Urban Edge Properties (UE) Earnings Call Transcript & Summary

Good afternoon, and welcome to the 1:15 session at Citi's Global Property CEO Conference. I'm Katy McConnell with Citi Research, and we're pleased to have with us Urban Edge. Before we get started, this session is for Citi-investing clients only. And if media or other individuals are on the line, please disconnect now. Disclosures are available up on the webcast. For those of you joining us here today in person, to ask management any questions, feel free to step up to one of the microphones located in the center aisle. If you're joining us remotely, you can also type your questions into the webcast question box on the screen, and we'll do our best to ask them during the session. And now, Jeff, I will turn it over to you to introduce your team and company and provide some opening remarks.

Great. Thank you, Katy. It's really good to see everybody, especially in person, so thank you for having us back. I will also tell you that just based on the quality of the meetings we've had over the last 1.5 days, it has just been wonderful being back and seeing the level of activity. And I think there are lots of reasons for why we're seeing higher quality of investors coming to us, which we'll talk about. But let me introduce my team first. To my left is Mark Langer, our Chief Financial Officer; and to his left is Jen Holmes, our Chief Accounting Officer, who's also spearheading Investor Relations. What I thought I'd do is just talk a little bit about UE and then we can open up for questions. But first is our outlook for open-air retail real estate; and for UE, in particular, it's the strongest that it's been in the 7 years since we spun from Vornado. And this really is based on 2 things. It's leasing activity, and it's also based on redevelopment. So we own about a $4 billion portfolio of shopping centers primarily concentrated in the D.C. to Boston corridor, but the majority of our assets are located around the dense suburbs of New York City. About 60% of our value is derived from properties anchored by a grocery store, and the percentage is likely increasing from 60% to 70% based on leases under negotiation. By the way, our grocers generate sales of about $900 a foot, which I believe is the highest in the sector. Another 10% of our portfolio is anchored by either Home Depot or Lowe's, and then another 6% of our portfolio is industrial. Our lease to occupancy is 94% today. It's up about 300 basis points just over the last year, and we expect that it will reach 96% by the end of this year. I think that the best leading indicator of NOI growth is the pipeline of signed but not open leases, which for us totals $22 million, which represents about 10% of our NOI. I think this percentage may be one of the highest in the space, too. In addition, we have another 1 million square foot space of leases under negotiation at rent spreads that are averaging 20%. So when you look at all of this activity, we're looking at 2023, 2024 and 2025 as very high earnings growth years. We have a redevelopment pipeline that's about $200 million. We expect to earn an 8% return on those redevelopments. Most of those redevelopments are pretty straightforward, lower-risk anchor repositioning investments. They have an average cost of about $10 million a piece, and we will have an anchor lease signed before we commence construction. Once those developments are completed, we will have redeveloped about 60% of our portfolio since we spun from Vornado. Lastly, our balance sheet is strong. We have $200 million in cash and a $600 million line of credit. I'll turn it back to you, Katy.

Great. Thank you. So to open each session, we're asking each company what are the top 3 reasons why investors should buy your stock today over any other property REIT.

Yes. I think the first reason gets back to some of my opening comments in terms of occupancy. We were 91% a year ago. We're 94% today, going to 96% by the end of this year. And our average in 2015, '16 and '17 was 98%. So I see a big uplift in occupancy, which, of course, is going to generate pretty significant earnings growth. I'd say that's the first reason. And I think relative to peers, we started at a much lower base at that 91%. So we're still not seeing that income in our current revenue. The second reason is our redevelopment pipeline, which is a couple of hundred million dollars. We're taking spaces that had been previously occupied by retailers like Sears and Kmart and Toys "R" Us and Century 21. And we're replacing those retailers with tenants like Shoprite; Amazon Fresh, where we've got a couple of deals underway with them; Marshalls; T.J. among others. So as a result of taking a bankrupt tenant that really wasn't doing well for 5 years leading up to their bankruptcy and putting in a leading tenant like the ones I've described, I think we're going to create probably 100 to 200 basis points in cap rate compression on each of those assets. And the 8% return that we're getting on these anchor repositioning investments don't include the upside that we're going to be capturing from getting higher rents from the surrounding tenants because we have better tenancy or leasing up vacancy around those centers. And the third reason is I just think our stock is cheap. Relative to the private market, we're seeing cap rates that are in the 4% to 5% range. I think most analysts have an implied cap rate on us that's in the mid-6s.

