Phillips Edison & Company, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. The company owns and operates grocery-anchored shopping centers and manages real estate investments for third-party funds. It owned 233 properties in 32 states at quarter-end. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $104.9 | $70.6 | $312.3 | $208.8 |
| Net loss | $(16.3) | $(8.4) | $(32.2) | $(8.5) |
| Net loss attributable to stockholders | $(13.2) | $(8.2) | $(26.2) | $(8.3) |
| Basic and diluted loss per share | $(0.07) | $(0.04) | $(0.14) | $(0.05) |
| FFO attributable to stockholders and convertible noncontrolling interests, diluted per share | $0.17 | $0.11 | $0.51 | $0.41 |
| MFFO per diluted share | $0.17 | $0.15 | $0.53 | $0.46 |
- Revenue rose about 49% year over year in both the quarter and nine-month period. Management attributed most of the increase to the October 2017 PELP acquisition and subsequent portfolio growth. Investment-management fees contributed $9.0 million in Q3 and $26.8 million year to date; those revenues were absent in the 2017 comparative periods.
- Pro forma same-center NOI increased 6.1% in Q3 and 5.1% for the nine months. Portfolio occupancy was 93.9%; average remaining lease term was 4.4 years.
- Net cash from operating activities was $122.0 million for the nine months, up from $67.5 million. Investing activities used $16.3 million, versus $133.1 million in 2017; financing activities used $99.3 million, versus providing $28.9 million.
- At September 30, total assets were $3.418 billion, total equity $1.339 billion, and debt obligations net of financing costs $1.843 billion. Gross debt was $1.853 billion, with a 3.5% weighted-average interest rate and 4.7-year weighted-average maturity. Net debt to total enterprise value was 42.3%, compared with 41.8% at year-end 2017.
- Cash, cash equivalents and restricted cash totaled $33.9 million, including $6.1 million unrestricted cash and $27.8 million restricted cash. The $500 million revolving facility had $444.0 million available. The company reported compliance with debt covenants.
Material changes and notable items
- Comparability is materially affected by the PELP transaction, completed in October 2017. The company added a third-party investment-management business and 76 shopping centers; 2018 includes their results, while 2017 comparisons generally do not.
- Net loss increased, reflecting higher depreciation and amortization, interest expense and impairment charges. Nine-month impairment expense was $27.7 million, including $16.8 million in Q3, related to properties held for sale or other impairment indicators. The company recorded a $5.6 million gain on five property sales year to date.
- Interest expense rose to $51.2 million for the nine months from $28.5 million. The weighted-average interest rate increased to 3.5% from 3.1%; debt maturities shortened to 4.7 years from 5.5 years at year-end.
- Quarter-end real estate investment, net, was $3.154 billion, down from $3.290 billion at December 31, 2017. Year to date, the company acquired two shopping centers and sold five.
Outlook, transactions, risks and contingencies
- Proposed REIT II merger: Announced in July 2018, the all-stock transaction was valued at approximately $1.9 billion. The company would issue 2.04 shares per REIT II share; REIT II debt of approximately $800 million was expected to be refinanced or assumed at closing. Management projected a combined portfolio of about 320 centers across 33 states and estimated pro forma FFO would exceed distributions. These are expectations, not a guarantee; closing remained subject to conditions. The filing identifies termination fees of $31.7 million potentially payable by REIT II and $75.6 million potentially payable by the company under specified circumstances.
- Subsequent joint venture agreements: On November 2, 2018, the company agreed to contribute or sell interests in 17 centers, valued at approximately $368 million, to a joint venture in which Northwestern Mutual would own 85% and the company would retain 15% and provide management services. The venture was expected to assume a $175 million loan. The company expected to use proceeds for debt reduction, redevelopment and acquisitions; closing was expected in Q4 2018.
- Distributions and share repurchases: The company declared common distributions of $0.50 per share for the first nine months. It stated it expected monthly distributions to continue, subject to board discretion and financial conditions. Repurchase demand exceeded program funding limits; approximately 4.5 million shares were repurchased year to date, and no standard repurchase funds were expected to be available for the remainder of 2018. Merger closing would cancel existing repurchase requests; the next standard combined-company repurchase was expected in July 2019.
- Key risks: Management cited economic and local-market conditions, vacancies and rental rates, tenant financial health, interest rates and refinancing access, portfolio concentration, and the ability and timing of completing the merger. Management stated that ordinary-course litigation and known environmental matters were not expected to have a material adverse effect.
- Other: The company recorded a $1.5 million expense from increasing the estimated fair value of the PELP earn-out liability. It had a limited non-recourse carveout and environmental guarantee related to NRP debt, up to $200 million, capped at $50 million in most instances.
Important facts for investors to verify
- Merger status, closing conditions, consideration, assumed or refinanced REIT II debt, and any transaction-related costs or termination exposure.
- Whether the impairment charges and property dispositions indicate further asset-value or operating pressure, and how reported NOI trends compare with cash needs.
- Debt maturities, refinancing plans, interest-rate exposure and liquidity after considering restricted cash, planned transactions and capital spending.
- Distribution coverage: management’s FFO estimate is forward-looking, while GAAP results show a loss; FFO and MFFO are non-GAAP measures and are not cash available for distributions.
- Share-repurchase queue and program funding after the merger, including the expected reset and timing of future standard repurchases.
- Execution and proceeds from the Northwestern Mutual joint ventures, including debt assumed and use of proceeds.