The following discussion and analysis should be read in conjunction with our
accompanying consolidated financial statements and notes thereto and the more
detailed information contained in our 2021 Annual Report on Form 10-K, filed
with the SEC on February 16, 2022. All references to "Notes" throughout this
document refer to the footnotes to the consolidated financial statements in
"Item 1. Financial Statements". See also "Cautionary Note Regarding
Forward-Looking Statements" below.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q 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"). These forward-looking
statements are based on current expectations, estimates, and projections about
the industry and markets in which we operate, and beliefs of, and assumptions
made by, management of our company and involve uncertainties that could
significantly affect our financial results. 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 SEC.
Such statements include, but are not limited to: (a) statements about our plans,
strategies, initiatives, and prospects; (b) statements about the COVID-19
pandemic; (c) statements about our underwritten incremental yields; and (d)
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) competition from other available shopping centers and the attractiveness of
properties in our portfolio to our tenants; (v) the financial stability of our
tenants, including, without limitation, their ability 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; (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; (xii) information technology security breaches;
(xiii) our corporate responsibility initiatives; (xiv) loss of key executives;
(xv) the concentration of our portfolio in a limited number of industries,
geographies, or investments; (xvi) the economic, political, and social impact
of, and uncertainty relating to, the COVID-19 pandemic; (xvii) our ability to
re-lease our properties on the same or better terms, or at all, in the event of
non-renewal or in the event we exercise our right to replace an existing tenant;
(xviii) the loss or bankruptcy of our tenants; (xix) to the extent we are
seeking to dispose of properties, our ability to do so at attractive prices or
at all; and (xx) the impact of inflation on us and on our tenants. 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 2021 Annual Report on
Form 10-K, filed with the SEC on February 16, 2022, 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. Therefore, such statements are not intended
to be a guarantee of our performance in future periods.
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.
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 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.
PHILLIPS EDISON & COMPANY
SEPTEMBER 30, 2022 FORM 10-Q 19
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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 at the end of the
period 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 unlevered 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 a
project upon stabilization and the estimated annualized NOI without the planned
improvements. Underwritten incremental unlevered 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 unlevered
yields may vary from our underwritten incremental unlevered 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 terms
that is executed for substantially the same space that has been vacant less than
twelve months.
•Comparable rent spread-This metric is calculated as 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) the 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 or cash flows from operations, we utilize non-GAAP
metrics to measure our operational and financial performance. See "Non-GAAP
Measures" below 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; (iv)
transaction and acquisition expenses; and (v) realized performance income. 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 ("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
modification of debt and other; (v) other impairment charges; (vi) transaction
and acquisition expenses; and (vii) realized performance income. 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.
PHILLIPS EDISON & COMPANY
SEPTEMBER 30, 2022 FORM 10-Q 20
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•Equity Market Capitalization-We calculate equity market capitalization as the
total dollar value of all outstanding shares using the closing price for the
applicable date.
•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 discounts, 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, as defined below. 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 have been owned and operational for the entirety of each
reporting period (i.e., since January 1, 2021).
•Total Enterprise Value-We calculate total enterprise value as our net debt plus
our equity market capitalization on a fully diluted basis.
OVERVIEW
We are a REIT and one of the nation's largest owners and operators of
omni-channel grocery-anchored shopping centers. Our portfolio primarily consists
of neighborhood centers anchored by the #1 or #2 grocer tenants by sales within
their respective formats by trade area. Our Neighbors are a mix of national,
regional, and local retailers that primarily provide necessity-based goods and
services.
As of September 30, 2022, we owned equity interests in 290 shopping centers,
including 270 wholly-owned shopping centers and 20 shopping centers owned
through one unconsolidated joint venture, which comprised approximately 33.3
million square feet in 31 states. In addition to managing our shopping centers,
our third-party investment management business provides comprehensive real
estate management services to the Managed Funds.
In May 2022, we sold the final property in our joint venture with NRP, in which
we own a 20% interest. We recognized no income during the three months ended
September 30, 2022 and $2.7 million in income during the nine months ended
September 30, 2022 related to NRP's achievement of certain performance targets,
which is included in Fees and Management Income in our consolidated statements
of operations.
PORTFOLIO AND LEASING STATISTICS-Below are statistical highlights of our
wholly-owned portfolio as of September 30, 2022 and 2021 (dollars and square
feet in thousands):
September 30, 2022 September 30, 2021
Number of properties 270 267
Number of states 31 31
Total square feet 31,098 30,443
ABR $ 429,005 $ 388,272
% ABR from omni-channel grocery-anchored shopping centers 97.1 % 96.3 %
Leased occupancy %:
Total portfolio spaces 97.1 % 95.6 %
Anchor spaces 98.9 % 97.6 %
Inline spaces 93.6 % 91.9 %
Average remaining lease term (in years)(1) 4.5 4.6
(1)The average remaining lease term in years excludes future options to extend
the term of the lease.
PHILLIPS EDISON & COMPANY
SEPTEMBER 30, 2022 FORM 10-Q 21
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The following table details information for our unconsolidated joint venture as
of September 30, 2022, which is the basis for determining the prorated
information included in the subsequent tables (dollars and square feet in
thousands):
September 30, 2022
Joint Venture Ownership Percentage Number of Properties ABR GLA
GRP I 14% 20 $ 30,356 2,209
LEASE EXPIRATIONS-The following chart shows the aggregate scheduled lease
expirations, excluding our Neighbors who are occupying space on a temporary
basis, after September 30, 2022 for each of the next ten years and thereafter
for our wholly-owned properties and the prorated portion of those owned through
our unconsolidated joint venture:
[[Image Removed: peco-20220930_g2.jpg]]
Our ability to create rental rate growth generally depends on our leverage
during new and renewal lease negotiations with prospective and existing
Neighbors, which typically occurs when occupancy at our centers is high or
during periods of economic growth and recovery. Conversely, we may experience
rental rate decline when occupancy at our centers is low or during periods of
economic recession, as the leverage during new and renewal lease negotiations
may shift to prospective and existing Neighbors.
See "Results of Operations - Leasing Activity" below for further discussion of
leasing activity.
