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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, 2018
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: 333-212951-01 (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 a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Urban Edge Properties:
Large Accelerated Filer x 
Accelerated Filer o                              
Non-Accelerated Filer o                              
Smaller Reporting Company o 
Emerging Growth Company o                              
Urban Edge Properties LP:
Large Accelerated Filer o                              
Accelerated Filer o                              
Non-Accelerated Filer x 
Smaller Reporting Company o 
Emerging Growth Company o                              
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act.
Urban Edge Properties o                   Urban Edge Properties LP o   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Urban Edge Properties    YES o   NO x         Urban Edge Properties LP     YES o   NO x
As of July 27, 2018, Urban Edge Properties had 114,024,276 common shares outstanding.




URBAN EDGE PROPERTIES AND URBAN EDGE PROPERTIES LP
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED JUNE 30, 2018

TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
Financial Statements
 
 
 
 
Consolidated Financial Statements of Urban Edge Properties:
 
 
 
 
Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017 (unaudited)
 
 
 
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)
 
 
 
Consolidated Statement of Changes in Equity for the Six Months Ended June 30, 2018 (unaudited)
 
 
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (unaudited)
 
 
 
Consolidated Financial Statements of Urban Edge Properties LP:
 
 
 
 
Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017 (unaudited)
 
 
 
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)
 
 
 
Consolidated Statement of Changes in Equity for the Six Months Ended June 30, 2018 (unaudited)
 
 
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (unaudited)
 
 
 
Urban Edge Properties and Urban Edge Properties LP
 
 
 
 
Notes to Consolidated Financial Statements (unaudited)
 
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3.
 
Quantitative and Qualitative Disclosures about Market Risk
 
Item 4.
 
Controls and Procedures
 
 
 
 
 
 
 
 
PART II
 
 
 
 
 
 
 
Item 1.
 
Legal Proceedings
 
Item 1A.
 
Risk Factors
 
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 3.
 
Defaults Upon Senior Securities
 
Item 4.
 
Mine Safety Disclosures
 
Item 5.
 
Other Information
 
Item 6.
 
Exhibits
 
 
 
Signatures
 
 
 
 
 
 







EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended June 30, 2018 of Urban Edge Properties and Urban Edge Properties LP. Unless stated otherwise or the context otherwise requires, references to “UE” and “Urban Edge” mean Urban Edge Properties, a Maryland real estate investment trust (“REIT”), and references to “UELP” and the “Operating Partnership” mean Urban Edge Properties LP, a Delaware limited partnership. References to the “Company,” “we,” “us” and “our” mean collectively UE, UELP and those entities/subsidiaries consolidated by UE.
UELP is the entity through which we conduct substantially all of our business and own, either directly or through subsidiaries, substantially all of our assets. UE is the sole general partner and also a limited partner of UELP. As the sole general partner of UELP, UE has exclusive control of UELP’s day-to-day management.
As of June 30, 2018, UE owned an approximate 89.9% ownership interest in UELP. The remaining approximate 10.1% interest is owned by limited partners. The other limited partners of UELP are Vornado Realty L.P., members of management, our Board of Trustees, and contributors of property interests acquired. Under the limited partnership agreement of UELP, unitholders may present their common units of UELP for redemption at any time (subject to restrictions agreed upon at the time of issuance of the units that may restrict such right for a period of time). Upon presentation of a common unit for redemption, UELP must redeem the unit for cash equal to the then value of a share of UE’s common shares, as defined by the limited partnership agreement. In lieu of cash redemption by UELP, however, UE may elect to acquire any common units so tendered by issuing common shares of UE in exchange for the common units. If UE so elects, its common shares will be exchanged for common units on a one-for-one basis. This one-for-one exchange ratio is subject to specified adjustments to prevent dilution. UE generally expects that it will elect to issue its common shares in connection with each such presentation for redemption rather than having UELP pay cash. With each such exchange or redemption, UE’s percentage ownership in UELP will increase. In addition, whenever UE issues common shares other than to acquire common units of UELP, UE must contribute any net proceeds it receives to UELP and UELP must issue to UE an equivalent number of common units of UELP. This structure is commonly referred to as an umbrella partnership REIT, or UPREIT.
The Company believes that combining the quarterly reports on Form 10-Q of UE and UELP into this single report provides the following benefits:
enhances investors’ understanding of UE and UELP by enabling investors to view the business as a whole in the same manner as management views and operates the business;
eliminates duplicative disclosure and provides a more streamlined and readable presentation because a substantial portion of the disclosure applies to both UE and UELP; and
creates time and cost efficiencies throughout the preparation of one combined report instead of two separate reports.
The Company believes it is important to understand the few differences between UE and UELP in the context of how UE and UELP operate as a consolidated company. The financial results of UELP are consolidated into the financial statements of UE. UE does not have any other significant assets, liabilities or operations, other than its investment in UELP, nor does it have employees of its own. UELP, not UE, generally executes all significant business relationships other than transactions involving the securities of UE. UELP holds substantially all of the assets of UE. UELP conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for the net proceeds from equity offerings by UE, which are contributed to the capital of UELP in exchange for units of limited partnership in UELP, as applicable, UELP generates all remaining capital required by the Company’s business. These sources may include working capital, net cash provided by operating activities, borrowings under the revolving credit agreement, the issuance of secured and unsecured debt and equity securities and proceeds received from the disposition of certain properties.
Shareholders’ equity, partners’ capital and noncontrolling interests are the main areas of difference between the consolidated financial statements of UE and UELP. The limited partners of UELP are accounted for as partners’ capital in UELP’s financial statements and as noncontrolling interests in UE’s financial statements. The noncontrolling interests in UELP’s financial statements include the interests of unaffiliated partners in consolidated entities. The noncontrolling interests in UE’s financial statements include the same noncontrolling interests at UELP’s level and limited partners of UELP. The differences between shareholders’ equity and partners’ capital result from differences in the equity issued at UE and UELP levels.
To help investors better understand the key differences between UE and UELP, certain information for UE and UELP in this report has been separated, as set forth below: Item 1. Financial Statements (unaudited) which includes specific disclosures for UE and UELP, Note 14, Equity and Noncontrolling Interest and Note 16, 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.




