TSR component is based on the Company’s performance compared to a peer group comprised of 14 companies. Under the Relative TSR Component (75% of the 50performance-based awards), 40% of the LTIP Units will be earned if the Company’s TSR over the Performance Period is equal to the 35th percentile of a retail REITthe peer group, comprised100% of 14the LTIP Units will be earned if the Company’s TSR over the Performance Period is equal to the 55th percentile of ourthe peer companies,group, and 165% of the LTIP Units will be earned if the Company’s TSR over a three-year performance measurement period. Distributions on awards accrue during the measurement period, except that 10%Performance Period is equal to or above the 75th percentile of the peer group, with earning determined using linear interpolation if between such distributions are paid in cash. If the designated performance objectives are achieved, LTIP units are also subject to time-based vesting requirements. Awards earned under the 2017 OPP vest 50% in year three, 25% in year four and 25% in year five.relative TSR thresholds.
The fair value of the 2017 OPPperformance-based award portion of the 2018 LTI Plan on the date of grant was $4.1$3.6 million using a Monte Carlo simulation to estimate the fair value based onthrough a risk-neutral premise. The time-based awards under the probability2018 LTI Plan, also granted in the form of satisfyingLTIP Units, vest ratably over three years or four years in the market conditionscase of our Chairman and Chief Executive Officer. The Company granted time-based awards under the projected share price at the time2018 LTI Plan that represent 33,172 LTIP units with a grant date fair value of payment, discounted to the valuated date over a three-year performance period. Assumptions include historic volatility (19.7%), risk-free interest rates (1.5%), and historic daily return as compared to our Peer Group. Such amount is being amortized into expense over a five-year period from the date of grant, using a graded vesting attribution model.$0.7 million.
Share-Based Compensation Expense
Share-based compensation expense, which is included in general and administrative expenses in our consolidated statements of income, is summarized as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
(Amounts in thousands) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 |
Share-based compensation expense components: | Share-based compensation expense components: | | | | | | | Share-based compensation expense components: | | |
Restricted share expense | $ | 518 |
| | $ | 383 |
| | $ | 908 |
| | $ | 616 |
| $ | 587 |
| | $ | 390 |
|
Stock option expense | 646 |
| | 653 |
| | 1,269 |
| | 1,229 |
| 585 |
| | 623 |
|
LTIP expense | 147 |
| | 100 |
| | 263 |
| | 283 |
| 166 |
| | 116 |
|
Outperformance Plan (“OPP”) expense | 564 |
| | 288 |
| | 919 |
| | 593 |
| 682 |
| | 355 |
|
Total Share-based compensation expense | $ | 1,875 |
| | $ | 1,424 |
| | $ | 3,359 |
| | $ | 2,721 |
| $ | 2,020 |
| | $ | 1,484 |
|
16. EARNINGS PER SHARE AND UNIT
Urban Edge Earnings per Share
We have calculated earnings per share (“EPS”) under the two-class method. The two-class method is an earnings allocation methodology whereby EPS for each class of Urban Edge common shares and participating securities is calculated according to dividends declared and participating rights in undistributed earnings. Restricted shares issued pursuant to our share-based compensation program are considered participating securities, and as such have non-forfeitable rights to receive dividends.
The following table sets forth the computation of our basic and diluted earnings per share:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
(Amounts in thousands, except per share amounts) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 |
Numerator: | | | | | | | | | | |
Net income attributable to common shareholders | $ | 13,583 |
| | $ | 33,868 |
| | $ | 64,169 |
| | $ | 52,506 |
| $ | 20,700 |
| | $ | 50,586 |
|
Less: Earnings allocated to unvested participating securities | (39 | ) | | (43 | ) | | (107 | ) | | (61 | ) | (48 | ) | | (79 | ) |
Net income available for common shareholders - basic | $ | 13,544 |
| | $ | 33,825 |
| | $ | 64,062 |
| | $ | 52,445 |
| $ | 20,652 |
| | $ | 50,507 |
|
Impact of assumed conversions: | | | | | | | | | | |
OP and LTIP units | — |
| | — |
| | 5,463 |
| | — |
| — |
| | — |
|
Net income available for common shareholders - dilutive | $ | 13,544 |
| | $ | 33,825 |
| | $ | 69,525 |
| | $ | 52,445 |
| $ | 20,652 |
| | $ | 50,507 |
|
| | | | | | | | | | |
Denominator: | | | | | | | | | | |
Weighted average common shares outstanding - basic | 104,063 |
| | 99,274 |
| | 101,863 |
| | 99,270 |
| 113,677 |
| | 99,639 |
|
Effect of dilutive securities(1): | | | | | | | | | | |
Stock options using the treasury stock method | 21 |
| | 272 |
| | 30 |
| | 157 |
| — |
| | 314 |
|
Restricted share awards | 176 |
| | 122 |
| | 158 |
| | 98 |
| 187 |
| | 140 |
|
Assumed conversion of OP and LTIP units | — |
| | — |
| | 9,173 |
| | 67 |
| — |
| | — |
|
Weighted average common shares outstanding - diluted | 104,260 |
| | 99,668 |
| | 111,224 |
| | 99,592 |
| 113,864 |
| | 100,093 |
|
| | | | | | | | | | |
Earnings per share available to common shareholders: | | | | | | | | | | |
Earnings per common share - Basic | $ | 0.13 |
| | $ | 0.34 |
| | $ | 0.63 |
| | $ | 0.53 |
| $ | 0.18 |
| | $ | 0.51 |
|
Earnings per common share - Diluted | $ | 0.13 |
| | $ | 0.34 |
| | $ | 0.63 |
| | $ | 0.53 |
| $ | 0.18 |
| | $ | 0.50 |
|
(1) For the three and six months ended June 30, 2016March 31, 2017 and the three months ended June 30, 2017March 31, 2018 the effect of the redemption of OP and LTIP units for Urban Edge common shares would have an anti-dilutive effect on the calculation of diluted EPS. Accordingly, the impact of such redemption has not been included in the determination of diluted EPS for these periods.
Operating Partnership Earnings per Unit
The following table sets forth the computation of basic and diluted earnings per unit:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
(Amounts in thousands, except per unit amounts) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 |
Numerator: | | | | | | | | | | |
Net income attributable to unitholders | $ | 14,909 |
| | $ | 36,069 |
| | $ | 69,633 |
| | $ | 55,861 |
| $ | 23,028 |
| | $ | 54,724 |
|
Less: net income attributable to participating securities | (39 | ) | | (45 | ) | | (104 | ) | | (64 | ) | (48 | ) | | (202 | ) |
Net income available for unitholders | $ | 14,870 |
| | $ | 36,024 |
| | $ | 69,529 |
| | $ | 55,797 |
| $ | 22,980 |
|
| $ | 54,522 |
|
| | | | | | | | | | |
Denominator: | | | | | | | | | | |
Weighted average units outstanding - basic | 113,847 |
| | 105,372 |
| | 110,682 |
| | 105,353 |
| 126,123 |
| | 107,483 |
|
Effect of dilutive securities issued by Urban Edge | 197 |
| | 394 |
| | 188 |
| | 255 |
| 187 |
| | 454 |
|
Unvested LTIP units | — |
| | 275 |
| | — |
| | 258 |
| 272 |
| | 317 |
|
Weighted average units outstanding - diluted | 114,044 |
| | 106,041 |
| | 110,870 |
| | 105,866 |
| 126,582 |
| | 108,254 |
|
| | | | | | | | | | |
Earnings per unit available to unitholders: | | | | | | | | | | |
Earnings per unit - Basic | $ | 0.13 |
| | $ | 0.34 |
| | $ | 0.63 |
| | $ | 0.53 |
| $ | 0.18 |
| | $ | 0.51 |
|
Earnings per unit - Diluted | $ | 0.13 |
| | $ | 0.34 |
| | $ | 0.63 |
| | $ | 0.53 |
| $ | 0.18 |
| | $ | 0.50 |
|
17. SUBSEQUENT EVENTS
Pursuant to the Subsequent Events Topic of the FASB ASC, we have evaluated subsequent events and transactions that occurred after our June 30, 2017 consolidated balance sheet date for potential recognition or disclosure in our consolidated financial statements. Based on this evaluation, the Company has determined there are no subsequent events required to be disclosed.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of future performance. They represent our intentions, plans, expectations and beliefs and are subject to numerous assumptions, risks and uncertainties. Our future results, financial condition and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” or other similar expressions in this Quarterly Report on Form 10-Q. Many of the factors that will determine the outcome of these and our other forward-looking statements are beyond our ability to control or predict.predict; these factors include, among others, the estimated remediation and repair costs related to Hurricane Maria at the affected properties. For further discussion of factors that could materially affect the outcome of our forward-looking statements, see “Risk Factors” in Part I, Item 1A, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.
For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Part I of this Quarterly Report on Form 10-Q.
Overview
Urban Edge Properties (“UE”, “Urban Edge” or the “Company”) (NYSE: UE) is a Maryland real estate investment trust that owns, manages, acquires, develops, redevelops, and operatesacquires retail real estate, primarily in high barrier-to-entry markets.the New York metropolitan area. Urban Edge Properties LP (“UELP” or the “Operating Partnership”) is a Delaware limited partnership formed to serve as the Company’sUE’s majority-owned partnership subsidiary and to own, through affiliates, all of the Company’sour real estate properties and other assets. Unless the context otherwise requires, references to “we”, “us” and “our” refer to Urban Edge Properties and UELP and their consolidated entities/subsidiaries.
The Operating Partnership’s capital includes general and common limited partnership interests in the operating partnership (“OP Units”). As of June 30, 2017,March 31, 2018, Urban Edge owned approximately 89.3%89.9% of the outstanding common OP Units with the remaining limited OP Units held by Vornado Realty L.P., members of management, our Board of Trustees and contributors of property interests acquired. Urban Edge serves as the sole general partner of the Operating Partnership. The third partythird-party unitholders have limited rights over the Operating Partnership such that they do not have characteristics of a controlling financial interest. As such, the Operating Partnership is considered a variable interest entity (“VIE”), and the Company is the primary beneficiary which consolidates it. The Company’s only investment is the Operating Partnership. The VIE’s assets can be used for purposes other than the settlement of the VIE’s obligations and the Company’s partnership interest is considered a majority voting interest.
