UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019March 31, 2020
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 Jurisdictionother jurisdiction of Incorporationincorporation or Organization)organization)
| (I.R.S. Employer Identification No.) |
|
| |
11501 Northlake Drive Cincinnati, Ohio | 45249 |
(Address of Principal Executive Offices)principal executive offices) | (Zip Code) |
(513) 554-1110
(Registrant’s Telephone Number, Including Area Code)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 |
| None | | None | | None |
Indicate by check mark whether the Registrant: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 Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the Registrantregistrant 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 Registrantregistrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the Registrantregistrant 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 | þ | Smaller reporting company | ¨ |
| | | | |
| | | Emerging growth company | ¨ |
If an emerging growth company, indicate by check mark if the Registrantregistrant 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. ¨
Indicate by check mark whether the Registrantregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Securities registered pursuant to Section 12(b) of the Act:
|
| | | | |
Title of each class | | Trading Symbol | | Name of each exchange on which registered |
None | | None | | None |
As of AugustMay 1, 2019,2020, there were 283.5290.5 million outstanding shares of common stock of the Registrant.
PHILLIPS EDISON & COMPANY, INC.
FORM 10-Q
TABLE OF CONTENTS
|
|
w PART I FINANCIAL INFORMATION |
ITEM 1. FINANCIAL STATEMENTS
PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2019MARCH 31, 2020 AND DECEMBER 31, 20182019
(Unaudited)(Condensed and Unaudited)
(In thousands, except per share amounts)
| | | | June 30, 2019 | | December 31, 2018 | March 31, 2020 | | December 31, 2019 |
| ASSETS | | | | | | |
| Investment in real estate: | | | |
| | | |
|
| Land and improvements | $ | 1,595,005 |
| | $ | 1,598,063 |
| $ | 1,547,542 |
| | $ | 1,552,562 |
|
| Building and improvements | 3,241,923 |
| | 3,250,420 |
| 3,201,552 |
| | 3,196,762 |
|
| In-place lease assets | 460,994 |
| | 464,721 |
| 441,492 |
| | 442,729 |
|
| Above-market lease assets | 66,740 |
| | 67,140 |
| 65,946 |
| | 65,946 |
|
| Total investment in real estate assets | 5,364,662 |
| | 5,380,344 |
| 5,256,532 |
| | 5,257,999 |
|
| Accumulated depreciation and amortization | (667,037 | ) | | (565,507 | ) | (786,328 | ) | | (731,560 | ) |
| Net investment in real estate assets | 4,697,625 |
| | 4,814,837 |
| 4,470,204 |
| | 4,526,439 |
|
| Investment in unconsolidated joint ventures | 42,418 |
| | 45,651 |
| 41,904 |
| | 42,854 |
|
| Total investment in real estate assets, net | 4,740,043 |
| | 4,860,488 |
| 4,512,108 |
| | 4,569,293 |
|
| Cash and cash equivalents | 17,772 |
| | 16,791 |
| 36,532 |
| | 17,820 |
|
| Restricted cash | 34,784 |
| | 67,513 |
| 48,043 |
| | 77,288 |
|
| Accounts receivable – affiliates | 3,409 |
| | 5,125 |
| |
| Corporate intangible asset, net | 4,401 |
| | 14,054 |
| |
| Goodwill | 29,066 |
| | 29,066 |
| 29,066 |
| | 29,066 |
|
| Other assets, net | 131,101 |
| | 153,076 |
| 141,263 |
| | 128,690 |
|
| Real estate investment and other assets held for sale | 15,877 |
| | 17,364 |
| — |
| | 6,038 |
|
| Total assets | $ | 4,976,453 |
| | $ | 5,163,477 |
| $ | 4,767,012 |
| | $ | 4,828,195 |
|
| | | | | | | |
| LIABILITIES AND EQUITY | |
| | |
| |
| | |
|
| Liabilities: | |
| | |
| |
| | |
|
| Debt obligations, net | $ | 2,423,405 |
| | $ | 2,438,826 |
| $ | 2,356,401 |
| | $ | 2,354,099 |
|
| Below-market lease liabilities, net | 125,041 |
| | 131,559 |
| 108,998 |
| | 112,319 |
|
| Earn-out liability | 32,000 |
| | 39,500 |
| 22,000 |
| | 32,000 |
|
| Derivative liability | | 62,756 |
| | 20,974 |
|
| Deferred income | 14,899 |
| | 14,025 |
| 13,841 |
| | 15,955 |
|
| Accounts payable and other liabilities | 138,780 |
| | 126,074 |
| 109,210 |
| | 124,054 |
|
| Liabilities of real estate investment held for sale | 302 |
| | 596 |
| |
| Total liabilities | 2,734,427 |
| | 2,750,580 |
| 2,673,206 |
| | 2,659,401 |
|
| Commitments and contingencies (Note 10) | — |
| | — |
| |
| Commitments and contingencies (Note 8) | | — |
| | — |
|
| Equity: | |
| | |
| |
| | |
|
| Preferred stock, $0.01 par value per share, 10,000 shares authorized, zero shares issued | | | | |
| and outstanding at June 30, 2019 and December 31, 2018, respectively | — |
| | — |
| |
| Common stock, $0.01 par value per share, 1,000,000 shares authorized, 283,770 and 279,803 | | | | |
| shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively | 2,838 |
| | 2,798 |
| |
| Preferred stock, $0.01 par value per share, 10,000 shares authorized, zero shares issued and | | | | |
| outstanding at March 31, 2020 and December 31, 2019 | | — |
| | — |
|
| Common stock, $0.01 par value per share, 1,000,000 shares authorized, 290,416 and 289,047 | | | | |
| shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively | | 2,903 |
| | 2,890 |
|
| Additional paid-in capital | 2,718,871 |
| | 2,674,871 |
| 2,793,803 |
| | 2,779,130 |
|
| Accumulated other comprehensive (loss) income (“AOCI”) | (20,538 | ) | | 12,362 |
| |
| Accumulated other comprehensive loss (“AOCI”) | | (58,552 | ) | | (20,762 | ) |
| Accumulated deficit | (830,358 | ) | | (692,045 | ) | (986,292 | ) | | (947,252 | ) |
| Total stockholders’ equity | 1,870,813 |
| | 1,997,986 |
| 1,751,862 |
| | 1,814,006 |
|
| Noncontrolling interests | 371,213 |
| | 414,911 |
| 341,944 |
| | 354,788 |
|
| Total equity | 2,242,026 |
| | 2,412,897 |
| 2,093,806 |
| | 2,168,794 |
|
| Total liabilities and equity | $ | 4,976,453 |
| | $ | 5,163,477 |
| $ | 4,767,012 |
| | $ | 4,828,195 |
|
See notes to consolidated financial statements.
PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOMELOSS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2020 AND 2019 AND 2018
(Unaudited)(Condensed and Unaudited)
(In thousands, except per share amounts)
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
| | 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 |
| Revenues: | | | | | | | | | | |
| Rental income | $ | 129,030 |
| | $ | 94,410 |
| | $ | 257,890 |
| | $ | 188,296 |
| $ | 128,466 |
| | $ | 128,860 |
|
| Fees and management income | 3,051 |
| | 9,137 |
| | 6,312 |
| | 17,849 |
| 2,165 |
| | 3,261 |
|
| Other property income | 500 |
| | 626 |
| | 1,148 |
| | 1,227 |
| 892 |
| | 648 |
|
| Total revenues | 132,581 |
| | 104,173 |
| | 265,350 |
| | 207,372 |
| 131,523 |
| | 132,769 |
|
| Expenses: | |
| | |
| | | | | |
| Operating Expenses: | | | | |
| Property operating | 20,933 |
| | 16,901 |
| | 43,799 |
| | 35,016 |
| 21,762 |
| | 22,866 |
|
| Real estate taxes | 17,930 |
| | 13,326 |
| | 35,278 |
| | 26,473 |
| 17,112 |
| | 17,348 |
|
| General and administrative | 13,540 |
| | 13,450 |
| | 26,750 |
| | 23,911 |
| 10,740 |
| | 13,285 |
|
| Depreciation and amortization | 59,554 |
| | 46,385 |
| | 120,543 |
| | 92,812 |
| 56,227 |
| | 60,989 |
|
| Impairment of real estate assets | 25,199 |
|
| 10,939 |
|
| 38,916 |
|
| 10,939 |
| — |
| | 13,717 |
|
| Total expenses | 137,156 |
| | 101,001 |
| | 265,286 |
| | 189,151 |
| |
| Total operating expenses | | 105,841 |
| | 128,205 |
|
| Other: | |
| | |
| | | | | | | |
| Interest expense, net | (25,758 | ) | | (17,051 | ) | | (50,842 | ) | | (33,830 | ) | (22,775 | ) | | (25,009 | ) |
| (Loss) gain on disposal of property, net | (1,266 | ) | | 985 |
| | 5,855 |
| | 985 |
| (1,577 | ) | | 7,121 |
|
| Other impairment charges | (9,661 | ) |
| — |
| | (9,661 | ) | | — |
| |
| Other (expense) income, net | (912 | ) | | (1,182 | ) | | 6,624 |
| | (1,289 | ) | |
| Net loss | (42,172 | ) |
| (14,076 | ) |
| (47,960 | ) |
| (15,913 | ) | |
| Net loss attributable to noncontrolling interests | 5,602 |
| | 2,725 |
| | 6,195 |
| | 2,962 |
| |
| Net loss attributable to stockholders | $ | (36,570 | ) |
| $ | (11,351 | ) |
| $ | (41,765 | ) |
| $ | (12,951 | ) | |
| Other income, net | | 9,869 |
| | 7,536 |
|
| Net income (loss) | | 11,199 |
|
| (5,788 | ) |
| Net (income) loss attributable to noncontrolling interests | | (1,430 | ) | | 593 |
|
| Net income (loss) attributable to stockholders | | $ | 9,769 |
|
| $ | (5,195 | ) |
| Earnings per common share: | |
| | |
| | | | | | | |
| Net loss per share attributable to stockholders - basic and diluted (See Note 13) | $ | (0.13 | ) | | $ | (0.06 | ) | | $ | (0.15 | ) | | $ | (0.07 | ) | |
| Net income (loss) per share attributable to stockholders - basic and diluted (See Note 10) | | $ | 0.03 |
| | $ | (0.02 | ) |
| | | | | | | | | | | |
| Comprehensive (loss) income: | |
| | |
| | | | | |
| Net loss | $ | (42,172 | ) | | $ | (14,076 | ) | | $ | (47,960 | ) | | $ | (15,913 | ) | |
| Other comprehensive (loss) income: | |
| | |
| | | | | |
| Comprehensive loss: | | | | |
| Net income (loss) | | $ | 11,199 |
| | $ | (5,788 | ) |
| Other comprehensive loss: | | | | |
| Change in unrealized value on interest rate swaps | (23,645 | ) | | 4,855 |
| | (38,006 | ) | | 18,343 |
| (43,364 | ) | | (14,361 | ) |
| Comprehensive (loss) income | (65,817 | ) | | (9,221 | ) | | (85,966 | ) | | 2,430 |
| |
| Net loss attributable to noncontrolling interests | 5,602 |
| | 2,725 |
| | 6,195 |
| | 2,962 |
| |
| Comprehensive loss (income) attributable to noncontrolling interests | 3,168 |
| | 1,782 |
| | 5,106 |
| | (584 | ) | |
| Comprehensive (loss) income attributable to stockholders | $ | (57,047 | ) | | $ | (4,714 | ) | | $ | (74,665 | ) | | $ | 4,808 |
| |
| Comprehensive loss | | (32,165 | ) | | (20,149 | ) |
| Net (income) loss attributable to noncontrolling interests | | (1,430 | ) | | 593 |
|
| Other comprehensive loss attributable to noncontrolling interests | | 5,574 |
| | 1,938 |
|
| Comprehensive loss attributable to stockholders | | $ | (28,021 | ) | | $ | (17,618 | ) |
See notes to consolidated financial statements.
PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE MONTHS ENDED JUNE 30,MARCH 31, 2020 AND 2019 AND 2018
(Unaudited)(Condensed and Unaudited)
(In thousands, except per share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 and 2018 |
| | Common Stock | | Additional Paid-In Capital | | AOCI | | Accumulated Deficit | | Total Stockholders’ Equity | | Noncontrolling Interests | | Total Equity |
| | Shares | | Amount | | | | | | |
| Balance at April 1, 2018 | 186,027 |
| | $ | 1,860 |
| | $ | 1,638,176 |
| | $ | 27,381 |
| | $ | (634,164 | ) | | $ | 1,033,253 |
| | $ | 428,019 |
| | $ | 1,461,272 |
|
| Share repurchases | (3,830 | ) | | (38 | ) | | (42,099 | ) | | — |
| | — |
| | (42,137 | ) | | — |
| | (42,137 | ) |
| Dividend reinvestment plan (“DRIP”) | 1,102 |
| | 11 |
| | 12,124 |
| | — |
| | — |
| | 12,135 |
| | — |
| | 12,135 |
|
Change in unrealized value on interest rate swaps | — |
| | — |
| | — |
| | 3,912 |
| | — |
| | 3,912 |
| | 943 |
| | 4,855 |
|
Common distributions declared, $0.17 per share | — |
| | — |
| | — |
| | — |
| | (31,158 | ) | | (31,158 | ) | | — |
| | (31,158 | ) |
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7,308 | ) | | (7,308 | ) |
| Share-based compensation expense | 5 |
| | — |
| | 401 |
| | — |
| | — |
| | 401 |
| | 1,300 |
| | 1,701 |
|
| Other | — |
| | — |
| | (12 | ) | | — |
| | — |
| | (12 | ) | | — |
| | (12 | ) |
| Net loss | — |
| | — |
| | — |
| | — |
| | (11,351 | ) | | (11,351 | ) | | (2,725 | ) | | (14,076 | ) |
| Balance at June 30, 2018 | 183,304 |
| | $ | 1,833 |
| | $ | 1,608,590 |
| | $ | 31,293 |
| | $ | (676,673 | ) | | $ | 965,043 |
| | $ | 420,229 |
| | $ | 1,385,272 |
|
| | | | | | | | | | | | | | | | |
| Balance at April 1, 2019 | 281,549 |
| | $ | 2,815 |
| | $ | 2,693,946 |
| | $ | (61 | ) | | $ | (745,740 | ) | | $ | 1,950,960 |
| | $ | 398,225 |
| | $ | 2,349,185 |
|
| Share repurchases | (541 | ) | | (5 | ) | | (5,989 | ) | | — |
| | — |
| | (5,994 | ) | | — |
| | (5,994 | ) |
| DRIP | 1,558 |
| | 15 |
| | 17,225 |
| | — |
| | — |
| | 17,240 |
| | — |
| | 17,240 |
|
Change in unrealized value on interest
rate swaps | — |
| | — |
| | — |
| | (20,477 | ) | | — |
| | (20,477 | ) | | (3,168 | ) | | (23,645 | ) |
Common distributions declared, $0.17 per share | — |
| | — |
| | — |
| | — |
| | (48,048 | ) | | (48,048 | ) | | — |
| | (48,048 | ) |
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7,061 | ) | | (7,061 | ) |
| Share-based compensation expense | — |
| | — |
| | 630 |
| | — |
| | — |
| | 630 |
| | 1,891 |
| | 2,521 |
|
| Share-based awards vesting | 24 |
| | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Conversion of noncontrolling interests | 1,180 |
| | 12 |
| | 13,060 |
| | — |
| | — |
| | 13,072 |
| | (13,072 | ) | | — |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | (36,570 | ) | | (36,570 | ) | | (5,602 | ) | | (42,172 | ) |
| Balance at June 30, 2019 | 283,770 |
| | $ | 2,838 |
| | $ | 2,718,871 |
| | $ | (20,538 | ) | | $ | (830,358 | ) | | $ | 1,870,813 |
| | $ | 371,213 |
| | $ | 2,242,026 |
|
PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(Unaudited)
(In thousands, except per share amounts)
| | | | Six Months Ended June 30, 2019 and 2018 | Common Stock | | Additional Paid-In Capital | | AOCI | | Accumulated Deficit | | Total Stockholders’ Equity | | Noncontrolling Interests | | Total Equity |
| | Common Stock | | Additional Paid-In Capital | | AOCI | | Accumulated Deficit | | Total Stockholders’ Equity | | Noncontrolling Interests | | Total Equity | Shares | | Amount | |
| | Shares | | Amount | | |
| Balance at January 1, 2018 | 185,233 |
| | $ | 1,852 |
| | $ | 1,629,130 |
| | $ | 16,496 |
| | $ | (601,238 | ) | | $ | 1,046,240 |
| | $ | 432,442 |
| | $ | 1,478,682 |
| |
| Balance at January 1, 2019 | | 279,803 |
|
| $ | 2,798 |
|
| $ | 2,674,871 |
|
| $ | 12,362 |
|
| $ | (692,573 | ) | | $ | 1,997,458 |
| | $ | 414,911 |
| | $ | 2,412,369 |
|
| Dividend reinvestment plan (“DRIP”) | | 1,603 |
| | 16 |
| | 17,702 |
| | — |
| | — |
| | 17,718 |
| | — |
| | 17,718 |
|
| Share repurchases | (4,196 | ) | | (42 | ) | | (46,110 | ) | | — |
| | — |
| | (46,152 | ) | | — |
| | (46,152 | ) | (605 | ) | | (6 | ) | | (6,674 | ) | | — |
| | — |
| | (6,680 | ) | | — |
| | (6,680 | ) |
| DRIP | 2,262 |
| | 23 |
| | 24,876 |
| | — |
| | — |
| | 24,899 |
| | — |
| | 24,899 |
| |
Change in unrealized value on interest rate swaps | — |
| | — |
| | — |
| | 14,797 |
| | — |
| | 14,797 |
| | 3,546 |
| | 18,343 |
| — |
| | — |
| | — |
| | (12,423 | ) | | — |
| | (12,423 | ) | | (1,938 | ) | | (14,361 | ) |
Common distributions declared, $0.34 per share | — |
| | — |
| | — |
| | — |
| | (62,484 | ) | | (62,484 | ) | | — |
| | (62,484 | ) | |
Common distributions declared, $0.17 per share | | — |
| | — |
| | — |
| | — |
| | (47,972 | ) | | (47,972 | ) | | — |
| | (47,972 | ) |
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (14,097 | ) | | (14,097 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7,167 | ) | | (7,167 | ) |
| Share-based compensation expense | 5 |
| | — |
| | 719 |
| | — |
| | — |
| | 719 |
| | 1,300 |
| | 2,019 |
| |
| Other | — |
| | — |
| | (25 | ) | | — |
| | — |
| | (25 | ) | | — |
| | (25 | ) | |
| Net loss | — |
| | — |
| | — |
| | — |
| | (12,951 | ) | | (12,951 | ) | | (2,962 | ) | | (15,913 | ) | |
| Balance at June 30, 2018 | 183,304 |
| | $ | 1,833 |
| | $ | 1,608,590 |
| | $ | 31,293 |
| | $ | (676,673 | ) | | $ | 965,043 |
| | $ | 420,229 |
| | $ | 1,385,272 |
| |
| | | | | | | | | | | | | | | | | |
| Balance at December 31, 2018 | 279,803 |
| | $ | 2,798 |
| | $ | 2,674,871 |
| | $ | 12,362 |
| | $ | (692,045 | ) | | $ | 1,997,986 |
| | $ | 414,911 |
| | $ | 2,412,897 |
| |
Adoption of new accounting pronouncement (see Note 3) | — |
| | — |
| | — |
| | — |
| | (528 | ) | | (528 | ) | | — |
| | (528 | ) | |
| Balance at January 1, 2019 | 279,803 |
| | $ | 2,798 |
| | $ | 2,674,871 |
| | $ | 12,362 |
| | $ | (692,573 | ) | | $ | 1,997,458 |
| | $ | 414,911 |
| | $ | 2,412,369 |
| |
| Share repurchases | (1,146 | ) | | (11 | ) | | (12,663 | ) | | — |
| | — |
| | (12,674 | ) | | — |
| | (12,674 | ) | |
| DRIP | 3,161 |
| | 31 |
| | 34,927 |
| | — |
| | — |
| | 34,958 |
| | — |
| | 34,958 |
| |