And how would you say -- where do you think your portfolio should be trading relative to that consensus cap rate?

I think it should be closer to the 5% than to the mid-6s. It's probably somewhere in between, but it should be closer to the 5%.

And what would you say the market is penalizing your stock for the most today? And how do you plan to address that?

I think there was some view that, geographically, the Northeast was at a disadvantage. It's funny. In every tenant meeting that I have, I ask them this question. How are you doing in the Sun Belt markets versus in the Northeast? Where would you rather be? How are your stores doing in each of the regions? And they never make that differentiation. In fact, they want more stores in the Northeast because it's so hard to find boxes of the size that they're looking for. So I think that the first reason is just geography. But what's interesting, the private market is telling you otherwise. There are plenty of transactions. There was a Long Island portfolio that sold recently, grocery-anchored retail. That was about a 4.5% cap. There's another 1 on the market that will be sub-5% cap. There's a portfolio in Boston, likely will be sub-5% cap. So the private market trades are telling you otherwise. I do think the market is also not looking at our land value on our non-income-producing land. So we have some nonincome-producing land at Bergen Town Center. That's situated for residential. We can do about 500 units there. And then we also have significant land value in a mall that we bought on the South Shore of Long Island called Massapequa at 77 acres that's zoned for industrial, and we're in the process of terminating leases there and unencumbering that asset. It actually has negative NOI while we're doing this. So I don't think the market's given us proper credit for both of those, too.

And just as you look at the company from a strategic perspective, what would you say are the key differentiating factors that separate you from the other shopping center peers?

Yes. I think the main thing would be our concentration in the New York metro area. I do think we have the largest portfolio of open-air centers within the New York metro market. And what differentiates us in that regard is just the sheer number of people around each of our assets. So if you did a chart and just looked at our average 3-mile population density relative to the shopping center group, we would be at the highest. And I think what that tells you as an investor is that our land values are probably higher than most because when you're operating in these densely populated markets, there aren't that many parcels that are undeveloped. And generally, our shopping centers are about 20 to 30 acres of land or maybe 75% of that land is just a parking lot. 25% is in building. So over time, we think there are more densification opportunities to realize that land value.

Maybe we could go into that a little bit more. You've talked about evaluating assets for their highest and best use, including potential opportunities for residential and industrial. What are your current thoughts around these other uses? And what's the timetable in which you think you might announce something, I don't know, from like your flagship assets?

Yes. I mean across the board, there are opportunities. At Bergen Town Center, as I stated earlier, there's a parcel of land that probably can accommodate about 500 residential units. At Yonkers, we also own land in the back that can probably accommodate 350 residential units, has to go through an entitlement process. And then thirdly, at Massapequa, which I described earlier, development in industrial sites, our prices are just skyrocketing like crazy. And so we think there's a lot of value embedded in that land to the extent that we can get it unencumbered. I'd say those are the greatest opportunities. But there are probably 5 or 6 other properties that we're looking at for similar type uses. And generally, our plan is to advance the entitlements as far as possible and then monetize that nonincome-producing land and then redeploy that capital back into acquisitions in a tax-efficient manner so that it will drive earnings growth. We're really focused right now on our 2023, '24 and '25 earnings outlook. And one of the things I think we've done a poor job of over the years is investor communication, and we have ramped up our investor communication effort in a pretty big way. Last year, we did 2 earnings calls after no earnings calls for the first 6 years. This year, we're on the quarterly track to do that. And I think we'll probably do an investor conference sometime early fall, so that we can begin to show what '23, '24 and '25 are going to look like. And I think it's going to be pretty real to everybody because so much of what we do is predictable through the executed leases that have not yet commenced rent. So we already disclosed it in our supplemental, and it's pretty clear. But we're expecting that we'll ramp up a bit, in particular, at projects like Bruckner where we're still sitting on a vacant 180,000-square-foot Kmart building. And then also at -- and a 40,000-square-foot vacant Toys "R" Us building, which we hope to have leased soon and announced; and a fairly significant anchor repositioning project we're working on in Jersey City; and a second Kmart box in Montehiedra, which is in Puerto Rico, which we expect to announce a grocer, a discounter and a medical user to take that space soon.

