UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20202021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 000-54691
PHILLIPS EDISON & COMPANY, INC.
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Maryland | | 27-1106076 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | | | | | |
11501 Northlake Drive, Cincinnati, Ohio | | 45249 |
(Address of principal executive offices) | | (Zip Code)code) |
| | |
(513) 554-1110 |
(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
NoneCommon stock, par value $0.01 per share | | NonePECO | | NoneNasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ | | | | | | | | | | | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | Yes | ☑ | No ☐ |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) | Yes | ☑ | No ☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
Large accelerated filer | ☐ | Accelerated filer | ☐ |
| | | |
Non-accelerated filer | ☑ | Smaller reporting company | Emerging growth company |
☐ | ☐ | ☑ | ☐ | ☐ |
| | | | | | | | | | | |
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | Emerging growth ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes | ☐ | No ☑ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a)There were 19.6 million shares of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of November 2, 2020, there were 290.5registrant’s Common Stock, $0.01 par value per share, and 93.7 million outstanding shares of commonClass B stock, $0.01 par value per share, outstanding as of the Registrant.July 30, 2021.
PHILLIPS EDISON & COMPANY, INC.
FORM 10-Q
TABLE OF CONTENTS
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 1 |
| | |
w PART I FINANCIAL INFORMATION |
ITEM 1. FINANCIAL STATEMENTS
PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBERJUNE 30, 20202021 AND DECEMBER 31, 20192020
(Condensed and Unaudited)
(In thousands, except per share amounts)
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
ASSETS | ASSETS | | | | ASSETS | | | |
Investment in real estate: | Investment in real estate: | | | | Investment in real estate: | | | |
Land and improvements | Land and improvements | $ | 1,547,154 | | | $ | 1,552,562 | | Land and improvements | $ | 1,529,803 | | | $ | 1,549,362 | |
Building and improvements | Building and improvements | 3,220,949 | | | 3,196,762 | | Building and improvements | 3,184,601 | | | 3,237,986 | |
In-place lease assets | In-place lease assets | 441,670 | | | 442,729 | | In-place lease assets | 434,499 | | | 441,683 | |
Above-market lease assets | Above-market lease assets | 65,637 | | | 65,946 | | Above-market lease assets | 64,795 | | | 66,106 | |
Total investment in real estate assets | Total investment in real estate assets | 5,275,410 | | | 5,257,999 | | Total investment in real estate assets | 5,213,698 | | | 5,295,137 | |
Accumulated depreciation and amortization | Accumulated depreciation and amortization | (892,090) | | | (731,560) | | Accumulated depreciation and amortization | (1,021,456) | | | (941,413) | |
Net investment in real estate assets | Net investment in real estate assets | 4,383,320 | | | 4,526,439 | | Net investment in real estate assets | 4,192,242 | | | 4,353,724 | |
Investment in unconsolidated joint ventures | Investment in unconsolidated joint ventures | 39,575 | | | 42,854 | | Investment in unconsolidated joint ventures | 32,746 | | | 37,366 | |
Total investment in real estate assets, net | Total investment in real estate assets, net | 4,422,895 | | | 4,569,293 | | Total investment in real estate assets, net | 4,224,988 | | | 4,391,090 | |
Cash and cash equivalents | Cash and cash equivalents | 103,910 | | | 17,820 | | Cash and cash equivalents | 22,205 | | | 104,296 | |
Restricted cash | Restricted cash | 32,888 | | | 77,288 | | Restricted cash | 89,196 | | | 27,641 | |
Goodwill | Goodwill | 29,066 | | | 29,066 | | Goodwill | 29,066 | | | 29,066 | |
Other assets, net | Other assets, net | 133,014 | | | 128,690 | | Other assets, net | 126,056 | | | 126,470 | |
Real estate investment and other assets held for sale | 0 | | | 6,038 | | |
Real estate investments and other assets held for sale | | Real estate investments and other assets held for sale | 14,261 | | | 0 | |
Total assets | Total assets | $ | 4,721,773 | | | $ | 4,828,195 | | Total assets | $ | 4,505,772 | | | $ | 4,678,563 | |
| LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | | | LIABILITIES AND EQUITY | | | |
Liabilities: | Liabilities: | | | | Liabilities: | | | |
Debt obligations, net | Debt obligations, net | $ | 2,319,003 | | | $ | 2,354,099 | | Debt obligations, net | $ | 2,228,232 | | | $ | 2,292,605 | |
Below-market lease liabilities, net | Below-market lease liabilities, net | 105,223 | | | 112,319 | | Below-market lease liabilities, net | 93,949 | | | 101,746 | |
Earn-out liability | Earn-out liability | 22,000 | | | 32,000 | | Earn-out liability | 40,000 | | | 22,000 | |
Derivative liabilities | Derivative liabilities | 60,615 | | | 20,974 | | Derivative liabilities | 39,929 | | | 54,759 | |
Deferred income | Deferred income | 14,092 | | | 15,955 | | Deferred income | 18,978 | | | 14,581 | |
Accounts payable and other liabilities | Accounts payable and other liabilities | 93,187 | | | 124,054 | | Accounts payable and other liabilities | 88,436 | | | 176,943 | |
Liabilities of real estate investments held for sale | | Liabilities of real estate investments held for sale | 860 | | | 0 | |
Total liabilities | Total liabilities | 2,614,120 | | | 2,659,401 | | Total liabilities | 2,510,384 | | | 2,662,634 | |
Commitments and contingencies (Note 8) | Commitments and contingencies (Note 8) | 0 | | | 0 | | Commitments and contingencies (Note 8) | 0 | | | 0 | |
Equity: | Equity: | | | | Equity: | | | |
Preferred stock, $0.01 par value per share, 10,000 shares authorized, 0 shares issued and | Preferred stock, $0.01 par value per share, 10,000 shares authorized, 0 shares issued and | | | | Preferred stock, $0.01 par value per share, 10,000 shares authorized, 0 shares issued and | | | |
outstanding at September 30, 2020 and December 31, 2019 | 0 | | | 0 | | |
Common stock, $0.01 par value per share, 1,000,000 shares authorized, 290,466 and 289,047 | | | | |
shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively | 2,905 | | | 2,890 | | |
outstanding at June 30, 2021 and December 31, 2020 | | outstanding at June 30, 2021 and December 31, 2020 | 0 | | | 0 | |
Common stock, $0.01 par value per share, 1,000,000 shares authorized, 93,640 and 93,279 | | Common stock, $0.01 par value per share, 1,000,000 shares authorized, 93,640 and 93,279 | | | |
shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively | | shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively | 2,808 | | | 2,798 | |
Additional paid-in capital (“APIC”) | Additional paid-in capital (“APIC”) | 2,796,655 | | | 2,779,130 | | Additional paid-in capital (“APIC”) | 2,749,680 | | | 2,739,358 | |
Accumulated other comprehensive loss (“AOCI”) | Accumulated other comprehensive loss (“AOCI”) | (55,630) | | | (20,762) | | Accumulated other comprehensive loss (“AOCI”) | (38,732) | | | (52,306) | |
Accumulated deficit | Accumulated deficit | (980,534) | | | (947,252) | | Accumulated deficit | (1,041,617) | | | (999,491) | |
Total stockholders’ equity | Total stockholders’ equity | 1,763,396 | | | 1,814,006 | | Total stockholders’ equity | 1,672,139 | | | 1,690,359 | |
Noncontrolling interests | Noncontrolling interests | 344,257 | | | 354,788 | | Noncontrolling interests | 323,249 | | | 325,570 | |
Total equity | Total equity | 2,107,653 | | | 2,168,794 | | Total equity | 1,995,388 | | | 2,015,929 | |
Total liabilities and equity | Total liabilities and equity | $ | 4,721,773 | | | $ | 4,828,195 | | Total liabilities and equity | $ | 4,505,772 | | | $ | 4,678,563 | |
See notes to consolidated financial statements.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 2 |
PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20202021 AND 20192020
(Condensed and Unaudited)
(In thousands, except per share amounts)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
Revenues: | Revenues: | | Revenues: | |
Rental income | Rental income | $ | 123,298 | | | $ | 132,715 | | | $ | 367,418 | | | $ | 390,605 | | Rental income | $ | 130,335 | | | $ | 115,654 | | | $ | 257,958 | | | $ | 244,120 | |
Fees and management income | Fees and management income | 2,581 | | | 2,766 | | | 7,506 | | | 9,078 | | Fees and management income | 2,374 | | | 2,760 | | | 4,660 | | | 4,925 | |
Other property income | Other property income | 816 | | | 528 | | | 2,334 | | | 1,676 | | Other property income | 361 | | | 626 | | | 833 | | | 1,518 | |
Total revenues | Total revenues | 126,695 | | | 136,009 | | | 377,258 | | | 401,359 | | Total revenues | 133,070 | | | 119,040 | | | 263,451 | | | 250,563 | |
Operating Expenses: | Operating Expenses: | | Operating Expenses: | |
Property operating | Property operating | 20,835 | | | 23,296 | | | 62,226 | | | 67,095 | | Property operating | 21,974 | | | 19,629 | | | 44,176 | | | 41,391 | |
Real estate taxes | Real estate taxes | 17,282 | | | 18,016 | | | 50,847 | | | 53,294 | | Real estate taxes | 16,814 | | | 16,453 | | | 33,387 | | | 33,565 | |
General and administrative | General and administrative | 9,595 | | | 11,537 | | | 30,141 | | | 38,287 | | General and administrative | 11,937 | | | 9,806 | | | 21,278 | | | 20,546 | |
Depreciation and amortization | Depreciation and amortization | 56,095 | | | 58,477 | | | 168,692 | | | 179,020 | | Depreciation and amortization | 56,587 | | | 56,370 | | | 111,928 | | | 112,597 | |
Impairment of real estate assets | Impairment of real estate assets | 0 | | | 35,710 | | | 0 | | | 74,626 | | Impairment of real estate assets | 1,056 | | | 0 | | | 6,056 | | | 0 | |
Total operating expenses | Total operating expenses | 103,807 | | | 147,036 | | | 311,906 | | | 412,322 | | Total operating expenses | 108,368 | | | 102,258 | | | 216,825 | | | 208,099 | |
Other: | Other: | | Other: | |
Interest expense, net | Interest expense, net | (20,388) | | | (25,309) | | | (65,317) | | | (76,151) | | Interest expense, net | (19,132) | | | (22,154) | | | (39,195) | | | (44,929) | |
Gain on disposal of property, net | 10,734 | | | 5,048 | | | 8,616 | | | 10,903 | | |
Other income (expense), net | 196 | | | 1,561 | | | 9,565 | | | (1,476) | | |
Gain (loss) on disposal of property, net | | Gain (loss) on disposal of property, net | 3,744 | | | (541) | | | 17,585 | | | (2,118) | |
Other (expense) income, net | | Other (expense) income, net | (2,924) | | | (500) | | | (18,509) | | | 9,369 | |
Net income (loss) | Net income (loss) | 13,430 | | | (29,727) | | | 18,216 | | | (77,687) | | Net income (loss) | 6,390 | | | (6,413) | | | 6,507 | | | 4,786 | |
Net (income) loss attributable to noncontrolling interests | Net (income) loss attributable to noncontrolling interests | (1,646) | | | 3,850 | | | (2,251) | | | 10,045 | | Net (income) loss attributable to noncontrolling interests | (796) | | | 825 | | | (810) | | | (605) | |
Net income (loss) attributable to stockholders | Net income (loss) attributable to stockholders | $ | 11,784 | | | $ | (25,877) | | | $ | 15,965 | | | $ | (67,642) | | Net income (loss) attributable to stockholders | $ | 5,594 | | | $ | (5,588) | | | $ | 5,697 | | | $ | 4,181 | |
Earnings per common share: | Earnings per common share: | | | | | | | | Earnings per common share: | | | | | | | |
Net income (loss) per share attributable to stockholders - basic and diluted (Note 10) | Net income (loss) per share attributable to stockholders - basic and diluted (Note 10) | $ | 0.04 | | | $ | (0.09) | | | $ | 0.05 | | | $ | (0.24) | | Net income (loss) per share attributable to stockholders - basic and diluted (Note 10) | $ | 0.06 | | | $ | (0.06) | | | $ | 0.06 | | | $ | 0.04 | |
| Comprehensive income (loss): | Comprehensive income (loss): | | Comprehensive income (loss): | |
Net income (loss) | Net income (loss) | $ | 13,430 | | | $ | (29,727) | | | $ | 18,216 | | | $ | (77,687) | | Net income (loss) | $ | 6,390 | | | $ | (6,413) | | | $ | 6,507 | | | $ | 4,786 | |
Other comprehensive income (loss): | Other comprehensive income (loss): | | Other comprehensive income (loss): | |
Change in unrealized value on interest rate swaps | Change in unrealized value on interest rate swaps | 5,098 | | | (9,731) | | | (40,013) | | | (47,737) | | Change in unrealized value on interest rate swaps | 3,373 | | | (1,747) | | | 15,493 | | | (45,111) | |
Comprehensive income (loss) | Comprehensive income (loss) | 18,528 | | | (39,458) | | | (21,797) | | | (125,424) | | Comprehensive income (loss) | 9,763 | | | (8,160) | | | 22,000 | | | (40,325) | |
Net (income) loss attributable to noncontrolling interests | Net (income) loss attributable to noncontrolling interests | (1,646) | | | 3,850 | | | (2,251) | | | 10,045 | | Net (income) loss attributable to noncontrolling interests | (796) | | | 825 | | | (810) | | | (605) | |
Other comprehensive (income) loss attributable to noncontrolling interests | (653) | | | 1,293 | | | 5,145 | | | 6,399 | | |
Change in unrealized value on interest rate swaps attributable to noncontrolling interests | | Change in unrealized value on interest rate swaps attributable to noncontrolling interests | (400) | | | 224 | | | (1,909) | | | 5,798 | |
Reallocation of comprehensive loss upon conversion of noncontrolling interests | | Reallocation of comprehensive loss upon conversion of noncontrolling interests | (10) | | | 0 | | | (10) | | | 0 | |
Comprehensive income (loss) attributable to stockholders | Comprehensive income (loss) attributable to stockholders | $ | 16,229 | | | $ | (34,315) | | | $ | (18,903) | | | $ | (108,980) | | Comprehensive income (loss) attributable to stockholders | $ | 8,557 | | | $ | (7,111) | | | $ | 19,271 | | | $ | (35,132) | |
See notes to consolidated financial statements.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 3 |
PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBERJUNE 30, 20202021 AND 20192020
(Condensed and Unaudited)
(In thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 and 2019 |
| Common Stock | | APIC | | AOCI | | Accumulated Deficit | | Total Stockholders’ Equity | | Noncontrolling Interests | | Total Equity |
| Shares | | Amount | | | | | | |
Balance at July 1, 2019 | 283,770 | | | $ | 2,838 | | | $ | 2,718,871 | | | $ | (20,538) | | | $ | (830,358) | | | $ | 1,870,813 | | | $ | 371,213 | | | $ | 2,242,026 | |
Dividend reinvestment plan (“DRIP”) | 1,475 | | | 14 | | | 16,357 | | | — | | | — | | | 16,371 | | | — | | | 16,371 | |
Share repurchases | (1,660) | | | (17) | | | (18,193) | | | — | | | — | | | (18,210) | | | — | | | (18,210) | |
Change in unrealized value on interest rate swaps | — | | | — | | | — | | | (8,438) | | | — | | | (8,438) | | | (1,293) | | | (9,731) | |
Common distributions declared, $0.17 per share | — | | | — | | | — | | | — | | | (48,062) | | | (48,062) | | | — | | | (48,062) | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (6,978) | | | (6,978) | |
Share-based compensation | 1 | | | 0 | | | 502 | | | — | | | — | | | 502 | | | 1,674 | | | 2,176 | |
Net loss | — | | | — | | | — | | | — | | | (25,877) | | | (25,877) | | | (3,850) | | | (29,727) | |
Balance at September 30, 2019 | 283,586 | | | $ | 2,835 | | | $ | 2,717,537 | | | $ | (28,976) | | | $ | (904,297) | | | $ | 1,787,099 | | | $ | 360,766 | | | $ | 2,147,865 | |
| | | | | | | | | | | | | | | |
Balance at July 1, 2020 | 290,465 | | | $ | 2,905 | | | $ | 2,795,434 | | | $ | (60,075) | | | $ | (991,939) | | | $ | 1,746,325 | | | $ | 341,144 | | | $ | 2,087,469 | |
Change in unrealized value on interest rate swaps | — | | | — | | | — | | | 4,445 | | | — | | | 4,445 | | | 653 | | | 5,098 | |
Share-based compensation | 1 | | | 0 | | | 1,036 | | | — | | | — | | | 1,036 | | | 818 | | | 1,854 | |
Other | 0 | | | — | | | 185 | | | — | | | (379) | | | (194) | | | (4) | | | (198) | |
Net income | — | | | — | | | — | | | — | | | 11,784 | | | 11,784 | | | 1,646 | | | 13,430 | |
Balance at September 30, 2020 | 290,466 | | | $ | 2,905 | | | $ | 2,796,655 | | | $ | (55,630) | | | $ | (980,534) | | | $ | 1,763,396 | | | $ | 344,257 | | | $ | 2,107,653 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 and 2020 |
| Common Stock | | APIC | | AOCI | | Accumulated Deficit | | Total Stockholders’ Equity | | Noncontrolling Interests | | Total Equity |
| Shares | | Amount | | | | | | |
Balance at April 1, 2020 | 96,805 | | | $ | 2,903 | | | $ | 2,793,803 | | | $ | (58,552) | | | $ | (986,292) | | | $ | 1,751,862 | | | $ | 341,944 | | | $ | 2,093,806 | |
Change in unrealized value on interest rate swaps | — | | | — | | | — | | | (1,523) | | | — | | | (1,523) | | | (224) | | | (1,747) | |
Share-based compensation | 2 | | | 1 | | | 1,332 | | | — | | | — | | | 1,333 | | | 808 | | | 2,141 | |
Conversion of noncontrolling interests | 17 | | | 1 | | | 555 | | | — | | | — | | | 556 | | | (556) | | | — | |
Other | (2) | | | — | | | (256) | | | — | | | (59) | | | (315) | | | (3) | | | (318) | |
Net loss | — | | | — | | | — | | | — | | | (5,588) | | | (5,588) | | | (825) | | | (6,413) | |
Balance at June 30, 2020 | 96,822 | | | $ | 2,905 | | | $ | 2,795,434 | | | $ | (60,075) | | | $ | (991,939) | | | $ | 1,746,325 | | | $ | 341,144 | | | $ | 2,087,469 | |
| | | | | | | | | | | | | | | |
Balance at April 1, 2021 | 93,582 | | | $ | 2,807 | | | $ | 2,746,891 | | | $ | (41,695) | | | $ | (1,023,155) | | | $ | 1,684,848 | | | $ | 324,558 | | | $ | 2,009,406 | |
Change in unrealized value on interest rate swaps | — | | | — | | | — | | | 2,973 | | | — | | | 2,973 | | | 400 | | | 3,373 | |
Common distributions declared, $0.255 per share | — | | | — | | | — | | | — | | | (24,056) | | | (24,056) | | | — | | | (24,056) | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (3,460) | | | (3,460) | |
Share-based compensation | 30 | | | 1 | | | 2,102 | | | — | | | — | | | 2,103 | | | 1,632 | | | 3,735 | |
Conversion of noncontrolling interests | 28 | | | — | | | 743 | | | — | | | — | | | 743 | | | (743) | | | — | |
Reallocation of operating partnership interests | — | | | — | | | (56) | | | (10) | | | — | | | (66) | | | 66 | | | — | |
Net income | — | | | — | | | — | | | — | | | 5,594 | | | 5,594 | | | 796 | | | 6,390 | |
Balance at June 30, 2021 | 93,640 | | | $ | 2,808 | | | $ | 2,749,680 | | | $ | (38,732) | | | $ | (1,041,617) | | | $ | 1,672,139 | | | $ | 323,249 | | | $ | 1,995,388 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 and 2019 |
| Common Stock | | APIC | | AOCI | | Accumulated Deficit | | Total Stockholders’ Equity | | Noncontrolling Interests | | Total Equity |
| Shares | | Amount | | | | | | |
Balance at January 1, 2019 | 279,803 | | | $ | 2,798 | | | $ | 2,674,871 | | | $ | 12,362 | | | $ | (692,573) | | | $ | 1,997,458 | | | $ | 414,911 | | | $ | 2,412,369 | |
DRIP | 4,636 | | | 45 | | | 51,284 | | | — | | | — | | | 51,329 | | | — | | | 51,329 | |
Share repurchases | (2,806) | | | (28) | | | (30,856) | | | — | | | — | | | (30,884) | | | — | | | (30,884) | |
Change in unrealized value on interest rate swaps | — | | | — | | | — | | | (41,338) | | | — | | | (41,338) | | | (6,399) | | | (47,737) | |
Common distributions declared, $0.50 per share | — | | | — | | | — | | | — | | | (144,082) | | | (144,082) | | | — | | | (144,082) | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (21,206) | | | (21,206) | |
Share-based compensation | 65 | | | 1 | | | 1,358 | | | — | | | — | | | 1,359 | | | 4,404 | | | 5,763 | |
Conversion of noncontrolling interests | 1,888 | | | 19 | | | 20,880 | | | — | | | — | | | 20,899 | | | (20,899) | | | — | |
Net loss | — | | | — | | | — | | | — | | | (67,642) | | | (67,642) | | | (10,045) | | | (77,687) | |
Balance at September 30, 2019 | 283,586 | | | $ | 2,835 | | | $ | 2,717,537 | | | $ | (28,976) | | | $ | (904,297) | | | $ | 1,787,099 | | | $ | 360,766 | | | $ | 2,147,865 | |
| | | | | | | | | | | | | | | |
Balance at January 1, 2020 | 289,047 | | | $ | 2,890 | | | $ | 2,779,130 | | | $ | (20,762) | | | $ | (947,252) | | | $ | 1,814,006 | | | $ | 354,788 | | | $ | 2,168,794 | |
DRIP | 1,436 | | | 14 | | | 15,926 | | | — | | | — | | | 15,940 | | | — | | | 15,940 | |
Share repurchases | (288) | | | (3) | | | (2,697) | | | — | | | — | | | (2,700) | | | — | | | (2,700) | |
Change in unrealized value on interest rate swaps | — | | | — | | | — | | | (34,868) | | | — | | | (34,868) | | | (5,145) | | | (40,013) | |
Common distributions declared, $0.17 per share | — | | | — | | | — | | | — | | | (48,809) | | | (48,809) | | | — | | | (48,809) | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (7,105) | | | (7,105) | |
Share-based compensation | 109 | | | 2 | | | 2,508 | | | — | | | — | | | 2,510 | | | 1,336 | | | 3,846 | |
Conversion of noncontrolling interests | 168 | | | 2 | | | 1,859 | | | — | | | — | | | 1,861 | | | (1,861) | | | 0 | |
Other | (6) | | | — | | | (71) | | | — | | | (438) | | | (509) | | | (7) | | | (516) | |
Net income | — | | | — | | | — | | | — | | | 15,965 | | | 15,965 | | | 2,251 | | | 18,216 | |
Balance at September 30, 2020 | 290,466 | | | $ | 2,905 | | | $ | 2,796,655 | | | $ | (55,630) | | | $ | (980,534) | | | $ | 1,763,396 | | | $ | 344,257 | | | $ | 2,107,653 | |
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 4 |
PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2021 AND 2020
(Condensed and Unaudited)
(In thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 and 2020 |
| Common Stock | | APIC | | AOCI | | Accumulated Deficit | | Total Stockholders’ Equity | | Noncontrolling Interests | | Total Equity |
| Shares | | Amount | | | | | | |
Balance at January 1, 2020 | 96,349 | | | $ | 2,890 | | | $ | 2,779,130 | | | $ | (20,762) | | | $ | (947,252) | | | $ | 1,814,006 | | | $ | 354,788 | | | $ | 2,168,794 | |
Dividend Reinvestment Plan (“DRIP”) | 479 | | | 14 | | | 15,926 | | | — | | | — | | | 15,940 | | | — | | | 15,940 | |
Share repurchases | (96) | | | (3) | | | (2,697) | | | — | | | — | | | (2,700) | | | — | | | (2,700) | |
Change in unrealized value on interest rate swaps | — | | | — | | | — | | | (39,313) | | | — | | | (39,313) | | | (5,798) | | | (45,111) | |
Common distributions declared, $0.503 per share | — | | | — | | | — | | | — | | | (48,809) | | | (48,809) | | | — | | | (48,809) | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (7,105) | | | (7,105) | |
Share-based compensation | 36 | | | 2 | | | 1,472 | | | — | | | — | | | 1,474 | | | 518 | | | 1,992 | |
Conversion of noncontrolling interests | 56 | | | 2 | | | 1,859 | | | — | | | — | | | 1,861 | | | (1,861) | | | — | |
Other | (2) | | | — | | | (256) | | | | | (59) | | | (315) | | | (3) | | | (318) | |
Net income | — | | | — | | | — | | | — | | | 4,181 | | | 4,181 | | | 605 | | | 4,786 | |
Balance at June 30, 2020 | 96,822 | | | $ | 2,905 | | | $ | 2,795,434 | | | $ | (60,075) | | | $ | (991,939) | | | $ | 1,746,325 | | | $ | 341,144 | | | $ | 2,087,469 | |
| | | | | | | | | | | | | | | |
Balance at January 1, 2021 | 93,279 | | | $ | 2,798 | | | $ | 2,739,358 | | | $ | (52,306) | | | $ | (999,491) | | | $ | 1,690,359 | | | $ | 325,570 | | | $ | 2,015,929 | |
DRIP | 280 | | | 8 | | | 7,360 | | | — | | | — | | | 7,368 | | | — | | | 7,368 | |
Share repurchases | (24) | | | 0 | | | (123) | | | — | | | — | | | (123) | | | — | | | (123) | |
Change in unrealized value on interest rate swaps | — | | | — | | | — | | | 13,584 | | | — | | | 13,584 | | | 1,909 | | | 15,493 | |
Common distributions declared, $0.510 per share | — | | | — | | | — | | | — | | | (47,823) | | | (47,823) | | | — | | | (47,823) | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (6,779) | | | (6,779) | |
Share-based compensation | 77 | | | 2 | | | 2,427 | | | — | | | — | | | 2,429 | | | 2,416 | | | 4,845 | |
Conversion of noncontrolling interests | 28 | | | 0 | | | 743 | | | — | | | — | | | 743 | | | (743) | | | — | |
Reallocation of operating partnership interests | — | | | — | | | (56) | | | (10) | | | — | | | (66) | | | 66 | | | — | |
Other | 0 | | | — | | | (29) | | | — | | | 0 | | | (29) | | | 0 | | | (29) | |
Net income | — | | | — | | | — | | | — | | | 5,697 | | | 5,697 | | | 810 | | | 6,507 | |
Balance at June 30, 2021 | 93,640 | | | $ | 2,808 | | | $ | 2,749,680 | | | $ | (38,732) | | | $ | (1,041,617) | | | $ | 1,672,139 | | | $ | 323,249 | | | $ | 1,995,388 | |
See notes to consolidated financial statements.