Change in unrealized value on interest
rate swaps | — |
| | — |
| | — |
| | (32,900 | ) | | — |
| | (32,900 | ) | | (5,106 | ) | | (38,006 | ) | |
Common distributions declared, $0.34 per share | — |
| | — |
| | — |
| | — |
| | (96,020 | ) | | (96,020 | ) | | — |
| | (96,020 | ) | |
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (14,228 | ) | | (14,228 | ) | |
| Share-based compensation expense | — |
| | — |
| | 1,063 |
| | — |
| | — |
| | 1,063 |
| | 2,730 |
| | 3,793 |
| |
| Share-based awards vesting | 82 |
| | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| |
| Share-based awards retained for taxes | (18 | ) | | — |
| | (206 | ) | | — |
| | — |
| | (206 | ) | | — |
| | (206 | ) | |
| Share-based compensation | | 40 |
| | — |
| | 227 |
| | — |
| | — |
| | 227 |
| | 839 |
| | 1,066 |
|
| Conversion of noncontrolling interests | 1,888 |
| | 19 |
| | 20,880 |
| | — |
| | — |
| | 20,899 |
| | (20,899 | ) | | — |
| 708 |
| | 7 |
| | 7,820 |
| | — |
| | — |
| | 7,827 |
| | (7,827 | ) | | — |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | (41,765 | ) | | (41,765 | ) | | (6,195 | ) | | (47,960 | ) | — |
| | — |
| | — |
| | — |
| | (5,195 | ) | | (5,195 | ) | | (593 | ) | | (5,788 | ) |
| Balance at June 30, 2019 | 283,770 |
| | $ | 2,838 |
| | $ | 2,718,871 |
| | $ | (20,538 | ) | | $ | (830,358 | ) | | $ | 1,870,813 |
| | $ | 371,213 |
| | $ | 2,242,026 |
| |
| Balance at March 31, 2019 | | 281,549 |
| | $ | 2,815 |
| | $ | 2,693,946 |
| | $ | (61 | ) | | $ | (745,740 | ) | | $ | 1,950,960 |
| | $ | 398,225 |
| | $ | 2,349,185 |
|
| | | | | | | | | | | | | | | | | |
| 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 | | — |
| | — |
| | — |
| | (37,790 | ) | | — |
| | (37,790 | ) | | (5,574 | ) | | (43,364 | ) |
Common distributions declared, $0.17 per share | | — |
| | — |
| | — |
| | — |
| | (48,809 | ) | | (48,809 | ) | | — |
| | (48,809 | ) |
| Distributions to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7,105 | ) | | (7,105 | ) |
| Share-based compensation | | 103 |
| | 1 |
| | 140 |
| | — |
| | — |
| | 141 |
| | (290 | ) | | (149 | ) |
| Conversion of noncontrolling interests | | 118 |
| | 1 |
| | 1,304 |
| | — |
| | — |
| | 1,305 |
| | (1,305 | ) | | — |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | 9,769 |
| | 9,769 |
| | 1,430 |
| | 11,199 |
|
| Balance at March 31, 2020 | | 290,416 |
| | $ | 2,903 |
| | $ | 2,793,803 |
| | $ | (58,552 | ) | | $ | (986,292 | ) | | $ | 1,751,862 |
| | $ | 341,944 |
| | $ | 2,093,806 |
|
See notes to consolidated financial statements.
PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIXTHREE MONTHS ENDED JUNE 30,MARCH 31, 2020 AND 2019 AND 2018
(Unaudited)(Condensed and Unaudited)
|
| | | | | | | |
| | Six Months Ended June 30, |
| | 2019 | | 2018 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
| Net loss | $ | (47,960 | ) | | $ | (15,913 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | |
| | |
|
| Depreciation and amortization of real estate assets | 117,170 |
| | 84,216 |
|
| Impairment of real estate assets | 38,916 |
| | 10,939 |
|
| Depreciation and amortization of corporate assets | 3,373 |
| | 7,672 |
|
| Amortization of deferred financing expenses | 2,522 |
| | 2,401 |
|
| Net amortization of above- and below-market leases | (2,224 | ) | | (1,990 | ) |
| Gain on disposal of property, net | (5,855 | ) | | (877 | ) |
| Change in fair value of earn-out liability | (7,500 | ) | | 1,500 |
|
| Straight-line rent | (4,456 | ) | | (2,471 | ) |
| Share-based compensation expense | 3,793 |
| | 1,994 |
|
| Equity in net loss of unconsolidated joint ventures | 976 |
| | — |
|
| Other impairment charges | 9,661 |
| | — |
|
| Other | 5,211 |
| | 229 |
|
| Changes in operating assets and liabilities: | |
| | |
|
| Other assets, net | (1,553 | ) | | (702 | ) |
| Accounts payable and other liabilities | (12,005 | ) | | (9,186 | ) |
| Net cash provided by operating activities | 100,069 |
|
| 77,812 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | |
|
| Real estate acquisitions | (49,880 | ) | | (9,222 | ) |
| Capital expenditures | (27,221 | ) | | (17,346 | ) |
| Proceeds from sale of real estate | 47,857 |
| | 13,300 |
|
| Return of investment in unconsolidated joint ventures | 2,257 |
| | — |
|
| Net cash used in investing activities | (26,987 | ) | | (13,268 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | |
|
| Net change in credit facility | (73,359 | ) | | (15,000 | ) |
| Proceeds from mortgages and loans payable | 60,000 |
| | 65,000 |
|
| Payments on outstanding indebtedness | (4,835 | ) | | (20,542 | ) |
| Distributions paid, net of DRIP | (60,787 | ) | | (37,819 | ) |
| Distributions to noncontrolling interests | (13,841 | ) | | (14,096 | ) |
| Repurchases of common stock | (11,802 | ) | | (44,494 | ) |
| Other | (206 | ) | | — |
|
| Net cash used in financing activities | (104,830 | ) | | (66,951 | ) |
| NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | (31,748 | ) | | (2,407 | ) |
| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH: | |
| | |
|
| Beginning of period | 84,304 |
| | 27,445 |
|
| End of period | $ | 52,556 |
| | $ | 25,038 |
|
| | | | |
| RECONCILIATION TO CONSOLIDATED BALANCE SHEETS | | | |
| Cash and cash equivalents | $ | 17,772 |
| | $ | 8,310 |
|
| Restricted cash | 34,784 |
| | 16,728 |
|
| Cash, cash equivalents, and restricted cash at end of period | $ | 52,556 |
| | $ | 25,038 |
|
|
| | | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
| Net income (loss) | $ | 11,199 |
| | $ | (5,788 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| | |
|
| Depreciation and amortization of real estate assets | 54,817 |
| | 59,342 |
|
| Impairment of real estate assets | — |
| | 13,717 |
|
| Depreciation and amortization of corporate assets | 1,410 |
| | 1,647 |
|
| Net amortization of above- and below-market leases | (788 | ) | | (1,133 | ) |
| Amortization of deferred financing expenses | 1,251 |
| | 1,297 |
|
| Amortization of debt and derivative adjustments | 1,061 |
| | 2,227 |
|
| Loss (gain) on disposal of property, net | 1,577 |
| | (7,121 | ) |
| Change in fair value of earn-out liability | (10,000 | ) | | (7,500 | ) |
| Straight-line rent | (2,288 | ) | | (1,713 | ) |
| Share-based compensation | (149 | ) | | 1,272 |
|
| Other | 707 |
| | 995 |
|
| Changes in operating assets and liabilities: | |
| | |
|
| Other assets, net | (14,871 | ) | | 1,923 |
|
| Accounts payable and other liabilities | (8,313 | ) | | (17,921 | ) |
| Net cash provided by operating activities | 35,613 |
|
| 41,244 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | |
|
| Real estate acquisitions | (4,319 | ) | | — |
|
| Capital expenditures | (15,965 | ) | | (8,574 | ) |
| Proceeds from sale of real estate | 17,447 |
| | 35,755 |
|
| Return of investment in unconsolidated joint ventures | 424 |
| | 1,197 |
|
| Net cash (used in) provided by investing activities | (2,413 | ) | | 28,378 |
|
| CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | |
|
| Net change in credit facility | 34,000 |
| | (22,000 | ) |
| Payments on mortgages and loans payable | (32,657 | ) | | (2,428 | ) |
| Distributions paid, net of DRIP | (32,792 | ) | | (30,132 | ) |
| Distributions to noncontrolling interests | (7,108 | ) | | (6,958 | ) |
| Repurchases of common stock | (5,176 | ) | | (5,444 | ) |
| Other | — |
| | (206 | ) |
| Net cash used in financing activities | (43,733 | ) | | (67,168 | ) |
| NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | (10,533 | ) | | 2,454 |
|
| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH: | |
| | |
|
| Beginning of period | 95,108 |
| | 84,304 |
|
| End of period | $ | 84,575 |
| | $ | 86,758 |
|
| | | | |
| RECONCILIATION TO CONSOLIDATED BALANCE SHEETS: | | | |
| Cash and cash equivalents | $ | 36,532 |
| | $ | 12,684 |
|
| Restricted cash | 48,043 |
| | 74,074 |
|
| Cash, cash equivalents, and restricted cash at end of period | $ | 84,575 |
| | $ | 86,758 |
|
PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIXTHREE MONTHS ENDED JUNE 30,MARCH 31, 2020 AND 2019 AND 2018
(Unaudited)
| | | | 2019 | | 2018 | 2020 | | 2019 |
| 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 | $ | 44,169 |
| | $ | 32,422 |
| $ | 20,329 |
| | $ | 21,679 |
|
| Right-of-use (“ROU”) assets obtained in exchange for new lease liabilities | | 551 |
| | 36 |
|
| Accrued capital expenditures | 2,960 |
| | 2,428 |
| 3,392 |
| | 2,095 |
|
| Change in distributions payable | 275 |
| | (235 | ) | 77 |
| | 122 |
|
| Change in distributions payable - noncontrolling interests | 387 |
| | 2 |
| (3 | ) | | 209 |
|
| Change in accrued share repurchase obligation | 872 |
| | 1,658 |
| (2,476 | ) | | 1,236 |
|
| Distributions reinvested | 34,958 |
| | 24,899 |
| 15,940 |
| | 17,718 |
|
See notes to consolidated financial statements.
Phillips Edison & Company, Inc.
Notes to Consolidated Financial Statements
(Unaudited)(Condensed and Unaudited)
Phillips Edison & Company, Inc. (“we,” the “Company,” “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, is the sole general partner of the Operating Partnership.
We investare a real estate investment trust (“REIT”) that invests primarily in well-occupied, 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 properties,shopping centers, our third-party investment management business provides comprehensive real estate and asset management services to (i) Phillips Edison Grocery Center REIT III, Inc. (“PECO III”), a non-traded publicly registered REIT; (ii) three institutional joint ventures;ventures, in which we have a partial ownership interest, and (iii) one private fund (collectively, the “Managed Funds”).
In November 2018,As of March 31, 2020, we completed a merger (the “Merger”) with Phillips Edison Grocery Center REIT II, Inc. (“REIT II”), a
public non-traded REIT that was advised and managed by us, in a 100% stock-for-stock transaction valued at approximately
$1.9 billion. As a result of the Merger,wholly-owned 285 real estate properties. Additionally, we acquired 86 properties andowned a 20% equity interest in Necessity Retail Partners (“NRP” or the “NRP joint venture”), a joint venture that owned 13 properties. Forseven properties; a more detailed discussion, see Note 4.
In November 2018, through our direct or indirect subsidiaries, we entered into a joint venture with The Northwestern
Mutual Life Insurance Company (“Northwestern Mutual”). At formation, we contributed or sold 17 grocery-anchored shopping centers with a fair value of approximately $359 million to the new joint venture,15% interest in Grocery Retail Partners I LLC (“GRP I” or the “GRP I), a joint venture”). GRP I also assumedventure that owned 17 properties; and a portfolio loan from us as part of this transaction. In exchange, we received a 15% ownership10% interest in Grocery Retail Partners II LLC (“GRP I and cash of $161.8 million. ForII”), a more detailed discussion, see Note 6.
As of June 30, 2019, we wholly-owned fee simple interests in 298 real estatejoint venture that owned three properties. In addition, we owned a 20% equity interest in NRP and a 15% interest in GRP I, as described previously.
|
|
| 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 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, recoverable amounts of receivables, and other fair value measurement assessments required for the preparation of the consolidated financial statements. As a result, these estimates are subject to a degree of uncertainty.
Other than those noted below, thereDuring the first quarter of 2020, a novel coronavirus (“COVID-19”) began spreading globally, with the outbreak being classified as a pandemic by the World Health Organization on March 11, 2020. Because of the adverse economic conditions that exist as a result of the 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 significantly. Specifically as it relates to our business, the current economic situation has resulted in temporary tenant closures at our shopping centers, often as a result of “stay-at-home” government mandates which limit travel and movement of the general public to essential activities only and require all non-essential businesses to close. These mandates could result in increased permanent retail store closings nationally if the duration of the closures is prolonged. This 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 collectability of revenue and valuation of real estate assets, goodwill and other intangible assets, and certain liabilities, among others.
There were no changes to our significant accounting policies during the sixthree months ended June 30, 2019.March 31, 2020. For a full summary of our accounting policies, refer to our 20182019 Annual Report on Form 10-K filed with the SEC on March 13, 2019.11, 2020.
Basis of Presentation and Principles of Consolidation—The accompanying 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, 2018,2019, which are included in our 20182019 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 six months ended June 30, 2019,March 31, 2020 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.
Leases—We are party to a number of lease agreements, both as a lessor as well as a lessee of various types of assets.
Lessor—The majority of our revenue is lease revenue derived from our real estate assets, which is accounted for under Accounting Standards Codification (“ASC”) Topic 842, Leases (“ASC 842”). We adopted the accounting guidance contained within ASC 842 on January 1, 2019, the effective date of the standard for public companies. We record lease and lease-related revenue as Rental Income on the consolidated statements of operations and comprehensive (loss) income, also referred to herein as our “consolidated statements of operations”, in accordance with ASC 842.
We enter into leases primarily as a lessor as part of our real estate operations, and leases represent the majority of our revenue. We lease space in our properties generally in the form of operating leases. Our leases typically provide for reimbursements from tenants for common area maintenance, insurance, and real estate tax expenses. Common area maintenance reimbursements can be fixed, with revenue earned on a straight-line basis over the term of the lease, or variable, with revenue recognized as services are performed for which we will be reimbursed.
The terms and expirations of our operating leases with our tenants are generally similar. The majority of leases for inline (non-anchor) tenants have terms that range from 2 to 10 years, and the majority of leases for anchor tenants range from 3 to 13 years. In both cases, the full term of the lease prior to our acquisition or assumption of the lease will generally be longer, however, we are measuring the commencement date for these purposes as being the date that we acquired or assumed the lease, excluding option periods.
The lease agreements frequently contain fixed-price renewal options to extend the terms of leases and other terms and conditions as negotiated. In calculating the term of our leases, we consider whether these options are reasonably certain to be exercised. Our determination involves a combination of contract-, asset-, entity-, and market-based factors and involves considerable judgment. We retain substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Currently, our tenants have no options to purchase at the end of the lease term, although in a small number of leases, a tenant, usually the anchor tenant, may have the right of first refusal to purchase one of our properties if we elect to sell the center.
Beginning January 1, 2019, we evaluate whether a lease is an operating, sales-type, or direct financing lease using the criteria established in ASC 842. Leases will be considered either sales-type or direct financing leases if any of the following criteria are met:
if the lease transfers ownership of the underlying asset to the lessee by the end of the term;
if the lease grants the lessee an option to purchase the underlying asset that is reasonably certain to be exercised;
if the lease term is for the major part of the remaining economic life of the underlying asset; or
if the present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset.
