Urban Edge Properties - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered record quarterly earnings for UE by management’s account, with FFO as Adjusted of $0.35 per diluted share (+6% YoY) and same-property NOI growth of 3.8% driven by rent commencements from the signed-not-open pipeline, higher net recovery revenue, and 2024 acquisitions.
• Net income per diluted share was $0.07 vs $0.02 in Q1 2024; total revenue was $118.17M vs $109.63M in Q1 2024; leasing momentum remained strong (42 deals; shop occupancy a new record 92.4%).
• Guidance: Net income per diluted share raised to $0.40–$0.45; FFO and FFO as Adjusted reiterated at $1.36–$1.41 and $1.37–$1.42; management noted they would have raised guidance by ~$0.02 if not for April macro/tariff volatility.
• Capital recycling continues: $25M land sale closed and ~$41.2M under contract (weighted avg ~5% cap), with proceeds targeted to 1031 exchanges; dividend maintained at $0.19 per share (declared May 7, 2025).

What Went Well and What Went Wrong

What Went Well

• Record quarterly FFO as Adjusted and accelerating rent growth: “FFO as adjusted of $0.35 per share… the highest quarterly earnings result in UE’s 10-year history… Rent growth is accelerating…”.
• Leasing execution and occupancy quality: 42 leases (434k sf) with strong spreads (new leases same-space cash +34.3%); shop occupancy rose to 92.4%, up 400 bps YoY.
• Redevelopment pipeline and capital recycling: $156.4M active projects at ~14% expected yield; $66M of assets sold/under contract at ~5% cap, improving portfolio mix.

What Went Wrong

• Occupancy ticked down vs Q4 due to anchor recaptures tied to bankruptcies; same-property leased occupancy fell 50 bps QoQ (96.6%).
• Macro uncertainty post-tariff announcements led management to hold back a potential ~$0.02 guidance raise despite a stronger start to the year.
• Investment sales market showing early signs of slowing; bid-ask spreads remain wide and CMBS issuance limited since April, tempering external growth pacing.

Transcript

Operator (participant)

Greetings and welcome to the Urban Edge Properties first quarter 2025 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeff Olson. Please go ahead.

Moderator (participant)

Good morning and welcome to Urban Edge Properties first quarter 2025 earnings conference call. Joining me today are Jeff Olson, Chairman and Chief Executive Officer; Jeff Mooallem, Chief Operating Officer; Mark Langer, Chief Financial Officer; Rob Milton, General Counsel; Scott Auster, EVP and Head of Leasing; and Andrea Drazin, Chief Accounting Officer. Please note today's discussion may contain forward-looking statements about the company's views of future events and financial performance, which are subject to numerous assumptions, risks, and uncertainties, and which the company does not undertake to update. Our actual results, financial condition, and business may differ. Please refer to our filings with the SEC, which are also available on our website for more information about the company. In our discussion today, we will refer to certain non-GAAP financial measures. Reconciliations of these measures to GAAP results are available in our earnings release and our supplemental disclosure package.

At this time, it is my pleasure to introduce our Chairman and Chief Executive Officer, Jeff Olson.

Jeff Olson (Chairman and CEO)

Great. Thank you, Areeba, and good morning, everyone. We had a great first quarter generating results that exceeded our expectations, reporting FFO as adjusted of $0.35 per share, a 6% increase over the first quarter of last year, and the highest quarterly earnings result in UE's 10-year history. Same property NOI increased 3.8% compared to the first quarter of last year and benefited from rents commenced from our signed but not open pipeline, improved recovery ratios, and better-than-expected collections. Leasing momentum continued at a good pace in the first quarter, with the execution of 42 leases totaling 434,000 sq ft. This included 18 new leases in the quarter amounting to 118,000 sq ft, with same-space cash leasing spreads of 34%. Our tenant retention ratio remains high at 95%.

