Phillips Edison & Company, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Phillips Edison owns and operates grocery-anchored shopping centers and, following its October 2017 PELP transaction, also manages real estate investments for third-party funds. Results are unaudited.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $104.2 million | $69.9 million | $207.4 million | $138.2 million |
| Net loss attributable to stockholders | $(11.4) million | $(1.2) million | $(13.0) million | $(0.1) million |
| Loss per common share, basic and diluted | $(0.06) | $(0.01) | $(0.07) | $(0.00) |
| FFO per diluted share | $0.17 | $0.15 | $0.34 | $0.30 |
| MFFO per diluted share | $0.18 | $0.16 | $0.36 | $0.32 |
Six-month operating cash flow was $77.8 million, versus $49.0 million a year earlier. Investing activities used $13.3 million, compared with $86.2 million, while financing activities used $67.0 million, compared with $1.9 million. Cash, cash equivalents and restricted cash totaled $25.0 million at June 30; unrestricted cash was $8.3 million.
Q2 Pro Forma Same-Center NOI increased 6.5% year over year; six-month growth was 5.4%. At June 30, the portfolio comprised 235 properties in 32 states, was 93.8% leased, and had a 4.0-year average remaining lease term. Segment profit was $69.7 million in Q2 and $138.6 million for the six months; these are non-GAAP measures.
Debt, liquidity and distributions
- Gross debt was $1.848 billion, up from $1.818 billion at year-end 2017. The weighted-average interest rate was 3.5% versus 3.4%; weighted-average maturity was 4.9 years versus 5.5 years. About $1.588 billion was fixed-rate debt.
- The $500 million revolving facility had $453.0 million available. Net debt to total enterprise value was 42.2%, compared with 41.8% at year-end. The company reported compliance with debt covenants.
- Six-month interest expense, net, rose to $33.8 million from $17.9 million. Cash interest paid was $32.4 million, up from $16.8 million.
- The board authorized monthly distributions of $0.05583344 per share for September through November 2018. Distributions are not guaranteed and remain subject to board discretion and financial conditions.
Material changes and unusual items
- Revenue rose 49% in Q2 and 50% for the six months, primarily reflecting the PELP portfolio and investment-management business acquired in October 2017, along with other acquisitions. The company attributed $50.0 million of the six-month owned-real-estate revenue increase to PELP and other acquisitions. Same-center operating improvement was more modest.
- Net losses widened as depreciation and amortization and interest expense increased with the larger portfolio; Q2 and six-month results also included a $10.9 million real estate impairment tied to an anticipated property sale. The company recorded a $1.5 million increase in the PELP earn-out liability in Q2.
- In July 2018, the company agreed to merge with REIT II in an approximately $1.9 billion all-stock transaction, issuing 2.04 PECO shares for each REIT II share, subject to closing adjustments and conditions. REIT II debt of approximately $800 million is expected to be assumed or refinanced. Management cited scale, portfolio and operating benefits; the transaction was not yet complete at the filing date.
- Management estimated that continuing PECO holders would own about 71% and former REIT II holders about 29% of the combined company on a fully diluted basis. Pro forma debt was estimated at approximately $2.7 billion. A failed transaction could trigger a $75.6 million termination fee payable by PECO in specified circumstances; other termination fees may also apply.
- Share repurchase requests exceeded program funding limits. At June 30, 13.4 million shares of requests remained unfulfilled, and the company said no funds would be available for ordinary repurchases for the remainder of 2018. The program was temporarily suspended in July in connection with the merger and resumed in August.
Outlook, risks and contingencies
Management said existing liquidity sources were expected to fund obligations. It projected merger benefits, including improved scale and earnings quality, but these are forward-looking expectations, not guarantees. The merger is subject to stockholder, regulatory, lender and other conditions; delay or failure could incur costs, distract management and affect operations. Risks also include higher combined leverage, refinancing and interest-rate exposure, tenant and occupancy risks, property-market conditions, integration and execution, and the absence of a guaranteed liquidity event. PECO stated there was no public market for its shares. Southeastern Grocers, a tenant representing 0.9% of ABR, emerged from Chapter 11 and assumed its leases. Ordinary-course litigation and known environmental matters were not expected to have a material adverse effect. Disclosure controls were reported effective.
Important facts for investors to verify
- Merger status, required approvals and consents, consideration adjustments, debt treatment, closing timetable and any termination-fee exposure.
- Whether operating cash flow and FFO/MFFO support distributions after interest, capital spending, leasing costs and merger-related financing needs.
- Repurchase-request backlog, program funding availability and the liquidity options actually available to shareholders.
- Debt maturities, covenant headroom, interest-rate hedging and pro forma leverage if the merger closes.
- Whether same-center NOI, occupancy, leasing spreads and major-tenant credit quality remain sound; compare non-GAAP measures using the company’s definitions.