We utilize substantial judgment in determining the fair value of the leased asset, the economic life of the leased asset, and the relevant borrowing rate in performing our lease classification analysis. If none of the criteria listed above are met, the lease is classified as an operating lease. Currently all of our leases are classified as operating leases, and we expect that the majority, if not all, of our leases will continue to be classified as operating leases based upon our typical lease terms.
We commence revenue recognition on our leases based on a number of factors. In most cases, revenue recognition under a lease begins when the lessee takes possession of or controls the physical use of the leased asset. The determination of when revenue recognition under a lease begins, as well as the nature of the leased asset, is dependent upon our assessment of who is the owner, for accounting purposes, of any related tenant improvements. If we are the owner, for accounting purposes, of the tenant improvements, then the leased asset is the finished space, and revenue recognition begins when the lessee takes possession of the finished space, typically when the improvements are substantially complete.
If we conclude that we are not the owner, for accounting purposes, of the tenant improvements (i.e., the lessee is the owner), then the leased asset is the unimproved space and any tenant allowances funded under the lease are treated as lease incentives, which reduce revenue recognized over the term of the lease. In these circumstances, we begin revenue recognition when the lessee takes possession of the unimproved space to construct their own improvements. We consider a number of different factors in evaluating whether the lessee or we are the owner of the tenant improvements for accounting purposes. These factors include:
whether the lease stipulates how and on what a tenant improvement allowance may be spent;
whether the tenant or landlord retains legal title to the improvements;
the uniqueness of the improvements;
the expected economic life of the tenant improvements relative to the length of the lease; and
who constructs or directs the construction of the improvements.
The majority of our leases provide for fixed rental escalations, and we recognize rental income on a straight-line basis over the term of each lease in such instances. The difference between rental income earned on a straight-line basis and the cash rent due under the provisions of the lease agreements is recorded as deferred rent receivable and is included as a component of Other Assets, Net. Due to the impact of the straight-line adjustments, rental income generally will be greater than the cash collected in the early years and will be less than the cash collected in the later years of a lease.
Reimbursements from tenants for recoverable real estate taxes and operating expenses that are fixed per the terms of the applicable lease agreements are recorded on a straight-line basis, as described above. The majority of our lease agreements with tenants, however, provide for tenant reimbursements that are variable depending upon the applicable expenses incurred. These reimbursements are accrued as revenue in the period in which the applicable expenses are incurred. We make certain assumptions and judgments in estimating the reimbursements at the end of each reporting period. We do not expect the actual results to materially differ from the estimated reimbursements. Both fixed and variable tenant reimbursements are recorded as Rental Income in the consolidated statements of operations. In certain cases, the lease agreement may stipulate that a tenant make a direct payment for real estate taxes to the relevant taxing authorities. In these cases, beginning on January 1, 2019, we no longer record any revenue or expense related to these tenant expenditures. Although we expect such cases to be rare, in the event that a direct-paying tenant failed to make their required payment to the taxing authorities, we would potentially be liable for such amounts, although they are not recorded as a liability in our consolidated balance sheets per the requirements of ASC 842. We have made a policy election to exclude amounts collected from customers for all sales tax and other similar taxes from the transaction price in our recognition of lease revenue.
Additionally, we record an immaterial amount of variable revenue in the form of percentage rental income. Our policy for percentage rental income is to defer recognition of contingent rental income until the specified target (i.e., breakpoint) that triggers the contingent rental income is achieved.
In some instances, as part of our negotiations, we may offer lease incentives to our tenants. These incentives usually take the form of payments made to or on behalf of the tenant, and such incentives will be deducted from the lease payment and recorded on a straight-line basis over the term of the new lease.
We record lease termination income if there is a signed termination agreement, all of the conditions of the agreement have been met, collectability is reasonably assured and the tenant is no longer occupying the property. Upon early lease termination, we provide for losses related to unrecovered tenant-specific intangibles and other assets. We record lease termination income as Rental Income in the consolidated statements of operations.
Historically, we periodically reviewed the collectability of outstanding receivables. Following the adoption of ASC 842, as of January 1, 2019, lease receivables are reviewed continually to determine whether or not it is likely that we will realize all amounts receivable for each 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 reduction of revenue is recorded, except in the case of disputed charges. If we determine that the 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. Under ASC 842, the aforementioned adjustments as well as any reserve for disputed charges are recorded as a reduction of Rental Income rather than in Property Operating, where our reserves were previously recorded, on the consolidated statements of operations.
Lessee—We enter into leases as a lessee as part of our real estate operations in the form of ground leases of land for certain properties, and as part of our corporate operations in the form of office space and office equipment leases. Ground leases typically have initial terms of 15-40 years with one or more options to renew for additional terms of 3-5 years, and may include options that grant us, as the lessee, the right to terminate the lease, without penalty, in advance of the full lease term. Our office space leases generally have terms of less than ten years with no renewal options. Office equipment leases typically have terms ranging from 3-5 years with options to extend the term for a year or less, but contain minimal termination rights. In calculating the term of our leases, we consider whether we are reasonably certain to exercise renewal and/or termination options. Our determination involves a combination of contract-, asset-, entity-, and market-based factors and involves considerable judgment.
Currently, neither our operating leases nor our finance leases have residual value guarantees or other restrictions or covenants, but a small number may contain nonlease components which have been deemed not material. Beginning January 1, 2019, we evaluate whether a lease is a finance or operating lease using the criteria established in ASC 842. The criteria we use to determine whether a lease is a finance lease are the same as those we use to determine whether a lease is sales-type lease as a lessor. If none of the finance lease criteria is met, we classify the lease as an operating lease.
We record right-of-use (“ROU”) assets and liabilities in the consolidated balance sheets based upon the terms and conditions of the applicable lease agreement. We use discount rates to calculate the present value of lease payments when determining lease classification and measuring our lease liability. We use the rate implicit in the lease as our discount rate unless that rate cannot be readily determined, in which case we consider various factors to select an appropriate discount rate. This requires the application of judgment, and we consider the length of the lease as well as the length and securitization of our outstanding debt agreements in selecting an appropriate rate. Refer to Note 3 for further detail.
Revenue Recognition—In addition to our lease-related revenue, we also earn fee revenues by providing services to the Managed Funds. These fees are accounted for within the scope of ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), and are recorded as Fees and Management Income on the consolidated statements of operations. We provide services to the Managed Funds, all of which are considered related parties. These services primarily include asset acquisition and disposition services, asset management, operating and leasing of properties, construction management, and other general and administrative responsibilities. These services are currently provided under various combinations of advisory agreements, property management agreements, and other service agreements (the “Management Agreements”). The wide variety of duties within the Management Agreements makes determining the performance obligations within the contracts a matter of judgment. We have concluded that each of the separately disclosed fee types in the below table represents a separate performance obligation within the Management Agreements.
The table below shows the most significant of these fee types in the Management Agreements: |
| | | | | | |
Fee | | Performance Obligation Satisfied | | Form and Timing of Payment | | Description |
Asset Management | | Over time | | In cash and/or ownership units, monthly | | Because each increment of service is distinct, although substantially the same, revenue is recognized at the end of each reporting period based upon asset base and the applicable rate. |
Property Management | | Over time | | In cash, monthly | | Because each increment of service is distinct, although substantially the same, revenue is recognized at the end of each month based on a percentage of the properties’ cash receipts. |
Leasing Commissions | | Point in time (upon close of a transaction) | | In cash, upon completion | | Revenue is recognized in an amount equal to the fees charged by unaffiliated persons rendering comparable services in the same geographic location. |
Construction Management | | Point in time (upon close of a project) | | In cash, upon completion | | Revenue is recognized in an amount equal to the fees charged by unaffiliated persons rendering comparable services in the same geographic location. |
Acquisition/Disposition | | Point in time (upon close of a transaction) | | In cash, upon close of the transaction | | Revenue is recognized based on a percentage of the purchase price or disposition price of the property acquired or sold. |
Due to the nature of the services being provided under our Management Agreements, each performance obligation has a variable component. Therefore, when we determine the transaction price for the contracts, we are required to constrain our estimate to an amount that is not probable of significant revenue reversal. For most of these fee types, such as acquisition fees and leasing commissions, compensation only occurs if a transaction takes place and the amount of compensation is dependent upon the terms of the transaction. For our property and asset management fees, due to the large number and broad range of possible consideration amounts, we calculate the amount earned at the end of each month.
In addition to the fees listed above, certain of our Management Agreements include the potential for additional revenues if certain market conditions are in place or certain events take place. We have not recognized revenue related to these fees, nor will we until it is no longer highly probable that there would be a material reversal of revenue.
Additionally, effective January 1, 2018, sales or transfers to non-customers of non-financial assets or in substance non-financial assets that do not meet the definition of a business are accounted for within the scope of ASC Topic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (“ASC 610-20”). Generally, our sales of real estate would be considered a sale of a non-financial asset as defined by ASC 610-20. Under ASC 610-20, if we determine we do not have a controlling financial interest in the entity that holds the asset and the arrangement meets the criteria to be accounted for as a contract, we would de-recognize the asset and recognize a gain or loss on the sale of the real estate when control of the underlying asset transfers to the buyer. Further, we may defer a tax gain through an Internal Revenue Code (the “Code”) Section 1031 like-kind exchange by purchasing another property within a specified time period. For additional information regarding gain on sale of assets, refer to Note 5.
Income Taxes—Our consolidated financial statements include the operations of wholly owned subsidiaries that have jointly elected to be treated as Taxable REIT Subsidiaries (“TRS”) and are subject to U.S. federal, state, and local income taxes at regular corporate tax rates. During the three and six months ended June 30, 2019 and 2018, noMarch 31, 2020, an immaterial amount of federal income tax expense or benefit was reported, and we recorded a full valuation allowance for our net deferred tax asset. We recorded no income tax expense or benefit for the three months ended March 31, 2019. We recognized an immaterial amount of state and local income tax expense for the three months ended March 31, 2020 and 2019, which is included in Other (Expense) Income, Net on the consolidated statements of operations.operations and comprehensive loss (“consolidated statements of operations”).
Recently Issued and Newly Adopted Accounting Pronouncements—The following table provides a brief description of recentnewly adopted accounting pronouncements that could have a materialand their effect on our consolidated financial statements: |
| | | | | | |
| Standard | | Description | | Date of Adoption | | Effect on the Consolidated 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 replacereplaced 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 clarifiesclarified 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 shouldwill be accounted for in accordance with ASCTopic 842. It also allowsallowed election of the fair value option on certain financial instruments. This update is effective for public entities in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted after December 15, 2018. | | January 1, 2020 | | We are currently evaluating the impact theThe adoption of this standard willdid not have a material impact on our consolidated financial statements. The majority of our financial instruments result from operating leasinglease transactions, which are not within the scope of this standard. |
ASU 2018-13, Fair Value Measurement (Topic 820) | | This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of the Financial Accounting Standards Board’s disclosure framework project. It is effective for annual and interim reporting periods beginning after December 15, 2019, but early adoption is permitted. | | January 1, 2020 | | We are currently evaluating the impact the adoption of this standard will have on our consolidated financial statements, which is expected to only impact fair value measurement disclosures. |
| ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities | | This ASU amendsamended two aspects of the related-party guidance in ASCTopic 810: (1) addsadded 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 shouldwill be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. For entities other than private companies, the amendments in this update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. All entities are required to apply the amendments in this update retrospectively with a cumulative effect adjustment to retained earnings at the beginning of the earliest period presented. Early adoption is permitted. | | January 1, 2020 | | We are currently evaluating the impact theThe adoption of this standard willdid 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 amendsamended 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. The amendment is effective for fiscal years beginning after December 15, 2019, but early adoption is permitted. | | January 1, 2020 | | We are currently evaluating the impact the adoption of this standard will have on our consolidated financial statements. |
The following table provides a brief description of newly adopted accounting pronouncements and their effect on our consolidated financial statements: |
| | | | | | |
Standard | | Description | | Date of Adoption | | Effect on the Financial Statements or Other Significant Matters |
ASU 2016-02, Leases (Topic 842)
ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842
ASU 2018-10, Codification Improvements to Topic 842, Leases
ASU 2018-11, Leases (Topic 842): Targeted Improvements
ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors
ASU 2019-01, Leases (Topic 842): Codification Improvements
| | These updates amended existing guidance by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.
| | January 1, 2019 | | We adopted this standard on January 1, 2019 and a modified retrospective transition approach was required. We determined that the adoption had a material impact on our consolidated financial statements; please refer to Note 3 for additional details.
We elected to utilize the following optional practical expedients upon adoption:
- Package of practical expedients which permits us not to reassess our prior conclusions about lease identification, lease classification, and initial direct costs.
- Practical expedient permitting us not to assess whether existing, expired, or current land easements either are or contain a lease.
- Practical expedient which permits us as a lessor not to separate non-lease components, such as common area maintenance reimbursements, from the associated lease component, provided that the timing and pattern of transfer of the services are substantially the same. Because of our decision to elect this practical expedient, we will no longer present our Rental Income and Tenant Recovery Income amounts separately on our consolidated statements of operations, and have reclassified Tenant Recovery Income amounts to Rental Income for all periods presented on the consolidated statements of operations.
- Practical expedient which permits us not to record a right of use asset or lease liability related to leases of twelve months or fewer, but instead allows us to record expense related to any such leases as it is incurred.
|
ASU 2018-07, Compensation - Stock Compensation
(Topic 718):
Improvements to Non-employee Share-Based Payment Accounting
| | The amendments in this update expanded the scope of Topic 718: Compensation - Stock Compensation to include share-base payment transactions for acquiring goods and services from non-employees, except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period).
| | January 1, 2019 | | The adoption of this standard did not have a material impact on our consolidated financial statements.
|
ASU 2018-16, Derivatives and Hedging2020-04, Reference Rate Reform (Topic 815)848): InclusionFacilitation of the Secured Overnight FinancingEffects of Reference Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting PurposesReform on Financial Reporting | | This update permitted useASU 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 OIS rate based onguidance and may apply other elections as applicable as additional changes in the SOFR as a US benchmark interest rate for hedge accounting purposes under Topic 815. The purpose of this was to facilitate the LIBOR to SOFR transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk management and hedge accounting purposes. | | January 1, 2019 | | The adoption of this standard did not have a material impact on our consolidated financial statements.
market occur. |
In response to the COVID-19 pandemic, the FASB issued interpretive guidance addressing the accounting treatment of lease concessions stemming from the pandemic. Under this guidance, entities may make an election to account for lease concessions granted in conjunction with the pandemic consistent with how those concessions would be accounted for under ASC Topic 842, Leases (“ASC 842”) if those enforceable rights and obligations for those concessions already existed within the lease agreement. This accounting treatment may be applied regardless of whether enforceable rights and obligations for those concessions are explicitly outlined within the lease. 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. We will continue to assess the potential impact of this accounting treatment. As of May 11, 2020, we had not yet made any such concessions.
Reclassifications—The following line itemsitem on our consolidated statementsbalance sheets as of operations for the three and six months ended June 30, 2018, wereDecember 31, 2019 was reclassified to conform to current year presentation:
Tenant RecoveryCorporate Intangible Assets, Net was combined with Rental Income, and
included in Other Expense, Net previously included activity from property disposals, and this is now presented as (Loss) Gain on Disposal of Property,Assets, Net.
The following line items on our consolidated statements of cash flows for the sixthree months ended June 30, 2018,March 31, 2019 were reclassified to conform to current year presentation:
Accounts Receivable - AffiliatesAmortization of Debt and Derivative Adjustments was listed on a separate line from Other Cash Flows from Operating Activities; and
Equity in Net Loss of Unconsolidated Joint Ventures was combined with Other Assets, Net;
Accounts Payable - Affiliates was combined with Accounts Payable and Other Liabilities; and
Net Loss on Write-off of Unamortized Capitalized Leasing Commissions, Market Debt Adjustments, and
Deferred Financing Expenses were reclassified to Other.Cash Flows from Operating Activities.
Standard Adoption—Effective January 1, 2019, we adopted ASU 2016-02, Leases. This standard was adopted in conjunction with the related updates, ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; ASU 2018-11, Leases (Topic 842): Targeted Improvements; and ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors, collectively “ASC 842,” using a modified-retrospective approach, as required. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.
The adoption of ASC 842 resulted in a $0.5 million adjustment to the current year’s opening balance in Accumulated Deficit on the consolidated balance sheets as a result of recognizing ROU assets and lease liabilities as well as adjustments to our collectability reserve. Beginning in January 1, 2019, due to the new standard’s narrowed definition of initial direct costs, we now expense significant lease origination costs as incurred, which were previously capitalized as initial direct costs and amortized to expense over the lease term. We capitalized $6.2 million of internal costs for the year ended December 31, 2018, some of which we will continue to capitalize in accordance with the standard. During the six months ended June 30, 2019, the amounts capitalized were $1.9 million, compared to $2.9 million during the six months ended June 30, 2018. Amounts that were capitalized prior to the adoption of ASC 842 will continue to be amortized over their remaining lives.
Additionally, ASC 842 requires that lessors exclude from variable payments all costs paid by a lessee directly to a third party. For the year ended December 31, 2018, $8.0 million in real estate tax payments made by tenants directly to third parties was recorded by us as both Tenant Recovery Income and Real Estate Taxes. This amount was approximately $1.3 million and $2.7 million for the three and six months ended June 30, 2018, respectively. Beginning January 1, 2019, such amounts are no longer recognized by us. As the recorded expense was completely offset by the tenant recovery income recorded, this has no net impact to earnings.
Beginning January 1, 2019, operating lease receivables are accounted for under ASC 842, which requires us to recognize changes in the collectability assessment for an operating lease as an adjustment to lease income. For the year ended December 31, 2018, $2.9 million of expense was recorded as Property Operating on our consolidated statements of operations, which would have been recorded as a reduction to Rental Income under the new standard. For the three and six months ended June 30, 2019, the total amount recorded as a reduction to Rental Income as a result of collectability reserves was $0.1 million and $0.7 million, respectively.