Our progress in attracting a desirable mix of shop tenants continued as our shop occupancy grew to a new record of 92.4%. Our leasing pipeline remains strong. Since the tariffs were announced in early April, we have not seen any changes in retailer demand at our properties. However, the investment sales market is showing early signs of slowing down. On the debt side, there has been limited CMBS issuance since April. Life insurance companies and banks are still actively lending on shopping centers, generally with spreads that have increased 10-30 basis points. On the equity side, many REITs and foreign investors are pausing. Transactions with private buyers remain active. This is highlighted by our successful $25 million sale of 8 acres of land at Bergen Town Center, which has been approved for 460 residential units.

Additionally, we are under contract to sell two more properties for $41 million, which will bring our total dispositions to $66 million this year at a 5% weighted average cap rate. We plan to reinvest this capital into accretive acquisitions that will enhance our portfolio quality and growth rate. Now, turning to our 2025 outlook, we are reiterating our 2025 full-year guidance of achieving FFO as adjusted of $1.37-$1.42 per share, reflecting growth of 4% at the midpoint. We would have likely increased our guidance by $0.02 a share if not for the economic volatility in April. While we had a stronger start to the year than we expected, the economic uncertainty has led us to project a more conservative outlook for the back half of the year. We will revisit our assumptions again next quarter to see if an increase in guidance is appropriate.

Our five points of differentiation should continue to drive our growth. First, our properties are concentrated in the DC to Boston corridor, the most densely populated supply-constrained region of the country. Our average three-mile population density of approximately 200,000 people is the highest in the sector. Second, our forecasted growth in net operating income is one of the most visible in the sector, rooted in our $25 million signed but not open pipeline, representing 9% of our current net operating income. Third, we have a large redevelopment pipeline totaling $156 million of projects expected to generate a 14% return. Fourth, we are actively recycling capital by selling some of our non-core, lower-cap assets and redeploying that capital into accretive acquisitions. Over the past 18 months, we have acquired over $550 million in assets at a 7.2% cap rate and sold approximately $450 million at a 5.2% cap rate.

Finally, our balance sheet is conservatively built for market disruption, considering we have no corporate debt other than $50 million currently drawn on our line. We have 31 individual non-recourse mortgages totaling $1.6 billion, isolating market risk to individual assets rather than at the corporate level. Our remaining 43 properties are unencumbered. I will now turn it over to our Chief Operating Officer, Jeff Mooallem.

Jeff Mooallem (COO)

Thanks, Jeff, and good morning, everyone. We had an excellent first quarter of leasing, signing 42 deals for over 430,000 sq ft, 24 renewals at a 6% spread, and 18 new leases at an impressive 34% spread. That spread was driven by deals with best-in-class retailers like Trader Joe's, Sephora, and Sweetgreen, providing both economic and merchandising upgrades at our assets. Our same property lease rate now stands at 96.6%, a 50 basis point decrease over the previous quarter and a 10 basis point decrease over the first quarter of 2024. This occupancy decrease was primarily a result of recapturing anchor spaces from Big Lots, Party City, and Buy Buy Baby. We had seven leases with those retailers. Two were acquired through the bankruptcy process by tenants we wanted in our properties, and five we took back willingly with better replacements in mind.

We are negotiating deals on those five spaces at better overall terms with tenants that we think are a better fit for those properties than the prior occupants. We also continue to improve our shop occupancy, which is now up to 92.4%, a 150 basis point increase since the last quarter and a 400 basis point increase over the prior year. Despite a bumpy economy in April, our leasing pipeline remains strong. We still expect to end 2025 with anchor occupancy of at least 97% and shop occupancy between 93-94%, with healthy leasing spreads of 20% or more. On the development side, we completed redevelopment projects at Montauk Highway, Amherst Commons, Bergen Town Center, and Manasquan at an aggregate cost of $22 million.