PHILLIPS EDISON & COMPANY
SEPTEMBER 30, 2022 FORM 10-Q 22
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PORTFOLIO TENANCY-We define national Neighbors as those Neighbors that operate
in at least three states. Regional Neighbors are defined as those Neighbors that
have at least three locations in fewer than three states. The following charts
present the composition of our portfolio, including our wholly-owned properties
and the prorated portion of those owned through our unconsolidated joint
venture, by Neighbor type as of September 30, 2022:
[[Image Removed: peco-20220930_g3.jpg]][[Image Removed: peco-20220930_g4.jpg]]
The following charts present the composition of our portfolio by Neighbor
industry as of September 30, 2022:
[[Image Removed: peco-20220930_g5.jpg]][[Image Removed: peco-20220930_g6.jpg]]
PHILLIPS EDISON & COMPANY
SEPTEMBER 30, 2022 FORM 10-Q 23
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NECESSITY-BASED GOODS AND SERVICES-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 71% of our ABR, including the pro rata portion attributable to
properties owned through our unconsolidated joint venture, is generated from
Neighbors providing necessity-based goods and services.
TOP 20 NEIGHBORS-The following table presents our top 20 Neighbors by ABR,
including our wholly-owned properties and the prorated portion of those owned
through our unconsolidated joint venture, as of September 30, 2022 (dollars and
square feet in thousands):
% of Leased
Neighbor(1) ABR % of ABR Leased Square Feet Square Feet Number of Locations(2)
Kroger $ 27,451 6.3 % 3,366 11.0 % 61
Publix 23,623 5.5 % 2,314 7.6 % 57
Albertsons 18,232 4.2 % 1,709 5.6 % 31
Ahold Delhaize 17,662 4.1 % 1,249 4.1 % 23
Walmart 8,932 2.1 % 1,770 5.8 % 13
Giant Eagle 7,810 1.8 % 828 2.7 % 12
Sprouts Farmers Market 6,494 1.5 % 421 1.4 % 14
TJX Companies 6,030 1.4 % 516 1.7 % 18
Dollar Tree 3,711 0.9 % 352 1.2 % 37
Raley's 3,672 0.8 % 248 0.8 % 4
SUPERVALU 3,244 0.7 % 336 1.1 % 5
Subway Group 2,589 0.6 % 100 0.3 % 70
Lowe's 2,469 0.6 % 369 1.2 % 4
Anytime Fitness, Inc. 2,461 0.6 % 151 0.5 % 31
Starbucks Corporation 2,250 0.5 % 51 0.2 % 30
Kohl's Corporation 2,241 0.5 % 365 1.2 % 4
Office Depot 2,237 0.5 % 179 0.6 % 8
Food 4 Less (PAQ) 2,215 0.5 % 119 0.4 % 2
Save Mart 2,174 0.5 % 258 0.8 % 5
Petco Animal Supplies, Inc. 2,136 0.5 % 127 0.4 % 11
Total $ 147,633 34.1 % 14,828 48.6 % 440
(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-The COVID-19 pandemic resulted in reduced
revenues beginning with the second quarter of 2020 through early 2021. Our
collections returned to pre-COVID levels during the second half of 2021 and have
remained strong throughout 2022. As of September 30, 2022, our Neighbors
currently being accounted for on a cash basis represented approximately 4% of
portfolio ABR. We believe our collections have stabilized, which will reduce
volatility in our earnings during 2022 as compared to 2021.
Due to changing economic conditions and supply chain limitations, there has been
an increase in wages and costs for materials. The resulting increased inflation
may negatively impact some of our Neighbors and increase our operating and
construction costs. Additionally, macroeconomic and geopolitical risks may
create challenges that cause current market conditions in the United States to
worsen. The policies implemented to address these risks, including raising
interest rates, could result in adverse impacts on the United States economy,
including a slowing of growth or potentially a recession.
PHILLIPS EDISON & COMPANY
SEPTEMBER 30, 2022 FORM 10-Q 24
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SUMMARY OF OPERATING ACTIVITIES FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2022
AND 2021
Three Months Ended Favorable (Unfavorable)
September 30, Change
(Dollars in thousands) 2022 2021 $ %(1)
Revenues:
Rental income $ 142,857 $ 128,826 $ 14,031 10.9 %
Fees and management income 2,081 2,435 (354) (14.5) %
Other property income 716 1,073 (357) (33.3) %
Total revenues 145,654 132,334 13,320 10.1 %
Operating Expenses:
Property operating 23,089 21,608 (1,481) (6.9) %
Real estate taxes 18,041 16,375 (1,666) (10.2) %
General and administrative 10,843 11,627 784 6.7 %
Depreciation and amortization 60,013 53,901 (6,112) (11.3) %
Impairment of real estate assets - 698 698 NM
Total operating expenses 111,986 104,209 (7,777) (7.5) %
Other:
Interest expense, net (17,569) (18,570) 1,001 5.4 %
(Loss) gain on disposal of property, net (10) 14,093 (14,103) (100.1) %
Other expense, net (3,916) (7,086) 3,170 44.7 %
Net income 12,173 16,562 (4,389) (26.5) %
Net income attributable to noncontrolling
interests (1,135) (1,929) 794 41.2 %
Net income attributable to stockholders $ 11,038 $ 14,633 $ (3,595) (24.6) %
(1)Line items that result in a percent change that exceed certain limitations
are considered not meaningful ("NM") and indicated as such.
Our basis for analyzing significant fluctuations in our results of operations
generally includes review of the results of our same-center portfolio,
non-same-center portfolio, and revenues and expenses from our management
activities. We define our same-center portfolio as the 255 properties that were
owned and operational prior to January 1, 2021. 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, 2020,
which includes 26 properties disposed of and 14 properties acquired. Below are
explanations of the significant fluctuations in the results of operations for
the three months ended September 30, 2022 and 2021:
Rental Income increased $14.0 million primarily as follows:
•$6.8 million increase related to our same-center portfolio as follows:
?$4.8 million increase primarily due to a $0.37 increase in average minimum rent
PSF and a 1.6% improvement in average occupancy; and
?$0.9 million increase owing largely to an increase in recoverable income
attributable to an increase in common area maintenance spending and the 1.6%
improvement in average occupancy; and
?$1.1 million increase primarily due to lower reserves as a result of a decrease
in Neighbors we have identified as a credit risk.
•$7.3 million increase primarily related to our acquisition and disposition
activity.
