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(1)PHILLIPS EDISON & COMPANY
JUNE 30, 2021 FORM 10-Q | As of September 30, 2017. The average remaining lease term in years excludes future options to extend the term of the lease. |
Lease Expirations
The following table lists, on an aggregate basis, all of the scheduled lease expirations after September 30, 2017, for each of the next ten years and thereafter for our 159 shopping centers. The table shows the leased square feet and annualized base rent (“ABR”) represented by the applicable lease expirations (dollars and square feet in thousands): |
| | | | | | | | | | | | | | | | |
Year | | Number of Leases Expiring | | Leased Square Feet Expiring | | % of Leased Square Feet Expiring | | ABR(1) | | % of Total Portfolio ABR |
Remaining 2017(2) | | 104 |
| | 274 |
| | 1.6 | % | | $ | 3,577 |
| | 1.7 | % |
2018 | | 332 |
| | 1,227 |
| | 7.3 | % | | 17,857 |
| | 8.4 | % |
2019 | | 415 |
| | 2,031 |
| | 12.1 | % | | 26,936 |
| | 12.7 | % |
2020 | | 349 |
| | 1,827 |
| | 10.9 | % | | 23,828 |
| | 11.3 | % |
2021 | | 349 |
| | 2,073 |
| | 12.4 | % | | 24,691 |
| | 11.7 | % |
2022 | | 306 |
| | 2,123 |
| | 12.7 | % | | 23,560 |
| | 11.1 | % |
2023 | | 138 |
| | 1,924 |
| | 11.5 | % | | 22,892 |
| | 10.8 | % |
2024 | | 149 |
| | 1,271 |
| | 7.6 | % | | 13,709 |
| | 6.5 | % |
2025 | | 114 |
| | 700 |
| | 4.2 | % | | 11,200 |
| | 5.3 | % |
2026 | | 119 |
| | 974 |
| | 5.8 | % | | 14,295 |
| | 6.8 | % |
Thereafter | | 218 |
| | 2,356 |
| | 13.9 | % | | 29,098 |
| | 13.7 | % |
| | 2,593 |
| | 16,780 |
| | 100.0 | % | | $ | 211,643 |
| | 100.0 | % |
| |
(1)
| We calculate ABR as monthly contractual rent as of September 30, 2017, multiplied by 12 months.21 |
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(2)
| Subsequent to September 30, 2017, of the 2,593 leases expiring we renewed 24 leases, which accounts for 164,196 total square feet and total ABR of $2.2 million. |
Portfolio Tenancy
The following table presentsmodification of debt, (v) other impairment charges; and (vi) transaction and acquisition expenses. We believe Nareit FFO provides insight into our operating performance as it excludes certain items that are not indicative of such performance. Core FFO provides further insight into the compositionsustainability of our portfoliooperating performance and provides an additional measure to compare our performance across reporting periods on a consistent basis by tenant type as of September 30, 2017 (dollars and square feet in thousands): |
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Tenant Type | | ABR | | % of ABR | | Leased Square Feet | | % of Leased Square Feet |
Grocery anchor | | $ | 84,879 |
| | 40.1 | % | | 8,829 |
| | 52.6 | % |
National and regional(1) | | 80,255 |
| | 37.9 | % | | 5,448 |
| | 32.5 | % |
Local | | 46,509 |
| | 22.0 | % | | 2,503 |
| | 14.9 | % |
| | $ | 211,643 |
| | 100.0 | % | | 16,780 |
| | 100.0 | % |
| |
(1)
| We define national tenants as those that operate in at least three states. Regional tenants are defined as those that have at least three locations. |
The following table presents the composition of our portfolio by tenant industry as of September 30, 2017 (dollars and square feet in thousands): |
| | | | | | | | | | | | | |
Tenant Industry | | ABR | | % of ABR | | Leased Square Feet | | % of Leased Square Feet |
Grocery | | $ | 84,879 |
| | 40.1 | % | | 8,829 |
| | 52.6 | % |
Service | | 48,933 |
| | 23.1 | % | | 2,549 |
| | 15.2 | % |
Retail | | 47,059 |
| | 22.2 | % | | 3,962 |
| | 23.6 | % |
Restaurants | | 30,772 |
| | 14.6 | % | | 1,440 |
| | 8.6 | % |
| | $ | 211,643 |
| | 100.0 | % | | 16,780 |
| | 100.0 | % |
The following table presents our grocery anchor tenants, grouped according to parent company, by leased square feet as of September 30, 2017 (dollars and square feet in thousands): |
| | | | | | | | | | | | | | | | |
Tenant | | ABR | | % of ABR | | Leased Square Feet | | % of Leased Square Feet | | Number of Locations(1) |
Kroger | | $ | 19,567 |
| | 9.2 | % | | 2,377 |
| | 14.1 | % | | 41 |
|
Publix Super Markets | | 15,514 |
| | 7.3 | % | | 1,503 |
| | 9.0 | % | | 32 |
|
Ahold Delhaize | | 8,383 |
| | 4.0 | % | | 555 |
| | 3.3 | % | | 10 |
|
Albertsons Companies | | 7,744 |
| | 3.7 | % | | 756 |
| | 4.5 | % | | 13 |
|
Giant Eagle | | 5,435 |
| | 2.6 | % | | 560 |
| | 3.3 | % | | 7 |
|
Walmart | | 5,197 |
| | 2.5 | % | | 1,121 |
| | 6.7 | % | | 9 |
|
Raley's Supermarkets | | 3,422 |
| | 1.6 | % | | 193 |
| | 1.2 | % | | 3 |
|
SuperValu | | 2,382 |
| | 1.1 | % | | 273 |
| | 1.6 | % | | 4 |
|
Sprouts Farmers Market | | 2,281 |
| | 1.1 | % | | 195 |
| | 1.1 | % | | 6 |
|
Southeastern Grocers | | 1,545 |
| | 0.7 | % | | 147 |
| | 0.9 | % | | 3 |
|
Schnuck Markets | | 1,459 |
| | 0.7 | % | | 121 |
| | 0.7 | % | | 2 |
|
Coborn's | | 1,388 |
| | 0.7 | % | | 108 |
| | 0.6 | % | | 2 |
|
BJ’s Wholesale Club | | 1,223 |
| | 0.6 | % | | 115 |
| | 0.7 | % | | 1 |
|
H.E. Butt Grocery Company | | 1,210 |
| | 0.6 | % | | 81 |
| | 0.5 | % | | 1 |
|
Big Y Foods | | 1,091 |
| | 0.4 | % | | 65 |
| | 0.4 | % | | 1 |
|
PAQ | | 1,046 |
| | 0.5 | % | | 59 |
| | 0.4 | % | | 1 |
|
Trader Joe's | | 934 |
| | 0.4 | % | | 55 |
| | 0.3 | % | | 4 |
|
McKeever Enterprises | | 844 |
| | 0.4 | % | | 68 |
| | 0.4 | % | | 1 |
|
Save Mart Supermarkets | | 843 |
| | 0.4 | % | | 102 |
| | 0.6 | % | | 2 |
|
The Fresh Market | | 841 |
| | 0.4 | % | | 59 |
| | 0.4 | % | | 3 |
|
Pete's Fresh Market | | 579 |
| | 0.3 | % | | 72 |
| | 0.4 | % | | 1 |
|
U R M Stores | | 574 |
| | 0.3 | % | | 51 |
| | 0.3 | % | | 1 |
|
Hy-Vee Food Stores | | 527 |
| | 0.2 | % | | 127 |
| | 0.8 | % | | 2 |
|
Fresh Thyme Farmers Market | | 450 |
| | 0.2 | % | | 30 |
| | 0.2 | % | | 1 |
|
Marc’s | | 400 |
| | 0.2 | % | | 36 |
| | 0.2 | % | | 1 |
|
| | $ | 84,879 |
| | 40.1 | % | | 8,829 |
| | 52.6 | % | | 152 |
|
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(1)
| Number of locations excludes (a) auxiliary leases with grocery anchors such as fuel stations, pharmacies, and liquor stores, (b) four locations where we do not own the portion of the shopping center that contains the grocery anchor, and (c) four locations that have non-grocery anchors. Number of locations also includes one shopping center that has two grocery anchors. |
Results of Operations
In conjunction with the closing of the PELP transaction on October 4, 2017, we expect our operations to change significantly. As a result of acquiring the third-party asset management business of PELP, we will earn fee and management income for certain services provided to Phillips Edison Grocery Center REIT II, Inc. and other funds, and incur expenses related to managing their day-to-day activities and implementing their investment strategy. Furthermore, following the termination of the PE-NTR Agreement, we will no longer pay fees to an advisor, including asset management fees. The acquisition of 76 real estate assets from PELP through this transaction substantially increased the size of our portfolio. Consequently, we expect our operating revenues to increase over the short- and long-term.
Summary of Operating Activities for the Three Months Ended September 30, 2017 and 2016
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| | | | | | Favorable (Unfavorable) Change |
(In thousands, except per share amounts) | | 2017 | | 2016 | | $ | | % |
Operating Data: | | | | | | | | |
Total revenues | | $ | 70,624 |
| | $ | 65,270 |
| | $ | 5,354 |
| | 8.2 | % |
Property operating expenses | | (10,882 | ) | | (10,030 | ) | | (852 | ) | | (8.5 | )% |
Real estate tax expenses | | (10,723 | ) | | (9,104 | ) | | (1,619 | ) | | (17.8 | )% |
General and administrative expenses | | (8,712 | ) | | (7,722 | ) | | (990 | ) | | (12.8 | )% |
Termination of affiliate arrangements | | (5,454 | ) | | — |
| | (5,454 | ) | | NM |
|
Acquisition expenses | | (202 | ) | | (870 | ) | | 668 |
| | 76.8 | % |
Depreciation and amortization | | (28,650 | ) | | (26,583 | ) | | (2,067 | ) | | (7.8 | )% |
Interest expense, net | | (10,646 | ) | | (8,504 | ) | | (2,142 | ) | | (25.2 | )% |
Transaction expenses | | (3,737 | ) | | — |
| | (3,737 | ) | | NM |
|
Other income, net | | 6 |
| | 33 |
| | (27 | ) | | 81.8 | % |
Net (loss) income | | (8,376 | ) | | 2,490 |
| | (10,866 | ) | | NM |
|
Net loss (income) attributable to noncontrolling interests | | 144 |
| | (26 | ) | | 170 |
| | NM |
|
Net (loss) income attributable to stockholders | | $ | (8,232 | ) | | $ | 2,464 |
| | $ | (10,696 | ) | | NM |
|
| | | | | |
| | |
Net (loss) income per share—basic and diluted | | $ | (0.04 | ) | | $ | 0.01 |
| | $ | (0.05 | ) | |
|
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Below are explanations of the significantexcluding items that may cause short-term fluctuations in the resultsnet income (loss).
•EBITDAre—The National Association of operationsReal Estate Investment Trusts (“Nareit”) defines EBITDAre as net income (loss) computed in accordance with GAAP before: (i) interest expense; (ii) income tax expense; (iii) depreciation and amortization; (iv) gains or losses from disposition of depreciable property; and (v) impairment write-downs of depreciable property. Adjustments for the three months ended September 30, 2017unconsolidated partnerships and 2016:
Total revenues—Of the $5.4 million increase in total revenues, $5.2 million was attributedjoint ventures are calculated to non-same-center properties, which are the properties acquired or disposed of after December 31, 2015, and those considered redevelopment properties. Of the $5.2 million increase, $6.7 million was related to acquisitions, offset by a decrease of $1.5 million related to redevelopment and disposed properties. There are nine properties being repositioned in the market and such repositioning is expected to have a significant impact on property operating income. As such, these properties have been classified as redevelopment and have been excluded from our same-center pool. The remaining increase in revenues was the result of a $0.2 million increase among same-center properties, which are the 137 properties that were owned and operational for the entire portion of both comparable reporting periods. The increase in same-center revenue was primarily driven by a $0.17 increase in minimum rent per square foot and a 0.7% increase in occupancy since September 30, 2016.
Property operating expenses—These expenses include (i) operating and maintenance expense, which consists of property-related costs including repairs and maintenance costs, landscaping, snow removal, utilities, property insurance costs, security, and various other property-related expenses; (ii) bad debt expense; and (iii) property management fees and expenses. The $0.9 million increase in property operating expenses primarily resulted from owning more properties for the entire three months ended September 30, 2017, than the comparable 2016 period.
Real estate tax expenses—The $1.6 million increase in real estate tax expenses was primarily due to having more properties in our portfolio for the entire three months ended September 30, 2017, than the comparable 2016 period.
General and administrative expenses—The $1.0 million increase in general and administrative expenses included a $0.6 million increase in third-party legal and consulting fees, as well as costs associated with distributing our Proxy. It also included a $0.3 million increase in asset management fees related to owning more properties for the entire three months ended September 30, 2017, than the comparable 2016 period.
Termination of affiliate arrangements—The $5.5 million expense was primarily related to the redemption of unvested Class B units at the estimated value per sharereflect EBITDAre on the datesame basis.
•Equity Market Capitalization—We calculate equity market capitalization as the total dollar value of termination, that had been earned by our former advisor for historical asset management services (see Note 9 to the consolidated financial statements).all outstanding shares.
Acquisition expenses—The $0.7 million decrease•Nareit FFO—Nareit defines FFO as net income (loss) computed in acquisition expenses was attributed to the implementationaccordance with GAAP, excluding: (i) gains (or losses) from sales of ASU 2017-01 on January 1, 2017, which caused us to capitalize most acquisition-related costs. For a more detailed discussion of this adoption, see Note 4 to the consolidated financial statements.
Depreciationproperty and amortization—The $2.1 million increasegains (or losses) from change in control; (ii) depreciation and amortization included a $2.8 million increase related to owning more propertiesreal estate; (iii) impairment losses on real estate and impairments of in-substance real estate investments in investees that are driven by measurable decreases in the fair value of the depreciable real estate held by the unconsolidated partnerships and joint ventures; and (iv) adjustments for unconsolidated partnerships and joint ventures, calculated to reflect FFO on the entire three months ended September 30, 2017, than the comparable 2016 period. This was offset bysame basis. We calculate Nareit FFO in a $0.4 million decrease due to the disposition of a property in December 2016, as well as a $0.4 million decrease among same-center properties that was primarily attributed to certain intangible lease assets becoming fully amortized.
Interest expense, net—The $2.1 million increase in interest expense was primarily due to additional borrowings since September 2016, offset by a decrease in amortization of loan closing costs due to refinancing certain mortgages in September 2016.
Transaction expenses—The $3.7 million of transaction expenses resulted from costs incurred in connectionmanner consistent with the PELP transaction (see Note 3Nareit definition.
•Net Debt—We calculate net debt as total debt, excluding market adjustments and deferred financing expenses, less cash and cash equivalents.
•Net Debt to Adjusted EBITDAre—This ratio is calculated by dividing net debt by Adjusted EBITDAre (included on an annualized basis within the consolidated financial statements), primarily third-party professional fees, such as accounting, legal, tax, financial advisor,calculation). It provides insight into our leverage rate based on earnings and consulting fees, and fees associated with obtaining debt consents necessary to complete the transaction.
Summary of Operating Activities for the Nine Months Ended September 30, 2017 and 2016
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| | | | | | | | | | | | | | | |
| | | | | | Favorable (Unfavorable) Change |
(In thousands, except per share amounts) | | 2017 | | 2016 | | $ | | % |
Operating Data: | | | | | | | | |
Total revenues | | $ | 208,778 |
| | $ | 191,405 |
| | $ | 17,373 |
| | 9.1 | % |
Property operating expenses | | (32,611 | ) | | (29,978 | ) | | (2,633 | ) | | (8.8 | )% |
Real estate tax expenses | | (31,136 | ) | | (27,745 | ) | | (3,391 | ) | | (12.2 | )% |
General and administrative expenses | | (25,438 | ) | | (23,736 | ) | | (1,702 | ) | | (7.2 | )% |
Termination of affiliate arrangements | | (5,454 | ) | | — |
| | (5,454 | ) | | NM |
|
Acquisition expenses | | (466 | ) | | (2,392 | ) | | 1,926 |
| | 80.5 | % |
Depreciation and amortization | | (84,481 | ) | | (78,266 | ) | | (6,215 | ) | | (7.9 | )% |
Interest expense, net | | (28,537 | ) | | (23,837 | ) | | (4,700 | ) | | (19.7 | )% |
Transaction expenses | | (9,760 | ) | | — |
| | (9,760 | ) | | NM |
|
Other income (expense), net | | 642 |
| | (125 | ) | | 767 |
| | NM |
|
Net (loss) income | | (8,463 | ) | | 5,326 |
| | (13,789 | ) | | NM |
|
Net loss (income) attributable to noncontrolling interests | | 144 |
| | (83 | ) | | 227 |
| | NM |
|
Net (loss) income attributable to stockholders | | $ | (8,319 | ) | | $ | 5,243 |
| | $ | (13,562 | ) | | NM |
|
| | | | | | | | |
Net (loss) income per share—basic and diluted | | $ | (0.05 | ) | | $ | 0.03 |
| | $ | (0.08 | ) | |
|
Below are explanations of the significantis not impacted by fluctuations in the resultsour equity price.
