Phillips Edison & Company, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The company is a REIT focused on grocery-anchored shopping centers and also manages third-party real estate investments. At quarter-end, it wholly owned 284 properties; 97.0% of ABR came from grocery-anchored properties.
Financial results and position
- Q2 revenue: $119.0 million, down 10.2% from $132.6 million a year earlier. Rental income was $115.7 million, down 10.4%.
- Profitability: Q2 net loss attributable to stockholders was $5.6 million ($0.02 per share), compared with a $36.6 million loss ($0.13 per share) in Q2 2019. For the first six months, attributable net income was $4.2 million versus a $41.8 million loss. The prior-year comparison included real estate and other impairment charges.
- Operating measures: Q2 same-center NOI fell 5.2% to $80.3 million; six-month same-center NOI declined 1.3% to $167.0 million. Q2 Core FFO was $51.7 million ($0.16 per diluted share), versus $55.1 million ($0.17); six-month Core FFO was $111.9 million ($0.34 per share), versus $110.7 million ($0.34). These are non-GAAP measures.
- Cash flow: Six-month operating cash flow was $89.9 million, down from $100.1 million. Investing used $6.5 million and financing used $99.2 million; cash, cash equivalents and restricted cash decreased $15.8 million to $79.3 million. Capital expenditures were $28.5 million.
- Debt and liquidity: Debt obligations, net, were $2.321 billion, versus $2.354 billion at year-end 2019. Gross debt had a 3.1% weighted-average interest rate and 4.5-year weighted-average term. The $500 million revolver had no outstanding balance at June 30 and $490.4 million available. The company reported covenant compliance. Net debt/annualized Adjusted EBITDAre was 7.1x; net debt/enterprise value was 44.4%, up from 39.5% at year-end.
- Balance sheet: Total assets were $4.702 billion and total equity was $2.087 billion. Cash and cash equivalents were $53.3 million, with another $26.1 million restricted.
Material changes versus prior periods
- COVID-19-related rent collection uncertainty reduced Q2 rental income. The company recorded collectability adjustments of $13.3 million in Q2 and $15.8 million for the first six months; $12.0 million and $14.8 million of revenue, respectively, will not be recognized until cash is collected or the tenants resume payment and are considered creditworthy.
- As of August 10, 2020, 97% of tenant spaces, representing 98% of portfolio ABR, were open. Rent and recovery collections for April, May, June and July were 84%, 86%, 89% and 90%, respectively, including amounts received through August 10.
- The company reported no real estate impairment charges in the first half of 2020, compared with $38.9 million in the first half of 2019. The 2020 results also included a $10.0 million gain from a reduction in the fair value of the earn-out liability.
- At quarter-end, leased occupancy was 95.6%, flat versus December 31, 2019. The estimated value per share was reduced from $11.10 to $8.75 in May, primarily reflecting COVID-19 impacts and uncertainty.
Outlook, management commentary and risks
- Management said COVID-19 could continue to significantly affect results for the remainder of 2020 and potentially beyond. Risks include further tenant closures or bankruptcies, lower rent collections, vacancy, weaker leasing demand and potential property impairments.
- As of August 10, executed relief agreements covered about 240 spaces and $3.8 million, or 1.0% of portfolio ABR. Agreements were primarily short-term payment plans without reducing amounts owed; the weighted-average repayment term was under 12 months. Further agreements were under negotiation.
- Distributions and the dividend reinvestment plan were suspended after the March 2020 distribution; share repurchase programs were also suspended. Management said the distribution suspension was expected to be reevaluated at the November Board meeting. No resumption date or formal earnings guidance was provided.
- The company borrowed $200 million on its revolver in April as a precaution and repaid it in June. Management stated current liquidity was sufficient for short- and long-term cash demands, while prioritizing or deferring capital spending. Acquisitions were expected to remain low and dispositions below prior expectations for the rest of 2020.
- Other risks include geographic exposure, particularly Florida and California, and the sensitivity of leasing, property values and refinancing to economic conditions and interest rates. The company reported no known litigation or environmental matter expected to have a material adverse effect.
Most important facts for investors to verify
- Subsequent rent and recovery collections, tenant reopening and payment-plan performance, and any increase in permanent closures or bankruptcies.
- Whether rent collectability adjustments, concessions or vacancies materially affect future revenue, occupancy, NOI or impairment testing.
- Whether distributions, the DRIP and repurchase programs remain suspended, and any Board decision following the planned November review.
- Revolver availability, debt covenant compliance, refinancing needs and the effect of interest-rate swaps, including the expected $19.7 million AOCI reclassification to interest expense over the next 12 months.
- Whether management’s liquidity assessment and reduced acquisition/disposition plans change as the pandemic and property markets evolve.