Phillips Edison & Company, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted. PECO is a REIT focused on grocery-anchored neighborhood and community shopping centers. At quarter-end it owned 269 properties and held interests in 21 joint-venture properties, across 31 states.
Financial and operating performance
Unless noted, dollar amounts are in millions.
- Revenue: $142.2, up 9.0%; rental income was $138.7, up 8.7%.
- Profit: Net income was $11.4 versus $0.1; net income attributable to stockholders was $10.1 versus $0.1. Basic and diluted EPS was $0.09 versus $0.00.
- Operating performance: Same-center NOI increased 6.8% to $89.8. Leased occupancy was 96.2%, up from 94.8% a year earlier. Comparable rent spreads were 34.0% on new leases and 14.7% on renewals.
- REIT performance measures: Core FFO was $72.6, up from $63.6, but Core FFO per diluted share declined to $0.56 from $0.59. Nareit FFO per diluted share rose to $0.52 from $0.42. These are non-GAAP measures and are not substitutes for GAAP results or cash flow.
- Cash flow: Operating cash flow was $60.2, up 23.5%. Investing used $106.5, primarily reflecting $101.4 of acquisitions and $18.6 of capital spending, partly offset by $12.8 of property-sale proceeds. Financing used $51.8. Cash, cash equivalents, and restricted cash fell $98.1 to $17.5.
- Debt and liquidity: Gross debt was $1.898 billion; the weighted-average rate was 3.2% and weighted-average term 5.1 years. Net debt was $1.919 billion; net debt to annualized Adjusted EBITDAre was 5.7x. The $500 million revolver had $444.9 million available. Management said current liquidity sources were sufficient for expected short- and long-term cash needs.
- Distributions: The monthly distribution was $0.09 per share, or $1.08 annualized; the board authorized the same monthly amount for May through July 2022.
Changes versus Q1 2021
- Revenue rose $11.8 million, supported by same-center rent growth, improved occupancy, stronger collections, and portfolio activity. Same-center NOI increased $5.7 million.
- GAAP net income improved substantially, but comparison was affected by unusual items: Q1 2021 included a $5.0 million impairment and $13.8 million property-sale gain; Q1 2022 had no impairment and a $1.4 million sale gain. Other expense was lower, mainly because the earn-out fair-value charge declined; the liability was settled in January 2022 with approximately 1.6 million OP units valued at $54.2 million.
- Interest expense declined to $18.2 million from $20.1 million, while general and administrative expense rose to $11.5 million from $9.3 million, partly reflecting compensation, insurance, public-company, and listing-related costs.
- Core FFO increased in total, but per-share Core FFO decreased, reflecting a larger diluted share count.
Outlook, commentary, and risks
- Management expects to continue strategic acquisitions during 2022. In-process development and redevelopment projects represented an estimated $48.3 million investment; targeted stabilized incremental unlevered yields were 10%–12%, with stabilization generally expected within 24 months. Actual yields may differ.
- Management reported that rent collections had returned to pre-COVID levels in the second half of 2021 and remained there through Q1 2022, reducing expected earnings volatility versus 2021.
- Risks include changes in interest rates and borrowing costs, inflation, tenant financial health and vacancies, refinancing needs, competition, weather and climate events, and local economic conditions. Florida and California represented 12.0% and 10.7% of wholly owned portfolio ABR, respectively; management flagged geographic concentration exposure.
- Ordinary-course litigation and environmental matters were disclosed; management did not expect them to have a material adverse effect based on information available. Tax protection agreements had a potential make-whole amount of approximately $143.3 million, but no liability was recorded; potential payment depends on future dispositions and tax-efficient alternatives.
- The company had not issued shares under its $250 million at-the-market program as of March 31, 2022. The filing provides no specific full-year revenue, earnings, or FFO guidance.
Important facts for investors to verify
- Whether occupancy, rent collections, leasing spreads, and same-center NOI growth persist, and how leasing costs affect returns.
- How acquisition, redevelopment, and capital-spending plans are funded given quarter-end cash of $17.5 million and the increase in net debt.
- Interest-rate exposure, swap maturities, and refinancing costs: $930 million of variable-rate debt was hedged to fixed rates for a weighted-average 1.9 years.
- The sustainability of distributions relative to operating cash flow and capital needs; the filing cautions that FFO and Core FFO do not indicate cash available for distributions.
- The effects of the increased share count and any future ATM issuance on per-share performance, as well as the terms and potential consequences of the tax protection agreements.