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,
 
2018
 
2017
ASSETS

 
 

Real estate, at cost:
 

 
 

Land
$
530,658

 
$
521,669

Buildings and improvements
2,060,960

 
2,010,527

Construction in progress
125,664

 
133,761

Furniture, fixtures and equipment
6,615

 
5,897

Total
2,723,897

 
2,671,854

Accumulated depreciation and amortization
(616,284
)
 
(587,127
)
Real estate, net
2,107,613

 
2,084,727

Cash and cash equivalents
500,930

 
490,279

Restricted cash
13,057

 
10,562

Tenant and other receivables, net of allowance for doubtful accounts of $6,176 and $4,937, respectively
23,017

 
20,078

Receivable arising from the straight-lining of rents, net of allowance for doubtful accounts of $562 and $494, respectively
84,378

 
85,843

Identified intangible assets, net of accumulated amortization of $39,770 and $33,827, respectively
76,310

 
87,249

Deferred leasing costs, net of accumulated amortization of $15,809 and $14,796, respectively
20,291

 
20,268

Deferred financing costs, net of accumulated amortization of $2,252 and $1,740, respectively
2,731

 
3,243

Prepaid expenses and other assets
12,228

 
18,559

Total assets
$
2,840,555

 
$
2,820,808

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Liabilities:
 
 
 
Mortgages payable, net
$
1,551,788

 
$
1,564,542

Accounts payable and accrued expenses
80,768

 
69,595

Identified intangible liabilities, net of accumulated amortization of $68,938 and $65,832, respectively
168,540

 
180,959

Other liabilities
17,527

 
15,171

Total liabilities
1,818,623

 
1,830,267

Commitments and contingencies


 


Shareholders’ equity:
 
 
 
Common shares: $0.01 par value; 500,000,000 shares authorized and 114,004,276 and 113,827,529 shares issued and outstanding, respectively
1,140

 
1,138

Additional paid-in capital
950,958

 
946,402

Accumulated deficit
(33,307
)
 
(57,621
)
Noncontrolling interests:
 
 
 
Operating partnership
102,714

 
100,218

Consolidated subsidiaries
427

 
404

Total equity
1,021,932

 
990,541

Total liabilities and equity
$
2,840,555

 
$
2,820,808

 

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,
 
2018
 
2017
 
2018
 
2017
REVENUE
 
 
 
 
 
 
 
Property rentals
$
74,546

 
$
64,708

 
$
144,268

 
$
127,206

Tenant expense reimbursements
26,222

 
23,881

 
54,894

 
47,652

Management and development fees
347

 
351

 
689

 
830

Income from acquired leasehold interest

 

 

 
39,215

Other income
855

 
561

 
1,172

 
662

Total revenue
101,970

 
89,501

 
201,023

 
215,565

EXPENSES
 
 
 
 
 
 
 
Depreciation and amortization
30,441

 
23,701

 
51,711

 
39,529

Real estate taxes
15,587

 
14,711

 
31,362

 
28,103

Property operating
20,492

 
11,088

 
37,159

 
24,456

General and administrative
8,236

 
7,841

 
15,877

 
15,973

Casualty and impairment loss (gain), net
35

 
303

 
(1,306
)
 
3,467

Ground rent
2,752

 
2,436

 
5,488

 
5,106

Provision for doubtful accounts
1,273

 
906

 
2,509

 
1,099

Total expenses
78,816

 
60,986

 
142,800

 
117,733

Operating income
23,154

 
28,515

 
58,223

 
97,832

Gain on sale of real estate
50,440

 

 
50,440

 

Interest income
2,031

 
336

 
3,555

 
463

Interest and debt expense
(15,659
)
 
(13,627
)
 
(31,303
)
 
(26,742
)
Gain (loss) on extinguishment of debt

 

 
2,524

 
(1,274
)
Income before income taxes
59,966

 
15,224

 
83,439

 
70,279

Income tax expense
(192
)
 
(304
)
 
(626
)
 
(624
)
Net income
59,774

 
14,920

 
82,813

 
69,655

Less net income attributable to noncontrolling interests in:
 
 
 
 
 
 
 
Operating partnership
(6,025
)
 
(1,326
)
 
(8,353
)
 
(5,464
)
Consolidated subsidiaries
(12
)
 
(11
)
 
(23
)
 
(22
)
Net income attributable to common shareholders
$
53,737

 
$
13,583

 
$
74,437

 
$
64,169

 
 
 
 
 
 
 
 
Earnings per common share - Basic:
$
0.47

 
$
0.13

 
$
0.65

 
$
0.63

Earnings per common share - Diluted:
$
0.47

 
$
0.13

 
$
0.65

 
$
0.63

Weighted average shares outstanding - Basic
113,739

 
104,063

 
113,708

 
101,863

Weighted average shares outstanding - Diluted
113,942

 
104,260

 
114,151

 
111,224

 
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)
 
Operating Partnership
 
Consolidated Subsidiaries
 
Total Equity
Balance, December 31, 2017
113,827,529

 
$
1,138

 
$
946,402

 
$
(57,621
)
 
$
100,218

 
$
404

 
$
990,541

Net income attributable to common shareholders

 

 

 
74,437

 

 

 
74,437

Net income attributable to noncontrolling interests

 

 

 

 
8,353

 
23

 
8,376

Limited partnership interests:
 
 
 
 
 
 
 
 
 
 
 
 
 
Units redeemed for common shares
70,000

 
1

 
570

 

 

 

 
571

Reallocation of noncontrolling interests

 

 
1,620

 

 
(2,191
)
 

 
(571
)
Common shares issued
123,937

 
2

 
423

 
(101
)
 

 

 
324

Dividends to common shareholders ($0.44 per share)

 

 

 
(50,037
)
 

 

 
(50,037
)
Distributions to redeemable NCI ($0.44 per unit)

 

 

 

 
(5,566
)
 

 
(5,566
)
Share-based compensation expense

 

 
2,327

 
15

 
1,900

 

 
4,242

Share-based awards retained for taxes
(17,190
)
 
(1
)
 
(384
)
 

 

 

 
(385
)
Balance, June 30, 2018
114,004,276

 
$
1,140

 
$
950,958

 
$
(33,307
)
 
$
102,714

 
$
427

 
$
1,021,932


See notes to consolidated financial statements (unaudited).

3



URBAN EDGE PROPERTIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
Six Months Ended June 30,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

Net income
$
82,813

 
$
69,655

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

 
 

Depreciation and amortization
52,045

 
39,440

Income from acquired leasehold interest

 
(39,215
)
Casualty and impairment loss

 
3,467

Gain on sale of real estate
(50,440
)
 

(Gain) loss on extinguishment of debt
(2,524
)
 
1,274

Amortization of deferred financing costs
1,440

 
1,451

Amortization of below market leases, net
(10,455
)
 
(4,107
)
Straight-lining of rent
182

 
520

Share-based compensation expense
4,242

 
3,359

Provision for doubtful accounts
2,509

 
1,099

Change in operating assets and liabilities:
 

 
 

Tenant and other receivables
(7,083
)
 
(4,994
)
Deferred leasing costs
(1,823
)
 
(2,047
)
Prepaid and other assets
2,907

 
1,596

Accounts payable and accrued expenses
563

 
9,953

Other liabilities
2,320

 
1,847

Net cash provided by operating activities
76,696

 
83,298

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Real estate development and capital improvements
(56,279
)
 
(35,994
)
Acquisition of real estate
(4,931
)
 
(211,393
)
Proceeds from sale of operating properties
54,303

 
4,790

Insurance proceeds
1,000

 

Net cash used in investing activities
(5,907
)
 
(242,597
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Debt repayments
(1,979
)
 
(83,845
)
Dividends to common shareholders
(50,037
)
 
(45,435
)
Distributions to redeemable noncontrolling interests
(5,566
)
 
(3,940
)
Debt issuance costs

 
(3,567
)
Taxes withheld for vested restricted shares
(385
)
 
(287
)
Proceeds related to the issuance of common shares
324

 
193,516

Proceeds from borrowings

 
225,500

Net cash (used in) provided by financing activities
(57,643
)
 
281,942

Net increase in cash and cash equivalents and restricted cash
13,146

 
122,643

Cash and cash equivalents and restricted cash at beginning of period
500,841

 
140,186

Cash and cash equivalents and restricted cash at end of period
$
513,987

 
$
262,829


See notes to consolidated financial statements (unaudited).