Property Operating Expenses increased $1.5 million primarily as follows:
•$0.6 million increase from our same-center portfolio and corporate operating
activities primarily due to an increase in recoverable expenses attributed to
higher common area maintenance costs, as compared to 2021; and
•$0.9 million increase primarily due to our acquisition activity.
Real Estate Tax Expenses:
•The $1.7 million increase in real estate tax expenses is primarily due to our
acquisition activity.
General and Administrative Expenses decreased $0.8 million primarily as follows:
•$0.4 million decrease primarily due to lower third-party consultant and
custodial costs; and
•$0.4 million decrease primarily related to savings in premiums for directors
and officers insurance.
Depreciation and Amortization:
PHILLIPS EDISON & COMPANY
SEPTEMBER 30, 2022 FORM 10-Q 25
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•The $6.1 million increase in depreciation and amortization is primarily due to
the execution of our acquisition strategy, investment in improvements to our
Neighbor spaces, and accelerated depreciation related to damage sustained at our
properties as a result of Hurricane Ian.
Interest Expense, Net:
•The $1.0 million decrease was primarily due to lower loss on extinguishment or
modification of debt, partially offset by increased debt outstanding in 2022.
Interest Expense, Net was comprised of the following (dollars in thousands):
Three Months Ended September 30,
2022 2021
Interest on unsecured term loans and senior notes, net $
10,492 $ 8,913
Interest on secured debt 5,080 6,049
Interest on revolving credit facility, net 443 237
Non-cash amortization and other 1,558 1,697
(Gain) loss on extinguishment or modification of debt and
other, net(1) (4) 1,674
Interest expense, net $ 17,569 $ 18,570
Weighted-average interest rate as of end of period 3.3 % 3.3 %
Weighted-average term (in years) as of end of period 4.6 4.2
(1)Includes defeasance fees related to early repayments of debt.
(Loss) Gain on Disposal of Property, Net:
•The $14.1 million decrease was primarily related to the sale of one outparcel
with an insignificant net loss during the three months ended September 30, 2022,
as compared to the sale of seven properties and two outparcels (in addition to
other property-related miscellaneous disposals and write-offs) with a net gain
of $14.1 million during the three months ended September 30, 2021 (see Note 4).
Other Expense, Net:
•The $3.2 million decrease was primarily related to a 2021 charge in connection
with the change in the fair value of our earn-out liability, which was settled
in January 2022, partially offset by an increase in transaction and acquisition
expenses owing largely to activities related to the execution of our growth
strategy. Other Expense, Net was comprised of the following (in thousands):
Three
Months Ended September 30,
2022 2021
Increase in fair value of earn-out liability (see Note 12) $
- $ (5,000)
Equity in net income (loss) of unconsolidated joint ventures 29 (54)
Transaction and acquisition expenses (3,740) (1,775)
Federal, state, and local income tax expense (179) (165)
Other (26) (92)
Other expense, net $ (3,916) $ (7,086)
PHILLIPS EDISON & COMPANY
SEPTEMBER 30, 2022 FORM 10-Q 26
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SUMMARY OF OPERATING ACTIVITIES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND
2021
Nine Months Ended Favorable (Unfavorable)
September 30, Change
(Dollars in thousands) 2022 2021 $ %(1)
Revenues:
Rental income $ 418,835 $ 386,784 $ 32,051 8.3 %
Fees and management income 9,323 7,095 2,228 31.4 %
Other property income 2,175 1,906 269 14.1 %
Total revenues 430,333 395,785 34,548 8.7 %
Operating Expenses:
Property operating 69,261 65,784 (3,477) (5.3) %
Real estate taxes 52,005 49,762 (2,243) (4.5) %
General and administrative 33,751 32,905 (846) (2.6) %
Depreciation and amortization 178,008 165,829 (12,179) (7.3) %
Impairment of real estate assets - 6,754 6,754 NM
Total operating expenses 333,025 321,034 (11,991) (3.7) %
Other:
Interest expense, net (52,895) (57,765) 4,870 8.4 %
Gain on disposal of property, net 4,151 31,678 (27,527) (86.9) %
Other expense, net (9,738) (25,595) 15,857 62.0 %
Net income 38,826 23,069 15,757 68.3 %
Net income attributable to noncontrolling
interests (4,181) (2,739) (1,442) (52.6) %
Net income attributable to stockholders $ 34,645 $ 20,330 $ 14,315 70.4 %
(1)Line items that result in a percent change that exceed certain limitations
are considered not meaningful ("NM") and indicated as such.
For details surrounding our basis for analyzing significant fluctuations in our
results of operations as well as definitions related to our portfolio of real
estate assets, please see "Summary of Operating Activities for the Three Months
Ended September 30, 2022 and 2021" above. Below are explanations of the
significant fluctuations in the results of operations for the nine months ended
September 30, 2022 and 2021:
Rental Income increased $32.1 million as follows:
•$17.2 million increase related to our same-center portfolio primarily as
follows:
?$13.8 million increase primarily due to a $0.37 increase in average minimum
rent per square foot and a 1.5% improvement in average occupancy; and
?$4.1 million increase owing largely to an increase in recoverable income
attributed to an increase in common area maintenance spending and lower reserves
for common area maintenance, as compared to 2021, and the 1.5% improvement in
average occupancy; offset by
?$0.6 million decrease primarily due to the stabilization of collections in 2022
compared to the recovery of prior year income in 2021 and the reversal of
reserves for uncollectibility from 2020 in 2021 resulting from the recovery of
our portfolio in the wake of the COVID-19 pandemic.
•$14.8 million increase primarily related to our acquisition and disposition
activity.
Fees and management income:
•The $2.2 million increase in fees and management income was primarily due to
the achievement of certain performance targets related to our joint venture with
NRP, partially offset by the reduction in revenue as result of our joint venture
with NRP fully liquidating its assets.
Property Operating Expenses increased $3.5 million primarily as follows:
•$2.2 million increase related to our same-center portfolio and corporate
operating activities primarily due to $2.9 million increase attributable to
higher common area maintenance costs, as compared to 2021; and
•$1.3 million increase primarily due to our acquisition activity.
Real Estate Tax Expenses:
•The $2.2 million increase in real estate tax expenses was primarily due to our
acquisition activity.