•Net Debt to Total Enterprise Value—This ratio is calculated by dividing net debt by total enterprise value. It provides insight into our capital structure and usage of operations for the nine months ended September 30, 2017 and 2016:debt.
Total revenues—Of the $17.4 million increase in total revenues, $16.4 million was related to non-same-center properties. Of the $16.4 million increase, $19.3 million was related to acquisitions, offset by a decrease of $2.9 million related to redevelopment and disposed properties. The remaining $1.0 million increase was attributed to same-center properties, which was primarily driven by a $0.17 increase in minimum rent per square foot and a 0.7% increase in occupancy since September 30, 2016.
Property operating expenses—The $2.6 million increase in property operating expenses was primarily related to owning more properties for the nine months ended September 30, 2017, than the comparable 2016 period.
Real estate tax expenses—The $3.4 million increase in real estate tax expenses was due to having more properties in our portfolio for the nine months ended September 30, 2017, than the comparable 2016 period.
General and administrative expenses—The $1.7 million increase in general and administrative expenses was primarily attributed to an increase in asset management fees related to owning more properties for the nine months ended September 30, 2017, than the comparable 2016 period.
Termination of affiliate arrangements—The $5.5 million expense was primarily related to the redemption of unvested Class B units at the estimated value per share on the date of termination, that had been earned by our former advisor for historical asset management services (see Note 9 to the consolidated financial statements).
Acquisition expenses—The $1.9 million decrease in acquisition expenses was attributed to the implementation of ASU 2017-01 on January 1, 2017, which caused us to capitalize most acquisition-related costs. For a more detailed discussion of this adoption, see Note 4 to the consolidated financial statements.
Depreciation and amortization—The $6.2 million increase in depreciation and amortization included an $8.3 million increase related to owning more properties for the nine months ended September 30, 2017, than the comparable 2016 period. This was offset by a $1.2 million decrease due to the disposition of a property in December 2016, as well as a $1.1 million decrease that was primarily attributed to certain intangible lease assets becoming fully amortized.
Interest expense, net—The $4.7 million increase in interest expense was primarily due to additional borrowings since September 2016, offset by a decrease from refinancing certain mortgages and improving the associated interest rate.
Transaction expenses—The $9.8 million of transaction expenses resulted from costs incurred in connection with the PELP transaction (see Note 3 to the consolidated financial statements), primarily third-party professional fees, such as accounting, legal, tax, financial advisor, and consulting fees, and fees associated with obtaining debt consents necessary to complete the transaction.
Other income (expense), net—Other income increased $0.8 million primarily due to gains from the sale of land at two of our properties.
Leasing Activity
The average rent per square foot and cost of executing leases fluctuates based on the tenant mix, size of the space, and lease term. Leases with national and regional tenants generally require a higher cost per square foot than those with local tenants. However, such tenants will also execute leases for a longer term. As we continue to attract more of these national and regional tenants, our costs to lease may increase.
Below is a summary of leasing activity for the three months ended September 30, 2017 and 2016: |
| | | | | | | | | | | | | | | | |
| | Total Deals | | Inline Deals(1) |
| | 2017 | | 2016 | | 2017 | | 2016 |
New leases: | | | | | | | | |
Number of leases | | 35 |
| | 35 |
| | 34 |
| | 32 |
|
Square footage (in thousands) | | 91 |
| | 184 |
| | 70 |
| | 77 |
|
First-year base rental revenue (in thousands) | | $ | 1,380 |
| | $ | 2,325 |
| | $ | 1,186 |
| | $ | 1,219 |
|
Average rent per square foot (“PSF”) | | $ | 15.24 |
| | $ | 12.62 |
| | $ | 16.92 |
| | $ | 15.87 |
|
Average cost PSF of executing new leases(2)(3) | | $ | 21.31 |
| | $ | 19.83 |
| | $ | 19.01 |
| | $ | 29.78 |
|
Weighted average lease term (in years) | | 6.9 |
| | 8.5 |
| | 5.9 |
| | 7.3 |
|
Renewals and options: | | | | | | | | |
Number of leases | | 84 |
| | 93 |
| | 79 |
| | 86 |
|
Square footage (in thousands) | | 482 |
| | 555 |
| | 138 |
| | 168 |
|
First-year base rental revenue (in thousands) | | $ | 5,285 |
| | $ | 5,806 |
| | $ | 2,959 |
| | $ | 3,367 |
|
Average rent PSF | | $ | 10.96 |
| | $ | 10.46 |
| | $ | 21.42 |
| | $ | 20.06 |
|
Average rent PSF prior to renewals | | $ | 10.24 |
| | $ | 9.65 |
| | $ | 19.24 |
| | $ | 17.78 |
|
Percentage increase in average rent PSF | | 7.0 | % | | 8.4 | % | | 11.3 | % | | 12.9 | % |
Average cost PSF of executing renewals and options(2)(3) | | $ | 2.11 |
| | $ | 1.68 |
| | $ | 4.66 |
| | $ | 3.51 |
|
Weighted average lease term (in years) | | 5.3 |
| | 4.9 |
| | 5.4 |
| | 4.9 |
|
Portfolio retention rate(4) | | 91.9 | % | | 89.2 | % | | 87.2 | % | | 81.0 | % |
| |
(1)
| We consider an inline deal to be a lease for less than 10,000 square feet of gross leasable area (“GLA”). |
| |
(2)
| The cost of executing new leases, renewals, and options includes leasing commissions, tenant improvement costs, and tenant concessions. |
| |
(3)
| The costs associated with landlord improvements are excluded for repositioning and redevelopment projects. |
| |
(4)
| The portfolio retention rate is calculated by dividing (a) total square feet of retained tenants with current period lease expirations by (b) the square feet of leases expiring during the period. |
Below is a summary of leasing activity for the nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | | |
| | Total Deals | | Inline Deals |
| | 2017 | | 2016 | | 2017 | | 2016 |
New leases: | | | | | | | | |
Number of leases | | 127 |
| | 124 |
| | 123 |
| | 118 |
|
Square footage (in thousands) | | 328 |
| | 512 |
| | 265 |
| | 296 |
|
First-year base rental revenue (in thousands) | | $ | 5,563 |
| | $ | 6,756 |
| | $ | 5,040 |
| | $ | 4,808 |
|
Average rent PSF | | $ | 16.97 |
| | $ | 13.20 |
| | $ | 18.99 |
| | $ | 16.22 |
|
Average cost PSF of executing new leases | | $ | 29.00 |
| | $ | 24.10 |
| | $ | 30.43 |
| | $ | 32.16 |
|
Weighted average lease term (in years) | | 7.8 |
| | 8.0 |
| | 7.2 |
| | 7.3 |
|
Renewals and options: | | | | | | | | |
Number of leases | | 254 |
| | 238 |
| | 236 |
| | 222 |
|
Square footage (in thousands) | | 1,288 |
| | 1,313 |
| | 465 |
| | 435 |
|
First-year base rental revenue (in thousands) | | $ | 17,751 |
| | $ | 14,224 |
| | $ | 10,621 |
| | $ | 9,057 |
|
Average rent PSF | | $ | 13.78 |
| | $ | 10.84 |
| | $ | 22.86 |
| | $ | 20.82 |
|
Average rent PSF prior to renewals | | $ | 12.73 |
| | $ | 9.87 |
| | $ | 20.44 |
| | $ | 18.33 |
|
Percentage increase in average rent PSF | | 8.2 | % | | 9.8 | % | | 11.8 | % | | 13.6 | % |
Average cost PSF of executing renewals and options | | $ | 2.68 |
| | $ | 2.30 |
| | $ | 5.03 |
| | $ | 4.30 |
|
Weighted average lease term (in years) | | 5.1 |
| | 5.3 |
| | 5.3 |
| | 5.2 |
|
Portfolio retention rate | | 92.9 | % | | 89.9 | % | | 88.1 | % | | 81.9 | % |
Non-GAAP Measures
Same-Center Net Operating Income
•NOI—We present Same-Center Net Operating Income (“Same-Center NOI”) as a supplemental measure of our performance. We define Net Operating Income (“NOI”)calculate NOI as total operating revenues, adjusted to exclude lease buy-out income and non-cash revenue items, less property operating expenses and real estate taxes. Same-Center NOI represents the NOI for the 137 properties that were owned and operational for the entire portion of both comparable reporting periods, except for the nine properties we currently classify as redevelopment. While there is judgment surrounding changes in designations, once a redevelopment property has stabilized, it is typically moved to the same-center pool the following year.
We believe that NOI and Same-Center NOI provide useful information to our investorsprovides insight about our financial and operating performance because eachit provides a performance measure of the revenues and expenses directly involved in owning and operating real estate assets and provides a perspective not immediately apparent from net income (loss). Because Same-Center NOI
•Same-Center—We use this term to refer to a property, or portfolio of properties, that has been owned and operational for the entirety of each reporting period (i.e., since January 1, 2020).
•Total Enterprise Value—We calculate total enterprise value as our net debt plus our equity market capitalization on a fully diluted basis.
We are a REIT and one of the nation’s largest owners and operators of omni-channel grocery-anchored neighborhood and community shopping centers. The majority of our revenue is lease revenue derived from our real estate investments. Additionally, we operate an investment management business providing property management and advisory services to over $460 million of unconsolidated joint ventures. This business provides comprehensive real estate and asset management services to the Managed Funds.
As of June 30, 2021, we wholly-owned 272 real estate properties. Additionally, we owned a 14% interest in GRP I, a joint venture that owned 20 properties, and a 20% interest in NRP, a joint venture that owned two properties.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 22 |
RECAPITALIZATION—On June 18, 2021, our stockholders approved Articles of Amendment that effected the Recapitalization, wherein each share of our common stock outstanding at the time the amendment became effective was converted into one share of a newly created class of Class B common stock. The Articles of Amendment became effective upon filing with, and acceptance by, the State Department of Assessments and Taxation of Maryland on July 2, 2021. Unless otherwise indicated, all information in this Form 10-Q disclosure gives effect to the Recapitalization and references to “shares” and per share metrics refer to our common stock and Class B common stock, collectively (Note 9).
REVERSE STOCK SPLIT—On July 2, 2021, our Board approved an amendment to our articles of incorporation to effect a one-for-three reverse stock split. Concurrent with the reverse split, the Operating Partnership enacted a one-for-three reverse split of its outstanding OP units. Unless otherwise indicated, the information in this Form 10-Q gives effect to the reverse stock and OP unit splits (Note 9).
UNDERWRITTEN INITIAL PUBLIC OFFERING—On July 19, 2021, we closed our underwritten IPO, through which we offered 17.0 million shares of a new class of common stock, $0.01 par value per share, at an initial price of $28.00 per share, pursuant to a registration statement filed with the SEC on Form S-11 (File No. 333-255846), as amended. These shares are listed on the Nasdaq Global Select Market under the trading symbol “PECO”. The underwriters have since exercised a 30-day option to purchase additional shares of common stock to cover overallotments, and, accordingly, on August 2, 2021 we settled the sale of an additional 2.55 million shares, with gross proceeds to us of $71.4 million.
On August 4, 2021, as a result of our underwritten IPO, our Board approved the termination of the DRIP and the SRP. The DRIP has been suspended since April 2021. The SRP, which was limited to repurchases resulting from the DDI of stockholders, has been suspended since March 2021, and the SRP for standard repurchases had been suspended since August 2019.
COVID-19 STRATEGY—During 2020, as a result of the COVID-19 pandemic, many state governments issued “stay-at-home” mandates that generally limited travel and movement of the general public to essential activities only and required all non-essential businesses to close.
Our management team determined the following were the key actions for recovery in our portfolio (all statistics are approximate and include the prorated portion attributable to properties owned through our joint ventures):
•Returning to Monthly Payments—We continue to work with our Neighbors to resume normal monthly rent payments, and our efforts have included raising awareness of the benefits available through numerous governmental relief programs. We have seen our collections continue to improve from the second quarter of 2020. The following table summarizes our collections by quarter, as they were originally reported as well as updated for payments received subsequent to the month billed:
| | | | | | | | | | | |
| Originally Reported | | Current(1) |
Q2 2020 | 86 | % | | 93 | % |
Q3 2020 | 94 | % | | 96 | % |
Q4 2020 | 95 | % | | 97 | % |
Q1 2021 | 95 | % | | 98 | % |
Q2 2021 | N/A | | 98 | % |
(1)Including collections received through July 20, 2021.
As of July 20, 2021, approximately 95% of our Neighbor spaces are paying their rent in full.
•Recovering Missed Rent Charges—We believe substantially all Neighbors, including those that were required to temporarily close under governmental mandates, are contractually obligated to continue with their rent payments as documented in our lease agreements with them. However, we decided to negotiate relief for a small subset of our Neighbors in the form of rent deferrals or abatements. As of July 20, 2021, we have $5.3 million of outstanding payment plans with our Neighbors, and we had recorded rent abatements of approximately $0.7 million during 2021, related to 2021 missed rental income. These payment plans and rent abatements represented approximately 2.0% and 0.3% of portfolio rental income for the six months ended June 30, 2021, respectively. As of July 20, 2021, approximately 54% of payments are scheduled to be received by December 31, 2021 for all executed payment plans, and the weighted-average term over which we expect to receive remaining amounts owed on executed payment plans is approximately twelve months.
We are still actively pursuing past due amounts under the terms negotiated with our Neighbors. For our entire portfolio, inclusive of our prorated share of properties owned through joint ventures, 69% of the missed monthly charges billed during the first and second quarters of 2021 have since been collected, and 5% have been waived, as of July 20, 2021, bringing both Q1 and Q2 2021 collections to 98%. We will continue to work with Neighbors on establishing plans to repay past due amounts, and will monitor the impact of such payment plans on our results of operations in future quarters. We cannot guarantee that we will ultimately be able to collect these amounts.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 23 |
•Monitoring for Credit Risk—The COVID-19 pandemic and resulting economic downturn has increased the uncertainty of collecting rents from a number of our Neighbors. We have been closely monitoring the status of our Neighbors to identify those who potentially pose a credit risk in order to appropriately account for the impact to revenue and in order to quickly take action when a Neighbor is ultimately unable to remain in a space.
For Neighbors with a higher degree of uncertainty as to their creditworthiness, we may not record revenue for amounts billed until the cash is received. Based on our analysis, no individual Neighbor category has been accounted for entirely on a cash basis as of June 30, 2021 or throughout the pandemic; however, we continue to evaluate each Neighbor individually to determine if they should be accounted for on a cash basis. For the three months ended June 30, 2021, inclusive of the prorated portion attributable to properties owned through our joint ventures, we had $1.3 million in net favorable monthly revenue adjustments for Neighbors who are being accounted for on a cash basis. For the six months ended June 30, 2021, we had $3.6 million in net unfavorable monthly revenue adjustments for Neighbors who are being accounted for on a cash basis. For the three and six months ended June 30, 2020, inclusive of the prorated portion attributable to properties owned through our joint ventures, we had $12.1 million and $15.0 million, respectively, in net unfavorable monthly revenue adjustments for Neighbors who are being accounted for on a cash basis. As of June 30, 2021, our Neighbors currently being accounted for on a cash basis represented approximately 8% of our total Neighbor spaces, or approximately 7.4% of portfolio ABR. Further, many of our Neighbors who are on a cash basis of accounting are actively making payments toward their outstanding balances. When considering the ABR associated with Neighbors who are currently on a cash basis of accounting, 76% of this ABR is represented by Neighbors who are actively making payments.
Additionally, certain of our Neighbors have entered into bankruptcy proceedings. While some of these cases have already been resolved, with the assumption or rejection of the lease already reflected in our results, in some cases these claims have yet to be resolved, and as such, the potential fallout is not yet reflected in our occupancy rate or ABR metrics. We believe that Neighbors in the bankruptcy process represent an exposure of less than 1% of our total portfolio ABR as of June 30, 2021. We have included our assessment of the impact of these bankruptcies in our estimate of rent collectibility, which impacted recorded revenue, as noted previously.