4



 
Six Months Ended June 30,
 
2018
 
2017
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 
 
Cash payment for interest, includes amounts capitalized of $2,423 and $1,946, respectively
$
33,340

 
$
26,051

Cash payments for income taxes
637

 
1,237

NON-CASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Accrued capital expenditures included in accounts payable and accrued expenses
27,574

 
13,344

Mortgage debt forgiven in foreclosure sale
11,537

 

Write-off of fully depreciated assets
9,918

 
910

Acquisition of real estate through issuance of OP units

 
171,084

Acquisition of real estate through assumption of debt

 
69,659

RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
Cash and cash equivalents at beginning of period
$
490,279

 
$
131,654

Restricted cash at beginning of period
10,562

 
8,532

Cash and cash equivalents and restricted cash at beginning of period
$
500,841

 
$
140,186

 
 
 
 
Cash and cash equivalents at end of period
$
500,930

 
$
248,407

Restricted cash at end of period
13,057

 
14,422

Cash and cash equivalents and restricted cash at end of period
$
513,987

 
$
262,829


 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,
 
2018
 
2017
ASSETS

 
 

Real estate, at cost:
 

 
 

Land
$
530,658

 
$
521,669

Buildings and improvements
2,060,960

 
2,010,527

Construction in progress
125,664

 
133,761

Furniture, fixtures and equipment
6,615

 
5,897

Total
2,723,897

 
2,671,854

Accumulated depreciation and amortization
(616,284
)
 
(587,127
)
Real estate, net
2,107,613

 
2,084,727

Cash and cash equivalents
500,930

 
490,279

Restricted cash
13,057

 
10,562

Tenant and other receivables, net of allowance for doubtful accounts of $6,176 and $4,937, respectively
23,017

 
20,078

Receivable arising from the straight-lining of rents, net of allowance for doubtful accounts of $562 and $494, respectively
84,378

 
85,843

Identified intangible assets, net of accumulated amortization of $39,770 and $33,827, respectively
76,310

 
87,249

Deferred leasing costs, net of accumulated amortization of $15,809 and $14,796, respectively
20,291

 
20,268

Deferred financing costs, net of accumulated amortization of $2,252 and $1,740, respectively
2,731

 
3,243

Prepaid expenses and other assets
12,228

 
18,559

Total assets
$
2,840,555

 
$
2,820,808

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Liabilities:
 
 
 
Mortgages payable, net
$
1,551,788

 
$
1,564,542

Accounts payable and accrued expenses
80,768

 
69,595

Identified intangible liabilities, net of accumulated amortization of $68,938 and $65,832, respectively
168,540

 
180,959

Other liabilities
17,527

 
15,171

Total liabilities
1,818,623

 
1,830,267

Commitments and contingencies


 


Equity:
 
 
 
Partners’ capital:
 
 
 
General partner: 114,004,276 and 113,827,529 units outstanding, respectively
952,098

 
947,540

Limited partners: 12,738,907 and 12,812,954 units outstanding, respectively
105,204

 
105,495

Accumulated deficit
(35,797
)
 
(62,898
)
Total partners’ capital
1,021,505

 
990,137

Noncontrolling interest in consolidated subsidiaries
427

 
404

Total equity
1,021,932

 
990,541

Total liabilities and equity
$
2,840,555

 
$
2,820,808

 

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,
 
2018
 
2017
 
2018
 
2017
REVENUE
 
 
 
 
 
 
 
Property rentals
$
74,546

 
$
64,708

 
$
144,268

 
$
127,206

Tenant expense reimbursements
26,222

 
23,881

 
54,894

 
47,652

Management and development fees
347

 
351

 
689

 
830

Income from acquired leasehold interest

 

 

 
39,215

Other income
855

 
561

 
1,172

 
662

Total revenue
101,970

 
89,501

 
201,023

 
215,565

EXPENSES
 
 
 
 
 
 
 
Depreciation and amortization
30,441

 
23,701

 
51,711

 
39,529

Real estate taxes
15,587

 
14,711

 
31,362

 
28,103

Property operating
20,492

 
11,088

 
37,159

 
24,456

General and administrative
8,236

 
7,841

 
15,877

 
15,973

Casualty and impairment loss (gain), net
35

 
303

 
(1,306
)
 
3,467

Ground rent
2,752

 
2,436

 
5,488

 
5,106

Provision for doubtful accounts
1,273

 
906

 
2,509

 
1,099

Total expenses
78,816

 
60,986

 
142,800

 
117,733

Operating income
23,154

 
28,515

 
58,223

 
97,832

Gain on sale of real estate
50,440

 

 
50,440

 

Interest income
2,031

 
336

 
3,555

 
463

Interest and debt expense
(15,659
)
 
(13,627
)
 
(31,303
)
 
(26,742
)
Gain (loss) on extinguishment of debt

 

 
2,524

 
(1,274
)
Income before income taxes
59,966

 
15,224

 
83,439

 
70,279

Income tax expense
(192
)
 
(304
)
 
(626
)
 
(624
)
Net income
59,774

 
14,920

 
82,813

 
69,655

Less: net income attributable to NCI in consolidated subsidiaries
(12
)
 
(11
)
 
(23
)
 
(22
)
Net income attributable to unitholders
$
59,762

 
$
14,909


$
82,790


$
69,633

 
 
 
 
 
 
 
 
Earnings per unit - Basic:
$
0.47

 
$
0.13

 
$
0.65

 
$
0.63

Earnings per unit - Diluted:
$
0.47

 
$
0.13

 
$
0.65

 
$
0.63

Weighted average units outstanding - Basic
126,178

 
113,847

 
126,178

 
110,682

Weighted average units outstanding - Diluted
126,602

 
114,044

 
126,621

 
110,870

 
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)
 
 
Total Shares
 
General Partner
 
 Total Units
 
Limited Partners(1)
 
Accumulated Earnings
(Deficit)
 
NCI in Consolidated Subsidiaries
 
Total Equity
Balance, December 31, 2017
113,827,529

 
$
947,540

 
12,812,954

 
$
105,495

 
$
(62,898
)
 
$
404

 
$
990,541

Net income attributable to unitholders

 

 

 

 
82,790

 

 
82,790

Net income attributable to noncontrolling interests

 

 

 

 

 
23

 
23

Common units issued as a result of common shares issued by Urban Edge
123,937

 
425

 

 

 
(101
)
 

 
324

Equity redemption of OP Units
70,000

 
571

 
(70,000
)
 

 

 

 
571

Limited partnership units issued, net

 

 
(4,047
)
 

 

 

 

Reallocation of noncontrolling interests

 
1,620

 

 
(2,191
)
 

 

 
(571
)
Distributions to Partners ($0.44 per unit)

 

 

 

 
(55,603
)
 

 
(55,603
)
Share-based compensation expense

 
2,327

 

 
1,900

 
15

 

 
4,242

Share-based awards withheld for taxes
(17,190
)
 
(385
)
 

 

 

 

 
(385
)
Balance, June 30, 2018
114,004,276

 
$
952,098

 
12,738,907

 
$
105,204

 
$
(35,797
)
 
$
427

 
$
1,021,932

(1) Limited partners have a 10.1% common limited partnership interest in the Operating Partnership as of June 30, 2018 in the form of units of interest in the Operating Partnership (“OP Units”) and Long-Term Incentive Plan (“LTIP”) units.

