Phillips Edison & Company, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. PECO is a REIT focused on grocery-anchored neighborhood and community shopping centers and also manages third-party real estate investments. At quarter-end, it wholly owned 278 properties and held interests in two joint ventures owning 22 properties.
Financial and operating performance
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Total revenue | $130.4 million | $131.5 million; down 0.9% |
| Net income | $0.1 million | $11.2 million |
| Net income attributable to stockholders | $0.1 million; $0.00 per share | $9.8 million; $0.03 per share |
| Same-center NOI | $86.5 million | $87.3 million; down 0.9% |
| Core FFO | $63.6 million; $0.20 per diluted share | $60.2 million; $0.18 per diluted share |
| Operating cash flow | $48.8 million | $35.6 million |
| Cash, cash equivalents and restricted cash | $62.3 million at quarter-end | Down $69.7 million during the quarter |
Revenue was nearly flat, while GAAP net income fell sharply. Results included a $13.8 million net property-disposal gain, a $5.0 million real estate impairment, and a $16.0 million expense from the increased fair value of the earn-out liability. The prior-year period included a $10.0 million earn-out fair-value gain and a $1.6 million disposal loss. Interest expense declined to $20.1 million from $22.8 million. Property operating costs rose, while real estate taxes and general and administrative expenses declined.
Gross debt was $2.291 billion, with a 3.0% weighted-average interest rate and 3.8-year weighted-average term. Net debt to annualized Adjusted EBITDAre was 7.4x, versus 7.3x at year-end 2020; net debt to enterprise value was 40.5%, versus 44.5%. The $500 million revolver had $490.3 million available and no drawn balance at quarter-end. It matures in October 2021, with an option to extend to October 2022 subject to conditions; management said it intended to extend or negotiate new terms. The company reported compliance with debt covenants.
Material changes and business developments
- Q1 property sales generated $58.4 million of proceeds from six properties and one outparcel, compared with $17.4 million from three properties a year earlier. Acquisitions totaled $39.9 million, versus $4.3 million.
- Cash used in financing rose to $123.1 million, principally reflecting $77.8 million of share repurchases, including settlement of a tender offer in January. Debt repayments were $16.5 million. Cash distributions paid, net of DRIP, were $24.3 million.
- Leased occupancy was 94.8%, down from 95.6% a year earlier. Portfolio retention was 88.8%, up from 71.2%. Comparable rent spreads were 12.4% on new leases and 8.0% on renewals, compared with 6.8% and 11.2%, respectively, in Q1 2020.
- As of April 20, 2021, reported collections were 95% for Q1 2021 and approximately 79% of Neighbor spaces were paying rent in full. Payment plans and 2021 rent abatements were reported at $5.4 million and $4.4 million, respectively, for the broader portfolio including the prorated joint-venture share.
- On March 25, the Board announced a review of alternatives to provide shareholder liquidity. The DRIP and share repurchase program were suspended; monthly distributions continued at $0.02833333 per share, or $0.34 annualized.
Outlook, risks and unusual items
- The filing gives no formal full-year earnings or revenue guidance. Management said current liquidity, particularly operating cash flow and revolver availability, was sufficient for expected short- and long-term cash needs. It anticipated funding 2021 capital and redevelopment obligations from operations, property dispositions or revolver borrowings.
- Development and redevelopment projects in process represented an estimated $35.1 million investment, with an underwritten incremental yield range of approximately 9.5%–10.5%; the broader targeted range was 8%–11%. Actual costs, timing and yields may differ.
- COVID-19 remained a significant uncertainty affecting tenant credit, rent collection, occupancy, leasing demand, asset valuations and liquidity. As of March 31, tenants on cash-basis accounting represented about 10% of spaces and 8.4% of portfolio ABR; bankrupt tenants with unresolved lease outcomes represented about 1% of ABR. Management noted payment plans may not be fully collected.
- The estimated value per share was set at $10.55 on April 29, 2021, up from $8.75 previously. The independent valuation range was $9.87–$11.22. The filing cautions that this unaudited estimate is assumption-dependent and is not a market price, liquidation value or assurance of sale proceeds.
- The earn-out liability rose from $22.0 million to $38.0 million, driven by the higher estimated value per share and improved market conditions. The potential award is up to five million OP units, with liquidity-event timing and valuation assumptions affecting its fair value.
- Other notable exposures include $43.0 million of derivative liabilities and limited guarantees related to joint-venture debt. Management said ordinary-course litigation and known environmental matters were not expected to have a material adverse effect. A tax-protection agreement may constrain certain property dispositions or debt decisions through 2027.
Important facts for investors to verify
- Progress on the liquidity-alternatives review, and any resulting transaction terms, timing or shareholder liquidity.
- Revolver extension or refinancing ahead of its October 2021 maturity and the company’s ability to maintain covenant compliance.
- Subsequent rent collections, tenant bankruptcies, payment-plan recoveries, abatements and occupancy trends.
- Whether property sales, acquisition activity and redevelopment spending support operating cash flow and leverage objectives.
- Assumptions behind the $10.55 estimated value per share and the earn-out liability; neither is a guaranteed realizable value.