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 months ended March 31, 2020 and 2019 (dollars in thousands): |
| | | | | | | |
| | March 31, 2020 | | March 31, 2019 |
| Rental income related to fixed lease payments | $ | 98,335 |
| | $ | 97,586 |
|
| Rental income related to variable lease payments | 31,838 |
| | 30,527 |
|
Other(1) | (1,707 | ) | | 747 |
|
| Total rental income | $ | 128,466 |
| | $ | 128,860 |
|
| |
(1) | Amounts consist of amortization of above- and below-market lease intangibles, lease inducements, revenue adjustments related to changes in collectability, settlement income, and lease buyout income. |
Approximate future fixed contractual lease payments to be received under non-cancelable operating leases in effect as of June 30, 2019,March 31, 2020, assuming no new or renegotiated leases or option extensions on lease agreements, are as follows (in thousands): | | | Year | Amount | Amount |
| Remaining 2019 | $ | 191,571 |
| |
| 2020 | 360,997 |
| |
| Remaining 2020 | | $ | 281,778 |
|
| 2021 | 316,521 |
| 341,849 |
|
| 2022 | 274,713 |
| 305,829 |
|
| 2023 | 223,940 |
| 257,200 |
|
| 2024 and thereafter | 636,772 |
| |
| 2024 | | 201,367 |
|
| Thereafter | | 537,322 |
|
| Total | $ | 2,004,514 |
| $ | 1,925,345 |
|
No single tenant comprised 10% or more of our aggregate annualized base rent (“ABR”) as of June 30, 2019.March 31, 2020. As of June 30, 2019,March 31, 2020, our real estate investments in Florida and California represented 12.3% and 10.0%10.5% of our ABR, respectively. As a result, the geographic concentration of our portfolio makes it particularly susceptible to adverse weather or economic or weather developmentsevents, including the impact of the COVID-19 pandemic, in the Florida and California real estate markets. As of May 11, 2020, there were approximately 210 and 170 tenant spaces temporarily closed as a result of the COVID-19 pandemic in Florida and California, respectively.
States have issued “stay-at-home” orders that have resulted in temporary business closures but have exempted businesses providing essential goods and services from these mandatory closures. While the definition of what constitutes an essential business and related guidelines vary between different states and municipalities, as it pertains to our portfolio, we believe this generally includes grocers and supermarkets, healthcare providers and pharmacies, banks, gas stations, automotive repair shops, pet stores, laundromats, and other businesses offering goods and services that would similarly be considered critical for a functional society and life-sustaining activities. Even among those that are considered to be essential, many businesses have seen sharp decreases in foot traffic and customer patronage as a result of “stay-at-home” mandates and social distancing guidelines. State mandates have continued to evolve from the initial closures in late March, with certain states implementing “stay-at-home” orders in April, and other states beginning to ease restrictions in late April and early May. As of March 31, 2020, we believe tenants comprising approximately 51% of our portfolio’s ABR are considered essential retail businesses and services. In addition to these essential retail businesses and services, restaurants, comprising approximately 15% of our ABR, are also characterized as essential in many states and municipalities, and may remain open for takeout and delivery.
Lessee—As a lessee, we recognized additional operating lease liabilities of $6.2 million with corresponding ROU assets of $6.0 million, and the difference between them was recorded as an adjustment to Accumulated Deficit on the consolidated balance sheets. On adoption of ASC 842, these asset and liability amounts represented the present value of the remaining fixed minimum rental payments under current leasing standards for existing leases, adjusted as appropriate for amounts written off in transition to the new guidance. The initial measurement of a ROU asset may differ from the initial measurement of the corresponding lease liability due to initial direct costs, prepaid lease payments, and lease incentives.
Lease assets and liabilities, grouped by balance sheet line where they are recorded, consisted of the following as of June 30,March 31, 2020 and December 31, 2019 (in thousands): |
| | | |
| | June 30, 2019 |
| Assets | |
| Investment in Real Estate: | |
| ROU asset - operating leases | $ | 4,707 |
|
| Less: accumulated amortization | (217 | ) |
| Total in Investment in Real Estate | 4,490 |
|
| Other Assets: | |
| ROU asset - operating leases | 2,540 |
|
| ROU asset - finance leases | 705 |
|
| Less: accumulated amortization | (595 | ) |
| Total in Other Assets | 2,650 |
|
Total ROU lease assets(1) | $ | 7,140 |
|
| | |
| Liabilities | |
| Accounts Payable and Other Liabilities: | |
| Operating lease liability | $ | 6,790 |
|
| Debt Obligations, Net: | |
| Finance lease liability | 581 |
|
Total lease liabilities(1) | $ | 7,371 |
|
|
| | | | | | | | |
| Balance Sheet Information | Balance Sheet Location | March 31, 2020 | | December 31, 2019 |
ROU assets, net - operating leases(1) | Investment in Real Estate | $ | 3,952 |
| | $ | 7,613 |
|
| ROU assets, net - operating and finance leases | Other Assets, Net | 2,396 |
| | 2,111 |
|
| Operating lease liability | Accounts Payable and Other Liabilities | 6,168 |
| | 9,453 |
|
| Finance lease liability | Debt Obligations, Net | 384 |
| | 443 |
|
| |
(1) | As ofDuring the three months ended June 30, 2019March 31, 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 weighted average remaininglessor controlled an option requiring us to purchase the land subject to the lease. Our valuation of the ROU asset and lease term was approximately 2.4 yearsliability as of December 31, 2019 for finance leasesthis ground lease reflected the assumption that the lessor would exercise this option and 18.3 years for operating leases. The weighted average discount rate was 3.54% for finance leases and 4.07% for operating leases.that we would purchase the underlying land asset.
|
Below are the amounts recorded in our consolidated statements of operations related to our ROU assets and lease liabilities by lease type (in thousands): |
| | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2019 | | June 30, 2019 |
| Statements of operations information: | | | |
| Finance lease cost: | | | |
| Amortization of ROU assets | $ | 64 |
| | $ | 128 |
|
| Interest on lease liabilities | 4 |
| | 9 |
|
| Operating lease costs | 449 |
| | 797 |
|
| Short term lease expense | 376 |
| | 767 |
|
Below are the amounts recorded in our consolidated statements of cash flows related to our leases by type (in thousands): |
| | | |
| | Six Months Ended |
| | June 30, 2019 |
| Statements of cash flows information: | |
| Operating cash flows used for operating leases | $ | (620 | ) |
| Financing cash flows used for finance leases | (122 | ) |
| ROU assets obtained in exchange for new lease liabilities | 1,444 |
|
Future undiscounted payments for fixed lease charges by lease type as of June 30, 2019, are as follows (in thousands): |
| | | | | | | |
| | Undiscounted |
| | Operating | | Finance |
| Remaining 2019 | $ | 745 |
| | $ | 148 |
|
| 2020 | 1,174 |
| | 295 |
|
| 2021 | 723 |
| | 98 |
|
| 2022 | 684 |
| | 26 |
|
| 2023 | 529 |
| | 20 |
|
| Thereafter | 6,419 |
| | 15 |
|
| Total undiscounted cash flows from leases | 10,274 |
| | 602 |
|
| Total lease liabilities recorded at present value | 6,790 |
| | 581 |
|
| Difference between undiscounted cash flows and present value of lease liabilities | $ | 3,484 |
| | $ | 21 |
|
|
|
4. MERGER WITH REIT IIREAL ESTATE ACTIVITY |
In November 2018, we acquired 86 properties as part of the Merger with REIT II. Under the terms of the Merger, at the time of closing, theProperty Sales—The following consideration was giventable summarizes our real estate disposition activity (dollars in exchange for REIT II common stock (in thousands):
|
| | | |
| | Amount |
Fair value of PECO common stock issued(1) | $ | 1,054,745 |
|
| Fair value of REIT II debt: | |
| Corporate debt | 719,181 |
|
| Mortgages and notes payable | 102,727 |
|
Derecognition of REIT II management contracts, net(2) | 30,428 |
|
| Transaction costs | 11,587 |
|
| Total consideration and debt activity | 1,918,668 |
|
| Less: debt assumed | 464,462 |
|
| Total consideration | $ | 1,454,206 |
|
|
| | | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
Number of properties sold(1) | 3 |
| | 3 |
|
| Proceeds from sale of real estate | $ | 17,447 |
| | $ | 35,755 |
|
(Loss) gain on sale of properties, net(2) | (826 | ) | | 7,399 |
|
| |
(1) | TheWe retained certain outparcels of land associated with one of our property dispositions during the three months ended March 31, 2020, and as a result, this property is still included in our total number of shares of common stock issued was 95.5 million.property count.
|
| |
(2) | Previously a component of Other Assets, Net. |
To complete the Merger, we issued 2.04 shares of our common stock in exchange for each issued and outstanding share of REIT II common stock, which was equivalent to $22.54 based on our most recent estimated value per share (“EVPS”), as of the date of the transaction, of $11.05. The exchange ratio was based on a thorough review of the relative valuation of each entity, including factoring in our investment management business as well as each company’s transaction costs.
Upon completion of the Merger, our continuing stockholders owned approximately 71% of the issued and outstanding shares of the Company on a fully diluted basis (determined as if each Operating Partnership unit (“OP unit”) were exchanged for one share of our common stock) and former REIT II stockholders owned approximately 29% of the issued and outstanding shares of the Company on a fully diluted basis (determined as if each OP unit were exchanged for one share of our common stock).
Assets Acquired and Liabilities Assumed—After consideration of all applicable factors pursuant to the business combination accounting rules under ASC 805, Business Combinations (“ASC 805”), including the application of a screen test to evaluate if substantially all the fair value of the acquired properties is concentrated in a single asset or group of similar assets, we concluded that the Merger qualified as an asset acquisition.
Additionally, prior to the close of the Merger, all of REIT II’s real properties were managed and leased by us, under the terms of various management agreements. As we had contractual relationships with REIT II, we considered the provisions of ASC 805 regarding the settlement of pre-existing relationships. This guidance provides that a transaction that in effect settles pre-existing relationships between the acquirer and acquiree should be evaluated under the guidance set forth in ASC 805 for possible gain/loss recognition.
In applying the relevant guidance to the settlement of our contractual relationships with REIT II, we noted that the provisions of the various agreements provided both parties to each of the agreements with substantial termination rights. The agreements permitted either party to terminate without cause or penalty upon prior written notice within a specified number of days’ notice. Therefore, we determined that the termination of the agreements did not result in a settlement gain or loss under the relevant guidance, and thus no gain or loss was recorded in the consolidated financial statements.
Prior to the consummation of the Merger, we did, however, have an existing intangible asset related to our acquisition of certain REIT II management contracts. Because this relationship was internalized as part of the Merger, we derecognized the carrying value of these intangible assets upon completion of the Merger and have included the derecognized contract value of $30.4 million in our calculation of total consideration in the table above.
As of December 31, 2018, we capitalized approximately $11.6 million in costs related to the Merger. The following table summarizes the final purchase price allocation based on a valuation report prepared by a third-party valuation specialist that was subject to management’s review and approval (in thousands): |
| | | |
| | Amount |
| Assets: | |
| Land and improvements | $ | 561,100 |
|
| Building and improvements | 1,198,884 |
|
| Intangible lease assets | 197,384 |
|
| Fair value of unconsolidated joint venture | 16,470 |
|
| Cash and cash equivalents | 354 |
|
| Restricted cash | 5,159 |
|
| Accounts receivable and other assets | 33,045 |
|
| Total assets acquired | 2,012,396 |
|
| Liabilities: | |
| Debt assumed | 464,462 |
|
| Intangible lease liabilities | 60,421 |
|
| Accounts payable and other liabilities | 33,307 |
|
| Total liabilities assumed | 558,190 |
|
| Net assets acquired | $ | 1,454,206 |
|
The allocation of the purchase price is based on management’s assessment, which requires a significant amount of judgment and represents management’s best estimate of the fair value as of the acquisition date.
Acquisitions—The following table summarizes our real estate acquisitions during the six months ended June 30, 2019 and 2018 (dollars in thousands): |
| | | | | | | | | | | | |
| Property Name | | Location | | Anchor Tenant | | Acquisition Date | | Purchase Price | | Leased % of Rentable Square Feet at Acquisition |
| Murray Landing Outparcel | | Columbia, SC | | N/A | | 5/16/2019 | | $ | 295 |
| | N/A |
| Naperville Crossings | | Naperville, IL | | ALDI | | 4/26/2019 | | 49,585 |
| | 88.0% |
| Shoppes of Lake Village | | Leesburg, FL | | Publix | | 2/26/2018 | | 8,423 |
| | 71.3% |
The fair value and weighted-average useful life at acquisition for lease intangibles acquired as part of the above acquisitions are as follows (dollars in thousands, weighted-average useful life in years): |
| | | | | | | | | | | |
| | Six Months Ended |
| | June 30, 2019 | | June 30, 2018 |
| | Fair Value | | Weighted-Average Useful Life | | Fair Value | | Weighted-Average Useful Life |
| In-place lease assets | $ | 4,736 |
| | 11 | | $ | 946 |
| | 6 |
| Above-market lease assets | 825 |
| | 8 | | 74 |
| | 3 |
| Below-market lease liabilities | (2,097 | ) | | 16 | | (457 | ) | | 16 |
Property Sales—The following table summarizes our property sales activity (dollars in thousands):
|
| | | | | | | |
| | Six Months Ended |
| | June 30, |
| | 2019 | | 2018 |
| Number of properties sold | 6 |
| | 2 |
|
| Number of outparcels sold | 1 |
| | — |
|
| Proceeds from sale of real estate | $ | 47,857 |
| | $ | 13,300 |
|
Gain on sale of properties, net(1) | 6,627 |
| | 985 |
|
| |
(1)
| The (loss) gain on sale of properties, net does not include miscellaneous write-off activity, which is also recorded in (Loss) Gain on Disposal of Property, Net on the consolidated statements of operations. |
Property Held for Sale—As of June 30, 2019, two properties were classified as held for sale. For information regarding the disposition of held for sale property, refer to Note 16. As of December 31, 2018, we had two properties that were classified as held for sale, and both were sold in the first quarter of 2019. Properties classified as held for sale as of June 30, 2019 and December 31, 2018, were under contract to sell, with no substantive contingencies, and the prospective buyers had significant funds at risk as of the respective reporting date. A summary of assets and liabilities for the properties held for sale as of June 30, 2019 and December 31, 2018, is below (in thousands): |
| | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| ASSETS | | | |
| Total investment in real estate assets, net | $ | 15,555 |
| | $ | 16,889 |
|
| Other assets, net | 322 |
| | 475 |
|
| Total assets | $ | 15,877 |
| | $ | 17,364 |
|
| LIABILITIES | | | |
| Below-market lease liabilities, net | $ | 117 |
| | $ | 208 |
|
| Accounts payable and other liabilities | 185 |
| | 388 |
|
| Total liabilities | $ | 302 |
| | $ | 596 |
|
Impairment of Real Estate Assets—During the three and six months ended June 30,March 31, 2020, we did not recognize any impairment charges. During the three months ended March 31, 2019, we recognized impairment charges totaling $25.2 million and $38.9 million, respectively. During the three and six months ended June 30, 2018, we recognized an impairment charge totaling $10.9$13.7 million. 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 have applied reasonable estimates and judgments in determining the amount of impairment recognized.
Acquisitions—During the three months ended March 31, 2020, we acquired two parcels of land for a total of $4.3 million, both of which are either underneath or adjacent to shopping centers that we own.
There were no acquisitions during the three months ended March 31, 2019.
|
|
6. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES |
We co-invest with third parties in joint ventures that own multiple properties. As a result of the Merger in November 2018, we acquired a 20% interest in the NRP joint venture. In November 2018, we also entered into an agreement (the “Joint Venture Agreement”) with Northwestern Mutual to create the GRP I joint venture. Under the terms of the Joint Venture Agreement, we contributed or sold all of our ownership interests in 17 grocery-anchored shopping centers to the GRP I joint venture.