See notes to consolidated financial statements (unaudited).


8



URBAN EDGE PROPERTIES LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
Six Months Ended June 30,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

Net income
$
82,813

 
$
69,655

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

 
 

Depreciation and amortization
52,045

 
39,440

Income from acquired leasehold interest

 
(39,215
)
Casualty and impairment loss

 
3,467

Gain on sale of real estate
(50,440
)
 

(Gain) loss on extinguishment of debt
(2,524
)
 
1,274

Amortization of deferred financing costs
1,440

 
1,451

Amortization of below market leases, net
(10,455
)
 
(4,107
)
Straight-lining of rent
182

 
520

Share-based compensation expense
4,242

 
3,359

Provision for doubtful accounts
2,509

 
1,099

Change in operating assets and liabilities:
 

 
 

Tenant and other receivables
(7,083
)
 
(4,994
)
Deferred leasing costs
(1,823
)
 
(2,047
)
Prepaid and other assets
2,907

 
1,596

Accounts payable and accrued expenses
563

 
9,953

Other liabilities
2,320

 
1,847

Net cash provided by operating activities
76,696

 
83,298

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Real estate development and capital improvements
(56,279
)
 
(35,994
)
Acquisition of real estate
(4,931
)
 
(211,393
)
Proceeds from sale of operating properties
54,303

 
4,790

Insurance proceeds
1,000

 

Net cash used in investing activities
(5,907
)
 
(242,597
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Debt repayments
(1,979
)
 
(83,845
)
Distributions to partners
(55,603
)
 
(49,375
)
Debt issuance costs

 
(3,567
)
Taxes withheld for vested restricted units
(385
)
 
(287
)
Proceeds related to the issuance of common shares
324

 
193,516

Proceeds from borrowings

 
225,500

Net cash (used in) provided by financing activities
(57,643
)
 
281,942

Net increase in cash and cash equivalents and restricted cash
13,146

 
122,643

Cash and cash equivalents and restricted cash at beginning of period
500,841

 
140,186

Cash and cash equivalents and restricted cash at end of period
$
513,987

 
$
262,829


See notes to consolidated financial statements (unaudited).


9



 
Six Months Ended June 30,
 
2018
 
2017
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 
 
Cash payment for interest, includes amounts capitalized of $2,423 and $1,946, respectively
$
33,340

 
$
26,051

Cash payments for income taxes
637

 
1,237

NON-CASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Accrued capital expenditures included in accounts payable and accrued expenses
27,574

 
13,344

Mortgage debt forgiven in foreclosure sale
11,537

 

Write-off of fully depreciated assets
9,918

 
910

Acquisition of real estate through issuance of OP units

 
171,084

Acquisition of real estate through assumption of debt

 
69,659

RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
Cash and cash equivalents at beginning of period
$
490,279

 
$
131,654

Restricted cash at beginning of period
10,562

 
8,532

Cash and cash equivalents and restricted cash at beginning of period
$
500,841

 
$
140,186

 
 
 
 
Cash and cash equivalents at end of period
$
500,930

 
$
248,407

Restricted cash at end of period
13,057

 
14,422

Cash and cash equivalents and restricted cash at end of period
$
513,987

 
$
262,829


 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 focused on managing, developing, redeveloping, and acquiring retail real estate in urban communities, primarily in the New York metropolitan area. Urban Edge Properties LP (“UELP” or the “Operating Partnership”) is a Delaware limited partnership formed to serve as UE’s majority-owned partnership subsidiary and to own, through affiliates, all of our 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, 2018, Urban Edge owned approximately 89.9% of the outstanding common OP Units with the remaining limited OP Units held by Vornado Realty L.P., members of management, our Board of Trustees and contributors of property interests acquired. Urban Edge serves as the sole general partner of the Operating Partnership. The third-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, 2018, our portfolio consisted of 83 shopping centers, four malls and a warehouse park totaling approximately 16.3 million square feet (sf).
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, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018. Accordingly, these consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Securities Exchange Commission (“SEC”).

The consolidated balance sheets as of June 30, 2018 and December 31, 2017 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, 2018 and 2017 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 and malls. We do not distinguish our primary business or group our operations on a geographical basis for purposes of measuring performance. The Company’s chief operating decision maker reviews operating and financial information for each property on an individual basis and therefore, each property represents an individual operating segment. None of our tenants accounted for more than 10% of our revenue or property operating income. We aggregate all of our properties into one reportable segment due to their similarities with regard to the nature and economics of the properties, tenants and operations, as well as long-term average financial performance.
3.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Recently Issued Accounting Literature
Effective January 1, 2018, we adopted (“ASU 2017-09”) Scope of Modification Accounting, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting will not apply if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The adoption of this standard resulted in no impact to our consolidated financial statements. 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

11



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 the period of modification.
Effective January 1, 2018, we adopted (“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 of real estate. ASU 2017-05 defines “in-substance nonfinancial assets” and includes guidance on partial sales of nonfinancial assets. The adoption of this standard resulted in no impact to our consolidated financial statements.
Effective January 1, 2018, we adopted (“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. We adopted the standard using the modified retrospective approach which requires applying the new standard to all existing contracts not yet completed as of the effective date. We have completed our evaluation of the standard’s impact on our revenue sources. The adoption of this standard did not have a material impact on our consolidated financial statements but has resulted in additional qualitative disclosures for the three and six months ended June 30, 2018 and 2017 (refer to Note 4 Revenues).

In February 2016, the FASB issued an update (“ASU 2016-02”) Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. The new standard requires lessors to account for the leases using an approach that is substantially equivalent to existing guidance for sales-type lease, direct financing leases and operating leases.

ASU 2016-02 originally stated that companies would be required to bifurcate certain lease revenues between lease and non-lease components, however, in July 2018, the FASB issued an update (“ASU 2018-11”) Leases: Targeted Improvements which provides lessors a practical expedient to account for lease and non-lease components as a single lease component if certain criteria are met. ASU 2016-02 originally required a modified retrospective method of adoption, however, ASU 2018-11 provides companies with an additional transition method of recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We plan to elect the practical expedients as a package, which will be applied consistently to all of our leases.