Maybe we can talk a bit more about the earnings outlook that you just mentioned. Outside of onetime noise associated with the pandemic, how should we think about your earnings growth profile over the next few years and really the key buckets of drivers from that?

I think the biggest driver is going to be the signed but not yet opened. And you can do the math. You can look at the $22 million that's coming. We've disclosed exactly how it's coming. So I would model that in. I'm not giving specific guidance yet, but we may end up doing that later this year. But it's really easy to do the math, which is why we set up our supplemental the way that we did. And then I would also look at some of the nonincome-producing land, even negative income-producing land because I think Massapequa's generating about minus $4.5 million in NOI. And so you can make some assumptions on that land and what we do with that capital to redeploy it into income-producing assets.

I guess I'm more so trying to get at just what does the longer-term sustainable core earnings growth profile look like for the company.

Yes, I'm not prepared to give an answer, a specific answer on that today. But if you do that back-of-the-envelope math, you'll get to a number that's not particularly far away from where we'd be.

Okay.

And that will be the primary message at our investor conference that will be held this fall.

Great. Maybe we can talk more about the leasing environment today, how it's compared to the last few years and where you're seeing the most tenant demand. And in your opening remarks, I think you mentioned a pipeline of 1 million square feet. Maybe you can talk about what's driving such strong spreads there?

Clearly, grocers are at the very top of the list, and it's all types of grocers. From the full-line supermarkets to the specialty grocers, to the Amazons of the world. And so I'd say #1 is grocery space. It's why we're going from 60% of our asset value to 70%. Second would be some of the discounters. Target's a big user of space today, particularly throughout the New York metro area. And then third would be some of the other discounters like the, T.J. Maxxs, the Burlingtons, Ulta, Five Below. I mean we're doing a lot of business with them. And then on the small store side, we are seeing a lot more activity from the quick service restaurants. It's pretty exciting to see.

And on the grocery side of things, with the grocers being one of the biggest beneficiaries of the pandemic, how sustainable do you think the tailwind is in grocery sales?

It seems pretty sustainable for the time being. I mean I think most people are not working 5 days a week from the office. So I think that the grocery stores are probably getting an extra 2 days compared to what they used to get, maybe even 3 days a week. So that's the primary reason you've been able to see sales go up. And I do think that's going to continue. I don't know what Citi's policy is going forward. Are you going to be in the office 5 days a week again or no?

We also have a hybrid policy, 3 days in the office, 2 at home.

So you'll be spending 2 more days at the supermarket.

Right. Exactly. Can you talk about how retailers are thinking about last mile fulfillment today through your centers?

Yes. I mean they're very focused on it, in part, to make sure that we have adequate transportation needs for them and sufficient parking. But Mark, maybe you can spend a couple of minutes on this.

Yes, there's been no doubt the evolution of omnichannel has really taken hold. We've seen it with leading retailers like Target who are not just looking at the design of that interior to accommodate buy online, pick up in store but also actually fulfilling orders out of store. The data that's tracking where their customer is and the retailers that are making much more investment, I mean, pre-pandemic, I think there was a lot of concern about how some of these brands were going to compete with Amazon. And what we've seen is, through the pandemic, the best brands, the Walmarts, the Targets, the discounters, they really made investments. If you listen to their recent earnings calls, it's been a shift that now they're actually focused on the in-store experience where they're making larger capital investments. Part of that is around technology. You've seen automated checkout and fulfillment of how people can go cashierless. And it's not just Amazon. It's others. So all of these elements to us kind of boil down what the retailers are telling us, is proximity to the rooftops where people live absolutely matters because it's a much more convenient way to come in when we have open-air centers. You can drive up front, park and easily get in and out to meet the customer on their terms, whether they want to shop in store or pick up in store. So we're seeing this confluence, and it's evolving. There isn't one playbook. I think certain retailers are still trying to figure out. But the one message that resonates with us is just that proximity. Whether it's to serve last mile distribution or just to make it easier to the customer, the open-air format, I think, has proven to be very effective.

