Phillips Edison & Company Reports First Quarter 2020 Results, Provides Update on COVID-19 Impact, and Updates Estimated Value Per Share to $8.75 from Previous $11.10
May 12, 2020
CINCINNATI--(BUSINESS WIRE)-- Phillips Edison & Company, Inc. (“PECO” or the “Company”), an internally-managed real estate investment trust (“REIT”) and one of the nation’s largest owners and operators of grocery-anchored shopping centers, reported net income of $11.2 million for the three-month period ended March 31, 2020, an improvement from a net loss of $5.8 million for the three-month period ended March 31, 2019.
First Quarter 2020 Highlights (vs. First Quarter 2019)
• Same-center net operating income (“NOI”) increased 2.6% to $86.9 million
• Leased portfolio occupancy totaled 95.6%, an increase from 93.0% at March 31, 2019
• Executed 214 leases (new, renewal, and options) totaling 1.1 million square feet with comparable new lease spreads of 6.8% and comparable renewal lease spreads of 11.2%
• Funds from operations (“FFO”) increased 11.9% to $68.2 million; FFO per diluted share increased to $0.20 from $0.19
• Core FFO increased 8.4% to $60.2 million; Core FFO per diluted share increased to $0.18 from $0.17
• FFO and Core FFO totaled 122.2% and 107.9%, respectively, of total distributions made during the quarter
• Paid off $30 million term loan due in 2021, leaving the Company with no material term loan maturities until 2022
Estimated Value per Share Update
On May 6, 2020, the Company’s board of directors updated the EVPS of its common stock to $8.75 as of its March 31, 2020 financials. The EVPS was below the midpoint of the range ($8.45 to $9.68) provided by Duff & Phelps, LLC, an independent third-party valuation firm. The decrease was primarily driven by the estimated negative impact of the COVID-19 pandemic on PECO’s non-grocery tenants resulting from social distancing and stay-at-home guidelines and the uncertainty of the duration and effect on the overall economy. Previously, as of its March 31, 2019 financials, the Company’s EVPS was $11.10.
“We ended our second consecutive quarter with record leased occupancy, which improved to 95.6% at March 31, 2020,” said Jeff Edison, chairman and chief executive officer of PECO. “Additionally, during the quarter we saw strong growth in our portfolio, illustrated by an 8.4% increase in Core FFO, compared to the first quarter of 2019, representing 107.9% of our total distributions. Despite this performance, the environment in the first quarter was materially different compared to today. Our current focus is working closely with our neighbors (tenants) and associates during this unprecedented time resulting from COVID-19.”
“Our core philosophy of owning and operating grocery-anchored shopping centers has never been more critical than during the ongoing pandemic. During this difficult time, all of our centers have remained open due to the necessity-based nature of our grocery anchors and other essential retailers. However, approximately 30% of our total neighbor spaces are temporarily closed due to restrictions on businesses and restaurants, as well as social distancing and stay-at-home mandates. The impact of the COVID-19 pandemic on our portfolio has been material.
“In response to the resulting uncertainty, we have implemented several measures to maximize our financial flexibility, including the temporary suspension of our monthly stockholder distributions, expense reductions including executive management salary decreases and workforce reductions, and a $200 million draw on our revolving credit facility. The draw was made to protect the liquidity required to operate the business effectively for the foreseeable future.
“It is difficult to predict when the economy will stabilize and what lasting effects this pandemic will have on our neighbors, our portfolio, and the economy over the long term. These factors and the anticipated reduction in cash flow were considered in the recently completed independent valuation performed by Duff & Phelps. As a result, our Board of Directors has lowered our EVPS to $8.75, versus our previous EVPS of $11.10.
“Despite this reduction in value, we are proud of our track record of 111 consecutive months of distributions and distributing over $1.3 billion to our stockholders in the form of regular monthly distributions. This represents approximately 46% of the proceeds from our initial public offerings that have been returned to our investors through distributions. Our temporary distribution suspension will be reevaluated once the pandemic has stabilized and we can assess our ongoing cash flows.
“We are working tirelessly with our neighbors to understand their needs and to ensure they are aware of all the resources available to help them. Maintaining regular dialogue with our neighbors will be critical as we seek to understand their future plans to reopen when the stay-at-home mandates begin to lift and the economy reopens.”
Measures Taken to Maximize Financial Flexibility During Pandemic Uncertainty
PECO has implemented a number of measures to mitigate the negative financial and operational impacts of the COVID-19 pandemic (including those mentioned above) to preserve liquidity and ensure that PECO is able to meet its operating needs for a sustained period:
The Board approved a temporary 25% reduction to the chief executive officer’s base salary, a temporary 10% reduction to the remaining executive management team’s respective base salaries (president, chief operating officer, chief financial officer, and general counsel), and a 10% reduction to board members’ base compensation for the 2020-2021 term.
Monthly distributions have been temporarily suspended.
The Company drew $200 million in April on its $500 million revolving credit facility.
All capital projects are being delayed to the extent possible.
Expense reductions are being implemented at the property and corporate levels, including a reduction in workforce.
The Share Repurchase Program for DDI (death, qualifying disability or determination of incompetence) requests has been temporarily suspended. The Share Repurchase Program for standard requests remains suspended.
PECO has formed an internal task force dedicated to understanding the CARES Act and other SBA programs that may help its neighbors in securing resources to help them with liquidity concerns. The Company is contacting each of its neighbors to understand their current business situation and needs, and to help them re-open their stores as quickly as possible.
The table below outlines how PECO’s neighbors have been impacted and the ensuing impact to PECO throughout the COVID-19 pandemic:
(1) Statistics are approximate and include our pro-rata ownership through joint ventures. Collections for April 2020 include any amounts billed for April that were received through May 11, 2020. April 2020 indicates approximate statistics as of April 30, 2020. May 2020 indicates approximate statistics as of May 11, 2020.