As of June 30, 2017,March 31, 2018, our portfolio consisted of 8584 shopping centers, four malls and a warehouse park totaling 16.6approximately 16.7 million square feet.
Critical Accounting Policies and Estimates
The Company’s 20162017 Annual Report on Form 10-K contains a description of our critical accounting policies, including accounting for real estate, allowance for doubtful accounts and revenue recognition. For the sixthree months ended June 30, 2017,March 31, 2018, there were no material changes to these policies, other than the adoption of the Accounting Standards Update (“ASU”) 2017-012014-09 described in Note 3 to the unaudited consolidated financial statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
Refer to Note 3 to the unaudited consolidated financial statements in Part I, Item I of this Quarterly Report on Form 10-Q for information regarding recent accounting pronouncements that may affect us.
Results of Operations
We derive substantially all of our revenue from rents received from tenants under existing leases on each of our properties. This revenue includes fixed basedbase rents, recoveries of expenses that we have incurred and that we pass through to the individual tenants and percentage rents that are based on specified percentages of tenants’ revenue, in each case as provided in the respective leases.
Our primary cash expenses consist of our property operating and capital expenses, general and administrative expenses, and interest and debt expense. Property operating expenses include: real estate taxes, repairs and maintenance, management expenses, insurance, and utilities; general and administrative expenses include payroll, professional fees, information technology, office expenses, professional fees and other administrative expenses; and interest and debt expense is primarily interest on our mortgage debt and amortization of deferred financing costs on our revolving credit facility.debt. In addition, we incur substantial non-cash charges for depreciation and amortization on our properties. We also capitalize certain expenses, such as taxes, interest, and salaries related to properties under development or redevelopment until the property is ready for its intended use.
Our consolidated results of operations often are not comparable from period to period due to the impact of property acquisitions, dispositions, developments and redevelopments. The results of operations of any acquired properties are included in our financial statements as of the date of acquisition.
The following provides an overview of our key financial metrics based on our consolidated results of operations (refer to cash Net Operating Income (“NOI”), same-property cash NOI and Funds From Operations applicable to diluted common shareholders (“FFO”) described later in this section):
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
(Amounts in thousands) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 |
Net income | $ | 14,920 |
| | $ | 36,071 |
| | $ | 69,655 |
| | $ | 55,859 |
| $ | 23,039 |
| | $ | 54,735 |
|
FFO applicable to diluted common shareholders(1) | 38,664 |
| | 33,846 |
| | 112,131 |
| | 67,393 |
| 44,100 |
| | 73,467 |
|
Cash NOI(2) | 58,908 |
| | 52,463 |
| | 114,548 |
| | 104,723 |
| 59,931 |
| | 55,097 |
|
Same-property cash NOI(2) | 48,627 |
| | 46,305 |
| | 96,721 |
| | 91,841 |
| 47,849 |
| | 46,736 |
|
(1) Refer to page 3130 for a reconciliation to the nearest generally accepted accounting principles (“GAAP”) measure.
(2) Refer to page 3029 for a reconciliation to the nearest GAAP measure.
Significant Development/Redevelopment Activity
The Company had 17 active development, redevelopment or anchor repositioning projects at 13 properties with total estimated costs of $173.7$205.9 million, of which $79.7$105.6 million (or 46%51%) has been incurred as of June 30, 2017.March 31, 2018. As of June 30, 2017,March 31, 2018, the Company had completed projects at four9 properties since March 2017, for a total investment of $29.7$64.0 million.
Acquisition/Disposition Activity
On January 4, 2017,During the three months ended March 31, 2018 we acquired feethree properties, at an aggregate purchase price of $4.0 million and leasehold interests in Yonkers Gateway Center for $51.9 million.23,050 sf, all adjacent to existing centers owned by the Company. Consideration for this purchasethese purchases consisted of the issuance of $48.8 million in OP units and $2.9 million of cash. The total number of OP units issued was 1.8 million at a value of $27.09 per unit. Transaction costs associated with this acquisition were $0.2 million.
On January 17, 2017, we acquired the leasehold interest in the Shops at Bruckner for $32.3 million, consisting of the assumption of the existing debt of $12.6 million and $19.4 million of cash. The property is an 114,000 sf retail center in the Bronx, NY directly across from our 376,000 sf Bruckner Commons shopping center. We own the land under the Shops at Bruckner and had been leasing it to the seller under a ground lease that ran through September 2044. Concurrent with the acquisition, we wrote-off the unamortized intangible liability balance related to the below-market ground lease as well as the existing straight-line receivable balance. As a result, we recognized $39.2 million of income from acquired leasehold interest in the six months ended June 30, 2017. Transaction costs associated with this acquisition were $0.3 million.
On February 2, 2017, we acquired Hudson Mall, a 383,000 sf retail center in Jersey City, NJ adjacent to our existing Hudson Commons shopping center. Consideration for this purchase consisted of the assumption of the existing debt of $23.8 million and $19.9 million of cash. Transaction costs associated with this acquisition were $0.6 million.
On May 24 and 25, 2017, we acquired a portfolio of seven retail assets (the "Portfolio”) comprising 1.5 million sf of gross leasable area, predominantly in the New York City metropolitan area, for $325 million. The Portfolio was privately owned for more than
three decades and was 83% leased as of June 30, 2017. Consideration for this purchase consisted of the issuance of $122 million in OP units, the assumption of $33 million of existing mortgage debt, the issuance of $126 million of non-recourse, secured mortgage debt and $44 million of cash. The total number of OP units issued was 4.5 million at a value of $27.02 per unit. Transaction costs associated with this acquisition were $10.2 million.
On June 30, 2017, we completed the sale ofAt March 31, 2018, our property previouslyin Allentown, PA was classified as held for sale in Eatontown, NJ, for $4.8 million, net of selling costs. Prior to the sale, the book value of this property exceeded its estimated fair value less costs to sell, and as such, an initial impairment charge of $3.2 million was recognized as of March 31, 2017. Our determination of fair value was based on the executed contract of sale with a third-party buyer and our intent to dispose of the third-party buyer.property. The carrying amount of this property is $3.3 million, net of accumulated depreciation of $14.3 million, which is included in prepaid expenses and other assets in our consolidated balance sheets as of March 31, 2018 and December 31, 2017, respectively. We recognized a $0.3 million impairment charge at closing on June 30, 2017, based on the final net sales price.
On June 9, 2016, we completed the sale of a shopping center located in Waterbury, CTthe property on April 26, 2018 for $21.6$54.3 million, resulting in a gain on salenet of $15.6 million. During the three and six months ended June 30, 2016, there were no acquisitions.
Significant Debt and Equity Activityselling costs.
Debt Activity
During May2017, our property in Englewood, NJ was transferred to a receiver. On January 31, 2018, the property was sold at a foreclosure sale and on February 23, 2018, the court order was received approving the sale and discharging the receiver of 2017, $126all assets and liabilities related to the property, including the $11.5 million of non-recourse, secured debt was issued in connection with the funding of the Portfolio acquisition. The mortgages are scheduled to mature beginning in 2022 through 2027. In addition, we assumed the $33 million existing mortgage in connection with the acquisition of Yonkers Gateway Center on May 24, 2017. The mortgage payable balance on the loan secured by Yonkers Gateway Center includes $0.9 million of unamortized debt premium as of June 30, 2017.
On March 29, 2017, we refinanced the $74 million, 4.59% mortgage loan secured by our Tonnelle Commons property in North Bergen, NJ, increasing the principal balance to $100 million at 4.18% with a 10-year fixed rate mortgage. As a result, weproperty. We recognized a lossgain on extinguishment of debt of $1.3$2.5 million as a result of this transaction during the sixthree months ended June 30, 2017 comprised of a $1.2 million prepayment penalty and write-off of $0.1 million of unamortized deferred financing fees on the original loan.March 31, 2018.
On January 15, 2015, we entered into a $500 million Revolving Credit Agreement (the “Agreement”) with certain financial institutions. On March 7, 2017, we amended and extended the Agreement. The amendment increased the credit facility size by $100 million to $600 million and extended the maturity date to March 7, 2021 with two six-month extension options. Borrowings under the Agreement are subject to interest at LIBOR plus 1.15% and we are required to pay an annual facility fee of 20 basis points which is expensed within interest and debt expense as incurred. Both the spread over LIBOR and the facility fee are based on our current leverage ratio and are subject to increase if our leverage ratio increases above predefined thresholds. The Agreement contains customary financial covenants including a maximum leverage ratio of 60% and a minimum fixed charge coverage ratio of 1.5x. No amounts have been drawn to date under the Agreement.
During June 2016, in connection with the sale of a shopping center located in Waterbury, CT, we prepaid $21.2 million of our cross collateralized mortgage loan to release the property from the mortgage and maintain compliance with covenant requirements.
On March 30, 2015, we notified the lender that due to tenants vacating the Englewood shopping center, the property’s operating cash flow would be insufficient to pay its debt service. As of June 30, 2017, we were in default and the property was transferred to receivership. Urban Edge no longer manages the property but will remain its title owner until the receiver disposes of the property.
Equity Activity
On January 7, 2015, our board and initial shareholder approved the Urban Edge Properties 2015 Omnibus Share Plan, under which awards may be granted up to a maximum of 15,000,000 of our common shares or share equivalents. Pursuant to the Omnibus Share Plan, stock options, LTIP units, Operating Partnership units and restricted shares are available for grant. We have a Dividend Reinvestment Plan (the “DRIP”), whereby shareholders may use their dividends to purchase shares.
