Phillips Edison & Company, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; financial statements are unaudited. PECO is a REIT focused on grocery-anchored neighborhood and community shopping centers. At quarter-end, it held interests in 295 centers across 31 states, including 275 wholly owned properties. Comparisons below are with Q1 2022 unless otherwise noted.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Total revenue | $151.1 million | $142.2 million; up 6.3% |
| Net income | $18.6 million | $11.4 million; up 63.5% |
| Net income attributable to stockholders | $16.6 million; $0.14 per diluted share | $10.1 million; $0.09 per diluted share |
| Same-center NOI | $98.6 million | $94.0 million; up 4.9% |
| Nareit FFO / diluted share | $76.3 million / $0.58 | $67.1 million / $0.52 |
| Core FFO / diluted share | $78.2 million / $0.59 | $72.6 million / $0.56 |
| Cash from operating activities | $62.8 million | $60.2 million |
| Cash, cash equivalents and restricted cash | $12.0 million at March 31 | $17.5 million at March 31, 2022 |
Rental income rose 6.5% to $147.7 million. Management attributed the increase to higher average minimum rent per square foot and improved same-center occupancy, lower credit-risk reserves, and acquired properties. Same-center leased occupancy was 97.5%, versus 96.2% a year earlier; ABR for the wholly owned portfolio was $445.6 million, versus $412.5 million.
Total operating expenses increased 3.3% to $113.1 million. Net interest expense rose 7.0% to $19.5 million, primarily reflecting higher debt outstanding and interest rates. Net income also benefited from lower other expense, including no repeat of the 2022 earn-out liability charge. Comprehensive income attributable to stockholders was $10.8 million, down from $34.7 million, principally reflecting the period’s unfavorable change in unrealized interest-rate swap values.
Debt, liquidity and capital allocation
- Gross debt was $1.983 billion at March 31, 2023, versus $1.913 billion at year-end 2022; the balance-sheet carrying amount, net of specified adjustments, was $1.967 billion. Weighted-average interest rate was 3.8%, up from 3.6%, and weighted-average debt term was 4.1 years.
- Revolving-credit capacity was $800 million, with $622.2 million available after borrowings and letters of credit. Net debt to annualized Adjusted EBITDAre was 5.3x; net debt to total enterprise value was 31.8%.
- Operating cash flow was $62.8 million; investing used $91.4 million and financing provided $23.3 million. Acquisitions used $69.4 million, capital expenditures were $23.9 million, and distributions paid were $33.3 million.
- PECO declared monthly distributions of $0.0933 per share for January through April 2023 ($1.12 annualized). Management stated that current liquidity sources were sufficient for short- and long-term cash demands.
Material changes, outlook and risks
- PECO acquired four properties for a total acquisition price of $69.4 million, compared with three properties for $101.4 million in Q1 2022. There were no property sales; $1.1 million of sale proceeds and a $0.9 million gain primarily related to land acquired by local authorities.
- Leasing indicators were generally strong: comparable rent spreads were 27.4% for new leases and 16.1% for renewals; portfolio retention was 94.7%, versus 89.7% a year earlier. New-lease costs per square foot increased.
- Management expects 2023 capital-improvement and redevelopment obligations to be funded by operating cash flow, dispositions or revolver borrowings. In-process projects represent estimated investment of $45.7 million; targeted underwritten incremental unlevered yields are 9%–12%, with stabilization generally expected within 24 months. These are targets, not guarantees; the filing provides no earnings or revenue guidance.
- Management cited inflation, higher interest rates, labor and materials costs, and potential economic slowdown or recession. Risks include tenant credit and vacancies, refinancing and borrowing costs, weather and climate events, and geographic concentration. Florida and California represented 12.2% and 10.9% of wholly owned ABR, respectively.
- For Hurricane Ian damage, PECO reported a $1.0 million insurance receivable, net of deductibles and self-insurance, and had received no recovery by March 31, 2023. The filing identifies a potential $147.8 million make-whole amount under tax protection agreements; no liability was recorded. A $175 million GRP I mortgage guarantee is limited to non-recourse carve-outs and environmental indemnity, with no liability recorded.
- Management reported no material change in risk factors, no material litigation expected to affect results or financial condition, and effective disclosure controls. The company cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether same-center NOI growth, occupancy and rent spreads persist, and how higher property costs affect margins and recoveries.
- Debt maturities, floating-rate exposure, the effect of rates on interest expense, and continued revolver availability.
- Cash needs for acquisitions, redevelopment, leasing and distributions relative to operating cash flow and the declared distribution.
- Collection of the Hurricane Ian insurance receivable and the exposure and terms of the tax-protection agreements and GRP I guarantee.
- How non-GAAP measures such as FFO, Core FFO and Adjusted EBITDAre are defined and reconciled; they are not substitutes for GAAP earnings or cash flow.