4
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 5 |
PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20202021 AND 20192020
(Condensed and Unaudited)
(In thousands)
| | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2021 | | 2020 |
CASH FLOWS FROM OPERATING ACTIVITIES: | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net income (loss) | $ | 18,216 | | | $ | (77,687) | | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | |
Net income | | Net income | $ | 6,507 | | | $ | 4,786 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization of real estate assets | Depreciation and amortization of real estate assets | 164,288 | | | 174,501 | | Depreciation and amortization of real estate assets | 109,995 | | | 109,709 | |
Impairment of real estate assets | Impairment of real estate assets | 0 | | | 74,626 | | Impairment of real estate assets | 6,056 | | | 0 | |
Depreciation and amortization of corporate assets | Depreciation and amortization of corporate assets | 4,404 | | | 4,519 | | Depreciation and amortization of corporate assets | 1,933 | | | 2,888 | |
Net amortization of above- and below-market leases | Net amortization of above- and below-market leases | (2,394) | | | (3,266) | | Net amortization of above- and below-market leases | (1,725) | | | (1,583) | |
Amortization of deferred financing expenses | Amortization of deferred financing expenses | 3,739 | | | 3,758 | | Amortization of deferred financing expenses | 2,448 | | | 2,495 | |
Amortization of debt and derivative adjustments | Amortization of debt and derivative adjustments | 2,154 | | | 6,007 | | Amortization of debt and derivative adjustments | 739 | | | 1,884 | |
Gain on disposal of property, net | (8,616) | | | (10,903) | | |
(Gain) loss on disposal of property, net | | (Gain) loss on disposal of property, net | (17,585) | | | 2,118 | |
Change in fair value of earn-out liability | Change in fair value of earn-out liability | (10,000) | | | (7,500) | | Change in fair value of earn-out liability | 18,000 | | | (10,000) | |
Straight-line rent | Straight-line rent | (3,131) | | | (7,024) | | Straight-line rent | (4,400) | | | (1,331) | |
Share-based compensation | Share-based compensation | 3,846 | | | 5,971 | | Share-based compensation | 4,845 | | | 1,992 | |
Other impairment charges | 0 | | | 9,661 | | |
Return on investment in unconsolidated joint ventures | | Return on investment in unconsolidated joint ventures | 1,533 | | | 32 | |
Other | Other | 1,497 | | | 1,223 | | Other | (519) | | | 1,239 | |
Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | | | Changes in operating assets and liabilities: | | | |
Other assets, net | Other assets, net | (11,089) | | | 858 | | Other assets, net | 900 | | | (12,853) | |
Accounts payable and other liabilities | Accounts payable and other liabilities | (5,669) | | | 1,138 | | Accounts payable and other liabilities | 1,170 | | | (11,470) | |
Net cash provided by operating activities | Net cash provided by operating activities | 157,245 | | | 175,882 | | Net cash provided by operating activities | 129,897 | | | 89,906 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Real estate acquisitions | Real estate acquisitions | (23,014) | | | (49,880) | | Real estate acquisitions | (40,459) | | | (4,343) | |
Capital expenditures | Capital expenditures | (40,772) | | | (48,079) | | Capital expenditures | (30,230) | | | (28,540) | |
Proceeds from sale of real estate | Proceeds from sale of real estate | 48,276 | | | 86,159 | | Proceeds from sale of real estate | 119,638 | | | 25,778 | |
Investment in third parties | | Investment in third parties | (3,000) | | | 0 | |
Return of investment in unconsolidated joint ventures | Return of investment in unconsolidated joint ventures | 1,949 | | | 2,498 | | Return of investment in unconsolidated joint ventures | 3,888 | | | 639 | |
Net cash used in investing activities | (13,561) | | | (9,302) | | |
Net cash provided by (used in) investing activities | | Net cash provided by (used in) investing activities | 49,837 | | | (6,466) | |
CASH FLOWS FROM FINANCING ACTIVITIES: | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Net change in credit facility | 0 | | | (73,359) | | |
Proceeds from mortgages and loans payable | 0 | | | 60,000 | | |
Proceeds from revolving credit facility | | Proceeds from revolving credit facility | 9,000 | | | 255,000 | |
Payments on revolving credit facility | | Payments on revolving credit facility | (9,000) | | | (255,000) | |
Payments on mortgages and loans payable | Payments on mortgages and loans payable | (37,778) | | | (7,973) | | Payments on mortgages and loans payable | (66,237) | | | (35,200) | |
Distributions paid, net of DRIP | Distributions paid, net of DRIP | (49,083) | | | (92,484) | | Distributions paid, net of DRIP | (48,308) | | | (49,083) | |
Distributions to noncontrolling interests | Distributions to noncontrolling interests | (9,406) | | | (20,616) | | Distributions to noncontrolling interests | (7,931) | | | (9,406) | |
Repurchases of common stock | Repurchases of common stock | (5,211) | | | (30,178) | | Repurchases of common stock | (77,765) | | | (5,211) | |
Other | Other | (516) | | | (208) | | Other | (29) | | | (318) | |
Net cash used in financing activities | Net cash used in financing activities | (101,994) | | | (164,818) | | Net cash used in financing activities | (200,270) | | | (99,218) | |
NET INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | 41,690 | | | 1,762 | | |
NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | | NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | (20,536) | | | (15,778) | |
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH: | CASH, CASH EQUIVALENTS, AND RESTRICTED CASH: | | | | CASH, CASH EQUIVALENTS, AND RESTRICTED CASH: | | | |
Beginning of period | Beginning of period | 95,108 | | | 84,304 | | Beginning of period | 131,937 | | | 95,108 | |
End of period | End of period | $ | 136,798 | | | $ | 86,066 | | End of period | $ | 111,401 | | | $ | 79,330 | |
| RECONCILIATION TO CONSOLIDATED BALANCE SHEETS: | RECONCILIATION TO CONSOLIDATED BALANCE SHEETS: | | RECONCILIATION TO CONSOLIDATED BALANCE SHEETS: | |
Cash and cash equivalents | Cash and cash equivalents | $ | 103,910 | | | $ | 29,516 | | Cash and cash equivalents | $ | 22,205 | | | $ | 53,262 | |
Restricted cash | Restricted cash | 32,888 | | | 56,550 | | Restricted cash | 89,196 | | | 26,068 | |
Cash, cash equivalents, and restricted cash at end of period | Cash, cash equivalents, and restricted cash at end of period | $ | 136,798 | | | $ | 86,066 | | Cash, cash equivalents, and restricted cash at end of period | $ | 111,401 | | | $ | 79,330 | |
5
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 6 |
PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20202021 AND 20192020
(Condensed and Unaudited)
(In thousands)
| | | | | | | | | | | | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2021 | | 2020 |
SUPPLEMENTAL CASH FLOW DISCLOSURE, INCLUDING NON-CASH INVESTING AND FINANCING ACTIVITIES: | SUPPLEMENTAL CASH FLOW DISCLOSURE, INCLUDING NON-CASH INVESTING AND FINANCING ACTIVITIES: | | SUPPLEMENTAL CASH FLOW DISCLOSURE, INCLUDING NON-CASH INVESTING AND FINANCING ACTIVITIES: | |
Cash paid for interest | Cash paid for interest | $ | 59,906 | | | $ | 66,811 | | Cash paid for interest | $ | 36,845 | | | $ | 40,980 | |
Right-of-use (“ROU”) assets obtained in exchange for new lease liabilities | Right-of-use (“ROU”) assets obtained in exchange for new lease liabilities | 551 | | | 1,444 | | Right-of-use (“ROU”) assets obtained in exchange for new lease liabilities | 239 | | | 551 | |
Accrued capital expenditures | Accrued capital expenditures | 3,587 | | | 3,036 | | Accrued capital expenditures | 6,053 | | | 2,884 | |
Change in distributions payable | Change in distributions payable | (16,214) | | | 269 | | Change in distributions payable | (7,853) | | | (16,214) | |
Change in distributions payable - noncontrolling interests | Change in distributions payable - noncontrolling interests | (2,301) | | | 590 | | Change in distributions payable - noncontrolling interests | (1,152) | | | (2,301) | |
Change in accrued share repurchase obligation | Change in accrued share repurchase obligation | (2,511) | | | 706 | | Change in accrued share repurchase obligation | (77,642) | | | (2,511) | |
Distributions reinvested | Distributions reinvested | 15,940 | | | 51,329 | | Distributions reinvested | 7,368 | | | 15,940 | |
See notes to consolidated financial statements.
6
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 7 |
Phillips Edison & Company, Inc.
Notes to Consolidated Financial Statements
(Condensed and Unaudited)
As of and for the period ended June 30, 2021
Phillips Edison & Company, Inc. (“we,” the “Company,” “PECO,” “our,” or “us”) was formed as a Maryland corporation in October 2009. Substantially all of our business is conducted through Phillips Edison Grocery Center Operating Partnership I, L.P., (the “Operating Partnership”), a Delaware limited partnership formed in December 2009. We are a limited partner of the Operating Partnership, and our wholly-owned subsidiary, Phillips Edison Grocery Center OP GP I LLC, (the “General Partner”), is the sole general partner of the Operating Partnership.
We are a real estate investment trust (“REIT”) that invests primarily in well-occupied,omni-channel grocery-anchored neighborhood and community shopping centers that have a mix of creditworthy national, regional, and local retailers that sell necessity-based goods and services in strong demographic markets throughout the United States. In addition to managing our own shopping centers, our third-party investment management business provides comprehensive real estate and asset management services to threetwo unconsolidated institutional joint ventures, in which we have a partial ownership interest, and one private fund (collectively, the “Managed Funds”) as of SeptemberJune 30, 2020.2021.
As of SeptemberJune 30, 2020,2021, we wholly-owned 283272 real estate properties. Additionally, we owned a 14% interest in Grocery Retail Partners I LLC (“GRP I”), a joint venture that owned 20 properties, and a 20% equity interest in Necessity Retail Partners (“NRP”), a joint venture that owned 6 properties; a 15% interest in Grocery Retail Partners I LLC (“GRP I”), a joint venture that owned 17 properties; and a 10% interest in Grocery Retail Partners II LLC (“GRP II”), a joint venture that owned 32 properties.
On October 1, 2020, GRP I acquired GRP II. Our ownershipJune 18, 2021, our stockholders approved an amendment to our charter (the “Articles of Amendment”) that effected a change of each share of our common stock outstanding at the time the amendment became effective into one share of a newly created class of Class B common stock (the “Recapitalization”). 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 combined entity was adjusted upon consummationRecapitalization and references to “shares” and per share metrics refer to our common stock and Class B common stock, collectively.
On July 2, 2021, our board of directors (the “Board”) approved an amendment to our articles of incorporation to effect a one-for-three reverse stock split. Concurrent with the transaction,reverse split, the Operating Partnership enacted a one-for-three reverse split of its outstanding Operating Partnership units (“OP units”). Unless otherwise indicated, the information in this Form 10-Q gives effect to the reverse stock and OP unit splits (Note 9).
On July 19, 2021, we own approximatelyclosed our underwritten initial public offering (“underwritten IPO”), through which we offered 17.0 million shares of a 14% equity interest in GRP Inew 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 U.S. Securities and Exchange Commission (“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 result30-day option to purchase additional shares of common stock to cover overallotments, and, accordingly, on August 2, 2021 we settled the acquisition.sale of an additional 2.55 million shares, with gross proceeds to us of $71.4 million.
| | |
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Set forth below is a summary of the significant accounting estimates and policies that management believes are important to the preparation of our condensed consolidated interim financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by management. For example, significant estimates and assumptions have been made with respect to the useful lives of assets, remaining hold period of assets, recoverable amounts of receivables, and other fair value measurement assessments required for the preparation of the consolidated interim financial statements. As a result, these estimates are subject to a degree of uncertainty.
DuringBeginning in 2020, the first quarter of 2020, a novel coronavirus (“COVID-19”) began spreading globally, withpandemic has caused significant disruption to our operations. All temporarily closed tenants have since been permitted to reopen; however, certain of our tenants have permanently closed. We have backfilled a number of these spaces, and continue to work on backfilling any remaining vacancies. The continuing economic impacts of the outbreak being classified asCOVID-19 pandemic could result in increased permanent store closures, reduce the demand for leasing space in our shopping centers, and/or result in a pandemic by the World Health Organization on March 11, 2020.decline in occupancy and rental revenues in our real estate portfolio. Because of the adverse economic conditions that existhave occurred as a result of the impacts of the COVID-19 pandemic and any remaining uncertainty related to the pandemic, it is possible that the estimates and assumptions that have been utilized in the preparation of the consolidated financial statements could change significantly. Specifically, as it relates to our business, the current economic situation resulted in temporary tenant closures at our shopping centers, often as a result of “stay-at-home” government mandates which limited travel and movement of the general public to essential activities only and required all non-essential businesses to close.
Temporary closures of tenant spaces at our centers peaked in April and have significantly decreased as states reduced or removed restrictions on business operations and the travel and movement of the general public. Certain tenants remain temporarily closed, have since closed after reopening, are limiting the number of customers allowed in their stores, or have modified their operations in other ways that may impact their profitability, either as a result of government mandates or self-elected efforts to reduce the spread of COVID-19. Some states and localities have temporarily reinstated certain mandates in response to increasing reported cases of COVID-19. These actions could result in increased permanent store closings and could reduce the demand for leasing space in our shopping centers and result in a decline in occupancy and rental revenues in our real estate portfolio. All of this activity impacts our estimates around the collectabilitycollectibility of revenue and valuation of real estate assets, goodwill and other intangible assets, and certain liabilities, among others.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 8 |
There were no changes to our significant accounting policies during the ninesix months ended SeptemberJune 30, 2020.2021, except for those discussed below. For a full summary of our accounting policies, refer to our 20192020 Annual Report on Form 10-K as originally filed with the SEC on March 12, 2020.2021.
Basis of Presentation and Principles of Consolidation—The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Readers of this Quarterly Report on Form 10-Q should refer to our audited consolidated financial statements for the year ended December 31, 2019,2020, which are included in our 20192020 Annual Report on Form 10-K. In the opinion of management, all normal and recurring adjustments necessary for the fair presentation of the unaudited consolidated financial statements for the periods presented have been included in this Quarterly Report. Our results of operations for the three and ninesix months ended SeptemberJune 30, 20202021 are not necessarily indicative of the operating results expected for the full year.
The accompanying consolidated financial statements include our accounts and those of our majority-owned subsidiaries. All intercompany balances and transactions are eliminated upon consolidation.
LeasesUnderwritten IPO Costs—Lease receivablesDeferred underwritten IPO costs are reviewed continuallycurrently recorded as Other Assets, Net on our consolidated balance sheets as of June 30, 2021, and will be offset against underwritten IPO proceeds and reclassified as a component of APIC on the consolidated balance sheets upon the consummation of the offering. Costs incurred that were related to determine whether orour underwritten IPO activities but were not it is probable that we will realize all amounts oweddirectly related to us for eachour equity raise were not capitalized and are included as transaction costs, currently in Other (Expense) Income, Net on our consolidated statements of our tenants (i.e., whether a tenant is deemed to be a credit risk). If we determine that the tenant is not a credit risk, no reserve or reductionoperations and comprehensive income (loss) (“consolidated statements of revenue is recorded, except in the case of disputed charges. If we determine that theoperations”).
tenant is a credit risk, revenue for that tenant is recorded on a cash basis, including any amounts relating to straight-line rent receivables and/or receivables for recoverable expenses. The COVID-19 pandemic has increased the uncertainty of collecting rents from a number of our tenants.
In our efforts to maximize collections in the near term while also supporting our tenants as they operate through this pandemic, we have begun negotiating rent relief primarily in the form of payment plans and deferrals on rent and recovery charges, which allow for changes in the timing of payments, but not the total amount of consideration due to us under the lease. In a limited number of instances, we may also agree to waive certain charges due to us under the lease; for additional details, please refer to Note 3.
Income Taxes—Our consolidated financial statements include the operations of wholly-owned subsidiaries that have jointly elected to be treated as Taxable REIT Subsidiaries and are subject to U.S. federal, state, and local income taxes at regular corporate tax rates. We recognized an insignificant amount of federal, state, and local income tax expense for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, and we retain a full valuation allowance for our deferred tax asset. All income tax amounts are included in Other (Expense) Income, (Expense), Net on theour consolidated statements of operations and comprehensive income (loss) (“consolidated statements of operations”).operations.
Recently Issued and Newly Adopted Accounting Pronouncements—In response to the COVID-19 pandemic,On January 7, 2021, the Financial Accounting Standards Board (“FASB”) issued interpretive guidance addressing the accounting treatment for lease concessions attributableAccounting Standards Update (“ASU”) 2021-01 to the pandemic. Under this guidance, entities may elect to account for such lease concessions consistent with how they would be accounted for under ASC Topic 842, Leases, (“ASC 842”) if the enforceable rights and obligations for the lease concessions already existed within the lease agreement, regardless of whether such enforceable rights and obligations are explicitly outlined within the lease. This accounting treatment may only be applied if (1) the lease concessions were granted as a direct result of the pandemic, and (2) the total cash flows under the modified lease are less than or substantially the same as the cash flows under the original lease agreement. As a result, entities that make this election will not have to analyze each lease to determine whether enforceable rights and obligations for concessions exist within the contract, and may elect not to account for these concessions as lease modifications withinamend the scope of ASC 842.
Some concessions will provide a deferral of payments, which may affect the timing of cash receipts without substantively impacting the total consideration per the original lease agreement. The FASB has stated that there are multiple acceptable methods to account for deferrals under the interpretive guidance:
•Account for the concession as if no changes to the lease contract were made, increasing the lease receivable as payments accrue and continuing to recognize income; or
•Account for deferred lease payments as variable lease payments.
We have elected not to account for any qualifying lease concessions granted as a resultguidance in ASU 2020-04 on facilitation of the COVID-19 pandemic as leaseeffects of reference rate reform on financial reporting. Specifically, the amendments in ASU 2021-01 clarify that certain optional expedients and exceptions in Accounting Standards Codification (“ASC”) Topic 848, Reference Rate Reform for contract modifications and will account for any qualifying concessions granted as if no changeshedge accounting apply to derivatives that are affected by the lease contract were made. This will result in an increase todiscounting transition. We adopted ASU 2021-01 upon its issuance and the related lease receivable as payments accrue while we continue to recognize rental income. We will, however, assess theadoption of this standard did not have a material impact of any such concessions on estimated collectability of the related lease payments and will reflect any adjustments as necessary as an offset to Rental Income on the consolidated statements of operations.
The following table provides a brief description of newly adopted accounting pronouncements and their effect on our consolidated financial statements:statements.
Reclassifications—The following line items on our consolidated statement of cash flows for the six months ended June 30, 2020 were reclassified to conform to current year presentation:
•Return on Investment in Unconsolidated Joint Ventures was listed on a separate line from Other Assets, Net; and
•Net Change in Credit Facility was separated into two lines, Proceeds from Revolving Credit Facility and Payments on Revolving Credit Facility.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | | | | | | |
Standard | | Description | | Date of Adoption | | Effect on the Financial Statements or Other Significant Matters |
Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
ASU 2018-19, Financial Instruments - Credit Losses (Topic 326): Codification Improvements
ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief
ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses
ASU 2020-02, Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842)
| | The amendments in this update replaced the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. It clarified that receivables arising from operating leases are not within the scope of Accounting Standards Codification (“ASC”) Topic 326. Instead, impairment of receivables arising from operating leases will be accounted for in accordance with Topic 842. It also allowed election of the fair value option on certain financial instruments. | | January 1, 2020 | | The adoption of this standard did not have a material impact on our consolidated financial statements. The majority of our financial instruments result from operating lease transactions, which are not within the scope of this standard. |
ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities | | This ASU amended two aspects of the related-party guidance in Topic 810: (1) added an elective private-company scope exception to the variable interest entity guidance for entities under common control and (2) indirect interests held through related parties in common control arrangements will be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. | | January 1, 2020 | | The adoption of this standard did not have a material impact on our consolidated financial statements. |
ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments | | This ASU amended a variety of topics, improving certain aspects of previously issued ASUs, including ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. | | January 1, 2020 | | The adoption of this standard did not have a material impact on our consolidated financial statements. |
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting | | This ASU contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. | | March 12, 2020 | | We have elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. We continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.9 |
Reclassifications—The following line item on our consolidated balance sheet as of December 31, 2019 was reclassified to conform to current year presentation:
•Corporate Intangible Assets, Net was included in Other Assets, Net.
The following line item on our consolidated statement of operations for the nine months ended September 30, 2019 was reclassified to conform to current year presentation:
•Other Impairment Charges was included in Other Income (Expense), Net.
The following line item on our consolidated statement of cash flows for the nine months ended September 30, 2019 was reclassified to conform to current year presentation:
•Payments of Deferred Financing Expenses was included in Payments on Mortgages and Loans Payable.
Lessor—The majority of our leases are largely similar in that the leased asset is retail space within our properties, and the lease agreements generally contain similar provisions and features, without substantial variations. All of our leases are currently classified as operating leases. Lease income related to our operating leases was as follows for the three and ninesix months ended SeptemberJune 30, 2021 and 2020 and 2019 (dollars in(in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
Rental income related to fixed lease payments(1) | Rental income related to fixed lease payments(1) | $ | 94,511 | | | $ | 97,328 | | | $ | 285,572 | | | $ | 289,318 | | Rental income related to fixed lease payments(1) | $ | 94,485 | | | $ | 95,036 | | | $ | 189,451 | | | $ | 191,063 | |
Rental income related to variable lease payments | 31,781 | | | 33,626 | | | 94,278 | | | 93,105 | | |
Rental income related to variable lease payments(1)(2) | | Rental income related to variable lease payments(1)(2) | 27,454 | | | 30,659 | | | 58,855 | | | 62,497 | |
Straight-line rent amortization(2)(3) | Straight-line rent amortization(2)(3) | 1,772 | | | 2,548 | | | 3,103 | | | 7,055 | | Straight-line rent amortization(2)(3) | 2,893 | | | (978) | | | 4,262 | | | 1,331 | |
Amortization of lease assets | Amortization of lease assets | 802 | | | 1,032 | | | 2,367 | | | 3,230 | | Amortization of lease assets | 877 | | | 786 | | | 1,704 | | | 1,565 | |
Lease buyout income | Lease buyout income | 664 | | | 632 | | | 972 | | | 1,088 | | Lease buyout income | 1,781 | | | 214 | | | 2,578 | | | 308 | |
Adjustments for collectability(2)(3) | (6,232) | | | (2,451) | | | (18,874) | | | (3,191) | | |
Adjustments for collectibility(4) | | Adjustments for collectibility(4) | 2,845 | | | (10,063) | | | 1,108 | | | (12,644) | |
Total rental income | Total rental income | $ | 123,298 | | | $ | 132,715 | | | $ | 367,418 | | | $ | 390,605 | | Total rental income | $ | 130,335 | | | $ | 115,654 | | | $ | 257,958 | | | $ | 244,120 | |
(1)Includes rental income related to fixed lease payments before assessing for collectability.collectibility.
(2)Variable payments are primarily related to tenant recovery income.
(3)Includes favorable revenue adjustments to straight-line rent for tenants previously considered non-creditworthy during the three months ended June 30, 2021 of $0.4 million, and unfavorable adjustments for non-creditworthy tenants during the six months ended June 30, 2021 of $0.4 million. Includes unfavorable adjustments for the three and six months ended June 30, 2020 of $3.2 million, and $3.1 million, respectively.
(4)Includes general reserves as well as adjustments for tenants not considered creditworthy and thus for which we are recording revenue on a cash basis, per ASC Topic 842, Leases (“ASC 842”).
For the three and six months ended June 30, 2021, we had net favorable changes to general reserves of $1.9 million and $4.1 million, respectively. Additionally, we had $1.0 million in net collections on receivables that were previously deemed unlikely to be collected for tenants not considered creditworthy for the three months ended June 30, 2021, and $3.0 million in net unfavorable revenue adjustments for non-creditworthy tenants.tenants for the six months ended June 30, 2021.
(3)ContainsFor the three and six months ended June 30, 2020, we had net general reserves; excludes reservesreserve increases of $1.3 million and $0.9 million, respectively. Additionally, we had net unfavorable adjustments of $8.8 million and $11.7 million, respectively, related to monthly revenue for straight-line rent amortization.tenants that we deemed non-creditworthy and for which we were recording revenue on a cash basis.
Approximate future fixed contractual lease payments to be received under non-cancelable operating leases in effect as of SeptemberJune 30, 2020,2021, assuming no new or renegotiated leases or option extensions on lease agreements, and including the impact of rent abatements, payment plans, and tenants who have been moved to the cash basis of accounting for revenue recognition purposes are as follows (in thousands):
| Year | Year | Amount | | Year | Amount | |
Remaining 2020 | $ | 98,238 | | | |
2021 | 364,782 | | | |
Remaining 2021 | | Remaining 2021 | $ | 191,000 | | |
2022 | 2022 | 330,635 | | | 2022 | 363,187 | | |
2023 | 2023 | 282,988 | | | 2023 | 317,301 | | |
2024 | 2024 | 227,052 | | | 2024 | 263,155 | | |
2025 | | 2025 | 209,307 | | |
Thereafter | Thereafter | 594,574 | | | Thereafter | 514,528 | | |
Total | Total | $ | 1,898,269 | | | Total | $ | 1,858,478 | | |
DuringIn response to the nine months ended September 30, 2020,COVID-19 pandemic, we executed payment plans with our tenants. As of June 30, 2021, we had $5.4 million of outstanding payment plans with our tenants, agreeing to deferwhich represented approximately $3.7 million in rent and related charges, and2.1% of rental income during the six months ended June 30, 2021. During the three months ended June 30, 2021, we grantedhad recorded an immaterial amount of rent abatements totalingrelated to 2021 missed charges. During the six months ended June 30, 2021, we recorded approximately $1.3 million. These payment plans and$0.5 million of rent abatements related to missed 2021 charges, which represented 0.9% and 0.3%less than 1% of rental income for the six months ended June 30, 2021.
No single tenant comprised 7% or more of our wholly-owned portfolio’saggregate annualized base rent (“ABR”), respectively, and the weighted-average term over which we expect to receive payment on executed payment plans is approximately eight months. For the three and nine months ended September 30, 2020, we had $5.2 million and $20.0 million, respectively, in billings that will not be recognized as revenue until cash is collected or the tenant resumes regular payments and/or is considered creditworthy. These amounts include the estimated impact of tenants who have filed for bankruptcy.