These projects provided not only a healthy return on our investment but also set us up for future rent growth, as tenants like TJ Maxx, Ross, First Watch, and Nordstrom Rack all bolster the lineup at those properties. We commenced two redevelopment projects in the first quarter totaling $14 million at Yonkers Gateway Center and at our Target-anchored Kingswood Crossing in Brooklyn. Our total active redevelopment pipeline is now $156 million at an expected 14% return. Jeff already touched on some of the dislocation in the transaction market, so I will not add much more there other than to say any volatility should give us a chance to transact at more attractive returns. The stability of our portfolio, along with the accretive redevelopment opportunities embedded throughout it, allows us to be patient. I will now turn it over to our Chief Financial Officer, Mark Langer.

Mark Langer (CFO)

Thanks, Jeff. Good morning. As you just heard, we had another excellent quarter with strong earnings, continued progress on the leasing front, and good execution on our anchor repositioning projects. FFO as adjusted was $0.35 per share, and our same property NOI, including redevelopment, increased 3.8% compared to the first quarter of 2024. NOI growth was better than expected, due in part to higher net recoveries, year-end CAM reconciliation billings, and collections from tenants in bankruptcy that continued to pay rent. FFO as adjusted also benefited from the impact of previous accretive capital recycling and lower recurring G&A. Our balance sheet remains strong with approximately $800 million of total liquidity, including $98 million in cash.

Our debt maturity profile is very manageable, with only 8% of outstanding debt maturing through 2026, comprised of one $24 million mortgage maturing in December of this year and $116 million in maturities in 2026. Currently, our only variable-rate debt pertains to our line of credit. Our net debt to annualized EBITDA now stands at 5.9 times. Our balance sheet is well-positioned to withstand the economic volatility that has recently emerged, and we have significant liquidity to take advantage of opportunities that may arise in the future. Turning to our outlook for 2025, Jeff noted that we are reiterating full-year FFO as adjusted guidance of $1.37-$1.42 and same property NOI growth, including properties in redevelopment, of 3-4%. Our assumption for revenue deemed to be uncollectible is unchanged at 75-100 basis points of gross rent.

As we have previously stated, our $25 million SNO pipeline remains a significant driver of NOI growth, with $4.4 million of annualized gross rent commenced in the first quarter and our expectation to recognize an additional $4.4 million from our SNO pipeline for the remainder of 2025, predominantly weighted to the second half of the year. Our same-property NOI growth was ahead of plan in the first quarter. We have built in more conservative assumptions for the remainder of the year, incorporating a contingency to cover potential volatility in rent collections, tenant fallout, and other income. We reduced the high end of our expected recurring G&A expense for 2025 by $500,000 to a new midpoint of $35.8 million, which is comparable to the amount incurred in the prior year. The reduction reflects our continued efforts to carefully manage third-party spending as well as internal costs, including headcount.

We are pleased with the efforts our entire team is making to ensure we operate with speed and efficiency. To conclude, our team remains focused on executing our business plan to drive leasing and occupancy and deliver new tenant spaces on time while carefully managing costs. We have a talented and seasoned team that has successfully navigated a variety of economic cycles, and we are confident that we can continue to drive sector-leading growth in the years ahead. I will now turn the call over to the operator for questions.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press Star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. Your first question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.

Jeff Olson (Chairman and CEO)

Good morning, Ron.

Operator (participant)

Ronald, your line is live. Okay. We'll move on to Michael Griffin with Evercore. Please go ahead.

Michael Griffin (Director and Senior REIT Analyst)

Great. Thanks. Jeff, I appreciate your kind of commentary as it relates to the demand for releasing some of those bigger boxes. If you think there is this macro uncertainty with the tariff policy and businesses might be putting decisions on hold, I mean, does that change your kind of thinking around the timeframe of getting those leased up and how it might ultimately impact occupancy?

Jeff Olson (Chairman and CEO)

Look, so far, we have seen no slowdown from the retailers. That is not only across our portfolio, but when we are speaking to our brethren, when we are speaking to retail landlords, we are not seeing anyone show a slowdown at the moment. Last night, I had dinner with somebody who runs one of the largest retail real estate brokerage firms here in the New York area. He told me that they have 500 leases out right now that they are negotiating, and not one of them has seen a material change relative to their historical norms. At the moment, we are not seeing it.

