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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
OR
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: 331-212951-01 (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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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) 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, Urban Edge Properties had 107,564,687 common shares outstanding.




EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended June 30, 2017 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, UE owned an approximate 89.3% ownership interest in UELP. The remaining approximate 10.7% 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, 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, Equity and Noncontrolling Interests 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,
 
2017
 
2016
ASSETS

 
 

Real estate, at cost:
 

 
 

Land
$
522,098

 
$
384,217

Buildings and improvements
1,992,386

 
1,650,054

Construction in progress
123,009

 
99,236

Furniture, fixtures and equipment
5,591

 
4,993

Total
2,643,084

 
2,138,500

Accumulated depreciation and amortization
(568,980
)
 
(541,077
)
Real estate, net
2,074,104

 
1,597,423

Cash and cash equivalents
248,407

 
131,654

Restricted cash
14,422

 
8,532

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

Prepaid expenses and other assets
9,245

 
17,442

Total assets
$
2,563,704

 
$
1,904,138

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Liabilities:
 
 
 
Mortgages payable, net
$
1,412,397

 
$
1,197,513

Identified intangible liabilities, net of accumulated amortization of $60,937 and $72,528, respectively
187,223

 
146,991

Accounts payable and accrued expenses
63,388

 
48,842

Other liabilities
16,627

 
14,675

Total liabilities
1,679,635

 
1,408,021

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

Additional paid-in capital
683,889

 
488,375

Accumulated deficit
(10,479
)
 
(29,066
)
Noncontrolling interests:
 
 
 
Redeemable noncontrolling interests
209,202

 
35,451

Noncontrolling interest in consolidated subsidiaries
382

 
360

Total equity
884,069

 
496,117

Total liabilities and equity
$
2,563,704

 
$
1,904,138

 

See notes to consolidated financial statements (unaudited).


1



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,
 
2017
 
2016
 
2017
 
2016
REVENUE
 
 
 
 
 
 
 
Property rentals
$
64,708

 
$
58,683

 
$
127,206

 
$
117,612

Tenant expense reimbursements
23,881

 
19,879

 
47,652

 
42,386

Income from acquired leasehold interest

 

 
39,215

 

Management and development fees
351

 
526

 
830

 
981

Other income
561

 
369

 
662

 
1,546

Total revenue
89,501

 
79,457

 
215,565

 
162,525

EXPENSES
 
 
 
 
 
 
 
Depreciation and amortization
23,701

 
13,558

 
39,529

 
27,473

Real estate taxes
14,711

 
12,723

 
28,103

 
25,972

Property operating
11,088

 
9,840

 
24,456

 
22,699

General and administrative
7,709

 
7,535

 
15,790

 
14,255

Real estate impairment loss
303

 

 
3,467

 

Ground rent
2,436

 
2,483

 
5,106

 
5,021

Transaction costs
132

 
34

 
183

 
84

Provision for doubtful accounts
906

 
494

 
1,099

 
845

Total expenses
60,986

 
46,667

 
117,733

 
96,349

Operating income
28,515

 
32,790

 
97,832

 
66,176

Gain on sale of real estate

 
15,618

 

 
15,618

Interest income
336

 
177

 
463

 
344

Interest and debt expense
(13,627
)
 
(12,820
)
 
(26,742
)
 
(26,249
)
Loss on extinguishment of debt

 

 
(1,274
)
 

Income before income taxes
15,224

 
35,765

 
70,279

 
55,889

Income tax benefit (expense)
(304
)
 
306

 
(624
)
 
(30
)
Net income
14,920

 
36,071

 
69,655

 
55,859

Less (net income) loss attributable to noncontrolling interests in:
 
 
 
 
 
 
 
Operating partnership
(1,326
)
 
(2,201
)
 
(5,464
)
 
(3,355
)
Consolidated subsidiaries
(11
)
 
(2
)
 
(22
)
 