No single tenant comprised 10% or more of our aggregate ABR as of SeptemberJune 30, 2020.2021. As of SeptemberJune 30, 2020,2021, our wholly-owned real estate investments in Florida and California represented 12.3%12.6% and 10.6%10.1% of our ABR, respectively. As a result, the geographic concentration of our portfolio makes it particularly susceptible to adverse weather or economic events, including the impact of the COVID-19 pandemic, in the Florida and California real estate markets.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 10 |
Lessee—Lease assets and liabilities, grouped by balance sheet line where they are recorded, consisted of the following as of SeptemberJune 30, 20202021 and December 31, 20192020 (in thousands):
| | | | | | | | | | | | | | |
Balance Sheet Information | Balance Sheet Location | September 30, 2020 | | December 31, 2019 |
ROU assets, net - operating leases(1) | Investment in Real Estate | $ | 3,895 | | | $ | 7,613 | |
ROU assets, net - operating and finance leases | Other Assets, Net | 1,998 | | | 2,111 | |
Operating lease liability | Accounts Payable and Other Liabilities | 5,880 | | | 9,453 | |
Finance lease liability | Debt Obligations, Net | 240 | | | 443 | |
(1)During the nine months ended September 30, 2020, one of our acquisitions was land upon which one of our shopping centers is situated that was previously subject to a ground lease in which the lessor controlled an option requiring us to purchase the land subject to the lease. Our valuation of the ROU asset and lease liability as of December 31, 2019 for this ground lease reflected the assumption that the lessor would exercise this option and that we would purchase the underlying land asset. | | | | | | | | | | | | | | |
Balance Sheet Information | Balance Sheet Location | June 30, 2021 | | December 31, 2020 |
ROU assets, net - operating leases | Investment in Real Estate | $ | 4,003 | | | $ | 3,867 | |
ROU assets, net - operating and finance leases | Other Assets, Net | 1,190 | | | 1,438 | |
Operating lease liability | Accounts Payable and Other Liabilities | 5,619 | | | 5,731 | |
Finance lease liability | Debt Obligations, Net | 127 | | | 164 | |
Property Sales—The following table summarizes our real estate disposition activity (dollars in thousands):
| | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2021 | | 2020 |
Number of properties sold(1) | Number of properties sold(1) | 6 | | | 10 | | Number of properties sold(1) | 13 | | | 4 | |
Number of outparcels sold(3) | Number of outparcels sold(3) | 0 | | | 1 | | Number of outparcels sold(3) | 1 | | | 0 | |
Proceeds from sale of real estate | Proceeds from sale of real estate | $ | 48,276 | | | $ | 86,159 | | Proceeds from sale of real estate | $ | 119,638 | | | $ | 25,778 | |
Gain on sale of properties, net(2) | 9,915 | | | 12,369 | | |
Gain (loss) on sale of properties, net(4) | | Gain (loss) on sale of properties, net(4) | 18,713 | | | (1,436) | |
(1)We retained certain outparcels of land associated withan outparcel for one of our property dispositionssold during the ninesix months ended SeptemberJune 30, 2020,2021, and astherefore the sale did not result in a result, this property is still includedreduction 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 properties, net does not include miscellaneous write-off activity, which is also recorded in Gain (Loss) on Disposal of Property, Net on the consolidated statements of operations.
Subsequent to SeptemberJune 30, 2020,2021, we sold 1 outparcel2 properties for approximately $1.1$16.0 million.
Impairment of Real Estate Assets—During the three and nine months ended September 30, 2020, we did not recognize any impairment charges. During the three and nine months ended September 30, 2019, we recognized impairment charges totaling $35.7 million and $74.6 million, respectively. The impairments were associated with certain anticipated property dispositions where the net book value exceeded the estimated fair value. Our estimated fair value was based upon the contracted price to sell or the marketed price for disposition, less estimated costs to sell. We applied reasonable estimates and judgments in determining the amount of impairment recognized.
Acquisitions—During the nine months ended September 30, 2020, weThe following table summarizes our real estate acquisition activity (dollars in thousands):
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
Number of properties acquired | 2 | | | 0 | |
Number of outparcels acquired(1) | 3 | | | 2 |
Total acquisition price | $ | 40,459 | | | $ | 4,343 | |
(1)Outparcels acquired 1 property and 2 parcels of land for a total of $23.0 million. Both parcels of land are adjacent to shopping centers that we own. During the nine months ended September 30, 2019, we acquired 1 property and 1 outparcel for a total of $49.9 million.
The fair value and weighted-average useful life at acquisition for lease intangibles acquired as part of acquisitions in the nine months ended September 30, 2020 and 2019 are as follows (dollars in thousands, weighted-average useful life in years):
| | | Nine Months Ended | | | | | | | | | | | |
| | September 30, 2020 | | September 30, 2019 | | Six Months Ended June 30, 2021 |
| | Fair Value | | Weighted-Average Useful Life | | Fair Value | | Weighted-Average Useful Life | | Fair Value | | Weighted-Average Useful Life | |
In-place leases | In-place leases | $ | 1,682 | | | 16 | | $ | 4,736 | | | 11 | In-place leases | $ | 4,155 | | | 7 | |
Above-market leases | Above-market leases | 120 | | | 5 | | 825 | | | 8 | Above-market leases | 52 | | | 5 | |
Below-market leases | Below-market leases | (1,882) | | | 26 | | (2,097) | | | 16 | Below-market leases | (1,652) | | | 6 | |
Subsequent to September 30, 2020, we purchased 1 property for approximately $18.4 million.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 11 |
Property Held for Sale—As of June 30, 2021, 2 properties were classified as held for sale. As of December 31, 2020, no properties were classified as held for sale. Properties classified as held for sale as of June 30, 2021 were under contract to sell, with no substantive contingencies, and the prospective buyers had significant funds at risk as of the reporting date. Subsequent to June 30, 2021, both of our held for sale properties were sold. A summary of assets and liabilities for the properties held for sale as of June 30, 2021 is below (in thousands):
| | | | | |
| June 30, 2021 |
ASSETS | |
Total investment in real estate assets, net | $ | 13,807 | |
Other assets, net | 454 | |
Total assets | $ | 14,261 | |
LIABILITIES | |
Below-market lease liabilities, net | $ | 379 | |
Accounts payable and other liabilities | 481 | |
Total liabilities | $ | 860 | |
The following is a summary of Other Assets, Net outstanding as of SeptemberJune 30, 20202021 and December 31, 2019,2020, excluding amounts related to assets classified as held for sale (in thousands):
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
Other assets, net: | Other assets, net: | | Other assets, net: | |
Deferred leasing commissions and costs | Deferred leasing commissions and costs | $ | 40,465 | | | $ | 38,738 | | Deferred leasing commissions and costs | $ | 44,428 | | | $ | 41,664 | |
Deferred financing expenses(1) | Deferred financing expenses(1) | 13,971 | | | 13,971 | | Deferred financing expenses(1) | 13,971 | | | 13,971 | |
Office equipment, ROU assets, and other | Office equipment, ROU assets, and other | 21,772 | | | 19,430 | | Office equipment, ROU assets, and other | 22,699 | | | 21,578 | |
Corporate intangible assets | Corporate intangible assets | 4,883 | | | 4,883 | | Corporate intangible assets | 6,804 | | | 6,804 | |
Total depreciable and amortizable assets | Total depreciable and amortizable assets | 81,091 | | | 77,022 | | Total depreciable and amortizable assets | 87,902 | | | 84,017 | |
Accumulated depreciation and amortization | Accumulated depreciation and amortization | (43,565) | | | (35,055) | | Accumulated depreciation and amortization | (50,014) | | | (45,975) | |
Net depreciable and amortizable assets | Net depreciable and amortizable assets | 37,526 | | | 41,967 | | Net depreciable and amortizable assets | 37,888 | | | 38,042 | |
Accounts receivable, net(1)(2) | Accounts receivable, net(1)(2) | 50,384 | | | 46,125 | | Accounts receivable, net(1)(2) | 37,151 | | | 46,893 | |
Accounts receivable - affiliates | Accounts receivable - affiliates | 622 | | | 728 | | Accounts receivable - affiliates | 522 | | | 543 | |
Deferred rent receivable | 32,179 | | | 29,291 | | |
Derivative assets | 0 | | | 2,728 | | |
Deferred rent receivable, net(3) | | Deferred rent receivable, net(3) | 35,760 | | | 32,298 | |
Prepaid expenses and other | Prepaid expenses and other | 12,303 | | | 7,851 | | Prepaid expenses and other | 11,735 | | | 8,694 | |
Investment in third parties | | Investment in third parties | 3,000 | | | 0 | |
Total other assets, net | Total other assets, net | $ | 133,014 | | | $ | 128,690 | | Total other assets, net | $ | 126,056 | | | $ | 126,470 | |
(1)Deferred financing expenses per the above table are related to our revolving line of credit and as such we have elected to classify them as an asset rather than as a contra-liability.
(2)Net of $7.1$7.4 million and $6.9$8.9 million of general reserves for uncollectible amounts.amounts as of June 30, 2021 and December 31, 2020, respectively. Receivables that were removed for tenants considered to be non-creditworthy were $23.4$16.2 million and $6.9$22.8 million as of SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively.
(3)Net of $4.7 million and $4.4 million of adjustments as of June 30, 2021 and December 31, 2020, respectively, related to straight-line rent for tenants previously or currently considered to be non-creditworthy.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 12 |
The following is a summary of the outstanding principal balances and interest rates, which include the effect of derivative financial instruments, for our debt obligations as of SeptemberJune 30, 20202021 and December 31, 20192020 (dollars in thousands):
| | | Interest Rate(1) | | September 30, 2020 | | December 31, 2019 | | Interest Rate(1) | | June 30, 2021 | | December 31, 2020 |
Revolving credit facility(2) | Revolving credit facility(2) | LIBOR + 1.40% | | $ | 0 | | | $ | 0 | | Revolving credit facility(2) | LIBOR + 1.4% | | $ | 0 | | | $ | 0 | |
Term loans(3)(2) | Term loans(3)(2) | 2.58% - 4.59% | | 1,622,500 | | | 1,652,500 | | Term loans(3)(2) | 1.3% - 4.6% | | 1,622,500 | | | 1,622,500 | |
Secured loan facilities | Secured loan facilities | 3.35% - 3.52% | | 395,000 | | | 395,000 | | Secured loan facilities | 3.4% - 3.5% | | 395,000 | | | 395,000 | |
Mortgages | Mortgages | 3.45% - 7.91% | | 317,148 | | | 324,578 | | Mortgages | 3.5% - 7.2% | | 223,868 | | | 290,022 | |
Finance lease liability | Finance lease liability | | 240 | | | 443 | | Finance lease liability | | 127 | | | 164 | |
Assumed market debt adjustments, net | Assumed market debt adjustments, net | | (1,419) | | | (1,218) | | Assumed market debt adjustments, net | | (1,553) | | | (1,543) | |
Deferred financing expenses, net | Deferred financing expenses, net | | (14,466) | | | (17,204) | | Deferred financing expenses, net | | (11,710) | | | (13,538) | |
Total | Total | | $ | 2,319,003 | | | $ | 2,354,099 | | Total | | $ | 2,228,232 | | | $ | 2,292,605 | |
| Weighted-average interest rate | | Weighted-average interest rate | | 2.9 | % | | 3.1 | % |
(1)Interest rates are as of SeptemberJune 30, 2020.2021.
(2)We had $255.0 million of both gross borrowings and payments under our revolving credit facility during the nine months ended September 30, 2020. The gross borrowings and payments under our revolving credit facility were $116.6 million and $190.0 million, respectively, during the nine months ended September 30, 2019.
(3)Our term loans carry an interest rate of LIBOR plus a spread. While a majoritymost of the rates are fixed through the use of swaps, somethere is a portion of these ratesloans that are not fixed throughsubject to a swap, and thus are still indexed to LIBOR.
Debt Activity—On July 2, 2021, we entered into a new $980 million credit facility comprised of a $500 million senior unsecured revolving credit facility and two $240 million senior unsecured term loan tranches (the “Refinancing”). In connection with the Refinancing, we paid off the $472.5 million term loan due in 2025. The revolving credit facility will mature in January 2020,2026, and the two senior unsecured term loan tranches will mature in November 2025 and July 2026, respectively.
On July 20, 2021, we madeused proceeds from the final $30underwritten IPO to retire our $375 million payment on our term loan maturing in 2021. Following this payment, the next term loan maturity is in April 2022.
In April 2020, we borrowed $200 million on our revolving credit facility to meet our operating needs for a sustained period due to the COVID-19 pandemic. In June 2020, we paid down the outstanding balance on our revolving credit facility. Our debt is subject to certain covenants, and as of September 30, 2020, we were in compliance with the restrictive covenants of our outstanding debt obligations.
In October 2020, we executed early repayments of $20.4 million in mortgage debt securing two of our properties.
—The allocation of total debt between fixed-rate and variable-rate as well as between secured and unsecured, excluding market debt adjustments and deferred financing expenses, net, as of September 30, 2020 and December 31, 2019, is summarized below (in thousands):
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
As to interest rate:(1) | | | |
Fixed-rate debt | $ | 1,754,388 | | | $ | 2,122,021 |
Variable-rate debt | 580,500 | | | 250,500 |
Total | $ | 2,334,888 | | | $ | 2,372,521 |
As to collateralization: | | | |
Unsecured debt | $ | 1,622,500 | | | $ | 1,652,500 |
Secured debt | 712,388 | | | 720,021 |
Total | $ | 2,334,888 | | | $ | 2,372,521 |
| | | |
Weighed-average interest rate(1) | 3.1 | % | | 3.4 | % |
(1)Includesincluding the effects of derivative financial instruments (see Notes 7 and 12). as of June 30, 2021 and December 31, 2020 is summarized below (in thousands):
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
As to interest rate: | | | |
Fixed-rate debt | $ | 1,548,995 | | | $ | 1,727,186 |
Variable-rate debt | 692,500 | | | 580,500 |
Total | $ | 2,241,495 | | | $ | 2,307,686 |
As to collateralization: | | | |
Unsecured debt | $ | 1,622,500 | | | $ | 1,622,500 |
Secured debt | 618,995 | | | 685,186 |
Total | $ | 2,241,495 | | | $ | 2,307,686 |
| | |
7. DERIVATIVES AND HEDGING ACTIVITIES |
Risk Management Objective of Using Derivatives—We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposure to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of our debt funding, and through the use of derivative financial instruments. Specifically, we enter into interest rate swaps to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash receipts and our known or expected cash payments principally related to our investments and borrowings.
Cash Flow Hedges of Interest Rate Risk—Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for our making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The changes in the fair value of derivatives designated, and that qualify, as cash flow hedges are recorded in AOCI and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, such derivatives were used to hedge the variable cash flows associated with certain variable-rate debt. Amounts reported in AOCI related to these derivatives will be reclassified to Interest Expense, Net as interest payments are made on the variable-rate debt. During the next twelve months, we estimate that an additional $19.4$18.2 million will be reclassified from AOCI as an increase to Interest Expense, Net.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 13 |
The following is a summary of our interest rate swaps that were designated as cash flow hedges of interest rate risk as of SeptemberJune 30, 20202021 and December 31, 2019 (notional amounts2020 (dollars in thousands):
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
Count | Count | 6 | | | 9 | | Count | 5 | | | 6 | |
Notional amount | Notional amount | $ | 1,042,000 | | | $ | 1,402,000 | | Notional amount | $ | 930,000 | | | $ | 1,042,000 | |
Fixed LIBOR | Fixed LIBOR | 1.3% - 2.9% | | 0.8% - 2.9% | Fixed LIBOR | 1.3% - 2.9% | | 1.3% - 2.9% |
Maturity date | Maturity date | 2021 - 2025 | | 2020 - 2025 | Maturity date | 2022 - 2025 | | 2021 - 2025 |
We assumed 5 hedges with a notional amount of $570 million as a part of a merger. The fair value of the five hedges assumed was $14.7 million and is amortized over the remaining lives of the respective hedges and recorded in Interest Expense, Net in the consolidated statements of operations. The net unamortized amount remaining as of June 30, 2021 and December 31, 2020 was $4.3 million and $5.0 million, respectively.
The table below details the nature of the gain orand loss recognized on interest rate derivatives designated as cash flow hedges in the consolidated statements of operations (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Amount of loss recognized in other comprehensive income on derivatives | $ | (45) | | | $ | (9,193) | | | $ | (51,575) | | | $ | (44,398) | |
Amount of loss (gain) reclassified from AOCI into interest expense | 5,143 | | | (538) | | | 11,562 | | | (3,339) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Amount of (loss) gain recognized in Other Comprehensive Income (Loss) | $ | (1,451) | | | $ | (6,614) | | | $ | 5,814 | | | $ | (51,530) | |
Amount of loss reclassified from AOCI into interest expense | 4,824 | | | 4,867 | | | 9,679 | | | 6,419 | |
Credit-risk-related Contingent Features—We have agreements with our derivative counterparties that contain provisions where, if we default, or are capable of being declared in default, on any of our indebtedness, we could also be declared to be in default on our derivative obligations. As of SeptemberJune 30, 2020,2021, the fair value of our derivatives in a net liability position, which included accrued interest but excluded any adjustment for nonperformance risk related to these agreements, was approximately $60.6$39.9 million. As of SeptemberJune 30, 2020,2021, we had not posted any collateral related to these agreements and were not in breach of any agreement provisions. If we had breached any of these provisions, we could have been required to settle our obligations under the agreements at their termination value of $60.6$39.9 million.
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8. COMMITMENTS AND CONTINGENCIES |
Litigation—We are involved in various claims and litigation matters arising in the ordinary course of business, some of which involve claims for damages. Many of these matters are covered by insurance, although they may nevertheless be subject to deductibles or retentions. Although the ultimate liability for these matters cannot be determined, based upon information currently available, we believe the resolution of such claims and litigation will not have a material adverse effect on our consolidated financial statements.
Environmental Matters—In connection with the ownership and operation of real estate, we may potentially be liable for costs and damages related to environmental matters. In addition, we may own or acquire certain properties that are subject to environmental remediation. Depending on the nature of the environmental matter, the seller of the property, a tenant of the property, and/or another third party may be responsible for environmental remediation costs related to a property. Additionally, in connection with the purchase of certain properties, the respective sellers and/or tenants may agree to indemnify us against future remediation costs. We also carry environmental liability insurance on our properties that provides limited coverage for any remediation liability and/or pollution liability for third-party bodily injury and/or property damage claims for which we may be liable. We are not aware of any environmental matters which we believe are reasonably likely to have a material effect on our consolidated financial statements.
Captive Insurance—Our captive insurance company, Silver Rock Insurance, Inc. (“Silver Rock”) provides general liability insurance, wind, reinsurance, and other coverage to us and our related-party joint ventures. We capitalize Silver Rock in accordance with applicable regulatory requirements.
Silver Rock established annual premiums based on the past loss experience of the insured properties. An independent third party was engaged to perform an actuarial estimate of projected future claims, related deductibles, and projected future expenses necessary to fund associated risk management programs. Premiums paid to Silver Rock may be adjusted based on these estimates, and such premiums may be reimbursed by tenants pursuant to specific lease terms.
As of SeptemberJune 30, 2020,2021, we had four letters of credit outstanding totaling approximately $8.0$9.0 million to provide security for our obligations under Silver Rock’s insurance and reinsurance contracts.
COVID-19—As of September 30, 2020, we were not aware of any significant liabilities or obligations to waive rent that we have incurred under force majeure or co-tenancy clauses in tenant leases.
General—The holders of common stock are entitled to one vote per share on all matters voted on by stockholders, including one vote per nominee in the election of our board of directors (“Board”).the Board. Our charter does not provide for cumulative voting in the election of directors.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 14 |
Reverse Stock Split—On November 4, 2020, our Board approved an amendment to our articles of incorporation to effectJuly 2, 2021, we effected a one-for-fourone-for-three reverse stock split. Concurrent with the reverse split, effective in March 2021.the Operating Partnership enacted a one-for-three reverse split of its outstanding OP units. Neither the number of authorized shares nor the par value of the common stock will be changed. In addition, we intend to amend the limited partnership agreement of our Operating Partnership to effect a corresponding reverse stock split of the OP units.were impacted. As a result of the reverse stock split, every fourthree shares of our common stock or OP units will bewere automatically combined and converted into one issued and outstanding share of common stock or OP unit rounded to the nearest 1/100th share, after which our stockholders will have an estimated value per share (“EVPS”) of $35.00.100th share. The reverse stock split impacts all common stock and OP units proportionately and will havehad no impact on any stockholder’s percentage ownership of common stock.
On May 6, 2020,In connection with the reverse stock split, the number of shares of common stock and OP units underlying the outstanding share-based awards was also proportionately reduced. All references to shares of common stock, number of OP units, and per share data for all periods presented in our Board decreasedconsolidated financial statements and notes have been adjusted to reflect the EVPSreverse split on a retroactive basis.
Class B Common Stock—Our stockholders approved Articles of Amendment that effected a change of each share of our common stock to $8.75 based substantially onoutstanding at the estimated market valuetime the amendment became effective into one share of our portfolioa newly-created class of real estate propertiesClass B common stock (the “Recapitalization”). The Articles of Amendment became effective upon filing with, and our third-party investment management business as of March 31, 2020. The decrease was primarily drivenacceptance by, the negative impactState Department of Assessments and Taxation of Maryland on July 2, 2021.
Our Class B common stock is identical to our common stock, except that (i) we do not intend to list our Class B common stock on a national securities exchange, and (ii) upon the six month anniversary of the COVID-19 pandemic on our non-grocery tenants resulting from social distancing and stay-at-home guidelines and the uncertainty of the duration and full effect on the overall economy. We engaged a third-party valuation firm to provide a calculation of the range in EVPSlisting of our common stock for trading on a national securities exchange, or January 15, 2022 (or such earlier date or dates as may be approved by our Board in certain circumstances with respect to all or any portion of March 31, 2020, which reflected certain balance sheet assets and liabilities as of that date. Previously, our EVPS was $11.10, based substantially on the estimated market valueoutstanding shares of our portfolioClass B common stock), each share of real estate propertiesour Class B common stock will automatically, and without any stockholder action, convert into one share of our third-party investment management business aslisted common stock.
Underwritten IPO—On July 19, 2021, we completed an underwritten IPO and issued 17.0 million shares of March 31, 2019.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.
Distributions—Distributions paid to stockholders and OP unit holders of record subsequent to June 30, 2021 were as follows (dollars in thousands, excluding per share amounts):
| | | | | | | | | | | | | | | | | |
Month | Date of Record | Monthly Distribution Rate | Date Distribution Paid | | Cash Distribution |
June 2021 | 6/15/2021 | $ | 0.085 | | 7/1/2021 | | $ | 9,063 | |
July 2021 | 7/15/2021 | 0.085 | | 8/2/2021 | | 9,065 | |
On March 27, 2020, our Board suspended stockholder distributions, effective after the payment of the March 2020 distribution on April 1, 2020, as a result of the uncertainty surrounding the COVID-19 pandemic. On NovemberAugust 4, 2020,2021, our Board authorized distributions forto the stockholders of record at the close of business on December 28, 2020August 16, 2021, equal to a monthly amount of $0.02833333$0.085 per share of common stock, or $0.34 annually. Operating partnershipstock. OP unit (“OP Unit”) holders will receive distributions at the same rate as common stockholders. We expect to pay this distribution on January 7, 2021.
Dividend Reinvestment Plan—The DRIP allows stockholders to invest distributions in additional shares of our common stock, subject to certain limits. Stockholders who elect to participate in the DRIP may choose to invest all or a portion of their cash distributions in shares of our common stock at a price equal to our most recent EVPS.
Stockholders who elect to participate in the DRIP, and who are subject to U.S. federal income taxation laws, will incur a tax liability on an amount equal to the fair value on the relevant distribution date of the shares of our common stock purchased with reinvested distributions, even though such stockholders have elected not to receive the distributions in cash.
On March 27, 2020, the DRIP was suspended, and the March 2020 distribution was paid in all cash on April 1, 2020. The DRIP remained suspended as of September 30, 2020. On November 4, 2020, our Board reinstated the DRIP, which will be effective beginning with the December 2020 distribution to be paid in January 2021.
Tender Offer—On November 4, 2020, our Board approved a voluntary tender offer commencing on November 10, 2020 (the “Tender Offer”) for up to 4.5 million shares of our outstanding common stock at a price of $5.75 per share, for a total value of approximately $26 million.
Share Repurchase Program (“SRP”)—The SRP provides an opportunity for stockholders to have shares of common stock repurchased, subject to certain restrictions and limitations. The Board reserves the right, in its sole discretion, at any time and from time to time, to reject any request for repurchase.
On August 7, 2019, the Board suspended the SRP with respect to standard repurchases. The SRP for death, qualifying disability, or determination of incompetence (“DDI”) was suspended effective March 27, 2020, in response to the uncertainty of COVID-19. Both the SRP with respect to standard repurchases and the SRP for death, qualifying disability, or determination of incompetence remain suspended as of September 30, 2020.
We expect to restart share repurchases for DDI at $5.75 per share, but no shares will be repurchased until at least 10 business days after completion of the Tender Offer. The SRP with respect to standard repurchases will remain suspended.
Convertible Noncontrolling Interests—As of June 30, 2021 and December 31, 2020, we had approximately 13.4 million and 13.3 million outstanding OP units, respectively. Additionally, certain of our outstanding restricted share and performance share awards will result in the issuance of OP units upon vesting in future periods.
Under the terms of the Fourth Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”), OP Unitunit holders may elect to exchange their OP units. The Operating Partnership controls the form of the redemption, and may elect to exchange OP units either for shares of our common stock, provided that the OP units have been outstanding for at least one year, or for cash. As the form of redemption for OP units is within our control, the OP units outstanding as of SeptemberJune 30, 20202021 and December 31, 20192020 are classified as Noncontrolling Interests within permanent equity on our consolidated balance sheets.
The distributions that have beentable below is a summary of our OP unit activity for the three and six months ended June 30, 2021 and 2020 (dollars and shares in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
OP units converted into shares of our common stock(1) | 28 | | | 17 | | | 28 | | | 56 | |
Distributions paid on OP units(2) | $ | 3,460 | | | $ | 0 | | | $ | 6,779 | | | $ | 7,105 | |
(1)OP units are converted into shares of our common stock at a 1:1 ratio.
(2)Distributions paid on OP units are included in Distributions to Noncontrolling Interests on the consolidated statements of equity. During
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 15 |
Underwritten IPO Grants—In connection with our underwritten IPO, we issued a total of 0.5 million RSUs and restricted stock awards in the nineform of time-based stock compensation awards. The shares have a grant price of $28.00 per share and, with the exception of one individual whose award is subject to accelerated vesting provisions, 50% of the shares will vest after 18 months ended September 30, 2020 and 2019, 0.2 million and 1.9 million OP units were converted into sharesthe remaining 50% will vest after 36 months.
Estimated Value per Share—Prior to our underwritten IPO, on April 29, 2021, our Board increased the estimated value per share (“EVPS”) of our common stock at a 1:1 ratio, respectively. There were approximately 42.7 million OP units outstandingto $31.65 based substantially on the estimated market value of our portfolio of real estate properties and our third-party investment management business as of September 30, 2020 and DecemberMarch 31, 2019. Additionally, certain2021. We engaged a third-party valuation firm to provide a calculation of the range in EVPS of our outstanding time-common stock as of March 31, 2021, which reflected certain balance sheet assets and performance-based equity awards willliabilities as of that date. Previously, our EVPS was $26.25, based substantially on the estimated market value of our portfolio of real estate properties and our third-party investment management business as of March 31, 2020.
Dividend Reinvestment Plan and Share Repurchase Program (“SRP”)—On August 4, 2021, as a result inof our underwritten IPO, our Board approved the issuancetermination of sharesthe 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 OP units upon vesting in future periods. Simultaneously with the reverse stock split described above, to be made effective indeclaration of incompetence (“DDI”) of stockholders, has been suspended since March 2021, every four OP units then outstanding will be automatically combined and converted into one OP unit.the SRP for standard repurchases had been suspended since August 2019.
We use the two-class method of computing earnings per share (“EPS”), which is an earnings allocation formula that determines EPS for common stock and any participating securities according to dividends declared (whether paid or unpaid). Under the two-class method, basic EPS is computed by dividing Net Income (Loss) Attributable to Stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS reflects the potential dilution that could occur from share equivalent activity. EPS reflects earnings per common share prior to the Recapitalization.
OP units held by limited partners other than us are considered to be participating securities because they contain non-forfeitable rights to dividends or dividend equivalents, and have the potential to be exchanged for an equal number of shares of our common stock in accordance with the terms of the the Partnership Agreement.