Three Months Ended March 31, 2020, Financial Results
For the first quarter of 2020, net income totaled $11.2 million, or $0.03 per diluted share, compared to a net loss of $5.8 million, or $0.02 per diluted share, for the first quarter of 2019.
The improvement is primarily attributable to a decrease in non-cash impairment charges resulting from disposition activity in 2019, coupled with 2.6% same-center NOI growth and lower general and administrative expenses compared to the first quarter of 2019. These improvements were partially offset by the loss from dispositions during the three months ended March 31, 2020, versus the comparable period.
FFO as defined by the National Association of Real Estate Investment Trusts (“Nareit”)
For the first quarter ended March 31, 2020, FFO attributable to stockholders and convertible noncontrolling interests increased 11.9% to $68.2 million, or $0.20 per diluted share, from $61.0 million, or $0.19 per diluted share, during the first quarter of 2019.
The improvements were driven by NOI growth from higher rent and recoveries, lower amortization of corporate intangibles, lower general and administrative expenses, lower interest expense, and a decrease in the estimated earn-out liability.
For the first quarter of 2020, Core FFO increased 8.4% to $60.2 million, or $0.18 per diluted share, compared to $55.6 million, or $0.17 per diluted share, during the same year-ago period.
The improvements were driven by NOI growth, lower general and administrative expenses, and lower interest expense.
For the first quarter of 2020, same-center NOI increased 2.6% to $86.9 million compared to $84.7 million during the first quarter of 2019. The improvement was driven by a $0.23, or 1.9%, increase in average minimum rent per square foot, increased same-center occupancy, and higher recovery of expenses when compared to the first quarter of 2019. These increases were partially offset by higher real estate taxes.
Three Months Ended March 31, 2020, Portfolio Overview
At quarter-end, PECO’s wholly-owned portfolio consisted of 285 properties, totaling approximately 31.9 million square feet located in 31 states. This compares to 300 properties, totaling approximately 34.1 million square feet located in 32 states as of March 31, 2019.
Leased portfolio occupancy was a record 95.6%, an improvement from 95.4% at December 31, 2019. Anchor occupancy increased to 98.3% from 98.0% at December 31, 2019, while in-line occupancy decreased to 90.1% from 90.2% at December 31, 2019. These strong results were driven by demand for retail space in well-located grocery-anchored neighborhood shopping centers.
During the first quarter of 2020, 214 leases (new, renewal and options) were executed totaling approximately 1.1 million square feet. This compared to 270 leases executed totaling approximately 1.0 million square feet during the first quarter of 2019.
Comparable rent spreads during the quarter, which compare the percentage increase (or decrease) of new or renewal leases to the expiring lease of a unit that was occupied within the past 12 months, were 6.8% for new leases, 11.2% for renewal leases (excluding options), and 10.4% combined (new and renewal leases).
Disposition & Acquisition Activity
PECO sold three properties, generating $17.4 million in gross proceeds during the quarter. In the near term, sale proceeds are expected to be used to help preserve liquidity during the current economic uncertainty caused by the COVID-19 pandemic. In the future, disposition proceeds are expected to be used to fund tax-efficient acquisitions, fund redevelopment opportunities in owned centers, and deliver the balance sheet.
During the quarter, PECO acquired land that was previously subject to a ground lease, as well as an out parcel adjacent to one of its shopping centers.
The Company anticipates selling non-core assets during the coming quarters as its capital recycling program winds down; however, the pace of dispositions and acquisitions will be impacted by the current economic uncertainty resulting from the COVID-19 pandemic.
Balance Sheet Highlights at March 31, 2020
At quarter-end, PECO had approximately $454.7 million of borrowing capacity available on its $500 million revolving credit facility, net of outstanding letters of credit. On April 1, 2020, PECO drew $200 million on its revolving credit facility, leaving approximately $255 million of borrowing capacity remaining.
Net debt to TEV was 45.0% at March 31, 2020, compared to 39.5% at December 31, 2019. This increase was driven by the change in EVPS, as net debt decreased $19.5 million from December 31, 2019.
At March 31, 2020, the Company's outstanding debt had a weighted-average interest rate of 3.3%, a weighted-average maturity of 4.7 years, and 81.9% of its total debt was fixed-rate debt. This compared to a weighted-average interest rate of 3.4%, a weighted-average maturity of 5.0 years, and 89.4% fixed-rate debt at December 31, 2019.
For the first quarter ended March 31, 2020, total distributions of $55.8 million were paid to common stockholders and operating partnership unit (“OP unit”) holders, including $15.9 million reinvested through the distribution reinvestment plan, for net cash distributions of $39.9 million.
During the quarter, FFO totaled 122.2% of total distributions and Core FFO totaled 107.9% of total distributions, compared to 111.3% and 101.4%, respectively, for the first quarter of 2019.
The Company made its March 2020 distribution of $0.05583344 per share ($0.67 annualized) to stockholders and OP unit holders of record on March 16, 2020 entirely in cash on April 1, 2020. Following this distribution, monthly distributions have been temporarily suspended and will be reevaluated once the pandemic has stabilized and PECO is able to fully assess the impact of COVID-19 on its business.
Together with Phillips Edison Grocery Center REIT II, Inc., the Company has distributed over $1.3 billion to its stockholders and OP unit holders in the form of monthly distributions.
Share Repurchase Program (“SRP”)
During the first quarter of 2020, approximately 288,000 shares of common stock, totaling $2.7 million, were repurchased under the SRP. The SRP for requests related to DDI have been temporarily suspended and the SRP for standard requests remains suspended.
Source: Phillips Edison & Co., Business WireGo Back
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