Phillips Edison & Company, Inc. — Q1 2018 10-Q
Business context and period. The filing covers the three months ended March 31, 2018. Phillips Edison owns and operates grocery-anchored shopping centers and, following its October 2017 PELP transaction, also manages real estate for third-party funds. At quarter-end, it owned 237 properties in 32 states, with 93.6% of rentable area leased and an average remaining lease term of 4.9 years. The PELP transaction added 76 centers and the investment-management business, significantly affecting comparisons with 2017.
Financial and operating metrics
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Total revenue | $103.2 million | $68.3 million |
| Net income (loss) | $(1.8) million | $1.1 million |
| Net income (loss) attributable to stockholders | $(1.6) million; $(0.01) per share | $1.1 million; $0.01 per share |
| Operating cash flow | $23.5 million | $20.5 million |
| Cash, cash equivalents and restricted cash | $32.0 million | $27.4 million at December 31, 2017 |
| Debt obligations, net | $1.835 billion | $1.807 billion at December 31, 2017 |
| Weighted-average debt interest rate | 3.4% | 0.4 percentage point higher than a year earlier |
| Pro forma same-center NOI | $61.3 million; up 4.3% | $58.8 million |
| FFO / MFFO per diluted share | $0.18 / $0.18 | $0.15 / $0.15 |
Revenue growth reflected the acquired PELP portfolio and management business. Consolidated rental income was $71.4 million, tenant recovery income $22.4 million, and fees and management income $8.7 million. The filing reports owned-real-estate segment profit of $65.5 million and investment-management segment profit of $3.7 million. It does not present a consolidated operating margin as a headline metric.
Net loss included $46.4 million of depreciation and amortization and $16.8 million of net interest expense. FFO and MFFO are non-GAAP measures; the company cautions they should not be treated as substitutes for GAAP earnings, cash flow, or liquidity.
Changes and capital position
- Compared with Q1 2017, total revenue rose 50.9%; owned-real-estate segment profit increased 42.7%. These comparisons are materially affected by PELP, which contributed $21.5 million of revenue and $1.3 million of net income in Q1 2018.
- Interest expense approximately doubled year over year, primarily reflecting debt financing associated with the PELP transaction and other 2017 borrowing; depreciation and amortization also rose substantially.
- Pro forma same-center NOI increased 4.3%, with revenues up 1.3% and operating expenses down 5.2%. Management cited higher same-center minimum rent and occupancy, as well as lower same-center property taxes.
- Debt was approximately 41.9% of total enterprise value under the company’s calculation. Of $1.845 billion of principal debt, $1.606 billion was fixed-rate and $238.6 million variable-rate. The $500 million revolving facility had $474.4 million available at quarter-end; the company reported covenant compliance.
- Operating cash flow exceeded net cash distributions of $25.5 million, but did not cover them in the quarter. Distributions included payments to common stockholders and OP-unit holders.
- The board declared monthly distributions of $0.05583344 per share for June through August 2018. The company gave no full-year earnings or operating guidance.
Outlook, risks and unusual items
- Management expects liquidity to come from cash, operating cash flows and debt financing. It expects to continue monthly distributions unless operating results, financial condition, economic conditions or other factors make them imprudent; distributions are not guaranteed.
- Share repurchase demand exceeded program funding limits. After repurchasing approximately 3.4 million shares in April 2018, the company reported 11.9 million shares of unfulfilled requests, subject to program limits and possible withdrawal.
- On May 9, 2018, the board raised the estimated share value from $11.00 to $11.05, based on an independent valuation range of $10.35–$11.75. The filing stresses that this estimate is not audited, is not GAAP fair value or liquidation value, and does not assure a resale price or exchange-traded value.
- Six interest-rate swaps covered $992 million of notional debt. The company expected $4.9 million of accumulated hedge gains to reduce interest expense over the following 12 months. A derivative default could be triggered by certain defaults on indebtedness; no breach or collateral posting was reported.
- Key disclosed risks include economic and local-market conditions, vacancies and rent levels, tenant creditworthiness, interest rates and refinancing, competition, regulatory and environmental matters, and portfolio concentration. The company reported no litigation or environmental matter believed likely to have a material adverse effect.
- Adoption of the new lease standard was planned for January 1, 2019. Management expected reduced capitalization of certain leasing costs, potentially increasing property operating expense, and was still evaluating lessee impacts.
Investor verification priorities
- Assess how much reported growth and the earnings change reflect PELP rather than comparable-property performance; review the 4.3% pro forma same-center NOI calculation and assumptions.
- Verify the sustainability of distributions against operating cash flow, FFO/MFFO, capital expenditure and leasing needs, and future debt service.
- Monitor the 2019 term-loan maturity, refinancing options, variable-rate exposure, covenant headroom and revolving-credit availability.
- Track unfulfilled repurchase requests and the program’s funding limits; distinguish the $11.05 estimated value from realizable market or sale value.
- Review PELP earn-out milestones, which could result in up to 12.5 million additional OP units, and the company’s valuation assumptions for the liability.