The impact of these outstanding OP units on basic and diluted EPS has been calculated using the two-class method whereby earnings are allocated to the OP units based on dividends declared and the OP units’ participation rights in undistributed earnings. The effects of the two-class method on basic and diluted EPS were immaterial to the consolidated financial statements during the ninethree and six months ended SeptemberJune 30, 20202021 and 2019.
The following table provides a reconciliation of the numerator and denominator of the earnings per share calculations, restated for prior periods to display the effect of the reverse split, and excluding the effects of the Recapitalization as it occurred after June 30, 2021 (in thousands, except per share amounts):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
Numerator: | Numerator: | | Numerator: | |
Net income (loss) attributable to stockholders - basic | Net income (loss) attributable to stockholders - basic | $ | 11,784 | | | $ | (25,877) | | | $ | 15,965 | | | $ | (67,642) | | Net income (loss) attributable to stockholders - basic | $ | 5,594 | | | $ | (5,588) | | | $ | 5,697 | | | $ | 4,181 | |
Net income (loss) attributable to convertible OP units(1) | Net income (loss) attributable to convertible OP units(1) | 1,646 | | | (3,893) | | | 2,251 | | | (10,319) | | Net income (loss) attributable to convertible OP units(1) | 796 | | | (825) | | | 810 | | | 605 | |
Net income (loss) - diluted | Net income (loss) - diluted | $ | 13,430 | | | $ | (29,770) | | | $ | 18,216 | | | $ | (77,961) | | Net income (loss) - diluted | $ | 6,390 | | | $ | (6,413) | | | $ | 6,507 | | | $ | 4,786 | |
Denominator: | Denominator: | | | | | | | | Denominator: | | | | | | | |
Weighted-average shares - basic | Weighted-average shares - basic | 290,465 | | | 283,827 | | | 290,295 | | | 282,714 | | Weighted-average shares - basic | 93,625 | | | 96,821 | | | 93,558 | | | 96,736 | |
OP units(1) | OP units(1) | 42,742 | | | 42,783 | | | 42,792 | | | 43,356 | | OP units(1) | 13,381 | | | 14,248 | | | 13,368 | | | 14,273 | |
Dilutive restricted stock awards | Dilutive restricted stock awards | 356 | | | 0 | | | 393 | | | 0 | | Dilutive restricted stock awards | 169 | | | 0 | | | 176 | | | 131 | |
Adjusted weighted-average shares - diluted | Adjusted weighted-average shares - diluted | 333,563 | | | 326,610 | | | 333,480 | | | 326,070 | | Adjusted weighted-average shares - diluted | 107,175 | | | 111,069 | | | 107,102 | | | 111,140 | |
Earnings per common share: | Earnings per common share: | | | | | | | | Earnings per common share: | | | | | | | |
Basic and diluted income (loss) per share | Basic and diluted income (loss) per share | $ | 0.04 | | | $ | (0.09) | | | $ | 0.05 | | | $ | (0.24) | | Basic and diluted income (loss) per share | $ | 0.06 | | | $ | (0.06) | | | $ | 0.06 | | | $ | 0.04 | |
(1)OP units include units that are convertible into common stock or cash, at the Operating Partnership’s option. The Operating Partnership income or loss attributable to these OP units, which is included as a component of Net (Income) Loss Attributable to Noncontrolling Interests on the consolidated statements of operations, has been added back in the numerator as these OP units were included in the denominator for all yearsperiods presented.
Approximately 1.00.4 million time-based and 2.50.9 million performance-based unvested stock unitsawards were outstanding as of SeptemberJune 30, 2019.2020. These securities were anti-dilutive for the three and nine months ended SeptemberJune 30, 2019, and as2020. As a result, their impact was excluded from the weighted-average common shares used to calculate diluted EPS for those periods.that period.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 16 |
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11. REVENUE RECOGNITION AND RELATED PARTY TRANSACTIONS |
Revenue—We have entered into agreements with the Managed Funds related to certain advisory, management, and administrative services we provide to their real estate assets in exchange for fees and reimbursement of certain expenses. Summarized below are amounts included in Fees and Management Income. The revenue includes the fees and reimbursements earned by us from the Managed Funds, and other revenues that are not in the scope of ASC Topic 606, Revenue from Contracts with Customers, but that are included in this table for the purpose of disclosing all related party revenues (in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
Recurring fees(1) | Recurring fees(1) | $ | 1,233 | | | $ | 1,669 | | | $ | 3,631 | | | $ | 4,890 | | Recurring fees(1) | $ | 1,103 | | | $ | 1,182 | | | $ | 2,228 | | | $ | 2,398 | |
Transactional revenue and reimbursements(2) | Transactional revenue and reimbursements(2) | 719 | | | 606 | | | 2,109 | | | 2,655 | | Transactional revenue and reimbursements(2) | 461 | | | 960 | | | 929 | | | 1,390 | |
Insurance premiums(3) | Insurance premiums(3) | 629 | | | 491 | | | 1,766 | | | 1,533 | | Insurance premiums(3) | 810 | | | 618 | | | 1,503 | | | 1,137 | |
Total fees and management income | Total fees and management income | $ | 2,581 | | | $ | 2,766 | | | $ | 7,506 | | | $ | 9,078 | | Total fees and management income | $ | 2,374 | | | $ | 2,760 | | | $ | 4,660 | | | $ | 4,925 | |
(1)Recurring fees include asset management fees and property management fees.
(2)Transactional revenue includes items such as leasing commissions, construction management fees, and acquisition fees.
(3)Insurance premium income includes amounts for reinsurance from third parties not affiliated with us.
DuringTax Protection Agreement—Through our Operating Partnership, we are currently party to a tax protection agreement (the “2017 TPA”) with certain partners that contributed property to our Operating Partnership on October 4, 2017, among them certain of our executive officers, including Jeffrey S. Edison, our Chairman and Chief Executive Officer, under which the nine months ended SeptemberOperating Partnership has agreed to indemnify such partners for tax liabilities that could accrue to them personally related to our potential disposition of certain properties within our portfolio. The 2017 TPA will expire on October 4, 2027. On July 19, 2021, we entered into an additional tax protection agreement (the “2021 TPA”) with certain of our executive officers, including Mr. Edison. The 2021 TPA carries a term of four years and will become effective upon the expiration of the 2017 TPA. As of June 30, 2019, we recognized a net charge2021, the potential “make-whole amount” on the estimated aggregate amount of $1.9 millionbuilt-in gain subject to protection under the agreements is approximately $152.6 million. The protection provided under the terms of the 2021 TPA will expire in Other Expense, Net2031. We have not recorded any liability related to the 2017 TPA or the 2021 TPA on our consolidated statementsbalance sheets for any periods presented, nor recognized any expense since the inception of operations. The charge was relatedthe 2017 TPA, owing to the fact that any potential liability under the agreements is controlled by us and we will either (i) continue to own and operate the protected properties or (ii) be able to successfully complete Section 1031 Exchanges (unless there is a reductionchange in our related party accounts receivable and organization and offering costs payable for amounts incurred in connection withapplicable law) or complete other tax-efficient transactions to avoid any liability under the Phillips Edison Grocery Center REIT III, Inc. (“REIT III”) public offering. Remaining accounts receivable and organization and offering costs payable that were outstanding as of September 30, 2019 related to REIT III were settled when we merged with REIT III in October 2019.agreements.
Other Related Party Matters—We are the limited guarantor for up to $190 million, capped at $50 million in most instances, of debt for our NRP joint venture. As of SeptemberJune 30, 2020,2021, the outstanding loan balance related to our NRP joint venture was $32.1 million. As of June 30, 2021, we were also the limited guarantor of a $175 million mortgage loan forsecured by GRP I.I properties. Our guaranty infor both casesthe NRP and GRP I debt is limited to being the non-recourse carveout guarantor and the environmental indemnitor. WeFurther, in both cases, we are also party to a separatean agreement with our institutional joint venture partnerpartners in which any potential liability under our guaranty for GRP Isuch guarantees will be apportioned between us and our applicable joint venture partner based on our respective ownership percentages in GRP I.the applicable joint venture. We have no liability recorded on our consolidated balance sheets for either guaranty as of SeptemberJune 30, 20202021 and December 31, 2019.2020.
Additionally, during 2021, we made a cash investment of $3.0 million into a third-party company in exchange for preferred shares of their stock. As part of the investment agreement, the third-party company committed to enter into leases at two of our properties. As of August 5, 2021, we had entered into two leases under the terms of the investment agreement, both of which carry a term of 10 years, over which period we expect to receive contractual rents of $2.6 million in total for both leases.
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12. FAIR VALUE MEASUREMENTS |
The following describes the methods we use to estimate the fair value of our financial and nonfinancial assets and liabilities:
Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, and Accounts Payable—We consider the carrying values of these financial instruments to approximate fair value because of the short period of time between origination of the instruments and their expected realization.
Real Estate Investments—The purchase prices of the investment properties, including related lease intangible assets and liabilities, were allocated at estimated fair value based on Level 3 inputs, such as discount rates, capitalization rates, comparable sales, replacement costs, income and expense growth rates, and current market rents and allowances as determined by management.
Debt Obligations—We estimate the fair value of our debt by discounting the future cash flows of each instrument at rates currently offered for similar debt instruments of comparable maturities by our lenders using Level 3 inputs. The discount rates used approximate current lending rates for loans or groups of loans with similar maturities and credit quality, assuming the debt is outstanding through maturity and considering the debt’s collateral (if applicable). We have utilized market information, as available, or present value techniques to estimate the amounts required to be disclosed.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 17 |
The following is a summary of borrowings as of SeptemberJune 30, 20202021 and December 31, 20192020 (in thousands):
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| | Recorded Principal Balance(1) | | Fair Value | | Recorded Principal Balance(1) | | Fair Value | | Recorded Principal Balance(1) | | Fair Value | | Recorded Principal Balance(1) | | Fair Value |
| Term loans | Term loans | $ | 1,609,291 | | | $ | 1,602,032 | | | $ | 1,636,470 | | | $ | 1,656,765 | | Term loans | $ | 1,612,031 | | | $ | 1,631,088 | | | $ | 1,610,204 | | | $ | 1,621,902 | |
Secured portfolio loan facilities | Secured portfolio loan facilities | 391,011 | | | 404,971 | | | 390,780 | | | 399,054 | | Secured portfolio loan facilities | 391,371 | | | 411,209 | | | 391,131 | | | 404,715 | |
Mortgages(2) | Mortgages(2) | 318,701 | | | 330,159 | | | 326,849 | | | 337,614 | | Mortgages(2) | 224,830 | | | 234,766 | | | 291,270 | | | 303,647 | |
Total | Total | $ | 2,319,003 | | | $ | 2,337,162 | | | $ | 2,354,099 | | | $ | 2,393,433 | | Total | $ | 2,228,232 | | | $ | 2,277,063 | | | $ | 2,292,605 | | | $ | 2,330,264 | |
(1)Recorded principal balances include net deferred financing expenses of $14.5$11.7 million and $17.2$13.5 million as of SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively. Recorded principal balances also include assumed market debt adjustments of $1.4$1.6 million and $1.2$1.5 million as of SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively. We have recorded deferred financing expenses related to our revolving credit facility, which are not included in these balances, in Other Assets, Net on our consolidated balance sheets which are not included in these balances.sheets.
(2)Our finance lease liability is included in the mortgages line item, as presented.
Recurring and Nonrecurring Fair Value Measurements—Our earn-out liability and interest rate swaps are measured and recognized at fair value on a recurring basis, while certain real estate assets and liabilities are measured and recognized at fair value as needed. Fair value measurements that occurred as of and during the ninesix months ended SeptemberJune 30, 20202021 and the year ended December 31, 2019,2020, were as follows (in thousands):
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| | Level 1 | Level 2 | Level 3 | | Level 1 | Level 2 | Level 3 | | Level 1 | Level 2 | Level 3 | | Level 1 | Level 2 | Level 3 |
Recurring | Recurring | | Recurring | |
Derivative assets(1) | $ | — | | $ | 0 | | $ | — | | | $ | — | | $ | 2,728 | | $ | — | | |
Derivative liabilities(1) | Derivative liabilities(1) | — | | (60,615) | | — | | | — | | (20,974) | | — | | Derivative liabilities(1) | $ | — | | $ | (39,929) | | $ | — | | | $ | — | | $ | (54,759) | | $ | — | |
Earn-out liability | Earn-out liability | — | | — | | (22,000) | | | — | | — | | (32,000) | | Earn-out liability | — | | — | | (40,000) | | | — | | — | | (22,000) | |
Nonrecurring | Nonrecurring | | Nonrecurring | |
Impaired real estate assets, net(2) | Impaired real estate assets, net(2) | — | | 0 | | — | | | — | | 280,593 | | — | | Impaired real estate assets, net(2) | $ | — | | $ | 22,850 | | $ | — | | | $ | — | | $ | 19,350 | | $ | — | |
Impaired corporate intangible asset, net(3) | — | | — | | — | | | — | | — | | 4,401 | | |
Impaired corporate ROU asset, net | | Impaired corporate ROU asset, net | — | | — | | — | | | — | | 537 | | — | |
(1)We record derivative assets in Other Assets, Net and derivative liabilities in Derivative Liabilities on our consolidated balance sheets.
(2)The carrying value of impaired real estate assets may have subsequently increased or decreased after the measurement date due to capital improvements, depreciation, or sale.
(3)The carrying value of our impaired corporate intangible asset, net, which consists of in-place management contracts, subsequently decreased after the measurement date due to amortization as well as through derecognition as part of the merger with REIT III.
Derivative Instruments—As of SeptemberJune 30, 20202021 and December 31, 2019,2020, we had interest rate swaps that fixed LIBOR on portions of our unsecured term loan facilities.
All interest rate swap agreements are measured at fair value on a recurring basis. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
To comply with the provisions of ASC Topic 820, Fair Value Measurement, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair
value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although we determined that the significant inputs used to value our derivatives fell within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our counterparties and our own credit risk utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and our counterparties. However, as of SeptemberJune 30, 20202021 and December 31, 2019,2020, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Earn-out—As part of our acquisition of Phillips Edison Limited Partnership (“PELP”),PELP in 2017, an earn-out structure was established which gave PELP the opportunity to earn additional OP units based upon the potential achievement of certain performance targets subsequent to the acquisition. After the expiration of certain provisions in 2019, PELP is now eligible to earn between 3000000a minimum of 1.0 million and 5a maximum of approximately 1.7 million OP units as contingent consideration based onupon the timing and valuation of a liquidity event for PECO. Certain of these performance targets are tied to the post-underwritten IPO trading price of our common stock. The number of OP units awarded will vary based on the highest volume weighted average price per share of our common stock over any 30 consecutive trading day period during the 180 days following the underwritten IPO commencement (the “liquidity event price per share”):
•if the liquidity event can occur no laterprice per share is greater than December 31,or equal to $33.60, PELP will receive approximately 1.7 million OP units;
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 18 |
•if the liquidity event price per share is less than $33.60 but greater than or equal to $26.40, PELP will receive a number of OP units equal to (i) 1.0 million plus (ii) the product of (A) approximately 0.7 million and (B) the quotient obtained by dividing the liquidity event price per share in excess of $26.40 by $7.20; or
•if the liquidity event price per share is less than $26.40, PELP will receive 1.0 million OP units.
Prior to the second quarter of 2021, for the maximum shares to be awarded, but can occur as late as December 31, 2023.
We estimatewe estimated the fair value of thisthe earn-out liability on a quarterly basis using the Monte Carlo method. This method requires usAs of June 30, 2021, our underwritten IPO process had commenced and thus the only remaining variable for calculating final amounts to make assumptions about future dividend yields, volatility, and timing and pricing ofbe paid under the earn-out agreement was the liquidity events, which are unobservable and are considered Level 3 inputs inevent price per share. Therefore, we estimated the fair value hierarchy. A change in these inputsof the liability related to the earn-out using a different amount might result in a significantly higher or lower fair value measurement atprobability-weighted model to estimate the reporting date.liquidity event price per share. In calculating the fair value of this liability as of SeptemberJune 30, 2020,2021, we have determined that 1.0 million OP units have been earned and the most likely range of potential outcomes includes a possibility of no additional OP units issued as well as up to a maximum of fiveapproximately 0.667 million units being issued.
ChangesFor the three months ended June 30, 2021, we recorded expense of $2.0 million related to the change in fair value of the earn-out liability. There was 0 change to the fair value of our earn-out liability for the three months ended June 30, 2020. We recorded expense of $18.0 million and income of $10.0 million, respectively, for the six months ended June 30, 2021 and June 30, 2020 related to changes in the fair value of the earn-out liability. The increase in the fair value of the liability haveas of June 30, 2021 was attributable to the commencement of our underwritten IPO as well as improved market conditions in 2021. The change in fair value for each period has been and will continue to be recognized in earnings. The following table presents a reconciliation of the change in the earn-out liability measured at fair value on a recurring basis using Level 3 inputs and recognized as Other (Expense) Income, (Expense), Net in the consolidated statements of operations (in thousands):
| | | | | |
| Earn-Out Liability |
Balance at December 31, 2019 | $ | 32,000 | |
Change in fair value recognized in Other Income (Expense), Net | (10,000) | |
Balance at September 30, 2020 | $ | 22,000 | |
operations.Real Estate Asset Impairment—Our real estate assets are measured and recognized at fair value, less costs to sell for held-for-sale properties, on a nonrecurring basis dependent upon when we determine an impairment has occurred. During the three and ninesix months ended SeptemberJune 30, 2019,2021, we impaired assets that were under contract or actively marketed for sale at a disposition price that was less than carrying value, or that had other operational impairment indicators. The valuation technique used for the fair value of all impaired real estate assets was the expected net sales proceeds, which we consider to be a Level 2 input in the fair value hierarchy. There were no impairment charges recorded during the three and ninesix months ended SeptemberJune 30, 2020.
On a quarterly basis, we employ a multi-step approach to assess our real estate assets for possible impairment and record any impairment charges identified. The first step is the identification of potential triggering events, such as significant decreases in occupancy or the presence of large dark or vacant spaces. If we observe any of these indicators for a shopping center, we then perform an additional screen test consisting of a years-to-recover analysis to determine if we will recover the net bookcarrying value of the property over its remaining economic life based upon net operating income (“NOI”) as forecasted for the current year. In the event that the results of this first step indicate a triggering event for a center, we proceed to the second step, utilizing an undiscounted cash flow model for the center to identify potential impairment. If the undiscounted cash flows are less than the net book value of the center as of the balance sheet date, we proceed to the third step. In performing the third step, we utilize market data such as capitalization rates and sales price per square foot on comparable recent real estate transactions to estimate fair value of the real estate assets. We also utilize expected net sales proceeds to estimate the fair value of any centers that are actively being marketed for sale. If the estimated fair value of the property is less than the recorded net book value at the balance sheet date, we record an impairment charge.
In addition to these procedures, we also review undeveloped or unimproved land parcels that we own for evidence of impairment and record any impairment charges as necessary. Primary impairment triggers for these land parcels are changes to our plans or intentions with regards to such properties, or planned dispositions at prices that are less than the current carrying values.
Our quarterly impairment procedures have not been altered by the COVID-19 pandemic, as we believe key impairment indicators such as temporary store closings and large dark or vacant spaces will continue to be identified in our review. We have utilized forecasts that incorporate estimated decreases in net operating income (“NOI”)NOI and cash flows as a result of the COVID-19 pandemic in performing our review procedures for the three and ninesix months ended SeptemberJune 30, 2021 and 2020. However, it is possible that we could experience unanticipated changes in assumptions that are employed in our impairment review which could impact our cash flows and fair value conclusions. Such unanticipated changes relative to our expectations may include but are not limited to: increases or decreases in the duration or permanence of tenant closures, increases or decreases in collectabilitycollectibility reserves and write-offs, additional capital required to fill vacancies, extended lease-up periods, future closings of large tenants, changes in macroeconomic assumptions such as rate of inflation and capitalization rates, and changes to the estimated timing of disposition of the properties under review.
We recorded the following expense upon impairment of real estate assets (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Impairment of real estate assets | $ | 0 | | | $ | 35,710 | | | $ | 0 | | | $ | 74,626 | |
Corporate Intangible Asset Impairment—In connection with our acquisition of PELP, we acquired a corporate intangible asset consisting of in-place management contracts. We evaluate our corporate intangible asset for impairment when a triggering event occurs, or circumstances change, that indicate the carrying value may not be recoverable.
In June 2019, the suspension of the REIT III public offering constituted a triggering event for further review of the corporate intangible asset’s fair value compared to its carrying value. We estimated the fair value of the corporate intangible asset using a discounted cash flow model which leveraged certain Level 3 inputs. The evaluation of corporate intangible assets for potential impairment required management to exercise significant judgment and to make certain assumptions. The assumptions utilized in the evaluation included projected future cash flows and a discount rate of 19%. Based on this analysis, we concluded the carrying value exceeded the estimated fair value of the corporate intangible asset, and an impairment charge of $7.8 million was recorded in Other Income (Expense), Net on the consolidated statements of operations in the second quarter of 2019.
We have not noted any triggering events related to our corporate intangible asset, and accordingly have not recorded any impairments, subsequent to this date. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Impairment of real estate assets | $ | 1,056 | | | $ | 0 | | | $ | 6,056 | | | $ | 0 | |
In preparing the condensed and unaudited consolidated financial statements, we have evaluated subsequent events through the filing of this report on Form 10-Q for recognition and/or disclosure purposes. Based on this evaluation, we have determined that there were no events that have occurred that require recognition or disclosure, other than certain events and transactions that have been disclosed elsewhere in these consolidated financial statements.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 19 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our accompanying consolidated financial statements and notes thereto. All references to “Notes” throughout this document refer to the footnotes to the consolidated financial statements in Part“Part I, Item 1. Financial Statements.Information”. See also “Cautionary Note Regarding Forward-Looking Statements” below.
Cautionary Note Regarding Forward-Looking Statements | | |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS |
Certain statements contained in this Quarterly Report on Form 10-Q (this “Report”) of Phillips Edison & Company, Inc. (“we,” the “Company,” “our,” or “us”) other than historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995 (collectively with the Securities Act and the Exchange Act, the “Acts”). We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in the Acts. Such forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “can,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” “possible,” “initiatives,” “focus,” “seek,” “objective,” “goal,” “strategy,” “plan,” “potential,” “potentially,” “preparing,” “projected,” “future,” “long-term,” “once,” “should,” “could,” “would,” “might,” “uncertainty,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the U.S. Securities and Exchange Commission (“SEC”).SEC. Such statements include, but are not limited to, (a) statements about our focus, plans, strategies, initiatives, and prospects; (b) statements about the COVID-19 pandemic, including its duration and potential or expected impact on our tenants, our business, and our estimated value per share; (c) statements about our intentions regarding the Tender Offer, a reverse stock split, our distributions, share repurchase program, and dividend reinvestment program;plan; (d) statements about our underwritten incremental yields; and (d)(e) statements about our future results of operations, capital expenditures, and liquidity. Such statements are subject to known and unknown risks and uncertainties, which could cause actual results to differ materially from those projected or anticipated, including, without limitation: (i) changes in national, regional, or local economic climates; (ii) local market conditions, including an oversupply of space in, or a reduction in demand for, properties similar to those in our portfolio; (iii) vacancies, changes in market rental rates, and the need to periodically repair, renovate, and re-let space; (iv) changes in interest rates and the availability of permanent mortgage financing; (v) competition from other available propertiesshopping centers and the attractiveness of properties in our portfolio to our tenants; (vi)(v) the financial stability of our tenants, including, thewithout limitation, their ability of tenants to pay rent; (vi) our ability to pay down, refinance, restructure, or extend our indebtedness as it becomes due; (vii) increases in our borrowing costs as a result of changes in interest rates and other factors, including the potential phasing out of LIBOR after 2021; (viii) potential liability for environmental matters; (ix) damage to our properties from catastrophic weather and other natural events, and the physical effects of climate change; (x) our ability and willingness to maintain our qualification as a REIT in light of economic, market, legal, tax, and other considerations; (xi) changes in tax, real estate, environmental, and zoning laws; (viii)(xii) information technology security breaches; (xiii) our corporate responsibility initiatives; (xiv) loss of key executives; (xv) the concentrationmeasures taken by federal, state, and local government agencies and tenants in response to the COVID-19 pandemic, including mandatory business shutdowns, “stay-at-home” orders and social distancing guidelines, the duration of any such measures and the extent to which the revenues of our portfoliotenants recover following the lifting of such restrictions; (xvi) the effectiveness or lack of effectiveness of governmental relief in a limited number of industries, geographies, or investments; (ix)providing assistance to individuals and businesses adversely impacted by the COVID-19 pandemic, including our tenants; (xvii) the effects of the COVID-19 pandemic, including on the demand for consumer goods and services and levels of consumer confidence in the safety of visiting shopping centers as a result of the COVID-19 pandemic; (x) the measures taken by federal, state, and local government agencies and tenants in response to the COVID-19 pandemic, including mandatory business shutdowns, stay-at-home orders and social distancing guidelines; (xi)(xviii) the impact of the COVID-19 pandemic on our tenants and their ability to pay rent on time or at all, orand willingness to renew their leases and, in the case of non-renewal,upon expiration; (xix) our ability to re-lease the space atour properties on the same or more favorablebetter terms, or at all; (xii)all, in the lengthevent of non-renewal or in the event we exercise our right to replace an existing tenant; (xx) the loss or bankruptcy of our tenants, particularly in light of the adverse impact to the financial health of many retailers and severityservice providers that has occurred and continues to occur as a result of the COVID-19 pandemic in the United States; (xiii)pandemic; (xxi) the pace of recovery following the COVID-19 pandemic given the current severe economic contraction and increase in unemployment rates; (xiv) our ability to implement cost containment strategies; (xv) our and our tenants’ ability to obtain loans under government programs; (xvi) our ability to pay down, refinance, restructure, or extend our indebtedness as it becomes due; (xvii)(xxii) to the extent we were seeking to dispose of properties in the near term, significantly greater uncertainty regarding our ability to do so at attractive prices; (xviii) the impact of the COVID-19 pandemic onprices or at all; and (xxiii) our business, results of operations, financial condition, and liquidity; and (xix) supply chain disruptions dueability to the COVID-19 pandemic.implement cost containment strategies. Additional important factors that could cause actual results to differ are described in the filings made from time to time by the Company with the SEC and include the risk factors and other risks and uncertainties described in our 20192020 Annual Report on Form 10-K, as originally filed with the SEC on March 12, 2020,2021, and those included in this Report, in each case as updated from time to time in our periodic and/or current reports filed with the SEC, which are accessible on the SEC’s website at www.sec.gov.
Except as required by law, we do not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.
Overview | | |
KEY PERFORMANCE INDICATORS AND DEFINED TERMS |
We use certain key performance indicators (“KPIs”), which include both financial and nonfinancial metrics, to measure the performance of our operations. We believe these KPIs, as well as the core concepts and terms defined below, allow our Board, management, and investors to analyze trends around our business strategy, financial condition, and results of operations in a manner that is focused on items unique to the retail real estate industry.
We do not consider our non-GAAP measures to be alternatives to measures required in accordance with GAAP. Certain non-GAAP measures should not be viewed as an alternative measure of our financial performance as they may not reflect the operations of our entire portfolio, and they may not reflect the impact of general and administrative expenses, depreciation
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 20 |
and amortization, interest expense, other income (expense), or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our shopping centers that could materially impact our results from operations. Additionally, certain non-GAAP measures should not be considered as an indication of our liquidity, nor as an indication of funds available to cover our cash needs, including our ability to fund distributions, and 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 in the manner currently contemplated. Accordingly, non-GAAP measures 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. Other REITs may use different methodologies for calculating similar non-GAAP measures, and accordingly, our non-GAAP measures may not be comparable to other REITs.
