Phillips Edison & Company Reports Second Quarter 2018 Results
CINCINNATI--(BUSINESS WIRE)--Aug 8, 2018-- (“PECO” or the “Company”), an internally-managed real estate investment trust (“REIT”) and one of the nation’s largest owners and operators of grocery-anchored shopping centers, reported its results for the quarter and six months ended June 30, 2018.
Merger with Phillips Edison Grocery Center REIT IIOn July 17, 2018, PECO entered into a definitive merger agreement with Phillips Edison Grocery Center REIT II, Inc. (“REIT II”), a public non-traded REIT currently advised and managed by PECO. PECO’s merger with REIT II’s 86 properties will create a national portfolio of 321 grocery-anchored shopping centers encompassing approximately 36.6 million square feet located across 33 states and a total enterprise value (“TEV”) of approximately $6.3 billion. The merger is an important step towards a full-cycle liquidity event for both PECO and REIT II shareholders.
More information on the merger is available in the Form 8-K filed on July 18, 2018, which can be found on our website at www.phillipsedison.com/investors.
Second Quarter 2018 Highlights (vs. Second Quarter 2017)Net loss totaled $14.1 million Funds from operations (FFO) per diluted share increased 13.3% to $0.17 FFO totaled 100.3% of total distributions made during the quarter Modified funds from operations (MFFO) per diluted share increased 12.5% to $0.18 Pro forma same-center net operating income (NOI)* increased 6.5% to $62.4 million Net debt to total enterprise value was 42.2% at quarter-end Outstanding debt had a weighted-average interest rate of 3.5% and 86.0% was fixed-rate debt
Six Months Ended June 30, 2018 Highlights (vs. Six Months Ended June 30, 2017)Net loss totaled $15.9 million FFO per diluted share increased 13.3% to $0.34 FFO totaled 102.8% of total distributions made during the six-month period MFFO per diluted share increased 12.5% to $0.36 Pro forma same-center NOI* increased 5.4% to $123.5 million
* Pro forma same-center NOI reflects adjustments for the Phillips Edison Limited Partnership (PELP) acquisition in October 2017. Please see ‘Pro Forma Same-Center Results’ under Portfolio Results for additional disclosure.
“Our portfolio of grocery-anchored shopping centers continues to produce strong results, as illustrated by our same-center NOI increase of 6.5% during the quarter,” commented Jeff Edison, Chairman and Chief Executive Officer of Phillips Edison & Company. “This growth in property NOI, coupled with $9.1 million of fee income generated by our investment management business, drove a 13.3% increase in FFO per diluted share. Our FFO totaled 100.3% of our total distributions for the quarter compared to 85.7% a year ago.”
“On July 17, 2018, we entered into an agreement to merge with Phillips Edison Grocery Center REIT II, which will result in a larger, more diverse portfolio that will benefit from increased occupancy, higher annualized base rent per square foot, and improved trade area demographics. Importantly, we believe this merger will enhance the long-term value of the combined company and better positions PECO for a full-cycle liquidity event.”
Three and Six Months Ended June 30, 2018 Financial Results
For the second quarter of 2018, net loss totaled $14.1 million compared to net loss of $1.2 million for the second quarter of 2017.
For the six months ended June 30, 2018, net loss totaled $15.9 million compared to a net loss of $0.1 million for the same period in 2017.
The increase in net loss for both periods was primarily driven by increased depreciation and amortization as a result of owning an additional 77 properties when compared to June 30, 2017.
Funds from Operations (FFO) as Defined by the National Association of Real Estate Investment Trusts (“NAREIT”)
For the second quarter of 2018, FFO attributable to stockholders and convertible noncontrolling interests increased 43.4% to $38.7 million, or $0.17 per diluted share, from $27.0 million, or $0.15 per diluted share, during the second quarter of 2017. FFO per diluted share increased 13.3%.
For the six months ended June 30, 2018, FFO attributable to stockholders and convertible noncontrolling interests increased 41.8% to $79.1 million compared to $55.7 million during the same year-ago period. FFO per diluted share increased 13.3%.