The following table details our investment balances in these unconsolidated joint ventures, which are accounted for using the equity method of accounting and are considered to be related parties to us as of June 30, 2019 and December 31, 2018 (dollars in thousands): |
| | | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | NRP | | GRP I | | NRP | | GRP I |
| Ownership percentage | 20 | % | | 15 | % | | 20 | % |
| 15 | % |
| Number of properties | 13 |
| | 17 |
| | 13 |
|
| 17 |
|
| Investment balance | $ | 14,454 |
| | $ | 27,964 |
| | $ | 16,198 |
| | $ | 29,453 |
|
Unamortized basis adjustments(1) | 5,317 |
| | — |
| | 6,026 |
| | — |
|
| |
(1)
| Our investment in NRP differs from our proportionate share of the entity’s underlying net assets due to basis differences initially recorded at $6.2 million arising from the Merger and recording the investment at fair value.
|
The following table summarizes the operating information of the unconsolidated joint ventures and their impact on our consolidated statements of operations and consolidated statements of equity. We did not have any investments in unconsolidated joint ventures during the three and six months ended June 30, 2018 (in thousands): |
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2019 | | June 30, 2019 |
| | NRP | | GRP I | | NRP | | GRP I |
| Loss from unconsolidated joint ventures, net | $ | 114 |
| | $ | 52 |
| | $ | 202 |
| | $ | 65 |
|
Amortization of basis adjustments(1) | 354 |
| | — |
| | 709 |
| | — |
|
| Distributions | 551 |
| | 509 |
| | 833 |
| | 1,424 |
|
| |
(1)
| These amounts are amortized starting at the date of the Merger and recorded as an offset to earnings from the NRP joint venture in Other Expense, Net on our consolidated statements of operations. |
The following is a summary of Other Assets, Net outstanding as of June 30, 2019March 31, 2020 and December 31, 2018,2019, excluding amounts related to assets classified as held for sale (in thousands): | | | | June 30, 2019 | | December 31, 2018 | March 31, 2020 | | December 31, 2019 |
| Other assets, net: | | | | | | |
| Deferred leasing commissions and costs | $ | 35,518 |
| | $ | 32,957 |
| $ | 39,667 |
| | $ | 38,738 |
|
| Deferred financing expenses | 13,971 |
| | 13,971 |
| 13,971 |
| | 13,971 |
|
| Office equipment, ROU assets, and other | 18,016 |
| | 14,315 |
| 20,612 |
| | 19,430 |
|
| Corporate intangible assets | | 4,883 |
| | 4,883 |
|
| Total depreciable and amortizable assets | 67,505 |
| | 61,243 |
| 79,133 |
| | 77,022 |
|
| Accumulated depreciation and amortization | (28,603 | ) | | (24,382 | ) | (37,880 | ) | | (35,055 | ) |
| Net depreciable and amortizable assets | 38,902 |
| | 36,861 |
| 41,253 |
| | 41,967 |
|
| Accounts receivable, net | 50,681 |
| | 56,104 |
| |
Accounts receivable, net(1) | | 52,854 |
| | 46,125 |
|
| Accounts receivable - affiliates | | 972 |
| | 728 |
|
| Deferred rent receivable, net | 25,778 |
| | 21,261 |
| 31,572 |
| | 29,291 |
|
| Derivative asset | 5,324 |
| | 29,708 |
| 18 |
| | 2,728 |
|
| Investment in affiliates | 700 |
| | 700 |
| |
| Prepaids and other | 9,716 |
| | 8,442 |
| |
| Prepaid expenses and other | | 14,594 |
| | 7,851 |
|
| Total other assets, net | $ | 131,101 |
| | $ | 153,076 |
| $ | 141,263 |
| | $ | 128,690 |
|
| |
(1) | Net of $6.2 million and $6.9 million of reserves for uncollectible amounts. |
The following is a summary of the outstanding principal balances and interest rates, which include the effect of derivative financial instruments, onfor our debt obligations as of June 30, 2019March 31, 2020 and December 31, 20182019 (dollars in thousands): | | | | Interest Rate(1) | | June 30, 2019 | | December 31, 2018 | Interest Rate(1) | | March 31, 2020 | | December 31, 2019 |
Revolving credit facility(2) | LIBOR + 1.40% | | $ | — |
| | $ | 73,359 |
| LIBOR + 1.4% | | $ | 34,000 |
| | $ | — |
|
Term loans | 2.06%-4.59% | | 1,918,410 |
| | 1,858,410 |
| 2.01% - 4.59% | | 1,622,500 |
| | 1,652,500 |
|
| Secured portfolio loan facility | 3.52% | | 195,000 |
| | 195,000 |
| |
| Secured loan facilities | | 3.35% - 3.52% | | 395,000 |
| | 395,000 |
|
| Mortgages | 3.45%-7.91% | | 329,404 |
| | 334,117 |
| 3.45% - 7.91% | | 322,127 |
| | 324,578 |
|
| Finance lease liability | | 581 |
| | 552 |
| | 384 |
| | 443 |
|
| Assumed market debt adjustments, net | | (3,841 | ) | | (4,571 | ) | | (1,285 | ) | | (1,218 | ) |
| Deferred financing expenses, net | | (16,149 | ) | | (18,041 | ) | | (16,325 | ) | | (17,204 | ) |
| Total | | $ | 2,423,405 |
| | $ | 2,438,826 |
| | $ | 2,356,401 |
| | $ | 2,354,099 |
|
| |
(1) | Interest rates are as of June 30, 2019March 31, 2020. |
| |
(2) | The gross borrowings and payments under our revolving credit facility were $105.655.0 million and $179.021.0 million, respectively, during the sixthree months ended June 30, 2019March 31, 2020. The gross borrowings and payments under our revolving credit facility were $151.064.0 million and $166.086.0 million, respectively, during the sixthree months ended June 30, 2018March 31, 2019. |
| |
(3) | Our term loans carry an interest rate of LIBOR plus a spread. While most of the rates are fixed through the use of swaps, there is still a portion of these loans that is not fixed through a swap, and thus is still indexed to LIBOR. |
In January 2020, we made the final $30 million payment on our term loan maturing in 2021. Following this payment, the next term loan maturity is in April 2022.
In March 2020, we borrowed $34 million on our $500 million revolving credit facility in order to satisfy general operating needs. In April 2020, we borrowed an additional $200 million on our revolving credit facility to meet our operating needs for a sustained period due to the COVID-19 pandemic. As of May 2019,11, 2020, total availability on our revolving credit facility, net of any letters of credit, was $254.7 million. Our debt is subject to certain covenants, and as of March 31, 2020, we executed a $60 million delayed draw feature on onewere in compliance with the restrictive covenants of our term loans. We used the proceeds from this draw to pay down our revolver balance.outstanding debt obligations.
As of June 30, 2019 and December 31, 2018, the weighted-average interest rate, including the effect of derivative financial instruments, for all of our debt obligations was 3.5%.
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 June 30, 2019March 31, 2020 and December 31, 2018,2019, is summarized below (in thousands): | | | | June 30, 2019 | | December 31, 2018 | March 31, 2020 | | December 31, 2019 |
As to interest rate:(1) | | | | | | |
| Fixed-rate debt | $ | 2,111,985 |
| | $ | 2,216,669 |
| $ | 1,944,511 |
| | $ | 2,122,021 |
|
| Variable-rate debt | 331,410 |
| | 244,769 |
| 429,500 |
| | 250,500 |
|
| Total | $ | 2,443,395 |
| | $ | 2,461,438 |
| $ | 2,374,011 |
| | $ | 2,372,521 |
|
| As to collateralization: | | | | | | |
| Unsecured debt | $ | 1,918,410 |
| | $ | 1,931,769 |
| $ | 1,656,500 |
| | $ | 1,652,500 |
|
| Secured debt | 524,985 |
| | 529,669 |
| 717,511 |
| | 720,021 |
|
| Total | $ | 2,443,395 |
| | $ | 2,461,438 |
| $ | 2,374,011 |
| | $ | 2,372,521 |
|
| | | | | |
Weighed-average interest rate(1) | | 3.3 | % | | 3.4 | % |
| |
(1) | Includes the effects of derivative financial instruments (see Notes 97 and 1512). |
|
|
9.7. 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 sixthree months ended June 30,March 31, 2020 and 2019, and 2018, 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 $3.5$18.7 million will be reclassified from AOCI as an increase to Interest Expense, Net.
The following is a summary of our interest rate swaps that were designated as cash flow hedges of interest rate risk as of June 30, 2019March 31, 2020 and December 31, 20182019 (notional amounts in thousands): | | | | June 30, 2019 | | December 31, 2018 | March 31, 2020 | | December 31, 2019 |
| Count | 11 |
| | 12 |
| 8 |
| | 9 |
|
| Notional amount | $ | 1,587,000 |
| | $ | 1,687,000 |
| $ | 1,227,000 |
| | $ | 1,402,000 |
|
| Fixed LIBOR | 0.7% - 2.9% |
| | 0.7% - 2.9% |
| 0.8% - 2.9% |
| | 0.8% - 2.9% |
|
| Maturity date | 2019 - 2025 |
| | 2019 - 2025 |
| 2020 - 2025 |
| | 2020 - 2025 |
|
The table below details the nature of the gain or loss recognized on interest rate derivatives designated as cash flow hedges in the consolidated statements of operations (in thousands): |
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Amount of (loss) gain recognized in other comprehensive income on derivatives(1) | $ | (22,348 | ) | | $ | 5,608 |
| | $ | (35,205 | ) | | $ | 19,047 |
|
Amount of gain reclassified from AOCI into interest expense(1) | (1,297 | ) | | (753 | ) | | (2,801 | ) | | (704 | ) |
|
| | | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
| Amount of (loss) recognized in other comprehensive income on derivatives | $ | (44,916 | ) | | $ | (12,857 | ) |
| Amount of loss (gain) reclassified from AOCI into interest expense | 1,552 |
| | (1,504 | ) |
| |
(1)
| Changes in value are solely driven from changes in LIBOR futures as a result of various economic factors. |
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 June 30, 2019,March 31, 2020, 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 $21.0$62.8 million. As of June 30, 2019,March 31, 2020, 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 $21.0$62.8 million.
|
|
10.8. 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 March 31, 2020, we had four cash collateralized letters of credit outstanding totaling approximately $9.7 million to provide security for our obligations under Silver Rock’s insurance and reinsurance contracts.
COVID-19—As of March 31, 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”). Our charter does not provide for cumulative voting in the election of directors.
On May 8, 2019,6, 2020, our Board increaseddecreased the estimated value per share (“EVPS”) of our common stock to $8.75 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. The decrease was primarily driven by the negative impact of the COVID-19 pandemic on PECO’s 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 EVPS of our common stock toas 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 value of our portfolio of real estate properties and our third-party investment management business as of March 31, 2019. We engaged a third-party valuation firm to provide a calculation of the range in EVPS of our common stock as of March 31, 2019, which reflected certain balance sheet assets and liabilities as of that date. Previously, on May 9, 2018, our Board increased the EVPS of our common stock to $11.05 from $11.00 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, 2018.
Shares of our common stock arewere issued under the DRIP, as discussed below, at the same price as the EVPS in effect at the time of issuance.
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 estimated value per share.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 temporarily suspended. The March 2020 distribution was paid all in cash on April 1, 2020.
Distributions—On March 27, 2020, our Board temporarily suspended stockholder distributions, effective after the payment of the March 2020 dividend on April 1, 2020 as a result of the uncertainty surrounding the COVID-19 pandemic, including the impact that the pandemic and the measures taken by governmental agencies and tenants in response to the pandemic are expected to continue to have on our shopping centers and our financial condition, liquidity sources, and capital needs.
Distributions paid entirely in cash to stockholders and OP unit holders of record subsequent to March 31, 2020 were as follows (in thousands, except distribution rate): |
| | | | | | | | | |
| Month | Date of Record | | Distribution Rate | | Date Distribution Paid | | Amount of Distribution Paid |
| March 2020 | 3/16/2020 | | $0.05583344 | | 4/1/2020 | | $ | 18,541 |
|
Share Repurchase Program (“SRP”)—Our 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.
Due to the funding limits, no proceeds were available for standard share repurchases during the six months ended June 30, 2019. Repurchase requests in connection with a stockholder’s death, “qualifying disability,” or “determination of incompetence” were completed in full. In July 2019, approximately 1.2 million shares of our common stock were repurchased under the SRP.
On August 7, 2019, the Board suspended the SRP with respect to standard repurchases. We will continue to fulfill repurchases sought upon a stockholder'sOur SRP for death, “qualifyingqualifying disability,” or “determinationdetermination of incompetence” in accordance with the terms of the amended SRP, adopted on August 7, 2019 and described in Part II, Item 5 of this Quarterly Report on Form 10-Q.incompetence was temporarily suspended effective March 27, 2020.
Convertible Noncontrolling Interests—Under the terms of the Fourth Amended and Restated Agreement of Limited Partnership Agreement, (the “Partnership Agreement”), Operating Partnership unit (“OP unitunit”) holders may elect to exchange OP units. The Operating Partnership controls the form of the redemption, and may elect to exchange OP units for shares of our common stock, provided that the OP units have been outstanding for at least one year.year, or for cash. As the form of redemption for OP units is within our control, the OP units outstanding as of June 30, 2019March 31, 2020 and December 31, 2018,2019 are classified as Noncontrolling Interests within permanent equity on our consolidated balance sheets. The distributions that have been paid on OP units are included in Distributions to Noncontrolling Interests on the consolidated statements of equity. During the sixthree months ended June 30,March 31, 2020 and 2019, 0.1 million and 0.7 million OP units were converted into shares of our common stock at a 1:1 ratio.ratio, respectively. There were approximately 42.7 million and 44.5 million OP units outstanding as of June 30, 2019March 31, 2020 and December 31, 2018, respectively.
Nonconvertible Noncontrolling Interests—In addition to partnership units of the Operating Partnership, Noncontrolling Interests also includes a 25% ownership share of one2019. Additionally, certain of our subsidiaries who provides advisory services, which was not significant to our results.outstanding time- and performance-based equity awards will result in the issuance of shares or OP units upon vesting in future periods.
Awards to employees under our Amended and Restated 2010 Long-Term Incentive Plan are typically granted and vest during the first quarter of each year. We also grant restricted stock to our independent directors under our Amended and Restated 2010 Independent Director Stock Plan, which vest based upon the completion of a service period. Certain of our executives have made the election to receive OP units in lieu of shares of common stock upon vesting of their award grants. All share-based compensation awards, regardless of the form of payout upon vesting, are presented in the following table, which summarizes our stock-based award activity (number of units in thousands): |
| | | | | | | | | | | | |
| | Six Months Ended |
| | June 30, 2019 |
| | Restricted Stock Awards | | Performance Stock Awards(1) | | Phantom Stock Units | | Weighted-Average Grant-Date Fair Value(2) |
| Nonvested at December 31, 2018 | 808 |
| | 199 |
| | 998 |
| | $ | 10.60 |
|
| Granted | 464 |
| | 1,275 |
| | — |
| | 11.05 |
|
| Vested | (196 | ) | | — |
| | — |
| | 10.99 |
|
| Forfeited | (26 | ) | | — |
| | (12 | ) | | 10.76 |
|
| Nonvested at June 30, 2019 | 1,050 |
| | 1,474 |
| | 986 |
| | $ | 10.80 |
|
| |
(1)
| Certain performance-based awards granted during the period contain terms which dictate that the number of award units to be issued will vary based upon actual performance compared to target performance. The number of shares deemed to be issued per this table reflect our probability-weighted estimate of the number of shares that will vest based upon current and expected company performance. The maximum number of award units to be issued under all outstanding grants, excluding phantom stock units as they are settled in cash, was 4.0 million and 1.2 million as of June 30, 2019 and December 31, 2018, respectively.
|
| |
(2)
| On an annual basis, we engage an independent third-party valuation advisory consulting firm to estimate the EVPS of our common stock. |
On March 12, 2019, the Compensation Committee of the Company’s Board of Directors (the “Committee”) approved a new form of award agreement under the Company’s Amended and Restated 2010 Long-Term Incentive Plan for performance-based long term incentive units (“Performance LTIP Units”) and made one-time grants of Performance LTIP Units to certain of our executives. Any amounts earned under the Performance LTIP Unit award agreements will be issued in the form of LTIP Units, which represent OP units that are structured as a profits interest in the Operating Partnership. Dividends will accrue on the Performance LTIP Units until the measurement date, subject to a quarterly distribution of 10% of the regular quarterly distributions.
During the three months ended June 30, 2019 and 2018, the expense for all stock-based awards, including phantom stock units, was $3.3 million and $3.1 million, respectively. During the six months ended June 30, 2019 and 2018, the expense was $5.3 million and $4.7 million, respectively. We had $22.6 million of unrecognized compensation costs related to these awards that we expect to recognize over a weighted average period of approximately 4.3 years. The fair value at the vesting date for stock-based awards that vested during the six months ended June 30, 2019 was $2.2 million.
|
|
13.10. EARNINGS PER SHARE |
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 LossIncome (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.
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 Fourth Amended and Restated Agreementthe Partnership Agreement.
In previous periods, we issued certain share-based awards to employees which are tied to the value of Limited Partnershipour EVPS, but that are paid in cash upon vesting. We have a small number of the Operating Partnership. Phantom stock unitsthese awards that remain outstanding, however, they are not considered to be participating securities as they are not convertible into common stock.stock, and as such are not included as a component of our basic or diluted EPS calculation.
The impact of 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 as of June 30, 2019March 31, 2020 and 2018.2019.
The following table provides a reconciliation of the numerator and denominator of the earnings per share calculations (in thousands, except per share amounts):
| | | | Three Months Ended | | Six Months Ended | | | | | |
| | June 30, | | June 30, | Three Months Ended March 31, |
| | 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 |
| Numerator: | | | | | | | | | | |
| Net loss attributable to stockholders - basic | $ | (36,570 | ) | | $ | (11,351 | ) | | $ | (41,765 | ) | | $ | (12,951 | ) | |
Net loss attributable to convertible OP units(1) | (5,643 | ) | | (2,756 | ) | | (6,426 | ) | | (3,090 | ) | |
| Net loss - diluted | $ | (42,213 | ) | | $ | (14,107 | ) | | $ | (48,191 | ) | | $ | (16,041 | ) | |
| Net income (loss) attributable to stockholders - basic | | $ | 9,769 |
| | $ | (5,195 | ) |
Net income (loss) attributable to convertible OP units(1) | | 1,430 |
| | (783 | ) |
| Net income (loss) - diluted | | $ | 11,199 |
| | $ | (5,978 | ) |
| Denominator: | | | | | | | | | | |
| Weighted-average shares - basic | 283,010 |
| | 184,450 |
| | 282,148 |
| | 185,171 |
| 289,955 |
| | 281,263 |
|
OP units(1) | 43,288 |
|
| 44,453 |
| | 43,640 |
| | 44,453 |
| 42,848 |
| | 43,996 |
|
| Dilutive restricted stock awards | | 425 |
| | — |
|
| Adjusted weighted-average shares - diluted | 326,298 |
| | 228,903 |
| | 325,788 |
| | 229,624 |
| 333,228 |
| | 325,259 |
|
| Earnings per common share: | | | | | | | | | | |
| Basic and diluted | $ | (0.13 | ) | | $ | (0.06 | ) | | $ | (0.15 | ) | | $ | (0.07 | ) | $ | 0.03 |
| | $ | (0.02 | ) |
(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 years presented.