2

Net income attributable to common shareholders
$
13,583

 
$
33,868

 
$
64,169

 
$
52,506

 
 
 
 
 
 
 
 
Earnings per common share - Basic:
$
0.13

 
$
0.34

 
$
0.63

 
$
0.53

Earnings per common share - Diluted:
$
0.13

 
$
0.34

 
$
0.63

 
$
0.53

Weighted average shares outstanding - Basic
104,063

 
99,274

 
101,863

 
99,270

Weighted average shares outstanding - Diluted
104,260

 
99,668

 
111,224

 
99,592

 
See notes to consolidated financial statements (unaudited).


2



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


See notes to consolidated financial statements (unaudited).

3



URBAN EDGE PROPERTIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
Six Months Ended June 30,
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

Net income
$
69,655

 
$
55,859

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
39,440

 
27,989

Income from acquired leasehold interest
(39,215
)
 

Real estate impairment loss
3,467

 

Loss on extinguishment of debt
1,274

 

Amortization of deferred financing costs
1,451

 
1,382

Amortization of below market leases, net
(4,107
)
 
(3,749
)
Straight-lining of rent
520

 
(225
)
Share-based compensation expense
3,359

 
2,721

Gain on sale of real estate

 
(15,618
)
Provision for doubtful accounts
1,099

 
845

Change in operating assets and liabilities:
 

 
 

Tenant and other receivables
(4,994
)
 
1,425

Deferred leasing costs
(2,047
)
 

Prepaid and other assets
1,596

 
1,425

Accounts payable and accrued expenses
9,953

 
(6,790
)
Other liabilities
1,847

 
1,454

Net cash provided by operating activities
83,298

 
66,718

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Real estate additions
(35,994
)
 
(27,545
)
Acquisition of real estate
(211,393
)
 

Proceeds from sale of operating properties
4,790

 
19,938

Net cash used in investing activities
(242,597
)
 
(7,607
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Debt repayments
(83,845
)
 
(29,699
)
Dividends paid to shareholders
(45,435
)
 
(39,589
)
Distributions to redeemable noncontrolling interests
(3,940
)
 
(2,474
)
Debt issuance costs
(3,567
)
 

Taxes withheld for vested restricted shares
(287
)
 
(33
)
Proceeds from issuance of common shares
193,516

 
326

Proceeds from borrowings
225,500

 

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
)
Cash and cash equivalents and restricted cash at beginning of period
140,186

 
178,025

Cash and cash equivalents and restricted cash at end of period
$
262,829

 
$
165,667


See notes to consolidated financial statements (unaudited).


4



 
Six Months Ended June 30,
 
2017
 
2016
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 payments for income taxes
1,237

 
1,249

NON-CASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Acquisition of real estate through issuance of OP units
171,084

 

Acquisition of real estate through assumption of debt
69,659

 

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

Restricted cash at beginning of period
8,532

 
9,042

Cash and cash equivalents and restricted cash at beginning of period
$
140,186

 
$
178,025

 
 
 
 
Cash and cash equivalents at end of period
$
248,407

 
$
156,672

Restricted cash at end of period
14,422

 
8,995

Cash and cash equivalents and restricted cash at end of period
$
262,829

 
$
165,667


 See notes to consolidated financial statements (unaudited).

5



URBAN EDGE PROPERTIES LP
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except unit and per unit amounts)
 
June 30,
 
December 31,
 
2017
 
2016
ASSETS

 
 

Real estate, at cost:
 

 
 

Land
$
522,098

 
$
384,217

Buildings and improvements
1,992,386

 
1,650,054

Construction in progress
123,009

 
99,236

Furniture, fixtures and equipment
5,591

 
4,993

Total
2,643,084

 
2,138,500

Accumulated depreciation and amortization
(568,980
)
 