The provisions of ASU 2016-02 are effective January 1, 2019, with early adoption permitted. We plan to adopt this standard January 1, 2019. For leases where we are the lessor, adoption will not have a material impact and we will continue to record revenues from rental properties for our operating leases on a straight-line basis. However, for leases where we are a lessee, we will be required to record a right-of-use asset and lease liability on our consolidated balance sheet. We are currently in the process of evaluating the inputs required to calculate the amount that will be recorded on our consolidated balance sheets for these leases. Further, internal leasing department costs previously capitalized will be expensed within general and administrative expenses. Historical capitalization of internal leasing costs were $0.3 million for each of the six months ended June 30, 2018 and June 30, 2017, respectively. We will continue to evaluate the impact of this guidance until it becomes effective.

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.
REVENUES

We have the following revenue sources and revenue recognition policies. The table below presents our revenues disaggregated by revenue source for the three and six months ended June 30, 2018 and 2017, respectively:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
 
2018
 
2017
 
2018
 
2017
Property rentals
 
$
74,546

 
$
64,708

 
$
144,268

 
$
127,206

Tenant expense reimbursements
 
26,222

 
23,881

 
54,894

 
47,652

Management and development fees
 
347

 
351

 
689

 
830

Income from acquired leasehold interest
 

 

 

 
39,215

Other income
 
855

 
561

 
1,172

 
662

Total Revenue
 
$
101,970


$
89,501


$
201,023


$
215,565


Property Rentals
We generate revenue from minimum lease payments from tenant operating leases. These rents are recognized over the noncancelable terms of the related leases on a straight-line basis which includes the effects of rent steps and rent abatements under the leases in accordance with ASC 840. We satisfy our performance obligations over time, under the noncancelable lease term, commencing when the tenant takes possession of the leased space and the leased space is substantially ready for its intended use. In addition, in circumstances where we provide a lease incentive to tenants, we recognize the incentive as a reduction of rental revenue on a straight-line basis over the remaining term of the lease. The underlying leased asset remains on our consolidated balance sheet and continues to depreciate.
Tenant expense reimbursements
In accordance with ASC 840, revenue arises from tenant leases, which provide for the recovery of all or a portion of the operating expenses, real estate taxes and capital improvements of the respective property. This revenue is accrued in the same periods as the expenses are incurred.
Income from acquired leasehold interest
Income from acquired leasehold interest was non-cash revenue generated in connection with the write-off of an unamortized intangible liability balance related to the below-market ground lease as well as the existing straight-line receivable balance, upon acquisition of the leasehold interest of the property. This revenue was recognized in accordance with ASC 840.
Other Income
Other income is generated in connection with certain services provided to tenants for which we earn a fee. This revenue is recognized as the services are transferred in accordance with ASC 606, with the exception of lease termination fee income, which is recognized in accordance with ASC 840.
Management and development fees
We generate management and development fee income from contractual property management agreements with third parties. This revenue is recognized as the services are transferred in accordance with ASC 606.


13



5.
ACQUISITIONS AND DISPOSITIONS

During the six months ended June 30, 2018, we closed the following acquisitions:
Date Purchased
 
Property Name
 
City
 
State
 
Square Feet
 
Purchase Price
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
 
January 26, 2018
 
938 Spring Valley Road
 
Maywood
 
NJ
 
2,000

 
$
719

 
February 23, 2018
 
116 Sunrise Highway
 
Freeport
 
NY
 
4,750

 
447

 
February 28, 2018
 
197 West Spring Valley Ave
 
Maywood
 
NJ
 
16,300

 
2,799

 
May 24, 2018
 
7 Francis Place
 
Montclair
 
NJ
 
3,000

 
966

 
 
 
 
 
 
 
 
 
Total
$
4,931

(1) 
(1) 
The total purchase price for the properties acquired in the six months ended June 30, 2018 includes $0.1 million of transaction costs incurred in relation to the transactions.

The properties purchased during the six months ended June 30, 2018 are all adjacent to existing centers owned by the Company. Consideration for these purchases consisted of cash.

The aggregate purchase price of the above property acquisitions have been allocated as follows:
Property Name
 
Land
 
Buildings and improvements
 
Total Purchase Price
(in thousands)
 
 
 
 
 
 
938 Spring Valley Road
 
$
519

 
$
200

 
$
719

116 Sunrise Highway
 
151

 
296

 
447

197 West Spring Valley Ave
 
1,768

 
1,031

 
2,799

7 Francis Place
 
585

 
381

 
966

Total
 
$
3,023

 
$
1,908

 
$
4,931


Dispositions

On April 26, 2018, we completed the sale of our property in Allentown, PA, which was previously classified as held for sale, for $54.3 million, net of selling costs. As a result of this transaction, we recognized a $50.4 million gain on sale of real estate during the six months ended June 30, 2018.


14



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 $76.3 million and $168.5 million as of June 30, 2018, respectively, and $87.2 million and $181.0 million as of December 31, 2017, respectively.

Amortization of acquired below-market leases, net of acquired above-market leases resulted in additional rental income of $7.8 million and $10.5 million for the three and six months ended June 30, 2018, respectively, and $2.1 million and $4.1 million for the same periods in 2017.
 
Amortization of acquired in-place leases and customer relationships resulted in additional depreciation and amortization expense of $5.8 million and $8.6 million for the three and six months ended June 30, 2018 and $2.1 million and $3.1 million for the same periods in 2017.

Certain shopping centers are subject to ground leases or ground and building leases. Amortization of these acquired below-market leases resulted in additional rent expense of $0.3 million and $0.5 million for the three and six months ended June 30, 2018 and $0.1 million and $0.5 million for the same periods in 2017.

The following table sets forth the estimated annual amortization expense related to intangible assets and liabilities for the five succeeding years commencing January 1, 2019:
(Amounts in thousands)
 
Below-Market
 
Above-Market
 
 
 
Below-Market
Year
 
Operating Lease Income
 
Operating Lease Expense
 
In-Place Leases
 
Ground Leases
2019
 
$
11,201

 
$
1,293

 
$
7,972

 
$
972

2020
 
11,034

 
1,016

 
6,698

 
972

2021
 
10,843

 
794

 
5,398

 
622

2022
 
10,500

 
426

 
4,104

 
590

2023
 
10,238

 
327

 
3,731

 
590



15



7.     MORTGAGES PAYABLE
 
The following is a summary of mortgages payable as of June 30, 2018 and December 31, 2017.
 
