Phillips Edison & Company, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 12, 2021. This is an annual report, not a standalone fourth-quarter filing. PECO is an internally managed REIT focused on grocery-anchored shopping centers, with a third-party investment management business. At year-end it wholly owned 283 properties and held interests in two joint ventures; the managed portfolio covered approximately 34.4 million square feet across 31 states.
Financial and operating performance
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $498.0 million | $536.7 million |
| Net income (loss) attributable to stockholders | $4.8 million | $(63.5) million |
| Net income (loss) per diluted share | $0.02 | $(0.22) |
| Core FFO | $220.4 million; $0.66 per diluted share | $230.9 million; $0.70 per diluted share |
| NOI for real estate investments | $332.0 million | $355.8 million |
| Same-center NOI | $328.0 million, down 4.1% | $342.1 million |
| Cash provided by operating activities | $210.6 million | $226.9 million |
| Capital expenditures | $64.0 million | $75.5 million |
Revenue fell 7.2%, primarily from COVID-related rent collectibility issues and property dispositions. Same-center reserves for uncollectibility rose to $26.5 million from $5.2 million. The GAAP return to positive net income chiefly reflects much lower real estate impairment charges: $2.4 million versus $87.4 million in 2019. The filing does not provide a single headline operating-margin measure.
For the fourth quarter, revenue was $120.8 million and net loss attributable to stockholders was $11.2 million, or $(0.04) per share. Fourth-quarter 2019 revenue was $135.3 million and net income attributable to stockholders was $4.1 million, or $0.02 per share.
Liquidity, debt and distributions
- Year-end cash and cash equivalents were $104.3 million; restricted cash was $27.6 million. Cash, cash equivalents and restricted cash together totaled $131.9 million.
- Debt obligations, net, were $2.293 billion; gross debt was $2.308 billion. Weighted-average interest rate was 3.1% and weighted-average term was 4.1 years. Net debt to annualized Adjusted EBITDAre was 7.3x, versus 7.2x a year earlier; net debt to total enterprise value was 44.5%, versus 39.5%.
- The $500 million revolving credit facility had $490.4 million available at year-end and matures in October 2021, with an option to extend to October 2022 subject to conditions. PECO said it intended to extend or negotiate new terms. It reported compliance with debt covenants at year-end.
- Operating cash flow was $210.6 million, down 7.2%. Investing activities used $44.1 million and financing activities used $129.7 million. The company repaid $64.8 million of debt during the year.
- Distributions were suspended after the March 2020 payment and reinstated for December at $0.02833333 per share monthly, or $0.34 annualized. Total 2020 distributions declared were $0.19 per share. Management said the board would evaluate distributions monthly during 2021.
Material changes and portfolio activity
- Wholly owned portfolio occupancy declined to 94.7% from 95.4%; inline occupancy was 88.9%, down from 90.2%. Grocery-anchored properties generated 97.3% of wholly owned portfolio ABR.
- At the April 2020 peak, temporary closures affected about 37% of Neighbor spaces, representing 27% of ABR. As of March 8, 2021, 98% of occupied spaces, representing 99% of ABR and GLA, were open.
- As of March 8, 2021, collections were approximately 93% for second-quarter 2020 billings, 95% for third- and fourth-quarter billings, and 94% for January and February 2021 combined. Executed payment plans covered approximately $8.7 million of deferred rent and related charges; abatements totaled approximately $4.2 million.
- PECO executed 861 leases totaling 4.7 million square feet, compared with 1,026 leases totaling 4.6 million square feet in 2019. Comparable rent spreads were 8.2% for new leases and 6.7% for renewals and options, below the respective 2019 spreads of 13.3% and 8.5%.
- PECO sold seven properties and one outparcel for $57.9 million, versus 21 properties and one outparcel for $223.1 million in 2019. It acquired two properties and two outparcels for $41.5 million. The GRP I/GRP II joint venture combination resulted in PECO owning approximately 14% of the combined GRP I.
Outlook, risks and unusual items
- Management said current liquidity sources, including operating cash flow and revolving-credit availability, were sufficient for short- and long-term cash demands. It did not provide full-year earnings or FFO guidance in the supplied filing text.
- 2021 capital expenditures were expected to be $85–$95 million, including $54.5 million for development and redevelopment. Acquisition activity could remain low during 2021; development and redevelopment were prioritized or deferred during the pandemic.
- COVID-19 remains the central operating risk: tenant failures, rent concessions and collection uncertainty, vacancies, lower leasing demand or rents, possible impairments, and constrained property sales or financing. At year-end, PECO had $28.5 million in monthly revenue that would not be recognized until cash collection or the tenant resumed payment and was considered creditworthy.
- Other material risks include substantial leverage and refinancing needs, variable-rate exposure and the LIBOR transition, competition from e-commerce, geographic and tenant concentration, and the illiquidity of the shares. Florida and California represented 12.5% and 10.4% of portfolio ABR, respectively.
- The board reduced estimated value per share from $11.10 to $8.75 in May 2020, based substantially on a March 31, 2020 valuation. The independent valuation firm cited “material valuation uncertainty”; the estimate is unaudited and is not a market price or a guarantee of sale proceeds. No established public trading market exists.
- A tender offer repurchased 13.5 million shares at $5.75 per share for $77.6 million. The amount payable was recorded at year-end and paid January 5, 2021. Standard share repurchases remained suspended; limited death, disability or incompetence repurchases were reinstated in January 2021.
- Unusual earnings factors include a $10.0 million gain from the change in fair value of the earn-out liability and the substantial year-over-year reduction in property impairments. The earn-out liability was $22.0 million at year-end and depends on the timing and valuation of a future liquidity event.
Most important facts for investors to verify
- Subsequent rent collections, tenant payment-plan performance, abatements, bankruptcies and the $28.5 million of revenue not recognized pending collection or restored creditworthiness.
- The maturity and extension or refinancing plan for the revolving facility due October 2021, covenant headroom, and the debt maturity schedule.
- Whether occupancy, leasing spreads and same-center NOI stabilize or deteriorate, especially as 2021 leases expire.
- The sustainability and cash-flow coverage of the reinstated $0.34 annualized distribution, including the board’s monthly decisions.
- The assumptions and limitations behind the $8.75 estimated value per share, and the practical limits on share liquidity and repurchases.
- Execution and funding of the $85–$95 million 2021 capital plan and expected returns from development and redevelopment projects.