Phillips Edison & Company, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; filed August 12, 2019. Phillips Edison is a REIT focused primarily on grocery-anchored shopping centers, with a third-party property and investment management business. The November 2018 REIT II merger materially expanded the portfolio and affects year-over-year comparisons.
Business and portfolio
- At June 30, 2019, the company wholly owned 298 properties across 32 states, totaling 33.5 million square feet; 94.6% of rentable area was leased, with a 4.8-year average remaining lease term.
- It also held 20% of Necessity Retail Partners (13 properties) and 15% of Grocery Retail Partners I (17 properties). Third-party assets under management were approximately $725 million.
- No tenant accounted for 10% or more of annualized base rent; Florida and California represented 12.3% and 10.0%, respectively.
Financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $132.6 million | $104.2 million | $265.4 million | $207.4 million |
| Net loss attributable to stockholders | $36.6 million | $11.4 million | $41.8 million | $13.0 million |
| Loss per share, basic and diluted | $0.13 | $0.06 | $0.15 | $0.07 |
| Operating cash flow | — | $100.1 million | $77.8 million | |
| Pro forma same-center NOI | $87.0 million | $85.7 million | $173.8 million | $170.3 million |
- Revenue increased 27.3% in Q2 and 28.0% for the first half, primarily due to REIT II properties acquired in November 2018. Fee and management income fell to $3.1 million in Q2 from $9.1 million, reflecting the end of fees previously earned from REIT II.
- Net losses widened substantially, with higher depreciation, interest, and real estate impairment. Real estate impairment charges were $25.2 million in Q2 and $38.9 million for the first half, principally on properties under contract or marketed for sale.
- First-half MFFO was $108.5 million ($0.33 per diluted share), compared with $83.1 million ($0.36 per share) in 2018. FFO and MFFO are non-GAAP measures and should not be treated as cash available for distributions.
- Pro forma same-center NOI rose 1.5% in Q2 and 2.0% for the first half. First-half leasing activity showed 11.6% comparable rent spreads on renewals and options; portfolio retention was 85.5%.
Balance sheet, debt, and liquidity
- At June 30, 2019, total assets were $5.0 billion, total liabilities $2.7 billion, and total equity $2.2 billion. Net investment in real estate was $4.7 billion.
- Debt obligations, net, were $2.42 billion; gross debt was $2.44 billion. Weighted-average interest rate was 3.5%, with 4.7 years’ weighted-average maturity. Debt was 86% fixed-rate and 79% unsecured, excluding adjustments and financing costs.
- The $500 million revolver had no drawn balance and $491.4 million available, net of letters of credit. The company reported compliance with debt covenants.
- Cash and cash equivalents were $17.8 million, with restricted cash of $34.8 million. Combined cash and restricted cash declined $31.7 million in the first half to $52.6 million.
- First-half investing cash use was $27.0 million, including $49.9 million of acquisitions and $27.2 million of capital expenditures, partly offset by $47.9 million of sale proceeds. Financing cash use was $104.8 million, including distributions and debt activity.
Changes, outlook, and notable items
- The REIT II merger drove much of the growth in revenue, expenses, and debt compared with 2018. The company attributed $464.5 million of debt assumed and new debt to the merger.
- Management said proceeds from dispositions are intended for capital recycling into higher-quality assets, redevelopment, and debt reduction. It expected liquidity sources to be adequate, but provided no specific earnings, revenue, or NOI guidance.
- The company adopted ASC 842 leases on January 1, 2019. It changed presentation of certain tenant-paid taxes and lease collectability adjustments; the direct-tax presentation change had no net earnings impact.
- Suspension of PECO III’s public offering led to $9.7 million of other impairment charges: $7.8 million on a corporate intangible asset and $1.9 million on organization and offering costs. The offering suspension also reduced fee-related receivables.
- Quarterly distributions were $0.17 per share. For the first half, gross distributions to common stockholders were $109.6 million, exceeding operating cash flow by $9.5 million and FFO by $5.5 million; the filing says the shortfall was funded by borrowings. The company cautioned that continued distributions above operating cash flow could be unsustainable.
- After quarter-end, the board suspended standard share repurchases and amended the repurchase program; only qualifying requests related to death, disability, or incompetence would continue. The amended program set a repurchase price at the lesser of $10.00 or the latest estimated value per share.
- Interest-rate swaps had a net liability fair value of approximately $21.0 million. The filing estimated $3.5 million would be reclassified from accumulated other comprehensive loss as increased interest expense over the next 12 months. The company reported no material litigation or known environmental matter expected to materially affect its financial statements.
Important facts for investors to verify
- Whether recurring property cash flows and leasing performance can sustain distributions, given the disclosed first-half distribution shortfall and reliance on borrowings.
- How much of reported revenue and NOI growth reflects the REIT II merger versus organic performance, and the impact of property sales and acquisitions.
- Whether impairment charges and planned asset dispositions continue, and whether sale proceeds are applied to debt reduction, redevelopment, or acquisitions as intended.
- Debt covenant headroom, refinancing needs, floating-rate exposure, and potential effects of swap valuations and interest-rate changes.
- The ongoing financial and fee impact of PECO III’s offering suspension, as well as the effect of the share-repurchase suspension and revised terms.