 
 
 
Interest Rate at
 
June 30,
 
December 31,
(Amounts in thousands)
 
Maturity
 
June 30, 2018
 
2018
 
2017
First mortgages secured by:
 
 
 
 
 
 
 
 

Variable rate
 
 
 
 
 
 
 
 
Plaza at Cherry Hill(1)
 
5/24/2022
 
3.58%
 
$
28,930

 
$
28,930

Westfield - One Lincoln Plaza(1)
 
5/24/2022
 
3.58%
 
4,730

 
4,730

Plaza at Woodbridge(1)
 
5/25/2022
 
3.58%
 
55,340

 
55,340

Hudson Commons(2)
 
11/15/2024
 
3.88%
 
29,000

 
29,000

Watchung(2)
 
11/15/2024
 
3.88%
 
27,000

 
27,000

Bronx (1750-1780 Gun Hill Road)(2)
 
12/1/2024
 
3.88%
 
24,500

 
24,500

Total variable rate debt
 
 
 
 
 
169,500

 
169,500

Fixed rate
 
 
 
 
 
 
 
 
Montehiedra Town Center, Senior Loan
 
7/6/2021
 
5.33%
 
85,699

 
86,236

Montehiedra Town Center, Junior Loan
 
7/6/2021
 
3.00%
 
30,000

 
30,000

Bergen Town Center
 
4/8/2023
 
3.56%
 
300,000

 
300,000

Shops at Bruckner
 
5/1/2023
 
3.90%
 
11,874

 
12,162

Hudson Mall(5)
 
12/1/2023
 
5.07%
 
24,666

 
25,004

Yonkers Gateway Center(6)
 
4/6/2024
 
4.16%
 
32,471

 
33,227

Las Catalinas
 
8/6/2024
 
4.43%
 
130,000

 
130,000

Brick
 
12/10/2024
 
3.87%
 
50,000

 
50,000

North Plainfield
 
12/10/2025
 
3.99%
 
25,100

 
25,100

Middletown
 
12/1/2026
 
3.78%
 
31,400

 
31,400

Rockaway
 
12/1/2026
 
3.78%
 
27,800

 
27,800

East Hanover (200 - 240 Route 10 West)
 
12/10/2026
 
4.03%
 
63,000

 
63,000

North Bergen (Tonnelle Ave)(4)
 
4/1/2027
 
4.18%
 
100,000

 
100,000

Manchester Plaza
 
6/1/2027
 
4.32%
 
12,500

 
12,500

Millburn
 
6/1/2027
 
3.97%
 
24,000

 
24,000

Totowa
 
12/1/2027
 
4.33%
 
50,800

 
50,800

Woodbridge Commons
 
12/1/2027
 
4.36%
 
22,100

 
22,100

East Brunswick
 
12/6/2027
 
4.38%
 
63,000

 
63,000

East Rutherford
 
1/6/2028
 
4.49%
 
23,000

 
23,000

Hackensack
 
3/1/2028
 
4.36%
 
66,400

 
66,400

Marlton
 
12/1/2028
 
3.86%
 
37,400

 
37,400

East Hanover Warehouses
 
12/1/2028
 
4.09%
 
40,700

 
40,700

Union (2445 Springfield Ave)
 
12/10/2028
 
4.01%
 
45,600

 
45,600

Freeport (437 East Sunrise Highway)
 
12/10/2029
 
4.07%
 
43,100

 
43,100

Garfield
 
12/1/2030
 
4.14%
 
40,300

 
40,300

Mt Kisco -Target(3)
 
11/15/2034
 
6.40%
 
14,224

 
14,451

Englewood(7)
 
 
—%
 

 
11,537

Total fixed rate debt
 
 
 
 
 
1,395,134

 
1,408,817

 
 
Total mortgages payable
 
1,564,634

 
1,578,317

 
 
Unamortized debt issuance costs
 
(12,846
)
 
(13,775
)
Total mortgages payable, net of unamortized debt issuance costs

 
$
1,551,788

 
$
1,564,542

(1) 
Bears interest at one month LIBOR plus 160 bps.
(2) 
Bears interest at one month LIBOR plus 190 bps.
(3) 
The mortgage payable balance on the loan secured by Mount Kisco (Target) includes $1.0 million of unamortized debt discount as of both June 30, 2018 and December 31, 2017, respectively. The effective interest rate including amortization of the debt discount is 7.29% as of June 30, 2018.

16



(4) 
On March 29, 2017, we refinanced the $74 million, 4.59% mortgage loan secured by our Tonnelle Commons property in North Bergen, NJ, increasing the principal balance to $100 million with a 10-year fixed rate mortgage, at 4.18%. 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 $1.1 million prepayment penalty and write-off of $0.2 million of unamortized deferred financing fees on the original loan.
(5) 
The mortgage payable balance on the loan secured by Hudson Mall includes $1.4 million and $1.5 million of unamortized debt premium as of June 30, 2018 and December 31, 2017, respectively. The effective interest rate including amortization of the debt premium is 3.82% as of June 30, 2018.
(6) 
The mortgage payable balance on the loan secured by Yonkers Gateway Center includes $0.8 million of unamortized debt premium as of both June 30, 2018 and December 31, 2017, respectively. The effective interest rate including amortization of the debt premium is 3.71% as of June 30, 2018.
(7) 
On January 31, 2018, our property in Englewood, NJ was sold at a foreclosure sale and on February 23, 2018, the court order was received approving the sale and discharging the receiver of all assets and liabilities related to the property.

The net carrying amount of real estate collateralizing the above indebtedness amounted to approximately $1.2 billion as of June 30, 2018. Our mortgage loans contain covenants that limit our ability to incur additional indebtedness on these properties and in certain circumstances require lender approval of tenant leases and/or yield maintenance upon repayment prior to maturity. As of June 30, 2018, we were in compliance with all debt covenants.

During 2017, our property in Englewood, NJ was transferred to a receiver. On January 31, 2018, our property in Englewood, NJ was sold at a foreclosure sale and on February 23, 2018, the court order was received approving the sale and discharging the receiver of all assets and liabilities related to the property. We recognized a gain on extinguishment of debt of $2.5 million as a result of the forgiveness of outstanding mortgage debt of $11.5 million, which is included in gain (loss) on extinguishment of debt in the consolidated statement of income for the six months ended June 30, 2018.

As of June 30, 2018, the principal repayments for the next five years and thereafter are as follows:
(Amounts in thousands)
 
 
Year Ending December 31,
 
 
2018(1)
 
$
1,641

2019
 
4,244

2020
 
7,571

2021
 
124,053

2022
 
100,899

2023
 
344,426

Thereafter
 
981,800

(1) Remainder of 2018.

On January 15, 2015, we entered into a $500 million Revolving Credit Agreement (the “Agreement”) with certain financial institutions. On March 7, 2017, we amended and extended the Agreement. The amendment increased the credit facility size by $100 million to $600 million and extended the maturity date to March 7, 2021 with two six-month extension options. Borrowings under the Agreement are subject to interest at LIBOR plus 1.10% to 1.55% and an annual facility fee of 15 to 35 basis points. Both the spread over LIBOR and the facility fee are based on our current leverage ratio and are subject to increase if our leverage ratio increases above predefined thresholds. The Agreement contains customary financial covenants including a maximum leverage ratio of 60% and a minimum fixed charge coverage ratio of 1.5x. No amounts have been drawn to date under the Agreement. Financing fees associated with the Agreement of $2.7 million and $3.2 million as of June 30, 2018 and December 31, 2017, respectively, are included in deferred financing fees, net 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.


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On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was signed into law. The Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. Effective January 1, 2018, for businesses, the Act reduces the corporate tax rate from a maximum of 35% to a flat 21% rate. Since UE has elected to qualify as a REIT under sections 856-860 of the Internal Revenue Code with intent to distribute 100% of its taxable income and did not have any activities in a Taxable REIT Subsidiary (“TRS”) prior to January 1, 2018, there was no impact to the Company’s financial statements.