(541,077
)
Real estate, net
2,074,104

 
1,597,423

Cash and cash equivalents
248,407

 
131,654

Restricted cash
14,422

 
8,532

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

Prepaid expenses and other assets
9,245

 
17,442

Total assets
$
2,563,704

 
$
1,904,138

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Liabilities:
 
 
 
Mortgages payable, net
$
1,412,397

 
$
1,197,513

Identified intangible liabilities, net of accumulated amortization of $60,937 and $72,528, respectively
187,223

 
146,991

Accounts payable and accrued expenses
63,388

 
48,842

Other liabilities
16,627

 
14,675

Total liabilities
1,679,635

 
1,408,021

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

Accumulated deficit
(10,585
)
 
(30,696
)
Total partners’ capital
883,687

 
495,757

Noncontrolling interest in consolidated subsidiaries
382

 
360

Total equity
884,069

 
496,117

Total liabilities and equity
$
2,563,704

 
$
1,904,138

 

See notes to consolidated financial statements (unaudited).


6



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,
 
2017
 
2016
 
2017
 
2016
REVENUE
 
 
 
 
 
 
 
Property rentals
$
64,708

 
$
58,683

 
$
127,206

 
$
117,612

Tenant expense reimbursements
23,881

 
19,879

 
47,652

 
42,386

Income from acquired leasehold interest

 

 
39,215

 

Management and development fees
351

 
526

 
830

 
981

Other income
561

 
369

 
662

 
1,546

Total revenue
89,501

 
79,457

 
215,565

 
162,525

EXPENSES
 
 
 
 
 
 
 
Depreciation and amortization
23,701

 
13,558

 
39,529

 
27,473

Real estate taxes
14,711

 
12,723

 
28,103

 
25,972

Property operating
11,088

 
9,840

 
24,456

 
22,699

General and administrative
7,709

 
7,535

 
15,790

 
14,255

Real estate impairment loss
303

 

 
3,467

 

Ground rent
2,436

 
2,483

 
5,106

 
5,021

Transaction costs
132

 
34

 
183

 
84

Provision for doubtful accounts
906

 
494

 
1,099

 
845

Total expenses
60,986

 
46,667

 
117,733

 
96,349

Operating income
28,515

 
32,790

 
97,832

 
66,176

Gain on sale of real estate

 
15,618

 

 
15,618

Interest income
336

 
177

 
463

 
344

Interest and debt expense
(13,627
)
 
(12,820
)
 
(26,742
)
 
(26,249
)
Loss on extinguishment of debt

 

 
(1,274
)
 

Income before income taxes
15,224

 
35,765

 
70,279

 
55,889

Income tax benefit (expense)
(304
)
 
306

 
(624
)
 
(30
)
Net income
14,920

 
36,071

 
69,655

 
55,859

Less: (net income) loss attributable to NCI in consolidated subsidiaries
(11
)
 
(2
)
 
(22
)
 
2

Net income attributable to unitholders
$
14,909

 
$
36,069

 
$
69,633

 
$
55,861

 
 
 
 
 
 
 
 
Earnings per unit - Basic:
$
0.13

 
$
0.34

 
$
0.63

 
$
0.53

Earnings per unit - Diluted:
$
0.13

 
$
0.34

 
$
0.63

 
$
0.53

Weighted average units outstanding - Basic
113,847

 
105,372

 
110,682

 
105,353

Weighted average units outstanding - Diluted
114,044

 
106,041

 
110,870

 
105,866

 
See notes to consolidated financial statements (unaudited).


7



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

(1) Limited partners have a 10.7% common limited partnership interest in the Operating Partnership as of June 30, 2017 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).


