Urban Edge Properties Q2 FY2025 earnings call

• Strong second quarter results with FFO and same-property NOI growth.
• Strong demand for space in shopping centers, with multiple bids on available space driving rent and lease term pressure.
• Sold $66 million of assets year-to-date, including Kennedy Commons, MacDade Commons, and a building across from Bergen Town Center.
• $24 million signed but not open pipeline representing 8% of current NOI, and $142 million redevelopment pipeline expected to yield 15% return.
• Strategic capital recycling: acquired $552 million of centers at 7.2% cap rate and sold $493 million of noncore assets at 5.2% cap rate.
• Resilient balance sheet with $1.5 billion nonrecourse mortgages and 42 unencumbered properties valued at nearly $2 billion; only 9% of debt maturing through 2026.
• Leasing and development progress: 42 deals totaling 482,000 sq ft in Q2, including 27 renewals and 15 new leases; 5 redevelopment projects completed, and new projects activated at Bergen Town Center.

FFO as adjusted increased by 12% over last year and 8% year-to-date. Same-property net operating income increased by 7.4% for the quarter and 5.6% year-to-date. Same-property occupancy increased to 96.7%, up 10 basis points from prior quarter, and shop occupancy rate reached a record high of 92.5%, up 270 basis points over prior year. Year-to-date, $66 million of assets sold at a blended cap rate of 4.9%.

• Increased 2025 FFO as adjusted guidance by $0.02 per share to $1.40 to $1.44 per share, midpoint reflecting 5% growth over 2024.
• Project same-property NOI growth, including redevelopment, to be 4.25% to 5% in 2025.
• Lowered recurring G&A forecast for 2025 by $500,000 to midpoint $35 million, implying 3% reduction from 2024.

• Tenant bankruptcies are a reality, but present opportunities to replace with higher credit and better concept operators.
• Market risks related to cap rates and acquisition pricing, with high pricing expectations for sellers.

Q: Just 2 quick ones. Starting with the record occupancy in the in-line space. Maybe can you talk a little bit about what -- how much more upside do you think is that number -- that occupancy number? And number two, how is that translating into either better lease contracts or pricing power for you guys in the business?

A: Yes. Yes, listen, we're really happy with where we are on the shop space. I'll take that first. But as I said in my prepared comments, we think we can get to between 93,000 and 94,000 square feet -- 93% and 94% shop occupancy, which requires us to get another 50,000, 60,000, 70,000 square feet and also account for some vacates as the year goes on, although we don't expect much of that. The nice thing about the shop occupancy right now is that we do have, as you said, real pricing power. And of course, pricing power today is not just charging a higher rent or asking for better interest rates, but it's on things like exclusive use provisions, radius restrictions, opening dates, landlord contributions, tying things to permitting. We've been able to extract much better terms on all of the shop leasing we've been doing. So there's a little bit of run rate there in terms of occupancy growth and certainly better economic and other terms in the leases. On the anchor side, we have a name circled next to pretty much every anchor vacancy in the portfolio. Some of those deals should happen in the next few weeks to a couple of months, and we'll announce them in 3Q. And some of them might take longer. But there's certainly more activity on all of our spaces than we've seen in years past, and we're not really too worried about having a lot of space that's going to be sort of static inherent long- term anchor vacancy. So that's pretty good news as well.

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

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

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

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

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

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

Q: Great. That's helpful. And then maybe just stepping back, kind of thinking about the leasing environment in the portfolio now. Obviously, you're about 97% leased, that lease to occupied spread continues to narrow. I mean, Jeff, as you kind of talk about pricing power from a landlord perspective, is this more the ability to push base rents? Are you -- do you have better negotiating power when it comes to concessions? I'm just trying to get a sense of kind of the landlord tenant relationship here and how best you can utilize that position of being very highly leased to maximize revenues.

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

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

A: Paulina, I think the main point is that the tenants that we replaced -- we replaced tenants that were struggling for years. This is like Toys "R" Us and Kmart and so many others that barely made it, but they made it over an extended time period. And we put in very high-quality credit tenants to replace them, tenants like ShopRite, tenants like TJX, tenants like Ross and many others. So we're not expecting as much dislocation going forward in part because of the high-quality retailers that we put in place and also in part because the retail market overall is just much healthier than it was 10 years ago.

Q: Just a numbers question here on G&A from guidance and then what was in the third -- second quarter here. I see you lowered obviously, G&A expense range to $34 million to $35.5 million. The line item was up year-over-year was about $11.7 million. Can you just talk about maybe what's different in that number? And was it just increased for the second quarter and going to come down for the second half? Or just add a little color there?

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