On December 31, 2017, the Company elected, for tax purposes, to treat the wholly-owned limited partnership that held its Allentown property as a taxable REIT subsidiary (“TRS”). A TRS is a corporation, other than a REIT, in which we directly or indirectly hold stock, which has made a joint election with us to be treated as a TRS under Section 856(l) of the Code. A TRS is required to pay regular U.S. federal income tax, and state and local income tax where applicable, as a non-REIT “C” corporation. The Allentown legal entity restructuring resulted in a capital gain recognized for tax purposes in 2017 and a step up in tax basis to the Allentown property resulting in no capital gains recognized for tax purposes in 2018. The Company’s consolidated financial statements for the three and six months ended June 30, 2018 reflect the TRS’ federal and state corporate income taxes associated with the operating activities at the TRS. The tax expense recorded in association with the operating activities of the TRS was $0.2 million for the six months ended June 30, 2018.
The REIT and the other minority members are partners in the Operating Partnership. As such, the partners are required to report their share of taxable income on their tax returns. We are also subject to certain other taxes, including state and local taxes and franchise taxes which are included in general and administrative expenses in the consolidated statements of income.

Our two Puerto Rico malls are subject to a 29% non-resident withholding tax which is included in income tax expense in the consolidated statements of income. The Puerto Rico tax expense recorded was $0.2 million and $0.3 million for the quarters ended June 30, 2018 and 2017, respectively, and $0.4 million and $0.6 million for the six months ended June 30, 2018 and 2017, respectively. Both properties are held in a special partnership for Puerto Rico tax reporting (the general partner being a qualified REIT subsidiary or “QRS”).


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9.     FAIR VALUE MEASUREMENTS
 
ASC 820, Fair Value Measurement and Disclosures defines fair value and establishes a framework for measuring fair value. The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 - quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 - observable prices based on inputs not quoted in active markets, but corroborated by market data; and Level 3 - unobservable inputs used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in our assessment of fair value.
 
Financial Assets and Liabilities Measured at Fair Value on a Recurring or Non-Recurring Basis

There were no financial assets or liabilities measured at fair value on a recurring or non-recurring basis as of June 30, 2018 and December 31, 2017.

Financial Assets and Liabilities not Measured at Fair Value
 
Financial assets and liabilities that are not measured at fair value on the consolidated balance sheets include cash and cash equivalents and mortgages payable. Cash and cash equivalents are carried at cost, which approximates fair value. The fair value of mortgages payable is calculated by discounting the future contractual cash flows of these instruments using current risk-adjusted rates available to borrowers with similar credit ratings, which are provided by a third-party specialist. The fair value of cash and cash equivalents is classified as Level 1 and the fair value of mortgages payable is classified as Level 2. The table below summarizes the carrying amounts and fair value of these financial instruments as of June 30, 2018 and December 31, 2017.
 
 
 
As of June 30, 2018
 
As of December 31, 2017
(Amounts in thousands)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Assets:
 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
500,930

 
$
500,930

 
$
490,279

 
$
490,279

Liabilities:
 
 

 
 

 
 

 
 

Mortgages payable(1)
 
$
1,564,634

 
$
1,527,175

 
$
1,578,317

 
$
1,579,839

(1) Carrying amounts exclude unamortized debt issuance costs of $12.8 million and $13.8 million as of June 30, 2018 and December 31, 2017, respectively.

The following market spreads were used by the Company to estimate the fair value of mortgages payable:
 
June 30, 2018
 
December 31, 2017
 
Low
 
High
 
Low
 
High
Mortgages payable
1.6%
 
1.9%
 
1.7%
 
2.1%

10.     COMMITMENTS AND CONTINGENCIES
 
There are various legal actions against us in the ordinary course of business. In our opinion, after consultation with legal counsel, the outcome of such matters will not have a material adverse effect on our financial condition, results of operations or cash flows.
Redevelopment
As of June 30, 2018, we had approximately $206.6 million of active development, redevelopment and anchor repositioning projects underway of which $87.1 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 
The Company maintains (i) general liability insurance with limits of $200 million for properties in the U.S. and Puerto Rico and (ii) all-risk property insurance with limits of $500 million per occurrence and in the aggregate for properties in the U.S. and $139 million for properties in Puerto Rico, subject to the terms, conditions, exclusions, deductibles and sub-limits when applicable for certain perils such as floods and earthquakes and (iii) numerous other insurance policies including trustees’ and officers’ insurance,

19



workers’ compensation and automobile-related liabilities insurance. The Company’s insurance includes coverage for certified acts of terrorism acts but excludes coverage for nuclear, biological, chemical or radiological terrorism events as defined by the Terrorism Risk Insurance Program Reauthorization Act, which expires in December 2020. In addition, the Company maintains coverage for certain cybersecurity losses with limits of $5 million per occurrence and 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 typically charged directly to each of the retail properties and warehouses but not all of the cost of such premiums are recovered. The Company is responsible for deductibles, losses in excess of insurance coverage, and the portion of premiums not covered from retail properties, which could be material.
We continue to monitor the state of the insurance market and the scope and costs of coverage for acts of terrorism. However, we cannot anticipate what coverage will be available on commercially reasonable terms in the future and expect premiums across most property coverage lines to increase in light of recent events. The incurrence of uninsured losses, costs or uncovered premiums could materially and adversely affect our business, results of operations and financial condition.
Certain of our loans and other agreements contain customary covenants requiring the maintenance of insurance coverage. Although we believe that we currently have adequate insurance coverage for purposes of these agreements, we may not be able to obtain an equivalent amount of coverage at reasonable costs in the future. If lenders or other counterparties insist on greater coverage than we are able to obtain, such requirement could materially and adversely affect our ability to finance our properties and expand our portfolio.

Hurricane-Related Charges
On September 20, 2017, Hurricane Maria made landfall, damaging our two properties in Puerto Rico. During the six months ended June 30, 2018, the Company received $1.5 million in insurance proceeds which were partially offset by $0.2 million of hurricane related costs, resulting in net casualty gains of $1.3 million included in casualty and impairment loss (gain), net on the accompanying consolidated statements of income.

During the three and six months ended June 30, 2018, the Company recognized a $0.2 million net gain and $0.5 million of business interruption losses, respectively. For the six months ended June 30, 2018, the losses were comprised of $0.7 million pertaining to rent abatements due to tenants that had not reopened since the hurricane, recorded as a reduction of property rentals and tenant expense reimbursements, offset by a $0.2 million reversal to provision for doubtful accounts for payments received from tenants on rents previously reserved. As of June 30, 2018, the only tenant yet to reopen since the hurricane for which we are still claiming business interruption insurance is for the Gap at Montehiedra.

No determination has been made as to the total amount or timing of insurance payments that may be received as a result of the hurricane.

Environmental Matters
Each of our properties has been subjected to varying degrees of environmental assessment at various times. Based on these assessments, we have accrued costs of $1.8 million and $1.2 million on our consolidated balance sheets as of June 30, 2018 and December 31, 2017, respectively, for remediation costs for environmental contamination at certain properties. While this accrual reflects our best estimates of the potential costs of remediation at these properties, there can be no assurance that the actual costs will not exceed these amounts. During the three and six months ended June 30, 2018, the Company recognized $0.3 million and $0.6 million of environmental remediation costs, respectively, within property operating expenses on the consolidated statements of income. Although we are not aware of any other material environmental contamination, 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.