On February 24, 2017,22, 2018, the Compensation Committee of the Board of Trustees of the Company approved the Company’s 2017 Outperformance2018 Long-Term Incentive Plan (“2017 OPP”("2018 LTI Plan"), a multi-year performance-based equity compensation program. The purposeprogram, comprised of both performance-based and time-based vesting awards. Equity awards granted under the 2017 Outperformance2018 LTI Plan is to further align the interestsare weighted, in terms of the Company’s shareholders with that of management by encouraging the Company’s senior officers to create shareholdergrant date and fair value, in a “pay for performance” structure. The aggregate notional amount of the 2017 OPP grant is $12.0 million. 302,000 LTIP units were granted in connection with the 2017 OPP. LTIP units will be awarded if the performance criteria are met in accordance with the OPPs.80% performance-based and 20% time-based.
On May 10, 2017,For the performance-based awards under the 2018 LTI Plan, participants have the opportunity to earn awards in the form of LTIP Units if, and only if, Urban Edge’s absolute and relative total shareholder return (“TSR”) meets certain criteria over the three-year performance measurement period (the “Performance Period”) beginning on February 22, 2018 and ending on February 21, 2021. The Company issued 7.7 million common shares328,107 LTIP Units under the 2018 LTI Plan.
Under the Absolute TSR component (25% of beneficial interest in an underwritten public offering pursuantthe performance-based awards), 40% of the LTIP Units will be earned if the Company’s TSR over the Performance Period is equal to 18%, 100% of the LTIP Units will be earned if the Company’s TSR over the Performance Period is equal to 27%, and 165% of the LTIP Units will be earned if the Company’s TSR over the Performance Period is equal to or greater than 36%. The Relative TSR component is based on the Company’s performance compared to a peer group comprised of 14 companies. Under the Relative TSR Component (75% of the performance-based awards), 40% of the LTIP Units will be earned if the Company’s TSR over the Performance Period is equal to the 35th percentile of the peer group, 100% of the LTIP Units will be earned if the Company’s effective shelf registration statement previously filedTSR over the Performance Period is equal to the 55th percentile of the peer group, and 165% of the LTIP Units will be earned if the Company’s TSR over the Performance Period is equal to or above the 75th percentile of the peer group, with earning determined using linear interpolation if between such relative TSR thresholds.
The fair value of the performance-based award portion of the 2018 LTI Plan on Form S-3 with the SEC on August 5, 2016. This offering generated cash proceedsdate of $193.5grant was $3.6 million net of $1.3 million of issuance costs. We intendusing a Monte Carlo simulation to useestimate the proceeds of this offering for development and redevelopment projects and for general corporate purposes including potential acquisitions that may be identifiedfair value through a risk-neutral premise. The time-based awards under the 2018 LTI Plan, also granted in the future.form of LTIP Units, vest ratably over three years or four years in the case of our Chairman and Chief Executive Officer. The Company granted time-based awards under the 2018 LTI Plan that represent 33,172 LTIP units with a grant date fair value of $0.7 million.
Other equity award activity during the sixthree months ended June 30, 2017March 31, 2018 included: (i) 137,259146,885 stock options granted, (ii) 104,69899,262 restricted shares granted, (iii) 31,73470,169 LTIP units granted, (iv) 53,236632,408 stock options vested, (v) 57,550 restricted shares vested, (v) 16,789and (vi) 14,209 LTIP units vested, (vi) 11,760 2015 OPP LTIP units forfeited, (vii) 5,879 stock options forfeited, and (viii) 5,251 restricted shares forfeited.vested.
The Operating Partnership issued 1.8 million OP units in connection with the acquisition of Yonkers Gateway Center on January 4, 2017 at a value of $27.09 per unit. On May 24 and 25, 2017, the Operating Partnership issued 2.6 million OP units and 1.9 million OP units, respectively, in connection with the Portfolio acquisition at a value of $27.02 per unit.
Comparison of the Three Months Ended June 30,March 31, 2018 to March 31, 2017 to June 30, 2016
Net income for the three months ended June 30, 2017March 31, 2018 was $14.9$23.0 million, compared to net income of $36.1$54.7 million for the three months ended June 30, 2016.March 31, 2017. The following table summarizes certain line items from our consolidated statements of income that we believe are important in understanding our operations and/or those items which significantly changed in the three months ended June 30, 2017March 31, 2018 as compared to the same period of 2016:2017:
| | | For the Three Months ended June 30, | For the Three Months ended March 31, |
(Amounts in thousands) | 2017 | | 2016 | | $ Change | 2018 | | 2017 | | $ Change |
Total revenue | $ | 89,501 |
| | $ | 79,457 |
| | $ | 10,044 |
| $ | 99,053 |
| | $ | 126,064 |
| | $ | (27,011 | ) |
Property operating expenses | 11,088 |
| | 9,840 |
| | 1,248 |
| |
Depreciation and amortization | 23,701 |
| | 13,558 |
| | 10,143 |
| 21,270 |
| | 15,828 |
| | 5,442 |
|
Real estate taxes | 14,711 |
| | 12,723 |
| | 1,988 |
| 15,775 |
| | 13,392 |
| | 2,383 |
|
Real estate impairment loss | 303 |
| | — |
| | 303 |
| |
Gain on sale of real estate | — |
| | 15,618 |
| | (15,618 | ) | |
Property operating expenses | | 16,667 |
| | 13,368 |
| | 3,299 |
|
Casualty and impairment (gain) loss, net | | (1,341 | ) | | 3,164 |
| | (4,505 | ) |
Gain (loss) on extinguishment of debt | | 2,524 |
| | (1,274 | ) | | 3,798 |
|
Interest income | | 1,524 |
| | 127 |
| | 1,397 |
|
Interest and debt expense | 13,627 |
| | 12,820 |
| | 807 |
| 15,644 |
| | 13,115 |
| | 2,529 |
|
Income tax benefit (expense) | (304 | ) | | 306 |
| | (610 | ) | |
Total revenue increaseddecreased by $10.0$27.0 million to $89.5$99.1 million in the secondfirst quarter of 20172018 from $79.5$126.1 million in the secondfirst quarter of 2016.2017. The increase is primarily attributable to:
$4.1 million net increase as a result of acquisitions and dispositions that closed since June 2016;
$4.0 million increase in tenant expense reimbursements due to an increase in recoverable expenses and revenue from recoverable capital projects;
$1.9 million net increase in property rentals due to rent commencements and contractual rent increases;
$0.2 million increase in other income due to an increase in tenant bankruptcy settlement income received during the second quarter of 2017;
partially offset by a $0.2 million decrease in management and development fee income due to a decrease in development activity at managed properties.
Property operating expenses increased by $1.2 million to $11.1 million in the second quarter of 2017 from $9.8 million in the second quarter of 2016. The increase is primarily attributable to an increase in common area maintenance expenses as a result of acquisitions that closed since June 2016.
Depreciation and amortization increased by $10.1 million to $23.7 million in the second quarter of 2017 from $13.6 million in the second quarter of 2016. The increase is primarily attributable to:
$4.7 million net increase as a result of acquisitions and dispositions that closed since June 2016;
$4.4 million increase in amortization of in-place leases as a result of the write-off of the existing intangible assets at Yonkers Gateway Center upon acquisition of the remaining fee and leasehold interests; and
$1.0 million increase from development projects and tenant improvements placed into service since June 2016.
Real estate taxes increased by $2.0 million to $14.7 million in the second quarter of 2017 from $12.7 million in the second quarter of 2016. The increase is primarily attributable to:
$1.1 million net increase as a result of acquisitions and dispositions that closed since June 2016;
$0.8 million increase due to higher assessed values and tax refunds received in 2016; and
$0.1 million increase due to additional real estate taxes capitalized in the second quarter of 2016 related to space taken out of service for development and redevelopment projects.
Real estate impairment loss of $0.3 million was recognized in the second quarter of 2017 for our property previously classified as held for sale in Eatontown, NJ, based on the final net sales price at closing on June 30, 2017.
Gain on sale of real estate assets of $15.6 million in the second quarter of 2016 was incurred as a result of the sale of our property in Waterbury, CT on June 9, 2016.
Interest and debt expense increased by $0.8 million to $13.6 million in the second quarter of 2017 from $12.8 million in the second quarter of 2016. The increase is primarily attributable to interest from loans issued and assumed on acquisitions closed since June 2016.
Income tax expense of $0.3 million was recognized in the second quarter of 2017 as compared to a $0.3 million benefit in the second quarter of 2016 as a result of a $0.6 million reduction to the accrued income tax liability recorded in the second quarter of 2016, offset by the period’s income tax expense accrual.
Comparison of the Six Months Ended June 30, 2017 to June 30, 2016
Net income for the six months ended June 30, 2017 was $69.7 million, compared to net income of $55.9 million for the six months ended June 30, 2016. The following table summarizes certain line items from our consolidated statements of income that we believe are important in understanding our operations and/or those items which significantly changed in the six months ended June 30, 2017 as compared to the same period of 2016:
|
| | | | | | | | | | | |
| For the Six Months ended June 30, |
(Amounts in thousands) | 2017 | | 2016 | | $ Change |
Total revenue | $ | 215,565 |
| | $ | 162,525 |
| | $ | 53,040 |
|
Property operating expenses | 24,456 |
| | 22,699 |
| | 1,757 |
|
General and administrative expenses | 15,790 |
| | 14,255 |
| | 1,535 |
|
Depreciation and amortization | 39,529 |
| | 27,473 |
| | 12,056 |
|
Real estate taxes | 28,103 |
| | 25,972 |
| | 2,131 |
|
Real estate impairment loss | 3,467 |
| | — |
| | 3,467 |
|
Gain on sale of real estate | — |
| | 15,618 |
| | (15,618 | ) |
Interest and debt expense | 26,742 |
| | 26,249 |
| | 493 |
|
Loss on extinguishment of debt | 1,274 |
| | — |
| | 1,274 |
|
Income tax expense | 624 |
| | 30 |
| | 594 |
|
Total revenue increased by $53.0 million to $215.6 million in the six months ended June 30, 2017 from $162.5 million in the six months ended June 30, 2016. The increase is primarily attributable to:
$39.2 million income from acquired leasehold interest due to the write-off of the unamortized intangible liability related to the below-market ground lease acquired and existing straight-line receivable balance in connection with the acquisition of the ground lease at Shops at Bruckner;Bruckner in the first quarter of 2017;
$7.30.6 million netof rent abatements, reflected as a reduction of property rentals and tenant expense reimbursements, at our two malls in Puerto Rico as a result of Hurricane Maria; and
$0.1 million decrease in management and development fee income due to a decrease in development activity at managed properties, partially offset by
$9.2 million increase as a result of acquisitions and dispositions that closed since June 2016;net of dispositions;
$2.42.3 million net increase in property rentals due to rent commencements, contractual rent increases and an increase in percentage rental income, partially offset by tenant vacancies primarily at properties undergoing development;
$5.3million increase in tenant expense reimbursements due to an increase in recoverable expenses and revenue from recoverable capital projects;
partially offset by a $0.9$1.2 million decreaseincrease in property rentals due to rent commencements, lease modifications and contractual rent increases; and
$0.2 million increase in other income due to a decrease inhigher tenant bankruptcy settlement income received during 2017;the first quarter of 2018.
