Phillips Edison & Company, Inc. — Q3 2019 Form 10-Q
Business and period. Phillips Edison is a REIT focused on grocery-anchored shopping centers, with a third-party property and investment management business. This unaudited report covers the quarter and nine months ended September 30, 2019; financial amounts below are in millions unless noted. Results are substantially affected by the November 2018 REIT II merger, which added 86 properties and debt, so reported year-over-year comparisons are not fully like-for-like.
Financial and operating highlights
- Revenue: Q3 revenue was $136.0 million, up 29.7% from $104.9 million; nine-month revenue was $401.4 million, up 28.5% from $312.3 million. Management attributed most of the increase to the REIT II merger. Nine-month fees and management income fell to $9.1 million from $26.8 million, in part because management fees from the acquired properties ceased after the merger.
- Profitability: Q3 net loss was $29.7 million versus $16.3 million; net loss attributable to stockholders was $25.9 million versus $13.2 million, or $(0.09) per share versus $(0.07). Nine-month net loss was $77.7 million versus $32.2 million; stockholder-attributable loss was $67.6 million versus $26.2 million, or $(0.24) per share versus $(0.14). Higher depreciation, interest and property impairments weighed on results.
- Impairments and other items: Real estate impairment charges were $35.7 million in Q3 and $74.6 million for nine months, compared with $16.8 million and $27.7 million, respectively, in 2018. These related to properties under contract or marketed for sale at values below carrying amount. Nine-month other impairment charges of $9.7 million included a $7.8 million management-contract intangible impairment and $1.9 million related to PECO III offering costs. A $7.5 million reduction in the earn-out liability benefited nine-month other income.
- Cash flow: Nine-month operating cash flow was $175.9 million, up from $122.0 million. Investing used $9.3 million, including $49.9 million of acquisitions and $48.1 million of capital expenditures, offset substantially by $86.2 million of property-sale proceeds. Financing used $164.8 million, including distributions, repurchases and debt activity. Cash, cash equivalents and restricted cash totaled $86.1 million at period-end; unrestricted cash was $29.5 million.
- Debt and liquidity: Gross debt was $2.441 billion, with a 3.5% weighted-average interest rate and 4.3-year weighted-average maturity. Debt was approximately 78% fixed-rate and 22% variable-rate, including derivatives. The company reported $491.4 million available under its $500 million revolving facility, compliance with debt covenants, and net debt to total enterprise value of 40.4%, down from 41.1% at year-end 2018. The derivative liability was $28.3 million; a qualifying default could have triggered settlement at that amount.
- Portfolio and operations: The wholly owned portfolio comprised 294 properties across 32 states, 33.2 million square feet and 95.0% leased space; average remaining lease term was 4.7 years. Pro forma same-center NOI increased 2.9% in Q3 and 2.4% for nine months. Nine-month comparable lease rent spreads were 13.9% on new leases and 8.4% on renewals; portfolio retention was 86.6%, compared with 90.1% in 2018.
- Distributions: The declared rate was $0.17 per share for Q3 and $0.50 year to date. Nine-month gross common-stockholder distributions were $164.4 million, including $51.3 million reinvested through the DRIP. Operating cash flow exceeded these distributions by $11.5 million, while FFO attributable to stockholders and convertible noncontrolling interests of $160.6 million was $3.8 million below them. The filing warns that distributions may not be sustainable if they continue to exceed operating cash flow.
Material changes and outlook
- The REIT II merger was the principal driver of portfolio growth, revenue increases, and higher interest and operating costs. Property sales and contributions to joint ventures partly offset revenue growth; the company said proceeds were used in part to reduce leverage and could fund acquisitions or redevelopment.
- The company adopted ASC 842 lease accounting in January 2019. Changes include presentation of tenant recoveries within rental income and lease collectability adjustments as reductions to rental income; some year-over-year line-item comparisons are therefore affected.
- The share repurchase program was suspended for standard repurchases effective August 2019; limited repurchases for death, qualifying disability or incompetence continued. The company reported no formal earnings or NOI guidance. Management said it expects adequate liquidity, intends to continue monthly distributions subject to Board authorization, and expects positive average rent increases on expiring leases, while noting no assurance of continued increases.
- After quarter-end, the company completed its PECO III merger on October 31, 2019, issuing 4.5 million shares and paying approximately $21 million in cash, among other consideration. It also sold two held-for-sale properties for $11.95 million and $11.8 million. The Board authorized monthly distributions of $0.05583344 per share for December 2019 through February 2020.
- Key stated risks include tenant credit and vacancies, local real estate conditions, interest rates and refinancing access, and portfolio concentration. Florida represented 12.2% of ABR. The filing identifies no litigation or environmental matter expected to have a material adverse financial effect; it cautions that future property-sale impairments may occur.
Important facts for investors to verify
- How much reported revenue and NOI growth reflects acquired properties versus organic same-center performance, and how occupancy and leasing spreads evolve.
- Whether property-sale proceeds and future operating cash flow can support debt reduction, capital spending and distributions; monitor distribution coverage against both operating cash flow and FFO.
- Debt maturities, variable-rate exposure, interest-rate hedges and covenant headroom, including the impact of the derivative liability and refinancing conditions.
- Further impairment charges, disposition pricing and execution of planned redevelopment or reinvestment.
- The effects of the completed PECO III merger, including share dilution, acquired assets and liabilities, and any resulting changes to management-fee revenue.