8



URBAN EDGE PROPERTIES LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
Six Months Ended June 30,
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

Net income
$
69,655

 
$
55,859

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
39,440

 
27,989

Income from acquired leasehold interest
(39,215
)
 

Real estate impairment loss
3,467

 

Loss on extinguishment of debt
1,274

 

Amortization of deferred financing costs
1,451

 
1,382

Amortization of below market leases, net
(4,107
)
 
(3,749
)
Straight-lining of rent
520

 
(225
)
Share-based compensation expense
3,359

 
2,721

Gain on sale of real estate

 
(15,618
)
Provision for doubtful accounts
1,099

 
845

Change in operating assets and liabilities:
 

 
 

Tenant and other receivables
(4,994
)
 
1,425

Deferred leasing costs
(2,047
)
 

Prepaid and other assets
1,596

 
1,425

Accounts payable and accrued expenses
9,953

 
(6,790
)
Other liabilities
1,847

 
1,454

Net cash provided by operating activities
83,298

 
66,718

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Real estate additions
(35,994
)
 
(27,545
)
Acquisition of real estate
(211,393
)
 

Proceeds from sale of operating properties
4,790

 
19,938

Net cash used in investing activities
(242,597
)
 
(7,607
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Debt repayments
(83,845
)
 
(29,699
)
Distributions to partners
(49,375
)
 
(42,063
)
Debt issuance costs
(3,567
)
 

Taxes withheld for vested restricted units
(287
)
 
(33
)
Proceeds from issuance of units
193,516

 
326

Proceeds from borrowings
225,500

 

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
)
Cash and cash equivalents and restricted cash at beginning of period
140,186

 
178,025

Cash and cash equivalents and restricted cash at end of period
$
262,829

 
$
165,667


See notes to consolidated financial statements (unaudited).


9



 
Six Months Ended June 30,
 
2017
 
2016
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 payments for income taxes
1,237

 
1,249

NON-CASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Acquisition of real estate through issuance of OP units
171,084

 

Acquisition of real estate through assumption of debt
69,659

 

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

Restricted cash at beginning of period
8,532

 
9,042

Cash and cash equivalents and restricted cash at beginning of period
$
140,186

 
$
178,025

 
 
 
 
Cash and cash equivalents at end of period
$
248,407

 
$
156,672

Restricted cash at end of period
14,422

 
8,995

Cash and cash equivalents and restricted cash at end of period
$
262,829

 
$
165,667


 See notes to consolidated financial statements (unaudited).


10



URBAN EDGE PROPERTIES AND URBAN EDGE PROPERTIES LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.
ORGANIZATION

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 operates retail real estate in high barrier-to-entry markets. Urban Edge Properties LP (“UELP” or the “Operating Partnership”) is a Delaware limited partnership formed to serve as the Company’s majority-owned partnership subsidiary and to own, through affiliates, all of the Company’s 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, Urban Edge owned approximately 89.3% 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 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, our portfolio consisted of 85 shopping centers, four malls and a warehouse park totaling 16.6 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, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017. 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, as filed with the Securities Exchange Commission (“SEC”).

The consolidated balance sheets as of June 30, 2017 and December 31, 2016 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, 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. We do not distinguish our primary business or group our operations on a geographical basis for purposes of measuring performance. We review 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

11



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 adopt the standard beginning January 1, 2018. Once adopted, 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 evaluating the impact this standard will have on 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. 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, internal leasing department overhead previously capitalized will be expensed within general and administrative expenses.

In May 2014, the FASB issued an update (“ASU 2014-09”) Revenue from Contracts with Customers to 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 the 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, 2017 using the modified retrospective approach, including evaluating all sources of revenue we expect will be impacted by the adoption of ASU 2014-09. We expect the impact, if any, 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.

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.


12



4.
ACQUISITIONS AND DISPOSITIONS

During the six months ended June 30, 2017, 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

(1) 
Includes $11.3 million of transaction costs incurred since January 1, 2017.
(2) 
On January 4, 2017, we acquired fee and leasehold interests, including 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.

On January 4, 2017, we acquired fee and leasehold interests in Yonkers Gateway Center for $51.9 million. Consideration for this purchase 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.