Certain of our Neighbors have been unable to remain in their spaces as a result of the factors previously noted. Despite this fallout, our leasing activity has been strong as demand for space in our centers remains high, allowing us to re-lease these spaces to Neighbors who may increase our concentration of necessity-based and omni-channel retailers. For the three and six months ended June 30, 2021, our wholly-owned portfolio retention rate was 85.5% and 87.2%, respectively. Additionally, for the three and six months ended June 30, 2021, for our wholly-owned portfolio, we executed 124 and 277 new leases, respectively, each an increase as compared to the same period a year ago.
PORTFOLIO AND LEASING STATISTICS—Below are statistical highlights of our wholly-owned portfolio as of June 30, 2021 and 2020 (dollars and square feet in thousands):
| | | | | | | | | | | |
| June 30, 2021 | | June 30, 2020 |
Number of properties | 272 | | | 284 | |
Number of states | 31 | | | 31 | |
Total square feet | 30,778 | | | 31,787 | |
ABR | $ | 384,916 | | | $ | 385,696 | |
% ABR from omni-channel grocery-anchored shopping centers | 96.0 | % | | 97.0 | % |
Leased % of rentable square feet: | | | |
Total portfolio spaces | 94.7 | % | | 95.6 | % |
Anchor spaces | 96.8 | % | | 98.3 | % |
Inline spaces | 90.6 | % | | 90.3 | % |
Average remaining lease term (in years)(1) | 4.5 | | | 4.6 | |
(1)The average remaining lease term in years excludes future options to extend the term of the lease.
The following table details information for our joint ventures as of June 30, 2021, which is the basis for determining the prorated information included in the subsequent tables (dollars and square feet in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 |
Joint Venture | Ownership Percentage | | Number of Properties | | ABR | | GLA |
Grocery Retail Partners I | 14% | | 20 | | | $ | 29,339 | | | 2,211 | |
Necessity Retail Partners | 20% | | 2 | | | 3,989 | | | 228 | |
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 24 |
LEASE EXPIRATIONS—The following chart shows the aggregate scheduled lease expirations, excluding our Neighbors who are occupying space on a temporary basis, after June 30, 2021 for each of the next ten years and thereafter for our wholly-owned properties and the prorated portion of those owned through our joint ventures:
Our ability to create rental rate growth generally depends on our leverage during new and renewal lease negotiations with prospective and existing Neighbors, which typically occurs when occupancy at our centers is high or during periods of economic growth and recovery. Conversely, we may experience rental rate decline when occupancy at our centers is low or during periods of economic recession, as the leverage during new and renewal lease negotiations may shift to prospective and existing Neighbors.
See “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Leasing Activity” of this filing on Form 10-Q for further discussion of leasing activity.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 25 |
PORTFOLIO TENANCY—We define national Neighbors as those Neighbors that operate in at least three states. Regional Neighbors are defined as those Neighbors that have at least three locations in fewer than three states. The following charts present the composition of our portfolio, including our wholly-owned properties and the prorated portion of those owned through our joint ventures, by Neighbor type as of June 30, 2021:
The following charts present the composition of our portfolio by Neighbor industry as of June 30, 2021:
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 26 |
We define “Necessity-based goods and services” as goods and services that are indispensable, necessary, or common for day-to-day living, or that tend to be inelastic (i.e., those for which the demand does not change based on a consumer’s income level). We estimate that approximately 73% of our ABR, including the pro rata portion attributable to properties owned through our joint ventures, is from Neighbors providing necessity-based goods and services. Additionally, within these categories, we estimate that approximately 50% of our ABR is from retail and service businesses generally deemed essential under most state and local mandates issued in response to the COVID-19 pandemic. The composition of our portfolio as a percentage of ABR is as follows:
| | | | | |
| June 30, 2021 |
Essential/Necessity Retail and Services: | |
Grocery | 35.4 | % |
Medical/pharmacy | 2.7 | % |
Banks | 2.4 | % |
Dollar stores | 2.2 | % |
Pet supply | 1.9 | % |
Hardware/automotive | 1.7 | % |
Wine, beer, and liquor | 1.4 | % |
Other essential | 2.7 | % |
Total Essential/Necessity-based retail and services(1) | 50.4 | % |
Other Necessity: | |
Quick service - restaurant | 9.7 | % |
Beauty and hair care | 4.9 | % |
Health care services | 4.0 | % |
Other necessity | 3.5 | % |
Total ABR from other Necessity | 22.1 | % |
| |
Total ABR from Necessity-based goods and services | 72.5 | % |
| |
Other Retail Stores: | |
Soft goods(2) | 12.4 | % |
Full service - restaurant | 6.4 | % |
Fitness and lifestyle services(3) | 5.2 | % |
Other retail(4) | 3.5 | % |
Total ABR from other retail and services | 27.5 | % |
Total ABR | 100.0 | % |
(1)Includes Neighbors that we believe are considered to be essential retail and service businesses but that may have temporarily closed at various points during the COVID-19 pandemic due to decreases in foot traffic and customer patronage as a result of “stay-at-home” mandates and social distancing guidelines implemented in response to the pandemic.
(2)Includes ABR contributions of 2% from each of apparel/shoes/accessories, department stores, and home furnishings Neighbors.
(3)Includes ABR contribution of 3% from fitness Neighbors.
(4)Includes ABR contribution of 1% from entertainment Neighbors.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 27 |
The following table presents our top twenty Neighbors by ABR, including our wholly-owned properties and the prorated portion of those owned through our joint ventures, as of June 30, 2021 (dollars and square feet in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Neighbor(1) | ABR | | % of ABR | | Leased Square Feet | | % of Leased Square Feet | | Number of Locations(2) |
Kroger | $ | 25,804 | | | 6.6 | % | | 3,244 | | | 11.0 | % | | 59 | |
Publix | 22,032 | | | 5.7 | % | | 2,241 | | | 7.6 | % | | 56 | |
Ahold Delhaize | 17,323 | | | 4.4 | % | | 1,240 | | | 4.2 | % | | 23 | |
Albertsons-Safeway | 16,804 | | | 4.3 | % | | 1,599 | | | 5.4 | % | | 29 | |
Walmart | 8,933 | | | 2.3 | % | | 1,770 | | | 6.0 | % | | 13 | |
Giant Eagle | 7,293 | | | 1.9 | % | | 738 | | | 2.5 | % | | 11 | |
TJX Companies | 5,060 | | | 1.3 | % | | 428 | | | 1.5 | % | | 15 | |
Sprouts Farmers Market | 5,000 | | | 1.3 | % | | 334 | | | 1.1 | % | | 11 | |
Raley's | 3,884 | | | 1.0 | % | | 253 | | | 0.9 | % | | 4 | |
Dollar Tree | 3,628 | | | 0.9 | % | | 370 | | | 1.3 | % | | 39 | |
SUPERVALU | 3,209 | | | 0.8 | % | | 336 | | | 1.1 | % | | 5 | |
Subway Group | 2,731 | | | 0.7 | % | | 111 | | | 0.4 | % | | 79 | |
Anytime Fitness, Inc. | 2,623 | | | 0.7 | % | | 171 | | | 0.6 | % | | 35 | |
Schnucks | 2,545 | | | 0.7 | % | | 249 | | | 0.8 | % | | 4 | |
Southeastern Grocers | 2,514 | | | 0.6 | % | | 281 | | | 1.0 | % | | 7 | |
Lowe's | 2,469 | | | 0.6 | % | | 369 | | | 1.3 | % | | 4 | |
Kohl's Corporation | 2,241 | | | 0.6 | % | | 365 | | | 1.2 | % | | 4 | |
Food 4 Less (PAQ) | 2,215 | | | 0.6 | % | | 119 | | | 0.4 | % | | 2 | |
Save Mart | 2,174 | | | 0.6 | % | | 258 | | | 0.9 | % | | 5 | |
Petco Animal Supplies, Inc. | 2,118 | | | 0.5 | % | | 127 | | | 0.3 | % | | 11 | |
Total | $ | 140,600 | | | 36.1 | % | | 14,603 | | | 49.5 | % | | 416 | |
(1)Neighbors are grouped by parent company and may represent multiple subsidiaries and banners.
(2)Number of locations excludes auxiliary leases with grocery anchors such as fuel stations, pharmacies, and liquor stores. Additionally, in the event that a parent company has multiple subsidiaries or banners in a single shopping center, those subsidiaries are included as one location.
KNOWN TRENDS AND UNCERTAINTIES OF THE COVID-19 PANDEMIC—The COVID-19 pandemic has resulted in reduced revenues beginning with the second quarter of 2020 and continuing through the second quarter of 2021, and our estimates around collectibility will likely continue to create volatility in our earnings. The total impact on revenue in the future cannot be determined at this time. The duration of the pandemic and mitigating measures, and the resulting economic impact, has caused some of our Neighbors to permanently vacate their spaces and/or not renew their leases, and we may have difficulty leasing these spaces on the same or better terms or at all, and/or incur additional costs to lease vacant spaces, which may reduce our occupancy rates in the future and ultimately reduce our revenue. Extended periods of vacancy or reduced revenues may trigger impairments of our real estate assets.
We believe that our investment focus on grocery-anchored shopping centers that provide daily necessities has helped and will continue to help lessen the negative effect of the pandemic on our business compared to non-grocery anchored shopping centers.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 28 |
SUMMARY OF OPERATING ACTIVITIES FOR THE THREE MONTHS ENDED JUNE 30, 2021 AND 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Favorable (Unfavorable) Change |
(Dollars in thousands) | | 2021 | | 2020 | | $ | | %(1) |
Revenues: | | | | | | | | |
Rental income | | $ | 130,335 | | | $ | 115,654 | | | $ | 14,681 | | | 12.7 | % |
Fee and management income | | 2,374 | | | 2,760 | | | (386) | | | (14.0) | % |
Other property income | | 361 | | | 626 | | | (265) | | | (42.3) | % |
Total revenues | | 133,070 | | | 119,040 | | | 14,030 | | | 11.8 | % |
Operating Expenses: | | | | | | | | |
Property operating expenses | | 21,974 | | | 19,629 | | | (2,345) | | | (11.9) | % |
Real estate tax expenses | | 16,814 | | | 16,453 | | | (361) | | | (2.2) | % |
General and administrative expenses | | 11,937 | | | 9,806 | | | (2,131) | | | (21.7) | % |
Depreciation and amortization | | 56,587 | | | 56,370 | | | (217) | | | (0.4) | % |
Impairment of real estate assets | | 1,056 | | | — | | | (1,056) | | | NM |
Total operating expenses | | 108,368 | | | 102,258 | | | (6,110) | | | (6.0) | % |
Other: | | | | | | | | |
Interest expense, net | | (19,132) | | | (22,154) | | | 3,022 | | | 13.6 | % |
Gain (loss) on disposal of property, net | | 3,744 | | | (541) | | | 4,285 | | | NM |
Other expense, net | | (2,924) | | | (500) | | | (2,424) | | | NM |
Net income (loss) | | 6,390 | | | (6,413) | | | 12,803 | | | NM |
Net (income) loss attributable to noncontrolling interests | | (796) | | | 825 | | | (1,621) | | | NM |
Net income (loss) attributable to stockholders | | $ | 5,594 | | | $ | (5,588) | | | $ | 11,182 | | | NM |
(1)Line items that result in a percent change that exceed certain limitations are considered not meaningful (“NM”) and indicated as such.
Our basis for analyzing significant fluctuations in our results of operations generally includes review of the results of our same-center portfolio, non-same-center portfolio, and revenues and expenses from our management activities. We define our same-center portfolio as the 268 properties that were owned and operational prior to January 1, 2020. We define our non-same-center portfolio as those properties that were not fully owned and operational in both periods owing to real estate asset activity occurring after December 31, 2019, which includes 19 properties disposed of and four properties acquired. Below are explanations of the significant fluctuations in the results of operations for the three months ended June 30, 2021 and 2020:
Rental Income increased $14.7 million as follows:
•$15.5 million increase related to our same-center portfolio primarily as follows:
▪$16.0 million increase primarily due to stronger collections in 2021 as compared with lower collections in 2020, the increase owing largely to the ongoing recovery of our portfolio in the wake of the COVID-19 pandemic and its economic impact, including a decrease in Neighbors we have identified as a credit risk as well as collections on charges that were uncollected in 2020;
▪$0.5 million increase primarily due to a $0.57 increase in average minimum rent per square foot, partially offset by a 0.8% decrease in average economic occupancy; and
▪$1.0 million decrease attributable to lower recoveries from a lower recovery rate and lower economic occupancy.
•$0.8 million decrease primarily related to our net disposition of 15 properties.
Property Operating Expenses increased$2.3 million as follows:
•$2.5 million increase related to our same-center portfolio and corporate operating activities, owing largely to lower expense for performance-based compensation during 2020 as a result of the COVID-19 pandemic, as compared to 2021; and
•$0.2 million decrease related to our net disposition of 15 properties.
General and Administrative Expenses increased $2.1 million as follows:
•$3.4 million increase owing largely to lower expense for performance-based compensation during 2020 as a result of the COVID-19 pandemic, as compared to 2021;
•$0.8 million decrease primarily due to lower third-party consultant and custodial costs; and
•$0.5 million decrease related to expense reductions taken to reduce the impact of the COVID-19 pandemic, with the majority of these decreases related to overhead costs at our corporate offices.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 29 |
Impairment of Real Estate Assets:
•The $1.1 million increase in impairment of real estate assets was due to assets that are actively being marketed for sale at a disposition price that was less than the carrying value. Proceeds from dispositions will be used to fund tax-efficient acquisitions, to fund redevelopment opportunities in owned centers, and for general corporate purposes. We continue to sell non-core assets and may potentially recognize impairments in future quarters.
Interest Expense, Net:
•The $3.0 million decrease during the three months ended June 30, 2021 as compared to the same period in 2020 was due to: (i) lower borrowings as a result of early repayments of debt; (ii) the repayment of our draw on the revolver during the second quarter of 2020; and (iii) lower interest rates due to the decrease in LIBOR and expiring interest rate swaps. Interest Expense, Net was comprised of the following (dollars in thousands):
| | | | | | | | | | | |
| Three Months Ended June 30, |
| 2021 | | 2020 |
Interest on revolving credit facility, net | $ | 207 | | $ | 979 |
Interest on term loans, net | 10,573 | | 11,685 |
Interest on secured debt | 6,246 | | 7,316 |
Loss on extinguishment of debt | 419 | | — |
Non-cash amortization and other | 1,687 | | 2,174 |
Interest expense, net | $ | 19,132 | | $ | 22,154 |
| | | |
Weighted-average interest rate as of end of period | 2.9 | % | | 3.1 | % |
Weighted-average term (in years) as of end of period | 3.7 | | 4.5 |
Gain (Loss) on Disposal of Property, Net:
•The $4.3 million change was primarily related to the sale of seven properties with a net gain (in addition to other property-related miscellaneous disposals and write-offs) of $3.7 million during the three months ended June 30, 2021, as compared to the sale of one property (as well as other property-related miscellaneous disposals and write-offs) with a net loss of $0.5 million during the three months ended June 30, 2020 (see Note 4).
Other Expense, Net:
•The $2.4 million increase was largely due to the change in the fair value of our earn-out liability as a result of general improving market conditions. Other Expense, Net was comprised of the following (dollars in thousands):
| | | | | | | | | | | |
| Three Months Ended June 30, |
| 2021 | | 2020 |
Change in fair value of earn-out liability | $ | (2,000) | | | $ | — | |
Equity in net income (loss) of unconsolidated joint ventures | 87 | | | (359) | |
Transaction and acquisition expenses | (934) | | | (14) | |
Federal, state, and local income tax expense | (165) | | | (180) | |
Other | 88 | | | 53 | |
Other expense, net | $ | (2,924) | | | $ | (500) | |
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 30 |
SUMMARY OF OPERATING ACTIVITIES FOR THE SIX MONTHS ENDED JUNE 30, 2021 AND 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | Favorable (Unfavorable) Change |
(Dollars in thousands) | | 2021 | | 2020 | | $ | | %(1) |
Revenues: | | | | | | | | |
Rental income | | $ | 257,958 | | | $ | 244,120 | | | $ | 13,838 | | | 5.7 | % |
Fee and management income | | 4,660 | | | 4,925 | | | (265) | | | (5.4) | % |
Other property income | | 833 | | | 1,518 | | | (685) | | | (45.1) | % |
Total revenues | | 263,451 | | | 250,563 | | | 12,888 | | | 5.1 | % |
Operating Expenses: | | | | | | | | |
Property operating expenses | | 44,176 | | | 41,391 | | | (2,785) | | | (6.7) | % |
Real estate tax expenses | | 33,387 | | | 33,565 | | | 178 | | | 0.5 | % |
General and administrative expenses | | 21,278 | | | 20,546 | | | (732) | | | (3.6) | % |
Depreciation and amortization | | 111,928 | | | 112,597 | | | 669 | | | 0.6 | % |
Impairment of real estate assets | | 6,056 | | | — | | | (6,056) | | | NM |
Total operating expenses | | 216,825 | | | 208,099 | | | (8,726) | | | (4.2) | % |
Other: | | | | | | | | |
Interest expense, net | | (39,195) | | | (44,929) | | | 5,734 | | | 12.8 | % |
Gain (loss) on disposal of property, net | | 17,585 | | | (2,118) | | | 19,703 | | | NM |
Other (expense) income, net | | (18,509) | | | 9,369 | | | (27,878) | | | NM |
Net income | | 6,507 | | | 4,786 | | | 1,721 | | | 36.0 | % |
Net income attributable to noncontrolling interests | | (810) | | | (605) | | | (205) | | | (33.9) | % |
Net income attributable to stockholders | | $ | 5,697 | | | $ | 4,181 | | | $ | 1,516 | | | 36.3 | % |
(1)Line items that result in a percent change that exceed certain limitations are considered not meaningful (“NM”) and indicated as such.