The improvement in FFO for both periods was driven by an increase in net operating income generated by additional properties owned, a 6.5% and 5.4% increase in pro forma same-center NOI and $9.1 million and $17.8 million of fee income generated by PECO’s investment management business for the three and six months ended June 30, 2018, respectively. The Company did not generate fee income prior to the acquisition of the investment management business from PELP in October 2017.
Modified Funds from Operations (MFFO)
For the second quarter of 2018, MFFO increased 39.0% to $40.9 million, or $0.18 per diluted share, compared to $29.5 million, or $0.16 per diluted share, during the same year-ago quarter.
For the first six months of 2018, MFFO increased 42.9% to $83.1 million, or $0.36 per diluted share, compared to $58.2 million, or $0.32 per diluted share, during the same year-ago period.
The increase in MFFO for both periods was directly correlated to the increase in FFO.
Pro Forma Same-Center Results*
For the second quarter of 2018, pro forma same-center NOI increased 6.5% to $62.4 million compared to $58.6 million during the second quarter of 2017. The increase was driven by a $0.22 increase in minimum rent per square foot, or 1.9%, as well as a 3.2% decrease in operating expenses versus the comparable period.
For the six months ended June 30, 2018, pro forma same-center NOI increased 5.4% to $123.5 million compared to $117.1 million during the same period in 2017. The increase was driven by the aforementioned increase in minimum rent, as well as a 4.2% decrease in operating expenses versus the comparable period.
The improvement in operating expenses during both periods was due to synergies resulting from PECO’s acquisition of PELP during 2017.
Pro-forma same-center leased occupancy totaled 94.0% which is unchanged from June 30, 2017.
*For purposes of evaluating same-center NOI on a comparative basis, and in light of the acquisition of PELP in October 2017, the Company is presenting pro forma same-center NOI, which includes all properties that were owned and operational for the entire portion of both comparable reporting periods for both Phillips Edison & Company and PELP. As such, contributing to pro forma same-center NOI were 224 properties.
Three and Six Months Ended June 30, 2018 Portfolio Results
At quarter-end, the portfolio consisted of 235 properties, totaling approximately 26.3 million square feet located in 32 states. This compares to 158 properties, totaling approximately 17.2 million square feet located in 28 states as of June 30, 2017.
Leased portfolio occupancy totaled 93.8% compared to 93.9% as of December 31, 2017 (the first comparable period after the PELP acquisition).
During the second quarter 2018, 178 leases (new, renewal and options) were executed totaling approximately 769,000 square feet. This compares to 130 leases executed totaling approximately 488,000 square feet during the second quarter of 2017.
Comparable rent spreads during the quarter, which compare the percentage increase (or decrease) of new or renewal leases to the expiring lease of a unit that was occupied within the past 12 months, were 15.1% for new leases, 7.9% for renewal leases (excluding options), and 8.7% combined (new and renewal leases).
During the first six months of 2018, there were 369 leases (new, renewal and options) executed totaling approximately 1.6 million square feet. This compares to 262 leases executed totaling approximately 1.0 million square feet during the same period of 2017.
Acquisition & Disposition Activity
During the quarter the Company generated $13.4 million from the sale of two properties; and there was no acquisition activity.
During the six months ended June 30, 2018, one shopping center was acquired for a total cost of $8.4 million; and there was no disposition activity outside of what occurred during the second quarter of 2018.
Investment Management Business
During the second quarter of 2018, the Company generated $9.1 million of fee income for asset management and property management services rendered to third parties.
At quarter-end, the Company had approximately $2.1 billion of third-party assets under management, which included Phillips Edison Grocery Center REIT II, Inc., Phillips Edison Grocery Center REIT III, Inc., and Necessity Retail Partners (a joint venture between Phillips Edison Grocery Center REIT II, Inc. and TPG Real Estate).