Michael Griffin (Director and Senior REIT Analyst)

Great. That's some helpful context. Maybe you could give a little more color on the dispositions that were announced and the ones that are under contract. I realize there are probably only so much you can say, particularly for the ones that are under contract. A 5% cap rate seems pretty attractive, particularly given you were acquiring properties in the low sevens last year. As we think about the opportunity set for external growth, is that a fair spread to assume about 200 basis points between acquisitions and dispos? Any color there would be helpful.

Jeff Olson (Chairman and CEO)

Over the last 18 months, that's what we've been able to do to the tune of around $500 million. We obviously have some visibility on the $66 million that we've announced this morning at a 5. Those are three separate assets. One was land that is going to get used for residential purposes, but it had a building on it. I think that was done at around a 4% cap rate. We will hope to do more in the future, but it's too early to tell. Likewise, we're trying to line up acquisitions on the other side of the equation because many of these will be done in 1031s. We're definitely on the hunt for those acquisitions.

Michael Griffin (Director and Senior REIT Analyst)

Great. That's it for me. Thanks for the time.

Jeff Olson (Chairman and CEO)

Okay. You bet. Thank you.

Operator (participant)

Next question, Floris Van Dijkum with Compass Point. Please go ahead.

Floris van Dijkum (Managing Director)

Hey. Morning, guys. Thanks for taking my question.

Jeff Olson (Chairman and CEO)

Morning.

Floris van Dijkum (Managing Director)

Hey. Jeff, you mentioned something in your opening remarks which sort of caught my attention. Maybe if you could expand on that and maybe Mark, if you can give a little bit more detail behind it. If it was not for the current disruption in the market or volatility with the tariffs, you would have raised your outlook by 2 cents. Maybe if you can go into more detail, what specifically are you being more cautious about? Did you raise your bad debt assumptions? What are the other things that you did not to raise your guidance going forward?

Jeff Olson (Chairman and CEO)

Look, I think, Floris, we're just being more conservative, and we added to the contingency. There's nothing specific that's specific to a certain tenant that caused us to do it. It's just that we thought that it'd be more prudent to have more conservative guidance out at the moment and not raise at this time.

Floris van Dijkum (Managing Director)

Okay. Fair enough. One of the other things is, as you look out, obviously, you're looking at negotiating and deploying some of that capital. Maybe you're doing a lot of these 1031 exchanges. What kind of impact does that have on your taxable income? I'm thinking there's another company that I cover in the office sector that has done a lot of 1031 exchanges in its history. Obviously, the good news is that you defer the tax. The bad news is it forces you to pay out more in terms of dividends. Obviously, you guys are still your payout ratio is still very modest. How do you think about that? What kind of impact would that have on your taxable income and your dividend?

Would that force you to, through these 1031 exchanges, does that force you to bump up your dividend maybe a little quicker than you otherwise might have?

Jeff Olson (Chairman and CEO)

I don't think so at all. Mark?

Mark Langer (CFO)

Yeah. No, Floris, by nature of doing the 1031, just to clarify for you, that is what's protecting us to defer the gain. Had we not put these in 1031 exchanges, it would have increased taxable income and, to your point, therefore, increased potential pressure on distributing that in the form of a dividend. Because we're protecting these gains via the deferral in 1031, we are not adding any pressure to the dividend. That's why we find it particularly attractive to do so.

Floris van Dijkum (Managing Director)

Got it. Just to clarify, the new tax basis of your or the new depreciable basis of your asset is the basis of your previous asset, correct?

Mark Langer (CFO)

Correct. Yeah, that's correct.

Floris van Dijkum (Managing Director)

Got it. Okay. That's it for me. Thanks, guys.

Mark Langer (CFO)

Great. Thank you.

Operator (participant)

Next question, Paulina Rojas with Green Street. Please go ahead.

Paulina Rojas (Senior Analyst)

Good morning. In your press release, you mentioned that rent growth is accelerating across your markets. Can you provide some numerical context or guidance to support that comment? Do you believe the number of BKs we had in 1Q had any impact on landlords' negotiating leverage?