Depreciation and amortization increased by $5.4 million to $21.3 million in the first quarter of 2018 from $15.8 million in the first quarter of 2017. The increase is primarily attributable to:
$4.9 million increase as a result of acquisitions net of dispositions; and
$0.20.5 million increase from development projects and tenant improvements placed into service.
Real estate taxes increased by $2.4 million to $15.8 million in the first quarter of 2018 from $13.4 million in the first quarter of 2017. The increase is primarily attributable to:
$1.6 million increase as a result of acquisitions net of dispositions; and
$0.8 million increase due to higher assessed values and decrease in management and development fee incomecapitalized real estate taxes due to less development activity in 2017 at managed properties.projects placed into service.
Property operating expenses increased by $1.8$3.3 million to $24.5$16.7 million in the six months ended June 30, 2017first quarter of 2018 from $22.7$13.4 million in the six months ended June 30, 2016.first quarter of 2017. The increase is primarily attributable to an increase in common area maintenance expenses as a result of acquisitions that closed since June 2016.acquisitions.
GeneralWe recognized a $1.3 million casualty and administrative expenses increased byimpairment gain in the first quarter of 2018 comprised of a $1.5 million to $15.8insurance gain net of $0.2 million in the six months ended June 30, 2017 from $14.3 million in the six months ended June 30, 2016. The increase is primarily attributable to:
$0.9 million net increase in employment costs including $0.5 million severance expense and $0.4 million increase in salary, bonus and benefits; and
$0.6 million net increase in legal, other professional fees and costs related to information technology.
Depreciation and amortization increased by $12.1 million to $39.5 million in the six months ended June 30, 2017 from $27.5 million in the six months ended June 30, 2016. The increase is primarily attributable to:
$5.7 million net increasehurricane-related expenses incurred as a result of acquisitions and dispositions that closed sinceHurricane Maria. We recognized a $3.2 million real estate impairment loss on our property in Eatontown, NJ in the first quarter of 2017. The property was sold on June 2016;30, 2017.
$4.4We recognized a $2.5 million increasegain on extinguishment of debt in amortizationthe first quarter of in-place leases2018 as a result of the write-offforeclosure sale and forgiveness of the existing intangible assets at Yonkers Gateway Center upon acquisition of the remaining fee and leasehold interests; and
$2.0$11.5 million increase from development projects and tenant improvements placed into service since June 2016.
Real estate taxes increasedmortgage debt secured by $2.1 million to $28.1 million in the six months ended June 30, 2017 from $26.0 million in the six months ended June 30, 2016. The increase is primarily attributable to:
$1.3 million net increase as a result of acquisitions and dispositions that closed since June 2016; and
$0.8 million increase due to higher assessed values and tax refunds received in 2016.
Real estate impairment loss of $3.5 million in the six months ended June 30, 2017 was recognized on our property previously classified as held for sale in Eatontown, NJ, due to the book value of this property exceeding its fair value less costs to sell. The Company’s determination of fair value was based on the executed contract of sale with the third-party buyer less selling costs.
Gain on sale of real estate assets of $15.6 million was incurred in the six months ended June 30, 2016 as a result of the sale of our property in Waterbury, CT on June 9, 2016.
Interest and debt expense increased $0.5Englewood, NJ. We recognized a $1.3 million to $26.7 million in the six months ended June 30, 2017 from $26.2 million in the six months ended June 30, 2016. The increase is primarily attributable to:
$1.1 million increase of interest from loans issued and assumed on acquisitions closed since June 2016;
partially offset by $0.4 million of higher interest capitalized related to increased levels of development; and
$0.2 million due to a lower mortgage payable balance as a result of scheduled principal payments and debt prepayment in connection with the sale of our property in Waterbury, CT during the second quarter of 2016.
Lossloss on extinguishment of debt of $1.3 million in the six months ended June 30,first quarter of 2017 was recognized as a result offrom the refinancing of our mortgage loan secured by our Tonnelle Commons property in North Bergen, NJ. The loss on extinguishment of debt is comprisedNJ, consisting of a $1.2$1.1 million prepayment penalty and $0.1$0.2 million of unamortized deferred financing fees on the original loan.
Income taxInterest income increased by $1.4 million to $1.5 million in the first quarter of 2018 from $0.1 million in the first quarter of 2017. The increase is primarily attributable to an increase in interest rates and an increase in our cash balance due to multiple equity offerings since March 2017 and our November 2017 debt refinancing.
Interest and debt expense increased by $0.6$2.5 million to $15.6 million in the six months ended June 30, 2017 as a resultfirst quarter of a $0.62018 from $13.1 million reduction to the accrued income tax liability recorded in the six months ended June 30, 2016.first quarter of 2017. The increase is primarily attributable to:
$1.5 million increase in interest from loans issued and assumed on acquisitions; and
$7.1 million increase in interest due to 18 new individual, non-recourse mortgage financings totaling $710 million closed in the fourth quarter of 2017, partially offset by
$5.9 million net decrease in interest due to principal paydowns and refinancing of the $544 million cross-collateralized mortgage loan in the fourth quarter of 2017; and
$0.2 million increase of interest capitalized related to additional development projects.
Non-GAAP Financial Measures
Throughout this section, we have provided certain information on a “same-property” cash basis which includes the results of operations that we consolidated,were owned and operated for the entirety of boththe reporting periods being compared, totaling 7675 properties for the three and sixthree months ended June 30, 2017March 31, 2018 and 2016.2017. Information provided on a same-property basis excludes properties that were under development, redevelopment or that involve anchor repositioning where a substantial portion of the gross leasable area is taken out of service and also excludes properties acquired, sold, or under contract to be sold or that are in the foreclosure process during the periods being compared. While there is judgment surrounding changes in designations, a property is removed from the same-property pool when a property is considered to be a redevelopment property because it is undergoing significant renovation or retenanting pursuant to a formal plan and is expected to have a significant impact on property operating income based on the retenanting that is occurring. A development or redevelopment property is moved back to the same-property pool once a substantial portion of the NOI growth expected from the development or redevelopment is reflected in both the current and comparable prior year period, generally one year after at least 80% of the expected NOI from the project is realized on a cash basis for a full quarter.basis. Acquisitions are moved into the same-property pool once we have owned the property for the entirety of the comparable periods and the property is not under significant development or redevelopment.
We calculate same-property cash NOI using net income as defined by GAAP reflecting only those income and expense items that are incurred at the property level, adjusted for the following items: lease termination fees, bankruptcy settlement income, non-cash rental income and ground rent expense and income or expenses that we do not believe are representative of ongoing operating results, if any.
The most directly comparable GAAP financial measure to cash NOI is net income. Cash NOI excludes certain components from net income in order to provide results that are more closely related to a property’s results of operations. We calculate cash NOI by adjusting GAAP operating income to add back depreciation and amortization expense, general and administrative expenses, casualty and real estate impairment losses and non-cash ground rent expense, and deduct non-cash rental income resulting from the straight-lining of rents and amortization of acquired below market leases net of above market leases.
We use cash NOI internally to make investment and capital allocation decisions and to compare the unlevered performance of our properties to our peers. Further, we believe cash NOI is useful to investors as a performance measure because, when compared across periods, cash NOI reflects the impact on operations from trends in occupancy rates, rental rates, operating costs and acquisition and disposition activity on an unleveraged basis, providing perspective not immediately apparent from operating income or net income. As such, cash NOI assists in eliminating disparities in net income due to the development, redevelopment, acquisition or disposition of properties during the periods presented, and thus provides a more consistent performance measure for the comparison of the operating performance of the Company’s properties. Cash NOI and same-property cash NOI should not be considered substitutes for operating income or net income and may not be comparable to similarly titled measures employed by others.
Same-property cash NOI increased by $2.3$1.1 million, or 5.0%2.4%, for the three months ended June 30, 2017March 31, 2018 as compared to the three months ended June 30, 2016 and by $4.9 million, or 5.3%, for the six months ended June 30, 2017 as compared to the six months ended June 30, 2016.March 31, 2017.
