Phillips Edison & Company Reports First Quarter 2019 Results; Increases Estimated Value Per Share to $11.10
May 9, 2019 | Phillips Edison & Company
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, today reported its results for the first quarter ended March 31, 2019, and increased its estimated value per share to $11.10 as of March 31, 2019.
“As we look toward our goal of executing a full-cycle liquidity event, we are focused on strategies that we expect will provide both long-term upside and future investor demand.”
First Quarter 2019 Highlights (vs. First Quarter 2018)
• Net loss totaled $5.8 million
• Funds from operations (“FFO”) per diluted share increased 5.6% to $0.19; FFO represented 111.3% of total distributions made during the quarter
• Modified funds from operations (“MFFO”) per diluted share decreased 5.6% to $0.17; MFFO represented 100.3% of total distributions made during the quarter
• Pro forma same-center net operating income (“NOI”)* increased 2.5% to $87.3 million
• Comparable new lease spreads were 17.2% and comparable renewal lease spreads were 12.3%
• Net debt to total enterprise value (“TEV”) decreased to 40.8% at quarter-end, an improvement from 41.9% at March 31, 2018
• Outstanding debt had a weighted-average interest rate of 3.5%, and 86.8% was fixed-rate debt
• Realized $36.6 million in gross proceeds from the sale of three properties and one outparcel
* Pro forma same-center NOI includes properties acquired in PECO’s merger with Phillips Edison Grocery Center REIT II, Inc. (“REIT II”) in November 2018. Please see ‘Pro Forma Same-Center Results’ under Portfolio Results for additional disclosure.
Estimated Value per Share Update
On May 8, 2019, the Company’s board of directors increased the estimated value per share of its common stock to $11.10 as of March 31, 2019, based on the range of $10.07 to $11.48 provided by Duff & Phelps, an independent third-party valuation firm. As of March 31, 2018, the Company’s estimated value per share was $11.05.
Management Commentary
“The first quarter of 2019 demonstrated the continued strength of our grocery-anchored portfolio and the benefits of our successful merger with REIT II, illustrated by our pro forma same-center NOI growth of 2.5%,” commented Jeff Edison, Chairman and Chief Executive Officer of PECO. “We saw an increased level of leasing activity during the quarter with 270 leases executed, marking an 18% increase from last quarter, as well as combined leasing spreads of 13.5%. Together, we believe these metrics are indicators of the resilience in our portfolio’s well-located, grocery-anchored assets.
“We continue to look for opportunities to recycle capital into higher quality assets, invest in our existing properties through redevelopment, and reduce our leverage. During the quarter we identified a number of new redevelopment projects that we expect will drive incremental growth through the remainder of 2019 and 2020. We also generated $36.6 million of gross proceeds from the sale of three properties and one outparcel, which we plan to use to acquire additional properties through 1031 exchanges and to pay down debt.
“The performance of our real estate during the past twelve months coupled with our successful merger with REIT II led our board of directors to increase our estimated value per share to $11.10, which represents an 11.0% increase from our original offering price of $10.00 per share. The opportunity for additional NOI growth through continued lease up, redevelopment and the growth potential of our investment management business were driving factors in our board’s decision to increase our estimated value per share.
“As we look toward our goal of executing a full-cycle liquidity event, we are focused on strategies that we expect will provide both long-term upside and future investor demand.”
First Quarter Ended March 31, 2019 Financial Results
Net Loss
For the first quarter of 2019, net loss totaled $5.8 million, compared to a net loss of $1.8 million for the first quarter of 2018.
Contributing to the change were $13.7 million of impairment charges, increased depreciation expense as a result of the additional properties owned, and increased general and administrative expense. Partially offsetting the increased expenses were $7.1 million of gains related to the sale of three properties, $7.5 million of income from a reduction in the liability for the earn-out provision of the 2017 contribution agreement with Phillips Edison Limited Partnership (“PELP”), and earnings from owning additional properties due to the merger with REIT II in November 2018.
