Phillips Edison & Company, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Financial statements are condensed and unaudited. PECO is a REIT focused on grocery-anchored neighborhood and community shopping centers; it wholly owned 267 properties at quarter-end.
Financial and operating performance
Amounts below are in millions except per-share data and percentages.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $132.3 | $126.7 | $395.8 | $377.3 |
| Net income | $16.6 | $13.4 | $23.1 | $18.2 |
| Net income attributable to stockholders | $14.6 | $11.8 | $20.3 | $16.0 |
| Basic and diluted EPS | $0.13 | $0.12 | $0.21 | $0.16 |
| Same-center NOI (non-GAAP) | $89.1 | $82.0 | $259.9 | $245.2 |
| Core FFO (non-GAAP) | $66.4 | $59.7 | $194.2 | $171.6 |
| Core FFO per diluted share | $0.54 | $0.54 | $1.73 | $1.54 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $198.3 | $157.2 |
Q3 revenue rose 4.5% year over year and stockholder-attributable income rose 24.2%. Nine-month revenue increased 4.9% and attributable income increased 27.3%. Management attributed rental-income growth chiefly to improved collections and higher average rents; same-center NOI increased 8.7% in Q3 and 6.0% year to date. Core FFO is a non-GAAP measure and is not a substitute for GAAP earnings or cash flow.
- Cash and liquidity: Cash and cash equivalents were $24.5 million and restricted cash was $89.8 million at September 30. The $500 million revolver had no outstanding balance and $489.3 million available, net of letters of credit. Cash, cash equivalents and restricted cash totaled $114.2 million.
- Cash flows: Nine-month operating cash flow was $198.3 million; investing activities provided $37.8 million, including $180.3 million of property-sale proceeds; financing activities used $253.9 million. Capital expenditures were $49.3 million.
- Debt: Gross debt was $1.716 billion at September 30, down from $2.308 billion at December 31, 2020. Weighted-average interest rate was 3.3%, and weighted-average term was 4.2 years. Company-reported net debt, including its prorated joint-venture amounts, was $1.722 billion; net debt to annualized Adjusted EBITDAre was 5.4x, versus 7.3x at year-end 2020.
- Portfolio: Leased occupancy was 95.6% of rentable area, compared with 95.3% a year earlier. ABR was $388.3 million. Approximately 72% of portfolio ABR was from necessity-based goods and services.
Material changes versus comparable periods
- Collections and rental income improved as the portfolio recovered from pandemic-related disruption. Management reported Q3 2021 collections of 99% through October 20; Q2 2020 collections were 93% on the same updated basis.
- Improved collections, stronger leasing and rent growth supported same-center NOI. New-lease comparable rent spreads were 14.1% in Q3 and 14.9% for the nine months, versus 8.2% and 9.7%, respectively, in 2020.
- Interest expense declined by $1.8 million in Q3 and $7.6 million for the nine months, primarily due to lower borrowings and, year to date, lower average LIBOR rates. Gains on property disposals increased to $31.7 million for the nine months from $8.6 million.
- Nine-month results included $6.8 million of real estate impairment charges, compared with none in 2020. Other expense included a $23.0 million earn-out fair-value charge, versus $10.0 million of income in 2020, and IPO-related transaction costs.
- The July IPO issued 19.6 million listed shares, raising $547.4 million gross; $39.0 million of offering costs, discounts and commissions reduced proceeds. The company also completed a recapitalization and one-for-three reverse stock split.
Outlook, risks and unusual items
- Management said current liquidity, including IPO proceeds, operating cash flow and revolver availability, was sufficient for anticipated short- and long-term cash needs. It expected to continue strategic dispositions during the remainder of 2021. No specific earnings or revenue guidance was provided.
- Management targeted 9%–11% underwritten incremental yields on development and redevelopment projects. Projects in progress represented an estimated $42.6 million investment, with a targeted yield range of approximately 9.5%–10.5%; actual results may differ.
- After quarter-end, PECO issued $350 million principal amount of 2.625% senior notes due November 2031, receiving $345.4 million gross proceeds, and used part of the proceeds to repay the remaining $150 million balance of a term loan. Management estimated debt activity would reduce annual interest expense by approximately $11.2 million.
- COVID-19 effects remain a risk to tenant credit, leasing demand, occupancy, rental income and property valuations. Tenants on cash-basis revenue recognition represented 7.3% of portfolio ABR; 79% of that ABR was associated with tenants actively making payments. Outstanding tenant payment plans were $4.2 million at September 30.
- Florida and California represented 12.4% and 10.1% of wholly owned ABR, respectively, exposing the portfolio to regional economic and weather risks. Interest-rate, refinancing, tenant bankruptcy, impairment, environmental and REIT-qualification risks also remain. The company reported no material change to previously disclosed risk factors.
- The earn-out liability was $45.0 million at September 30. The company estimated 1.4 million OP units had been earned, with up to 0.3 million additional units possible. A related-party tax protection agreement had an estimated potential make-whole amount of approximately $150 million; no liability was recorded.
Important facts for investors to verify
- Confirm post-quarter debt balances and the use of the October bond proceeds, including the term-loan repayment and the stated estimated interest savings.
- Track rent collections, payment-plan collections, cash-basis tenants and tenant bankruptcies as pandemic-related credit risks evolve.
- Review same-center NOI and leasing trends alongside occupancy, tenant-improvement costs and capital spending; these operating measures do not capture all corporate, financing or property-investment costs.
- Assess the effect of property dispositions, acquisitions and impairment charges on recurring earnings and the composition of the portfolio.
- Monitor the earn-out’s final unit issuance and potential tax-protection obligations, as well as compliance with debt covenants and the company’s distribution capacity.