The following table reconciles net income to cash NOI and same-property cash NOI for the three and six months ended June 30, 2017March 31, 2018 and 2016.2017.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(Amounts in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Net income | $ | 14,920 |
| | $ | 36,071 |
| | $ | 69,655 |
| | $ | 55,859 |
|
Add: income tax expense (benefit) | 304 |
| | (306 | ) | | 624 |
| | 30 |
|
Income before income taxes | 15,224 |
| | 35,765 |
| | 70,279 |
| | 55,889 |
|
Interest income | (336 | ) | | (177 | ) | | (463 | ) | | (344 | ) |
Gain on sale of real estate | — |
| | (15,618 | ) | | — |
| | (15,618 | ) |
Interest and debt expense | 13,627 |
| | 12,820 |
| | 26,742 |
| | 26,249 |
|
Loss on extinguishment of debt | — |
| | — |
| | 1,274 |
| | — |
|
Operating income | 28,515 |
| | 32,790 |
| | 97,832 |
| | 66,176 |
|
Depreciation and amortization | 23,701 |
| | 13,558 |
| | 39,529 |
| | 27,473 |
|
Real estate impairment loss | 303 |
| | — |
| | 3,467 |
| | — |
|
General and administrative expense | 7,709 |
| | 7,535 |
| | 15,790 |
| | 14,255 |
|
Transaction costs | 132 |
| | 34 |
| | 183 |
| | 84 |
|
NOI | 60,360 |
| | 53,917 |
| | 156,801 |
|
| 107,988 |
|
Less: non-cash revenue and expenses | (1,452 | ) | | (1,454 | ) | | (42,253 | ) | | (3,265 | ) |
Cash NOI(1) | 58,908 |
| | 52,463 |
|
| 114,548 |
|
| 104,723 |
|
Adjustments: | | | | | | | |
Cash NOI related to properties being redeveloped(1) | (5,414 | ) | | (4,851 | ) | | (10,868 | ) | | (9,525 | ) |
Cash NOI related to properties acquired, disposed, or in foreclosure(1) | (4,050 | ) | | (477 | ) | | (5,628 | ) | | (970 | ) |
Management and development fee income from non-owned properties | (351 | ) | | (526 | ) | | (830 | ) | | (981 | ) |
Tenant bankruptcy settlement income | (486 | ) | | (340 | ) | | (513 | ) | | (1,490 | ) |
Other(2) | 20 |
| | 36 |
| | 12 |
| | 84 |
|
Subtotal adjustments | (10,281 | ) | | (6,158 | ) |
| (17,827 | ) |
| (12,882 | ) |
Same-property cash NOI | $ | 48,627 |
| | $ | 46,305 |
|
| $ | 96,721 |
|
| $ | 91,841 |
|
|
| | | | | | | |
| Three Months Ended March 31, |
(Amounts in thousands) | 2018 | | 2017 |
Net income | $ | 23,039 |
| | $ | 54,735 |
|
Management and development fee income from non-owned properties | (342 | ) | | (479 | ) |
Other income | (77 | ) | | (64 | ) |
Depreciation and amortization | 21,270 |
| | 15,828 |
|
General and administrative expense | 7,641 |
| | 8,132 |
|
Casualty and impairment (gain) loss, net(5) | (1,341 | ) | | 3,164 |
|
Interest income | (1,524 | ) | | (127 | ) |
Interest and debt expense | 15,644 |
| | 13,115 |
|
Gain (loss) on extinguishment of debt | (2,524 | ) | | 1,274 |
|
Income tax expense | 434 |
| | 320 |
|
Non-cash revenue and expenses | (2,289 | ) | | (40,801 | ) |
Cash NOI(1) | 59,931 |
| | 55,097 |
|
Adjustments: | | | |
Non-same property cash NOI(1)(2) | (12,474 | ) | | (8,334 | ) |
Tenant bankruptcy settlement income | (164 | ) | | — |
|
Hurricane related operating loss(3) | 306 |
| | (27 | ) |
Environmental remediation costs | 250 |
| | — |
|
Same-property cash NOI | $ | 47,849 |
|
| $ | 46,736 |
|
Cash NOI related to properties being redeveloped(4) | 5,983 |
| | 5,693 |
|
Same-property cash NOI including properties in redevelopment | $ | 53,832 |
| | $ | 52,429 |
|
(1) Cash NOI is calculated as total property revenues less property operating expenses excluding the net effects of non-cash rental income and non-cash ground rent expense.
(2)Non-same property cash NOI includes cash NOI related to properties being redeveloped and properties acquired or disposed.
(3) Other adjustments include revenueAmount reflects rental and expense items attributabletenant reimbursement losses as well as provisions for outstanding amounts due from tenants at Las Catalinas that are subject to non-same propertiesreimbursement from the insurance company.
(4) Excludes $0.5 million of rental and corporate activities.tenant reimbursement losses as well as provisions for outstanding amounts due from tenants at Montehiedra that are subject to reimbursement from the insurance company.
(5) Casualty and impairment gain of $1.3 million per the consolidated statements of income is comprised of a $1.5 million insurance gain net of $0.2 million hurricane-related expenses for the first quarter of 2018. Casualty and impairment loss for the first quarter of 2017 is comprised of a $3.2 million real estate impairment loss incurred related to our property in Eatontown, NJ.
Funds From Operations
FFO for the three and six months ended June 30, 2017March 31, 2018 was $38.7$44.1 million and $112.1 million, respectively, compared to $33.8$73.5 million and $67.4 million, respectively, for the three and six months ended June 30, 2016.March 31, 2017.
We calculate FFO in accordance with the National Association of Real Estate Investment Trusts’ (‘‘NAREIT’’) definition. NAREIT defines FFO as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of depreciated real estate assets, real estate impairment losses, rental property depreciation and amortization expense. We believe FFO is a meaningful non-GAAP financial measure useful in comparing our levered operating performance from period to period both internally and among our peers because this non-GAAP measure excludes net gains on sales of depreciable real estate, real estate impairment losses, rental property depreciation and amortization expense which implicitly assumes that the value of real estate diminishes predictably over time rather than fluctuating based on market conditions. FFO does not represent cash flows from operating activities in accordance with GAAP, should not be considered an alternative to net income as an indication of our performance, and is not indicative of cash flow as a measure of liquidity or our ability to make cash distributions. FFO may not be comparable to similarly titled measures employed by others.
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
(Amounts in thousands) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 |
Net income | $ | 14,920 |
| | $ | 36,071 |
| | $ | 69,655 |
| | $ | 55,859 |
| $ | 23,039 |
| | $ | 54,735 |
|
Less (net income) attributable to noncontrolling interests in: | | | | | | | | | | |
Operating partnership | (1,326 | ) | | (2,201 | ) | | (5,464 | ) | | (3,355 | ) | (2,328 | ) | | (4,138 | ) |
Consolidated subsidiaries | (11 | ) | | (2 | ) | | (22 | ) | | 2 |
| (11 | ) | | (11 | ) |
Net income attributable to common shareholders | 13,583 |
| | 33,868 |
| | 64,169 |
| | 52,506 |
| 20,700 |
| | 50,586 |
|
Adjustments: | | | | | | | | | | |
Gain on sale of real estate | — |
| | (15,618 | ) | | — |
| | (15,618 | ) | |
Rental property depreciation and amortization | 23,452 |
| | 13,395 |
| | 39,031 |
| | 27,150 |
| 21,072 |
| | 15,579 |
|
Real estate impairment loss | 303 |
| | — |
| | 3,467 |
| | — |
| — |
| | 3,164 |
|
Limited partnership interests in operating partnership(1) | 1,326 |
| | 2,201 |
| | 5,464 |
| | 3,355 |
| 2,328 |
| | 4,138 |
|
FFO applicable to diluted common shareholders | $ | 38,664 |
| | $ | 33,846 |
| | $ | 112,131 |
| | $ | 67,393 |
| $ | 44,100 |
| | $ | 73,467 |
|
(1) Represents earnings allocated to vested LTIP and OP unit holders for unissued common shares which have been excluded for purposes of calculating earnings per diluted share for the three months ended June 30, 2017.periods presented. FFO applicable to diluted common shareholders and FFO as Adjusted applicable to diluted common shareholders calculations includesinclude earnings allocated to vested LTIP and OP unit holders and the respective weighted average share totals include the redeemablecommon shares outstandingthat may be issued upon redemption of units as their inclusion is dilutive.
Liquidity and Capital Resources
Due to the nature of our business, we typically generate significant amounts of cash from operations; however, the cash generated from operations is primarily paid to our shareholders and unitholders of the Operating Partnership in the form of distributions. Our status as a REIT requires that we distribute 90% of our REIT taxable income each year. Our Board of Trustees declared a quarterly dividend of $0.22 per common share and OP unit for each of the first two quartersquarter of 2017,2018, or an annual rate of $0.88. We expect to pay regular cash dividends, however, the timing, declaration, amount and payment of distributions to shareholders and unitholders of the Operating Partnership falls within the discretion of our Board of Trustees. Our Board of Trustees’ decisions regarding the payment of dividends depends on many factors, such as maintaining our REIT tax status, our financial condition, earnings, capital requirements, debt service obligations, limitations under our financing arrangements, industry practice, legal requirements, regulatory constraints, and other factors.
Property rental income is our primary source of cash flow and is dependent on a number of factors including our occupancy level and rental rates, as well as our tenants’ ability to pay rent. Our properties provide us with a relatively consistent stream of cash flow that enables us to pay operating expenses, debt service and recurring capital expenditures. Other sources of liquidity to fund cash requirements include proceeds from financings, equity offerings and asset sales.
Our short-term liquidity requirements consist of normal recurring operating expenses, lease obligations, regular debt service requirements, (including debt service relating to additional or replacement debt, as well as scheduled debt maturities), recurring expenditures (general & administrative expenses), expenditures related to leasing activity and distributions to shareholders and unitholders of the Operating Partnership. Our long-term capital requirements consist primarily of maturities under our long-term debt agreements, development and redevelopment costs and potential acquisitions.
At June 30, 2017,March 31, 2018, we had cash and cash equivalents, including restricted cash, of $248.4$473.6 million and no amounts drawn on our line of credit. In addition, the Company has the following sources of capital available:
|
| | | |
(Amounts in thousands) | March 31, 2018 |
ATM equity program(1) | |
Original offering amount | $ | 250,000 |
|
Available capacity | $ | 241,300 |
|
| |
Revolving credit agreement(2) | |
Total commitment amount | $ | 600,000 |
|
Available capacity | $ | 600,000 |
|
Maturity(3) | March 7, 2021 |
|
(1) Refer to Note 14 to the unaudited consolidated financial statements in Part I, Item I of this Quarterly Report on Form 10-Q.
(2) Refer to Note 7 to the unaudited consolidated financial statements in Part I, Item I of this Quarterly Report on Form 10-Q.
(3)On March 7, 2017, we amended and extended our line of credit.revolving credit agreement. The amendment increased the credit facility size by $100 million to $600 million and extended the maturity date to March 7, 2021 with two six-month extension options.