Our KPIs and terminology can be grouped into three key areas:
PORTFOLIO—Portfolio metrics help management to gauge the health of our centers overall and individually.
•Anchor space—We define an anchor space as a space greater than or equal to 10,000 square feet of gross leasable area (“GLA”).
•ABR—We use ABR to refer to the monthly contractual base rent as of June 30, 2021 multiplied by twelve months.
•ABR per Square Foot (“PSF”)—This metric is calculated by dividing ABR by leased GLA. Increases in ABR PSF can be an indication of our ability to create rental rate growth in our centers, as well as an indication of demand for our spaces, which generally provides us with greater leverage during lease negotiations.
•GLA—We use GLA to refer to the total occupied and unoccupied square footage of a building that is available for tenants (whom we refer to as a “Neighbor” or our “Neighbors”) or other retailers to lease.
•Inline space—We define an inline space as a space containing less than 10,000 square feet of GLA.
•Leased Occupancy—This metric is calculated as the percentage of total GLA for which a lease has been signed regardless of whether the lease has commenced or the Neighbor has taken possession. High occupancy is an indicator of demand for our spaces, which generally provides us with greater leverage during lease negotiations.
•Underwritten incremental yield—This reflects the yield we target to generate from a project upon expected stabilization and is 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 by 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 property upon sale or disposition. Actual incremental yields may vary from our underwritten incremental yield range based on the actual total cost to complete a project and its actual incremental NOI at stabilization.
LEASING—Leasing is a key driver of growth for our company.
•Comparable lease—We use this term to refer to a lease with consistent structure that is executed for substantially the exact same space that has been vacant less than twelve months.
•Comparable rent spread—This metric is calculated as being the percentage increase or decrease in first-year ABR (excluding any free rent or escalations) on new or renewal leases (excluding options) where the lease was considered a comparable lease. This metric provides an indication of our ability to generate revenue growth through leasing activity.
•Cost of executing new leases—We use this term to refer to certain costs associated with new leasing, namely, leasing commissions, tenant improvement costs, and tenant concessions.
•Portfolio retention rate—This metric is calculated by dividing (i) total square feet of retained Neighbors with current period lease expirations by (ii) the total square feet of leases expiring during the period. The portfolio retention rate provides insight into our ability to retain Neighbors at our shopping centers as their leases approach expiration. Generally, the costs to retain an existing Neighbor are lower than costs to replace with a new Neighbor.
•Recovery rate—This metric is calculated by dividing (i) total recovery income by (ii) total recoverable expenses during the period. A high recovery rate is an indicator of our ability to recover certain property operating expenses and capital costs from our Neighbors.
FINANCIAL PERFORMANCE—In addition to financial metrics calculated in accordance with GAAP, such as net income, we utilize non-GAAP metrics to measure our operational and financial performance. See the section within this Item 2 titled Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Measures for further discussion on the following metrics.
•Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization for Real Estate (“Adjusted EBITDAre”)—To arrive at Adjusted EBITDAre, we adjust EBITDAre, as defined below, to exclude certain recurring and non-recurring items including, but not limited to: (i) changes in the fair value of the earn-out liability; (ii) other impairment charges; (iii) amortization of basis differences in our investments in our unconsolidated joint ventures; and (iv) transaction and acquisition expenses. We use EBITDAre and Adjusted EBITDAre as additional measures of operating performance which allow us to compare earnings independent of capital structure and evaluate debt leverage and fixed cost coverage.
•Core Funds From Operations (“Core FFO”)—To arrive at Core FFO, we adjust Nareit FFO attributable to stockholders and OP unit holders, as defined below, to exclude certain recurring and non-recurring items including, but not limited to: (i) depreciation and amortization of corporate assets; (ii) changes in the fair value of the earn-out liability; (iii) amortization of unconsolidated joint venture basis differences; (iv) gains or losses on the extinguishment or
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 21 |
modification 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 sustainability of our operating performance and provides an additional measure to compare our performance across reporting periods on a consistent basis by excluding items that may cause short-term fluctuations in net income (loss).
•EBITDAre—The National Association of Real 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 unconsolidated partnerships and joint ventures are calculated to reflect EBITDAre on the same basis.
•Equity Market Capitalization—We calculate equity market capitalization as the total dollar value of all outstanding shares.
•Nareit FFO—Nareit defines FFO as net income (loss) computed in accordance with GAAP, excluding: (i) gains (or losses) from sales of property and gains (or losses) from change in control; (ii) depreciation and amortization related to real 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 same basis. We calculate Nareit FFO in a manner consistent with the Nareit 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 calculation). It provides insight into our leverage rate based on earnings and is not impacted by fluctuations in our 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 debt.
•NOI—We calculate NOI as total operating revenues, adjusted to exclude non-cash revenue items, less property operating expenses and real estate taxes. NOI provides insight about our financial and operating performance because it 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).
•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 an internally-manageda 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 approximately $550over $460 million of third-party assets.unconsolidated joint ventures. This business provides comprehensive real estate and asset management services to the Managed Funds.
As of SeptemberJune 30, 2020,2021, we wholly-owned 283272 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 six properties;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 15% interestnewly 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 GRP I,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 joint venture that owned 17 properties;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 10% interest in GRP II,new class of common stock, $0.01 par value per share, at an initial price of $28.00 per share, pursuant to a joint venture that owned three properties.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 October 1, 2020, GRP I acquired GRP II. Our ownership inAugust 4, 2021, as a result of our underwritten IPO, our Board approved the combined entity was adjusted upon consummationtermination of the transaction,DRIP and we own approximately a 14% equity interest in GRP Ithe 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 acquisition.
COVID-19 Strategy—During the first quarter of 2020, the COVID-19 pandemic began spreading globally, with the outbreak being classified as a pandemic by the World Health Organization on March 11, 2020. As a result of the 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. The following initiatives were enacted in response to the pandemic and remain in effect as of the date of this filing, unless otherwise noted:
•We suspended stockholder distributions, after the March 2020 distribution (see Note 9 for more detail);
•We suspended the SRP for DDI;
•Our Compensation Committee approved a temporary 25% reduction to the base salary of our chief executive officer; a temporary 10% reduction to the base salaries of our president, chief operating officer, chief financial officer, and general counsel; and a temporary 10% reduction to board members’ base compensation for the 2020-2021 term;
•We have implemented expense reductions at the property and corporate levels, including reductions to our workforce and travel costs;
•Our capital investments have been prioritized to support the reopening of our tenants (which we refer to as a “neighbor” or our “neighbors”) and new leasing activity, or deferred if possible;
•We borrowed $200 million on our revolving credit facility in April 2020 to ensure that we were able to meet our operating needs for a sustained period. Our rent and recovery collections during the second quarter, combined with the above initiatives, sufficiently funded our short-term operating needs and provided enough stability to allow us to repay in full the outstanding balance on our revolving credit facility in June 2020; and
In May 2020, many state 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. Some states and localities have temporarily reinstated certain mandates in response to increasing reported cases of COVID-19. The impact these measures and the resulting consumer behavior are having on our portfolio has evolved throughout the second and third quarters, and we expect that it will continue to do so. Our management team has determined the following arewere the key indicators ofactions for recovery forin our portfolio and is executing a strategy to guide our neighbors through these phases (all statistics are approximate and include the prorated portion attributable to properties owned through our joint ventures):
•Assisting Neighbors in Reopening—Our wholly-owned properties and those owned through our joint ventures contained approximately 5,600 occupied neighbor spaces as of November 4, 2020. At the peak of the pandemic-related closure activity, temporary closures reached 37% of all neighbor spaces, totaling 27% of our ABR and 22% of our GLA. As of November 4, 2020, 98% of our occupied tenant spaces, totaling 99% of our ABR and GLA, are open for business. We believe that the best way to ensure that we receive monthly payment of rent and other amounts due is to first have neighbors open and operating.
In order to facilitate communication with our neighbors, we launched PECO ConnectTM,a webpage designed to provide resources, information, and tools to assist our neighbors in reopening as states lifted “stay-at-home” requirements and other restrictions. Resources made available through PECO Connect include, but are not limited to: a digital tool kit providing various marketing options, industry guides and blueprints to facilitate effective communication between our neighbors and their customers; educational videos and webinars to help neighbors prepare for and adjust to the consumer environment as businesses reopen; a neighbor rewards program; and DashComm®, our proprietary internal communications platform designed to deliver important updates and information to our neighbors as well as to facilitate our responses to neighbor questions and concerns.
•Returning to Monthly Payments—We continue to work with our neighborsNeighbors to resume normal monthly rent payments. Ourpayments, and our efforts have included raising awareness of the benefits available through the Coronavirus Aid, Relief, and Economic Security Act, including the Paycheck Protection Program and Health Care Enhancement Act (collectively, the “CARES Act”) and other small businessnumerous governmental relief programs. The CARES Act was intended to provide economic relief and stimulus to taxpayers and businesses in order to mitigate the economic impact of the pandemic, and provided an estimated $2.7 trillion to combat the COVID-19 pandemic and stimulate the economy through the provision of government loans and grants to affected individuals and businesses.
As our neighbors have reopened, weWe have seen our collections continue to improve including those related to the second quarter. As of November 4, 2020, total collections forfrom the second quarter improved to 90%, and third quarter collections were 94%. Additionally,of 2020. The following table summarizes our collections by quarter, as they were originally reported as well as updated for October 2020 were approximately 94%. 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 November 4, 2020, 87%July 20, 2021, approximately 95% of our neighborsNeighbor spaces are paying their rent in full.
•Establishing and Collecting on Payment PlansRecovering Missed Rent Charges—We believe substantially all neighbors,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. We further believe that it is bestHowever, we decided to begin negotiationnegotiate relief for a small subset of relief only once a neighbor has reopened, andour Neighbors in the form of rent deferrals or abatements. As of July 20, 2021, we have continued to see payments made toward rent and recovery charges owed. As$5.3 million of November 4, 2020, we have executedoutstanding payment plans with our neighbors agreeing to defer approximately $4.3 million in rent and related charges,Neighbors, and we had grantedrecorded rent abatements totalingof approximately $2.0 million.$0.7 million during 2021, related to 2021 missed rental income. These payment plans and rent abatements represented 1.1%approximately 2.0% and 0.5%0.3% of portfolio ABR, respectively,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 paymentremaining amounts owed on executed payment plans is approximately eighttwelve months.
We are in negotiations with additional neighbors, which we believe will lead to more neighbors repaying theirstill actively pursuing past due charges. 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 neighborsNeighbors 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. The final measure of recovery for our portfolio is to collect past due amounts under the terms negotiated with our neighbors. 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 |
On November 4, 2020, our Board reinstated monthly stockholder distributions beginning December 2020 to stockholders•Monitoring for Credit Risk—The COVID-19 pandemic and resulting economic downturn has increased the uncertainty of record as of December 28, 2020, payable on January 7, 2021.
Additionally, the Board approvedcollecting rents from a Tender Offer commencing on November 10, 2020 for up to 4.5 million sharesnumber of our outstanding common stock at a price of $5.75 per share, for a total value of approximately $26 million. This price is lower than our current EVPS of $8.75, reflecting the Board’s acknowledgment that the share prices of our publicly-traded peers in the shopping center REIT sector have declined significantly below their respective estimated net asset values, primarily as a result of the ongoing market uncertainty caused by the COVID-19 pandemic. Accordingly, they believe that if our shares were listed on a national securities exchange, the price of our shares of common stock might similarly trade at a discount to our EVPS.
Neighbors. We expect to restart share repurchases for DDI at $5.75 per share, but no shares will be repurchased until at least 10 business days after completion of the Tender Offer (see Note 9 for more detail). The SRP with respect to standard repurchases will remain suspended.
COVID-19 Operational Impact—During the COVID-19 pandemic, we have been closely monitoring the status of our neighborsNeighbors 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 wasNeighbor is ultimately unable to remain in a space.
The current economic environment has increased the uncertainty of collecting rents from a number of our neighbors. For neighborsNeighbors 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 neighborNeighbor category was deemed to behas been accounted for entirely non-creditworthyon a cash basis as of SeptemberJune 30, 2020;2021 or throughout the pandemic; however, we continue to evaluate each neighbor’s creditworthinessNeighbor individually to determine if they should be accounted for on an individuala 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 ninesix months ended SeptemberJune 30, 2020, inclusive of the prorated portion attributable to properties owned through our joint ventures, we had $5.3$12.1 million and $20.3$15.0 million, respectively, in billings that will not be recognized asnet unfavorable monthly revenue untiladjustments for Neighbors who are being accounted for on a cash is collected or the neighbor resumes payment and is considered creditworthy.basis. As of SeptemberJune 30, 2020, this2021, our Neighbors currently being accounted for on a cash basis represented approximately 7%8% of outour total Neighbor spaces, or approximately 7.4% of nearly 5,600 total neighbors inportfolio ABR. Further, many of our entire portfolio.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 neighborsNeighbors 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 neighborsNeighbors in the bankruptcy process represent an exposure of only 1.2%less than 1% of our total portfolio ABR as of SeptemberJune 30, 2020.2021. We have included our assessment of the impact of these bankruptcies in our estimate of rent collectability,collectibility, which impacted recorded revenue, as noted previously.
PortfolioCertain 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 Leasing Statisticsomni-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 SeptemberJune 30, 2021 and 2020 (dollars and 2019:square feet in thousands):
| | | September 30, 2020 | | September 30, 2019 | | June 30, 2021 | | June 30, 2020 |
Number of properties | Number of properties | 283 | | | 294 | | Number of properties | 272 | | | 284 | |
Number of states | Number of states | 31 | | | 32 | | Number of states | 31 | | | 31 | |
Total square feet (in thousands) | 31,731 | | | 33,203 | | |
Total square feet | | Total square feet | 30,778 | | | 31,787 | |
ABR | | ABR | $ | 384,916 | | | $ | 385,696 | |
% ABR from omni-channel grocery-anchored shopping centers | | % ABR from omni-channel grocery-anchored shopping centers | 96.0 | % | | 97.0 | % |
Leased % of rentable square feet: | Leased % of rentable square feet: | | Leased % of rentable square feet: | |
Total portfolio spaces | Total portfolio spaces | 95.3 | % | | 95.0 | % | Total portfolio spaces | 94.7 | % | | 95.6 | % |
Anchor spaces | Anchor spaces | 98.3 | % | | 98.1 | % | Anchor spaces | 96.8 | % | | 98.3 | % |
Inline spaces | Inline spaces | 89.5 | % | | 89.2 | % | Inline spaces | 90.6 | % | | 90.3 | % |
Average remaining lease term (in years)(1) | Average remaining lease term (in years)(1) | 4.5 | | | 4.7 | | Average remaining lease term (in years)(1) | 4.5 | | | 4.6 | |
% ABR from grocery-anchored properties | 97.0 | % | | 96.0 | % | |
(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 as of September 30, 2020 (dollars and square feet in thousands):
| | | September 30, 2020 | | June 30, 2021 |
Joint Venture | Joint Venture | Ownership Percentage | | Number of Properties | | ABR(1) | | GLA(2) | Joint Venture | Ownership Percentage | | Number of Properties | | ABR | | GLA |
Grocery Retail Partners I | | Grocery Retail Partners I | 14% | | 20 | | | $ | 29,339 | | | 2,211 | |
Necessity Retail Partners | Necessity Retail Partners | 20% | | 6 | | $ | 10,330 | | | 698 | | Necessity Retail Partners | 20% | | 2 | | | 3,989 | | | 228 | |
Grocery Retail Partners I | 15% | | 17 | | 24,740 | | | 1,905 | | |
Grocery Retail Partners II | 10% | | 3 | | 3,841 | | | 312 | | |
(1)We calculate ABR as monthly contractual rent as of September 30, 2020, multiplied by 12 months.
(2)GLA is defined as the portion of the total square feet of a building that is available for leasing.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 24 |
Lease ExpirationsLEASE EXPIRATIONS—The following chart shows on anthe aggregate basis, all of the scheduled lease expirations, excluding our Neighbors who are occupying space on a temporary basis, after SeptemberJune 30, 20202021 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,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.
Most of our grocery neighbors have remained open throughout the COVID-19 pandemic, and many other neighbor spaces were allowed to remain open, though their sales may have been impacted by social distancing and “stay-at-home” mandates. The number of our neighbor spaces that temporarily closed as a result of the COVID-19 pandemic peaked in April 2020 and has significantly decreased as states began to lift in full or in part “stay-at-home” mandates in May 2020. Certain neighbors remain temporarily closed, have since closed after reopening, are limiting the number of customers allowed in their stores, or have modified their operations in other ways that may impact their profitability, either as a result of government mandates or self-elected efforts to reduce the spread of COVID-19. Some states and localities have temporarily reinstated certain mandates in response to increasing reported cases of COVID-19. These actions could result in increased permanent store closings and could reduce the demand for leasing space in our shopping centers and result in a decline in average rental rates on expiring leases. As of September 30, 2020, our average rental rates on new leases have exceeded the average rental rates on expiring leases and our occupancy remained flat as compared to December 31, 2019. We anticipate increased volatility in new and renewal rental rates until the business environment becomes more stable.
For our wholly-owned properties and the prorated share of those owned through our joint ventures, subsequent to September 30, 2020, we renewed approximately 0.2 million total square feet and $3.8 million of total ABR of future expiring leases. This includes three anchor lease renewals, one of which was pursuant to the exercise of an option to extend the lease.Neighbors.
See the section below titled“Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Leasing ActivityActivity” 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 TenancyPORTFOLIO TENANCY—We define national neighborsNeighbors as those neighborsNeighbors that operate in at least three states. Regional neighborsNeighbors are defined as those neighborsNeighbors 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 neighborNeighbor type as of SeptemberJune 30, 2020:2021:
The following charts present the composition of our portfolio by neighborNeighbor industry as of SeptemberJune 30, 2020:2021:
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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 51%73% of our ABR, including the pro rata portion attributable to our 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:
| | | | | |
| SeptemberJune 30, 20202021 |
EssentialEssential/Necessity Retail and Services: | |
Grocery | 35.935.4 | % |
Medical/pharmacy | 2.7 | % |
Banks | 2.4 | % |
Dollar stores | 2.32.2 | % |
Pet supply | 2.21.9 | % |
MedicalHardware/automotive | 1.8 | % |
Hardware/Automotive | 1.61.7 | % |
Wine, beer, and liquor | 1.3 | % |
Pharmacy | 1.01.4 | % |
Other essential | 2.82.7 | % |
Total essentialEssential/Necessity-based retail and services(1) | 51.350.4 | % |
Restaurants:Other Necessity: | |
Quick service - restaurant | 9.59.7 | % |
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 | 5.96.4 | % |
Fitness and lifestyle services(3) | 5.2 | % |
Other retail(4) | 3.5 | % |
Total restaurants | 15.4 | % |
Other Retail and Services: | |
Services | 16.3 | % |
Soft goods | 12.7 | % |
Fitness | 3.2 | % |
Entertainment | 1.1 | % |
TotalABR from other retail and services | 33.327.5 | % |
Total ABR | 100.0 | % |
(1)Includes neighborsNeighbors 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 COVID-19 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 neighborsNeighbors by ABR, including our wholly-owned properties and the prorated portion of those owned through our joint ventures, as of SeptemberJune 30, 20202021 (dollars and square feet in thousands):
| | | September 30, 2020 | | | | | | | | | | | | | | | | | | | | | | | | | |
Neighbor(1) | Neighbor(1) | ABR | | % of ABR | | Leased Square Feet | | % of Leased Square Feet | | Number of Locations(2) | Neighbor(1) | ABR | | % of ABR | | Leased Square Feet | | % of Leased Square Feet | | Number of Locations(2) |
Kroger | Kroger | $ | 27,281 | | | 7.0 | % | | 3,467 | | | 11.3 | % | | 65 | | Kroger | $ | 25,804 | | | 6.6 | % | | 3,244 | | | 11.0 | % | | 59 | |
Publix | Publix | 22,021 | | | 5.6 | % | | 2,241 | | | 7.3 | % | | 56 | | Publix | 22,032 | | | 5.7 | % | | 2,241 | | | 7.6 | % | | 56 | |
Ahold Delhaize | Ahold Delhaize | 17,496 | | | 4.5 | % | | 1,278 | | | 4.2 | % | | 25 | | Ahold Delhaize | 17,323 | | | 4.4 | % | | 1,240 | | | 4.2 | % | | 23 | |
Albertsons-Safeway | Albertsons-Safeway | 16,579 | | | 4.2 | % | | 1,588 | | | 5.2 | % | | 30 | | Albertsons-Safeway | 16,804 | | | 4.3 | % | | 1,599 | | | 5.4 | % | | 29 | |
Walmart | Walmart | 8,932 | | | 2.3 | % | | 1,770 | | | 5.8 | % | | 13 | | Walmart | 8,933 | | | 2.3 | % | | 1,770 | | | 6.0 | % | | 13 | |
Giant Eagle | Giant Eagle | 8,147 | | | 2.1 | % | | 823 | | | 2.7 | % | | 12 | | Giant Eagle | 7,293 | | | 1.9 | % | | 738 | | | 2.5 | % | | 11 | |
TJX Companies | TJX Companies | 4,979 | | | 1.3 | % | | 428 | | | 1.4 | % | | 15 | | TJX Companies | 5,060 | | | 1.3 | % | | 428 | | | 1.5 | % | | 15 | |
Sprouts Farmers Market | Sprouts Farmers Market | 4,885 | | | 1.2 | % | | 334 | | | 1.1 | % | | 11 | | Sprouts Farmers Market | 5,000 | | | 1.3 | % | | 334 | | | 1.1 | % | | 11 | |
Raley's | | Raley's | 3,884 | | | 1.0 | % | | 253 | | | 0.9 | % | | 4 | |
Dollar Tree | Dollar Tree | 4,047 | | | 1.0 | % | | 423 | | | 1.4 | % | | 44 | | Dollar Tree | 3,628 | | | 0.9 | % | | 370 | | | 1.3 | % | | 39 | |
Raley's | 3,884 | | | 1.0 | % | | 253 | | | 0.8 | % | | 4 | | |
SUPERVALU | SUPERVALU | 3,455 | | | 0.9 | % | | 376 | | | 1.2 | % | | 7 | | SUPERVALU | 3,209 | | | 0.8 | % | | 336 | | | 1.1 | % | | 5 | |
Subway Group | Subway Group | 3,052 | | | 0.8 | % | | 125 | | | 0.4 | % | | 90 | | Subway Group | 2,731 | | | 0.7 | % | | 111 | | | 0.4 | % | | 79 | |
Schnuck's | 3,025 | | | 0.8 | % | | 329 | | | 1.1 | % | | 5 | | |
Anytime Fitness, Inc. | Anytime Fitness, Inc. | 2,694 | | | 0.7 | % | | 179 | | | 0.6 | % | | 38 | | Anytime Fitness, Inc. | 2,623 | | | 0.7 | % | | 171 | | | 0.6 | % | | 35 | |
Schnucks | | Schnucks | 2,545 | | | 0.7 | % | | 249 | | | 0.8 | % | | 4 | |
Southeastern Grocers | Southeastern Grocers | 2,626 | | | 0.7 | % | | 291 | | | 0.9 | % | | 8 | | Southeastern Grocers | 2,514 | | | 0.6 | % | | 281 | | | 1.0 | % | | 7 | |
Save Mart | 2,619 | | | 0.7 | % | | 309 | | | 1.0 | % | | 6 | | |
Lowe's | Lowe's | 2,407 | | | 0.6 | % | | 371 | | | 1.2 | % | | 4 | | Lowe's | 2,469 | | | 0.6 | % | | 369 | | | 1.3 | % | | 4 | |
Kohl's Corporation | Kohl's Corporation | 2,255 | | | 0.6 | % | | 365 | | | 1.2 | % | | 4 | | Kohl's Corporation | 2,241 | | | 0.6 | % | | 365 | | | 1.2 | % | | 4 | |
Food 4 Less (PAQ) | Food 4 Less (PAQ) | 2,215 | | | 0.6 | % | | 118 | | | 0.4 | % | | 2 | | Food 4 Less (PAQ) | 2,215 | | | 0.6 | % | | 119 | | | 0.4 | % | | 2 | |
Save Mart | | Save Mart | 2,174 | | | 0.6 | % | | 258 | | | 0.9 | % | | 5 | |
Petco Animal Supplies, Inc. | Petco Animal Supplies, Inc. | 2,104 | | | 0.4 | % | | 127 | | | 0.3 | % | | 11 | | Petco Animal Supplies, Inc. | 2,118 | | | 0.5 | % | | 127 | | | 0.3 | % | | 11 | |
| $ | 144,703 | | | 37.0 | % | | 15,195 | | | 49.5 | % | | 450 | | |
Total | | 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.
Results of Operations
Known Trends and Uncertainties of theKNOWN TRENDS AND UNCERTAINTIES OF THE COVID-19 Pandemic
PANDEMIC—The COVID-19 pandemic has resulted in reduced revenues forbeginning with the second quarter of 2020 and third quarters,continuing through the second quarter of 2021, and our estimates around collectabilitycollectibility 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 neighborsNeighbors 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. Additionally, these factors may impact disposition activity by decreasing demand and negatively impacting capitalization rates. Our disposition and acquisition activity has been reduced as a result of the pandemic during 2020.
The ongoing impact of the COVID-19 pandemic and the resulting economic downturn will likely continue to be significant to our results of operations for the remainder of 2020 and potentially beyond as a result of a number of factors outside of our control. These factors include, but are not limited to: overall economic conditions on both a macro and micro level, including consumer demand as well as retailer demand for space within our shopping centers; the impact of social distancing guidelines, recommendations from governmental authorities, and consumer shopping preferences; the nature and effectiveness of any economic stimulus or relief measures; and the impact of all of the factors above, including other potentially unknown factors, on our neighbors’ ability to continue paying rent and related charges on time or at all and neighbors’ willingness to renew their leases on the same terms or at all. The impact of these factors, some of which have already been realized, could include reduced revenue from neighbor concessions, increased collectability reserves, decreased recovery rates on expenses, and other unforeseen impacts that may arise in the course of operating during these circumstances. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview for our observation of neighbor impacts through November 4, 2020.
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. We are closely monitoring the occupancy, operating performance, and neighbor sales results at our centers, including those neighbors
operating with reduced hours or under government-imposed restrictions. Further, we have taken action to maximize our financial flexibility by implementing expense reductions at the property and corporate level; prioritizing capital projects to support the reopening of our neighbors and new leasing activity, or deferring if possible; and suspending monthly distributions and share repurchases.
