Phillips Edison & Company, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; financial statements are unaudited. PECO is a REIT focused on grocery-anchored shopping centers. At quarter-end, it owned 274 properties and held an interest in 20 properties through a joint venture, across 31 states.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 |
|---|---|---|---|---|
| Total revenue | $152.1 million | $142.5 million | $303.2 million | $284.7 million |
| Net income | $16.2 million | $15.3 million | $34.8 million | $26.7 million |
| Net income attributable to stockholders | $14.5 million | $13.5 million | $31.1 million | $23.6 million |
| EPS, basic and diluted | $0.12 | $0.12 | $0.26 | $0.21 |
| Core FFO per diluted share | $0.59 | $0.56 | $1.18 | $1.12 |
- Q2 rental income rose 8.6%; H1 rental income rose 7.5%. Same-center NOI increased 5.3% in Q2 and 5.1% in H1.
- H1 operating cash flow was $130.4 million, down from $142.5 million. Investing used $107.0 million and financing used $30.8 million. Cash, cash equivalents and restricted cash totaled $9.9 million at June 30.
- Debt obligations were $1.97 billion gross ($1.95 billion reported net carrying value); weighted-average interest rate was 3.9%, versus 3.6% at year-end 2022. Net debt to annualized Adjusted EBITDAre was 5.2x, compared with 5.3x at year-end.
- Revolving credit capacity was $800 million, with $619.2 million available. Stockholders’ equity was $2.21 billion; total assets were $4.74 billion.
Changes versus the prior comparable period
- Revenue growth was primarily driven by same-center rent and occupancy gains and acquisitions. Wholly owned portfolio leased occupancy increased to 97.8% from 96.8%; ABR increased to $449.3 million from $421.0 million year over year.
- Q2 net income attributable to stockholders increased 6.8%; H1 increased 31.6%. H1 growth also reflected lower other expense, including the absence of the prior-year earn-out liability charge, and lower property-sale gains.
- Interest expense rose $3.5 million in Q2 and $4.8 million in H1, mainly due to higher rates. Property operating costs and real estate taxes also increased.
- Fees and management income declined as 2022 included realized performance income from the NRP joint venture. Acquisition spending fell to $69.5 million in H1 from $170.2 million; capital expenditures increased to $47.6 million from $42.9 million.
Outlook, risks and unusual items
- Management said existing liquidity sources are sufficient for short- and long-term cash demands. No specific earnings or revenue guidance was provided.
- Management expects current 2023 capital-improvement and redevelopment obligations to be funded through operating cash flow, dispositions or revolver borrowings. In-process projects represent an estimated $37.5 million investment, with targeted underwritten incremental unlevered yields of 9%–12% and typical stabilization within 24 months; actual outcomes may differ.
- On July 31, 2023, PECO amended three unsecured term loans totaling approximately $484.8 million, refinancing loans previously scheduled to mature in 2024. The amended loans mature in 2026 or 2027, with extension options on one facility.
- Risks highlighted include inflation and higher borrowing/construction costs, possible economic slowdown, tenant credit and vacancy, refinancing and interest-rate exposure, and severe weather. Florida and California represented 12.3% and 10.9% of ABR, respectively. Hurricane Ian damage had resulted in prior accelerated depreciation; $1.0 million of insurance recoveries was collected in 2023.
- A tax protection agreement has an estimated potential make-whole amount of $125.8 million; no liability was recorded. Management said ordinary-course litigation and known environmental matters were not expected to have a material adverse effect. Four letters of credit totaling about $12.5 million support captive-insurance obligations.
Important facts for investors to verify
- Review the July 31 loan amendments, including final rates, maturities, extension terms and covenant headroom.
- Track the effect of higher rates and the timing of hedges: $755 million of variable-rate debt was hedged, with a weighted-average hedge period of 1.1 years; $18.2 million was expected to be reclassified from AOCI as a reduction of interest expense over the next 12 months.
- Assess whether rent growth and high occupancy can offset rising property costs, taxes and interest expense, and monitor tenant receivables and collectibility.
- Compare operating cash generation with distributions, capital spending and acquisitions. The monthly distribution was $0.0933 per share, or $1.12 annualized; the filing notes distributions are not guaranteed.
- Monitor redevelopment project costs and yields, geographic weather exposure, and any developments affecting the tax protection agreements or contingent obligations.