General and Administrative Expenses increased $0.8 million primarily as follows:
•$0.8 million increase primarily due to an increase in directors and officers
insurance as a result of our becoming a publicly traded company; and
PHILLIPS EDISON & COMPANY
SEPTEMBER 30, 2022 FORM 10-Q 27
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•$0.9 million increase primarily due to increases in overhead attributed to
technology-related costs and travel and conference expenses; offset by
•$0.5 million decrease in compensation expense owing largely to lower
performance-based compensation; and
•$0.4 million decrease primarily due to lower third-party consultant and
custodial costs.
Depreciation and Amortization:
•The $12.2 million increase in depreciation and amortization is primarily due to
the execution of our acquisition strategy, investment in improvements to our
Neighbor spaces, and accelerated depreciation related to damage sustained at our
properties as a result of Hurricane Ian.
Impairment of Real Estate Assets:
•The $6.8 million decrease in impairment of real estate assets was due to assets
that were sold during 2021 at a disposition price that was less than the
carrying value.
Interest Expense, Net:
•The $4.9 million decrease was primarily due to net repayments of debt
outstanding in 2021, partially offset by higher average interest rates in 2022.
Interest Expense, Net was comprised of the following (dollars in thousands):
Nine Months Ended September 30,
2022 2021
Interest on unsecured term loans and senior notes, net $
29,920 $ 30,119
Interest on secured debt 15,758 19,075
Interest on revolving credit facility, net 1,211 672
Non-cash amortization and other 4,981 5,115
Loss on extinguishment or modification of debt and other,
net(1) 1,025 2,784
Interest expense, net $ 52,895 $ 57,765
Weighted-average interest rate as of end of period 3.3 % 3.3 %
Weighted-average term (in years) as of end of period 4.6 4.2
(1)Includes defeasance fees related to early repayments of debt.
Gain on Disposal of Property, Net:
•The $27.5 million decrease was primarily related to the sale of three
properties and three outparcels with a net gain of $4.2 million during the nine
months ended September 30, 2022, as compared to the sale of 20 properties and
three outparcels (as well as other property-related miscellaneous disposals and
write-offs) with a net gain of $31.7 million during the nine months ended
September 30, 2021 (see Note 4).
PHILLIPS EDISON & COMPANY
SEPTEMBER 30, 2022 FORM 10-Q 28
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Other Expense, Net:
•The $15.9 million decrease was primarily related to a 2021 charge in connection
with the change in the fair value of our earn-out liability, which was settled
in January 2022, combined with an increase from equity in income of our
unconsolidated joint ventures, partially offset by an increase in transaction
and acquisition expenses owing largely to the amortization of the restricted
stock units awarded at the time of our underwritten IPO combined with costs for
activities related to the execution of our growth strategy and a decrease in the
value of our investment in marketable securities. Other Expense, Net was
comprised of the following (in thousands):
Nine
Months Ended September 30,
2022 2021
Increase in fair value of earn-out liability (see Note 12) $ (1,809) $ (23,000)
Equity in net income of unconsolidated joint ventures
1,203 747
Transaction and acquisition expenses (7,820) (2,850)
Federal, state, and local income tax expense (373) (496)
Other (939) 4
Other expense, net $ (9,738) $ (25,595)
LEASING ACTIVITY-Below is a summary of leasing activity for our wholly-owned
properties for the three months ended September 30, 2022 and 2021(1):
Total Deals Inline Deals
2022 2021 2022 2021
New leases:
Number of leases 99 140 97 133
Square footage (in thousands) 240 551 201 312
ABR (in thousands) $ 5,417 $ 9,172 $ 4,990 $ 6,749
ABR PSF $ 22.57 $ 16.63 $ 24.78 $ 21.64
Cost PSF of executing new leases $ 41.02 $ 24.11 $ 43.30 $ 31.15
Number of comparable leases 41 57 41 56
Comparable rent spread 21.3 % 14.1 % 21.3 % 14.1 %
Weighted-average lease term (in years) 7.5 8.6 7.0 6.2
Renewals and options:
Number of leases 141 128 124 110
Square footage (in thousands) 921 854 307 211
ABR (in thousands) $ 13,591 $ 11,082 $ 7,408 $ 5,377
ABR PSF $ 14.76 $ 12.98 $ 24.12 $ 25.53
ABR PSF prior to renewals $ 13.55 $ 12.30 $ 21.26 $ 22.85
Percentage increase in ABR PSF 9.0 % 5.5 % 13.4 % 11.7 %
Cost PSF of executing renewals and options $ 0.56 $ 0.22 $ 1.66 $ 0.86
Number of comparable leases(2) 104 97 102 91
Comparable rent spread(2) 15.5 % 8.9 % 15.3 % 13.1 %
Weighted-average lease term (in years) 4.2 5.4 4.5 4.6
Portfolio retention rate 88.5 % 91.2 % 79.9 % 80.4 %
(1)PSF amounts may not recalculate exactly based on other amounts presented
within the table due to rounding.
(2)Excludes exercise of options.
PHILLIPS EDISON & COMPANY
SEPTEMBER 30, 2022 FORM 10-Q 29
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Below is a summary of leasing activity for our wholly-owned properties for the
nine months ended September 30, 2022 and 2021(1):
Total Deals Inline Deals
2022 2021 2022 2021
New leases:
Number of leases 296 417 283 401
Square footage (in thousands) 901 1,360 612 931
ABR (in thousands) $ 17,838 $ 23,630 $ 14,790 $ 19,171
ABR PSF $ 19.80 $ 17.38 $ 24.16 $ 20.59
Cost PSF of executing new leases $ 34.91 $ 27.52 $ 37.31 $ 30.05
Number of comparable leases 113 184 111 181
Comparable rent spread 31.3 % 14.9 % 24.2 % 14.9 %
Weighted-average lease term (in years) 7.9 8.1 7.4 6.4
Renewals and options:
Number of leases 453 465 411 416
Square footage (in thousands) 2,665 2,880 920 855
ABR (in thousands) $ 37,971 $ 35,449 $ 22,001 $ 19,752
ABR PSF $ 14.25 $ 12.31 $ 23.92 $ 23.10
ABR PSF prior to renewals $ 13.08 $ 11.58 $ 21.18 $ 21.11
Percentage increase in ABR PSF 8.9 % 6.3 %
12.9 % 9.4 %
Cost PSF of executing renewals and options $ 0.57 $ 0.56
$ 1.10 $ 1.22
Number of comparable leases(2) 352 388 346 372
Comparable rent spread(2) 14.9 % 8.2 %
14.4 % 9.8 %
Weighted-average lease term (in years) 4.8 5.0 4.2 4.1
Portfolio retention rate 90.1 % 88.3 % 81.1 % 80.1 %
(1)PSF amounts may not recalculate exactly based on other amounts presented
within the table due to rounding.