Summary
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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
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| | 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 2019
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| Three Months Ended September 30, | | Favorable (Unfavorable) Change |
(Dollars in thousands) | 2020 | | 2019 | | $ | | % |
Revenues: | | | | | | | |
Rental income | $ | 123,298 | | | $ | 132,715 | | | $ | (9,417) | | | (7.1) | % |
Fee and management income | 2,581 | | | 2,766 | | | (185) | | | (6.7) | % |
Other property income | 816 | | | 528 | | | 288 | | | 54.5 | % |
Total revenues | 126,695 | | | 136,009 | | | (9,314) | | | (6.8) | % |
Operating Expenses: | | | | | | | |
Property operating expenses | (20,835) | | | (23,296) | | | 2,461 | | | 10.6 | % |
Real estate tax expenses | (17,282) | | | (18,016) | | | 734 | | | 4.1 | % |
General and administrative expenses | (9,595) | | | (11,537) | | | 1,942 | | | 16.8 | % |
Depreciation and amortization | (56,095) | | | (58,477) | | | 2,382 | | | 4.1 | % |
Impairment of real estate assets | — | | | (35,710) | | | 35,710 | | | NM |
Total operating expenses | (103,807) | | | (147,036) | | | 43,229 | | | 29.4 | % |
Other: | | | | | | | |
Interest expense, net | (20,388) | | | (25,309) | | | 4,921 | | | 19.4 | % |
Gain on disposal of property, net | 10,734 | | | 5,048 | | | 5,686 | | | 112.6 | % |
Other income, net | 196 | | | 1,561 | | | (1,365) | | | (87.4) | % |
Net income (loss) | 13,430 | | | (29,727) | | | 43,157 | | | 145.2 | % |
Net (income) loss attributable to noncontrolling interests | (1,646) | | | 3,850 | | | (5,496) | | | (142.8) | % |
Net income (loss) attributable to stockholders | $ | 11,784 | | | $ | (25,877) | | | $ | 37,661 | | | 145.5 | % |
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 276268 properties that were owned and operational prior to January 1, 2019.2020. 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, 2018,2019, which includes 2719 properties disposed of and sixfour properties acquired. Below are explanations of the significant fluctuations in the results of operations for the three months ended SeptemberJune 30, 20202021 and 2019:2020:
Rental Income decreased $9.4increased $14.7 million as follows:
•$4.915.5 million decreaseincrease related to our same-center portfolio primarily as follows:
▪$3.216.0 million decreaseincrease primarily due to stronger collections in minimum rent2021 as compared with lower collections in 2020, the increase owing largely due to the ongoing recovery of our portfolio in the wake of the COVID-19 pandemic and its economic impact. This includes an increased number of neighborsimpact, including a decrease in Neighbors we have identified as a credit risk which resultedas well as collections on charges that were uncollected in a decrease of $2.1 million related to revenue that will not be recognized until cash is collected or the neighbor resumes payment and is considered creditworthy, including a $0.7 million increase in revenues due to reserves on straight-line rent adjustments for the related leases. Additionally, we saw a $1.1 million decrease in rental revenues as a result of rent abatement;2020;
▪$1.8 million decrease primarily due to non-cash straight-line rent amortization;
▪$1.4 million decrease in recovery income largely due to the increased number of neighbors we have identified as a credit risk in connection with the COVID-19 pandemic, which resulted in a decrease of $0.9 million;
▪$1.50.5 million increase primarily due to improvementsa $0.57 increase in average minimum rent per square foot, andpartially 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.
•$4.50.8 million decrease primarily related to our net disposition of 2115 properties.
Property Operating Expenses decreasedincreased $2.52.3 million primarily as follows:
•$1.62.5 million decreaseincrease related to our same-center portfolio and corporate operating activities, including $1.7 millionowing largely to lower expense for performance-based compensation during 2020 as a result of decreasesthe COVID-19 pandemic, as compared to compensation in connection with our expense reduction initiatives and performance compensation;2021; and
•$0.80.2 million decrease related to our net disposition of 2115 properties.
General and Administrative Expenses:Expenses increased $2.1 million as follows:
•The $1.9$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 in generalprimarily due to lower third-party consultant and administrative expenses was primarilycustodial 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 compensation.overhead costs at our corporate offices.
Depreciation and Amortization decreased $2.4 million as follows:
•$1.8 million decrease related to our net disposition of 21 properties; and
•
$0.6 million decrease related to our same-center portfolio and corporate operating activities, primarily due to intangible assets becoming fully amortized by December 31, 2019.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 29 |
Impairment of Real Estate Assets:
•Our decreaseThe $1.1 million increase in impairment of real estate assets of $35.7 million was relateddue to assets under contract orthat are actively being marketed for sale at a disposition price that was less than the carrying value in 2019, the proceedsvalue. Proceeds from which weredispositions 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, but our anticipated disposition activity will likely be delayed or reduced due to current market conditions as a result of the COVID-19 pandemic.quarters.
Interest Expense, Net:
•The $4.9$3.0 million decrease during the three months ended SeptemberJune 30, 20202021 as compared to the same period in 20192020 was largelydue 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 in 2020 as well as repricing activities that occurred in 2019.swaps. Interest Expense, Net was comprised of the following (dollars in thousands):
| | | Three Months Ended September 30, | | Three Months Ended June 30, |
| | 2020 | | 2019 | | 2021 | | 2020 |
Interest on revolving credit facility, net | Interest on revolving credit facility, net | $ | 260 | | $ | 227 | Interest on revolving credit facility, net | $ | 207 | | $ | 979 |
Interest on term loans, net | Interest on term loans, net | 11,195 | | 16,409 | Interest on term loans, net | 10,573 | | 11,685 |
Interest on secured debt | Interest on secured debt | 7,308 | | 5,780 | Interest on secured debt | 6,246 | | 7,316 |
Loss on extinguishment of debt | | Loss on extinguishment of debt | 419 | | — |
Non-cash amortization and other | Non-cash amortization and other | 1,625 | | 2,893 | Non-cash amortization and other | 1,687 | | 2,174 |
Interest expense, net | Interest expense, net | $ | 20,388 | | $ | 25,309 | Interest expense, net | $ | 19,132 | | $ | 22,154 |
| Weighted-average interest rate as of end of period | Weighted-average interest rate as of end of period | 3.1 | % | | 3.5 | % | Weighted-average interest rate as of end of period | 2.9 | % | | 3.1 | % |
Weighted-average term (in years) as of end of period | Weighted-average term (in years) as of end of period | 4.3 | | 4.3 | Weighted-average term (in years) as of end of period | 3.7 | | 4.5 |
Gain (Loss) on Disposal of Property, Net:
•The $5.7$4.3 million increasechange was primarily related to the sale of twoseven properties with a net gain (in addition to other property-related miscellaneous disposals and write-offs) of $10.7$3.7 million during the three months ended SeptemberJune 30, 2020,2021, as compared to the sale of four propertiesone property (as well as other property-related miscellaneous disposals and write-offs) with a net gainloss of $5.0$0.5 million during the three months ended SeptemberJune 30, 20192020 (see Note 4).
Other Income,Expense, Net:
•The $1.4$2.4 million decreaseincrease was largely due to the change in the fair value of our earn-out liability as a decrease in income from our unconsolidated joint ventures primarily due to lower gains on the dispositionresult of properties in NRP as compared to the three months ended September 30, 2019.general improving market conditions. Other Income,Expense, Net was comprised of the following (dollars in thousands):
| | | Three Months Ended September 30, | | Three Months Ended June 30, |
| | 2020 | | 2019 | | 2021 | | 2020 |
Equity in net income of unconsolidated joint ventures | $ | 133 | | | $ | 1,550 | | |
Change in fair value of earn-out liability | | Change in fair value of earn-out liability | $ | (2,000) | | | $ | — | |
Equity in net income (loss) of unconsolidated joint ventures | | Equity in net income (loss) of unconsolidated joint ventures | 87 | | | (359) | |
Transaction and acquisition expenses | Transaction and acquisition expenses | (152) | | | (120) | | Transaction and acquisition expenses | (934) | | | (14) | |
Federal, state, and local income tax expense | Federal, state, and local income tax expense | (173) | | | (176) | | Federal, state, and local income tax expense | (165) | | | (180) | |
Other | Other | 388 | | | 307 | | Other | 88 | | | 53 | |
Other income, net | $ | 196 | | | $ | 1,561 | | |
Other expense, net | | 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 Nine Months Ended SeptemberSUMMARY OF OPERATING ACTIVITIES FOR THE SIX MONTHS ENDED JUNE 30, 2021 AND 2020
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| | 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 2019
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| Nine Months Ended September 30, | | Favorable (Unfavorable) Change |
(Dollars in thousands) | 2020 | | 2019 | | $ | | % |
Revenues: | | | | | | | |
Rental income | $ | 367,418 | | | $ | 390,605 | | | $ | (23,187) | | | (5.9) | % |
Fee and management income | 7,506 | | | 9,078 | | | (1,572) | | | (17.3) | % |
Other property income | 2,334 | | | 1,676 | | | 658 | | | 39.3 | % |
Total revenues | 377,258 | | | 401,359 | | | (24,101) | | | (6.0) | % |
Operating Expenses: | | | | | | | |
Property operating expenses | (62,226) | | | (67,095) | | | 4,869 | | | 7.3 | % |
Real estate tax expenses | (50,847) | | | (53,294) | | | 2,447 | | | 4.6 | % |
General and administrative expenses | (30,141) | | | (38,287) | | | 8,146 | | | 21.3 | % |
Depreciation and amortization | (168,692) | | | (179,020) | | | 10,328 | | | 5.8 | % |
Impairment of real estate assets | — | | | (74,626) | | | 74,626 | | | NM |
Total operating expenses | (311,906) | | | (412,322) | | | 100,416 | | | 24.4 | % |
Other: | | | | | | | |
Interest expense, net | (65,317) | | | (76,151) | | | 10,834 | | | 14.2 | % |
Gain on disposal of property, net | 8,616 | | | 10,903 | | | (2,287) | | | (21.0) | % |
Other income (expense), net | 9,565 | | | (1,476) | | | 11,041 | | | NM |
Net income (loss) | 18,216 | | | (77,687) | | | 95,903 | | | 123.4 | % |
Net (income) loss attributable to noncontrolling interests | (2,251) | | | 10,045 | | | (12,296) | | | (122.4) | % |
Net income (loss) attributable to stockholders | $ | 15,965 | | | $ | (67,642) | | | $ | 83,607 | | | 123.6 | % |
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 SeptemberJune 30, 20202021 and 20192020 section above. Below are explanations of the significant fluctuations in the results of operations for the ninesix months ended SeptemberJune 30, 20202021 and 2019:2020:
Rental Income decreased $23.2increased $13.8 million as follows:
•$10.315.3 million decreaseincrease related to our same-center portfolio primarily as follows:
▪$15.315.7 million decreaseincrease primarily due to stronger collections in minimum rent2021 as compared with lower collections in 2020, the increase owing largely due to the ongoing recovery of our portfolio in the wake of the COVID-19 pandemic and its economic impact. This includes an increased number of neighborsimpact, including a decrease in Neighbors we have identified as a credit risk which resultedas well as collections on charges that were uncollected in a decrease of $13.6 million, including a $2.4 million reduction in revenues due to reserves on straight-line rent adjustments for the related leases. Additionally, we saw a $1.7 million decrease due to rent abatement;2020; and
▪$2.20.2 million decrease primarily due to non-cash straight-line rent amortization;
▪$6.2 million increase primarily due to a $0.240.8% decrease in average economic occupancy, partially offset by a $0.55 increase in average minimum rent per square foot and a 1.1% improvement in average occupancy;
▪$1.0 million increase in recovery income primarily due to improved recoverability of expenses and higher occupancy at our centers, partially offset by the increased number of neighbors we have identified as a credit risk in connection with the COVID-19 pandemic, which resulted in a decrease of $3.7 million; andfoot.
• $12.9$1.5 million decrease primarily related to our net disposition of 2115 properties.
Fee and Management Income:
•The $1.6 milliondecrease in fee and management income is primarily due to fees no longer received from REIT III following its acquisition by us in October 2019 and a decrease in fees received from NRP, primarily due to property dispositions. This offsets improvements in fees received from GRP I and GRP II.
Property Operating Expenses decreased $4.9increased $2.8 million primarily as follows:
•$2.52.9 million decreaseincrease related to our same-center portfolio and corporate operating activities including $3.8as follows:
▪$2.4 million increase owing largely to lower expense for performance-based compensation during 2020 as a result of reduced compensationthe COVID-19 pandemic, as compared to 2021;
▪$0.6 million increase in connection withinsurance 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 expense reduction initiatives and performance compensation, partially offset by higher insurance costs; andproperties.
•$2.40.2 million decrease related to our net disposition of 2115 properties.
Real Estate TaxGeneral and Administrative Expenses increased $0.7 million as follows:
decreased•$2.44.3 million increase owing largely to lower expense for performance-based compensation during 2020 as follows:a result of the COVID-19 pandemic, as compared to 2021;
•$1.6 milliondecreaserelated primarily due to our net disposition of 21 properties;lower third-party consultant and custodial costs;
•$0.82.0 million decrease related to our same-center portfolio primarily as a result of successful real estate tax appeals.
General and Administrative Expenses:
•The $8.1 million decrease in general and administrative expenses was primarily related to expense reductions taken to reduce the impact of the COVID-19 pandemic, with the majority of these decreases related to compensation.overhead costs at our corporate offices, as well as decreased travel and related costs.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 31 |
Depreciation and Amortization decreased $10.3 million as follows:
•$6.3 million decrease related to our net disposition of 21 properties; and
•$4.0 million decrease related to our same-center portfolio and corporate operating activities, primarily due to intangible lease assets becoming fully amortized by December 31, 2019.
Impairment of Real Estate Assets:
•The decrease$6.1 million increase in impairment of real estate assets of $74.6 million was relateddue to assets under contract orthat are actively being marketed for sale at a disposition price that was less than the carrying value in 2019, the proceedsvalue. Proceeds from which weredispositions 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, but our anticipated disposition activity will likely be delayed or reduced due to current market conditions as a result of the COVID-19 pandemic.quarters.
Interest Expense, Net:
•The $10.8$5.7 million decrease during the ninesix months ended SeptemberJune 30, 20202021 as compared to the same period in 20192020 was largelydue 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 in 2020 as well as repricing activities that occurred in 2019.swaps. Interest Expense, Net was comprised of the following (dollars in thousands):
| | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2021 | | 2020 |
Interest on revolving credit facility, net | Interest on revolving credit facility, net | $ | 1,455 | | $ | 1,648 | Interest on revolving credit facility, net | $ | 435 | | $ | 1,195 |
Interest on term loans, net | Interest on term loans, net | 35,611 | | 47,113 | Interest on term loans, net | 21,206 | | 24,416 |
Interest on secured debt | Interest on secured debt | 21,973 | | 17,319 | Interest on secured debt | 13,026 | | 14,665 |
Loss on extinguishment of debt | | Loss on extinguishment of debt | 1,110 | | 73 |
Non-cash amortization and other | Non-cash amortization and other | 6,278 | | 10,071 | Non-cash amortization and other | 3,418 | | 4,580 |
Interest expense, net | Interest expense, net | $ | 65,317 | | $ | 76,151 | Interest expense, net | $ | 39,195 | | $ | 44,929 |
| Weighted-average interest rate as of end of period | Weighted-average interest rate as of end of period | 3.1 | % | | 3.5 | % | Weighted-average interest rate as of end of period | 2.9 | % | | 3.1 | % |
Weighted-average term (in years) as of end of period | Weighted-average term (in years) as of end of period | 4.3 | | 4.3 | Weighted-average term (in years) as of end of period | 3.7 | | 4.5 |
Gain (Loss) on Disposal of Property, Net:
•The $2.3$19.7 million change was primarily related to the sale of sixthirteen properties and one outparcel (in addition to other miscellaneous property-related disposals and write-offs) with a net gain of $8.6$17.6 million during the ninesix months ended SeptemberJune 30, 2020,2021, as compared to the sale of tenfour properties (as well as other property-related miscellaneous disposals and one outparcelwrite-offs) with a net gainloss of $10.9$2.1 million during the ninesix months ended SeptemberJune 30, 20192020 (see Note 4).
Other (Expense) Income, (Expense), Net:
•The $11.0$27.9 million change was largely due to other impairment charges of $9.7 million in connection with the REIT III public offering during the three months ended September 30, 2019, which included $7.8 million of impairment charges related to our corporate intangible asset and $1.9 million of impairment charges related to organization and offering costs, as well as the change in the fair value of our earn-out liability.liability as a result of general improving market conditions. Other (Expense) Income, (Expense), Net was comprised of the following (dollars in(in thousands):
| | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2021 | | 2020 |
Change in fair value of earn-out liability | Change in fair value of earn-out liability | $ | 10,000 | | | $ | 7,500 | | Change in fair value of earn-out liability | $ | (18,000) | | | $ | 10,000 | |
Equity in (loss) income of unconsolidated joint ventures | (506) | | | 574 | | |
Equity in income (loss) of unconsolidated joint ventures | | Equity in income (loss) of unconsolidated joint ventures | 801 | | | (639) | |
Transaction and acquisition expenses | Transaction and acquisition expenses | (211) | | | (396) | | Transaction and acquisition expenses | (1,075) | | | (59) | |
Federal, state, and local income tax expense | Federal, state, and local income tax expense | (382) | | | (517) | | Federal, state, and local income tax expense | (331) | | | (209) | |
Other impairment charges | — | | | (9,661) | | |
Other | Other | 664 | | | 1,024 | | Other | 96 | | | 276 | |
Other income (expense), net | $ | 9,565 | | | $ | (1,476) | | |
Other (expense) income, net | | Other (expense) income, net | $ | (18,509) | | | $ | 9,369 | |
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 32 |
Leasing ActivityLEASING ACTIVITY—The average rent per square foot and cost of executing leases fluctuates based on the neighbor mix, size of the leased space, and lease term. Leases with national and regional neighbors generally require a higher cost per square foot to execute than those with local neighbors. However, generally such national and regional neighbors will also pay higher rates for a longer term.
Below is a summary of leasing activity for our wholly-owned properties for the three months ended SeptemberJune 30, 20202021 and 2019:2020(1):
| | | Total Deals(1) | | Inline Deals(1)(2) | | Total Deals | | Inline Deals |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
New leases: | New leases: | | New leases: | |
Number of leases | Number of leases | | 111 | | | 98 | | | 110 | | | 95 | | Number of leases | | 124 | | | 61 | | | 121 | | | 58 | |
Square footage (in thousands) | Square footage (in thousands) | | 302 | | | 370 | | | 287 | | | 276 | | Square footage (in thousands) | | 341 | | | 197 | | | 278 | | | 159 | |
ABR (in thousands) | ABR (in thousands) | | $ | 5,181 | | | $ | 5,635 | | | $ | 5,023 | | | $ | 4,595 | | ABR (in thousands) | | $ | 6,338 | | | $ | 3,034 | | | $ | 5,816 | | | $ | 2,801 | |
ABR per square foot | ABR per square foot | | $ | 17.15 | | | $ | 15.24 | | | $ | 17.49 | | | $ | 16.67 | | ABR per square foot | | $ | 18.57 | | | $ | 15.38 | | | $ | 20.94 | | | $ | 17.59 | |
Cost per square foot of executing new leases(3) | Cost per square foot of executing new leases(3) | | $ | 27.25 | | | $ | 18.08 | | | $ | 26.01 | | | $ | 20.40 | | Cost per square foot of executing new leases(3) | | $ | 31.01 | | | $ | 19.48 | | | $ | 29.30 | | | $ | 23.35 | |
Number of comparable leases(4) | Number of comparable leases(4) | | 34 | | | 33 | | | 34 | | | 31 | | Number of comparable leases(4) | | 57 | | | 20 | | | 55 | | | 19 | |
Comparable rent spread(5) | Comparable rent spread(5) | | 8.2 | % | | 12.6 | % | | 8.2 | % | | 7.6 | % | Comparable rent spread(5) | | 18.5 | % | | 15.5 | % | | 19.0 | % | | 15.9 | % |
Weighted-average lease term (in years) | Weighted-average lease term (in years) | | 6.6 | | | 7.6 | | | 6.3 | | | 6.6 | | Weighted-average lease term (in years) | | 7.2 | | | 6.1 | | | 6.8 | | | 7.2 | |
Renewals and options: | Renewals and options: | | Renewals and options: | |
Number of leases | Number of leases | | 119 | | | 148 | | | 101 | | | 126 | | Number of leases | | 174 | | | 108 | | | 159 | | | 95 | |
Square footage (in thousands) | Square footage (in thousands) | | 1,035 | | | 1,053 | | | 244 | | | 271 | | Square footage (in thousands) | | 1,049 | | | 975 | | | 333 | | | 209 | |
ABR (in thousands) | ABR (in thousands) | | $ | 12,473 | | | $ | 10,361 | | | $ | 4,993 | | | $ | 5,403 | | ABR (in thousands) | | $ | 12,895 | | | $ | 8,942 | | | $ | 7,306 | | | $ | 4,141 | |
ABR per square foot | ABR per square foot | | $ | 12.06 | | | $ | 9.84 | | | $ | 20.45 | | | $ | 19.90 | | ABR per square foot | | $ | 12.30 | | | $ | 9.17 | | | $ | 21.95 | | | $ | 19.81 | |
ABR per square foot prior to renewals | ABR per square foot prior to renewals | | $ | 11.56 | | | $ | 9.46 | | | $ | 19.16 | | | $ | 18.38 | | ABR per square foot prior to renewals | | $ | 11.55 | | | $ | 8.73 | | | $ | 20.08 | | | $ | 18.40 | |
Percentage increase in ABR per square foot | Percentage increase in ABR per square foot | | 4.3 | % | | 4.0 | % | | 6.7 | % | | 8.3 | % | 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) | Cost per square foot of executing renewals and options(3) | | $ | 2.42 | | | $ | 2.28 | | | $ | 4.60 | | | $ | 4.32 | | Cost per square foot of executing renewals and options(3) | | $ | 3.01 | | | $ | 1.62 | | | $ | 4.60 | | | $ | 3.69 | |
Number of comparable leases(4)(2) | Number of comparable leases(4)(2) | | 87 | | | 110 | | | 82 | | | 101 | | Number of comparable leases(4)(2) | | 155 | | | 87 | | | 148 | | | 84 | |
Comparable rent spread(5)(2) | Comparable rent spread(5)(2) | | 4.1 | % | | 2.7 | % | | 6.4 | % | | 11.0 | % | Comparable rent spread(5)(2) | | 8.0 | % | | 7.1 | % | | 9.4 | % | | 9.0 | % |
Weighted-average lease term (in years) | Weighted-average lease term (in years) | | 4.8 | | | 4.5 | | | 4.2 | | | 4.0 | | Weighted-average lease term (in years) | | 5.4 | | | 5.4 | | | 4.0 | | | 3.5 | |
Portfolio retention rate(6) | Portfolio retention rate(6) | | 90.4 | % | | 88.7 | % | | 74.9 | % | | 74.8 | % | Portfolio retention rate(6) | | 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)We consider an inline deal to be a lease for less than 10,000 square feetExcludes exercise of GLA.
(3)The cost of executing new leases, renewals, and options includes leasing commissions, tenant improvement costs, landlord work, and tenant concessions. The costs associated with landlord work are excluded for repositioning and redevelopment projects, if any.
(4)A comparable lease is a lease that is executed for the exact same space (location and square feet) in which a neighbor was previously located. For a lease to be considered comparable, it must have been executed within 365 days from the earlier of legal possession or the day the prior neighbor physically vacated the space.
(5)The comparable rent spread compares the percentage increase (or decrease) of new or renewal leases (excluding options) to the expiring lease of a unit that was occupied within the past twelve months.
(6)The portfolio retention rate is calculated by dividing (a) total square feet of retained neighbors with current period lease expirations by (b) the square feet of leases expiring during the period.options.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 33 |
Below is a summary of leasing activity for our wholly-owned properties for the ninesix months ended SeptemberJune 30, 20202021 and 20192020(1):
| | | Total Deals | | Inline Deals | | Total Deals | | Inline Deals |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
New leases: | New leases: | | New leases: | |
Number of leases | Number of leases | | 259 | | | 305 | | | 245 | | | 294 | | Number of leases | | 277 | | | 148 | | | 268 | | | 135 | |
Square footage (in thousands) | Square footage (in thousands) | | 881 | | | 1,086 | | | 627 | | | 755 | | Square footage (in thousands) | | 808 | | | 579 | | | 619 | | | 339 | |
ABR (in thousands) | ABR (in thousands) | | $ | 13,778 | | | $ | 15,980 | | | $ | 11,038 | | | $ | 12,779 | | ABR (in thousands) | | $ | 14,458 | | | $ | 8,597 | | | $ | 12,421 | | | $ | 6,015 | |
ABR per square foot | ABR per square foot | | $ | 15.63 | | | $ | 14.71 | | | $ | 17.62 | | | $ | 16.93 | | ABR per square foot | | $ | 17.89 | | | $ | 14.84 | | | $ | 20.06 | | | $ | 17.72 | |
Cost per square foot of executing new leases | Cost per square foot of executing new leases | | $ | 23.25 | | | $ | 23.64 | | | $ | 25.89 | | | $ | 25.93 | | Cost per square foot of executing new leases | | $ | 28.51 | | | $ | 21.16 | | | $ | 28.00 | | | $ | 25.78 | |
Number of comparable leases | Number of comparable leases | | 79 | | | 106 | | | 78 | | | 102 | | Number of comparable leases | | 127 | | | 45 | | | 125 | | | 44 | |
Comparable rent spread | Comparable rent spread | | 9.7 | % | | 13.9 | % | | 9.7 | % | | 11.2 | % | Comparable rent spread | | 15.3 | % | | 10.8 | % | | 15.3 | % | | 10.7 | % |
Weighted-average lease term (in years) | Weighted-average lease term (in years) | | 7.7 | | | 7.6 | | | 6.6 | | | 6.7 | | Weighted-average lease term (in years) | | 7.7 | | | 8.2 | | | 6.5 | | | 6.8 | |
Renewals and options: | Renewals and options: | | Renewals and options: | |
Number of leases | Number of leases | | 354 | | | 470 | | | 309 | | | 426 | | Number of leases | | 337 | | | 235 | | | 306 | | | 208 | |
Square footage (in thousands) | Square footage (in thousands) | | 2,749 | | | 2,457 | | | 702 | | | 906 | | Square footage (in thousands) | | 2,027 | | | 1,714 | | | 645 | | | 458 | |
ABR (in thousands) | ABR (in thousands) | | $ | 31,135 | | | $ | 30,490 | | | $ | 14,498 | | | $ | 19,268 | | ABR (in thousands) | | $ | 24,367 | | | $ | 18,662 | | | $ | 14,375 | | | $ | 9,505 | |
ABR per square foot | ABR per square foot | | $ | 11.33 | | | $ | 12.41 | | | $ | 20.64 | | | $ | 21.26 | | ABR per square foot | | $ | 12.02 | | | $ | 10.89 | | | $ | 22.30 | | | $ | 20.75 | |
ABR per square foot prior to renewals | ABR per square foot prior to renewals | | $ | 10.74 | | | $ | 11.55 | | | $ | 18.94 | | | $ | 19.19 | | ABR per square foot prior to renewals | | $ | 11.27 | | | $ | 10.24 | | | $ | 20.54 | | | $ | 18.83 | |
Percentage increase in ABR per square foot | Percentage increase in ABR per square foot | | 5.4 | % | | 7.4 | % | | 9.0 | % | | 10.7 | % | Percentage increase in ABR per square foot | | 6.6 | % | | 6.7 | % | | 8.6 | % | | 12.2 | % |
Cost per square foot of executing renewals and options | Cost per square foot of executing renewals and options | | $ | 2.40 | | | $ | 2.64 | | | $ | 4.24 | | | $ | 4.57 | | Cost per square foot of executing renewals and options | | $ | 2.19 | | | $ | 3.41 | | | $ | 4.08 | | | $ | 4.36 | |
Number of comparable leases(2) | Number of comparable leases(2) | | 263 | | | 362 | | | 252 | | | 345 | | Number of comparable leases(2) | | 291 | | | 176 | | | 281 | | | 170 | |
Comparable rent spread(2) | Comparable rent spread(2) | | 7.4 | % | | 8.4 | % | | 9.9 | % | | 12.0 | % | Comparable rent spread(2) | | 8.0 | % | | 9.2 | % | | 8.7 | % | | 11.8 | % |
Weighted-average lease term (in years) | Weighted-average lease term (in years) | | 4.9 | | | 4.7 | | | 4.0 | | | 4.4 | | Weighted-average lease term (in years) | | 4.9 | | | 5.0 | | | 4.0 | | | 3.7 | |
Portfolio retention rate | Portfolio retention rate | | 82.7 | % | | 86.6 | % | | 70.5 | % | | 77.3 | % | Portfolio retention rate | | 87.2 | % | | 79.5 | % | | 79.9 | % | | 68.6 | % |
(1) SeePer square foot amounts may not recalculate exactly based on other amounts presented within the footnotestable due to the summaryrounding.
