Phillips Edison & Company, Inc. — FY2021 Form 10-K
Reporting period: Year ended December 31, 2021. Phillips Edison & Company (PECO) is a REIT focused on grocery-anchored neighborhood shopping centers, with a third-party property-management and investment-management business. It owned 268 centers and held interests in 21 joint-venture centers; the managed portfolio covered approximately 33.0 million square feet across 31 states. PECO completed its IPO in July 2021 and began trading on Nasdaq as PECO.
Financial and operating performance
| Metric | FY2021 | FY2020 | Change / context |
|---|---|---|---|
| Total revenue | $532.8 million | $498.0 million | Up 7.0%; rental income rose 7.0% to $519.5 million. |
| Net income | $17.2 million | $5.5 million | Net income attributable to stockholders was $15.1 million; diluted EPS was $0.15, versus $0.05. |
| Same-center NOI | $346.8 million | $320.4 million | Up 8.2%. |
| Core FFO per diluted share | $2.19 | $1.98 | Up $0.21. Nareit FFO per diluted share was $1.81, down from $1.99. |
| Operating cash flow | $262.9 million | $210.6 million | Up 24.8%. |
| Cash, cash equivalents and restricted cash | $115.5 million | $131.9 million | Down $16.4 million during 2021. |
| Gross debt obligations | $1.914 billion | $2.308 billion | Down 17.1%; weighted-average interest rate was 3.3%, versus 3.1%. |
| Net debt / Adjusted EBITDAre | 5.6x | 7.3x | Improved leverage; net debt / enterprise value was 30.6%, versus 44.5%. |
At year-end, PECO reported total assets of $4.669 billion and total equity of $2.476 billion. Available liquidity was $604.8 million, including $115.5 million of cash, cash equivalents and restricted cash and $489.3 million of availability under its $500 million revolving credit facility. The company reported compliance with debt covenants.
Leased occupancy improved to 96.3% from 94.7%; inline occupancy rose to 92.7% from 88.9%. New-lease comparable rent spreads were 15.7%, and renewal spreads were 8.1%. Approximately 72% of portfolio ABR was from necessity-based goods and services, and 96.7% of wholly-owned ABR came from omni-channel grocery-anchored centers.
Material changes and notable items
- Rental income and same-center NOI benefited from stronger collections and recovery from pandemic-related disruption. Operating cash flow also improved, including through better collections and working-capital changes.
- GAAP net income included a $30.4 million loss from the change in fair value of the earn-out liability, compared with $10.0 million of income in 2020. This was partly offset by a $30.4 million gain on disposal of property, versus $6.5 million in 2020. Real-estate impairment charges increased to $6.8 million from $2.4 million.
- Interest expense fell to $76.4 million from $85.3 million, reflecting debt repayments, less revolving-credit borrowing and lower average borrowing rates; the new bond offering partly offset the decrease.
- The July IPO raised $547.4 million gross. In October, PECO issued $350 million principal amount of 2.625% senior notes due 2031, generating $345.4 million gross proceeds. The company refinanced credit facilities, repaid or refinanced substantial term debt and reduced net outstanding debt obligations by 17.5% year over year.
- PECO acquired nine properties and five outparcels for $308.4 million and sold 24 properties and four outparcels, receiving $206.4 million net proceeds. Capital spending was $75.0 million, versus $64.0 million.
- Distributions were $0.085 per share monthly through September 2021 and increased to $0.09 monthly for October–December. The board authorized $0.09 monthly distributions for February–April 2022. The DRIP and share repurchase program ended in August 2021.
Outlook, management commentary and risks
- Management said collections had returned to pre-pandemic levels; 2021 collections were approximately 99% of rent and recoveries billed, as of January 20, 2022. Outstanding pandemic-related payment plans were approximately $3.3 million, with expected collections over a weighted-average term of about ten months. These amounts were not guaranteed.
- For 2022, PECO expected capital expenditures of $95–$105 million, including $45–$55 million for development and redevelopment. It expected current projects to stabilize generally within 24 months and underwritten incremental unlevered yields to average 10%–12%; actual outcomes may differ. The filing does not provide clear earnings or revenue guidance.
- Key risks include tenant financial distress and lease rollover, renewed pandemic impacts, e-commerce and retail-sector changes, inflation and construction-cost pressures, interest rates and refinancing access, property impairments, weather and climate exposure, cybersecurity, and REIT qualification. Florida and California accounted for 12.4% and 10.7% of portfolio ABR, respectively.
- Tax-protection agreements restrict disposition flexibility for certain assets. The estimated potential make-whole amount on protected built-in gains was $146.8 million; PECO had not recorded a liability for these agreements. The company also had limited, non-recourse-carveout and environmental-indemnity guarantees related to joint-venture debt.
- The auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective at year-end; the auditor was not engaged to express an opinion on internal-control effectiveness.
Important facts for investors to verify
- Reconcile the improvement in GAAP net income with the lower Nareit FFO per share and the impact of the earn-out fair-value charge, property-sale gains and impairments.
- Review the sustainability of collections, the remaining payment plans and the credit quality of tenants still accounted for on a cash basis.
- Assess the 2022 lease-expiration schedule, leasing spreads, occupancy trends and the costs required to retain or replace tenants.
- Confirm debt maturities, covenant headroom, interest-rate exposure and the transition of LIBOR-linked contracts; approximately $930 million of term loans was hedged with swaps at year-end.
- Track acquisition and redevelopment returns against the stated 10%–12% yield objective, and compare planned capital spending with operating cash flow and disposition proceeds.
- Consider the distribution’s coverage and the board’s discretion over future payments; REIT distribution requirements do not guarantee a particular per-share distribution.