On May 10, 2017, the Company issued 7.7 million common shares of beneficial interest in an underwritten public offering pursuant to the Company’s effective shelf registration statement previously filed on Form S-3 with the SEC on August 5, 2016. This offering generated cash proceeds of $193.5 million, net of $1.3 million of issuance costs.
In 2016, the Company established an at-the-market (“ATM”) equity program, pursuant to which the Company may offer and sell from time to time its common shares, par value $0.01 per share, with an aggregate gross sales price of up to $250.0 million through a consortium of broker dealers acting as sales agents. As of June 30, 2017, $241.3 million of common shares remained available for issuance under this ATM equity program. During the six months ended June 30, 2017 and 2016, there were no common shares issued under this ATM equity program. Actual future sales will depend on a variety of factors including, but not limited to, market conditions, the trading price of our common shares and our capital needs. We have no obligation to sell the remaining shares available under the active ATM equity program.
On January 4, 2017, we issued 1.8 million OP units in connection with the acquisition of Yonkers Gateway Center at a value of $27.09 per unit. On May 24 and 25, 2017 we issued 2.6 million OP units and 1.9 million OP units, respectively, in connection with the Portfolio acquisition at a value of $27.02 per unit.
We have no debt scheduled to mature in 2017.2018. We currently believe that cash flows from operations over the next 12 months, together with cash on hand, our ATM equity program, our line ofrevolving credit agreement and our general ability to access the capital markets will be sufficient to finance our operations and fund our debt service requirements and capital expenditures.
Summary of Cash Flows
Our cash flow activities are summarized as follows:
|
| | | | | | | | | | | |
| Six Months Ended June 30, |
(Amounts in thousands) | 2017 | | 2016 | | Increase (Decrease) |
Net cash provided by operating activities | $ | 83,298 |
| | $ | 66,718 |
| | $ | 16,580 |
|
Net cash used in investing activities | (242,597 | ) | | (7,607 | ) | | (234,990 | ) |
Net cash provided by (used in) financing activities | 281,942 |
| | (71,469 | ) | | 353,411 |
|
Cash and cash equivalents including restricted cash was $262.8$473.6 million at June 30, 2017,March 31, 2018, compared to $140.2$500.8 million as of December 31, 2016, an increase2017, a decrease of $122.6$27.2 million.
|
| | | | | | | | | | | |
| Three Months Ended March 31, |
(Amounts in thousands) | 2018 | | 2017 | | Increase (Decrease) |
Net cash provided by operating activities | $ | 34,001 |
| | $ | 37,226 |
| | $ | (3,225 | ) |
Net cash used in investing activities | (32,237 | ) | | (47,703 | ) | | 15,466 |
|
Net cash used in financing activities | (29,014 | ) | | (6,923 | ) | | (22,091 | ) |
Operating Activities
Net cash provided by operating activities primarily consists of $83.3cash inflows from tenant rent and tenant expense reimbursements and cash outflows for property operating expenses, general and administrative expenses and interest and debt expense.
For the three months ended March 31, 2018, net cash provided by operating activities of $34.0 million for the six months
ended June 30, 2017 was comprised of $76.9$43.4 million of cash from operating income and a net increasedecrease of $6.4$9.4 million in cash due to timing of cash receipts and payments related to changes in operating assets and liabilities.
Investing Activities
Net cash flow used in investing activities is impacted by the timing and extent of our real estate development, capital improvements, and acquisition and disposition activities during the period.
Net cash used in investing activities of $242.6$32.2 million for the sixthree months ended June 30, 2017March 31, 2018, decreased by $263.5 million from $295.7 million as of December 31, 2017. The activity was comprised of (i) $211.4$29.3 million of acquisitions ofnet cash used in real estate development and capital improvements at existing properties and (ii) $36.0$4.0 million ofnet cash used in acquiring three real estate additions,assets during the first quarter of 2018, offset by (iii) $4.8$1.0 million net cash provided by insurance proceeds for physical property damages caused by Hurricane Maria at our two properties in Puerto Rico.
Financing Activities
Net cash flow used in financing activities is impacted by the timing and extent of proceedsissuances of debt and equity securities, distributions paid to common shareholders and unitholders of the Operating Partnership as well as principal and other payments associated with our outstanding indebtedness.
Net cash used in financing activities of $29.0 million for the three months ended March 31, 2018 decreased by $527.5 million from sale of operating properties. Netnet cash provided by financing activities of $281.9$498.5 million for the six months ended June 30, 2017as of December 31, 2017. The activity was comprised of (i) $225.5 million proceeds from borrowings and (ii) $193.5 million proceeds from issuance of common shares, offset by (iii) $83.8 million for debt repayments, (iv) $49.4$27.8 million of distributions paid to common shareholders and unitholders of the Operating Partnership, (v) $3.6(ii) $0.8 million offor debt issuance costs,repayments and (vi) $0.3(iii) $0.4 million of taxes withheld on vested restricted units.
Financing Activities and Contractual Obligations
Below is a summary of our outstanding debt and maturitiesweighted average interest rate as of June 30, 2017.March 31, 2018.
|
| | | | | | | | |
| | | | Interest Rate at | | Principal Balance at |
(Amounts in thousands) | | Maturity | | June 30, 2017 | | June 30, 2017 |
Cross-collateralized mortgage loan: | | | | | | |
Fixed Rate | | 9/10/2020 | | 4.38% | | $ | 511,739 |
|
Variable Rate(1) | | 9/10/2020 | | 2.36% | | 38,756 |
|
Total cross collateralized | | | | | | 550,495 |
|
First mortgages secured by: | | | | | | |
|
Englewood(3) | | 10/1/2018 | | 6.22% | | 11,537 |
|
Montehiedra Town Center, Senior Loan(2) | | 7/6/2021 | | 5.33% | | 86,658 |
|
Montehiedra Town Center, Junior Loan(2) | | 7/6/2021 | | 3.00% | | 30,000 |
|
Plaza at Cherry Hill(8)(10) | | 5/24/22 | | 2.82% | | 28,930 |
|
Westfield - One Lincoln(8)(10) | | 5/24/22 | | 2.82% | | 4,730 |
|
Plaza at Woodbridge(8)(10) | | 5/25/22 | | 2.82% | | 55,340 |
|
Bergen Town Center | | 4/8/2023 | | 3.56% | | 300,000 |
|
Shops at Bruckner(6) | | 5/1/2023 | | 3.90% | | 12,443 |
|
Hudson Mall(7) | | 12/1/2023 | | 5.07% | | 25,333 |
|
Yonkers Gateway Center(9) | | 4/6/2024 | | 4.16% | | 33,967 |
|
Las Catalinas | | 8/6/2024 | | 4.43% | | 130,000 |
|
North Bergen (Tonnelle Avenue)(5) | | 4/1/2027 | | 4.18% | | 100,000 |
|
Manchester Plaza(10) | | 6/1/2027 | | 4.32% | | 12,500 |
|
Millburn Gateway Center(10) | | 6/1/2027 | | 3.97% | | 24,000 |
|
Mount Kisco (Target)(4) | | 11/15/2034 | | 6.40% | | 14,672 |
|
Total mortgages payable | | 1,420,605 |
|
Unamortized debt issuance costs | | (8,208 | ) |
Total mortgages payable, net of unamortized debt issuance costs | | $ | 1,412,397 |
|
|
| | | | | | |
(Amounts in thousands) | | Principal balance at March 31, 2018 | | Weighted Average Interest Rate at March 31, 2018 |
Mortgages payable: | | | | |
Fixed rate debt | | $ | 1,396,329 |
| | 4.12% |
Variable rate debt(1) | | 169,500 |
| | 3.41% |
Total mortgages payable | | 1,565,829 |
| | 4.04% |
Unamortized debt issuance costs | | (13,286 | ) | | |
Total mortgages payable, net of unamortized debt issuance costs | | $ | 1,552,543 |
| | |
| |
(1)(1) As of March 31, 2018, $80.5 million of our variable rate debt bears interest at one month LIBOR plus 190 bps and $89 million of our variable rate debt bears interest at one month LIBOR plus 160 bps. | Subject to a LIBOR floor of 1.00%, bears interest at LIBOR plus 136 bps. |
| |
(2)
| As part of the planned redevelopment of Montehiedra Town Center, we committed to fund $20.0 million for leasing and capital expenditures of which $19.3 million has been funded as of June 30, 2017. |
| |
(3)
| On March 30, 2015, we notified the lender that due to tenants vacating, the property’s operating cash flow would be insufficient to pay its debt service. As of June 30, 2017, we were in default and the property was transferred to receivership. Urban Edge no longer manages the property but will remain its title owner until the receiver disposes of the property. We have determined this property is held in a VIE for which we are the primary beneficiary. Accordingly, as of June 30, 2017 we consolidated Englewood and its operations. The consolidated balance sheet included total assets and liabilities of $12.4 million and $14.5 million, respectively. |
| |
(4)
| The mortgage payable balance on the loan secured by Mount Kisco (Target) includes $1.1 million of unamortized debt discount as of June 30, 2017 and December 31, 2016. The effective interest rate including amortization of the debt discount is 7.34% as of June 30, 2017. |
| |
(5)
| On March 29, 2017, we refinanced the $74 million, 4.59% mortgage loan secured by our Tonnelle Commons property in North Bergen, NJ, increasing the principal balance to $100 million at 4.18% with a 10-year fixed rate mortgage. As a result, we recognized a loss on extinguishment of debt of $1.3 million during the six months ended June 30, 2017 comprised of a $1.2 million prepayment penalty and write-off of $0.1 million of unamortized deferred financing fees on the original loan.
|
| |
(6)
| On January 17, 2017, we assumed the existing mortgage secured by the Shops at Bruckner in connection with our acquisition of the property’s leasehold interest. |
| |
(7)
| On February 2, 2017, we assumed the existing mortgage secured by Hudson Mall in connection with our acquisition of the property. The mortgage payable balance on the loan secured by Hudson Mall includes $1.6 million of unamortized debt premium as of June 30, 2017. The effective interest rate including amortization of the debt premium is 3.11% as of June 30, 2017. |
| |
(8)
| Bears interest at one month LIBOR plus 160 bps. |
| |
(9)
| Reflects the $33 million existing mortgage assumed in connection with the acquisition of Yonkers Gateway Center on May 24, 2017. The mortgage payable balance on the loan secured by Yonkers Gateway Center includes $0.9 million of unamortized debt premium as of June 30, 2017. The effective interest rate including amortization of the debt premium is 0.8% as of June 30, 2017. |
| |
(10)
| Reflects a portion of the $126 million non-recourse, secured debt issued to fund the Portfolio acquisition closed on May 24 and 25, 2017. |
The net carrying amount of real estate collateralizing the above indebtedness amounted to approximately $1.3$1.2 billion as of June 30, 2017.March 31, 2018. Our mortgage loans contain covenants that limit our ability to incur additional indebtedness on these properties and in certain circumstances, require lender approval of tenant leases and/or yield maintenance upon repayment prior to maturity. As of June 30, 2017,March 31, 2018, we were in compliance with all debt covenants.