Approximately 2.5 million and 1.02.6 million unvested restrictedtime- and performance-based stock awards were outstanding as of June 30, 2019 and 2018, respectively.March 31, 2019. These securities were anti-dilutive for the three months ended March 31, 2019, and, as a result, their impact was excluded from the weighted-average common shares used to calculate diluted EPS.EPS for that period.
|
|
14.11. REVENUE RECOGNITION AND RELATED PARTY TRANSACTIONS |
Revenue—Summarized below are amounts included in FeeFees 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 | | Six Months Ended |
| | June 30, 2019 | | June 30, 2019 |
| | PECO III | | Joint Ventures | | Other Parties(1) | | Total | | PECO III | | Joint Ventures | | Other Parties(1) | | Total |
Recurring fees(2) | $ | 228 |
| | $ | 1,352 |
| | $ | 59 |
| | $ | 1,639 |
| | $ | 422 |
| | $ | 2,681 |
| | $ | 118 |
| | $ | 3,221 |
|
Transactional revenue and reimbursements(3) | 204 |
| | 621 |
| | 2 |
| | 827 |
| | 1,016 |
| | 1,026 |
| | 7 |
| | 2,049 |
|
| Insurance premiums | 21 |
| | 72 |
| | 492 |
| | 585 |
| | 24 |
| | 72 |
| | 946 |
| | 1,042 |
|
Total fees and management income | $ | 453 |
| | $ | 2,045 |
| | $ | 553 |
| | $ | 3,051 |
| | $ | 1,462 |
| | $ | 3,779 |
| | $ | 1,071 |
| | $ | 6,312 |
|
|
| | | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
Recurring fees(1) | $ | 1,216 |
| | $ | 1,582 |
|
Transactional revenue and reimbursements(2) | 430 |
| | 1,222 |
|
Insurance premiums(3) | 519 |
| | 457 |
|
| Total fees and management income | $ | 2,165 |
| | $ | 3,261 |
|
| |
(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 from other parties includes amounts from third parties not affiliated with us in the amount of $0.5 million and $1.0 million for the three and six months ended June 30, 2019. |
| |
(2)
| Recurring fees include asset management fees and property management fees.us. |
| |
(3)
| Transaction revenue includes items such as leasing commissions, construction management fees,Certain related party accounts receivable and acquisition fees. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2018 | | June 30, 2018 |
| | REIT II(1) | | PECO III and Joint Ventures | | Other Parties(2) | | Total | | REIT II(1) | | PECO III and Joint Ventures | | Other Parties(2) | | Total |
| Recurring fees | $ | 5,189 |
| | $ | 581 |
| | $ | 77 |
| | $ | 5,847 |
| | $ | 10,333 |
| | $ | 1,139 |
| | $ | 152 |
| | $ | 11,624 |
|
Transactional revenue and reimbursements | 2,240 |
| | 515 |
| | (11 | ) | | 2,744 |
| | 3,951 |
| | 1,184 |
| | 20 |
| | 5,155 |
|
| Insurance premiums | 109 |
| | — |
| | 437 |
| | 546 |
| | 189 |
| | — |
| | 881 |
| | 1,070 |
|
Total fees and management income | $ | 7,538 |
| | $ | 1,096 |
| | $ | 503 |
| | $ | 9,137 |
| | $ | 14,473 |
| | $ | 2,323 |
| | $ | 1,053 |
| | $ | 17,849 |
|
| |
(1)
| All amounts earned from REIT II were earned prior to the close of the Merger in November 2018, and ceased upon its acquisition by us. |
| |
(2)
| Recurring fees and other revenue from other parties includes amounts from third parties not affiliated with us in the amount of $0.5 million and $0.9 million for the three and six months ended June 30, 2018.
|
Organization and Offering Costs—Under the terms of one of our Management Agreements, we have incurred organization and offering costs payable that were outstanding as of March 31, 2019 related to PECO III’s private placementPhillips Edison Grocery Center REIT III, Inc. (“REIT III”) and public offering since 2017. In June 2019, PECO III’s Board of Directors approved the suspension of the public offering, effective June 14,were settled when we merged with REIT III in October 2019. In connection with the suspension, we reduced our organization and offering cost receivable to the contractually obligated amount as of June 30, 2019, which resulted in a reduction of $2.3 million to Accounts Receivable - Affiliates on our consolidated balance sheets. As of June 30, 2019 and December 31, 2018, we had receivables for organization and offering costs of $2.5 million and $4.5 million, respectively, which were recorded in Accounts Receivable - Affiliates on our consolidated balance sheets.
In addition to organization and offering costs, we have receivables related to Management Agreements from related parties of $0.9 million and $0.6 million as of June 30, 2019 and December 31, 2018, respectively. These amounts were recorded in Accounts Receivable - Affiliates on the consolidated balance sheets.
Other Related Party Matters—Griffin Capital Company, LLC (“Griffin sponsor”) owns a 25% interest, and we own a 75% interest, in the PECO III advisor. A portion of organization and offering costs was incurred by the Griffin sponsor. In connection with the suspension of PECO III’s public offering, we have reduced our organization and offering cost payable to the contractually obligated amount as of June 30, 2019, which resulted in a $0.4 million reduction to Accounts Payable and Other Liabilities on our consolidated balance sheets. This reduction, coupled with the $2.3 million reduction to Accounts Receivable - Affiliates, resulted in a net increase in expense of $1.9 million recorded in Other Impairment Charges in our consolidated statements of operations. As such, of the receivable we have from PECO III, $0.9 million and $1.2 million were reimbursable to the Griffin sponsor as of June 30, 2019 and December 31, 2018, respectively, and were recorded in Accounts Payable and Other Liabilities on the consolidated balance sheets.
PECO Air L.L.C. (“PECO Air”), an entity in which Mr. Edison, our Chairman, Chief Executive Officer, and President, owns a 50% interest, owns an airplane that we use for business purposes in the course of our operations. We paid approximately $0.2 million to PECO Air for use of its airplane for the three months ended June 30, 2019 and 2018. For the six months ended June 30, 2019 and 2018, we paid $0.5 million and $0.4 million, respectively.
We are the limited guarantor for up to $200$190 million, capped at $50 million in most instances, of debt for our NRP joint venture. Our guarantee isWe are also the limited to being the non-recourse carveout guarantor and the environmental indemnitor. Additionally, as a part of the GRP I joint venture, GRP I assumed from us a $175 million mortgage loan for which we assumed the obligation of limited guarantor.GRP I. Our guaranteeguaranty in both cases is limited to being the non-recourse carveout guarantor and the environmental indemnitor. We entered intoare also party to a separate agreement with Northwestern Mutualour joint venture partner in which we agree to apportion any potential liability under thisour guaranty for GRP I will be apportioned between us and themour joint venture partner based on our respective ownership percentages.percentages in GRP I. We have no liability recorded on our consolidated balance sheets for either guaranty as of March 31, 2020 and December 31, 2019.
|
|
15.12. 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.
The following is a summary of borrowings as of June 30, 2019March 31, 2020 and December 31, 20182019 (in thousands):
|
| | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| Fair value | $ | 2,467,023 |
| | $ | 2,467,317 |
|
Recorded value(1) | 2,439,554 |
| | 2,456,867 |
|
|
| | | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
| | Recorded Principal Balance(1) | | Fair Value | | Recorded Principal Balance(1) | | Fair Value |
| Revolving credit facility | $ | 34,000 |
| | 33,767 |
| | $ | — |
| | $ | — |
|
| Term loans | 1,607,464 |
| | 1,594,503 |
| | 1,636,470 |
| | 1,656,765 |
|
| Secured portfolio loan facilities | 390,769 |
| | 384,068 |
| | 390,780 |
| | 399,054 |
|
Mortgages(2) | 324,168 |
| | 325,219 |
| | 326,849 |
| | 337,614 |
|
| Total | $ | 2,356,401 |
| | $ | 2,337,557 |
| | $ | 2,354,099 |
| | $ | 2,393,433 |
|
| |
(1) | Recorded value does notprincipal balances include net deferred financing expenses of $16.116.3 million and $18.017.2 million as of June 30, 2019March 31, 2020 and December 31, 20182019, respectively. Recorded principal balances also include assumed market debt adjustments of $1.3 million and $1.2 million as of March 31, 2020 and December 31, 2019, respectively. There are deferred financing expenses related to our revolving credit facility that are in an asset position and thus are not included in these balances. |
| |
(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. The fairFair value measurements that occurred as of and during the sixthree months ended June 30, 2019,March 31, 2020 and during the year ended December 31, 2018,2019, were as follows (in thousands): | | | | June 30, 2019 | | December 31, 2018 | March 31, 2020 | | December 31, 2019 |
| | 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 | | | | | | |
Derivative assets(1) | $ | — |
| $ | 5,324 |
| $ | — |
| | $ | — |
| $ | 29,708 |
| $ | — |
| $ | — |
| $ | 18 |
| $ | — |
| | $ | — |
| $ | 2,728 |
| $ | — |
|
Derivative liability(1) | — |
| (21,007 | ) | — |
| | — |
| (3,633 | ) | — |
| — |
| (62,756 | ) | — |
| | — |
| (20,974 | ) | — |
|
| Earn-out liability | — |
| — |
| (32,000 | ) | | — |
| — |
| (39,500 | ) | — |
| — |
| (22,000 | ) | | — |
| — |
| (32,000 | ) |
| Nonrecurring | | | | | | |
Impaired real estate assets, net(2) | — |
| 120,510 |
| — |
| | — |
| 71,991 |
| — |
| — |
| — |
| — |
| | — |
| 280,593 |
| — |
|
Impaired corporate intangible asset, net | — |
| — |
| 4,401 |
| | — |
| — |
| — |
| — |
| — |
| — |
| | — |
| — |
| 4,401 |
|
| |
(1) | We record derivative assets in Other Assets, Net and derivative liabilities in Accounts Payable and Other LiabilitiesDerivative Liability 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 June 30, 2019March 31, 2020 and December 31, 2018,2019, 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 June 30, 2019March 31, 2020 and December 31, 2018,2019, 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—In connection with the PELP transaction, the Company entered into a contribution agreement (the “Contribution Agreement”As part of our acquisition of Phillips Edison Limited Partnership (“PELP”), dated as of May 18, 2017, with the Operating Partnership and the contributors listed therein. The Contribution Agreement established an earn-out structure bywas established which gave PELP was given the opportunity to earn a maximum of 12.5 million additional OP units ifbased upon the potential achievement of certain milestones relatedperformance targets subsequent to (i) fundraisingthe acquisition. After the expiration of certain provisions in the investment management business, and (ii)2019, PELP is now eligible to earn up to five million OP units based on the timing and valuation related toof a liquidity event for PECO, were achieved by certain dates. The liquidity event earn-out provisions provided, in relevant part, that the contributors would have the right to receive a minimum of three million and a maximum of five million OP units as contingent consideration if a “liquidity event” (as defined in the Contribution Agreement) was successfully achieved by the Company bywhich can occur no later than December 31, 2019. On March 12, 2019,2021 in order for the Company entered into an amendmentperformance targets to the Contribution Agreement (“Amendment”). Pursuant tobe achieved per the terms of the Amendment, the initial liquidity earn-out term has been extended by two years through December 31, 2021 and the threshold for the maximum payout of five million OP units has been raised to $11.20 per share from $10.20 per share.agreement.
We estimate the fair value of this liability on a quarterly basis using weighted-average probabilities of likely outcomes. These estimates requirethe Monte Carlo method. This method requires us to make various assumptions about future share prices,dividend yields, volatility, and timing and pricing of liquidity events, equity raise projections, and other items thatwhich are unobservable and are considered Level 3 inputs in the fair value hierarchy. A change in these inputs to a different amount might result in a significantly higher or lower fair value measurement at the reporting date. In calculating the fair value of this liability, we have determined that the most likely range of potential outcomes includes a possibility of no additional OP units issued as well as up to five million outa maximum of the maximum 12.5five million units being issued.
Changes in the fair value of the earn-out liability have 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 Income, Net in the consolidated statements of operations (in thousands): |
| | | |
| | Earn-Out Liability |
| Balance at December 31, 2018 | $ | 39,500 |
|
| Change in fair value recognized in Other Income (Expense), Net | (7,500 | ) |
| Balance at June 30, 2019 | $ | 32,000 |
|
|
| | | |
| | Earn-Out Liability |
| Balance at December 31, 2019 | $ | 32,000 |
|
| Change in fair value recognized in Other Income, Net | (10,000 | ) |
| Balance at March 31, 2020 | $ | 22,000 |
|
Real Estate Asset Impairment—Our real estate assets are measured and recognized at fair value less costs to sell on a nonrecurring basis dependent upon when we determine an impairment has occurred. During the three and six months ended June 30,March 31, 2019, and 2018, 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. We determined that valuationproceeds, which we consider to fall underbe a Level 2 ofinput in the fair value hierarchy. We did not impair any assets during the three months ended March 31, 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 book value of the property over its remaining economic life based upon net operating income 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”) and cash flows as a result of the COVID-19 pandemic in performing our review procedures for the three months ended March 31, 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 include but are not limited to: increases or decreases in the duration or permanence of tenant closures, increases or decreases in collectability 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 as a resultupon impairment of the impaired real estate assets (in thousands): |
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Impairment of real estate assets | $ | 25,199 |
| | $ | 10,939 |
| | $ | 38,916 |
| | $ | 10,939 |
|
Corporate Intangible Asset Impairment—In connection with the PELP transaction, 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. For the three months ended June 30, 2019, the suspension of the PECO III public offering constituted a triggering event for further review of the corporate intangible asset’s fair value compared to its carrying value.
We estimate the fair value of the corporate intangible asset using a discounted cash flow model, leveraging certain Level 3 inputs. The evaluation of corporate intangible assets for potential impairment requires management to exercise significant judgment and to make certain assumptions. The assumptions utilized in the evaluation include future cash flows and a discount rate. For our most recent impairment test for the corporate intangible asset during the three months ended June 30, 2019, we used a discount rate of 19% in our discounted cash flow model.
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 Impairment Charges on the consolidated statements of operations. As a result of this impairment, the estimated remaining future amortization of the management contracts is as follows: $0.7 million in 2019, $1.4 million in 2020, $1.4 million in 2021, and $0.9 million in 2022. |
| | | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
| Impairment of real estate assets | $ | — |
| | $ | 13,717 |
|
Distributions—Distributions paid to stockholdersIn preparing the condensed and OP unit holdersunaudited consolidated financial statements, we have evaluated subsequent events through the filing of record subsequent to June 30, 2019,this report on Form 10-Q for recognition and/or disclosure purposes. Based on this evaluation, we have determined that there were as follows (in thousands, except distribution rate): |
| | | | | | | | | | | | | | | | | |
| Month | Date of Record | | Distribution Rate | | Date Distribution Paid | | Gross Amount of Distribution Paid | | Distribution Reinvested through the DRIP | | Net Cash Distribution |
| June | 6/15/2019 | | $0.05583344 | | 7/1/2019 | | $ | 18,101 |
| | $ | 5,571 |
| | $ | 12,530 |
|
| July | 7/15/2019 | | $0.05583344 | | 8/1/2019 | | 18,118 |
| | 5,412 |
| | 12,706 |
|
In August 2019, our Board authorized distributions for September, October,no events that have occurred that require recognition or disclosure, other than certain events and November 2019 to the stockholders of record at the close of business on September 16, 2019, October 15, 2019, and November 15, 2019, respectively, equal to a monthly amount of $0.05583344 per share of common stock. The distributions for August 2019 were previously authorized by our Board and are expected to be paid on September 3, 2019. OP unit holders will receive distributions at the same rate as common stockholders. We pay distributions to stockholders and OP unit holders based on monthly record dates. We expect to paytransactions that have been disclosed elsewhere in these distributions on the first business day after the end of each month.
Property Sales—Subsequent to June 30, 2019, we sold the following real estate property, which was classified as held for
sale as of June 30, 2019 (dollars in thousands):
|
| | | | | | | | | | | | |
| Property Name | | Location | | Anchor Tenant | | Square Footage | | Disposition Date | | Sale Price |
| Winery Square | | Fairfield, CA | | Food Maxx | | 118,370 | | 7/19/2019 | | $ | 14,250 |
|
consolidated financial statements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All references to “Notes” throughout this document refer to the footnotes to the consolidated financial statements in Part I, Item 1. Financial 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”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)., and the Private Securities Litigation Reform Act of 1995. We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in those acts.Acts. Such forward-looking statements generally can generally be identified by ourthe use of forward-looking terminology such as “may,” “will,” “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”). Such statements include, in particular,but are not limited to, statements about our focus, plans, strategies, initiatives, and prospects,prospects; statements about the global pandemic of a novel coronavirus (“COVID-19”), including its duration and potential or expected impact on our tenants, our business, and our estimated value per share; statements about our estimated value per share and when it may be updated; statements about the duration or extent of the suspension of our distributions, share repurchase program, and dividend reinvestment program; and statements about our future results of operations, capital expenditures, and liquidity. Such statements are subject to certain risks and uncertainties, including known and unknown risks and uncertainties, which could cause actual results to differ materially from those projected or anticipated. These risks include,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 properties and the attractiveness of properties in our portfolio to our tenants; (vi) the financial stability of tenants, including the ability of tenants to pay rent; (vii) changes in tax, real estate, environmental, and zoning laws; (viii) the concentration of our portfolio in a limited number of industries, geographies, or investments; and (ix) anythe 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) the impact of the COVID-19 pandemic on our tenants and their ability to pay rent on time or at all, or to renew their leases and, in the case of non-renewal, our ability to re-lease the space at the same or more favorable terms or at all; (xii) the length and severity of the COVID-19 pandemic in the United States; (xiii) 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 the CARES Act or similar state programs; (xvi) our ability to pay down, refinance, restructure, or extend our indebtedness as it becomes due; (xvii) 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 on our business, results of operations, financial condition, and liquidity; and (xix) supply chain disruptions due to the COVID-19 pandemic. 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 includedand uncertainties described in this Quarterly Report on Form 10-Q. Therefore, such statements are not intended to be a guarantee of our performance in future periods.
