Phillips Edison & Company, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; compared with Q1 2023 unless otherwise noted. PECO is a REIT focused on grocery-anchored neighborhood and community shopping centers. At quarter-end it owned 284 properties and held a 14% interest in a 20-property joint venture; the portfolio spanned 31 states.
Financial and operating performance
- Revenue: $161.3 million, up 6.8% from $151.1 million. Rental income rose 7.0% to $158.1 million, reflecting same-center rent and occupancy gains and acquisition activity.
- Profit: Net income was $19.6 million, up 5.3%; net income attributable to stockholders was $17.7 million, up 6.3%. Basic and diluted GAAP EPS remained $0.14.
- Operating measures: Same-center NOI increased 3.7% to $106.7 million. Core FFO per diluted share rose to $0.60 from $0.59; Nareit FFO per diluted share was $0.59 versus $0.58. These are non-GAAP measures and are not substitutes for GAAP results or cash flow.
- Leasing and occupancy: Wholly owned portfolio leased occupancy was 97.2%, versus 97.5% a year earlier. Comparable rent spreads were 29.1% on new leases and 16.9% on renewals. Retention was 87.9%, down from 94.7%.
- Cash flow: Operating cash flow was $63.1 million, nearly unchanged from $62.8 million. Investing used $66.6 million, including $56.2 million for acquisitions; financing provided $4.7 million. Cash, cash equivalents and restricted cash totaled $10.1 million at quarter-end.
- Debt and liquidity: Debt obligations, net, were $2.016 billion, up from $1.969 billion at year-end 2023. Gross debt was $2.032 billion; weighted-average interest rate was 4.3%, and weighted-average term was 3.6 years. Revolver capacity was $800 million, with $560.6 million available. Net debt to annualized trailing-twelve-month Adjusted EBITDAre was 5.1x.
- Equity distributions: Monthly distributions were $0.0975 per share, or $1.17 annualized. The Q1 declared distribution was $0.2925 per share.
Changes versus the prior comparable period
- Revenue increased 6.8% and net income increased 5.3%, while same-center NOI grew 3.7%.
- Net interest expense rose $3.9 million to $23.3 million, primarily due to higher interest rates and more debt outstanding. The reported weighted-average rate at quarter-end was 4.3%, versus 3.8% a year earlier.
- Acquisition spending declined: PECO acquired two properties and one outparcel for $56.2 million, compared with four properties and $69.4 million of acquisition cash outlay in Q1 2023. Capital expenditures were $12.9 million versus $23.9 million.
- Leased occupancy edged lower, while renewal retention declined; reported rent spreads remained positive.
Outlook, risks and unusual items
- Management said current liquidity sources are sufficient for short- and long-term cash demands. No specific full-year earnings or revenue guidance was provided in the filing.
- PECO estimated $21.7 million of total investment in projects in process, generally expected to stabilize within 24 months. Underwritten incremental unlevered yields are targeted at 9%–12%; actual results may differ.
- Management cited inflation, higher borrowing costs, potential economic slowdown, tenant credit and vacancy risk, and leasing-market conditions. Florida and California represented 12.4% and 11.0% of wholly owned portfolio ABR, respectively, exposing the portfolio to regional economic and weather risks. No tenant represented 10% or more of aggregate ABR.
- Tenant collectibility reserves increased, and management attributed a $1.2 million same-center rental-income offset to increased reserves for tenants identified as credit risks.
- Tax protection agreements covering certain contributed properties had an estimated potential make-whole amount of approximately $122.2 million; no liability was recorded. PECO also had a limited, non-recourse-carveout and environmental guaranty related to a $175 million GRP I mortgage; no liability was recorded.
- Ordinary-course litigation and environmental matters were not expected by management to have a material adverse effect. Four letters of credit totaling approximately $12.5 million supported the captive insurer’s obligations. The filing reported no real estate impairment charges in Q1 2024 or Q1 2023.
Important facts for investors to verify
- Whether higher interest expense, variable-rate exposure and upcoming debt maturities affect future financing costs; $700 million of variable-rate debt was hedged for a weighted-average 1.3 years.
- Whether rent growth and high occupancy can offset tenant credit issues, operating-cost inflation and the lower retention rate.
- Whether acquisition and redevelopment spending generates returns consistent with management’s targeted yields, and how much additional capital is required.
- Distribution sustainability relative to recurring cash generation and FFO, noting that FFO is non-GAAP and does not equal cash available for distributions.
- Potential exposure under the tax protection agreements and the GRP I guaranty, despite no amounts being recorded as liabilities.