On January 15, 2015, we entered into a $500 million Revolving Credit Agreement (the “Agreement”) with certain financial institutions. On March 7, 2017, we amended and extended the Agreement. The amendment increased the credit facility size by $100 million to $600 million and extended the maturity date to March 7, 2021 with two six-month extension options. Borrowings under the Agreement are subject to interest at LIBOR plus 1.15%an applicable margin of 1.10% to 1.55% and we are required to pay an annual facility fee of 2015 to 35 basis points. Both the spread over LIBOR and the facility fee are based on our current leverage ratio and are subject to increase if our leverage ratio increases above predefined thresholds. The Agreement contains customary financial covenants, including a maximum leverage ratio of 60% and a minimum fixed charge coverage ratio of 1.5x. No amounts have been drawn to date under the Agreement.
Capital Expenditures
The following summarizes capital expenditures presented on a cash basis for the sixthree months ended June 30, 2017March 31, 2018 and 2016:2017:
| | | | Six Months Ended June 30, | | Three Months Ended March 31, |
(Amounts in thousands) | | 2017 | | 2016 | | 2018 | | 2017 |
Capital expenditures: | | | |
| | | |
|
Development and redevelopment costs | | $ | 25,258 |
| | $ | 22,272 |
| | $ | 26,579 |
| | $ | 9,248 |
|
Maintenance capital expenditures | | 1,311 |
| | 3,147 |
| |
Capital improvements | | | 643 |
| | 656 |
|
Tenant improvements and allowances | | 2,791 |
| | 2,127 |
| | 894 |
| | 1,246 |
|
Total capital expenditures | | $ | 29,360 |
| | $ | 27,546 |
| | $ | 28,116 |
| | $ | 11,150 |
|
As of June 30, 2017,March 31, 2018, we had approximately $173.7$205.9 million of active redevelopment, development and anchor repositioning projects at various stages of completion and $29.7$64.0 million of completed projects, an increase of $11.7$20.8 million from $191.7$249.1 million of projects as of December 31, 2016.2017. We have advanced these projects $25.4$27.7 million since December 31, 20162017 and anticipate that these projects will require an additional $96.8$104.5 million over the next two years to complete. We expect to fund these projects using cash on hand, proceeds from dispositions, borrowings under our line of credit and/or using secured debt, or issuing equity.
Commitments and Contingencies
Loan Commitments
In January 2015, we completed a modification of the $120.0 million, 6.04% mortgage loan secured by Montehiedra. As part of the planned redevelopment of the property, we committed to fund $20.0 million for leasing and other capital expenditures of which $19.3 million has been funded as of June 30, 2017.
Insurance
We maintainThe Company maintains (i) general liability insurance with limits of $200 million for properties in the U.S. and Puerto Rico and (ii) all-risk property and rental value insurance coverage with limits of $500 million per occurrence and in the aggregate for properties in the U.S. and $139 million for properties in Puerto Rico, withsubject to the terms, conditions, exclusions, deductibles and sub-limits when applicable for certain perils such as floods and earthquakes on each of our properties. Ourand (iii) numerous other insurance policies including trustees’ and officers’ insurance, workers’ compensation and automobile-related liabilities insurance. The Company’s insurance includes coverage for certified acts of terrorism acts but excludes coverage for nuclear, biological, chemical or radiological terrorism events as defined by the Terrorism Risk Insurance Program Reauthorization Act, which expires in December 2020. In addition, we maintainthe Company maintains coverage for certain cybersecurity losses with limits of $5 million per occurrence and in the aggregate providing first and third partythird-party coverage including network interruption, event management, cyber extortion and claims for media content, security and privacy liability. Insurance premiums are typically charged directly to each of the retail properties and warehouses. We will bewarehouses but not all of the cost of such premiums are recovered. The Company is responsible for deductibles, and losses in excess of insurance coverage, and the portion of premiums not covered from retail properties, which could be material.
We continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism. However, we cannot anticipate what coverage will be available on commercially reasonable terms in the future. Our mortgagefuture and expect premiums across most property coverage lines to increase in light of recent events. The incurrence of uninsured losses, costs or uncovered premiums could materially and adversely affect our business, results of operations and financial condition.
Certain of our loans are non-recourse and other agreements contain customary covenants requiring adequatethe maintenance of insurance coverage. Although we believe that we currently have adequate insurance coverage for purposes of these agreements, we may not be able to obtain an equivalent amount of coverage at reasonable costs in the future. If lenders or other counterparties insist on greater coverage than we are able to obtain, itsuch requirement could materially and adversely affect our ability to finance our properties and expand our portfolio.
Hurricane-Related Charges
On September 20, 2017, Hurricane Maria made landfall, damaging our two properties in Puerto Rico. During the three months ended March 31, 2018, the Company received $1.5 million in insurance proceeds which were partially offset by $0.2 million of hurricane related costs, resulting in net casualty gains of $1.3 million included in casualty and impairment (gain) loss, net on the accompanying consolidated statements of income.
During the three months ended March 31, 2018, the Company recognized $0.8 million of business interruption losses. Losses of $0.6 million pertained to rent abatements due to tenants that have not reopened since the hurricane, recorded as a reduction of property rentals and tenant expense reimbursements, and $0.2 million was recorded as a provision for doubtful accounts for unpaid rents. As of May 2, 2018, approximately 95% of all stores previously occupied prior to the hurricane (as measured by GLA) are open, including Marshalls, which opened on April 12, 2018.
To the extent future insurance proceeds exceed the difference between the hurricane related expenses incurred and/or business interruption losses recognized, the excess will be reflected as a gain in the period those amounts are received or when receipt is deemed probable.
No determination has been made as to the total amount or timing of insurance payments that may be received as a result of the hurricane.
Environmental Matters
Each of our properties has been subjected to varying degrees of environmental assessment at various times. Based on these assessments and the projected remediation costs, we have accrued costs of $1.4$1.5 million and $1.2 million on our consolidated balance sheets as of March 31, 2018 and December 31, 2017, respectively, for potential remediation costs for environmental contamination at twocertain properties. While this accrual reflects our best estimates of the potential costs of remediation at these properties, $0.1$0.3 million has currently been expendedaccrued during the quarter ended March 31, 2018 and there can be no assurance that the actual costs will not exceed this amount. With respect to our other properties, the environmental assessments did not reveal any material environmental contamination. However, there can be no assurance that the identification of new areas of contamination, changes in the extent or known scope of contamination, the discovery of additional sites, or changes in cleanup requirements would not result in significant costs to us.
Bankruptcies
Although our base rent is supported by long-term leases, leases may be rejected in a bankruptcy proceeding and the impacted stores may close prior to lease expiration. In the event that a tenant with a significant number of leases in our shopping centers files for bankruptcy and rejects its leases with us, we could experience a reduction in our revenues. We monitor the operating performance and rent collections of all tenants in our shopping centers, especially those tenants in arrears or operating retail formats that are experiencing significant changes in competition, business practice, or store closings in other locations.locations, such as Toys “R” Us, Sears Holding Corporation (“Sears”) and Staples, Inc. (“Staples”). Sears and Staples represent 2.0% and 1.5%, respectively, of our annualized base rent and each continued to close stores in 2017. During September 2017, Toys “R” Us filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code and announced an orderly wind-down of its U.S. business and liquidation of all U.S. stores on March 15, 2018. As of March 31, 2018, the Company had leases with Toys “R” Us at nine locations with annualized base rent of $5.2 million. We are unable to estimate the outcome of the bankruptcy proceedings at this time. We are not aware of any bankruptcyadditional bankruptcies or announced store closings by any tenants in our shopping centers that would individually cause a material reduction in our revenues.