(2)Excludes exercise of leasing activity table for the three months ended September 30, 2020 and 2019 for more detail regarding certain items throughout this table.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 IncomeSAME-CENTER NET OPERATING INCOME—We present Same-Center NOI is presented as a supplemental measure of our performance. We define NOIperformance, as total operating revenues, adjusted to exclude non-cash revenue items, less property operating expenses and real estate taxes. For the three and nine months ended September 30, 2020 and 2019, Same-Center NOI represents the NOI for the 276 properties that were wholly-owned and operational for the entire portion of both comparable reporting periods. We believe Same-Center NOI provides useful information to our investors about our financial and operating performance because it 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 excludes the change in NOI from properties acquired or disposed of after December 31, 2018, 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 as it does not reflect the operations of our entire portfolio, nor does it reflect the impact of general and administrative 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.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 34 |
The table below comparespresents our Same-Center NOI for the current period and the comparable prior period (dollars in thousands):
| | | Three Months Ended September 30, | | Favorable (Unfavorable) | | Nine Months Ended September 30, | | Favorable (Unfavorable) | | Three Months Ended June 30, | | Favorable (Unfavorable) | | Six Months Ended June 30, | | Favorable (Unfavorable) |
| | 2020 | | 2019 | | $ Change | | % Change | | 2020 | | 2019 | | $ Change | | % Change | | 2021 | | 2020 | | $ Change | | % Change | | 2021 | | 2020 | | $ Change | | % Change |
Revenues: | Revenues: | | Revenues: | |
Rental income(1) | Rental income(1) | $ | 86,574 | | | $ | 89,281 | | | $ | (2,707) | | | $ | 261,061 | | | $ | 268,046 | | | $ | (6,985) | | | Rental income(1) | $ | 91,305 | | | $ | 90,814 | | | $ | 491 | | | $ | 182,599 | | | $ | 182,852 | | | $ | (253) | | |
Tenant recovery income | Tenant recovery income | 29,964 | | | 31,425 | | | (1,461) | | | 88,283 | | | 87,369 | | | 914 | | | Tenant recovery income | 27,250 | | | 30,197 | | | (2,947) | | | 57,851 | | | 60,980 | | | (3,129) | | |
Reserves for uncollectibility(2) | | Reserves for uncollectibility(2) | 2,889 | | | (9,706) | | | 12,595 | | | 1,261 | | | (12,129) | | | 13,390 | | |
Other property income | Other property income | 786 | | | 493 | | | 293 | | | 2,243 | | | 1,549 | | | 694 | | | Other property income | 284 | | | 600 | | | (316) | | | 756 | | | 1,465 | | | (709) | | |
Total revenues | Total revenues | 117,324 | | | 121,199 | | | (3,875) | | | (3.2) | % | | 351,587 | | | 356,964 | | | (5,377) | | | (1.5) | % | Total revenues | 121,728 | | | 111,905 | | | 9,823 | | | 8.8 | % | | 242,467 | | | 233,168 | | | 9,299 | | | 4.0 | % |
Operating expenses: | Operating expenses: | | Operating expenses: | |
Property operating expenses | Property operating expenses | 16,865 | | | 16,940 | | | 75 | | | 51,681 | | | 50,979 | | | (702) | | | Property operating expenses | 17,504 | | | 16,495 | | | (1,009) | | | 36,614 | | | 34,562 | | | (2,052) | | |
Real estate taxes | Real estate taxes | 16,975 | | | 17,167 | | | 192 | | | 50,161 | | | 50,417 | | | 256 | | | Real estate taxes | 16,519 | | | 16,038 | | | (481) | | | 32,749 | | | 33,182 | | | 433 | | |
Total operating expenses | Total operating expenses | 33,840 | | | 34,107 | | | 267 | | | 0.8 | % | | 101,842 | | | 101,396 | | | (446) | | | (0.4) | % | Total operating expenses | 34,023 | | | 32,533 | | | (1,490) | | | (4.6) | % | | 69,363 | | | 67,744 | | | (1,619) | | | (2.4) | % |
Total Same-Center NOI | Total Same-Center NOI | $ | 83,484 | | | $ | 87,092 | | | $ | (3,608) | | | (4.1) | % | | $ | 249,745 | | | $ | 255,568 | | | $ | (5,823) | | | (2.3) | % | 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.
Same-Center(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 resume recording revenue on an accrual basis, rather than on a cash basis.
SAME-CENTER NOI ReconciliationRECONCILIATION—Below is a reconciliation of Net Income (Loss) to NOI for our real estate investments and Same-Center NOI (in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019(1) | | 2020 | | 2019(1) | | 2021 | | 2020 | | 2021 | | 2020 |
Net income (loss) | Net income (loss) | $ | 13,430 | | | $ | (29,727) | | | $ | 18,216 | | | $ | (77,687) | | Net income (loss) | $ | 6,390 | | | $ | (6,413) | | | $ | 6,507 | | | $ | 4,786 | |
Adjusted to exclude: | Adjusted to exclude: | | Adjusted to exclude: | |
Fees and management income | Fees and management income | (2,581) | | | (2,766) | | | (7,506) | | | (9,078) | | Fees and management income | (2,374) | | | (2,760) | | | (4,660) | | | (4,925) | |
Straight-line rental income(2) | (1,800) | | | (2,573) | | | (3,164) | | | (7,105) | | |
Straight-line rental (income) expense(1) | | Straight-line rental (income) expense(1) | (2,970) | | | 948 | | | (4,392) | | | (1,364) | |
Net amortization of above- and below-market leases | Net amortization of above- and below-market leases | (811) | | | (1,042) | | | (2,394) | | | (3,266) | | Net amortization of above- and below-market leases | (887) | | | (795) | | | (1,725) | | | (1,583) | |
Lease buyout income | Lease buyout income | (664) | | | (632) | | | (972) | | | (1,088) | | Lease buyout income | (1,781) | | | (214) | | | (2,578) | | | (308) | |
General and administrative expenses | General and administrative expenses | 9,595 | | | 11,537 | | | 30,141 | | | 38,287 | | General and administrative expenses | 11,937 | | | 9,806 | | | 21,278 | | | 20,546 | |
Depreciation and amortization | Depreciation and amortization | 56,095 | | | 58,477 | | | 168,692 | | | 179,020 | | Depreciation and amortization | 56,587 | | | 56,370 | | | 111,928 | | | 112,597 | |
Impairment of real estate assets | Impairment of real estate assets | — | | | 35,710 | | | — | | | 74,626 | | Impairment of real estate assets | 1,056 | | | — | | | 6,056 | | | — | |
Interest expense, net | Interest expense, net | 20,388 | | | 25,309 | | | 65,317 | | | 76,151 | | Interest expense, net | 19,132 | | | 22,154 | | | 39,195 | | | 44,929 | |
Gain on disposal of property, net | (10,734) | | | (5,048) | | | (8,616) | | | (10,903) | | |
Other (income) expense, net | (196) | | | (1,561) | | | (9,565) | | | 1,476 | | |
(Gain) loss on disposal of property, net | | (Gain) loss on disposal of property, net | (3,744) | | | 541 | | | (17,585) | | | 2,118 | |
Other expense (income), net | | Other expense (income), net | 2,924 | | | 500 | | | 18,509 | | | (9,369) | |
Property operating expenses related to fees and management income | Property operating expenses related to fees and management income | 1,058 | | | 2,328 | | | 2,586 | | | 5,154 | | Property operating expenses related to fees and management income | 1,306 | | | 891 | | | 2,122 | | | 1,528 | |
NOI for real estate investments | NOI for real estate investments | 83,780 | | | 90,012 | | | 252,735 | | | 265,587 | | NOI for real estate investments | 87,576 | | | 81,028 | | | 174,655 | | | 168,955 | |
Less: Non-same-center NOI(3)(2) | Less: Non-same-center NOI(3)(2) | (296) | | | (2,920) | | | (2,990) | | | (10,019) | | Less: Non-same-center NOI(3)(2) | 129 | | | (1,656) | | | (1,551) | | | (3,531) | |
Total Same-Center NOI | Total Same-Center NOI | $ | 83,484 | | | $ | 87,092 | | | $ | 249,745 | | | $ | 255,568 | | Total Same-Center NOI | $ | 87,705 | | | $ | 79,372 | | | $ | 173,104 | | | $ | 165,424 | |
(1)Certain prior period amounts have been reclassified to conform with current year presentation.
(2)Includes straight-line rent adjustments for neighbors deemed to be non-creditworthy.Neighbors for whom revenue is being recorded on a cash basis.
(3)(2)Includes operating revenues and expenses from non-same-center properties which includes properties acquired or sold and corporate activities.
Funds from Operations (“FFO”) and CoreNAREIT FFO AND CORE FFO—Nareit FFO is a non-GAAP financial performance financial measure that is widely recognized as a measure of REIT operating performance. The National Association of Real Estate Investment Trusts (“Nareit”) defines FFO as net income (loss) computed in accordance with GAAP, excluding gains (or losses) from sales of property and gains (or losses) from change in control, plus depreciation and amortization, and after adjustments for 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. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO on the same basis. We calculate FFO Attributable to Stockholders and Convertible Noncontrolling Interests in a manner consistent with the Nareit definition, with an additional adjustment made for noncontrolling interests that are not convertible into common stock.
Core FFO is an additional financial performance financial measure used by us as Nareit FFO includes certain non-comparable items that affect our performance over time. We believe that Core FFO is helpful in assisting management and investors with the assessment ofassessing the sustainability of our operating performance in future periods. We believe it is more reflective of our core operating performance and provides an additional measure to compare our performance across reporting periods on a consistent basis
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by excluding items that may cause short-term fluctuations in net income (loss). To arrive at CoreNareit FFO, we adjust FFO attributable to stockholders and convertible noncontrolling interests to exclude certain recurring and non-recurring items including, but not limited to, depreciation and amortization of corporate assets, changes in the fair value of the earn-out liability, amortization of unconsolidated joint venture basis differences, gains or losses on the extinguishment or modification of debt, other impairment charges, and transaction and acquisition expenses.
FFO,Nareit FFO Attributable to Stockholders and Convertible Noncontrolling Interests,OP Unit Holders, and Core FFO should not be considered alternatives to net income (loss) under GAAP, as an indication of our liquidity, nor as an indication of funds available to cover our cash needs, including our ability to fund distributions. Core 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.
Accordingly, Nareit FFO, Nareit FFO Attributable to Stockholders and Convertible Noncontrolling Interests,OP Unit Holders, and Core FFO 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 Nareit FFO, Nareit FFO Attributable to Stockholders and Convertible Noncontrolling Interests,OP Unit Holders, and Core FFO, as presented, may not be comparable to amounts calculated by other REITs.
The following table presents our calculation of FFO,Nareit FFO Attributable to Stockholders and Convertible Noncontrolling Interests,OP Unit Holders, and Core FFO and provides additional information related to our operations (in thousands, except per share amounts):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019(1) | | 2020 | | 2019(1) | | 2021 | | 2020 | | 2021 | | 2020 |
Calculation of FFO Attributable to Stockholders and Convertible Noncontrolling Interests | | | | | | | | |
Calculation of Nareit FFO Attributable to Stockholders and OP Unit Holders | | Calculation of Nareit FFO Attributable to Stockholders and OP Unit Holders | | | | | | | |
Net income (loss) | Net income (loss) | $ | 13,430 | | | $ | (29,727) | | | $ | 18,216 | | | $ | (77,687) | | Net income (loss) | $ | 6,390 | | | $ | (6,413) | | | $ | 6,507 | | | $ | 4,786 | |
Adjustments: | Adjustments: | | Adjustments: | |
Depreciation and amortization of real estate assets | Depreciation and amortization of real estate assets | 54,579 | | | 57,331 | | | 164,288 | | | 174,501 | | Depreciation and amortization of real estate assets | 55,654 | | | 54,892 | | | 109,995 | | | 109,709 | |
Impairment of real estate assets | Impairment of real estate assets | — | | | 35,710 | | | — | | | 74,626 | | Impairment of real estate assets | 1,056 | | | — | | | 6,056 | | | — | |
Gain on disposal of property, net | (10,734) | | | (5,048) | | | (8,616) | | | (10,903) | | |
(Gain) loss on disposal of property, net | | (Gain) loss on disposal of property, net | (3,744) | | | 541 | | | (17,585) | | | 2,118 | |
Adjustments related to unconsolidated joint ventures | Adjustments related to unconsolidated joint ventures | 166 | | | (1,814) | | | 1,760 | | | 292 | | Adjustments related to unconsolidated joint ventures | 537 | | | 940 | | | (100) | | | 1,594 | |
FFO attributable to the Company | 57,441 | | | 56,452 | | | 175,648 | | | 160,829 | | |
Adjustments attributable to noncontrolling interests not convertible into common stock | — | | | (43) | | | — | | | (274) | | |
FFO attributable to stockholders and convertible noncontrolling interests | $ | 57,441 | | | $ | 56,409 | | | $ | 175,648 | | | $ | 160,555 | | |
Nareit FFO attributable to stockholders and OP unit holders | | Nareit FFO attributable to stockholders and OP unit holders | $ | 59,893 | | | $ | 49,960 | | | $ | 104,873 | | | $ | 118,207 | |
Calculation of Core FFO | Calculation of Core FFO | | | | | | | | Calculation of Core FFO | | | | | | | |
FFO attributable to stockholders and convertible noncontrolling interests | $ | 57,441 | | | $ | 56,409 | | | $ | 175,648 | | | $ | 160,555 | | |
Nareit FFO attributable to stockholders and OP unit holders | | Nareit FFO attributable to stockholders and OP unit holders | $ | 59,893 | | | $ | 49,960 | | | $ | 104,873 | | | $ | 118,207 | |
Adjustments: | Adjustments: | | | | | | | | Adjustments: | | | | | | | |
Depreciation and amortization of corporate assets | Depreciation and amortization of corporate assets | 1,516 | | | 1,146 | | | 4,404 | | | 4,519 | | Depreciation and amortization of corporate assets | 933 | | | 1,478 | | | 1,933 | | | 2,888 | |
Change in fair value of earn-out liability | Change in fair value of earn-out liability | — | | | — | | | (10,000) | | | (7,500) | | Change in fair value of earn-out liability | 2,000 | | | — | | | 18,000 | | | (10,000) | |
Amortization of unconsolidated joint venture basis differences | Amortization of unconsolidated joint venture basis differences | 546 | | | 1,181 | | | 1,267 | | | 1,878 | | Amortization of unconsolidated joint venture basis differences | 79 | | | 254 | | | 825 | | | 721 | |
Other impairment charges | — | | | — | | | — | | | 9,661 | | |
Loss on extinguishment of debt, net | | Loss on extinguishment of debt, net | 419 | | | — | | | 1,110 | | | 73 | |
Transaction and acquisition expenses | Transaction and acquisition expenses | 152 | | | 120 | | | 211 | | | 396 | | Transaction and acquisition expenses | 934 | | | 14 | | | 1,075 | | | 59 | |
Other | — | | | 157 | | | 73 | | | 157 | | |
Core FFO | Core FFO | $ | 59,655 | | | $ | 59,013 | | | $ | 171,603 | | | $ | 169,666 | | Core FFO | $ | 64,258 | | | $ | 51,706 | | | $ | 127,816 | | | $ | 111,948 | |
| FFO Attributable to Stockholders and Convertible Noncontrolling Interests per share and Core FFO per share | | |
Weighted-average common shares outstanding - diluted(2) | 333,563 | | | 326,983 | | | 333,480 | | | 326,429 | | |
FFO attributable to stockholders and convertible noncontrolling interests per share - diluted
| $ | 0.17 | | | $ | 0.17 | | | $ | 0.53 | | | $ | 0.49 | | |
Nareit FFO Attributable to Stockholders and OP Unit Holders/Core FFO per Share(1) | | Nareit FFO Attributable to Stockholders and OP Unit Holders/Core FFO per Share(1) | |
Weighted-average common shares outstanding - diluted | | Weighted-average common shares outstanding - diluted | 107,175 | | | 111,165 | | | 107,102 | | | 111,140 | |
Nareit FFO attributable to stockholders and OP unit holders per share - diluted | | Nareit FFO attributable to stockholders and OP unit holders per share - diluted | $ | 0.56 | | | $ | 0.45 | | | $ | 0.98 | | | $ | 1.06 | |
Core FFO per share - diluted | Core FFO per share - diluted | $ | 0.18 | | | $ | 0.18 | | | $ | 0.51 | | | $ | 0.52 | | Core FFO per share - diluted | $ | 0.60 | | | $ | 0.47 | | | $ | 1.19 | | | $ | 1.01 | |
(1)Certain prior period amounts have been reclassified to conform with current year presentation.
(2)Restricted stock unitsawards were dilutive to Nareit FFO Attributable to Stockholders and Convertible Noncontrolling InterestsOP Unit Holders per share and Core FFO per share for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, and, accordingly, their impact was included in the weighted-average common shares used in their respective per share calculations. For the three and nine months ended SeptemberJune 30, 2019,2020, restricted stock units had an anti-dilutive effect upon the calculation of earnings per share and thus were excluded. For details related to the calculation of earnings per share, see Note 10.
Earnings Before Interest, Taxes, Depreciation, and Amortization for Real Estate (“EBITDAre”) and Adjusted EBITDAre
—We have included the calculation
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 36 |
EBITDAre to better align with publicly traded REITs. Additionally, we believe
that, as another important earnings metric, it is a useful indicator of our ability to support our debt obligations. 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 unconsolidated partnerships and joint ventures are calculated to reflectADJUSTED EBITDAre on the same basis.
Adjusted EBITDAre is an additional performance measure used by us as EBITDAre includes certain non-comparable items that affect our performance over time. To arrive at Adjusted EBITDAre, we exclude certain recurring and non-recurring items from EBITDAre, including, but not limited to: (i) changes in the fair value of the earn-out liability; (ii) other impairment charges; (iii) amortization of basis differences in our investments in our unconsolidated joint ventures; and (iv) transaction and acquisition expenses.
—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.
EBITDAre 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.
The following table presents our calculation of EBITDAre and Adjusted EBITDAre (in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Year Ended | | Three Months Ended June 30, | | Six Months Ended June 30, | | Year Ended December 31, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 | | 2020 |
Calculation of EBITDAre | Calculation of EBITDAre | | | | | | | | | Calculation of EBITDAre | | | | | | | | |
Net income (loss) | Net income (loss) | $ | 13,430 | | | $ | (29,727) | | | $ | 18,216 | | | $ | (77,687) | | | $ | (72,826) | | Net income (loss) | $ | 6,390 | | | $ | (6,413) | | | $ | 6,507 | | | $ | 4,786 | | | $ | 5,462 | |
Adjustments: | Adjustments: | | Adjustments: | |
Depreciation and amortization | Depreciation and amortization | 56,095 | | | 58,477 | | | 168,692 | | | 179,020 | | | 236,870 | | Depreciation and amortization | 56,587 | | | 56,370 | | | 111,928 | | | 112,597 | | | 224,679 | |
Interest expense, net | Interest expense, net | 20,388 | | | 25,309 | | | 65,317 | | | 76,151 | | | 103,174 | | Interest expense, net | 19,132 | | | 22,154 | | | 39,195 | | | 44,929 | | | 85,303 | |
Gain on disposal of property, net | (10,734) | | | (5,048) | | | (8,616) | | | (10,903) | | | (28,170) | | |
(Gain) loss on disposal of property, net | | (Gain) loss on disposal of property, net | (3,744) | | | 541 | | | (17,585) | | | 2,118 | | | (6,494) | |
Impairment of real estate assets | Impairment of real estate assets | — | | | 35,710 | | | — | | | 74,626 | | | 87,393 | | Impairment of real estate assets | 1,056 | | | — | | | 6,056 | | | — | | | 2,423 | |
Federal, state, and local tax expense | Federal, state, and local tax expense | 173 | | | 176 | | | 382 | | | 517 | | | 785 | | Federal, state, and local tax expense | 165 | | | 180 | | | 331 | | | 209 | | | 491 | |
Adjustments related to unconsolidated joint ventures | Adjustments related to unconsolidated joint ventures | 594 | | | (1,131) | | | 3,162 | | | 2,398 | | | 2,571 | | Adjustments related to unconsolidated joint ventures | (535) | | | 1,391 | | | 597 | | | 2,568 | | | 3,355 | |
EBITDAre | EBITDAre | $ | 79,946 | | | $ | 83,766 | | | $ | 247,153 | | | $ | 244,122 | | | $ | 329,797 | | EBITDAre | $ | 79,051 | | | $ | 74,223 | | | $ | 147,029 | | | $ | 167,207 | | | $ | 315,219 | |
Calculation of Adjusted EBITDAre | Calculation of Adjusted EBITDAre | | | | | | | | | | Calculation of Adjusted EBITDAre | | | | | | | | | |
EBITDAre | EBITDAre | $ | 79,946 | | | $ | 83,766 | | | $ | 247,153 | | | $ | 244,122 | | | $ | 329,797 | | EBITDAre | $ | 79,051 | | | $ | 74,223 | | | $ | 147,029 | | | $ | 167,207 | | | $ | 315,219 | |
Adjustments: | Adjustments: | | | | | | | | | Adjustments: | | | | | | | | |
Change in fair value of earn-out liability | Change in fair value of earn-out liability | — | | | — | | | (10,000) | | | (7,500) | | | (7,500) | | Change in fair value of earn-out liability | 2,000 | | | — | | | 18,000 | | | (10,000) | | | (10,000) | |
Other impairment charges | — | | | — | | | — | | | 9,661 | | | 9,661 | | |
Transaction and acquisition expenses | Transaction and acquisition expenses | 152 | | | 120 | | | 211 | | | 396 | | | 598 | | Transaction and acquisition expenses | 934 | | | 14 | | | 1,075 | | | 59 | | | 539 | |
Amortization of unconsolidated joint venture basis differences | Amortization of unconsolidated joint venture basis differences | 546 | | | 1,181 | | | 1,267 | | | 1,878 | | | 2,854 | | Amortization of unconsolidated joint venture basis differences | 79 | | | 254 | | | 825 | | | 721 | | | 1,883 | |
Other impairment charges | | Other impairment charges | — | | | — | | | — | | | — | | | 359 | |
Adjusted EBITDAre | Adjusted EBITDAre | $ | 80,644 | | | $ | 85,067 | | | $ | 238,631 | | | $ | 248,557 | | | $ | 335,410 | | Adjusted EBITDAre | $ | 82,064 | | | $ | 74,491 | | | $ | 166,929 | | | $ | 157,987 | | | $ | 308,000 | |
Liquidity and Capital Resources | | |
LIQUIDITY AND CAPITAL RESOURCES |
GeneralGENERAL—Aside from standard operating expenses, we expect our principal cash demands to be for:
•principal and interest payments on our outstanding indebtedness;
•cash distributions to stockholders;
•repurchases of common stock for DDI and the Tender Offer;investments in real estate;
•capital expenditures and leasing costs;
•investments in real estate;redevelopment and repositioning projects; and
•redevelopmentprincipal and repositioning projects.interest payments on our outstanding indebtedness
We expect our primary sources of liquidity to be:
•net proceeds from our underwritten IPO;
•operating cash flows;
•proceeds received from the disposition of properties;
•proceeds from equity and debt financings, including borrowings under our unsecured revolving credit facility;
•proceeds received from the disposition of properties;
•distributions received from our unconsolidated joint ventures; and
•available, unrestricted cash and cash equivalents; andequivalents.
•reinvested distributions.
Our cash from operations has been reduced, and we anticipate that it may continue to be be negatively impacted, at least in the near term, as a result of the immediate impact of the COVID-19 pandemic as we temporarily experience reduced or delayed cash payments and/or revenue from neighbors. Additionally, our cash from financing activities has been impacted by actions taken to preserve liquidity such as the suspension of our distributions, the DRIP, and the SRP, and will continue to be impacted by any distributions declared as well as the Tender Offer. We are monitoring events closely and managing our cash usage, which also includes prioritizing our capital spending and redevelopment to support the reopening of our neighbors and new leasing activity, or deferring if possible, as well as reducing other property and corporate expenses. 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, are sufficient to meet our short- and long-term cash demands.
Debt
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 37 |
UNDERWRITTEN INITIAL PUBLIC OFFERING—On 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 SeptemberJune 30, 20202021 and December 31, 20192020 (dollars in thousands):
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
Total debt obligations, gross | Total debt obligations, gross | $ | 2,334,888 | | | $ | 2,372,521 | | Total debt obligations, gross | $ | 2,241,495 | | | $ | 2,307,686 | |
Weighted-average interest rate at end of period | 3.1 | % | | 3.4 | % | |
Weighted-average term (in years) at end of period | 4.3 | | | 5.0 | | |
Weighted-average interest rate | | Weighted-average interest rate | 2.9 | % | | 3.1 | % |
Weighted-average term (in years) | | Weighted-average term (in years) | 3.7 | | | 4.1 | |
| Revolving credit facility capacity(1) | Revolving credit facility capacity(1) | $ | 500,000 | | | $ | 500,000 | | Revolving credit facility capacity(1) | $ | 500,000 | | | $ | 500,000 | |
Revolving credit facility availability(1)(2) | Revolving credit facility availability(1)(2) | 490,404 | | | 489,805 | | Revolving credit facility availability(1)(2) | 489,329 | | | 490,404 | |
Revolving credit facility maturity(2) | October 2021 | | October 2021 | |
(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:
(2)•On July 2, 2021, we completed the Refinancing. In connection with the Refinancing, we paid off the $472.5 million term loan due in 2025. The revolving credit facility matureswill mature in October 2021 and includes an option to extend the maturity to October 2022, with its execution being subject to compliance with certain terms included in the loan agreement, including the absence of any defaultsJanuary 2026, and the payment of relevant fees. We intend to either exercise our option to extend the maturity or to negotiate under new terms.two senior unsecured term loan tranches will mature in November 2025 and July 2026, respectively.
As our debt obligations mature,•On July 20, 2021, we intend to refinance or pay off the balances at maturity usingused proceeds from operations and/or corporate-level debt.
In January 2020, we paid down $30.0the underwritten IPO to retire our $375.0 million of term loan debt maturing in 2021 using proceeds2022.