I mean I look at Target's stock price pre-pandemic, which has increased 86% from the month before we went into the pandemic compared to Amazon's stock price, which is up 29%. So would you have made that call going into COVID on a brick-and-mortar retailer versus Amazon, which would make things much easier in a COVID-type world? So the retailers have responded quite well, and it feels really good being bullish again on retail. For those of you who know me, I have been more conservative over the years because I've been -- I've seen what's happened. I mean we had -- across the industry, we had some fairly weak retail -- retailers that ultimately ended up going bankrupt. But in normal times, maybe 10% to 15% of our rent roll was at risk. I mean I think that number today is 2% maybe. It's just not that much, and it's across many of our peers as well. It's refreshing to see. Eventually, we'll get back up to that 10% to 15% again because retailers are going to leverage up and they're going to make some mistakes. But nonetheless, for the foreseeable future, we are operating in a market where we really do have more leverage. We have multiple tenants looking at vacancies today. And so we are able to leverage them, and we're able to get higher rents and better terms as a result.

So it feels like we've really entered this year with a lot of the positive tailwinds to the retail sector continuing, especially on the leasing front. So just curious what risks are on your radar. And to what extent do you expect inflation and rising oil prices to have an impact on consumer demand that's meaningful enough to impact leasing?

Yes. I mean I do think it's a risk. I do think it will impact more discretionary-type shoppers and retailers than it will for our primary customer base. Inflation concerns us, especially as we have a large redevelopment pipeline. I mean, right now, on our $200 million, by the way, about 70% of that cost is already locked in. So we feel good about that. But any incremental redevelopments, we're going to have to build in higher contingency. We're going to have to build in longer lead times, and it's going to put pressure to get the tenants to pay more in rent because we're going to want even a higher return given the risks.

Is this having an impact on your rent commencement expectations in terms of time frame?

Slightly, slightly.

Not as meaningful though?

Yes. Not overly meaningful, but any time you're a little bit late in a party, you don't want to be late. So -- but it hasn't been material, but it has -- we have had some delays as a result of that. Well, it's impossible not to.

And how has inflation impacted your ability to raise net effective rents and maintain growth that's going to outpace inflation going forward?

Yes. I mean it all comes down to the real estate and having multiple retailers want that piece of land. So putting in an auction-type process will allow us to get the highest rent that's possible, and that rent we're hoping is keeping up with inflation or even exceeding it at some point. I do think rent growth has been muted this year and probably will continue to stay muted for the next year until occupancy levels are back up to where they were prepandemic, which, call it, is 95%, 96% across most markets. But then we're virtually out of space, large space. And now if a retailer wants to get in, they're really going to have to pay the price to do it.

And I think you said you expect to get back to that 96% level this year.

Yes.

What's the time frame for getting back to your prior peak, which I think you said was 98%?

I think it's reasonable to assume that 12 to 18 months after that, we should get there.

Okay. You had terminated your remaining Kmart leases. I think there were 3 of them towards the end of last year. Can you update us on the status of backfilling those?