See Part I, Item 1A. Risk Factors of our 20182019 Annual Report on Form 10-K, filed with the SEC on March 13, 201911, 2020, and Part II, Item 1A. Risk Factorsthose included in this Quarterly Report, on Form 10-Q for a discussion of some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause actual resultsin each case as updated from time to differ materially from those presentedtime in our forward-looking statements. 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 statements contained in this Form 10-Q.statement, whether as a result of new information, future events, or otherwise.
Overview
We are an internally-managed REIT and one of the nation’s largest owners and operators of grocery-anchored shopping centers. The majority of our revenues arerevenue is lease revenuesrevenue derived from our real estate investments. Additionally, we operate an investment management business providing property management and advisory services to approximately $725$570 million of third-party assets. This business provides comprehensive real estate and asset management services to (i) PECO III,the Managed Funds.
During the first quarter of 2020, the COVID-19 pandemic began spreading globally, with the outbreak being classified as a non-traded publicly registered REIT; (ii) three institutional joint ventures; and (iii) one private fund (collectively,pandemic by the “Managed Funds”).
In November 2018, throughWorld Health Organization on March 11, 2020. We began preparing for the effects of the COVID-19 pandemic on our direct or indirect subsidiaries, we entered intobusiness as well as the economic climate as a joint venture with Northwestern Mutual. At formation, we contributed or sold 17 grocery-anchored shopping centers with a fair valuewhole. Our employees are almost entirely working remotely to help combat the spread of approximately $359 millionthe virus, while also allowing us to be as productive as possible during this time. Some of our initiatives to respond to the new joint venture, GRP I. GRP I also assumedongoing pandemic are:
We temporarily suspended stockholder distributions (see Note 9 for more detail);
We temporarily suspended the SRP for death, qualifying disability, or determination of incompetence, while our standard SRP remains suspended;
Our Compensation Committee approved a portfolio loan from us as parttemporary 25% reduction to the base salary of this transaction. In exchange,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 10% reduction to board members’ base compensation for the 2020-2021 term;
We have implemented expense reductions at the property and corporate levels, including the temporary reductions in executive salaries and director compensation, and workforce reductions;
We are delaying capital projects to the extent possible; and
We have borrowed $200 million on our revolving credit facility to ensure that we receivedare able to meet our operating needs for a 15% ownership interest in GRP I and cash of $161.8 million. For a more detailed discussion, see Note 6.sustained period.
In November 2018, we completed the Merger with REIT II, a public non-traded REIT that was advised and managed by us, in a 100% stock-for-stock transaction valued at approximately $1.9 billion. As a result of the Merger, we acquired 86pandemic, many state governments have issued “stay-at-home” mandates that generally limit travel and movement of the general public to essential activities only and require all non-essential businesses to close. The impact these measures are having on our portfolio has evolved since March 31, 2020 and will continue to do so. Our wholly-owned properties and those owned through our joint ventures contained approximately 5,550 tenant spaces as of May 11, 2020. The following statistics are related to our wholly-owned properties and those owned through our joint ventures as of May 11, 2020 (all statistics are approximate; ABR, GLA, and rent include the prorated portion attributable to properties owned through our joint ventures):
30% of all tenant spaces, totaling 21% of our ABR and 16% of our GLA, remained temporarily closed
Temporary closures include 7% of tenant spaces that we believe are considered to be essential retail and service businesses, totaling 3% of the ABR and 2% of the GLA associated with all essential retail and service businesses; even though they are generally exempted from “stay-at-home” mandates, some essential businesses have temporarily closed due to sharp decreases in foot traffic and customer patronage as a 20% equity interestresult of these mandates and social distancing guidelines
Received 2,120 rent relief requests from tenant spaces representing 29% of our ABR, all of which are still being evaluated
Collected 77% of rent and recoveries billed for April 2020 and 74% of rent and recoveries billed for the month of May
We believe substantially all tenants, including those that have been deemed non-essential businesses, are contractually obligated to continue with their rent payments as documented in NRP,our lease agreements with them. The Coronavirus Aid, Relief, and Economic Security Act, including the Paycheck Protection Program and Health Care Enhancement Act (collectively, the “CARES Act”), is intended to provide economic relief and stimulus to taxpayers and businesses in order to mitigate the economic impact of the pandemic, and provides 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. We have begun working directly with our tenants to inform them of the benefits available through the CARES Act and other small business programs. We have created a joint venture that owned 13 properties. For a more detailed discussion, see Note 4.resource page on our website to assist in these information efforts.
Portfolio and Leasing Statistics—Below are statistical highlights of our wholly-owned portfolio: |
| | |
| | Total Portfolio as of
June 30, 2019
March 31, 2020 |
| Number of properties | 298285 |
|
| Number of states | 3231 |
|
| Total square feet (in thousands) | 33,52631,862 |
|
| Leased % of rentable square feet | 94.695.6 | % |
Average remaining lease term (in years)(1) | 4.84.6 |
|
| % ABR from grocery-anchored properties | 97.0 | % |
| |
(1) | The average remaining lease term in years excludes future options to extend the term of the lease. |
The following table summarizes the portfoliodetails information of thefor our joint ventures, and our ownership percentagewhich is the basis for determining the prorated information included in the subsequent tables as of June 30, 2019March 31, 2020 (dollars and square feet in thousands): | | | | | June 30, 2019 | March 31, 2020 |
| Joint Venture | | Ownership Percentage | | Number of Properties | | ABR(1) | | GLA(2) | Ownership Percentage | | Number of Properties | | ABR(1) | | GLA(2) |
| Necessity Retail Partners | | 20% | | 13 | | $ | 18,384 |
| | 1,391 |
| 20% | | 7 | | $ | 11,933 |
| | 851 |
|
| Grocery Retail Partners I | | 15% | | 17 | | 24,538 |
| | 1,908 |
| 15% | | 17 | | 24,462 |
| | 1,909 |
|
| Grocery Retail Partners II | | 10% | | 3 | | 3,840 |
| | 312 |
|
| |
(1) | We calculate annualized base rent (“ABR”)ABR as monthly contractual rent as of June 30, 2019March 31, 2020, multiplied by 12 months. |
| |
(2) | Gross leasable area (“GLA”) is defined as the portion of the total square feet of a building that is available for tenant leasing. |
Lease Expirations—The following chart shows, on an aggregate basis, all of the scheduled lease expirations after June 30, 2019,March 31, 2020 for each of the next ten years and thereafter for our 298wholly-owned properties and the prorated portion of those owned through our joint ventures. The chart showsventures:
Our ability to create rental rate growth generally depends on our leverage during new and renewal lease negotiations with prospective and existing tenants, 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 tenants.
We continued to meet or exceed average rental rates on expiring leases during the first quarter of 2020 and our leased square feetoccupancy remained high as of March 31, 2020 at 95.6%; however, due to the impact of the COVID-19 pandemic, a large number of our tenant spaces have temporarily closed. Most of our grocery tenants remain open and ABR represented bycontinue to service their customers during this pandemic; however, many other tenants are either not currently operating or have significantly reduced sales due to government-mandated social distancing and “stay-at-home” guidelines. We expect increased volatility in new and renewal rental rates until the applicable lease expiration year:business environment becomes more stable.
Additionally,For our wholly-owned properties and the prorated share of those owned through our joint ventures, subsequent to June 30, 2019,March 31, 2020, we renewed approximately 0.60.3 million total square feet and $4.1$2.6 million of total ABR of the expiring leases, inclusive of our pro rata share related to our joint ventures.
Based on current market base rental rates, we continue to believe we will achieve an overall positive increase in our average ABR forfuture expiring leases. However, changes in base rental income associated with individual signedThis includes four anchor leases on comparable spaces may be positive or negative, and we can provide no assurance that were renewed pursuant to the base rents on new leases will continueexercise of an option to increase from current levels.extend the lease.
See Item 2.the section below titled Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations -
Leasing Activity for further discussion of leasing activity.
Portfolio Tenancy—Prior to the acquisition of a property, we assess the suitability of the grocery-anchor tenant and other tenants in light of our investment objectives, namely, preserving capital and providing stable cash flows for distributions. Generally, we assess the strength of the tenant by consideration of company factors, such as its financial strength and market share in the geographic area of the property, as well as location-specific factors, such as the store’s sales, local competition, and demographics. When assessing the tenancy of the non-anchor space at the property, we consider the tenant mix at each property in light of our portfolio, the proportion of national and national-franchise tenants, the creditworthiness of specific
tenants, and the timing of lease expirations. When evaluating non-national tenancy, we attempt to obtain credit enhancements to leases, which typically come in the form of deposits and/or guarantees from one or more individuals.
Portfolio Tenancy—We define national tenants as those tenants that operate in at least three states. Regional tenants are defined as those tenants that have at least three locations.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 tenant type as of June 30, 2019:March 31, 2020:
The following charts present the composition of our portfolio by tenant industry as of June 30, 2019:March 31, 2020:
In response to the COVID-19 pandemic, as of May 11, 2020, 15 states have state-wide “stay-at-home” mandates in place and 26 states have partial mandates in place, with 4 states that we expect to begin lifting mandates in the coming weeks. We estimate that approximately 51.1% of our ABR, including the pro rata portion attributable to our properties owned through our joint ventures, is from retail and service businesses generally deemed essential under most state and local mandates as of March 31, 2020:
| |
(1) | Includes tenants that we believe are considered to be essential retail and service businesses but that may have temporarily closed due to sharp decreases in foot traffic and customer patronage as a result of “stay-at-home” mandates and social distancing guidelines. |
The following table presents our top twenty tenants by ABR, including our wholly-owned properties and the prorated portion of those owned through our joint ventures, grouped according to parent company, by ABR, as of June 30, 2019March 31, 2020 (dollars and square feet in thousands): | | | | | June 30, 2019 | March 31, 2020 |
Tenant | | ABR | | % of ABR | | Leased Square Feet | | % of Leased Square Feet | | Number of Locations(1) | ABR | | % of ABR | | Leased Square Feet | | % of Leased Square Feet | | Number of Locations(2) |
| Kroger | | $ | 27,227 |
| | 6.9 | % | | 3,549 |
| | 11.0 | % | | 69 |
| $ | 26,877 |
| | 6.9 | % | | 3,466 |
| | 11.2 | % | | 66 |
|
| Publix | | 21,986 |
| | 5.5 | % | | 2,231 |
| | 6.9 | % | | 58 |
| 22,019 |
| | 5.6 | % | | 2,241 |
| | 7.3 | % | | 56 |
|
| Ahold Delhaize | | 17,496 |
| | 4.5 | % | | 1,278 |
| | 4.1 | % | | 25 |
|
| Albertsons-Safeway | | 17,018 |
| | 4.3 | % | | 1,680 |
| | 5.2 | % | | 32 |
| 16,674 |
| | 4.3 | % | | 1,629 |
| | 5.3 | % | | 31 |
|
| Ahold Delhaize | | 16,798 |
| | 4.2 | % | | 1,262 |
| | 3.9 | % | | 25 |
| |
| Walmart | | 10,451 |
| | 2.6 | % | | 1,956 |
| | 6.1 | % | | 16 |
| 8,933 |
| | 2.3 | % | | 1,770 |
| | 5.7 | % | | 13 |
|
| Giant Eagle | | 9,163 |
| | 2.3 | % | | 900 |
| | 2.8 | % | | 13 |
| 8,085 |
| | 2.1 | % | | 823 |
| | 2.7 | % | | 12 |
|
| TJX Companies | | 4,968 |
| | 1.3 | % | | 428 |
| | 1.4 | % | | 15 |
|
| Sprouts Farmers Market | | 4,343 |
| | 1.1 | % | | 304 |
| | 0.9 | % | | 10 |
| 4,885 |
| | 1.2 | % | | 334 |
| | 1.1 | % | | 11 |
|
| Dollar Tree | | 4,189 |
| | 1.1 | % | | 469 |
| | 1.5 | % | | 47 |
| 4,194 |
| | 1.1 | % | | 445 |
| | 1.4 | % | | 45 |
|
| Raley's | | 3,897 |
| | 1.0 | % | | 262 |
| | 0.8 | % | | 5 |
| 3,798 |
| | 1.0 | % | | 253 |
| | 0.8 | % | | 4 |
|
| Subway | | 3,142 |
| | 0.8 | % | | 133 |
| | 0.4 | % | | 99 |
| |
| SUPERVALU | | 3,122 |
| | 0.8 | % | | 400 |
| | 1.2 | % | | 9 |
| 3,480 |
| | 0.9 | % | | 386 |
| | 1.2 | % | | 8 |
|
| Subway Group | | 3,077 |
| | 0.8 | % | | 127 |
| | 0.4 | % | | 92 |
|
| Schnuck's | | 2,953 |
| | 0.7 | % | | 328 |
| | 1.0 | % | | 5 |
| 2,993 |
| | 0.8 | % | | 329 |
| | 1.1 | % | | 5 |
|
| Save Mart | | 2,868 |
| | 0.7 | % | | 359 |
| | 1.1 | % | | 7 |
| 2,619 |
| | 0.7 | % | | 309 |
| | 1.0 | % | | 6 |
|
| Southeastern Grocers | | 2,799 |
| | 0.7 | % | | 331 |
| | 1.0 | % | | 8 |
| 2,599 |
| | 0.7 | % | | 291 |
| | 0.9 | % | | 8 |
|
| Anytime Fitness | | 2,720 |
| | 0.7 | % | | 182 |
| | 0.6 | % | | 39 |
| |
| Anytime Fitness, Inc. | | 2,581 |
| | 0.7 | % | | 173 |
| | 0.6 | % | | 37 |
|
| Lowe's | | 2,407 |
| | 0.6 | % | | 371 |
| | 1.2 | % | | 4 |
| 2,407 |
| | 0.6 | % | | 371 |
| | 1.2 | % | | 4 |
|
| Kohl's | | 2,215 |
| | 0.6 | % | | 365 |
| | 1.1 | % | | 4 |
| |
| Kohl's Corporation | | 2,255 |
| | 0.6 | % | | 365 |
| | 1.2 | % | | 4 |
|
| Food 4 Less (PAQ) | | 2,124 |
| | 0.5 | % | | 118 |
| | 0.4 | % | | 2 |
| 2,215 |
| | 0.6 | % | | 118 |
| | 0.4 | % | | 2 |
|
| Walgreens | | 2,117 |
| | 0.5 | % | | 106 |
| | 0.3 | % | | 8 |
| |
| H&R Block | | 2,090 |
| | 0.5 | % | | 115 |
| | 0.4 | % | | 63 |
| |
| Petco Animal Supplies, Inc. | | 2,099 |
| | 0.5 | % | | 127 |
| | 0.4 | % | | 11 |
|
| | | $ | 143,629 |
| | 36.1 | % | | 15,421 |
| | 47.8 | % | | 523 |
| $ | 144,254 |
| | 37.2 | % | | 15,263 |
| | 49.4 | % | | 455 |
|
| |
(1) | Tenants 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 serving as tenants in a single shopping center, those subsidiaries are included as one location. |
Of our top 20 tenants, TJX Companies and Kohl’s Corporation had announced the temporary closure of all their stores nationwide as of March 31, 2020. As of May 11, certain TJX Companies and Kohl’s Corporation store locations have begun to reopen. While no other top 20 tenants have announced company-wide closures, certain locations may be closed due to specific state regulations. We are not aware, at this time, of the bankruptcy or permanent closure of any of the top 20 tenants in our shopping centers. No tenant represents more than 6.9% of our ABR on a pro-rata basis.
Results of Operations
Due to the timingImpact of the closing of the Merger with REIT II, there is no financial data included related to the acquired properties inCOVID-19 Pandemic
The COVID-19 pandemic did not significantly affect our results of operations priorfor the first quarter of 2020, with the exception of certain items noted in our discussion of results below. However, the negative impact on our results of operations in the second quarter of 2020 and future quarters could be significant, depending on a number of factors outside of our control, including the duration and severity of the pandemic; the nature and duration of “stay-at-home” mandates and business shut-downs as well as physical and social distancing guidelines and recommendations from governmental authorities; the nature and effectiveness of any economic stimulus or relief measures, including the CARES Act; overall economic conditions on both a macro and micro level, including consumer demand as well as retailer demand for space within our shopping centers; and the impact of all of the factors above, including other potentially unknown factors, on our tenants’ ability to its closingcontinue paying rent and related charges on November 16, 2018. time or at all and tenants’ willingness to renew their leases on the same terms or at all.
The variancespotential impact of the COVID-19 pandemic to 2018our second quarter results may be significant and may include reduced revenue from tenant 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 certain of these factors through May 11, 2020. The duration of the pandemic and mitigating measures, and their economic impact, may cause some of our current tenants 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 the space. Extended periods of vacancy or reduced revenues could also trigger impairments of our real estate assets. Moreover, we anticipate a reduction in our disposition and acquisition activity, as well as potential joint venture activities, during the second quarter and potentially for the remainder of 2020. Conversely, the disruption to our workforce upon the emergence of the COVID-19 pandemic has been and is expected to be minimal as the nature of our operations, coupled with our IT infrastructure, allows our employees to successfully work remotely.
We believe that our investment focus on grocery-anchored shopping centers that provide daily necessities will help lessen the negative effect of the pandemic on our business compared to non-grocery anchored retail shopping centers. We are primarily relatedclosely monitoring the occupancy, operating performance, and tenants’ sales in our centers, including those tenants operating with reduced hours or under government-imposed restrictions. We are also taking action to maximize our financial flexibility by implementing expense reductions at the property and corporate level, delaying capital projects to the Merger unless otherwise stated.extent possible, drawing on our revolving credit facility, and temporarily suspending monthly distributions and share repurchases for death, disability, or determination of incompetence.