For details surrounding our basis for analyzing significant fluctuations in our results of operations as well as definitions related to our portfolio of real estate assets, please see the Summary of Operating Activities for the Three Months Ended June 30, 2021 and 2020 section above. Below are explanations of the significant fluctuations in the results of operations for the six months ended June 30, 2021 and 2020:
Rental Income increased $13.8 million as follows:
•$15.3 million increase related to our same-center portfolio primarily as follows:
▪$15.7 million increase primarily due to stronger collections in 2021 as compared with lower collections in 2020, the increase owing largely to the ongoing recovery of our portfolio in the wake of the COVID-19 pandemic and its economic impact, including a decrease in Neighbors we have identified as a credit risk as well as collections on charges that were uncollected in 2020; and
▪$0.2 million decrease primarily due to a 0.8% decrease in average economic occupancy, partially offset by a $0.55 increase in average minimum rent per square foot.
•$1.5 million decrease primarily related to our net disposition of 15 properties.
Property Operating Expenses increased $2.8 million primarily as follows:
•$2.9 million increase related to our same-center portfolio and corporate operating activities as follows:
▪$2.4 million increase owing largely to lower expense for performance-based compensation during 2020 as a result of the COVID-19 pandemic, as compared to 2021;
▪$0.6 million increase in insurance expenses owing to higher market rates and an increase in claims and claim development; and
▪ $0.1 million decrease primarily due to net reductions of controllable expenses at our properties.
•$0.2 million decrease related to our net disposition of 15 properties.
General and Administrative Expenses increased $0.7 million as follows:
•$4.3 million increase owing largely to lower expense for performance-based compensation during 2020 as a result of the COVID-19 pandemic, as compared to 2021;
•$1.6 million decrease primarily due to lower third-party consultant and custodial costs;
•$2.0 million decrease related to expense reductions taken to reduce the impact of the COVID-19 pandemic, with the majority of these decreases related to overhead costs at our corporate offices, as well as decreased travel and related costs.
| | | | | | | | | | | |
PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 31 |
Impairment of Real Estate Assets:
•The $6.1 million increase in impairment of real estate assets was due to assets that are actively being marketed for sale at a disposition price that was less than the carrying value. Proceeds from dispositions will be used to fund tax-efficient acquisitions, to fund redevelopment opportunities in owned centers, and for general corporate purposes. We continue to sell non-core assets and may potentially recognize impairments in future quarters.
Interest Expense, Net:
•The $5.7 million decrease during the six months ended June 30, 2021 as compared to the same period in 2020 was due to: (i) lower borrowings as a result of early repayments of debt; (ii) the repayment of our draw on the revolver during the second quarter of 2020; and (iii) lower interest rates due to the decrease in LIBOR and expiring interest rate swaps. Interest Expense, Net was comprised of the following (dollars in thousands):
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
Interest on revolving credit facility, net | $ | 435 | | $ | 1,195 |
Interest on term loans, net | 21,206 | | 24,416 |
Interest on secured debt | 13,026 | | 14,665 |
Loss on extinguishment of debt | 1,110 | | 73 |
Non-cash amortization and other | 3,418 | | 4,580 |
Interest expense, net | $ | 39,195 | | $ | 44,929 |
| | | |
Weighted-average interest rate as of end of period | 2.9 | % | | 3.1 | % |
Weighted-average term (in years) as of end of period | 3.7 | | 4.5 |
Gain (Loss) on Disposal of Property, Net:
•The $19.7 million changewas primarily related to the sale of thirteen properties and one outparcel (in addition to other miscellaneous property-related disposals and write-offs) with a net gain of $17.6 million during the six months ended June 30, 2021, as compared to the sale of four properties (as well as other property-related miscellaneous disposals and write-offs) with a net loss of $2.1 million during the six months ended June 30, 2020 (see Note 4).
Other (Expense) Income, Net:
•The $27.9 million change was largely due to the change in the fair value of our earn-out liability as a result of general improving market conditions. Other (Expense) Income, Net was comprised of the following (in thousands):
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
Change in fair value of earn-out liability | $ | (18,000) | | | $ | 10,000 | |
Equity in income (loss) of unconsolidated joint ventures | 801 | | | (639) | |
Transaction and acquisition expenses | (1,075) | | | (59) | |
Federal, state, and local income tax expense | (331) | | | (209) | |
Other | 96 | | | 276 | |
Other (expense) income, net | $ | (18,509) | | | $ | 9,369 | |
| | | | | | | | | | | |
PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 32 |
LEASING ACTIVITY—Below is a summary of leasing activity for our wholly-owned properties for the three months ended June 30, 2021 and 2020(1):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Deals | | Inline Deals |
| | 2021 | | 2020 | | 2021 | | 2020 |
New leases: | | | | | | | | |
Number of leases | | 124 | | | 61 | | | 121 | | | 58 | |
Square footage (in thousands) | | 341 | | | 197 | | | 278 | | | 159 | |
ABR (in thousands) | | $ | 6,338 | | | $ | 3,034 | | | $ | 5,816 | | | $ | 2,801 | |
ABR per square foot | | $ | 18.57 | | | $ | 15.38 | | | $ | 20.94 | | | $ | 17.59 | |
Cost per square foot of executing new leases | | $ | 31.01 | | | $ | 19.48 | | | $ | 29.30 | | | $ | 23.35 | |
Number of comparable leases | | 57 | | | 20 | | | 55 | | | 19 | |
Comparable rent spread | | 18.5 | % | | 15.5 | % | | 19.0 | % | | 15.9 | % |
Weighted-average lease term (in years) | | 7.2 | | | 6.1 | | | 6.8 | | | 7.2 | |
Renewals and options: | | | | | | | | |
Number of leases | | 174 | | | 108 | | | 159 | | | 95 | |
Square footage (in thousands) | | 1,049 | | | 975 | | | 333 | | | 209 | |
ABR (in thousands) | | $ | 12,895 | | | $ | 8,942 | | | $ | 7,306 | | | $ | 4,141 | |
ABR per square foot | | $ | 12.30 | | | $ | 9.17 | | | $ | 21.95 | | | $ | 19.81 | |
ABR per square foot prior to renewals | | $ | 11.55 | | | $ | 8.73 | | | $ | 20.08 | | | $ | 18.40 | |
Percentage increase in ABR per square foot | | 6.5 | % | | 5.0 | % | | 9.3 | % | | 7.7 | % |
Cost per square foot of executing renewals and options | | $ | 3.01 | | | $ | 1.62 | | | $ | 4.60 | | | $ | 3.69 | |
Number of comparable leases(2) | | 155 | | | 87 | | | 148 | | | 84 | |
Comparable rent spread(2) | | 8.0 | % | | 7.1 | % | | 9.4 | % | | 9.0 | % |
Weighted-average lease term (in years) | | 5.4 | | | 5.4 | | | 4.0 | | | 3.5 | |
Portfolio retention rate | | 85.5 | % | | 88.2 | % | | 79.5 | % | | 70.3 | % |
(1)Per square foot amounts may not recalculate exactly based on other amounts presented within the table due to rounding.
(2)Excludes exercise of options.
| | | | | | | | | | | |
PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 33 |
Below is a summary of leasing activity for our wholly-owned properties for the six months ended June 30, 2021 and 2020(1):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Deals | | Inline Deals |
| | 2021 | | 2020 | | 2021 | | 2020 |
New leases: | | | | | | | | |
Number of leases | | 277 | | | 148 | | | 268 | | | 135 | |
Square footage (in thousands) | | 808 | | | 579 | | | 619 | | | 339 | |
ABR (in thousands) | | $ | 14,458 | | | $ | 8,597 | | | $ | 12,421 | | | $ | 6,015 | |
ABR per square foot | | $ | 17.89 | | | $ | 14.84 | | | $ | 20.06 | | | $ | 17.72 | |
Cost per square foot of executing new leases | | $ | 28.51 | | | $ | 21.16 | | | $ | 28.00 | | | $ | 25.78 | |
Number of comparable leases | | 127 | | | 45 | | | 125 | | | 44 | |
Comparable rent spread | | 15.3 | % | | 10.8 | % | | 15.3 | % | | 10.7 | % |
Weighted-average lease term (in years) | | 7.7 | | | 8.2 | | | 6.5 | | | 6.8 | |
Renewals and options: | | | | | | | | |
Number of leases | | 337 | | | 235 | | | 306 | | | 208 | |
Square footage (in thousands) | | 2,027 | | | 1,714 | | | 645 | | | 458 | |
ABR (in thousands) | | $ | 24,367 | | | $ | 18,662 | | | $ | 14,375 | | | $ | 9,505 | |
ABR per square foot | | $ | 12.02 | | | $ | 10.89 | | | $ | 22.30 | | | $ | 20.75 | |
ABR per square foot prior to renewals | | $ | 11.27 | | | $ | 10.24 | | | $ | 20.54 | | | $ | 18.83 | |
Percentage increase in ABR per square foot | | 6.6 | % | | 6.7 | % | | 8.6 | % | | 12.2 | % |
Cost per square foot of executing renewals and options | | $ | 2.19 | | | $ | 3.41 | | | $ | 4.08 | | | $ | 4.36 | |
Number of comparable leases(2) | | 291 | | | 176 | | | 281 | | | 170 | |
Comparable rent spread(2) | | 8.0 | % | | 9.2 | % | | 8.7 | % | | 11.8 | % |
Weighted-average lease term (in years) | | 4.9 | | | 5.0 | | | 4.0 | | | 3.7 | |
Portfolio retention rate | | 87.2 | % | | 79.5 | % | | 79.9 | % | | 68.6 | % |
(1) Per square foot amounts may not recalculate exactly based on other amounts presented within the table due to rounding.
(2)Excludes exercise of options.
See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Key Performance Indicators and Defined Terms”of this filing on Form 10-Q for a discussion related to the following non-GAAP measures.
SAME-CENTER NET OPERATING INCOME—Same-Center NOI from properties acquired after December 31, 2015, and those considered redevelopment properties,is presented as a supplemental measure of our performance, as it highlights operating trends such as occupancy levels, rental rates, and operating costs on properties that were operational for both comparable periods.our Same-Center portfolio. Other REITs may use different methodologies for calculating Same-Center NOI, and accordingly, our Same-Center NOI may not be comparable to other REITs. For the three and six months ended June 30, 2021 and 2020, Same-Center NOI represents the NOI for the 268 properties that were wholly-owned and operational for the entire portion of both comparable periods.
Same-Center NOI should not be viewed as an alternative measure of our financial performance sinceas it does not reflect the operations of our entire portfolio, nor does it reflect the impact of general and administrative expenses, acquisition expenses, depreciation and amortization, interest expense, other income (expense), or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties that could materially impact our results from operations.
| | | | | | | | | | | |
PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 34 |
The table below is a comparison ofpresents our Same-Center NOI for the threecurrent period and nine months ended September 30, 2017,the comparable prior period (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Favorable (Unfavorable) | | Six Months Ended June 30, | | Favorable (Unfavorable) |
| 2021 | | 2020 | | $ Change | | % Change | | 2021 | | 2020 | | $ Change | | % Change |
Revenues: | | | | | | | | | | | | | | | |
Rental income(1) | $ | 91,305 | | | $ | 90,814 | | | $ | 491 | | | | | $ | 182,599 | | | $ | 182,852 | | | $ | (253) | | | |
Tenant recovery income | 27,250 | | | 30,197 | | | (2,947) | | | | | 57,851 | | | 60,980 | | | (3,129) | | | |
Reserves for uncollectibility(2) | 2,889 | | | (9,706) | | | 12,595 | | | | | 1,261 | | | (12,129) | | | 13,390 | | | |
Other property income | 284 | | | 600 | | | (316) | | | | | 756 | | | 1,465 | | | (709) | | | |
Total revenues | 121,728 | | | 111,905 | | | 9,823 | | | 8.8 | % | | 242,467 | | | 233,168 | | | 9,299 | | | 4.0 | % |
Operating expenses: | | | | | | | | | | | | | | | |
Property operating expenses | 17,504 | | | 16,495 | | | (1,009) | | | | | 36,614 | | | 34,562 | | | (2,052) | | | |
Real estate taxes | 16,519 | | | 16,038 | | | (481) | | | | | 32,749 | | | 33,182 | | | 433 | | | |
Total operating expenses | 34,023 | | | 32,533 | | | (1,490) | | | (4.6) | % | | 69,363 | | | 67,744 | | | (1,619) | | | (2.4) | % |
Total Same-Center NOI | $ | 87,705 | | | $ | 79,372 | | | $ | 8,333 | | | 10.5 | % | | $ | 173,104 | | | $ | 165,424 | | | $ | 7,680 | | | 4.6 | % |
(1)Excludes straight-line rental income, net amortization of above- and below-market leases, and lease buyout income.
(2)Includes billings that will not be recognized as revenue until cash is collected or the Neighbor resumes regular payments and/or we deem it appropriate to the three and nine months ended September 30, 2016 (in thousands):resume recording revenue on an accrual basis, rather than on a cash basis. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | $ Change | | % Change | | 2017 | | 2016 | | $ Change | | % Change |
Revenues: | | | | | | | | | | | | | | | |
Rental income(1) | $ | 42,621 |
| | $ | 41,797 |
| | $ | 824 |
| | | | $ | 127,588 |
| | $ | 124,664 |
| | $ | 2,924 |
| | |
Tenant recovery income | 13,620 |
| | 14,020 |
| | (400 | ) | | | | 41,337 |
| | 42,583 |
| | (1,246 | ) | | |
Other property income | 274 |
| | 195 |
| | 79 |
| | | | 615 |
| | 562 |
| | 53 |
| | |
Total revenues | 56,515 |
| | 56,012 |
| | 503 |
| | 0.9 | % | | 169,540 |
| | 167,809 |
| | 1,731 |
| | 1.0 | % |
Operating expenses: | | | | | | | | | | | | | | | |
Property operating expenses | 8,831 |
| | 8,813 |
| | 18 |
| | | | 26,563 |
| | 26,673 |
| | (110 | ) | | |
Real estate taxes | 8,179 |
| | 7,909 |
| | 270 |
| | | | 24,731 |
| | 24,774 |
| | (43 | ) | | |
Total operating expenses | 17,010 |
| | 16,722 |
| | 288 |
| | 1.7 | % | | 51,294 |
| | 51,447 |
| | (153 | ) | | (0.3 | )% |
Total Same-Center NOI | $ | 39,505 |
| | $ | 39,290 |
| | $ | 215 |
| | 0.5 | % | | $ | 118,246 |
| | $ | 116,362 |
| | $ | 1,884 |
| | 1.6 | % |
| |
(1)
| Excludes straight-line rental income, net amortization of above- and below-market leases, and lease buyout income. |
SAME-CENTER NOI RECONCILIATION—Below is a reconciliation of Net (loss) incomeIncome to NOI and Same-Center NOI for the three and nine months ended September 30, 2017 and 2016 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net income (loss) | $ | 6,390 | | | $ | (6,413) | | | $ | 6,507 | | | $ | 4,786 | |
Adjusted to exclude: | | | | | | | |
Fees and management income | (2,374) | | | (2,760) | | | (4,660) | | | (4,925) | |
Straight-line rental (income) expense(1) | (2,970) | | | 948 | | | (4,392) | | | (1,364) | |
Net amortization of above- and below-market leases | (887) | | | (795) | | | (1,725) | | | (1,583) | |
Lease buyout income | (1,781) | | | (214) | | | (2,578) | | | (308) | |
General and administrative expenses | 11,937 | | | 9,806 | | | 21,278 | | | 20,546 | |
Depreciation and amortization | 56,587 | | | 56,370 | | | 111,928 | | | 112,597 | |
Impairment of real estate assets | 1,056 | | | — | | | 6,056 | | | — | |
Interest expense, net | 19,132 | | | 22,154 | | | 39,195 | | | 44,929 | |
(Gain) loss on disposal of property, net | (3,744) | | | 541 | | | (17,585) | | | 2,118 | |
Other expense (income), net | 2,924 | | | 500 | | | 18,509 | | | (9,369) | |
Property operating expenses related to fees and management income | 1,306 | | | 891 | | | 2,122 | | | 1,528 | |
NOI for real estate investments | 87,576 | | | 81,028 | | | 174,655 | | | 168,955 | |
Less: Non-same-center NOI(2) | 129 | | | (1,656) | | | (1,551) | | | (3,531) | |
Total Same-Center NOI | $ | 87,705 | | | $ | 79,372 | | | $ | 173,104 | | | $ | 165,424 | |
(1)Includes straight-line rent adjustments for Neighbors for whom revenue is being recorded on a cash basis.