Yes. The market hated that by the way. So we terminated 3 Kmart leases for about $20 million. I think our stock underperformed by like 1,000 basis points for the first 45 days after that announcement because it came with $0.08 of earnings dilution. But $20 million for getting a 180000-square-foot leased back in the middle of the Bronx, probably our most valuable vacancy, also getting back 1/3 of our land in Massapequa, which we bought for the whole intention of vacating at and then a third piece in Puerto Rico, which we have -- we are close to lease with a grocer with one of the T.J. concepts and a medical provider, we feel really good about where we are on the Kmart. We hope to have Bruckner solved this summer. We're in late-stage negotiations with a very large national retailer, who I think is going to help turn that site into a dominant retail node. It's already a pretty dominant node, but having this retailer in 180,000 square feet will solidify our position. And this retailer, in particular, is looking at it both for retail, but they're also looking at it as a means for distribution, too.

Well, maybe we can switch gears a little bit to your acquisition strategy. What is your target acquisition volume for this year? And what are you expecting in terms of cap rates that you can achieve?

Yes. We don't have a targeted volume because we really don't want to put pressure on ourselves to buy anything we don't want to buy. What we will do is, to the extent that we sell this nonincome-producing land, we have a tax basis that's pretty low, so we would need to redeploy that into a 1031. So we would look at buying 1031 assets. We did purchase about a $200 million center right before year-end, and we were very happy with that purchase. It's called Woodmore. It's anchored by a Costco and a Wegmans. It's the second most visited shopping center in the state of Maryland. It's a real powerhouse. We bought it at about a 6.5% cap rate, which is pretty high in this market. We were able to finance it with 10-year IO money at 3.4%. So out of the gate, we're getting an 11% return on a very stable property that also has 20 acres of excess land that we think there are other things to do. So if we could find 4 more of those, that would be awesome, but I'm not expecting that to happen. Cap rates have compressed. I think they're probably going to stay in this 4.5% to 5% cap rate for the high-quality assets for the foreseeable future.

And how do you think about your ability to remain competitive in bidding for assets when there is a lot of capital chasing deals today?

Tough, it's really tough. But again, the shopping center industry is still a highly fragmented industry. About 80% of the shopping centers are still in private hands. So our competitive advantage is we know all of the shopping centers and all of the owners throughout the New York metropolitan region, and lots of times, sellers just don't want to take their property to full market for confidentiality reasons. There might be tax planning issues that they need to accomplish. So we can offer UPREIT units as we've done in the past. So many of our deals are off-market deals, and I would expect that to continue until the space is more consolidated than it is.

And then on the disposition side, what are you targeting this year? And just given the strength of the buyer environment, does it make sense to accelerate asset sales this year?

Yes. I think we have about $50 million of assets that we've targeted for disposition, mostly noncore properties, and I think that's a fair number for this year and next year.

And what would you describe as noncore properties within your portfolio?

We have a property in Wilkes-Barre, Pennsylvania. It's just not -- it's not consistent with the name Urban Edge Properties because it's not on the edge of a major urban market. So that would be a good example.

Noncore for us is usually geography-focused outside of our core or often a single asset could be ground lease. So it's just not where we can build scale in markets that we like.

And then in terms of the acquisition side, are there any new markets that you're looking to enter? Or is it largely just building scale where you already are?

It's mostly building scale where we are. I mean we've looked at other markets. But I think it would take multiple properties in order to pull that trigger so that we have critical mass. I mean we both -- Mark and I have spent a lot of time here in Florida. We used to work here. It's nice to be here. I wish we owned more property -- I wish we owned some properties here. But I think we have to find multiple assets, and we're not the only ones looking for properties down here. So we would have to have a competitive advantage. And that would have to come through a relationship of some sort that we have that nobody else does.

What's your appetite to acquire assets outside of retail today?

We've done some bolt-on acquisitions to an industrial park that we own in East Hanover, New Jersey, which we bought at around a 5% cap rate. We bought it because we think we could sell this industrial park, which is 1 million square feet at a cap rate that's significantly below the 5%. It was part of the spin from Vornado. Vornado actually used to own these parcels as well. So it was a natural bolt-on for us. But I would not expect us to see -- I would not expect to see us buying any other industrial buildings, except for the 2 parcels that we don't own within this industrial park. And it's very possible that we decide to sell the industrial park after we sell our nonincome-producing land because we know we could get such a low cap rate for it, and we could redeploy that into higher yielding but high-quality retail.