The Company adopted FASB Accounting Standards Codification Topic 842, “Leases” (“ASC 842”) on January 1, 2019, and will provide additional detail regarding the adoption in its Form 10-Q to be filed with the SEC. As a result, the Company recognized a $1.1 million increase in net expenses for the three months ended March 31, 2019.
FFO as Defined by the National Association of Real Estate Investment Trusts (“Nareit”)
FFO attributable to stockholders and convertible noncontrolling interests increased 51.2% to $61.0 million, or $0.19 per diluted share, from $40.4 million, or $0.18 per diluted share, during the first quarter of 2018. On a per diluted share basis, FFO increased 5.6% compared to the first quarter of 2018.
The improvements in FFO and FFO per diluted share were driven by the assets acquired from the merger with REIT II, year-over-year NOI growth, and the reduction in the PELP earn-out liability.
MFFO
For the first three months of 2019, MFFO increased 30.3% to $55.0 million, or $0.17 per diluted share, compared to $42.2 million, or $0.18 per diluted share, during the same year-ago period.
The increase in MFFO was driven by additional properties owned from the merger with REIT II. The decrease in MFFO per share was the result of a number of factors including the recycling of assets, higher expenses from the changes in lease accounting, and a decrease in leverage through net disposition activity of wholly-owned properties over the past year, as debt to TEV decreased to 40.8% from 41.9% at March 31, 2018.
Pro Forma Same-Center Results*
For the first quarter of 2019, pro forma same-center NOI increased 2.5% to $87.3 million compared to $85.1 million during the first quarter of 2018. The improvement was driven by a $0.21 increase in average minimum rent per square foot, an increase of 1.8%. Total pro forma same-center revenue and operating expenses decreased year-over-year almost entirely as a result of the change in presentation of real estate taxes directly paid by tenants and bad debt expense from the implementation of new lease accounting standards.
*For purposes of evaluating same-center NOI on a comparative basis, and in light of the merger with REIT II, the Company is presenting pro forma same-center NOI, which is same-center NOI on a pro forma basis as if the merger had occurred on January 1, 2018. As such, contributing to pro forma same-center NOI were 294 properties that were owned and operational for the entire portion of both comparable reporting periods.
Three Months Ended March 31, 2019 Portfolio Overview
Portfolio Statistics
At quarter-end, PECO’s portfolio consisted of 300 properties, totaling approximately 34.1 million square feet located in 32 states. This compares to 237 properties, totaling approximately 26.4 million square feet located in 32 states as of March 31, 2018.
Leased portfolio occupancy totaled 93.0%, which compared to 93.2% at December 31, 2018 (the first comparable period after the merger with REIT II). Anchor occupancy declined to 96.8% compared to 97.4% at year-end with non-renewals of several junior anchors and the disposition of certain properties with 100% anchor occupancy. In-line occupancy increased to 85.7% from 84.9% at year-end due to high leasing velocity during the current quarter.
Leasing Activity
During the first quarter 2019, 270 leases (new, renewal and options) were executed totaling approximately 1.0 million square feet. This compared to 192 leases executed totaling approximately 0.8 million square feet during the first quarter of 2018.
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 17.2% for new leases, 12.3% for renewal leases (excluding options), and 13.5% combined (new and renewal leases).
Acquisition & Disposition Activity
During the quarter, the Company did not acquire any properties and sold three properties and one outparcel, generating $36.6 million in gross proceeds.
Sale proceeds realized are expected to be used to fund acquisitions with potential growth, fund redevelopment opportunities in owned centers, and delever the balance sheet.
Investment Management Business
During the first quarter of 2019, the Company generated $3.3 million of fee income for asset management and property management services rendered to third parties. Fee income declined from 2018 due to the decrease in third-party assets under management resulting from the acquisition of REIT II. Looking forward, the Company is committed to expanding its investment management business, which has the potential to generate income and cash flow without requiring additional capital or increasing leverage.