(2)Includes operating revenues and expenses from non-same-center properties which includes properties acquired or sold and corporate activities.
needs, including our ability to fund distributions. MFFOCore FFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate our business plan in the manner currently contemplated.
| | | | | | | | | | | |
(1)PHILLIPS EDISON & COMPANY
JUNE 30, 2021 FORM 10-Q | OP units and restricted stock awards were dilutive to FFO/MFFO for the three and nine months ended September 30, 2017 and 2016, and, accordingly, were included in the weighted average common shares used to calculate diluted FFO/MFFO per share. | | 36 |
LiquidityEBITDAre and Capital ResourcesADJUSTED EBITDAre—We use EBITDAre and Adjusted EBITDAre as additional measures of operating performance which allow us to compare earnings independent of capital structure, determine debt service and fixed cost coverage, and measure enterprise value. Additionally, we believe they are a useful indicator of our ability to support our debt obligations.
GeneralEBITDAre and Adjusted EBITDAre should not be considered as alternatives to net income (loss), as an indication of our liquidity, nor as an indication of funds available to cover our cash needs, including our ability to fund distributions. Accordingly, EBITDAre and Adjusted EBITDAre should be reviewed in connection with other GAAP measurements, and should not be viewed as more prominent measures of performance than net income (loss) or cash flows from operations prepared in accordance with GAAP. Our EBITDAre and Adjusted EBITDAre, as presented, may not be comparable to amounts calculated by other REITs.
Our principal cash demands, asideThe following table presents our calculation of EBITDAre and Adjusted EBITDAre (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | Year Ended December 31, |
| 2021 | | 2020 | | 2021 | | 2020 | | 2020 |
Calculation of EBITDAre | | | | | | | | | |
Net income (loss) | $ | 6,390 | | | $ | (6,413) | | | $ | 6,507 | | | $ | 4,786 | | | $ | 5,462 | |
Adjustments: | | | | | | | | | |
Depreciation and amortization | 56,587 | | | 56,370 | | | 111,928 | | | 112,597 | | | 224,679 | |
Interest expense, net | 19,132 | | | 22,154 | | | 39,195 | | | 44,929 | | | 85,303 | |
(Gain) loss on disposal of property, net | (3,744) | | | 541 | | | (17,585) | | | 2,118 | | | (6,494) | |
Impairment of real estate assets | 1,056 | | | — | | | 6,056 | | | — | | | 2,423 | |
Federal, state, and local tax expense | 165 | | | 180 | | | 331 | | | 209 | | | 491 | |
Adjustments related to unconsolidated joint ventures | (535) | | | 1,391 | | | 597 | | | 2,568 | | | 3,355 | |
EBITDAre | $ | 79,051 | | | $ | 74,223 | | | $ | 147,029 | | | $ | 167,207 | | | $ | 315,219 | |
Calculation of Adjusted EBITDAre | | | | | | | | | |
EBITDAre | $ | 79,051 | | | $ | 74,223 | | | $ | 147,029 | | | $ | 167,207 | | | $ | 315,219 | |
Adjustments: | | | | | | | | | |
Change in fair value of earn-out liability | 2,000 | | | — | | | 18,000 | | | (10,000) | | | (10,000) | |
Transaction and acquisition expenses | 934 | | | 14 | | | 1,075 | | | 59 | | | 539 | |
Amortization of unconsolidated joint venture basis differences | 79 | | | 254 | | | 825 | | | 721 | | | 1,883 | |
Other impairment charges | — | | | — | | | — | | | — | | | 359 | |
Adjusted EBITDAre | $ | 82,064 | | | $ | 74,491 | | | $ | 166,929 | | | $ | 157,987 | | | $ | 308,000 | |
| | |
LIQUIDITY AND CAPITAL RESOURCES |
GENERAL—Aside from standard operating expenses, are for we expect our principal cash demands to be for:
•cash distributions to stockholders;
•investments in real estate, estate;
•capital expenditures repurchases of common stock, distributions to stockholders, and leasing costs;
•redevelopment and repositioning projects; and
•principal and interest payments on our outstanding indebtedness. indebtedness.
We intendexpect our primary sources of liquidity to usebe:
•net proceeds from our cash on hand, underwritten IPO;
•operating cash flows, and flows;
•proceeds received from the disposition of properties;
•proceeds from equity and debt financings, including borrowings under our unsecured revolving credit facility;
•distributions received from our unconsolidated joint ventures; and
•available, unrestricted cash and cash equivalents.
At this time, we believe our current sources of liquidity, most significantly the net proceeds from our underwritten IPO, our operating cash flows, and borrowing availability on our revolving credit facility, asare sufficient to meet our primary sources of immediateshort- and long-term liquidity. cash demands.
| | | | | | | | | | | |
PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 37 |
UNDERWRITTEN INITIAL PUBLIC OFFERING—On October 4, 2017,July 19, 2021, we completed an underwritten IPO and issued 17.0 million shares of common stock at an offering price of $28.00 per share. We used a portion of the net proceeds to reduce our leverage and expect to use the remaining amount to fund external growth with property acquisitions and for other general corporate uses. As part of the underwritten IPO, underwriters were granted an option exercisable within 30 days from July 14, 2021 to purchase up to an additional 2.55 million shares of common stock at the underwritten IPO price, less underwriting discounts and commissions. On July 29, 2021, the underwriters exercised their option.
DEBT—The following table summarizes information about our debt as of June 30, 2021 and December 31, 2020 (dollars in thousands):
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Total debt obligations, gross | $ | 2,241,495 | | | $ | 2,307,686 | |
Weighted-average interest rate | 2.9 | % | | 3.1 | % |
Weighted-average term (in years) | 3.7 | | | 4.1 | |
| | | |
Revolving credit facility capacity(1) | $ | 500,000 | | | $ | 500,000 | |
Revolving credit facility availability(2) | 489,329 | | | 490,404 | |
(1)In July 2021, we refinanced the revolving credit facility and exercised our option to extend its maturity as noted below.
(2)Net of any outstanding balance and letters of credit.
In July 2021, we took steps to reduce our leverage, lower our cost of debt, and appropriately ladder our debt maturities as follows:
•On July 2, 2021, we completed the PELP transaction. UnderRefinancing. In connection with the terms ofRefinancing, we paid off the agreement,$472.5 million term loan due in 2025. The revolving credit facility will mature in January 2026, and the two senior unsecured term loan tranches will mature in November 2025 and July 2026, respectively.
•On July 20, 2021, we issued 39.6used proceeds from the underwritten IPO to retire our $375.0 million OP units, assumed $501 million of debt,term loan maturing in 2022.
We have been assigned investment grade ratings from Moody’s Investors Service (Baa3) and paidS&P Global Ratings (BBB-) which may allow us access to additional capital markets. We expect to save approximately $25$7.2 million in cash (see Note 3 to the consolidated financial statements).
As of September 30, 2017, we had cash and cash equivalents of $7.2 million, a net cash decrease of $1.0 million during the nine months ended September 30, 2017.
Operating Activities
Our net cash provided by operating activities consists primarily of cash inflows from tenant rental and recovery payments and cash outflows for property operating expenses, real estate taxes, general and administrative expenses, and interest payments.
Our cash flows from operating activities were $67.5 million for the nine months ended September 30, 2017, compared to $85.2 million for the same period in 2016. The decrease primarily resulted from having a net loss, which was due to increased expenses related to the redemption of unvested Class B units at the estimated value per share on the date of termination, that had been earned by our former advisor for historical asset management services (see Note 9 to the consolidated financial statements), and expenses related to the PELP transaction.
Investing Activities
Net cash flows from investing activities are affected by the nature, timing, and extent of improvements to, as well as acquisitions and dispositions of, real estate and real estate-related assets, as we continue to evaluate the market for available properties and may acquire properties when we believe strategic opportunities exist.
Our net cash used in investing activities was $97.4 million for the nine months ended September 30, 2017, compared to $148.8 million for the same period in 2016. The decrease in cash used primarily resulted from the release of $35.9 million from restricted cash due to the completion of a reverse Section 1031 like-kind exchange, which originated from the sale of a property in December 2016.
During the nine months ended September 30, 2017, we acquired six shopping centers for a total cash outlay of $111.7 million. During the same period in 2016, we acquired three shopping centers and additional real estate adjacent to previously acquired shopping centers for a total cash outlay of $132.3 million.
Financing Activities
Net cash flows from financing activities are affected by payments of distributions, share repurchases, principal and other payments associated with our outstanding debt, and borrowings during the period. As our debt obligations mature, we intend to refinance the remaining balance, if possible, or pay off the balances at maturity using proceeds from operations and/or corporate-level debt. Our net cash provided by financing activities was $28.9 million for the nine months ended September 30, 2017, compared to net cash flow provided by financing activities of $44.3 million for the same period in 2016. The decrease in cash provided by financing activities primarily resulted from increased share repurchases in January 2017, as well as increased cash distributionsannually as a result of fewer investors participating in the DRIP. The decrease was also due to the redemption of OP units that had been earned by our former advisor for historical asset management services. These cash flow decreases were partially offset by an increase in net borrowings.
As of September 30, 2017, our debt activity and our investment grade ratings. Further, our weighted-average interest rate was 3.1% as of June 30, 2021, as adjusted to reflect certain material July debt transactions described above.
The allocation of total enterprise value was 39.1%. Debt to total enterprise value is calculateddebt between fixed-rate and variable-rate as net debt (total debt,well as between secured and unsecured, excluding below-marketmarket debt adjustments and deferred financing costs, less cashexpenses, net, and cash equivalents) as a percentageincluding the effects of enterprise value (equity value, calculated as diluted shares outstanding multiplied by the estimated value per share of $10.20derivative financial instruments (see Notes 7 and 12) as of SeptemberJune 30, 2017, plus net debt).2021 and December 31, 2020 is summarized below. We have also presented this allocation as of June 30, 2021 on an adjusted basis to reflect certain material July debt transactions described above (in thousands):
| | | | | | | | | | | | | | | | | |
| June 30, 2021 | | June 30, 2021 (As Adjusted) | | December 31, 2020 |
As to interest rate: | | | | | |
Fixed-rate debt | $ | 1,548,995 | | | $ | 1,548,995 | | | $ | 1,727,186 |
Variable-rate debt | 692,500 | | | 325,000 | | | 580,500 |
Total | $ | 2,241,495 | | | $ | 1,873,995 | | | $ | 2,307,686 |
As to collateralization: | | | | | |
Unsecured debt | $ | 1,622,500 | | | $ | 1,255,000 | | | $ | 1,622,500 |
Secured debt | 618,995 | | | 618,995 | | | 685,186 |
Total | $ | 2,241,495 | | | $ | 1,873,995 | | | $ | 2,307,686 |
Our maturity schedule as of June 30, 2021 with respective principal payment obligations, excluding finance lease liabilities, market debt adjustments, and deferred financing expenses, is subjectpresented below on an adjusted basis to reflect certain covenants, as disclosed in our 2016 Annual Report on Form 10-K filed with the SEC on March 9, 2017. Asmaterial July debt transactions described above (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter | | Total |
Term loans | $ | — | | | $ | — | | | $ | 300,000 | | | $ | 475,000 | | | $ | 240,000 | | | $ | 240,000 | | | $ | 1,255,000 | |
Secured debt | 10,068 | | | 61,171 | | | 66,702 | | | 28,124 | | | 27,877 | | | 424,925 | | | 618,867 | |
Total | $ | 10,068 | | | $ | 61,171 | | | $ | 366,702 | | | $ | 503,124 | | | $ | 267,877 | | | $ | 664,925 | | | $ | 1,873,867 | |
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 38 |
FINANCIAL LEVERAGE RATIOS—We expect to continue to meet the requirements ofbelieve our debt covenants over the short- and long-term. Ourto Adjusted EBITDAre, debt to total enterprise value, and debt covenant compliance as of SeptemberJune 30, 2017,2021 allow us access to future borrowings as needed.needed in the near term. The following table presents our calculation of net debt and total enterprise value, inclusive of our prorated portion of net debt and cash and cash equivalents owned through our unconsolidated joint ventures, as of June 30, 2021 and December 31, 2020 (in thousands):
We have access to a revolving credit facility with a capacity of $500 million and a current interest rate of LIBOR plus 1.3%. As of September 30, 2017, $121.0 million was available for borrowing under | | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Net debt: | | | |
Total debt, excluding market adjustments and deferred financing expenses | $ | 2,272,268 | | | $ | 2,345,620 | |
Less: Cash and cash equivalents | 22,633 | | | 104,952 | |
Total net debt | $ | 2,249,635 | | | $ | 2,240,668 | |
| | | |
Enterprise value: | | | |
Net debt | $ | 2,249,635 | | | $ | 2,240,668 | |
Total equity value(1) | 3,386,803 | | | 2,797,234 | |
Total enterprise value | $ | 5,636,438 | | | $ | 5,037,902 | |
(1)Total equity value is calculated as the revolving credit facility. In October 2017, the maturity date of the revolving credit facility was extended to October 2021, with additional options to extend the maturity to October 2022.
To increase the availability on our revolving credit facility and refinance the corporate debt assumed from the PELP transaction, we entered into two new term loan agreements that have principal balances of $310 million, with a delayed draw feature for a total capacity of $375 million, and $175 million that mature in April 2022 and October 2024, respectively. We also entered into two new secured loan facilities with principal balances of $175 million and $195 million that mature in November 2026 and November 2027, respectively. For more information regarding these loans, see Note 6 to the consolidated financial statements.
We offer an SRP that provides a limited opportunity for stockholders to have sharesnumber of common stock repurchased, subjectshares and OP units outstanding multiplied by the EVPS as of June 30, 2021 and December 31, 2020, respectively. There were 107.0 million diluted shares outstanding with an EVPS of $31.65 as of June 30, 2021 and 106.6 million diluted shares outstanding with an EVPS of $26.25 as of December 31, 2020.
The following table presents our calculation of net debt to certain restrictionsAdjusted EBITDAre and limitations. Fornet debt to total enterprise value as of June 30, 2021 and December 31, 2020 (dollars in thousands):
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Net debt to Adjusted EBITDAre - annualized: | | | |
Net debt | $ | 2,249,635 | | $ | 2,240,668 |
Adjusted EBITDAre - annualized(1) | 316,942 | | 308,000 |
Net debt to Adjusted EBITDAre - annualized | 7.1x | | 7.3x |
| | | |
Net debt to total enterprise value | | | |
Net debt | $ | 2,249,635 | | $ | 2,240,668 |
Total enterprise value | 5,636,438 | | 5,037,902 |
Net debt to total enterprise value | 39.9% | | 44.5% |
(1)Adjusted EBITDAre is based on a more detailed discussion of our SRP, see Note 9 to the consolidated financial statements.
Activity related to distributions to our common stockholders for the nine months ended September 30, 2017 and 2016, is as follows (in thousands): |
| | | | | | | |
| 2017 | | 2016 |
Gross distributions paid | $ | 92,397 |
| | $ | 92,266 |
|
Distributions reinvested through the DRIP | 36,171 |
| | 44,731 |
|
Net cash distributions | $ | 56,226 |
| | $ | 47,535 |
|
Net (loss) income attributable to stockholders | $ | (8,319 | ) | | $ | 5,243 |
|
Net cash provided by operating activities | $ | 67,522 |
| | $ | 85,179 |
|
FFO(1) | $ | 74,918 |
| | $ | 82,338 |
|
(1) trailing twelve month period. See “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Measures - Funds from Operations EBITDAre and Modified Funds from Operations,Adjusted EBITDAre” of this filing on Form 10-Q for a reconciliation to Net Income (Loss).