We have been assigned investment grade ratings from property dispositions in 2019. Following this repayment, our next term loan maturity is in April 2022. In April 2020, we borrowed $200 million on our revolving credit facility to meet our operating needs for a sustained period due to the COVID-19 pandemic. Our rentMoody’s Investors Service (Baa3) and recovery collections during the second quarter, combined with our COVID-19 expense reduction initiatives, sufficiently funded our operating needs and provided enough stability toS&P Global Ratings (BBB-) which may allow us access to repay in full the outstanding balance on our revolving credit facility in June 2020.
In October 2020, we executed early repayments of $20.4 million in mortgage debt utilizing cash on hand.
Our debt is subject to certain covenants, and as of September 30, 2020, we were in compliance with the restrictive covenants of our outstanding debt obligations.additional capital markets. We expect to continue to meet the requirementssave approximately $7.2 million in interest annually as a result of our debt covenants overactivity 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 debt between fixed-rate and variable-rate as well as between secured and unsecured, excluding market debt adjustments and deferred financing expenses, net, and including the next twelve months.effects of derivative financial instruments (see Notes 7 and 12) as of June 30, 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 presented below on an adjusted basis to reflect certain material 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 | |
36
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 38 |
Financial Leverage RatiosFINANCIAL LEVERAGE RATIOS—We believe our debt to Adjusted EBITDAre, debt to total enterprise value, and debt covenant compliance as of SeptemberJune 30, 20202021 allow us access to future borrowings as 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 SeptemberJune 30, 20202021 and December 31, 2019 (dollars in2020 (in thousands):
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
Net debt: | Net debt: | | Net debt: | |
Total debt, excluding market adjustments and deferred financing expenses | Total debt, excluding market adjustments and deferred financing expenses | $ | 2,379,355 | | | $ | 2,421,520 | | Total debt, excluding market adjustments and deferred financing expenses | $ | 2,272,268 | | | $ | 2,345,620 | |
Less: Cash and cash equivalents | Less: Cash and cash equivalents | 105,270 | | | 18,376 | | Less: Cash and cash equivalents | 22,633 | | | 104,952 | |
Net debt | $ | 2,274,085 | | | $ | 2,403,144 | | |
Total net debt | | Total net debt | $ | 2,249,635 | | | $ | 2,240,668 | |
| Enterprise value: | Enterprise value: | | Enterprise value: | |
Net debt | Net debt | $ | 2,274,085 | | | $ | 2,403,144 | | Net debt | $ | 2,249,635 | | | $ | 2,240,668 | |
Total equity value(1) | Total equity value(1) | 2,914,940 | | | 3,682,161 | | Total equity value(1) | 3,386,803 | | | 2,797,234 | |
Total enterprise value | Total enterprise value | $ | 5,189,025 | | | $ | 6,085,305 | | Total enterprise value | $ | 5,636,438 | | | $ | 5,037,902 | |
(1)Total equity value is calculated as the number of common shares and OP units outstanding multiplied by the EVPS as of SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively. There were 333.1107.0 million diluted shares outstanding with an EVPS of $8.75$31.65 as of SeptemberJune 30, 20202021 and 331.7106.6 million diluted shares outstanding with an EVPS of $11.10$26.25 as of December 31, 2019.2020.
The following table presents our calculation of net debt to Adjusted EBITDAre and net debt to total enterprise value as of SeptemberJune 30, 20202021 and December 31, 20192020 (dollars in thousands):
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
Net debt to Adjusted EBITDAre - annualized: | Net debt to Adjusted EBITDAre - annualized: | | Net debt to Adjusted EBITDAre - annualized: | |
Net debt | Net debt | $ | 2,274,085 | | $ | 2,403,144 | Net debt | $ | 2,249,635 | | $ | 2,240,668 |
Adjusted EBITDAre - annualized(1) | Adjusted EBITDAre - annualized(1) | 325,484 | | 335,410 | Adjusted EBITDAre - annualized(1) | 316,942 | | 308,000 |
Net debt to Adjusted EBITDAre - annualized | Net debt to Adjusted EBITDAre - annualized | 7.0x | | 7.2x | Net debt to Adjusted EBITDAre - annualized | 7.1x | | 7.3x |
| Net debt to total enterprise value | Net debt to total enterprise value | | Net debt to total enterprise value | |
Net debt | Net debt | $ | 2,274,085 | | $ | 2,403,144 | Net debt | $ | 2,249,635 | | $ | 2,240,668 |
Total enterprise value | Total enterprise value | 5,189,025 | | 6,085,305 | Total enterprise value | 5,636,438 | | 5,037,902 |
Net debt to total enterprise value | Net debt to total enterprise value | 43.8% | | 39.5% | Net debt to total enterprise value | 39.9% | | 44.5% |
(1)Adjusted EBITDAre is annualized based on a trailing twelve months.month period. See “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Measures - EBITDAre and Adjusted EBITDArere” of this filing on Form 10-Q for a reconciliation to Net Income (Loss).
Capital Expenditures and Redevelopment ActivityCAPITAL EXPENDITURES AND REDEVELOPMENT ACTIVITY—We make capital expenditures during the course of normal operations, which includeincluding maintenance capital expenditures and tenant improvements, as well as value-enhancing anchor space repositioning and redevelopment, ground-up outparcel development, and other accretive projects. Our capital investments have been prioritized to support the reopening of our neighbors and new leasing activity, or deferred if possible.
During the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, we had capital spend of $40.8$30.2 million and $48.1$28.5 million, respectively. Our capital spend during the nine months ended September 30, 2020 included $20.7 million related toGenerally, we expect our development and redevelopment projects.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 summary 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 | |
Acquisition Activity(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 filing 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. Given the uncertainty around the COVID-19 pandemic as well as the resulting market conditions,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 shopping centers that we expect acquisition activity to remain low for the remainder of 2020. During the nine months ended September 30, 2020, we acquired one property and two parcels of land, as described in Note 4 to the consolidated financial statements, for a total cash outlay of $23.0 million. During the nine months ended September 30, 2019, we acquired one property and one parcel of land for a total cash outlay of $49.9 million.own.
Disposition and Contribution ActivityDISPOSITION 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 2020, though the volume will likely be less than anticipated due to the impactremainder of the COVID-19 pandemic and the resulting economic downturn.2021. The following
table highlights our property dispositions for the nine months ended September 30, 2020 and 2019 (dollars and square feet in thousands):
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
Number of properties sold | 6 | | | 10 | |
Number of outparcels sold | — | | | 1 | |
GLA | 525 | | 1,178 |
Proceeds from the sale of real estate | $ | 48,276 | | | $ | 86,159 | |
Gain on sale of property, net(1) | 9,915 | | | 12,369 | |
| | | | | | | | | | | |
| 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)GainWe 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) on Disposal of Property, Net on the consolidated statements of operations.
Distributions
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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 ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, 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“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 - Funds from OperationsNareit FFO and Core Funds from Operations for the definition of Core FFO, or information regarding why we present Core FFO, andFFO” for a reconciliaitonreconciliation of this non-GAAP financial measure to Net Income (Loss). |
During 2020, weWe paid monthly distributions of $0.05583344$0.085 per share, or $1.02 annualized, for the months of December 20192020, and each month beginning January February, and March 2020 on2021 through July 2021. On August 4, 2021, the Board authorized a cash basis, untilmonthly distribution in the suspension of stockholder distributions by the Board. The timing and amount of distributions is determined by our Board and is influenced in part by our intention to comply with REIT requirements of the Internal Revenue Code, as well as our results of operations, our general financial condition, general economic conditions, and other factors.
On March 27, 2020, as a result of the uncertainty surrounding the COVID-19 pandemic, our Board suspended stockholder distributions, effective after the payment of the March 2020 distribution on April 1, 2020. The DRIP was also suspended, and the March 2020 distribution was paid in all cash on April 1, 2020.
On November 4, 2020, our Board reinstated monthly stockholder distributions beginning December 2020 equal to $0.02833333$0.085 per share of common stock, or $0.34 annualized. Additionally, the DRIP will also be reinstated with this distribution. OP unit holders will receive distributions at the same rate as common stockholders. The distribution and DRIP for December 2020 will be effective forpayable on September 1, 2021 to stockholders of record at the close of business on December 28, 2020. We expect to pay this distribution on January 7, 2021. Our Board intends to evaluate distributions on a monthly basis throughoutAugust 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 intend to maintain compliance with these requirements and keep our qualification as a REIT.
We have not established a minimum distribution level, and our charter does not require that we make distributions to our stockholders.
Tender Offer—DRIP AND THE SRP—On NovemberAugust 4, 2020,2021, as a result of our underwritten IPO, our Board approved a voluntary tender offer commencing on November 10, 2020the 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 up to 4.5 million shares of our outstanding common stock at a price of $5.75 per share, for a total value of approximately $26 million.standard repurchases had been suspended since August 2019.
Share Repurchase Program—
On August 7, 2019, the Board suspended the SRP with respect to standard repurchases. The SRP for DDI was suspended effective March 27, 2020, in response to the uncertainty
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 41 |
We expect to restart share repurchases for DDI at $5.75 per share, but no shares will be repurchased until at least 10 business days after completion of the Tender Offer. The SRP with respect to standard repurchases will remain suspended.
Cash Flow ActivitiesCASH FLOW ACTIVITIES—As of SeptemberJune 30, 2020,2021, we had cash and cash equivalents and restricted cash of $136.8$111.4 million, a net cash increasedecrease of $41.7$20.5 million during the ninesix months ended SeptemberJune 30, 2020.2021.
Below is a summary of our cash flow activity for the nine months ended September 30, 2020 and 2019 (dollars in thousands):
| | | Nine Months Ended September 30, | | | Six Months Ended June 30, | |
| | 2020 | | 2019 | | $ Change | | % Change | | 2021 | | 2020 | | $ Change | | % Change |
Net cash provided by operating activities | Net cash provided by operating activities | $ | 157,245 | | | $ | 175,882 | | | $ | (18,637) | | | (10.6) | % | Net cash provided by operating activities | $ | 129,897 | | | $ | 89,906 | | | $ | 39,991 | | | 44.5 | % |
Net cash used in investing activities | (13,561) | | | (9,302) | | | (4,259) | | | 45.8 | % | |
Net cash provided by (used in) investing activities | | Net cash provided by (used in) investing activities | 49,837 | | | (6,466) | | | 56,303 | | | NM |
Net cash used in financing activities | Net cash used in financing activities | (101,994) | | | (164,818) | | | 62,824 | | | (38.1) | % | Net cash used in financing activities | (200,270) | | | (99,218) | | | (101,052) | | | 101.8 | % |
Operating ActivitiesOPERATING ACTIVITIES—Our net cash provided by operating activities was primarily impacted by the following:
•Property operations and working capital—Most of our operating cash comes from rental and tenant recovery income and is offset by property operating expenses, real estate taxes, and general and administrative costs. OurDuring 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 in cash flowswas primarily driven by improved collections on amounts due from property operations is primarily due to reduced revenue and collectionsNeighbors as a result of the COVID-19 pandemic, partially mitigated bywell as expense reduction measures at the propertyinitiatives, and corporate levels.was partially offset by higher leasing commissions. Additionally, we had an increase in returns on our investments 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 $7.5$4.7 million for the ninesix months ended SeptemberJune 30, 2020,2021, a decrease of $1.6$0.3 million as compared to the same period in 2019, primarily due to fee and management income no longer received from REIT III following its acquisition by us in October 2019 and a decrease in fees received from NRP largely due to property dispositions.2020.
•Cash paid for interest—During the ninesix months ended SeptemberJune 30, 2020,2021, we paid $59.9$36.8 million for interest, a decrease of $6.9$4.1 million over the same period in 2019,2020, 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 athe decrease in LIBOR and expiring interest rate swaps in 2020, as well as repricing activities occurring in 2019.swaps.
Investing ActivitiesINVESTING ACTIVITIES—Our net cash used inprovided by (used in) investing activities was primarily impacted by the following:
•Real estate acquisitions—During the ninesix months ended SeptemberJune 30, 2020, we acquired one property and two parcels of land, for2021, our acquisitions resulted in a total cash outlay of $23.0 million. During the nine months ended September 30, 2019, we acquired one property and one parcel of land for$40.5 million, as compared to a total cash outlay of $49.9 million.$4.3 million during the same period in 2020.
•Real estate dispositions—During the ninesix months ended SeptemberJune 30, 2020, we disposed of six properties for2021, our dispositions resulted in a net cash inflow of $48.3$119.6 million, as compared to the disposal of ten properties and one outparcel for a net cash inflow of $86.2$25.8 million during the same period in 2019.2020.
•Capital expenditures—We invest capital into leasing our properties and maintaining or improving the condition of our properties. During the ninesix months ended SeptemberJune 30, 2020,2021, we paid $40.8$30.2 million for capital expenditures, a decreasean increase of $7.3$1.7 million over the same period in 2019. This decrease was2020, primarily driven by reduced capital expenditures sincedue to the first quarter of 2020, as our capital investments have been prioritized to support the reopeningtiming of our neighborsdevelopment and new leasing activity, or deferred if possible, as wellredevelopment 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 lower volumeresult of other building improvements at our centers.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 ActivitiesFINANCING ACTIVITIES—Our net cash used in financing activities was primarily impacted by the following:
•Debt borrowings and payments—Cash from financing activities is primarily affected by inflows from borrowings and outflows from payments on debt. During the ninesix months ended SeptemberJune 30, 2020,2021, we had $37.8$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. During the nine months ended September 30, 2019 we had $21.3 million in net repayment of debt, net of cash from the disposition of properties.
•Distributions to stockholders and OP unit holders—Cash used for distributions to common stockholders and OP unit holders decreased $54.6$2.3 million for the ninesix months ended SeptemberJune 30, 20202021 as compared to the same period in 2019, primarily2020, due to the temporary suspension of stockholder distributions which became effective after the paymenta reduction of the March 2020 dividend on April 1, 2020.distribution rate.
•Share repurchases—Cash outflows for share repurchases decreasedincreased by $25.0$72.6 million for the ninesix months ended SeptemberJune 30, 20202021 as compared to the same period in 2019. On August 7, 2019,2020, primarily as a result of a tender offer, which was settled in January 2021.
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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):
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| 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 Board suspendedmaturity from October 2021 to January 2026, and lower the SRP with respectinterest rate spread from 1.40% over LIBOR to standard repurchases.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 SRP for DDI was suspended effective March 27, 2020, in responsefollowing list provides an update to certain restrictive covenants specific to the uncertaintyunsecured revolving credit facility and unsecured term loans that were deemed significant as a result of COVID-19.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 | | |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES |
Our 20192020 Annual Report on Form 10-K, originally filed with the SEC on March 12, 2020,2021, contains a description of our critical accounting policies and estimates, including those relating to real estate acquisitions, rental income, and the valuation of real estate assets. There have been no significant changes to our critical accounting policies during 2020.
Because of the adverse economic conditions and uncertainty regarding the negative impacts of the COVID-19 pandemic, it is possible that the estimates and assumptions that have been utilized in the preparation of the consolidated financial statements could change or vary significantly from actual results. Please refer to Notes 2 and 12 for additional discussion on the potential impact that the COVID-19 pandemic could have on significant accounting estimates as employed per our critical accounting policies.
Impact of Recently Issued Accounting Pronouncements
In response to the COVID-19 pandemic, the FASB issued interpretive guidance addressing the accounting treatment for lease concessions attributable to the pandemic. Under this guidance, entities may elect to account for such lease concessions consistent with how they would be accounted for under ASC Topic 842, Leases, (“ASC 842”) if the enforceable rights and obligations for the lease concessions already existed within the lease agreement, regardless of whether such enforceable rights and obligations are explicitly outlined within the lease. This accounting treatment may only be applied if (1) the lease concessions were granted as a direct result of the pandemic, and (2) the total cash flows under the modified lease are less than or substantially the same as the cash flows under the original lease agreement. As a result, entities that make this election will not have to analyze each lease to determine whether enforceable rights and obligations for concessions exist within the contract, and may elect not to account for these concessions as lease modifications within the scope of ASC 842.
Some concessions will provide a deferral of payments, which may affect the timing of cash receipts without substantively impacting the total consideration per the original lease agreement. The FASB has stated that there are multiple acceptable methods to account for deferrals under the interpretive guidance:
•Account for the concession as if no changes to the lease contract were made, increasing the lease receivable as payments accrue and continuing to recognize income; or
•Account for deferred lease payments as variable lease payments.
We have elected not to account for any qualifying lease concessions granted as a result of the COVID-19 pandemic as lease modifications and will account for any qualifying concessions granted as if no changes to the lease contract were made. This will result in an increase to the related lease receivable as payments accrue while we continue to recognize rental income. We will, however, assess the impact of any such concessions on estimated collectability of the related lease payments and will reflect any adjustments as necessary as an offset to Rental Income on the consolidated statements of operations.
Please refer to Note 2 for discussion of the impact of other recently issued accounting pronouncements.2021.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ThereWe utilize interest rate swaps in order to hedge a portion of our exposure to interest rate 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 been no material changescredit 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 the quantitative and qualitative disclosures abouta change in interest rates. The market risk disclosedassociated 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 June 30, 2021, we had five interest rate swaps that fixed LIBOR on $930 million of our unsecured term loan facilities. In July 2021, we paid down $375 million in Partunsecured 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 June 30, 2021 (“as adjusted”), we had not
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 43 |
fixed the interest rate on $325 million of our unsecured debt through derivative financial instruments. Further, as of June 30, 2021, we estimate that a one percentage point increase in interest rates on the outstanding balance of our variable rate debt (as adjusted) would result in approximately $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, other than the effect of the unsecured term loan pay down as described above. For further discussion of certain quantitative details related to our interest rate swaps, see Note 7.
See “Part II, Item 7A7A. Quantitative and Qualitative Disclosures about Market Risk” of our 20192020 Annual Report on Form 10-K originally filed with the SEC on March 12, 2020.2021 for more details associated with our exposure to credit risk and market risk.
ITEM 4. CONTROLS 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, 2020.2021. 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, 2020.
Changes in Internal Control over Financial Reporting
During the quarter ended SeptemberJune 30, 2020,2021, 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.
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w PART II OTHER INFORMATION |
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are party to legal proceedings, which arise in the ordinary course of our business. We are not currently involved in any legal proceedings for which we are not covered by our liability insurance or the outcome is reasonably likely to have a material impact on our results of operations or financial 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 20192020 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 12, 2020.2021. Except to the extent updated below or previously updated, or to the extent additional factual information disclosed elsewhere in our Quarterly ReportsReport on Form 10-Q relates to such risk factors (including, without limitation, the matters discussed in Part“Part I, “Item 2 -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“Part I, “ItemItem 1A. Risk Factors” of our 2020 Annual Report on Form 10-K forfiled with the year ended December 31, 2019.SEC on March 12, 2021.
The outbreak of theongoing COVID-19 pandemic has had, and couldis expected to continue to have, a material adversenegative effect on our and our tenants’Neighbors’ businesses, financial condition, results of operations, cash flow, liquidity,flows, and ability to satisfy debt service obligations.liquidity.
In March 2020, the World Health Organization declared COVID-19 a global pandemic. The COVID-19 pandemic has caused, and couldis 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. Some states and localities have temporarily reinstated certain mandates in response to increasing reported cases of COVID-19. The impact these measures and the resulting consumer behavior are having on our portfolio evolved throughout the second and third quarters, and we expect that it will continue to do so.
The COVID-19 pandemic has impacted our business and financial performance, and we expect this impact to continue. Our retail and servicesservice-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 COVID-19 pandemic has decreased, and may continue to decrease, customercustomers’ willingness to frequent, and mandated “shelter-in-place” or “stay-at-home” orders may prevent customers from frequenting our tenants’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. We own properties acrossAt the United States, including properties in states that have been significantly impacted bypeak of the COVID-19 pandemic. We have a higher concentration of annualized base rent (“ABR”) from tenants in certain states significantly impacted by the pandemic, such as Florida, Texas, California, Georgia, and Illinois. Ourpandemic-related closure activity, for our wholly-owned properties and those owned through our joint ventures, contained approximately 5,600 occupied tenant spaces as of November 4, 2020. At the peak of the pandemic-related closure activity, our temporary closures reached approximately 2,100, or 37% of all tenantNeighbor spaces, totaling 27% of our ABRannualized base rent (“ABR”) and 22% of our gross leasable area (“GLA”). As of November 4, 2020, 98% of our occupied tenant spaces, totaling 99% of our ABR and GLA, are open for business. Certain tenants remainAll temporarily closed Neighbors have since closed after reopening,been permitted to reopen; however, there are limiting
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 44 |
continuing economic impacts from the number of customers allowed in their stores, or have modified their operations in other ways that may impact their profitability, either as a result of government mandates or self-elected efforts to reduce the spread of COVID-19. These actionsCOVID-19 pandemic which could result in increased permanentfuture store closings andclosures or could reduce the demand for leasing space in our shopping centers and result in a decline in average rental rates on expiring leases.centers.
While most of our tenantsNeighbors have reopened, we cannot presently determine how many of the tenantsNeighbors 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 believe substantially all tenants,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 tenantNeighbor has reopened and we have receivedmade payments made toward rent and recovery charges owed during the second and third quarter. Asaccrued. Inclusive of November 4, 2020,our prorated share of properties owned through our joint ventures, as of July 20, 2021, we have executed$5.3 million of outstanding payment plans with our tenants agreeing to defer approximately $4.3 million in rent and related charges,Neighbors, and we had grantedrecorded rent abatements totalingof approximately $2.0 million.$0.7 million during 2021. These payment plans and rent abatements represented 1.1%approximately 2.0% and 0.5%0.3% of portfolio ABR, respectively,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 paymentremaining amounts owed on executed payment plans is approximately eighttwelve months. We are still actively pursuing past due amounts under the terms negotiated with our Neighbors. We are in negotiations with additional tenants,Neighbors, which we believe will lead to more tenantsNeighbors repaying their past due charges. As of November 4, 2020,July 20, 2021, we have collected approximately 90%95% of rent and recoveries billed during the second quarterthrough fourth quarters of 2020,
and approximately 94%98% of rent and recoveries billed during the third quarter. Further, our collections for October 2020 were 94%.first and second quarters of 2021. In the event of any default by a tenantNeighbor under its lease agreement or relief agreement, we may not be able to fully recover, and/or may experience delays in recovering and additional costs in enforcing our rights as landlord to recover, amounts due to us under the terms of the lease agreement and/or relief agreement. We currently anticipate the above circumstances to negatively impact our revenues at least for the remainder of the year. Additionally, certain tenants have declared bankruptcy as a result of the effects of the pandemic. As of September 30, 2020, we have several tenants in bankruptcy proceedings where we have not yet received notice that the lease has been assumed or rejected, representing an exposure of 1.2% of our total ABR.
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:
•the ability and willingness of our tenantsNeighbors 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 tenant,Neighbor, and obligations we may incur in connection with the replacement of an existing tenant,Neighbor, particularly in light of the adverse impact to the financial health of many retailers and service providers that has occurred and continues to occur as a result of the COVID-19 pandemic and the significant uncertainty as to when and the conditions under which certain potential tenantsNeighbors 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 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 (“EVPS”) 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 tenantsNeighbors 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 reversed;way;
•state, local, or industry-initiated efforts, such as a rent freeze for tenantsNeighbors 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 have temporarily suspended stockholder distributions in an effort to preserve cash due to current economic uncertainty and we may choose to do the same in the future. Additionally, 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 tenants’Neighbors’ business, financial condition, results of operations, cash flows, liquidity, and ability to satisfy debt service obligations. Moreover, to the extent any of these risks and uncertainties adversely impact us in the ways described above or otherwise, they may also have the effect of heightening many of the other risks described under the section entitled “Item 1A. Risk Factors” in our most recent annual report on Form 10-K for the year ended December 31, 2019.2020.
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 yield 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 property upon sale or disposition.
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 planned development projects, effects of the COVID-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. (the “Operating Partnership”), entered into tax protection agreements with certain protected partners, which may limit the Operating Partnership’s ability to sell or otherwise dispose of certain shopping centers and may require the Operating Partnership to maintain certain debt levels that otherwise would not be required to operate its business.
We and the Operating Partnership entered into a tax 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 the Operating Partnership: (i) sells, exchanges, transfers or otherwise disposes of 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 October 4, 2017; or (ii) fails, prior to the expiration of such period, to maintain certain minimum levels of indebtedness that would be allocable to each protected partner for tax purposes or, under certain circumstances, fails to offer such protected partners the opportunity to guarantee certain types of the Operating Partnership’s indebtedness, then the Operating Partnership will indemnify each affected protected 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 our stockholders’ best interest for us to cause the Operating Partnership to sell, exchange, transfer or otherwise dispose of one or more of these shopping centers, it may be economically prohibitive for us to do so until the expiration of the applicable protection period because of these indemnity obligations. Moreover, these obligations may require us to cause the Operating Partnership to maintain more or different indebtedness than we would otherwise require for our business. As a result, the tax protection agreements could, during their term, restrict our ability to take actions or make decisions that otherwise would be in our best interests.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended June 30, 2021, we issued 28,000 shares of common stock in redemption of 28,000 OP units.
As described in Item 5. “Other Information”, our Board has approved the termination of the share repurchase program (“SRP”).
ITEM 5. OTHER INFORMATION
Amended and Restated CodeOn August 4, 2021, as a result of Business Conduct and Ethics
On November 4, 2020,our underwritten IPO, our Board approved the termination of Directors adopted an amended and restated Code of Business Conduct and Ethics (the “Code of Ethics”). The Code of Ethics reflects updates to the “Diversity, Equity and Inclusion”Dividend Reinvestment Plan (“DRIP”) and the “Discrimination & Harassment Prevention” sections, as well as updatesSRP. The DRIP has been suspended since April 2021. The SRP, which was limited to improve language, appearancerepurchases resulting from the death, qualifying disability, or the declaration of incompetence of stockholders, has been suspended since March 2021, and style throughout the Code ofSRP for standard repurchases had been suspended since August 2019.
Ethics. The Code of Ethics took effect upon adoption by our Board of Directors and did not result in any waiver, explicit or implicit, of any provision of our previous Code of Business Conduct and Ethics.
The Code of Ethics will be made available on our website at www.phillipsedison.com in the “Investors – Governance” section as soon as practicable.
The foregoing description of the amendments reflected in the Code of Ethics does not purport to be complete and is qualified in its entirety by reference to the Code of Ethics, attached as Exhibit 14.1 hereto and incorporated herein by reference.
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 47 |
ITEM 6. EXHIBITS
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Ex. | | Description | Reference |
3.1 | * | | |
3.2 | | | Form 8-K, filed with the SEC on August 10, 2020)July 19, 2021, Exhibit 3.1 |
14.110.1 | | | DEF14A, filed April 7, 2021, Appendix A |
10.2 | | | 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 | | | Form 8-K, filed July 19, 2021, Exhibit 10.1 |
10.5 | | | 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 | * | | |
31.2 | * | | |
32.1 | * | | |
32.2 | * | | |
101.INS | | Inline XBRL Instance Document - the instance 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 | | | 48 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| PHILLIPS EDISON & COMPANY, INC. |
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Date: November 9, 2020August 5, 2021 | By: | /s/ Jeffrey S. Edison |
| | Jeffrey S. Edison |
| | Chairman of the Board and Chief Executive Officer (Principal Executive Officer) |
| | |
Date: November 9, 2020August 5, 2021 | By: | /s/ John P. Caulfield |
| | John P. Caulfield |
| | Chief Financial Officer, Senior Vice President and Treasurer (Principal Financial Officer) |
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PHILLIPS EDISON & COMPANY JUNE 30, 2021 FORM 10-Q | | | 49 |