(2)Excludes exercise of options.
NON-GAAP MEASURES
See "Key Performance Indicators and Defined Terms" above for additional
information related to the following non-GAAP measures.
SAME-CENTER NOI-Same-Center NOI is presented as a supplemental measure of our
performance, as it highlights operating trends such as occupancy levels, rental
rates, and operating costs for 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 nine
months ended September 30, 2022 and 2021, Same-Center NOI represents the NOI for
the 255 properties that were wholly-owned and operational for the entire portion
of all comparable reporting 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.
PHILLIPS EDISON & COMPANY
SEPTEMBER 30, 2022 FORM 10-Q 30
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The table below presents our Same-Center NOI (dollars in thousands):
Three Months Ended September
30, Favorable (Unfavorable) Nine Months Ended September 30, Favorable (Unfavorable)
$ %
2022 2021 Change Change 2022 2021 $ Change % Change
Revenues:
Rental income(1) $ 96,067 $ 90,949 $ 5,118 $ 284,629 $ 270,090 $ 14,539
Tenant recovery income 30,696 29,645 1,051 90,468 86,566 3,902
Reserves for uncollectibility(2) 112 59 53 (403) 1,280 (1,683)
Other property income 581 989 (408) 1,767 1,740 27
Total revenues 127,456 121,642 5,814 4.8 % 376,461 359,676 16,785 4.7 %
Operating expenses:
Property operating expenses 18,559 17,156 (1,403) 56,664 52,912 (3,752)
Real estate taxes 16,381 15,819 (562) 48,031 48,160 129
Total operating expenses 34,940 32,975 (1,965) (6.0) % 104,695 101,072 (3,623) (3.6) %
Total Same-Center NOI $ 92,516 $ 88,667 $ 3,849 4.3 % $ 271,766 $ 258,604 $ 13,162 5.1 %
(1)Excludes straight-line rental income, net amortization of above- and
below-market leases, and lease buyout income.
(2)Includes billings that will not be recognized as revenue until cash is
collected or the Neighbor resumes regular payments and/or we deem it appropriate
to resume recording revenue on an accrual basis, rather than on a cash basis.
SAME-CENTER NOI RECONCILIATION-Below is a reconciliation of Net Income to NOI
and Same-Center NOI (in thousands):
Three Months Ended
September
30,
Nine Months Ended September 30,
2022 2021 2022 2021
Net income $ 12,173 $ 16,562 $ 38,826 $ 23,069
Adjusted to exclude:
Fees and management income (2,081) (2,435) (9,323) (7,095)
Straight-line rental income(1) (3,932) (2,476) (9,060) (6,868)
Net amortization of above- and below-market
leases (1,081) (908) (3,161) (2,633)
Lease buyout income (221) (560) (2,362) (3,138)
General and administrative expenses 10,843 11,627 33,751 32,905
Depreciation and amortization 60,013 53,901 178,008 165,829
Impairment of real estate assets - 698 - 6,754
Interest expense, net 17,569 18,570 52,895 57,765
Loss (gain) on disposal of property, net 10 (14,093) (4,151) (31,678)
Other expense, net 3,916 7,086 9,738 25,595
Property operating expenses related to fees
and
management income 704 1,489 3,061 3,611
NOI for real estate investments 97,913 89,461 288,222 264,116
Less: Non-same-center NOI(2) (5,397) (794) (16,456) (5,512)
Total Same-Center NOI $ 92,516 $ 88,667 $ 271,766 $ 258,604
(1)Includes straight-line rent adjustments for Neighbors for whom revenue is
being recorded on a cash basis.
(2)Includes operating revenues and expenses from non-same-center properties
which includes properties acquired or sold and corporate activities.
NAREIT FFO AND CORE FFO-Nareit FFO is a non-GAAP financial performance measure
that is widely recognized as a measure of REIT operating performance. Core FFO
is an additional financial performance 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 assessing
the sustainability of our operating performance in future periods.
Nareit FFO, Nareit FFO Attributable to Stockholders and 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 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 OP Unit
Holders, and Core FFO, as presented, may not be comparable to amounts calculated
by other REITs.
PHILLIPS EDISON & COMPANY
SEPTEMBER 30, 2022 FORM 10-Q 31
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The following table presents our calculation of Nareit FFO Attributable to
Stockholders and OP Unit Holders and Core FFO (in thousands, except per share
amounts):
Three Months Ended September
30, Nine Months Ended September 30,
2022 2021 2022 2021
Calculation of Nareit FFO Attributable to Stockholders
and OP Unit Holders
Net income
$ 12,173 $ 16,562 $ 38,826 $ 23,069
Adjustments:
Depreciation and amortization of real estate assets 59,136 52,984 175,305 162,979
Impairment of real estate assets - 698 - 6,754
Loss (gain) on disposal of property, net 10 (14,093) (4,151) (31,678)
Adjustments related to unconsolidated joint ventures 662 776 181 676
Nareit FFO attributable to stockholders and OP unit
holders
$ 71,981 $ 56,927 $ 210,161 $ 161,800
Calculation of Core FFO
Nareit FFO attributable to stockholders and OP unit
holders $ 71,981 $ 56,927 $ 210,161 $ 161,800
Adjustments:
Depreciation and amortization of corporate assets 877 917 2,703 2,850
Change in fair value of earn-out liability - 5,000 1,809 23,000
Transaction and acquisition expenses 3,740 1,775 7,820 2,850
(Gain) loss on extinguishment or modification of debt
and other, net
(4) 1,674 1,025 2,784
Amortization of unconsolidated joint venture basis
differences 1 80 220 905
Realized performance income(1) - - (2,742) -
Core FFO $ 76,595 $
66,373 $ 220,996 $ 194,189
Nareit FFO Attributable to Stockholders and OP Unit
Holders/Core FFO per diluted share
Weighted-average shares of common stock outstanding -
diluted 131,593 122,573 129,805 112,317
Nareit FFO attributable to stockholders and OP unit
holders
per share - diluted $ 0.55 $ 0.46 $ 1.62 $ 1.44
Core FFO per share - diluted $ 0.58 $ 0.54 $ 1.70 $ 1.73
(1)Realized performance income includes fees received related to the achievement
of certain performance targets in our NRP joint venture.