CAPITAL EXPENDITURES AND REDEVELOPMENT ACTIVITY—We make capital expenditures during the definitioncourse of FFO, information regarding why we present FFO,normal operations, including maintenance capital expenditures and tenant improvements, as well as forvalue-enhancing anchor space repositioning and redevelopment, ground-up outparcel development, and other accretive projects.
During the six months ended June 30, 2021 and 2020, we had capital spend of $30.2 million and $28.5 million, respectively. Generally, we expect our development and redevelopment projects to stabilize within 24 months. We anticipate that obligations related to capital improvements as well as redevelopment and development in 2021 can be met with cash flows from operations, cash flows from dispositions, or borrowings on our unsecured revolving line of credit. Below is a reconciliationsummary of our capital spending activity, excluding leasing commissions, on a cash basis (dollars in thousands):
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
Capital expenditures for real estate(1): | | | |
Capital improvements | $ | 3,101 | | | $ | 2,142 | |
Tenant improvements | 9,557 | | | 5,840 | |
Redevelopment and development | 15,658 | | | 18,659 | |
Total capital expenditures for real estate | 28,316 | | | 26,641 | |
Corporate asset capital expenditures | 1,007 | | | 810 | |
Capitalized indirect costs(1) | 907 | | | 1,089 | |
Total capital spending activity | $ | 30,230 | | | $ | 28,540 | |
(1)Amount includes internal salaries and related benefits of personnel who work directly on capital projects as well as capitalized interest expense.
Our underwritten incremental yields on development and redevelopment projects are expected to range between 9% - 11%. Our current in process projects represent an estimated total investment of $36.3 million, and the total underwritten incremental yield range on this estimated investment is approximately 9.5% - 10.5%. Actual incremental yields may vary
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 39 |
from our underwritten incremental yield range based on the actual total cost to complete a project and its actual incremental annual NOI at stabilization. See “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Key Performance Indicators and Defined Terms” and “Part II, Item 1A. Risk Factors” of this non-GAAP financial measurefiling on Form 10-Q for further information.
ACQUISITION ACTIVITY—We continually monitor the commercial real estate market for properties that have future growth potential, are located in attractive demographic markets, and support our business objectives. The following table highlights our property acquisitions (dollars in thousands):
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
Number of properties acquired | 2 | | | — | |
Number of outparcels acquired(1) | 3 | | | 2 |
Total acquisition price | $ | 40,459 | | | $ | 4,343 | |
(1)Outparcels acquired are adjacent to Netshopping centers that we own.
DISPOSITION ACTIVITY—We are actively evaluating our portfolio of assets for opportunities to make strategic dispositions of assets that no longer meet our growth and investment objectives or assets that have stabilized in order to capture their value. We expect to continue to make strategic dispositions during the remainder of 2021. The following table highlights our property dispositions (dollars in thousands):
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
Number of properties sold(1) | 13 | | | 4 | |
Number of outparcels sold(2)(3) | 1 | | | — | |
Proceeds from sale of real estate | $ | 119,638 | | | $ | 25,778 | |
Gain (loss) on sale of property, net(4) | 18,713 | | | (1,436) | |
(1)We retained an outparcel for one property sold during the six months ended June 30, 2021, and therefore the sale did not result in a reduction in our total property count.
(2)One outparcel sold during the six months ended June 30, 2021 was the only remaining portion of one of our properties, and therefore the sale resulted in a reduction in our total property count.
(3)In addition to the one outparcel sold during the six months ended June 30, 2021, a tenant at one of our properties exercised a bargain purchase option to acquire a parcel of land that we previously owned. This generated minimal proceeds for us.
(4)The gain (loss) on sale of property, net does not include miscellaneous write-off activity, which is also recorded in Gain (Loss) Incomeon Disposal of Property, Net on the consolidated statements of operations.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 40 |
DISTRIBUTIONS—Distributions to our common stockholders and OP unit holders, including key financial metrics for comparison purposes, for the six months ended June 30, 2021 and 2020, are as follows (in thousands):
| | | | | | | | | | | | | | |
| Cash distributions to OP unit holders | | | Net cash provided by operating activities |
| | | | |
| Cash distributions to common stockholders | | | Core FFO(1) |
| | | | |
| Distributions reinvested through the DRIP | | | |
| | |
(1)See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Key Performance Indicators” for the definition of Core FFO, or information regarding why we present Core FFO. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Measures - Nareit FFO and Core FFO” for a reconciliation of this non-GAAP financial measure to Net Income (Loss). |
We paid monthly distributions of $0.085 per share, or $1.02 annualized, for the months of December 2020, and each month beginning January 2021 through July 2021. On August 4, 2021, the Board authorized a monthly and expect to continue paying distributions monthly unless our results of operations, our general financial condition, general economic conditions, or other factors, as determined by our Board, make it imprudent to do so. The timing anddistribution in the amount of distributions is determined by our Board and is influenced in part by our intention$0.085 per share payable on September 1, 2021 to comply with REIT requirementsstockholders of record at the Internal Revenue Code. close of business on August 16, 2021.
To maintain our qualification as a REIT, we must make aggregate annual distributions to our stockholders of at least 90% of our REIT taxable income (which is computed without regard to the dividends paid deduction or net capital gain, and which does not necessarily equal net income (loss)or loss as calculated in accordance with GAAP). We generally will not be subject to U.S. federal income tax on the income that we distribute to our stockholders each year due to meeting the REIT qualification requirements. However, we may be subject to certain state and local taxes on our income, property, or net worth and to federal income and excise taxes on our undistributed income.
We have not established a minimum distribution level, and our charter does not require that we make distributions to our stockholders.
Critical Accounting Policies
Real Estate Acquisition AccountingDRIP AND THE SRP—In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition ofOn August 4, 2021, as a Business. This update amends existing guidance in order to clarify when an integrated set of assets and activities is considered a business. We adopted ASU 2017-01 on January 1, 2017, and applied it prospectively. Under this new guidance, mostresult of our real estate acquisition activity will no longer be considered a business combination and will instead be classified as an asset acquisition. As a result, most acquisition-related costs that would have been recorded onunderwritten IPO, our consolidated statements of operations have been capitalized and will be amortized overBoard approved the lifetermination of the related assets.DRIP and the SRP. The DRIP has been suspended since April 2021. The SRP, which was limited to repurchases resulting from the DDI of stockholders, has been suspended since March 2021, and the SRP for standard repurchases had been suspended since August 2019.
For
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 41 |
CASH FLOW ACTIVITIES—As of June 30, 2021, we had cash and cash equivalents and restricted cash of $111.4 million, a net cash decrease of $20.5 million during the six months ended June 30, 2021.
Below is a summary of allour cash flow activity (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
| 2021 | | 2020 | | $ Change | | % Change |
Net cash provided by operating activities | $ | 129,897 | | | $ | 89,906 | | | $ | 39,991 | | | 44.5 | % |
Net cash provided by (used in) investing activities | 49,837 | | | (6,466) | | | 56,303 | | | NM |
Net cash used in financing activities | (200,270) | | | (99,218) | | | (101,052) | | | 101.8 | % |
OPERATING ACTIVITIES—Our net cash provided by operating activities was primarily impacted by the following:
•Property operations and working capital—Most of our critical accounting policies, referoperating cash comes from rental and tenant recovery income and is offset by property operating expenses, real estate taxes, and general and administrative costs. During the six months ended June 30, 2021, we had a net cash inflow of $2.1 million from changes in working capital as compared to a net cash outlay of $24.3 million during the same period in 2020. This change was primarily driven by improved collections on amounts due from Neighbors as well as expense reduction initiatives, and was partially offset by higher leasing commissions. Additionally, we had an increase in returns on our 2016investments in unconsolidated joint ventures.
•Fee and management income—We also generate operating cash from our third-party investment management business, pursuant to various management and advisory agreements between us and the Managed Funds. Our fee and management income was $4.7 million for the six months ended June 30, 2021, a decrease of $0.3 million as compared to the same period in 2020.
•Cash paid for interest—During the six months ended June 30, 2021, we paid $36.8 million for interest, a decrease of $4.1 million over the same period in 2020, largely due to: (i) lower borrowings as a result of early repayments of debt; (ii) the repayment of our draw on the revolver during the second quarter of 2020; and (iii) lower interest rates due to the decrease in LIBOR and expiring interest rate swaps.
INVESTING ACTIVITIES—Our net cash provided by (used in) investing activities was primarily impacted by the following:
•Real estate acquisitions—During the six months ended June 30, 2021, our acquisitions resulted in a total cash outlay of $40.5 million, as compared to a total cash outlay of $4.3 million during the same period in 2020.
•Real estate dispositions—During the six months ended June 30, 2021, our dispositions resulted in a net cash inflow of $119.6 million, as compared to a net cash inflow of $25.8 million during the same period in 2020.
•Capital expenditures—We invest capital into leasing our properties and maintaining or improving the condition of our properties. During the six months ended June 30, 2021, we paid $30.2 million for capital expenditures, an increase of $1.7 million over the same period in 2020, primarily due to the timing of our development and redevelopment projects and reduced spend during the same period period a year ago.
•Return of investment in unconsolidated joint ventures—During the six months ended June 30, 2021, we had a return of investment in unconsolidated joint ventures of $3.9 million, including $2.0 million in connection with NRP primarily as a result of property dispositions. During the six months ended June 30, 2020, we had a return of investment in unconsolidated joint ventures of $0.6 million.
•Investment in third parties—During the six months ended June 30, 2021, we made an investment in a third party business that resulted in a net cash outflow of $3.0 million.
FINANCING ACTIVITIES—Our net cash used in financing activities was primarily impacted by the following:
•Debt borrowings and payments—During the six months ended June 30, 2021, we had $66.2 million in net repayment of debt primarily as a result of early repayments of mortgage loans. During the six months ended June 30, 2020 we had net payments of $35.2 million, primarily as a result of a pay down in January 2020 of $30.0 million on term loan debt maturing in 2021.
•Distributions to stockholders and OP unit holders—Cash used for distributions to common stockholders and OP unit holders decreased $2.3 million for the six months ended June 30, 2021 as compared to the same period in 2020, due to a reduction of the distribution rate.
•Share repurchases—Cash outflows for share repurchases increased by $72.6 million for the six months ended June 30, 2021 as compared to the same period in 2020, primarily as a result of a tender offer, which was settled in January 2021.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 42 |
| | |
CONTRACTUAL COMMITMENTS AND CONTINGENCIES |
We have debt obligations related to both our secured and unsecured debt. In addition, we have operating leases pertaining to office equipment for our business as well as ground leases at certain of our shopping centers. We are presenting our future contractual commitments and contingencies as of June 30, 2021 on an adjusted basis to reflect our material debt transactions occurring in July 2021 (see Note 6 for more details). The table below excludes obligations related to tenant allowances and improvements because such amounts are not fixed or determinable. However, we believe we currently have sufficient financing in place to fund any such amounts as they arise through cash from operations or borrowings. The following table details our pro forma contractual obligations as of June 30, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
| Total | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter |
Debt obligations - principal payments(1) | $ | 1,873,867 | | | $ | 10,068 | | | $ | 61,171 | | | $ | 366,702 | | | $ | 503,124 | | | $ | 267,877 | | | $ | 664,925 | |
Debt obligations - interest payments(2) | 236,284 | | | 27,875 | | | 53,942 | | | 48,516 | | | 36,736 | | | 24,323 | | | 44,892 | |
Operating lease obligations | 8,713 | | | 424 | | | 823 | | | 672 | | | 546 | | | 317 | | | 5,931 | |
Finance lease obligations | 134 | | | 25 | | | 45 | | | 40 | | | 24 | | | — | | | — | |
Total | $ | 2,118,998 | | | $ | 38,392 | | | $ | 115,981 | | | $ | 415,930 | | | $ | 540,430 | | | $ | 292,517 | | | $ | 715,748 | |
(1)In July 2021, we amended our $500 million revolving credit facility to extend the maturity from October 2021 to January 2026, and lower the interest rate spread from 1.40% over LIBOR to 1.35% over LIBOR. Additionally, the new terms include two six-month maturity extension options. As of June 30, 2021, we have 0 outstanding balance on our revolving credit facility.
(2)Future variable-rate interest payments are based on interest rates as of June 30, 2021, including the impact of our swap agreements.
Our portfolio debt instruments and the unsecured revolving credit facility contain certain covenants and restrictions. The following list provides an update to certain restrictive covenants specific to the unsecured revolving credit facility and unsecured term loans that were deemed significant as a result of our debt activity occurring in July 2021:
•limits the ratio of total debt to total asset value, as defined, to 60% or less with a surge to 65% for a period of four consecutive fiscal quarters following a material acquisition;
•limits the ratio of secured debt to total asset value, as defined, to 35% or less with a surge to 40% for a period of four consecutive fiscal quarters following a material acquisition;
•requires the fixed-charge ratio, as defined, to be 1.5:1 or greater
•limits the ratio of cash dividend payments to Nareit FFO, as defined, to 95%;
•limits the ratio of unsecured debt to unencumbered total asset value, as defined, to 60% or less with a surge to 65% for a period of four consecutive fiscal quarters following a material acquisition;
•requires the unencumbered NOI to interest expense ratio, as defined, to be 1.75:1 or greater; and
•if we were to lose our investment grade rating in the future, the current tangible net worth will be required to exceed the minimum tangible net worth, as defined, at that time.
| | |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES |
Our 2020 Annual Report on Form 10-K, originally filed with the SEC on March 9, 2017.
Recently Issued Accounting Pronouncements—Refer to Note 212, 2021, contains a description of our consolidated financial statements in this report for discussioncritical accounting policies and estimates, including those relating to real estate acquisitions, rental income, and the valuation of the impact of recently issuedreal estate assets. There have been no significant changes to our critical accounting pronouncements.policies during 2021.
ItemITEM 3. Quantitative and Qualitative Disclosures About Market RiskQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We utilize interest rate swaps in order to hedge a portion of our exposure to interest rate fluctuations through the utilization of interest rate swaps in order to mitigate the risk of this exposure.fluctuations. We do not intend to enter into derivative or interest rate transactions for speculative purposes. Our hedging decisions are determined based upon the facts and circumstances existing at the time of the hedge and may differ from our currently anticipated hedging strategy. Because we use derivative financial instruments to hedge against interest rate fluctuations, we may be exposed to both credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty will owe us, which creates credit risk for us. If the fair value of a derivative contract is negative, we will owe the counterparty and, therefore, do not have credit risk. We seek to minimize the credit risk in derivative instruments by entering into transactions with high-quality counterparties. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. The market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
As of SeptemberJune 30, 2017,2021, we had fourfive interest rate swaps that fixed the LIBOR on $642$930 million of our unsecured term loan facilities, andfacilities. In July 2021, we were party to an interest rate swap that fixed the variable interest ratepaid down $375 million in unsecured term loan debt using proceeds from our underwritten IPO. Taking into effect our pay down of this unsecured term loan as if such pay down occurred on $10.8 million of one of our secured mortgage notes. We had no other outstanding interest rate swap agreements June 30, 2021 (“as of September 30, 2017.
As of September 30, 2017,adjusted”), we had not
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 43 |
fixed the interest rate on $392.0$325 million of our unsecured debt through derivative financial instruments, andinstruments. Further, as of June 30, 2021, we estimate that a result, we are subject to the potential impact of rising interest rates, which could negatively impact our profitability and cash flows. The impact on our results of operations of a one-percentageone percentage point increase in interest rates on the outstanding balance of our variable-ratevariable rate debt at September 30, 2017,(as adjusted) would result in approximately $3.9$3.3 million of additional interest expense annually.
The additional interest expense was determined based on the impact of hypothetical interest rates on our borrowing cost and assumes no changes in our capital structure.
Upon completionstructure, other than the effect of the PELP transaction, we entered into two new variable-rate term loans with principal balances of $310 million and $175 million that mature in April 2022 and October 2024, respectively. On October 27, 2017, we entered into an interest rate swap agreement with a notional amount of $175 million that fixed the interest rate on theunsecured term loan maturing in 2022 at 3.29%. Also on October 27, 2017, we entered into an interest rate swap with a notional amountpay down as described above. For further discussion of $175 million that fixed the interest rate on the term loan maturing in 2024 at 3.93%. Thesecertain quantitative details related to our interest rate swaps, were effective November 1, 2017.see Note 7.