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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, 2018
 
December 31, 2017
Other assets
$
3,806

 
$
3,771

Real estate held for sale

 
3,285

Deposits for acquisitions

 
406

Prepaid expenses:
 
 
 
Real estate taxes
4,644

 
7,094

Insurance
1,783

 
2,793

Rent, licenses/fees
1,995

 
1,210

Total Prepaid expenses and other assets
$
12,228

 
$
18,559

 

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, 2018
 
December 31, 2017
Deferred ground rent expense
$
6,535

 
$
6,499

Deferred tax liability, net
3,073

 
2,828

Deferred tenant revenue
4,459

 
4,183

Environmental remediation costs
1,813

 
1,232

Other liabilities
1,647

 
429

Total Other liabilities
$
17,527

 
$
15,171


13.     INTEREST AND DEBT EXPENSE
 
The following table sets forth the details of interest and debt expense:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in thousands)
2018
 
2017
 
2018
 
2017
Interest expense
$
14,942

 
$
13,040

 
$
29,864

 
$
25,291

Amortization of deferred financing costs
717

 
587

 
1,439

 
1,451

Total Interest and debt expense
$
15,659

 
$
13,627

 
$
31,303


$
26,742

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, 2018, $241.3 million of common shares remained available for issuance under this ATM equity program and there were no common shares issued under the ATM equity program during the three and six months ended June 30, 2018 and 2017, respectively. Actual future sales will depend on a variety of factors including, but not limited to, market conditions, the trading price of our common shares and our capital needs. We have no obligation to sell the remaining shares available under the active ATM equity program.
Dividends and Distributions
During each of the three months ended June 30, 2018 and 2017, the Company declared dividends on our common shares and OP unit distributions of $0.22 per share/unit. During the six months ended June 30, 2018 and 2017, the Company declared common stock dividends and OP unit distributions of $0.44 per share/unit in the aggregate.

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Noncontrolling Interests in Operating Partnership
Redeemable noncontrolling interests reflected on the consolidated balance sheets of the Company are comprised of OP units and limited partnership interests in the Operating Partnership in the form of LTIP unit awards. In connection with the separation, the Company issued 5.7 million OP units, representing a 5.4% interest in the Operating Partnership to Vornado Realty L.P. (“VRLP”) in exchange for interests in VRLP properties contributed by VRLP. LTIP unit awards were granted to certain executives pursuant to our 2015 Omnibus Share Plan (the “Omnibus Share Plan”). OP units were issued to contributors in exchange for their property interests in connection with the Company’s property acquisitions in 2017. The total of the OP units and LTIP units represent a 10.1% weighted-average interest in the Operating Partnership for both the three and six months ended June 30, 2018. Holders of outstanding vested LTIP units may, from and after two years from the date of issuance, redeem their LTIP units for cash, or for the Company’s common shares on a one-for-one basis, solely at our election. Holders of outstanding OP units may, at a determinable date, redeem their units for cash or the Company’s common shares on a one-for-one basis, solely at our election.
Noncontrolling Interest in Consolidated Subsidiaries
The noncontrolling interest relates to the 5% interest held by others in our property in Walnut Creek, CA (Mount Diablo). The net income attributable to noncontrolling interest is presented separately in our consolidated statements of income.

15.     SHARE-BASED COMPENSATION

2018 Long-Term Incentive Plan

On February 22, 2018, the Compensation Committee of the Board of Trustees of the Company approved the Company’s 2018 Long-Term Incentive Plan ("2018 LTI Plan"), a multi-year equity compensation program, comprised of both performance-based and time-based vesting awards. Equity awards granted under the 2018 LTI Plan are weighted, in terms of grant date and fair value, 80% performance-based and 20% time-based.

For the performance-based awards under the 2018 LTI Plan, participants, have the opportunity to earn awards in the form of LTIP Units if, and only if, Urban Edge’s absolute and relative total shareholder return (“TSR”) meets certain criteria over the three-year performance measurement period (the “Performance Period”) beginning on February 22, 2018 and ending on February 21, 2021. The Company issued 328,107 LTIP Units under the 2018 LTI Plan.

Under the Absolute TSR component (25% of the performance-based awards), 40% of the LTIP Units will be earned if the Company’s TSR over the Performance Period is equal to 18%, 100% of the LTIP Units will be earned if the Company’s TSR over the Performance Period is equal to 27%, and 165% of the LTIP Units will be earned if the Company’s TSR over the Performance Period is equal to or greater than 36%. The Relative TSR component is based on the Company’s performance compared to a peer group comprised of 14 companies. Under the Relative TSR Component (75% of the performance-based awards), 40% of the LTIP Units will be earned if the Company’s TSR over the Performance Period is equal to the 35th percentile of the peer group, 100% of the LTIP Units will be earned if the Company’s TSR over the Performance Period is equal to the 55th percentile of the peer group, and 165% of the LTIP Units will be earned if the Company’s TSR over the Performance Period is equal to or above the 75th percentile of the peer group, with earning determined using linear interpolation if between such relative TSR thresholds.

The fair value of the performance-based award portion of the 2018 LTI Plan on the date of grant was $3.6 million using a Monte Carlo simulation to estimate the fair value through a risk-neutral premise. The time-based awards under the 2018 LTI Plan, also granted in the form of LTIP Units, vest ratably over three years except in the case of our Chairman and Chief Executive Officer, where the vesting is ratably over four years. The Company granted time-based awards under the 2018 LTI Plan that represent 33,172 LTIP units with a grant date fair value of $0.7 million.

Deferred Share Units Granted to Trustees

In connection with the 2015 Omnibus Share Plan, the Company has authorized Trustee Deferred Share Unit Agreements (“DSU Agreements”) in connection with the services of the trustees to the Company. Each deferred share unit (“DSU”) is equivalent to one common share of the Company. All DSUs shall vest in full on the agreed upon vesting date, provided the trustee remains in service as a member of the Board of Trustees of the Company on such date. If the service of the trustee to the Company or its affiliates terminates for any reason prior to the vesting date, any DSUs that have not vested as of such date shall automatically and without notice terminate and be forfeited. Once vested, the common shares underlying the DSUs are granted to the trustees on predetermined dates or upon their departure as trustees.

During the three and six months ended June 30, 2018, trustees elected to receive a portion of their compensation in deferred share units and an aggregate of 13,656 shares were credited to those trustees based on the weighted average grant date fair value of

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$19.33. During the six months ended June 30, 2018, the Company incurred expense of $23,000 related to deferred share units granted to trustees.

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)
2018
 
2017
 
2018
 
2017
Share-based compensation expense components:
 
 
 
 
 
 
Restricted share expense
$
614

 
$
518

 
$
1,201

 
$
908

Stock option expense
519

 
646

 
1,104

 
1,269

LTIP expense
208

 
147

 
374

 
263