Phillips Edison & Company, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results. PECO is a REIT focused on grocery-anchored neighborhood and community shopping centers, with a third-party investment management business. At quarter-end it wholly owned 283 properties and held interests in three joint ventures. Unless stated otherwise, amounts below are in millions.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $126.7 | $136.0 | $377.3 | $401.4 |
| Net income (loss) | $13.4 | $(29.7) | $18.2 | $(77.7) |
| Net income (loss) attributable to stockholders | $11.8 | $(25.9) | $16.0 | $(67.6) |
| EPS, basic and diluted | $0.04 | $(0.09) | $0.05 | $(0.24) |
| Same-center NOI | $83.5 | $87.1 | $249.7 | $255.6 |
| Core FFO per diluted share | $0.18 | $0.18 | $0.51 | $0.52 |
- Q3 revenue declined 6.8% year over year; nine-month revenue declined 6.0%. Rental income fell 7.1% in Q3 and 5.9% year to date, reflecting pandemic-related collectability impacts and property dispositions.
- Same-center NOI decreased 4.1% in Q3 and 2.3% for the nine-month period. Q3 occupancy was described as flat versus December 31, 2019; leased area was 95.3% at September 30, compared with 95.0% a year earlier.
- Positive GAAP earnings compared with prior-year losses partly reflect the absence of prior-year real estate impairment charges: none were recorded in 2020, versus $35.7 million in Q3 2019 and $74.6 million in the first nine months of 2019. Lower interest expense and a $10.0 million gain from the earn-out liability’s fair-value change also supported 2020 results.
- Operating cash flow was $157.2 million for the first nine months, down from $175.9 million. Investing activities used $13.6 million; financing activities used $102.0 million. Cash, cash equivalents and restricted cash totaled $136.8 million at period-end, including $103.9 million of unrestricted cash.
- Debt obligations, net, were $2.319 billion, versus $2.354 billion at year-end 2019. Gross debt was $2.335 billion; weighted-average interest rate was 3.1% versus 3.4%, and weighted-average debt term was 4.3 years versus 5.0 years. Net debt to annualized Adjusted EBITDAre was 7.0x; net debt to enterprise value was 43.8%.
- The $500 million revolving facility had $490.4 million available at September 30, with stated maturity in October 2021 and an option to extend to October 2022 subject to conditions. The company reported compliance with debt covenants. It drew $200 million in April to preserve liquidity and repaid the balance in June.
Material changes, outlook and risks
- COVID-19 and collections: Management said the pandemic reduced second- and third-quarter revenue and that collectability estimates may continue to make earnings volatile. At September 30, $20.0 million of billed amounts for the nine-month period was not recognized as revenue pending cash collection or restored creditworthiness. The company had deferred approximately $3.7 million of rent and related charges and granted $1.3 million in abatements during the nine months.
- By November 4, management reported collections of 90% for Q2 billings, 94% for Q3, and approximately 94% for October; 87% of tenants were paying in full. It reported 98% of occupied tenant spaces open, representing 99% of ABR and GLA. These are subsequent-date management figures, not September 30 results. Management cautioned that collections and future impacts remained uncertain.
- As of November 4, payment plans covered approximately $4.3 million and abatements approximately $2.0 million. Tenant bankruptcies with unresolved lease decisions represented 1.2% of portfolio ABR at September 30. Risks include renewed restrictions, tenant failures or non-renewals, lower rents and occupancy, asset impairment, reduced property-sale values, and refinancing or covenant pressures.
- Management said available liquidity, particularly operating cash flow and revolver capacity, was sufficient for short- and long-term cash needs. It expected acquisition activity to remain low and dispositions to be reduced or delayed for the rest of 2020; no specific earnings or full-year financial guidance was provided. Capital spending was being prioritized for reopening and leasing needs or deferred where possible.
- Common distributions were suspended after the March 2020 distribution. On November 4, the board authorized a restart at $0.02833333 per share monthly ($0.34 annualized), beginning with the December 2020 distribution, payable January 7, 2021; future distributions were to be reviewed monthly. The board also approved a tender offer for up to 4.5 million shares at $5.75 per share, approximately $26 million, and a planned one-for-four reverse stock split effective in March 2021. The share repurchase program remained generally suspended, with limited DDI repurchases expected only after the tender offer.
- Estimated value per share was reduced to $8.75 in May 2020 from $11.10, primarily reflecting pandemic-related effects and uncertainty. The tender offer price of $5.75 is below that estimate. In October 2020, the company repaid $20.4 million of mortgage debt early and acquired one property for approximately $18.4 million; these occurred after quarter-end.
Important facts for investors to verify
- Subsequent rent collections, payment-plan performance, abatements, and whether unrecognized billed rent becomes collectible.
- Tenant bankruptcies, closures and lease renewals, and resulting occupancy, rental-rate and impairment trends.
- Availability and terms of refinancing or extension for the revolving facility maturing in October 2021, together with debt covenant headroom and leverage.
- Cash requirements and execution of the tender offer, planned distribution restart, DDI repurchases and reverse stock split.
- Whether future cash flows and property valuations support management’s liquidity assessment, given pandemic uncertainty and the absence of specific full-year guidance.