Jeff Mooallem (COO)

Paulina, good morning. It's Jeff Mooallem. I mean, as far as context, what we can tell you is that we are pushing rents across the board. We recently had a situation where we had a national retailer telling us they were topped out in the mid-teens. We passed on the deal, and they were able to come back in the low 20s. You can attribute a 10-15% increase in market rents from that transaction. I think that maybe it's a little less than that. Maybe 5-10% is a good number to use. Certainly, we've seen some legitimate market rent growth across our markets and good demand across the board.

The bankruptcies in the first quarter, in particular, if you look at Big Lots and Party City, which have been hanging out there for a very long time, and you could add Joann's to that list, although we don't have any Joann's exposures. We don't view those as a canary in the coal mine of multiple retailer bankruptcies. There are names on the at-risk list that we worry about and that we talk about often. We think the retailer balance sheets are overall very healthy. When we talk to our biggest tenants, like the Home Depots, the Walmarts, the TJ Maxx companies, they're not worried. Ross is performing extremely well in the Northeast so far and has opened up their buying program to do a lot more stores. We're negotiating a couple of deals with them right now.

We do not really see any big bankruptcy headlines coming down the pike. Obviously, the economic disruption we are all worried about and the potential recession that that could cause is on all of our minds. Leaving that aside, we feel like the state of the industry is very healthy right now.

Paulina Rojas (Senior Analyst)

Thank you. My other question is, I think during periods of market volatility, investors tend to view traditional small-format grocery-anchored centers as a safer space compared to larger properties with a higher exposure to anchor space. What is your view on this perception? Given the credit quality of your anchors, how do you think your portfolio would perform in a more difficult environment relative to a typical, again, small grocery-anchored center portfolio?

Jeff Mooallem (COO)

Yeah. Paulina, it's Jeff Mooallem again. It's a great question. It's one that we ask ourselves constantly as we do our internal evaluations and we look at our external opportunities. We feel very good about how our portfolio would perform in a recessionary environment. I like to say to our employees here that Urban Edge is a good place to be when times are good and a great place to be when times are bad. I really do believe that. Now, of course, if you're comparing it to a very healthy grocery store with a reasonable 10-20 thousand sq ft amount of shop space in a thriving environment and those shops are getting 3% a year increases, that's an excellent investment. It's priced that way, right?

There's a 50-150 basis point delta between where those price in the market today and where some of our stuff might price. A lot of the grocery-anchored centers we look at are very heavy on shop space and, in our opinion, therefore, might be exposed more to a slowdown in the economy than some of our properties, which are very heavy on well-balance sheeted anchored spaces. Who's to say what happens in a recession? Historically, if you look at the GFC and other times of turbulences, it's been the small shops. It's been the local mom-and-pops and the weaker balance sheets that have struggled the most and had the most trouble coming out of it. When I look at our balance sheet and our tenant roster, I view it as more bulletproof and a little bit more insulated than some of the peers.

We'd love to buy more great grocery-anchored shopping centers, but we're not going to stretch and buy something with too much shop space just because it has a grocer in it if we think it's going to be more susceptible to a slower economy.

Paulina Rojas (Senior Analyst)

Thank you. Great caller.

Jeff Mooallem (COO)

All right. Thank you.

Operator (participant)

Once again, if you would like to ask a question, please press star one on your telephone keypad. Next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.

Ronald Kamdem (Managing Director, Head of US REITs and CRE Research)

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

Jeff Olson (Chairman and CEO)

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

Ronald Kamdem (Managing Director, Head of US REITs and CRE Research)

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

Jeff Olson (Chairman and CEO)

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

Mark Langer (CFO)

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

Ronald Kamdem (Managing Director, Head of US REITs and CRE Research)

Great. Thanks so much. That's it for me.

Operator (participant)

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

Jeff Olson (Chairman and CEO)

Great. We appreciate your interest and look forward to seeing everyone soon. Thank you.

Operator (participant)

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