Phillips Edison & Company, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 9, 2019. The company is a REIT focused on grocery-anchored shopping centers and also manages third-party real estate assets. Unless stated otherwise, dollar amounts below are in millions.
Key financial results and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $132.8 | $103.2; up 28.7% |
| Net loss | $(5.8) | $(1.8) |
| Net loss attributable to stockholders | $(5.2); $(0.02) per share | $(1.6); $(0.01) per share |
| Operating cash flow | $41.2 | $23.5 |
| Investing cash flow | $28.4 | $(16.9) |
| Financing cash flow | $(67.2) | $(2.1) |
| Cash and cash equivalents at quarter-end | $12.7 | $16.8 at Dec. 31, 2018 |
| Restricted cash at quarter-end | $74.1 | $67.5 at Dec. 31, 2018 |
| Debt obligations, net of financing adjustments | $2,415.8 | $2,438.8 at Dec. 31, 2018 |
- Gross debt was $2,437.0 million; weighted-average interest rate was 3.5% and weighted-average maturity was 4.8 years. Fixed-rate debt was $2,114.3 million and variable-rate debt $322.8 million.
- The $500 million revolving credit facility had $439.7 million available; its stated maturity is October 2021, with extension options. The company reported compliance with debt covenants.
- Net debt to total enterprise value was 40.8%, versus 41.1% at year-end 2018. The filing’s calculation includes the company’s prorated share of joint-venture debt.
- FFO attributable to stockholders and convertible noncontrolling interests was $61.0 million, or $0.19 per diluted share, versus $40.4 million and $0.18. MFFO was $55.0 million, or $0.17 per diluted share, versus $42.2 million and $0.18. These are non-GAAP measures, not substitutes for GAAP earnings or cash flow.
- No clear consolidated profit margin is provided in the filing. Pro forma same-center NOI increased 2.5% to $87.3 million; this non-GAAP measure covers comparable properties and is not a company-wide margin.
Business and portfolio
At March 31, the company wholly owned 300 properties across 32 states, totaling 34.1 million square feet. The portfolio was 93.0% leased, with an average remaining lease term of 4.9 years. It held a 20% interest in Necessity Retail Partners, which owned 13 properties, and a 15% interest in Grocery Retail Partners I, which owned 17.
The November 2018 merger with REIT II added 86 properties and a 20% interest in NRP. The company also formed GRP I with Northwestern Mutual in November 2018, contributing or selling 17 centers for a 15% interest. Because REIT II was not included in the prior-year results before the merger, reported year-over-year changes are substantially affected by the enlarged portfolio.
Material changes and unusual items
- Revenue rose $29.6 million. The merger contributed $37.6 million, partly offset by lower management fees from the acquired properties and property dispositions. Fee and management income fell to $3.3 million from $8.7 million, primarily because REIT II management fees ceased after the merger.
- Interest expense increased $8.2 million to $25.0 million, largely reflecting debt assumed or entered into in connection with the merger.
- The company recorded $13.7 million of real estate impairment charges on four assets under contract or marketed for sale; no impairment was recorded in Q1 2018. It also recorded $7.1 million of net gain on property disposals after selling three properties for $35.8 million.
- Other income included a $7.5 million fair-value reduction in the earn-out liability. The earn-out terms were amended to extend the liquidity-event deadline to December 31, 2021, and raise the threshold for the maximum five million OP-unit payout to $11.20 per share.
- ASC 842 lease accounting was adopted January 1, 2019. Adoption reduced opening accumulated deficit by $0.5 million and changed certain revenue, collectability, and cost classifications; some tenant-paid property taxes are no longer recorded as both revenue and expense.
- Operating cash flow increased, while financing cash outflows included distributions and reduced net borrowings. Property-sale proceeds were a significant source of investing cash in the quarter.
Outlook, distributions, and risks
- The filing gives no formal earnings or financial guidance. Management stated it believes available sources of cash provide adequate liquidity to fund obligations and expects to continue meeting debt covenants.
- Management reported positive comparable rent spreads and said it continues to expect overall positive increases in average base rent on expiring leases, while cautioning that individual lease outcomes may vary and future increases are not assured.
- The company declared monthly distributions of $0.05583344 per share for June, July, and August 2019, subject to the stated record dates. The board controls distributions; the filing does not establish a minimum distribution level.
- Repurchase requests exceeded program funding limits in Q1. The company said standard repurchases were expected to resume in July 2019 and likely be made pro rata; qualifying requests related to death, disability, or incompetence continued to be fulfilled.
- Key risks include changes in economic and local property-market conditions, vacancies and rent levels, tenant creditworthiness, interest rates and refinancing availability, and geographic or industry concentration. Florida and California represented 12.2% and 10.2% of ABR, respectively. The company also identified ordinary-course litigation and environmental exposure, but reported no known matter expected to have a material adverse effect.
Investor facts to verify
- How much reported revenue, NOI, and operating cash-flow growth reflects the REIT II merger versus performance of the pre-existing portfolio.
- Whether occupancy, rent spreads, tenant retention, and same-center NOI remain resilient; Q1 retention was 84.4%, compared with 91.2% a year earlier.
- The cash and covenant implications of debt maturities, variable-rate exposure, and interest-rate swaps; the company estimated $3.7 million would be reclassified from swap-related AOCI as a reduction to interest expense over the next 12 months.
- Whether property-sale proceeds, impairments, and other nonrecurring items affect future earnings or liquidity, and whether planned acquisitions or dispositions proceed as described.
- The sustainability of distributions relative to recurring operating cash flow and FFO, given distributions, reinvestments, and restricted cash.
- The board-set estimated value per share increased to $11.10 in May 2019, from $11.05 previously. The independent valuation range was $10.07–$11.48; the company cautioned that this estimate is unaudited, assumption-dependent, and not a market price or liquidation value.