At quarter-end, the Company had approximately $743 million of third-party assets under management. Those assets included properties owned by Phillips Edison Grocery Center REIT III, Inc. (PECO’s co-sponsored non-traded REIT), Grocery Retail Partners I and Grocery Retail Partners II (joint ventures with The
Northwestern Mutual Life Insurance Company), Necessity Retail Partners (a joint venture with TPG Real Estate), and a private fund.
Balance Sheet Highlights at March 31, 2019
At quarter-end, the Company had $439.7 million of borrowing capacity available on its $500 million revolving credit facility.
Net debt to TEV was 40.8% at March 31, 2019, compared to 41.1% at December 31, 2018.
The Company’s outstanding debt had a weighted-average interest rate of 3.5%, a weighted-average maturity of 4.8 years, and 86.8% of its total debt was fixed-rate debt. This compared to a weighted-average interest rate of 3.5%, a weighted-average maturity of 4.9 years, and 90.1% fixed-rate debt at December 31, 2018.
Distributions
For the quarter ended March 31, 2019, gross distributions of $54.8 million were paid to common stockholders and operating partnership (“OP unit”) holders, including $17.7 million reinvested through the distribution reinvestment plan (“DRIP”), for net cash distributions of $37.1 million.
During the quarter, FFO totaled 111.3% of total distributions, up from 105.4% in Q1 2018.
The Company made its April 2019 distribution and will make its May 2019 distribution in the amount of $0.05583344 per share to the stockholders of record at the close of business on April 15, 2019, and May 15, 2019, respectively.
Subsequent to quarter-end, the Company’s board of directors authorized distributions for June 2019, July 2019, and August 2019 in the amount of $0.05583344 per share to the stockholders of record at the close of business on June 17, 2019, July 15, 2019, and August 15, 2019, respectively. OP unit holders will receive distributions at the same rate, subject to required tax withholding.
Share Repurchase Program (“SRP”)
During the first quarter of 2019, approximately 605,000 shares of common stock, totaling $6.7 million, were repurchased under the SRP.
The Company fulfilled all repurchases sought upon a stockholder’s death, qualifying disability, or determination of incompetence in accordance with the terms of the SRP. Cash available for standard repurchases on any particular date under the SRP, of which the Company may use all or any portion, is generally limited to the proceeds from the DRIP during the preceding four quarters, less amounts already used for repurchases during the same time period. As such, the Company did not process standard repurchases during the quarter.
All standard repurchase requests must be on file and in good order by the close of business on July 24, 2019, to be included for the next standard repurchase, which is expected to occur on July 31, 2019. At that time, the demand for standard redemptions is expected to exceed funding the Company makes available for repurchases and, as a result, the Company expects to make redemptions on a pro-rata basis.
Estimated Value Per Share
Effective May 8, 2019, the Company’s board of directors increased the estimated value per share of its common stock to $11.10 as of March 31, 2019.
Duff & Phelps was engaged to provide a calculation of the range in estimated value per share of the Company’s common stock as of March 31, 2019. Duff & Phelps prepared a valuation report based substantially on its estimate of the “as is” market values of the company’s portfolio, adjusted to reflect balance sheet assets and liabilities and the estimated value of in-place contracts of the third-party asset management business provided by the Company’s management as of March 31, 2019, before calculating a range of estimated per share values based on the number of outstanding shares of common stock as of quarter end. These calculations produced an estimated value per share in the range of $10.07 to $11.48.
For a full description of the assumptions and methodologies used to determine the estimated value per share, see the Form 10-Q for the quarter ended March 31, 2019, to be filed with the SEC, which will be accessible on the SEC’s website at www.sec.gov.
Stockholder Update Call
Chairman and Chief Executive Officer Jeff Edison, Chief Financial Officer Devin Murphy, and Executive Vice President Mark Addy will host a live presentation addressing the Company’s results and estimated value per share later today, May 9, 2019, at 2:00 p.m. Eastern Time. Following management’s prepared remarks, there will be a question and answer session.
Source: Phillips Edison & Co.