The information presented above does not consider all exposures or positions that could arise inSee “Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk” of our 2020 Annual Report on Form 10-K originally filed with the future. Hence, the information represented herein has limited predictive value. As a result, the ultimate realized gain or lossSEC on March 12, 2021 for more details associated with respectour exposure to interest rate fluctuations will depend on the exposures that arise during the period, the hedging strategies at the time,credit risk and the related interest rates.market risk.
We do not have any foreign operations, and thus we are not exposed to foreign currency fluctuations.
ItemITEM 4. Controls and ProceduresCONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of SeptemberJune 30, 2017.2021. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective as of SeptemberJune 30, 2017.2021.
Changes in Internal Control Changesover Financial Reporting
During the quarter ended SeptemberJune 30, 2017,2021, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION | | |
wPART II OTHER INFORMATION |
ItemITEM 1. Legal ProceedingsLEGAL PROCEEDINGS
WeFrom time to time, we are involved in various claims and litigation matters arisingparty to legal proceedings, which arise in the ordinary course of business, some ofour business. We are not currently involved in any legal proceedings for which involve claims for damages. Many of these matterswe are not covered by our liability insurance although they may nevertheless be subjector the outcome is reasonably likely to deductibles or retentions. Although the ultimate liability for these matters cannot be determined, based upon information currently available, we believe the ultimate resolution of such claims and litigation will not have a material adverse effectimpact on our consolidatedresults of operations or financial statements,condition, nor are we aware of any such legal proceedings contemplated by governmental authorities.
ITEM 1A. RISK FACTORS
The following risk factor supplements the risk factors set forth in our 2020 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 12, 2021. Except to the extent updated below or previously updated, or to the extent additional factual information disclosed elsewhere in our Quarterly Report on Form 10-Q relates to such risk factors (including, without limitation, the matters discussed in “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations”), there were no material changes to the risk factors disclosed in “Part I, Item 1A. Risk Factors
For a listing of risk factors associated with investing in us, please see Item 1A. Risk Factors in Part IFactors” of our 20162020 Annual Report on Form 10-K filed with the SEC on March 9, 2017,12, 2021.
The ongoing COVID-19 pandemic has had, and is expected to continue to have, a negative effect on our and our Neighbors’ businesses, financial condition, results of operations, cash flows, and liquidity.
In March 2020, the World Health Organization declared COVID-19 a global pandemic. The COVID-19 pandemic has caused, and is expected to continue to cause, significant disruptions to the United States and global economy and has contributed to significant volatility and negative pressure in financial markets. The global impact of the outbreak is continually evolving and, as additional cases of the virus are identified, many countries, including the United States, reacted by instituting quarantines, restrictions on travel, and/or mandatory closures of businesses. Certain states and cities, including where our properties are located, also reacted by instituting quarantines, restrictions on travel, “shelter-in-place” or “stay-at-home” rules, restrictions on types of businesses that may continue to operate, and/or restrictions on the types of construction projects that may continue. In May 2020, many state and local governments began lifting, in whole or in part, the “stay-at-home” mandates, effectively removing or lessening the limitations on travel and allowing many businesses to reopen in full or limited capacity.
The COVID-19 pandemic has impacted our business and financial performance, and we expect this impact to continue. Our retail and service-based tenants (whom we refer to as a “Neighbor” or our “Neighbors”) depend on in-person interactions with their customers to generate unit-level profitability, and the risk factors listed below:COVID-19 pandemic has decreased, and may continue to decrease, customers’ willingness to frequent, and mandated “shelter-in-place” or “stay-at-home” orders may prevent customers from frequenting our Neighbors’ businesses, which may result in their inability to maintain profitability and make timely rental payments to us under their leases or to otherwise seek lease modifications or to declare bankruptcy. At the peak of the pandemic-related closure activity, for our wholly-owned properties and those owned through our joint ventures, our temporary closures reached approximately 37% of all Neighbor spaces, totaling 27% of our annualized base rent (“ABR”) and 22% of our gross leasable area (“GLA”). All temporarily closed Neighbors have since been permitted to reopen; however, there are
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 44 |
continuing economic impacts from the COVID-19 pandemic which could result in future store closures or could reduce the demand for leasing space in our shopping centers.
While most of our Neighbors have reopened, we cannot presently determine how many of the Neighbors that remain closed will reopen, or whether a portion of those that have reopened will be required by government mandates to temporarily close again or will encounter financial difficulties that require them to close permanently. We recently transitionedbelieve substantially all Neighbors, including those that were required to temporarily close under governmental mandates, are contractually obligated to continue with their rent payments as documented in our lease agreements with them. However, we believe it is best to begin negotiation of relief only once a self-managed real estate investment trustNeighbor has reopened and made payments toward rent and recovery charges accrued. Inclusive of our prorated share of properties owned through our joint ventures, as of July 20, 2021, we have limited operating experience being self-managed.
Effective October 4, 2017,$5.3 million of outstanding payment plans with our Neighbors, and we transitionedhad recorded rent abatements of approximately $0.7 million during 2021. These payment plans and rent abatements represented approximately 2.0% and 0.3% of portfolio rental income for the six months ended June 30, 2021, respectively. As of July 20, 2021, approximately 54% of payments are scheduled to a self-managed real estate investment trust following the closing of a transaction to acquire certain real estate assetsbe received by December 31, 2021 for all executed payment plans, and the third-party asset management businessweighted-average term over which we expect to receive remaining amounts owed on executed payment plans is approximately twelve months. We are still actively pursuing past due amounts under the terms negotiated with our Neighbors. We are in negotiations with additional Neighbors, which we believe will lead to more Neighbors repaying their past due charges. As of Phillips Edison Limited Partnership (“PELP”)July 20, 2021, we have collected approximately 95% of rent and recoveries billed during the second through fourth quarters of 2020, and approximately 98% of rent and recoveries billed during the first and second quarters of 2021. In the event of any default by a Neighbor under its lease agreement or relief agreement, we may not be able to fully recover, and/or may experience delays in a stockrecovering and cash transaction (“PELP transaction”). While we no longer bearadditional costs in enforcing our rights as landlord to recover, amounts due to us under the coststerms of the various feeslease agreement and/or relief agreement.
Moreover, the ongoing COVID-19 pandemic, restrictions intended to prevent and mitigate its spread, resulting consumer behavior, and the economic slowdown or recession could have additional adverse effects on our business, including with regards to:
expense reimbursements previously paid to our former external advisor•the ability and its affiliates, our expenses now include the compensation and benefitswillingness of our officers, employeesNeighbors to renew their leases upon expiration, our ability to re-lease the properties on the same or better terms in the event of nonrenewal or in the event we exercise our right to replace an existing Neighbor, and consultants, as well as overhead previously paid by our former external advisor or their affiliates. Our employees now provide us services historically provided by our former external advisor and its affiliates. We are also now subject to potential liabilities that are commonly faced by employers, such as workers' disability and compensation claims, potential labor disputes, and other employee-related liabilities and grievances, andobligations we bearmay incur in connection with the costsreplacement of an existing Neighbor, particularly in light of the establishmentadverse impact to the financial health of many retailers and maintenance of any employee compensation plans. In addition, we have limited experience operating as a self-managed real estate investment trust (“REIT”)service providers that has occurred and we may encounter unforeseen costs, expenses, and difficulties associated with providing those services on a self-advised basis. If we incur unexpected expensescontinues to occur as a result of the COVID-19 pandemic and the significant uncertainty as to when and the conditions under which certain potential Neighbors will be able to operate physical retail locations in the future;
•a potential sustained or permanent increase in online shopping instead of shopping at physical retail properties, thereby reducing demand for space in our self-management,shopping centers and possible related reductions in rent or increased costs to lease space;
•the adverse impact of current economic conditions on the market value of our real estate portfolio and our third-party investment management business, and consequently on the estimated value per share of our common stock;
•the adverse impact of the current economic conditions on our ability to effect a liquidity event at an attractive price or at all in the near term and for a potentially lengthy period of time;
•the financial impact and continued economic uncertainty that could continue to negatively impact our ability to pay distributions to our stockholders and/or to repurchase shares;
•to the extent we were seeking to sell properties in the near term, significantly greater uncertainty regarding our ability to do so at attractive prices or at all;
•anticipated returns from development and redevelopment projects, which have been prioritized to support the reopening of our Neighbors and new leasing activity, or deferred if possible;
•the broader impact of the severe economic contraction due to the COVID-19 pandemic, the resulting increase in unemployment that has occurred in the short-term and its effect on consumer behavior, and negative consequences that will occur if these trends are not reversed in a timely way;
•state, local, or industry-initiated efforts, such as a rent freeze for Neighbors or a suspension of a landlord’s ability to enforce evictions, which may affect our ability to collect rent or enforce remedies for the failure to pay rent;
•severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions, which could make it difficult for us to access debt and equity capital on attractive terms, or at all, and impact our ability to fund business operations and activities and repay liabilities on a timely basis;
•our ability to pay down, refinance, restructure, or extend our indebtedness as it becomes due, and our potential inability to comply with the financial covenants of our credit facility and other debt agreements, which could result in a default and potential acceleration of indebtedness and impact our ability to make additional borrowings under our credit facility or otherwise in the future; and
•the potential negative impact on the health of our personnel, particularly if a significant number of them and/or key personnel are impacted, and the potential impact of adaptations to our operations in order to protect our personnel, such as remote work arrangements, could introduce operational risk, including but not limited to cybersecurity risks, and could impair our ability to manage our business.
We may in the future choose to pay distributions in shares of our common stock rather than solely in cash, which may result in our stockholders having a tax liability with respect to such distributions that exceeds the amount of cash received, if any.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 45 |
While the rapid developments regarding the COVID-19 pandemic preclude any prediction as to its ultimate adverse impact, the current economic, political, and social environment presents material risks and uncertainties with respect to our and our Neighbors’ business, financial condition, results of operations, could be lower than they otherwise would have been. Furthermore, our results of operations following our transitioncash flows, liquidity, and ability to self-management may not be comparable to our results priorsatisfy debt service obligations. Moreover, to the transition.
Mr. Edison,extent any of these risks and uncertainties adversely impact us in the ways described above or his designee, will be nominated tootherwise, they may also have the boardeffect of directors (“Board”) for eachheightening many of the next ten succeedingother risks described under the section entitled “Item 1A. Risk Factors” in our most recent annual meetings, subject to certain terminating events.report on Form 10-K for the year ended December 31, 2020.
Actual incremental yields for our development and redevelopment projects may vary from our underwritten incremental yield range.
As part of our standard development and redevelopment underwriting process, we analyze the PELP transaction, Mr. Edison, or his designee, will be nominated to the Boardyield for each project and establish a range of target yields (“underwritten incremental yields”). Underwritten incremental yields reflect the yield we target to generate from each project upon expected stabilization and are calculated as the estimated incremental NOI for a project at stabilization divided by its estimated net project investment. The estimated incremental NOI is the difference between the estimated annualized NOI we target to generate from a project upon stabilization and the estimated annualized NOI without the planned improvements. Underwritten incremental yield does not include peripheral impacts, such as lease rollover risk or the impact on the long term value of the ten succeeding annual meetings, subject to certain terminating events, including theproperty upon sale or transferdisposition.
Underwritten incremental yields are based solely on our estimates, using data available to us in our development and redevelopment underwriting processes. The actual total cost to complete a development or redevelopment project may differ substantially from our estimates due to various factors, including unanticipated expenses, delays in the estimated start and/or completion date of more than 35%planned development projects, effects of the partnership units (“OP Units”) ofCOVID-19 pandemic, and other contingencies. In addition, the actual incremental NOI from our planned development and redevelopment activities may differ substantially from our estimates based on numerous other factors, including delays and/or difficulties in leasing and stabilizing a development or redevelopment project, failure to obtain estimated occupancy and rental rates, inability to collect anticipated rental revenues, Neighbor bankruptcies, and unanticipated expenses that we cannot pass on to our Neighbors. Actual incremental yields may vary from our underwritten incremental yield range based on the actual total cost to complete a project and its incremental NOI at stabilization.
We and our consolidated subsidiary, Phillips Edison Grocery Center Operating Partnership I, L. P. (“PECO I OP”L.P. (the “Operating Partnership”) that he beneficially owns. As a result, it is possible that Mr. Edison may continue to be nominated as a director in circumstances when the independent directors would not otherwise have done so.
Mr. Edison shall continue to serve as Chairman of the Board until the third anniversary of the closing of the PELP transaction, subject to, entered into tax protection agreements with certain terminating events.
Our bylaws provide that Mr. Edison will continue to serve as Chairman of the Board until the third anniversary of the closing of the PELP transaction, subject to certain terminating events, including the listing of our common stock on a national securities exchange. As a result, Mr. Edison may continue to serve as Chairman of the Board in circumstances when the independent directors would not otherwise have selected him.
Upon closing of the PELP transaction, the PECO I OP partnership agreement was amended to, among other things, grant certain rights and protections to the limitedprotected partners, which may prevent or delay a change of control transaction that might involve a premium price for our shares of common stock.
The amended and restated PECO I OP partnership agreement, which, among other things, grants certain rights and protections tolimit the limited partners, including granting limited partners the right to consent to a change of control transaction. Furthermore, Mr. Edison currently has voting control over approximately 9.6% of the OP Units (inclusive of those owned by us) and therefore could have a significant influence over votes on change of control transactions. As part of the PELP transaction, we entered into certain provisions that should reduce the possibility that Mr. Edison or other protected partners (“Tax Protection Agreement”) would have an economic incentive to oppose a change of control transaction that would otherwise be in our best interest, we cannot be certain however that such limited partners would view a change of control transaction as favorably as our stockholders. The Tax Protection Agreement expires after ten years from the closing of the PELP transaction.
We have and will incur substantial expenses related to the PELP transaction and its integration.
We have incurred and will incur substantial expenses in connection with completing the PELP transaction. While we expected to incur a certain level of transaction and integration expenses, factors beyond our control could affect the total amount or the timing of its integration expenses. As a result, the transaction and integration expenses associated with the PELP transaction could, particularly in the near term, exceed the savings that we expect to achieve from the acquisition of the companies contributed under the PELP transaction (“Contributed Companies”) following the closing. If the expenses we incur as a result of the PELP transaction are higher than anticipated, our net income per common share and funds from operations per common share would be adversely affected.
Our future results will suffer if we do not effectively manage our expanded portfolio and operations.
There can be no assurance, however, regarding when or to what extent we will be able to realize the benefits of the PELP transaction, which may be difficult, unpredictable and subject to delays. We will be required to devote significant management attention and resources to integrating our business practices and operations with the Contributed Companies. It is possible that the integration process could result in the distraction of our management, the disruption of our ongoing business or inconsistencies in our operations, services, standards, controls, procedures and policies, any of which could adversely affect our ability to maintain relationships with operators, vendors and employees or to fully achieve the anticipated benefits of the PELP transaction. There may also be potential unknown or unforeseen liabilities, increased expenses, or delays associated with integrating the Contributed Companies into us.
With the closing of the PELP transaction, we have an expanded portfolio and operations, and likely will continue to expand our operations through additional acquisitions and other strategic transactions, some of which may involve complex challenges.
Our future success will depend, in part, upon our ability to manage expansion opportunities, integrate new operations into our existing business in an efficient and timely manner, successfully monitor our operations, costs, regulatory compliance and service quality and maintain other necessary internal controls. There can be no assurance that our expansion or acquisition opportunities will be successful, or that it will realize our expected operating efficiencies, cost savings, revenue enhancements, synergies or other benefits.
We may be unable to retain key employees.
Our success after the PELP transaction closing depends in part upon its ability to retain key employees. Key employees of the Contributed Companies and subsidiaries thereof may depart because of issues relating to the uncertainty and difficulty of integration. Accordingly, no assurance can be given that we will be able to retain key employees.
We may be exposed to risks to which we have not historically been exposed to.
We historically have not had employees. We now have employees following the consummation of the PELP transaction, and as their employer, we will be subject to those potential liabilities that are commonly faced by employers, such as workers disability and compensation claims, potential labor disputes and other employee-related liabilities and grievances. Further, we will bear the costs of the establishment and maintenance of health, retirement and similar benefit plans for our employees.
Following the closing of the PELP transaction, we agreed to honor and fulfill the rights to certain indemnification claims for acts or omissions occurring at or prior to the closing in favor of managers, directors, officers, trustees, agents or fiduciaries of any Contributed Company or subsidiary thereof.