Maybe you could walk us through just more bigger picture your strategy around mixed use since that's another differentiating factor relative to some of the other strips. And what do you view as targeted levels in terms of exposure for each sector?

Yes. I really think we've pivoted a bit in terms of most of our mixed-use potential had residential opportunities at Bergen, at Yonkers and also in the Bronx. As of now, we think monetizing that land is probably a better choice than building it on our own. And the reason for that is because it does take a lot of money. It takes a lot of time. We would rather show our investors more predictable, consistent earnings growth than taking the next 5 years and building out mixed use. The other thing we found on 2 of our projects, 1 is at Bruckner and 1 is a Jersey City, is the retailers paid us or are paying us enough in rent to not justify tearing down that land and doing residential. So they made it a lot easier on us because, for us, it's more math than anything else. So we were prepared to do more residential on both of those sites, but the retail demand has escalated enough that we're basically getting paid enough to not have to do it. So mixed use is much less of a component than it used to be.

Maybe on the balance sheet strategy, can you talk about what steps you're taking to protect the balance sheet and plan for a potential rising rate environment?

Yes. Mark?

Yes. We're fortunate that -- and unique in many regards compared to our peers. Our debt strategy today consists entirely of single-asset nonrecourse mortgages. So for us, when we look at maturity profile this year, we only have 2 mortgages around $80 million. Next year, we do have -- one of our largest mortgages is at Bergen Town Center. It's a $300 million note. It doesn't come due till May. But to your point, Katy, what we're doing is actively remarketing and getting that out for refinancing early rather than waiting. So we have a well-laddered profile, and we really like, at our size and scale, the -- I'm sorry, the secured debt strategy for us has provided great flexibility. Some of you may have seen back 2 years ago, during the pandemic, we were able to eliminate over $90 million of debt through restructuring CMBS mortgages. So we like the strategy, but we are going to be more proactive considering this environment to look at refinancing debt that's coming due next year, earlier this year.

And what leverage metrics are you targeting? And how do you think about using your current cash balance to fund external growth?

Yes. So our cash balance is really earmarked primarily to fund the redevelopments we have underway. We also like having some opportunistic capital, as Jeff said, as we look for acquisitions. So longer term, our position has been to get net debt to EBITDA below 7. Because of the acquisition we just made, it's a little bit elevated, above that now at around 7.2. But as Jeff said, we know with the signed but not open pipeline as you look at the way incoming EBITDA is going to grow because it's already signed and executed. If you look at what's coming online in '23 and '24, we feel like we can get back below to meet the leverage levels.

Great. Okay. Well, before we go into my rapid fire, one last one on ESG. Can you talk about recent milestones that your company has accomplished on the ESG front? And what is your #1 priority for this year?

Yes. I'd say our biggest ESG priority is actually making ESG a bigger priority throughout the company. So for us, we filed our first ESG report publicly last year. And what we've set out for this year is to really make sure that all of our department heads, our employees know both some very specific ESG goals, but also having them tied to, invested into how they can help contribute to them. So one is just a very specific and broad awareness. Secondly, we're working and expanding data coverage. I think all of you who follow and monitor ESG programs are aware, just having good data, particularly as a strip center owner where our anchor tenants actually control the utility and energy usage of their spaces, we do not. We obviously control the common areas. So we've work more collaboratively with them to make sure that our data coverage can at least understand the usage on our assets. And then lastly, I would say, on the social and governance side, we're expanding efforts on DEI. Our HR team is working on expanding DEI initiatives throughout the company. And on the governance front, we have adopted new policies and procedures for shareholders as well as internally for management. So we're really trying to attack it on each level.

Great. Thank you. So rapid fire, first is what will same-store NOI growth be for your property sector overall in 2023.

4% to 5%.

Okay. What will the 10-year treasury yield be 1 year from today?

2.25.

And will your property sector have more or fewer public companies a year from now?

Fewer.

Okay. Thank you so much.

Okay. Thank you all. Appreciate it.