Phillips Edison Grocery Center REIT III
On May 8, 2018, the registration statement for Phillips Edison Grocery Center REIT III (“REIT III”) pertaining to an initial public offering was declared effective by the Securities and Exchange Commission. REIT III will offer up to an aggregate of $1.7 billion in common stock.
Balance Sheet Highlights at June 30, 2018
At quarter-end, the Company had $453.0 million of borrowing capacity available on its $500 million revolving credit facility.
Net debt to TEV was 42.2% at June 30, 2018. Please see the Net Debt to Total Enterprise Value table for additional disclosure.
At quarter-end, the Company’s outstanding debt had a weighted-average interest rate of 3.5%, a weighted-average maturity of 4.9 years, and 86.0% of its total debt was fixed-rate debt. This compared to a weighted-average interest rate of 3.4%, a weighted average maturity of 5.5 years, and 88.5% fixed-rate debt at December 31, 2017.
For the quarter ended June 30, 2018, gross distributions of $38.5 million were paid to common shareholders and operating partnership (“OP”) unit holders, including $12.1 million reinvested through the distribution reinvestment plan (“DRIP”), for net cash distributions of $26.4 million.
During the quarter, FFO totaled 100.3% of total distributions, up from 85.7% in Q2 2017.
For the first six months of 2018, gross distributions of $76.8 million were paid to common shareholders and OP unit holders, including $24.9 million reinvested through the DRIP, for net cash distributions of $51.9 million.
During the first six months of 2018, FFO totaled 102.8% of total distributions, up from 89.5% during the comparable six months in 2017.
Subsequent to quarter-end, the Company’s board of directors authorized distributions for September 2018, October 2018, and November 2018 in the amount of $0.05583344 per share to the shareholders of record at the close of business on September 17, 2018, October 15, 2018, and November 15, 2018, respectively. OP unit holders will receive distributions at the same rate, subject to required withholding.
In connection with the proposed merger between PECO and REIT II, PECO was required to temporarily suspend its DRIP during July 2018, and DRIP participants received their July 2018 distribution (payable on August 1, 2018) in cash. The DRIP will resume in August 2018 (with the distribution payable on September 1, 2018) as the filing of a joint preliminary proxy statement and registration statement on Form S-4 has been completed.
Share Repurchase Program (SRP)
During the second quarter of 2018, approximately 3.8 million shares of common stock, totaling $42.1 million, were repurchased under the SRP.
The Company fulfilled all repurchases sought upon a stockholder’s death, “qualifying disability,” or “determination of incompetence” in accordance with the terms of the SRP. Standard repurchase requests were processed on a pro rata basis due to requests surpassing the funding limits under the SRP.
Cash available for standard repurchases on any particular date under the SRP is generally limited to the proceeds from the DRIP during the preceding four quarters, less amounts already used for repurchases during the same time period.
In connection with the proposed merger between PECO and REIT II, PECO was required to temporarily suspend the SRP during July 2018 and will resume the SRP in August 2018 as the filing of the joint preliminary proxy statement and registration statement on Form S-4 has been completed. The next repurchase for death, disability, and incompetence (“DDI”) is expected to take place on August 31, 2018. SRP paperwork must be on file and in good order by August 24, 2018 at 6:00pm Eastern Time. PECO does not expect funding to be available for standard repurchases for the remainder of 2018.
Stockholder Update Call
Chairman and Chief Executive Officer Jeff Edison, Chief Financial Officer Devin Murphy, and Executive Vice President Mark Addy will host a live presentation addressing the Company’s results later today at 3:30 p.m. Eastern Time. Following management’s prepared remarks, there will be a question and answer session.
Date: Today, Wednesday, August 8, 2018 Time: 3:30 p.m. Eastern Time Webcast link:https://services.choruscall.com/links/peco180808.htmlU.S. listen-only: (888) 346-2646 International listen-only: (412) 317-5249 Submit Questions:InvestorRelations@phillipsedison.comWebcast Replay: A replay will be available at http://investors.phillipsedison.com/event
Investors are encouraged to submit questions in advance of the presentation by emailing them to InvestorRelations@phillipsedison.com. Additionally, questions may be submitted via the webcast interface during the live presentation.