We have agreed to honor and fulfill, following the closing, the rights to indemnification and exculpation from liabilities for acts or omissions occurring at or prior to the closing now existing in favor of a manager, director, officer, trustee, agent or fiduciary of any Contributed Company or subsidiary contained in (i) the organizational documents of the Contributed Companies and their subsidiaries and (ii) all existing indemnification agreements of the Contributed Companies and their subsidiaries. For six years after the closing, we may not amend, modify or repeal the organizational documents of the Contributed Companies and their subsidiaries in any way that would adversely affect such rights. We may incur substantial costs to address such claims and are limited in our ability to modify such indemnification obligations.
The estimated net asset value per common share may decline now or in the future as a result of the PELP transaction.
The estimated net asset value per common share may decline as a result of the PELP transaction for a number of reasons, including if we do not achieve the perceived benefits of the PELP transaction as rapidly or to the extent that is anticipated.
We cannot assure stockholders that we will be able to continue paying distributions at the rate currently paid.
We expect to continue our current distribution practices following the closing of the PELP transaction. Stockholders however, may not receive distributions following the closing of the PELP transaction equivalent to those previously paid by us for various reasons, including the following:
as a result of the PELP transaction and the issuance of OP Units in connection with the PELP transaction, the total amount of cash required for us to pay distributions at our current rate has increased;
we may not have enough cash to pay such distributions due to changes in our cash requirements, indebtedness, capital spending plans, cash flows or financial position or as a result of unknown or unforeseen liabilities incurred in connection with the PELP transaction;
decisions on whether, when and in what amounts to make any future distributions will remain at all times entirely at the discretion of the Board, which reserves the right to change our distribution practices at any time and for any reason; and
we may desire to retain cash to maintain or improve our credit ratings and financial position.
Existing and future stockholders have no contractual or other legal right to distributions that have not been declared.
We may have failed to uncover all liabilities of the Contributed Companies through the due diligence process prior to the PELP transaction, exposing us to potentially large, unanticipated costs.
Prior to completing the PELP transaction, we performed certain due diligence reviews of the business of PELP. Our due diligence review may not have adequately uncovered all of the contingent or undisclosed liabilities we may incur as a consequence of the PELP transaction. Any such liabilities could cause us to experience potentially significant losses, which could materially adversely affect our business, results of operations and financial condition.
The Tax Protection Agreement, during its term, could limit PECO I OP’sOperating Partnership’s ability to sell or otherwise dispose of certain propertiesshopping centers and may require PECO I OPthe Operating Partnership to maintain certain debt levels that otherwise would not be required to operate its business.
We and PECO I OPthe Operating Partnership entered into a Tax Protection Agreementtax protection agreement on October 4, 2017 (the “2017 TPA”) with, among others, Jeffrey S. Edison, our Chairman and Chief Executive Officer, and certain entities controlled by him at the closing of a transaction in May 2017 pursuant to which we internalized our management structure through the acquisition of certain real estate assets and the third party investment management business of Phillips Edison Limited Partnership in exchange for ownership units of the Operating Partnership (“OP units”) and cash. Pursuant to the 2017 TPA, if PECO I OPthe Operating Partnership: (i) sells, exchanges, transfers conveys or otherwise disposes of a Protected Property (as defined in the Tax Protection Agreement)certain shopping centers in a taxable transaction, or undertakes any taxable merger, combination, consolidation or similar transaction (including a transfer of all or substantially all assets), for a period of ten years commencing on the closing (the “Tax Protection Period”)October 4, 2017; or (ii) fails, prior to the expiration of the Tax Protection Period,such period, to maintain certain minimum levels of indebtedness that would be allocable to each Protected Partner (as defined in the Tax Protection Agreement)protected partner for tax purposes or, alternatively,under certain circumstances, fails to offer such Protected Partnerprotected partners the opportunity to guarantee specificcertain types of PECO I OP’sthe Operating Partnership’s indebtedness, in order to enable such Protected Partner to continue to defer certain tax liabilities, PECO I OPthen the Operating Partnership will indemnify each affected Protected Partnerprotected partner, including Mr. Edison, against certain resulting tax liabilities. Our tax indemnification obligations include a tax gross-up. As of June 30, 2021, 36 of our 272 wholly-owned properties, comprising approximately 11.4% of our ABR, are subject to the protection described in clause (i) above, and the potential “make-whole amount” on the estimated aggregate amount of built-in gain subject to such protection is approximately $152.6 million.
We and the Operating Partnership entered into an additional tax protection agreement (the “2021 TPA”) on July 19, 2021 with Mr. Edison; Devin I. Murphy, our President; and Robert F. Myers, our Chief Operating Officer and Executive Vice President, which will become effective upon the expiration of the 2017 TPA. The 2021 TPA generally has the following terms: (i) the 2021 TPA will severally provide to Mr. Edison, Mr. Murphy and Mr. Myers the same protection provided under the 2017 TPA until 2031, so long as (a) Mr. Edison, Mr. Murphy or Mr. Myers (or their permitted transferees), as applicable, individually owns at least 65% of the OP units owned by him as of the date of the execution of the 2021 TPA and (b) in the case of Mr. Murphy or Mr. Myers, Mr. Edison individually owns at least 65% of the OP units owned by him as of the date of the execution of the 2021 TPA; and (ii) the 2021 TPA will provide that following the expiration of the four-year tax protection period under the 2021 TPA, for so long as Mr. Edison holds at least $5.0 million in value of OP units, (a) Mr. Edison will have the opportunity to guarantee debt of the Operating Partnership or enter into a “deficit restoration” obligation, and (b) the Operating Partnership will provide reasonable notice to Mr. Edison before effecting a significant transaction reasonably likely to result in the recognition of more than one-third of the built-in gain allocated to Mr. Edison that is protected under the 2017 TPA as of the date that the 2021 TPA is executed, and will consider in good faith any proposal made by Mr. Edison relating to structuring such transaction in a manner to avoid or mitigate adverse tax consequences to him.
Therefore, although it may be in theour stockholders’ best interest for us to cause PECO I OPthe Operating Partnership to sell, exchange, transfer convey or otherwise dispose of one or more of these properties,shopping centers, it may be economically prohibitive for us to do so duringuntil the Tax Protection Periodexpiration of the applicable protection period because of these indemnity obligations. Moreover, these obligations may require us to cause PECO I OPthe Operating Partnership to maintain more or different indebtedness than we would otherwise require for our business. As a result, the Tax Protection Agreement will,tax protection agreements could, during itstheir term, restrict our ability to take actions or make decisions that otherwise would be in our best interests.
If PECO I OP fails to qualify as a partnership for U.S. federal income tax purposes, we would fail to qualify as a REIT and suffer other adverse consequences.
We believe that PECO I OP is organized and will be operated in a manner so as to be treated as a partnership, and not an association or publicly traded partnership taxable as a corporation for U.S. federal income tax purposes. As a partnership, PECO I OP will not be subject to U.S. federal income tax on its income. Instead, each
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 46 |
Table of its partners, including us, will be allocated that partner’s share of PECO I OP’s income. No assurance can be provided, however, that the Internal Revenue Service will not challenge PECO I OP’s status as a partnership for U.S. federal income tax purposes, or that a court would not sustain such a challenge. If the Internal Revenue Service were successful in treating PECO I OP as an association or publicly traded partnership taxable as a corporation for U.S. federal income tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, would cease to qualify as a REIT. Also, the failure of PECO I OP to qualify as a partnership would cause it to become subject to U.S. federal corporate income tax, which would reduce significantly the amount of its cash available for debt service and for distribution to its partners, including us.Contents PECO I OP has a carryover tax basis on certain of its assets as a result of the PELP transaction, and the amount that we have to distribute to Stockholders therefore may be higher.
As a result of the PELP transaction, certain of PECO I OP’s properties have carryover tax bases that are lower than the fair market values of these properties at the time of the acquisition. As a result of this lower aggregate tax basis, PECO I OP will recognize higher taxable gain upon the sale of these assets, and PECO I OP will be entitled to lower depreciation deductions on these assets than if it had purchased these properties in taxable transactions at the time of the acquisition. Such lower depreciation deductions and increased gains on sales allocated to us generally will increase the amount of our required distribution under the REIT rules, and will decrease the portion of any distribution that otherwise would have been treated as a “return of capital” distribution.
We intend to use taxable REIT subsidiaries (“TRSs”), which may cause us to fail to qualify as a REIT.
To qualify as a REIT for federal income tax purposes, we hold, and plan to continue to hold, our non-qualifying REIT assets and conduct our non-qualifying REIT income activities in or through one or more TRSs. A TRS is a corporation other than a REIT in which a REIT directly or indirectly holds stock, and that has made a joint election with such REIT to be treated as a TRS. A TRS also includes any corporation other than a REIT with respect to which a TRS owns securities possessing more than 35% of the total voting power or value of the outstanding securities of such corporation. Other than some activities relating to lodging and health care facilities, a TRS may generally engage in any business, including the provision of customary or non-customary services to tenants of its parent REIT. A TRS is subject to income tax as a regular C corporation.
The net income of our TRSs is not required to be distributed to us and income that is not distributed to us will generally not be subject to the REIT income distribution requirement. However, our TRS may pay dividends. Such dividend income should qualify under the 95%, but not the 75%, gross income test. We will monitor the amount of the dividend and other income from our TRS and will take actions intended to keep this income, and any other non-qualifying income, within the limitations of the REIT income tests. While we expect these actions will prevent a violation of the REIT income tests, we cannot guarantee that such actions will in all cases prevent such a violation.
Our ownership of TRSs will be subject to limitations that could prevent us from growing our management business and our transactions with our TRSs could cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on an arm’s-length basis.
Overall, (i) for taxable years beginning prior to January 1, 2018, no more than 25% of the value of a REIT’s gross assets, and (ii) for taxable years beginning after December 31, 2017, no more than 20% of the value of a REIT’s gross assets, may consist of interests in TRSs; compliance with this limitation could limit our ability to grow our management business. In addition, the Internal Revenue Code limits the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The Internal Revenue Code also imposes a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. We will monitor the value of investments in our TRSs in order to ensure compliance with TRS ownership limitations and will structure our transactions with our TRSs on terms that we believe are arm’s-length to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the TRS ownership limitation or be able to avoid application of the 100% excise tax.
ItemITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
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c) | During the quarter ended September 30, 2017, we repurchased shares as follows (shares in thousands): |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
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Period | | Total Number of Shares Repurchased | | Average Price Paid per Share(1) | | Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program(2) | | Approximate Dollar Value of Shares Available That May Yet Be Repurchased Under the Program |
July 2017 | | 75 |
| | $ | 10.20 |
| | 75 |
| | (3) |
August 2017 | | 46 |
| | 10.20 |
| | 46 |
| | (3) |
September 2017 | | 104 |
| | 10.20 |
| | 104 |
| | (3) |
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(1)
| On November 8, 2017, our Board increased the estimated value per share of our common stock to $11.00 based substantially on the estimated market value of our portfolio of real estate properties our recently acquired third-party asset management business as of October 5, 2017, the first full business day after the closing of the PELP transaction. Prior to November 8, 2017, the estimated value per share was $10.20 (see Note 9 to the consolidated financial statements). The repurchase price per share for all stockholders is equal to the estimated value per share on the date of the repurchase. |
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(2)
| We announced the commencement of the share repurchase program (“SRP”) on August 12, 2010, and it was subsequently amended on September 29, 2011, and on April 14, 2016. |
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(3)
| We currently limit the dollar value and number of shares that may yet be repurchased under the SRP, as described below. |
Our SRP may provide a limited opportunity for stockholders to haveDuring the three months ended June 30, 2021, we issued 28,000 shares of common stock repurchased, subject to certain restrictions and limitations that are discussed below:in redemption of 28,000 OP units.
During any calendar year, we may repurchase no more than 5%As described in Item 5. “Other Information”, our Board has approved the termination of the weighted-average number of shares outstanding during the prior calendar year.share repurchase program (“SRP”).
We have no obligation to repurchase shares if the repurchase would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.
The cash available for repurchases on any particular date will generally be limited to the proceeds from the DRIP during the preceding four fiscal quarters, less any cash already used for repurchases since the beginning of the same period; however, subject to the limitations described above, we may use other sources of cash at the discretion of the Board. The limitations described above do not apply to shares repurchased due to a stockholder’s death, “qualifying disability,” or “determination of incompetence.”
Only those stockholders who purchased their shares from us or received their shares from us (directly or indirectly) through one or more non-cash transactions may be able to participate in the SRP. In other words, once our shares are transferred for value by a stockholder, the transferee and all subsequent holders of the shares are not eligible to participate in the SRP.
The Board reserves the right, in its sole discretion, at any time and from time to time, to reject any request for repurchase.
Our Board may amend, suspend, or terminate the program upon 30 days’ notice. We may provide notice by including such information (a) in a Current Report on Form 8-K or in our annual or quarterly reports, all publicly filed with the SEC, or (b) in a separate mailing to the stockholders. In connection with the May announcement of the PELP transaction (see Note 3 to the consolidated financial statements), the SRP was suspended during the month of May and resumed in June.
During the three and nine months ended September 30, 2017, repurchase requests surpassed the funding limits under the SRP. Due to the program’s funding limits, no funds will be available for the remainder of 2017. When we are unable to fulfill all repurchase requests in any month, we will honor requests on a pro rata basis to the extent possible. As of September 30, 2017, we had 9.8 million shares of unfulfilled repurchase requests, which will be treated as requests for repurchase during future months until satisfied or withdrawn. We continue to fulfill repurchases sought upon a stockholder’s death, “qualifying disability,” or “determination of incompetence” in accordance with the terms of the SRP.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
ItemITEM 5. Other InformationOTHER INFORMATION
On November 8, 2017,August 4, 2021, as a result of our underwritten IPO, our Board approved the independent directorstermination of the Board unanimously approved Les Chao as their lead independent director.Dividend Reinvestment Plan (“DRIP”) and the SRP. The DRIP has been suspended since April 2021. The SRP, which was limited to repurchases resulting from the death, qualifying disability, or the declaration of incompetence of stockholders, has been suspended since March 2021, and the SRP for standard repurchases had been suspended since August 2019.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 47 |
ItemITEM 6. Exhibits
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Ex. | | Description | Reference |
3.1 | * | | |
3.2 | | | Form 8-K, filed July 19, 2021, Exhibit 3.1 |
10.1 | | | DEF14A, filed April 7, 2021, Appendix A |
10.2 | | First Amendment to Credit Agreement, dated as of May 18, 2017, betweenby and among Phillips Edison Grocery Center REITOperating Partnership I, L.P., Phillips Edison & Company, Inc., the Lenders and Capital One, National Association, as administrative agent, dated November 16, 2018 | Form S-11/A, filed July 7, 2021, Exhibit 10.4 |
10.3 | | | Form 8-K, filed July 2, 2021, Exhibit 10.1 |
10.4 | | |
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| | Form 8-K, filed October 11, 2017)July 19, 2021, Exhibit 10.1 |
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| | Form S-11/A, filed July 7, 2021, Exhibit 10.32 |
10.6 | | | Form S-11/A, filed July 7, 2021, Exhibit 10.33 |
10.7 | | | Form S-11/A, filed July 7, 2021, Exhibit 10.34 |
10.8 | | | Form S-11/A, filed July 7, 2021, Exhibit 10.35 |
31.1 | * | |
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101.1101.INS | The following information from | Inline XBRL Instance Document - the Company’s quarterly report on Forminstance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | | Inline XBRL Taxonomy Definition Linkbase Document | |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in exhibit 101) | |
*Filed herewith
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q for the quarter ended September 30, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations and Comprehensive (Loss) Income; (iii) Consolidated Statements of Equity; and (iv) Consolidated Statements of Cash Flows* | | | 48 |
*Filed herewith.
**Compensation Plan or Benefit filed herewith.
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrantRegistrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| PHILLIPS EDISON GROCERY CENTER REIT I,& COMPANY, INC. |
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Date: November 9, 2017August 5, 2021 | By: | /s/ Jeffrey S. Edison |
| | Jeffrey S. Edison |
| | Chairman of the Board and Chief Executive Officer (Principal Executive Officer) |
| | (Principal Executive Officer) |
Date: August 5, 2021 | | |
Date: November 9, 2017 | By: | /s/ Devin I. MurphyJohn P. Caulfield |
| | Devin I. MurphyJohn P. Caulfield |
| | Chief Financial Officer, |
| | (Principal Senior Vice President and Treasurer (Principal Financial Officer) |
39
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 49 |