Inflation and Economic Condition Considerations
Most of our leases contain provisions designed to partially mitigate the impact of inflation. Although inflation has been low in recent periods and has had a minimal impact on the performance of our shopping centers, there are more recent data suggesting that inflation may be a greater concern in the future given economic conditions and governmental fiscal policy. Most of our leases require tenants to pay their share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing our exposure to increases in costs and operating expenses resulting from inflation, although some larger tenants have capped the amount of these operating expenses they are responsible for under the lease. A small number of our leases also include percentage rent clauses enabling us to receive additional rent based on tenant sales above a predetermined level, which sales generally increase as prices rise and are typically related to increases in the Consumer Price Index or similar inflation indices.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as of June 30, 2017March 31, 2018 or December 31, 2016.2017.
| |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Interest Rate Risk
We have exposure to fluctuations in interest rates, which are sensitive to many factors that are beyond our control. The following table discusses our exposure to hypothetical changes in market rates of interest on interest expense for our variable rate debt and fixed-rate debt. Interest rate risk amounts were determined by considering the impact of hypothetical interest rates on our debt. This analysis does not take into account all of the factors that may affect our debt, such as the effect that a changing interest rate environment could have on the overall level of economic activity or the action that our management might take to reduce our exposure to the change. This analysis assumes no change in our financial structure. Our exposure to a change in interest rates is summarized in the table below.
| | | 2017 | | 2016 | 2018 | | 2017 |
(Amounts in thousands) | June 30, Balance | | Weighted Average Interest Rate | | Effect of 1% Change in Base Rates | | December 31, Balance | | Weighted Average Interest Rate | March 31, Balance | | Weighted Average Interest Rate | | Effect of 1% Change in Base Rates | | December 31, Balance | | Weighted Average Interest Rate |
| | |
Variable Rate | $ | 127,756 |
| | 2.68% | | $ | 1,278 |
| (2) | $ | 38,756 |
| | 2.36% | $ | 169,500 |
| | 3.41% | | $ | 1,695 |
| | $ | 169,500 |
| | 3.10% |
Fixed Rate | 1,292,849 |
| | 4.25% | | — |
| | 1,166,804 |
| | 4.26% | 1,396,329 |
| | 4.12% | | — |
| (2) | 1,408,817 |
| | 4.14% |
| $ | 1,420,605 |
| (1) | | $ | 1,278 |
| | $ | 1,205,560 |
| (1) | | $ | 1,565,829 |
| (1) | | $ | 1,695 |
| | $ | 1,578,317 |
| (1) | |
(1) Excludes unamortized debt issuance costs of $8.2$13.3 million and $8.0$13.8 million as of June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.
(2) The variableIf the weighted average interest rate of our fixed rate debt is subjectincreased by 1% (i.e. due to a LIBOR floor such that a 1% change in base rates does not impact the actual borrowing raterefinancing at higher rates), interest expense would have increased by 1%.approximately $14.0 million based on outstanding balances as of March 31, 2018.
We may utilize various financial instruments to mitigate the impact of interest rate fluctuations on our cash flows and earnings, including hedging strategies, depending on our analysis of the interest rate environment and the costs and risks of such strategies. As of June 30, 2017,March 31, 2018, we did not have any hedging instruments in place.
Fair Value of Debt
The estimated fair value of our consolidated debt is calculated based on current market prices and discounted cash flows at the current rate at which similar loans would be made to borrowers with similar credit ratings for the remaining term of such debt. As of June 30, 2017,March 31, 2018, the estimated fair value of our consolidated debt was $1.4$1.5 billion.
Other Market Risks
As of June 30, 2017,March 31, 2018, we had no material exposure to any other market risks (including foreign currency exchange risk or commodity price risk).
In making this determination and for purposes of the SEC’s market risk disclosure requirements, we have estimated the fair value of our financial instruments at June 30, 2017March 31, 2018 based on pertinent information available to management as of that date. Although management is not aware of any factors that would significantly affect the estimated amounts as of June 30, 2017,March 31, 2018, future estimates of fair value and the amounts which may be paid or realized in the future may differ significantly from amounts presented.
| |
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures (Urban Edge Properties)
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective.
There have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f)) that occurred during the three and six months ended June 30, 2017March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures (Urban Edge Properties LP)
The Operating Partnership’s management maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer of our general partner, as appropriate to allow timely decisions regarding required disclosures. Because of inherent limitations, disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of disclosure controls and procedures are met.
The Operating Partnership’s management, with the participation of the Chief Executive Officer and Chief Financial Officer of our general partner, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer of our general partner concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective.
There have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f)) that occurred during the three and six months ended June 30, 2017March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
We are party to various legal actions that arise in the ordinary course of business. In our opinion, after consultation with legal counsel, the outcome of such matters is not expected to have a material adverse effect on our financial position, results of operations or cash flows.
There have been no material changes to the risk factors previously disclosed in the Company’s Annual Report for the year ended December 31, 20162017 filed with the SEC on February 16, 2017.14, 2018.
| |
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Urban Edge Properties
(a) Not applicable.
(b) Not applicable.
(c) Issuer Purchases of Equity Securities.
|
| | | | | | | | | | | |
Period | | (a) Total Number of Common Shares Purchased | | (b) Average Price Paid per Common Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | (d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet to be Purchased Under the Plan or Program |
April 1, 2017 - April 30, 2017 | | — |
| | $ | — |
| | N/A | | N/A |
May 1, 2017 - May 31, 2017 | | 1,092 |
| (1) | 27.66 |
| | N/A | | N/A |
June 1, 2017 - June 30, 2017 | | — |
| | — |
| | N/A | | N/A |
| | 1,092 |
| | $ | 27.66 |
| | N/A | | N/A |
|
| | | | | | | | | | | |
Period | | (a) Total Number of Common Shares Purchased | | (b) Average Price Paid per Common Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | (d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet to be Purchased Under the Plan or Program |
January 1, 2018 - January 31, 2018 | | 2,876 |
| (1) | $ | 21.98 |
| | N/A | | N/A |
February 1, 2018 - February 28, 2018 | | 12,825 |
| (1) | 26.26 |
| | N/A | | N/A |
March 1, 2018 - March 31, 2018 | | 457 |
| (1) | 23.85 |
| | N/A | | N/A |
| | 16,158 |
| | $ | 25.43 |
| | N/A | | N/A |
(1) Represents common shares surrendered by employees to us to satisfy such employees’ tax withholding obligations in connection with the vesting of restricted common shares.
Urban Edge Properties LP
(a) On May 24 and 25, 2015, the Operating Partnership issued 2,587,179 OP Units and 1,938,520 OP units, respectively, valued at $122 million, as partial consideration for the acquisition of seven retail assets. The properties were acquired through the issuance of OP Units and the assumption of $33 million of existing mortgage debt, the issuance of $126 million new non-recourse, secured mortgage debt and $44 million in cash, for total consideration of $325 million. Beginning one year after issuance, the OP units are redeemable at the option of the holders thereof for cash or, at the Company’s option, for common shares of beneficial interest of the Company on a one-for-one basis, subject to certain adjustments in accordance with the terms of the Operating Partnership’s limited partnership agreement. The issuance of the OP units described above is exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended.Not applicable.
(b) Not applicable.
(c) Issuer Purchases of Equity Securities.
|
| | | | | | | | | | | |
Period | | (a) Total Number of Units Purchased | | (b) Average Price Paid per Unit | | (c) Total Number of Units Purchased as Part of Publicly Announced Plans or Programs | | (d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet to be Purchased Under the Plan or Program |
April 1, 2017 - April 30, 2017 | | — |
| | $ | — |
| | N/A | | N/A |
May 1, 2017 - May 31, 2017 | | 1,092 |
| (1) | 27.66 |
| | N/A | | N/A |
June 1, 2017 - June 30, 2017 | | — |
| | — |
| | N/A | | N/A |
| | 1,092 |
| | $ | 27.66 |
| | N/A | | N/A |
|
| | | | | | | | | | | |
Period | | (a) Total Number of Units Purchased | | (b) Average Price Paid per Unit | | (c) Total Number of Units Purchased as Part of Publicly Announced Plans or Programs | | (d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet to be Purchased Under the Plan or Program |
January 1, 2018 - January 31, 2018 | | 2,876 |
| (1) | $ | 21.98 |
| | N/A | | N/A |
February 1, 2018 - February 28, 2018 | | 12,825 |
| (1) | 26.26 |
| | N/A | | N/A |
March 1, 2018 - March 31, 2018 | | 457 |
| (1) | 23.85 |
| | N/A | | N/A |
| | 16,158 |
| | $ | 25.43 |
| | N/A | | N/A |
(1) Represents common units of the Operating Partnership previously held by Urban Edge Properties that were redeemed in connection with the surrender of restricted common shares of Urban Edge Properties by employees to Urban Edge Properties to satisfy such employees’ tax withholding obligations in connection with the vesting of restricted common shares.
| |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
| |
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
None.
A list of exhibits to this Quarterly Report on Form 10-Q is set forth on the Exhibit Index immediately preceding such exhibits and is incorporated herein by reference.
INDEX TO EXHIBITS
The following exhibits are filed as part of this Quarterly Report on Form 10-Q:
|
| | |
Exhibit Number | | Exhibit Description |
10.1 | | Tax Protection Agreement dated asAmendment No. 1 to the Amended and Restated Bylaws of May 24, 2017, by and among Urban Edge Properties LP; Urban Edge Properties; and Acklinis Yonkers Realty, L.L.C., Acklinis Realty Holding, LLC, Acklinis Original Building, L.L.C., A & R Woodbridge Shopping Center, L.L.C., A & R Millburn Associates, L.P., Ackrik Associates, L.P., A & R Manchester, LLC, A & R Westfield Lincoln Plaza, LLC and A & R Westfield Broad Street, LLC.(as adopted on February 23, 2018) (incorporated by reference to Exhibit 3.1 to Form 8-K filed February 28, 2018) |
10.2 | | Contribution Agreement dated as of April 7, 2017, by and among Urban Edge Properties LP; Urban Edge Properties; and Acklinis Yonkers Realty, L.L.C., Acklinis Realty Holding, LLC, Acklinis Original Building, L.L.C., A & R Woodbridge Shopping Center, L.L.C., A & R Millburn Associates, L.P., Ackrik Associates, L.P., A & R Manchester, LLC, A & R Westfield Lincoln Plaza, LLC and A & R Westfield Broad Street, LLC. |
31.1 | | |
| | |
| | |
| | |
| | |
| | |
101.INS | | XBRL Instance Document |
101.SCH | | XBRL Taxonomy Extension Schema |
101.CAL | | XBRL Extension Calculation Linkbase |
101.LAB | | XBRL Extension Labels Linkbase |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase |
PART IV
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.
|
| |
| URBAN EDGE PROPERTIES |
| (Registrant) |
| |
| /s/ Mark Langer |
| Mark Langer, Chief Financial Officer |
| |
| Date: AugustMay 2, 20172018 |
| |
| URBAN EDGE PROPERTIES LP |
| By: Urban Edge Properties, General Partner |
| |
| /s/ Mark Langer |
| Mark Langer, Chief Financial Officer |
| |
| Date: AugustMay 2, 20172018 |
| |