13



The aggregate purchase price 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


Dispositions

On June 30, 2017, we completed the sale of our property previously 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 the third-party buyer. 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, CT for $21.6 million, resulting in a gain 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

14



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.

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 million and $187.2 million as of June 30, 2017, respectively, and $30.9 million and $147.0 million as of December 31, 2016, respectively.

Amortization of acquired below-market leases, net of acquired above-market leases resulted in additional rental income of $2.1 million and $4.1 million and for the three and six months ended June 30, 2017, respectively, and $1.9 million and $3.8 million for the same periods in 2016.
 
Amortization of acquired in-place leases and customer relationships resulted in additional depreciation and amortization expense of $2.1 million and $3.1 million for the three and six months ended June 30, 2017, respectively, and $0.4 million and $0.8 million for the same periods in 2016.

Certain shopping centers were acquired 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 million for the three and six months ended June 30, 2017, respectively, and $0.2 million and $0.5 million for the same periods in 2016.

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:
(Amounts in thousands)
 
Below-Market
 
Above-Market
 
 
 
Below-Market
Year
 
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

2020
 
11,453

 
1,016

 
7,325

 
972

2021
 
11,251

 
803

 
6,013

 
622

2022
 
10,802

 
426

 
4,224

 
590



15



7.     MORTGAGES PAYABLE
 
The following is a summary of mortgages payable as of June 30, 2017 and December 31, 2016.
 
 
 
 
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

(1) 
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. Refer to Note 4 Acquisitions and Dispositions for further information.

16



The net carrying amount of real estate collateralizing the above indebtedness amounted to approximately $1.3 billion as of June 30, 2017. 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, we were in compliance with all debt covenants.
 
As of June 30, 2017, 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

2019
 
20,397

2020
 
517,327

2021
 
123,003

2022
 
96,748

Thereafter
 
623,722

(1) Remainder of 2017.

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. Financing fees associated with the Agreement of $3.8 million and $1.9 million as of June 30, 2017 and December 31, 2016, respectively, are included in deferred financing fees in the consolidated balance sheets.

8.
INCOME TAXES

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.

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 million and $30.0 thousand for the six months ended June 30, 2017 and 2016, respectively, and $0.3 million for the quarter ended June 30, 2017. There was a $0.3 million income tax benefit recorded for the quarter ended June 30, 2016. Both properties are held in a special partnership for Puerto Rico tax reporting (the general partner being a qualified REIT subsidiary or “QRS”).


17



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 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, 2017 and December 31, 2016.

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, 2017 and December 31, 2016.
 
 
 
As of June 30, 2017
 
As of December 31, 2016
(Amounts in thousands)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Assets:
 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
248,407

 
$
248,407

 
$
131,654

 
$
131,654

Liabilities:
 
 

 
 

 
 

 
 

Mortgages payable(1)
 
$
1,420,605

 
$
1,443,347

 
$
1,205,560

 
$
1,216,989

(1) Carrying amounts exclude unamortized debt issuance costs of $8.2 million and $8.0 million as of June 30, 2017 and December 31, 2016, respectively.

The following interest rates 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%


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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: As of June 30, 2017, we had approximately $173.7 million of active development, redevelopment and anchor repositioning projects underway of which $94.0 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 maintain general liability insurance with limits of $200 million for properties in the U.S. and Puerto Rico and all-risk property and rental value insurance coverage with limits of $500 million for properties in the U.S. and $139 million for properties in Puerto Rico, with sub-limits for certain perils such as floods and earthquakes on each of our properties. Our insurance includes coverage for 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 maintain coverage for cybersecurity with limits of $5 million in the aggregate providing first and third party coverage including network interruption, event management, cyber extortion and claims for media content, security and privacy liability. Insurance premiums are charged directly to each of the retail properties and warehouses. We will be responsible for deductibles and losses in excess of insurance coverage, 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 mortgage loans are non-recourse and contain customary covenants requiring adequate 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 insist on greater coverage than we are able to obtain it could adversely affect our ability to finance our properties and expand our portfolio.
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 million on our consolidated balance sheets for potential remediation costs for environmental contamination at two properties. While this accrual reflects our best estimates of the potential costs of remediation at these properties, $0.1 million has currently been expended 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
(Amounts in thousands)
June 30, 2017
 