PHILLIPS EDISON & COMPANY
SEPTEMBER 30, 2022 FORM 10-Q 32
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EBITDAre and ADJUSTED EBITDAre-We use EBITDAre and Adjusted EBITDAre as
additional measures of operating performance which allow us to compare earnings
independent of capital structure, determine debt service and fixed cost
coverage, and measure enterprise value. Additionally, we believe they are a
useful indicator of our ability to support our debt obligations.
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 Year Ended
30, Nine Months Ended September 30, December 31,
2022 2021 2022 2021 2021
Calculation of EBITDAre
Net income $ 12,173 $ 16,562
$ 38,826 $ 23,069 $ 17,233
Adjustments:
Depreciation and amortization
60,013 53,901 178,008 165,829 221,433
Interest expense, net 17,569 18,570 52,895 57,765 76,371
Loss (gain) on disposal of property, net 10 (14,093) (4,151) (31,678) (30,421)
Impairment of real estate assets - 698 - 6,754 6,754
Federal, state, and local tax expense 179 165 373 496 327
Adjustments related to unconsolidated
joint ventures 927 1,107 1,061 1,704 1,431
EBITDAre $ 90,871 $ 76,910
$ 267,012 $ 223,939 $ 293,128
Calculation of Adjusted EBITDAre
EBITDAre
$ 90,871 $ 76,910 $ 267,012 $ 223,939 $ 293,128
Adjustments:
Change in fair value of earn-out
liability - 5,000 1,809 23,000 30,436
Transaction and acquisition expenses 3,740 1,775 7,820 2,850 5,363
Amortization of unconsolidated joint
venture basis differences 1 80 220 905 1,167
Realized performance income(1) - - (2,742) - (675)
Adjusted EBITDAre $ 94,612 $ 83,765 $ 274,119 $ 250,694 $ 329,419
(1)Realized performance income includes fees received related to the achievement
of certain performance targets in our NRP joint venture.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL-Aside from standard operating expenses, we expect our principal cash
demands to be for:
•investments in real estate;
•cash distributions to stockholders;
•redevelopment and repositioning projects;
•capital expenditures and leasing costs; and
•principal and interest payments on our outstanding indebtedness.
We expect our primary sources of liquidity to be:
•operating cash flows;
•proceeds received from the disposition of properties;
•borrowings from our unsecured revolving credit facility and proceeds from debt
financings;
•proceeds from any ATM offering activities;
•distributions received from our unconsolidated joint ventures; and
•available, unrestricted cash and cash equivalents.
At this time, we believe our current sources of liquidity are sufficient to meet
our short- and long-term cash demands.
PHILLIPS EDISON & COMPANY
SEPTEMBER 30, 2022 FORM 10-Q 33
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IMPACT OF THE UNDERWRITTEN IPO-On July 19, 2021, we closed our underwritten IPO,
from which we received gross proceeds of $547.4 million. The underwritten IPO
has allowed us access to forms of capital not previously available to us as
follows:
•In October 2021, we settled the registered offering of $350 million aggregate
principal amount of 2.625% senior notes, which resulted in gross proceeds of
$345.4 million.
•In February 2022, we filed an automatically effective shelf registration
statement on Form S-3 providing for the public offering and sale, from time to
time, by us of our preferred stock, common stock, debt securities, depository
shares, warrants, right, units, and guarantees of debt securities and by the
Operating Partnership of its debt securities, in each case in unlimited amounts.
•In connection with our February 2022 Form S-3 filing, we commenced the ATM
program through which we may offer and sell shares of our common stock having an
aggregate offering price of up to $250 million. During the three months ended
September 30, 2022, we issued 0.8 million shares of our common stock under the
ATM program for net proceeds of $26.2 million, after approximately $0.3 million
in commissions. During the nine months ended September 30, 2022, we issued
2.6 million shares of our common stock under the ATM program for net proceeds of
$89.2 million, after approximately $0.9 million in commissions. As of
September 30, 2022, $159.9 million of common stock remained available for
issuance under the ATM program.
DEBT-The following table summarizes information about our debt as of
September 30, 2022 and December 31, 2021 (dollars in thousands):
September 30, 2022 December 31, 2021
Total debt obligations, gross $ 1,890,039 $
1,914,082
Weighted-average interest rate 3.3 % 3.3 %
Weighted-average term (in years) 4.6
5.2
Revolving credit facility capacity(1) $ 800,000 $
500,000
Revolving credit facility availability(2) 733,385
489,329
(1)The revolving credit facility matures in January 2026, extendable at our
option to January 2027. In addition, the revolving credit facility also includes
an accordion feature that permits us to increase our aggregate borrowing
capacity thereunder to up to $1 billion, subject to the satisfaction of certain
conditions.
(2)Net of any outstanding balance and letters of credit.
In May 2022, we amended our credit facility agreement to, among other things,
increase the total amount available under our unsecured revolving credit
facility from $500 million to $800 million. The unsecured revolving credit
facility also includes an accordion feature that permits us to increase our
aggregate borrowing capacity thereunder to up to $1 billion, subject to the
satisfaction of certain conditions. The unsecured revolving credit facility is
scheduled to mature in January 2026, extendable at our option to January 2027.
In addition to expanding the borrowing capacity, the Amendment replaces LIBOR
with SOFR as the benchmark interest rate for the unsecured revolving credit
facility and the two $240 million senior unsecured term loan tranches, maturing
in November 2025 and July 2026. In August 2022, we amended two of our interest
rate swaps with a total notional amount of $430 million to replace LIBOR with
SOFR as the benchmark interest rate in conjunction with the Amendment.
