Phillips Edison & Company, Inc. — 2018 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2018, filed March 13, 2019. Phillips Edison is an internally managed REIT focused on grocery-anchored shopping centers and also earns fees from managing third-party real estate. At year-end, it wholly owned 303 properties and held interests in 30 properties through joint ventures; the reported portfolio comprised 340 centers, approximately 34.4 million square feet, across 32 states.
Two significant transactions changed the company’s scale and reporting: its November 16, 2018 stock-for-stock merger with REIT II, valued at approximately $1.9 billion, added 86 wholly owned centers; and its November 2018 joint venture with Northwestern Mutual transferred 17 centers valued at approximately $359 million, while PECO retained a 15% interest and management role. Results include REIT II only after the merger closing, so annual comparisons are materially affected by transaction timing.
Key financial and operating metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $430.4 million | $311.5 million |
| Net income (loss) | $47.0 million | $(41.7) million |
| Net income (loss) attributable to stockholders | $39.1 million; $0.20 per share | $(38.4) million; $(0.21) per share |
| Net cash provided by operating activities | $153.3 million | $108.9 million |
| FFO attributable to stockholders and convertible noncontrolling interests | $156.2 million; $0.65 diluted per share | $84.2 million; $0.43 diluted per share |
| MFFO | $166.4 million; $0.69 diluted per share | $125.2 million; $0.64 diluted per share |
| Pro forma same-center NOI | $325.5 million; up 3.7% | $313.9 million |
| Total assets | $5.16 billion | $3.53 billion |
| Debt obligations, net | $2.44 billion | $1.81 billion |
At December 31, 2018, cash and cash equivalents were $16.8 million and restricted cash was $67.5 million. Gross debt was $2.46 billion, with a 3.5% weighted-average interest rate and 4.9-year weighted-average maturity. The $500 million revolving facility had $426.2 million available, net of letters of credit. Net debt to total enterprise value was 40.6%, versus 41.8% in 2017. The company reported compliance with debt covenants.
Portfolio leased occupancy was 93.2%. Renewals and options generated a 6.6% increase in average rent per square foot; comparable rent spreads were 6.7% for renewals and 14.6% for new leases. Occupancy declined 0.93 percentage points during 2018.
Material changes versus the prior comparable period
- Revenue increased 38.1%, reflecting acquired properties and a full year of the PELP management business, plus the partial-year contribution from REIT II. The filing attributes $91.0 million of the increase to PELP-related activity and $18.4 million to the merger.
- The swing to reported net income included a $109.3 million net gain on property sales or contributions, principally associated with the GRP I transaction, and was partly offset by $40.8 million of real estate impairment charges. Thus, reported earnings include substantial transaction-related effects.
- Interest expense rose $27.0 million to $72.6 million, primarily from debt assumed or issued in connection with the merger. Cash interest paid increased to $67.6 million from $39.5 million.
- Operating cash flow increased 40.8%. Investing cash outflow narrowed to $258.9 million from $640.7 million, while financing cash inflow was $162.4 million versus $509.4 million, reflecting different acquisition, disposition, and borrowing activity.
- Gross distributions paid to common stockholders were $124.8 million, including $44.1 million reinvested through the DRIP. Operating cash flow exceeded this amount by $28.5 million. The company reported FFO coverage of distributions of 101.8% and MFFO coverage of 108.5%; these are non-GAAP measures and are not substitutes for cash flow or GAAP earnings.
Outlook, management commentary, risks, and unusual items
Management said it expects current distribution practices to continue, subject to Board discretion and business conditions; the Board authorized monthly distributions of $0.05583344 per share for March through May 2019. The company believes its liquidity sources are adequate to fund obligations. It reported no public trading market for its common stock, and no quantified operating or earnings guidance is provided in the filing.
- Share liquidity is limited: the SRP is subject to funding and other restrictions, 2.4 million shares had unfulfilled repurchase requests at year-end, and no standard repurchase funding was expected for the first quarter of 2019. A standard repurchase was expected in July 2019, subject to available funds and possible pro-rata fulfillment.
- The $11.05 estimated value per share was based on March 31, 2018 information and was not updated for the merger, joint venture, or subsequent operating changes. The company states it is not audited, is not a GAAP fair value or liquidation value, and may not represent a realizable sale price.
- Material business risks include tenant and anchor financial health, vacancies and lease renewals, e-commerce, property-market and interest-rate changes, refinancing and debt obligations, integration of the merger, joint-venture partner risks, and the illiquidity of real estate. LIBOR uncertainty was also identified; a one-percentage-point increase on variable-rate debt outstanding at year-end would add approximately $2.4 million of annual interest expense.
- Key unusual items include $40.8 million of impairment charges on 11 properties; the $92.5 million gain recognized on the GRP I transaction; and a $1.5 million increase in the fair value of the PELP earn-out liability. Goodwill of approximately $29.1 million was not impaired.
- Subsequent to year-end, the company extended the PELP earn-out term through December 31, 2021 and raised the threshold for the maximum 5 million OP-unit payout to $11.20 per share. It also announced a planned August 2019 CFO transition and awarded performance-based LTIP units to senior executives.
Most important facts for investors to verify
- Reconcile reported 2018 earnings with the significant property-sale and contribution gains, impairment charges, acquisition accounting, and partial-year merger contribution; review the audited statements and transaction notes.
- Assess recurring distribution capacity against operating cash flow, debt service, capital expenditures, leasing costs, and the REIT’s cash requirements; distinguish cash distributions from DRIP reinvestment and non-GAAP FFO/MFFO coverage.
- Review debt maturities, variable-rate exposure, hedging terms, covenant headroom, and the effect of the merger and GRP I debt arrangements, including the company’s limited guarantees.
- Evaluate the 93.2% leased occupancy, tenant concentration, lease expirations, retention, and the basis for management’s expectation of positive rent increases.
- Confirm current share-repurchase availability, the outstanding request queue, and the limitations of the $11.05 estimated value per share; there is no established public trading market.