December 31, 2016
Other assets
$
2,301

 
$
2,161

Deposits for acquisitions

 
6,600

Prepaid expenses:
 
 
 
Real estate taxes
3,822

 
5,198

Insurance
1,622

 
2,545

Rent, licenses/fees
1,500

 
938

Total Prepaid expenses and other assets
$
9,245

 
$
17,442

 


19



12.     OTHER LIABILITIES

The following is a summary of the composition of other liabilities in the consolidated balance sheets:
 
Balance at
(Amounts in thousands)
June 30, 2017
 
December 31, 2016
Deferred ground rent expense
$
6,392

 
$
6,284

Deferred tax liability, net
3,859

 
3,802

Deferred tenant revenue
4,743

 
3,280

Environmental remediation costs
1,232

 
1,309

Other liabilities
401

 

Total Other liabilities
$
16,627

 
$
14,675


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,
(Amounts in thousands)
2017
 
2016
 
2017
 
2016
Interest expense
$
13,040

 
$
12,097

 
$
25,291

 
$
24,867

Amortization of deferred financing costs
587

 
723

 
1,451

 
1,382

Total Interest and debt expense
$
13,627

 
$
12,820

 
$
26,742

 
$
26,249


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, $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.
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 the three months ended June 30, 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.
Redeemable Noncontrolling Interests
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 VRLP in exchange for interests in VRLP properties contributed by VRLP. LTIP unit awards were granted to certain executives pursuant to our 2015 Omnibus

20



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% weighted-average interest in the Operating Partnership for the three and six months ended June 30, 2017, respectively. 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
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 Outperformance Plan

On February 24, 2017, the Compensation Committee of the Board of Trustees of the Company approved the Company’s 2017 Outperformance Plan (“2017 OPP”), a multi-year performance-based equity compensation program. Under the 2017 OPP, participants, including our Chairman and Chief Executive Officer, have the opportunity to earn awards in the form of LTIP units if, and only if, we outperform a predetermined 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% over the three-year performance measurement period, and/or (ii) achieve a TSR equal to or above, that of the 50th percentile of a retail REIT peer group comprised of 14 of our peer companies, over a three-year performance measurement period. Distributions on awards accrue during the measurement period, except that 10% of 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.

The fair value of the 2017 OPP on the date of grant was $4.1 million using a Monte Carlo simulation to estimate the fair value based on the probability of satisfying the market conditions and the projected share price at the time 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.

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,
(Amounts in thousands)
2017
 
2016
 
2017
 
2016
Share-based compensation expense components:
 
 
 
 
 
 
Restricted share expense
$
518

 
$
383

 
$
908

 
$
616

Stock option expense
646

 
653

 
1,269

 
1,229

LTIP expense
147

 
100

 
263

 
283

Outperformance Plan (“OPP”) expense
564

 
288

 
919

 
593

Total Share-based compensation expense
$
1,875

 
$
1,424

 
$
3,359

 
$
2,721



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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,
(Amounts in thousands, except per share amounts)
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
Net income attributable to common shareholders
$
13,583

 
$
33,868

 
$
64,169

 
$
52,506

Less: Earnings allocated to unvested participating securities
(39
)
 
(43
)
 
(107
)
 
(61
)
Net income available for common shareholders - basic
$
13,544

 
$
33,825

 
$
64,062

 
$
52,445

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

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
104,063

 
99,274

 
101,863

 
99,270

Effect of dilutive securities(1):
 
 
 
 
 
 
 
Stock options using the treasury stock method
21

 
272

 
30

 
157

Restricted share awards
176

 
122