The 2.625% senior notes issued by the Operating Partnership pursuant to an
effective registration statement in October 2021 were, and debt securities of
the Operating Partnership registered under our automatically effective shelf
registration statement on Form S-3 filed in February 2022 will be, fully and
unconditionally guaranteed by us. At September 30, 2022, the Operating
Partnership had issued and outstanding its 2.625% senior notes. The obligations
of the Operating Partnership to pay principal, premiums, if any, and interest on
the 2.625% senior notes are fully and unconditionally guaranteed by us on a
senior basis. As a result of the amendments to SEC Rule 3-10 of Regulation S-X,
subsidiary issuers of obligations guaranteed by the parent are not required to
provide separate financial statements, provided that: (i) the subsidiary obligor
is consolidated into the parent company's consolidated financial statements;
(ii) the parent guarantee is "full and unconditional"; and (iii) subject to
certain exceptions as set forth below, the alternative disclosure required by
Rule 13-01 of Regulation S-X is provided, which includes narrative disclosure
and summarized financial information. We meet the conditions of this requirement
and thus, are not presenting separate financial statements. Furthermore, as
permitted under Rule 13-01(a)(4)(vi) of Regulation S-X, we have excluded the
summarized financial information for the Operating Partnership because the
assets, liabilities, and results of operations of the Operating Partnership are
not materially different than the corresponding in our consolidated financial
statements, and management believes such summarized financial information would
be repetitive and would not provide incremental value to investors.
PHILLIPS EDISON & COMPANY
SEPTEMBER 30, 2022 FORM 10-Q 34
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FINANCIAL LEVERAGE RATIOS-We believe our net debt to Adjusted EBITDAre, net debt
to total enterprise value, and debt covenant compliance as of September 30, 2022
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 September 30, 2022 and December 31,
2021 (in thousands):
September 30,
2022 December 31, 2021
Net debt:
Total debt, excluding discounts, market adjustments, and deferred
financing expenses $ 1,914,397 $ 1,941,504
Less: Cash and cash equivalents 5,249 93,109
Total net debt $ 1,909,148 $ 1,848,395
Enterprise value:
Net debt $ 1,909,148 $ 1,848,395
Total equity market capitalization(1)(2) 3,678,197 4,182,996
Total enterprise value $ 5,587,345 $ 6,031,391
(1)Total equity market capitalization is calculated as diluted shares multiplied
by the closing market price per share, which includes 131.1 million and 126.6
million diluted shares as of September 30, 2022 and December 31, 2021,
respectively, and the closing market price per share of $28.05 and $33.04 as of
September 30, 2022 and December 31, 2021, respectively.
(2)Fully diluted shares include common stock and OP units as of September 30,
2022 and Class B common stock, common stock, and OP units as of December 31,
2021.
The following table presents our calculation of net debt to Adjusted EBITDAre
and net debt to total enterprise value as of September 30, 2022 and December 31,
2021 (dollars in thousands):
September 30, 2022 December 31, 2021
Net debt to Adjusted EBITDAre - annualized:
Net debt $ 1,909,148 $ 1,848,395
Adjusted EBITDAre - annualized(1) 352,844 329,419
Net debt to Adjusted EBITDAre - annualized 5.4x 5.6x
Net debt to total enterprise value:
Net debt $ 1,909,148 $ 1,848,395
Total enterprise value 5,587,345 6,031,391
Net debt to total enterprise value 34.2% 30.6%
(1)Adjusted EBITDAre is based on a trailing twelve month period. See "Non-GAAP
Measures - EBITDAre and Adjusted EBITDAre" above for a reconciliation to Net
Income.
CAPITAL EXPENDITURES AND REDEVELOPMENT ACTIVITY-We make capital expenditures
during the course of normal operations, including maintenance capital
expenditures and tenant improvements, as well as value-enhancing anchor space
repositioning and redevelopment, ground-up outparcel development, and other
accretive projects.
PHILLIPS EDISON & COMPANY
SEPTEMBER 30, 2022 FORM 10-Q 35
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During the nine months ended September 30, 2022 and 2021, we had capital spend
of $74.3 million and $49.3 million, respectively. Below is a summary of our
capital spending activity, excluding leasing commissions, on a cash basis (in
thousands):
Nine Months Ended September 30,
2022 2021
Capital expenditures for real estate:
Capital improvements $ 12,426 $ 5,900
Tenant improvements 18,696 16,350
Redevelopment and development 37,443 24,312
Total capital expenditures for real estate 68,565 46,562
Corporate asset capital expenditures 2,757 1,429
Capitalized indirect costs(1) 3,026 1,324
Total capital spending activity $
74,348 $ 49,315
(1)Amount includes internal salaries and related benefits of personnel who work
directly on capital projects as well as capitalized interest expense.
We anticipate that obligations related to capital improvements, as well as
redevelopment and development, in 2022 can be met with cash flows from
operations, cash flows from dispositions, or borrowings on our unsecured
revolving credit facility.
Generally, we expect our development and redevelopment projects to stabilize
within 24 months. Our underwritten incremental unlevered yields on development
and redevelopment projects are expected to range between 10%-12%. Our current in
process projects represent an estimated total investment of $67.3 million.
Actual incremental unlevered yields may vary from our underwritten incremental
unlevered yield range based on the actual total cost to complete a project and
its actual incremental annual NOI at stabilization. See "Key Performance
Indicators and Defined Terms" above for further information.
ACQUISITION ACTIVITY-We are actively monitoring the commercial real estate
market for properties that have future growth potential, are located in
attractive demographic markets, and support our business objectives. We expect
to continue to make strategic acquisitions during the remainder of 2022. The
following table highlights our property acquisitions (dollars in thousands):
Nine Months Ended September 30,
2022 2021
Number of properties acquired 5
4
Number of outparcels acquired(1) 3
3
Contract price $ 228,842 $
88,451
Total price of acquisitions(2) 229,895
88,954
(1)Outparcels acquired are adjacent to shopping centers that we own.
(2)Total price of acquisitions includes closing costs and credits.
PHILLIPS EDISON & COMPANY
SEPTEMBER 30, 2022 FORM 10-Q 36
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DISPOSITION ACTIVITY-We continually evaluate 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. The following table highlights our property dispositions
(dollars in thousands):
Nine Months Ended September 30,
2022 2021
Number of properties sold(1) 3 20
Number of outparcels sold(2)(3) 3 3
Contract price $ 28,737 $ 188,252
Proceeds from sale of real estate, net(4) 27,286 180,340
Gain on sale of property, net(5) 4,151 33,121
(1)We retained an outparcel for one property sold during the nine months ended
September 30, 2021, and therefore the sale did not result in a reduction in our
total property count.