Interested parties will be able to access the presentation online or by telephone. If dialing in, please call the conference telephone number five minutes prior to the start time as an operator will register your name and organization. Participants should ask to join the Phillips Edison & Company call.
For investor-related updates on Phillips Edison, please visit www.phillipsedison.com/investors.
For more information on the Company’s quarterly results, please refer to the Company’s Form 10-Q for the quarter ended June 30, 2018, which will be filed with the SEC and available on the SEC’s website at www.sec.gov.
Pro Forma Same-Center Net Operating Income
Same-Center NOI represents the NOI for the properties that were owned and operational for the entire portion of both comparable reporting periods. As of June 30, 2018, we had 224 same-center properties. For purposes of evaluating Same-Center NOI on a comparative basis, and in light of the Company’s acquisition of 74 shopping centers and the investment management business from PELP, the Company is presenting Pro Forma Same-Center NOI, which is Same-Center NOI on a pro forma basis as if the transaction had occurred on January 1, 2017. This perspective allows the Company to evaluate Same-Center NOI growth over a comparable period. Pro Forma Same-Center NOI is not necessarily indicative of what actual Same-Center NOI and growth would have been if the PELP transaction had occurred on January 1, 2017, nor does it purport to represent Same-Center NOI and growth for future periods.
Pro Forma Same-Center NOI highlights operating trends such as occupancy rates, rental rates, and operating costs on properties that were operational for both comparable periods. Other REITs may use different methodologies for calculating Same-Center NOI, and accordingly, Pro Forma Same-Center NOI may not be comparable to other REITs.
Pro Forma Same-Center NOI should not be viewed as an alternative measure of the Company’s financial performance since it does not reflect the operations of the Company’s entire portfolio, nor does it reflect the impact of general and administrative expenses, acquisition expenses, depreciation and amortization, interest expense, other income, or the level of capital expenditures and leasing costs necessary to maintain the operating performance of Company properties that could materially impact its results from operations.
Funds from Operations and Modified Funds from Operations
FFO is a non-GAAP 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) attributable to common stockholders computed in accordance with GAAP, excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for impairment losses on depreciable 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 funds from operations on the same basis. The Company calculates 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.
MFFO is an additional performance financial measure used by the Company as FFO includes certain non-comparable items that affect the Company’s performance over time. MFFO excludes the following items:acquisition and transaction expenses; straight-line rent amounts, both income and expense; amortization of above- or below-market intangible lease assets and liabilities; amortization of discounts and premiums on debt investments; gains or losses from the early extinguishment of debt; gains or losses on the extinguishment of derivatives, except where the trading of such instruments is a fundamental attribute of Company operations; gains or losses related to fair value adjustments for derivatives not qualifying for hedge accounting; gains or losses related to fair value adjustments for the Company’s earn-out liability; and adjustments related to the above items for joint ventures and noncontrolling interests and unconsolidated entities in the application of equity accounting.
The Company believes that MFFO is helpful in assisting management and investors with the assessment of the sustainability of operating performance in future periods. The Company believes it is more reflective of its core operating performance and provides an additional measure to compare its performance across reporting periods on a consistent basis by excluding items that may cause short-term fluctuations in net income (loss) but have no impact on cash flows.
FFO, FFO Attributable to Stockholders and Convertible Noncontrolling Interests, and MFFO should not be considered alternatives to net income (loss) or income (loss) from continuing operations under GAAP, as an indication of liquidity, nor as an indication of funds available to cover the Company’s cash needs, including its ability to fund distributions. MFFO may not be a useful measure of the impact of long-term operating performance on value if the Company does not continue to operate its business plan in the manner currently contemplated.
Accordingly, FFO, FFO Attributable to Stockholders and Convertible Noncontrolling Interests, and MFFO 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. The Company’s FFO, FFO Attributable to Stockholders and Convertible Noncontrolling Interests, and MFFO, as presented, may not be comparable to amounts calculated by other REITs.
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