Phillips Edison & Company, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 11, 2020. The filing also reports fourth-quarter results. Phillips Edison is an internally managed REIT focused on grocery-anchored shopping centers, with a third-party investment-management business.
Business context and portfolio
- At year-end, the company wholly owned 287 properties across 31 states and held interests in 28 properties through three joint ventures. The managed portfolio totaled approximately 35.3 million square feet; wholly owned properties were 95.4% leased.
- The October 2019 REIT III merger was valued at approximately $71 million and added three properties and a 10% interest in a joint venture. The 2018 REIT II merger added 86 properties, making 2019 the first full year of operations with that portfolio.
Financial and operating performance
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Total revenue | $536.7 million | $430.4 million |
| Net income (loss) | $(72.8) million | $47.0 million |
| Net income (loss) attributable to stockholders | $(63.5) million; $(0.22) per share | $39.1 million; $0.20 per share |
| Net operating income (NOI), real estate investments | $355.8 million | $272.5 million |
| Pro forma same-center NOI | $339.6 million, up 3.7% | $327.6 million |
| FFO attributable to stockholders and convertible noncontrolling interests | $217.0 million; $0.66 per diluted share | $156.2 million; $0.65 per diluted share |
| Core FFO | $230.9 million; $0.70 per diluted share | $176.1 million; $0.73 per diluted share |
| Net cash from operating activities | $226.9 million | $153.3 million |
- Revenue increased 24.7%, principally reflecting the full-year contribution of REIT II properties; management also cited higher occupancy and rent at properties owned before 2018. Fee and management income fell to $11.7 million from $32.9 million, partly because acquired properties no longer generated third-party management fees.
- Real estate impairment charges rose to $87.4 million from $40.8 million, mainly on properties under contract or actively marketed below carrying value. Depreciation and amortization was $236.9 million; net interest expense was $103.2 million.
- Leasing improved: total occupancy rose 2.2 percentage points to 95.4%, and in-line occupancy rose 5.3 points to 90.2%. Comparable new-lease spreads were 13.3% and renewal spreads 8.5%.
- Fourth quarter: Revenue was $135.3 million; net income attributable to stockholders was $4.1 million, or $0.02 per share. The filing’s quarterly table reports losses attributable to stockholders in each of the first three quarters.
Debt, liquidity, and distributions
- Year-end gross debt obligations were $2.373 billion; the balance-sheet carrying amount, net of financing costs and adjustments, was $2.354 billion. Weighted-average interest rate was 3.4% and weighted-average maturity was 5.0 years.
- Net debt to total enterprise value improved to 39.5% from 41.1%. The $500 million revolving facility had $489.8 million available and no outstanding balance at year-end. The company reported covenant compliance.
- Cash and cash equivalents were $17.8 million, with restricted cash of $77.3 million. Operating cash flow was $226.9 million. Investing activities provided $64.2 million, while financing activities used $280.3 million.
- Property sales generated $223.1 million of proceeds; net borrowings declined by $89.1 million during 2019. The company paid $75.5 million in capital spending, including $37.5 million for development and redevelopment.
- Common distributions remained $0.67 per share for the year. Gross distributions to common stockholders and noncontrolling interests were $220.2 million, including $67.4 million reinvested through the DRIP. Operating cash flow exceeded gross distributions by $6.7 million; FFO was $3.2 million below them. These measures have different scopes and are not interchangeable.
Changes, outlook, risks, and unusual items
- Management reported 3.7% pro forma same-center NOI growth and continued strategic dispositions to reduce leverage and recycle capital. It targeted completion of a phase of non-core dispositions in the first half of 2020 and expected additional core dispositions.
- The company expected 2020 lease renewals to meet or exceed expiring average rents, citing high occupancy and the then-current economic outlook, while warning that local or broader economic changes could reverse that expectation.
- Twenty-seven development and redevelopment projects were completed or in progress, with estimated total investment of $78.1 million. The remaining $37.0 million was expected to be spent in 2020; projects were expected to stabilize within 24 months. Target incremental yields were 8%–11%.
- In December 2019, the company executed a $200 million fixed-rate secured loan maturing in 2030 and used financing and disposition proceeds to repay $265.9 million of term debt due in 2020 and 2021. It repaid a further $30 million in January 2020; management said the next term-loan maturity was then 2022. Repricing $375 million of debt was expected to save about $1.9 million annually.
- Standard share repurchases were suspended in August 2019; only qualifying death, disability, or incompetence repurchases continued. The share price had no established public market. The $11.10 estimated value per share was not an audited fair value or a guaranteed resale price.
- COVID-19 was identified as a potential risk to tenant sales, operations, rent collection, and property performance; the filing did not quantify its financial effect. Other key risks include retail disruption and e-commerce, tenant distress or vacancies, impairment and disposition pricing, geographic and weather exposure, leverage and interest rates, and refinancing or liquidity constraints.
- The company adopted lease accounting standard ASC 842 in 2019. It changed presentation of certain tenant-paid real estate taxes and lease collectability adjustments; management said the tax-presentation change had no net earnings impact. The company recorded a $7.8 million impairment of a management-contract intangible and a $1.9 million impairment of a receivable related to REIT III’s suspended offering.
- Management stated that disclosure controls and internal control over financial reporting were effective at year-end. The independent auditor issued an unqualified opinion on the financial statements; it was not engaged to opine on internal-control effectiveness. No material legal proceeding was reported.
Important facts for investors to verify
- How much of revenue, NOI, and FFO growth reflects the REIT II merger and other portfolio changes versus organic performance; review the company’s same-center methodology and reconciliations.
- Whether further impairments or asset-sale discounts arise as the disposition and deleveraging program proceeds, and whether planned proceeds are realized.
- Distribution sustainability: compare cash distributions with operating cash flow, FFO, capital needs, and debt-service requirements; note that the Board may change distributions.
- Debt maturities, covenant headroom, variable-rate exposure, hedge effectiveness, and the effect of LIBOR transition. The filing estimates a 1-percentage-point rate increase would add about $2.5 million of annual interest expense on unhedged variable debt.
- The limitations of the $11.10 estimated value per share, the suspended standard repurchase program, and the absence of a public trading market or assured liquidity event.
- Tenant and geographic concentrations, lease expirations, post-year-end leasing and dispositions, and any subsequent COVID-19 effects not measurable in this filing.