(2)During the nine months ended September 30, 2021, our outparcel sales
included: (i) the only remaining portion of one of our properties, which
resulted in a reduction in our total property count; and (ii) an undeveloped
parcel of land, as well as an outparcel adjacent to one of our centers, neither
of which resulted in a reduction in our total property count.
(3)In addition to the three outparcels sold during the nine months ended
September 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)Total proceeds from sale of real estate, net includes closing costs and
credits.
(5)During the nine months ended September 30, 2021, (Loss) Gain on Disposal of
Property, Net on the consolidated statements of operations includes
miscellaneous write-off activity, which is not included in gain on sale of
property, net, presented above.
DISTRIBUTIONS-We paid 2022 monthly distributions of $0.09 per share, or $1.08
annualized, for each month beginning January 2022 through August 2022. On August
31, 2022, our Board authorized an increase of 3.7% on the September 2022 and
October 2022 distributions to an amount of $0.0933 per share, or $1.12
annualized, which were paid on October 3, 2022 and November 1, 2022,
respectively. On November 2, 2022, our Board authorized a distribution for
November and December 2022, as well as January 2023, of $0.0933 per share to the
stockholders of record at the close of business on November 15, 2022, December
15, 2022, and January 17, 2023, respectively. OP unit holders will receive
distributions at the same rate as common stockholders, subject to certain
withholdings.
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 or loss as calculated in
accordance with GAAP). We generally will not be subject to U.S. federal income
tax on the income that we distribute to our stockholders each year due to
meeting the REIT qualification requirements. However, we may be subject to
certain state and local taxes on our income, property, or net worth and to
federal income and excise taxes on our undistributed income.
We have not established a minimum distribution level, and our charter does not
require that we make distributions to our stockholders.
PHILLIPS EDISON & COMPANY
SEPTEMBER 30, 2022 FORM 10-Q 37
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CASH FLOW ACTIVITIES-As of September 30, 2022, we had cash and cash equivalents
and restricted cash of $24.4 million, a net cash decrease of $91.1 million
during the nine months ended September 30, 2022.
Below is a summary of our cash flow activity (dollars in thousands):
Nine Months Ended September 30,
2022 2021 $ Change % Change(1)
Net cash provided by operating
activities $ 228,763 $ 198,313 $ 30,450 15.4 %
Net cash (used in) provided by
investing activities (276,275) 37,835 (314,110) NM
Net cash used in financing activities (43,571) (253,870) 210,299 82.8 %
(1)Line items that result in a percent change that exceed certain limitations
are considered not meaningful ("NM") and indicated as such.
OPERATING 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. The increase in
property operations was primarily due to a $13.2 million, or 5.1%, improvement
in same center NOI as compared to the same period in 2021, and the execution of
our acquisition strategy. During the nine months ended September 30, 2022, we
had a net cash inflow of $9.3 million from changes in working capital as
compared to a net cash inflow of $4.6 million during the same period in 2021.
This was primarily driven by higher real estate tax liabilities related to
acquisition activity, partially offset by higher performance-based compensation
payments in 2022.
•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
$9.3 million for the nine months ended September 30, 2022, an increase of $2.2
million as compared to the same period in 2021. The increase in fees and
management income was primarily due to our joint venture with NRP from which we
recognized income of $2.7 million related to NRP's achievement of certain
performance targets.
•Cash paid for interest-During the nine months ended September 30, 2022, we paid
$47.4 million for interest, a decrease of $6.1 million over the same period in
2021, primarily due to our debt repayments in 2021.
INVESTING ACTIVITIES-Our net cash (used in) provided by investing activities was
primarily impacted by the following:
•Real estate acquisitions-During the nine months ended September 30, 2022, our
acquisitions resulted in a total cash outlay of $229.9 million, as compared to a
total cash outlay of $89.0 million during the same period in 2021.
•Real estate dispositions-During the nine months ended September 30, 2022, our
dispositions resulted in a net cash inflow of $27.3 million, as compared to a
net cash inflow of $180.3 million during the same period in 2021.
•Capital expenditures-We invest capital into leasing our properties and
maintaining or improving the condition of our properties. During the nine months
ended September 30, 2022, we paid $74.3 million for capital expenditures, an
increase of $25.0 million over the same period in 2021, primarily due to an
increase in tenant improvements owing largely to our leasing volume during 2022
and 2021.
FINANCING ACTIVITIES-Our net cash used in financing activities was primarily
impacted by the following:
•Debt borrowings and payments-During the nine months ended September 30, 2022,
we had $25.6 million in net repayment of debt primarily as a result of early
repayments of mortgage loans, partially offset by our net borrowings under our
revolving credit facility. During the nine months ended September 30, 2021, we
had net payments of $597.4 million primarily as a result of: (i) a pay down in
July 2021 of a $375 million term loan set to mature in 2022 using proceeds from
our underwritten IPO; (ii) a partial pay down in August 2021 of a $150 million
term loan set to mature in 2023 utilizing cash on hand; and (iii) early
repayments of mortgage loans.
•Distributions to stockholders and OP unit holders-Cash used for distributions
to common stockholders and OP unit holders increased $20.0 million for the nine
months ended September 30, 2022 as compared to the same period in 2021,
primarily due to an increase in shares of common stock outstanding as a result
of our underwritten IPO.
•Issuance of common stock-During the nine months ended September 30, 2022, we
issued 2.6 million shares of our common stock under the ATM program for net
proceeds of $89.2 million, after approximately $0.9 million in commissions.
During the nine months ended September 30, 2021, we had net proceeds from the
issuance of common stock of $508.4 million from our underwritten IPO.
•Share repurchases-Cash outflows for share repurchases decreased by $77.8
million for the nine months ended September 30, 2022 as compared to the same
period in 2021, primarily as a result of a tender offer which was settled in
January 2021.
PHILLIPS EDISON & COMPANY
SEPTEMBER 30, 2022 FORM 10-Q 38
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CRITICAL ACCOUNTING ESTIMATES
"Part II, Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Critical Accounting Estimates" of our 2021 Annual
Report on Form 10-K, filed with the SEC on February 16, 2022, contains a
description of our critical accounting estimates, including those relating to
the valuation of real estate assets and rental income. There have been no
significant changes to our critical accounting policies during 2022.
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