Summary of Operating Activities for the Three Months Ended June 30, 2019 and 2018
| | | | | Three Months Ended | | Favorable (Unfavorable) | | | | | | | | | |
| | | June 30, | | Change | | Three Months Ended
March 31, | | Favorable (Unfavorable)
Change |
| (Dollars in thousands) | | 2019 | | 2018 | | $ | | % | | 2020 | | 2019 | | $ | | % |
| Operating Data: | | | | | | | | | |
| Total revenues | | $ | 132,581 |
| | $ | 104,173 |
| | $ | 28,408 |
| | 27.3 | % | |
| Revenues: | | | | | | | | |
|
|
| Rental income | | | $ | 128,466 |
| | $ | 128,860 |
| | $ | (394 | ) | | (0.3 | )% |
| Fee and management income | | | 2,165 |
| | 3,261 |
| | (1,096 | ) | | (33.6 | )% |
| Other property income | | | 892 |
| | 648 |
| | 244 |
| | 37.7 | % |
| Operating Expenses: | | | | | | | | | |
| Property operating expenses | | (20,933 | ) | | (16,901 | ) | | (4,032 | ) | | (23.9 | )% | | (21,762 | ) | | (22,866 | ) | | 1,104 |
| | 4.8 | % |
| Real estate tax expenses | | (17,930 | ) | | (13,326 | ) | | (4,604 | ) | | (34.5 | )% | | (17,112 | ) | | (17,348 | ) | | 236 |
| | 1.4 | % |
| General and administrative expenses | | (13,540 | ) | | (13,450 | ) | | (90 | ) | | (0.7 | )% | | (10,740 | ) | | (13,285 | ) | | 2,545 |
| | 19.2 | % |
| Depreciation and amortization | | (59,554 | ) | | (46,385 | ) | | (13,169 | ) | | (28.4 | )% | | (56,227 | ) | | (60,989 | ) | | 4,762 |
| | 7.8 | % |
| Impairment of real estate assets | | (25,199 | ) | | (10,939 | ) | | (14,260 | ) | | (130.4 | )% | | — |
| | (13,717 | ) | | 13,717 |
| | NM |
|
| Other: | | | | | | | | | |
| Interest expense, net | | (25,758 | ) | | (17,051 | ) | | (8,707 | ) | | (51.1 | )% | | (22,775 | ) | | (25,009 | ) | | 2,234 |
| | 8.9 | % |
| (Loss) gain on disposal of property, net | | (1,266 | ) | | 985 |
| | (2,251 | ) | | NM |
| | (1,577 | ) | | 7,121 |
| | (8,698 | ) | | (122.1 | )% |
| Other impairment charges | | (9,661 | ) | | — |
| | (9,661 | ) | | NM |
| |
| Other expense, net | | (912 | ) | | (1,182 | ) | | 270 |
| | 22.8 | % | |
| Net loss | | (42,172 | ) | | (14,076 | ) | | (28,096 | ) | | NM |
| |
| Net loss attributable to noncontrolling interests | | 5,602 |
| | 2,725 |
| | 2,877 |
| | 105.6 | % | |
| Net loss attributable to stockholders | | $ | (36,570 | ) | | $ | (11,351 | ) | | $ | (25,219 | ) | | NM |
| |
| Other income, net | | | 9,869 |
| | 7,536 |
| | 2,333 |
| | 31.0 | % |
| Net income (loss) | | | 11,199 |
| | (5,788 | ) | | 16,987 |
| | NM |
|
| Net (income) loss attributable to noncontrolling interests | | | (1,430 | ) | | 593 |
| | (2,023 | ) | | NM |
|
| Net income (loss) attributable to stockholders | | | $ | 9,769 |
| | $ | (5,195 | ) | | $ | 14,964 |
| | NM |
|
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 279 properties that were owned and operational prior to January 1, 2019. 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, which includes 24 properties disposed of and five properties acquired. Below are explanations of the significant fluctuations in ourthe results of operations for the three months ended June 30, 2019March 31, 2020 and 2018:2019:
Total Revenues increased $28.4
Rental Income decreased $0.4 million as follows:
$35.73.4 million increasedecrease related to the Merger with REIT II, includingour non-same-center portfolio, namely our $43.2 millionnet disposition from the properties acquired, partially offset by a reduction of $7.5 million19 in management fee revenue previously received from the acquired properties; and
$1.43.0 millionincrease primarily related to our same-center portfolio primarily as follows:
| |
| ▪ | $2.3 millionincrease in rental revenues primarily due to a $0.23increase in average minimum rent per square foot and a 1.7% increase in average occupancy; |
| |
| ▪ | $2.1 millionincrease in recovery income largely as a result of higher recoverable real estate taxes and insurance expenses; |
| |
| ▪ | $0.6 millionincrease in temporary and variable rent as well as non-cash adjustments; partially offset by |
| |
| ▪ | $2.1 milliondecrease due to higher adjustments for tenants that have been identified as a credit risk, including as a result of the COVID-19 pandemic. |
Fee and Management Income:
The $1.1 milliondecrease in fee and management income is primarily due to fees no longer received from the joint ventures includedREIT III following its acquisition by us in October 2019.
Property Operating Expenses decreased $1.1 million primarily as Managed Funds;
follows:$0.70.8 million increase related to properties acquired before January 1, 2018, primarily driven by a decrease$0.22 increase in average minimum rent per square foot as compared to the three months ended June 30, 2018;
$8.1 million decrease related to our net disposition of properties since January 1, 2018, outside of the Merger with REIT II, which includes 17 properties sold or contributed to GRP I and 14 properties sold to third parties, net of 619 properties acquired;properties; and
$1.30.3 milliondecrease related to the change in presentation of real estate tax payments paid directly by tenants. The adoption of ASC 842, which requires lessors to exclude from variable payments all costs paid by a lessee directly to a third party, precludes our recognition of real estate tax payments made by tenants directly to third parties as recoverable revenue or expense. As such, we recognized no applicable real estate tax revenue for these direct payments during the three months ended June 30, 2019. As the recorded revenue in prior periods was completely offset by the recorded expense, this has no net impact to earnings.
Property Operating increased$4.0 million as follows:
$4.4 million increase related to the properties acquired in the Merger with REIT II;
$0.2 million decrease related to our same-center portfolio;portfolio and corporate operating activities.
General and Administrative Expenses:
The $2.5 milliondecrease in general and administrative expenses was primarily due to a decrease in estimated performance-based compensation, including adjustments made as a result of the COVID-19 pandemic.
Depreciation and Amortization decreased $4.8 million primarily as follows:
$2.2 milliondecrease related to our net disposition of 19 properties; and
$0.21.8 milliondecrease related to our net disposal and corporate activity.
Real Estate Taxes increased $4.6 million as follows:
$6.3 million increase related to the properties acquired in the Merger with REIT II;
$0.4 million increase related to our same-center portfolio;
$0.8 million decrease related to our net disposal activity; and
$1.3 million decrease related to the change in presentation of real estate tax payments paid directly by tenantsportfolio, primarily due to the adoption of ASC 842.intangible lease assets becoming fully amortized by December 31, 2019.
Impairment of Real Estate Assets:
Our increaseThe decrease in impairment of real estate assets of $14.313.7 million iswas primarily due to less disposition activity. Our impairments during the three months ended March 31, 2019 were related to assets under contract or actively marketed for sale at a disposition price that was less than the carrying value. Uponvalue, the proceeds from which were or 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 such disposition we intendactivity will likely be delayed or reduced due to usecurrent market conditions as a result of the funds to execute our initiatives to recycle capital into higher quality assets, invest in our existing properties through redevelopment, and reduce our leverage.COVID-19 pandemic.
Interest Expense, Net:
•The $8.72.2 million increasedecrease was largely due to repricing activities executed during $464.5 million2019 of debt assumed and new debt entered into in connection with the Merger.. Interest expense, netExpense, Net was comprised of the following (dollars in thousands):
| | | | Three Months Ended | | | | | |
| | June 30, | Three Months Ended March 31, |
| | 2019 | | 2018 | 2020 | | 2019 |
| Interest on revolving credit facility, net | $ | 566 |
| | $ | 544 |
| $ | 216 |
| | $ | 855 |
|
| Interest on term loans, net | 15,851 |
| | 9,579 |
| 12,731 |
| | 14,853 |
|
| Interest on secured debt | 5,767 |
| | 6,074 |
| 7,350 |
| | 5,771 |
|
| Amortization of deferred financing expenses, assumed market debt and derivative adjustments, net | 3,480 |
| | 854 |
| |
| Other | 94 |
| | — |
| |
| Non-cash amortization and other | | 2,478 |
| | 3,530 |
|
| Interest expense, net | $ | 25,758 |
| | $ | 17,051 |
| $ | 22,775 |
| | $ | 25,009 |
|
| | | | | | | |
| Weighted-average interest rate as of end of period | 3.5 | % | | 3.5 | % | 3.3 | % | | 3.5 | % |
| Weighted-average term (in years) as of end of period | 4.7 |
| | 4.9 |
| 4.7 |
| | 4.8 |
|
(Loss) Gain on Disposal of Property, Net:
The $2.38.7 milliondecrease change was primarily related to a net loss recognized from the sale of three properties with a net loss and associated write-offs of $1.6 millionduring the three months ended June 30, 2019, as compared to a net gain recognized from the sale of two properties during the three months ended June 30, 2018.
Other Impairment Charges:
Other impairment charges of$9.7 million are due to the suspension of the PECO III public offering. This included a $7.8 million impairment of a corporate intangible asset and a $1.9 million impairment of organization and offering costs (see Notes 14 and 15).
Other Expense, Net decreased $0.3 million as follows:
$0.9 million expense, net during the three months ended June 30, 2019 was primarily attributable to:
| |
▪ | $0.5 million expense from our unconsolidated joint ventures, primarily due to the amortization of basis adjustments as a result of our Merger with REIT II; and
|
| |
▪ | $0.3 million expense related to state and local income taxes.
|
$1.2 million expense, net during the three months ended June 30, 2018 was primarily attributable to a $1.5 million expense related to an increase in the fair value of our earn-out liability (see Note 15).
Summary of Operating Activities for the Six Months Ended June 30, 2019 and 2018
|
| | | | | | | | | | | | | | | |
| | | Six Months Ended | | Favorable (Unfavorable) |
| | | June 30, | | Change |
| (Dollars in thousands) | | 2019 | | 2018 | | $ | | % |
| Operating Data: | | | | | | | | |
| Total revenues | | $ | 265,350 |
| | $ | 207,372 |
| | $ | 57,978 |
| | 28.0 | % |
| Property operating expenses | | (43,799 | ) | | (35,016 | ) | | (8,783 | ) | | (25.1 | )% |
| Real estate tax expenses | | (35,278 | ) | | (26,473 | ) | | (8,805 | ) | | (33.3 | )% |
| General and administrative expenses | | (26,750 | ) | | (23,911 | ) | | (2,839 | ) | | (11.9 | )% |
| Depreciation and amortization | | (120,543 | ) | | (92,812 | ) | | (27,731 | ) | | (29.9 | )% |
| Impairment of real estate assets | | (38,916 | ) | | (10,939 | ) | | (27,977 | ) | | NM |
|
| Interest expense, net | | (50,842 | ) | | (33,830 | ) | | (17,012 | ) | | (50.3 | )% |
| Gain on disposal of property, net | | 5,855 |
| | 985 |
| | 4,870 |
| | NM |
|
| Other impairment charges | | (9,661 | ) | | — |
| | (9,661 | ) | | NM |
|
| Other income (expense), net | | 6,624 |
| | (1,289 | ) | | 7,913 |
| | NM |
|
| Net loss | | (47,960 | ) | | (15,913 | ) | | (32,047 | ) | | NM |
|
| Net loss attributable to noncontrolling interests | | 6,195 |
| | 2,962 |
| | 3,233 |
| | 109.1 | % |
| Net loss attributable to stockholders | | $ | (41,765 | ) | | $ | (12,951 | ) | | $ | (28,814 | ) | | NM |
|
Below are explanations of the significant fluctuations in the results of operations for the six months ended June 30, 2019 and 2018:
Total Revenues increased $58.0 million as follows:
$73.4 million increase related to the Merger with REIT II, including $87.9 million from the properties acquired, partially offset by a reduction of $14.5 million in management fee revenue previously received from the acquired properties;
$2.9 million increase primarily related to fee and management income received from the joint ventures included as Managed Funds;
$1.5 million increase related to properties acquired before January 1, 2018, primarily driven by a $0.20 increase in average minimum rent per square foot as compared to the six months ended June 30, 2018;
$16.4 million decrease related to our net disposition of properties since January 1, 2018, outside of the Merger with REIT II. This includes 17 properties sold or contributed to GRP I and 14 properties sold to third parties, net of 6 properties acquired; and
$3.4 milliondecrease related to the adoption of ASC 842 (see our Summary of Operating Activities for theThree Months Ended June 30, 2019 and 2018), which included a $2.7 million decrease related to the change in presentation of real estate tax payments paid directly by tenants, and a $0.7 million decrease related to the change in presentation of our assessment of lease collectability.
Property Operating increased $8.8 million primarily as follows:
$9.6 million increase related to the properties acquired in the Merger with REIT II;
$0.7 million decrease related to our same-center portfolio; and
$0.2 million decrease related to our net disposal and corporate activity.
Real Estate Taxes increased $8.8 million as follows:
$12.8 million increase related to the properties acquired in the Merger with REIT II;
$0.6 million increase related to our same-center portfolio;
$1.9 million decrease related to our net disposal activity; and
$2.7 million decrease related to the change in presentation of real estate tax payments paid directly by tenants due to the adoption of ASC 842.
General and Administrative Expenses:
The $2.8 millionincrease in general and administrative expenses was driven by the Merger with REIT II, primarily related to overhead costs such as compensation and benefits, accounting fees, and IT-related costs which are no longer reimbursable from REIT II as it is no longer an unconsolidated Managed Fund.
Impairment of Real Estate Assets:
Our increase in impairment of real estate assets of $28.0 million is related to assets under contract or actively marketed for sale at a disposition price that was less than the carrying value. Upon disposition, we intend to use the
funds to execute our initiatives to recycle capital into higher quality assets, invest in our existing properties through redevelopment, and reduce our leverage.
Interest Expense, Net:
•The $17.0 millionincrease was largely due to $464.5 million of debt assumed and new debt entered into in connection with the Merger. Interest expense, net was comprised of the following (dollars in thousands): |
| | | | | | | |
| | Six Months Ended |
| | June 30, |
| | 2019 | | 2018 |
| Interest on revolving credit facility, net | $ | 1,421 |
| | $ | 811 |
|
| Interest on term loans, net | 30,704 |
| | 18,872 |
|
| Interest on secured debt | 11,539 |
| | 12,337 |
|
| Amortization of deferred financing expenses, assumed market debt and derivative adjustments, net | 7,004 |
| | 1,810 |
|
| Other | 174 |
| | — |
|
| Interest expense, net | $ | 50,842 |
| | $ | 33,830 |
|
| | | | |
| Weighted-average interest rate as of end of period | 3.5 | % | | 3.5 | % |
| Weighted-average term (in years) as of end of period | 4.7 |
| | 4.9 |
|
Gain on Disposal of Property, Net:
The $4.9 millionincrease was related to the sale of six properties during the six months ended June 30, 2019March 31, 2020, as compared to the sale of twothree properties with a net gain of $7.1 million during the sixthree months ended June 30, 2018March 31, 2019 (see Note 54).
Other Impairment Charges:Income, Net:
Other impairment charges ofThe $9.72.3 million areincrease was largely due to the suspension of the PECO III public offering. This included a $7.8 million impairment of a corporate intangible asset and a $1.9 million impairment of organization and offering costs (see Notes 14 and 15).
Other Income (Expense), Net increased $7.9 million as follows:
$6.6 million income, net during the six months ended June 30, 2019 was primarily attributable to:
| |
▪ | $7.5 million income related to the change in fair value of our earn-out liability (see Note 15);
|
| |
▪ | $0.5 million income related to other non-recurring income associated with property acquisitions;
|
| |
▪ | $1.0 million expense from our unconsolidated joint ventures, primarily due to the amortization of basis adjustments as a result of our Merger with REIT II; and
|
| |
▪ | $0.3 million expense related to state and local income taxes.
|
$1.3 million expense, net during the six months ended June 30, 2018 was primarily attributable to a $1.5 million expense related to an increase in the fair value of our earn-out liability.liability during the three months ended March 31, 2020 as compared to the same period in 2019. Other Income, Net was comprised of the following (dollars in thousands):
|
| | | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
| Change in fair value of earn-out liability | $ | 10,000 |
| | $ | 7,500 |
|
| Equity in loss of unconsolidated joint ventures | (280 | ) | | (456 | ) |
| Transaction and acquisition expenses | (45 | ) | | (88 | ) |
| Federal, state, and local income tax expense | (29 | ) | | — |
|
| Other | 223 |
| | 580 |
|
| Other income, net | $ | 9,869 |
| | $ | 7,536 |
|
Leasing Activity—The average rent per square foot and cost of executing leases fluctuates based on the tenant mix, size of the leased space, and lease term. Leases with national and regional tenants generally require a higher cost per square foot to execute than those with local tenants. However, generally such national and regional tenants 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 June 30, 2019March 31, 2020 and 2018(1):2019: | | | | | Total Deals | | Inline Deals(2) | | Total Deals(1) | | Inline Deals(1)(2) |
| | | 2019 | | 2018(3) | | 2019 | | 2018(3) | | 2020 | | 2019 | | 2020 | | 2019 |
| New leases: | | | | | | | | | | | | | | | | |
| Number of leases | | 100 |
| | 44 |
| | 96 |
| | 42 |
| | 87 |
| | 107 |
| | 77 |
| | 103 |
|
| Square footage (in thousands) | | 393 |
| | 119 |
| | 227 |
| | 93 |
| | 382 |
| | 323 |
| | 180 |
| | 252 |
|
| First-year base rental revenue (in thousands) | | $ | 5,467 |
| | $ | 1,905 |
| | $ | 4,017 |
| | $ | 1,679 |
| |
| Average rent per square foot (“PSF”) | | $ | 13.91 |
| | $ | 16.04 |
| | $ | 17.67 |
| | $ | 17.98 |
| |
Average cost PSF of executing new leases(4) | | $ | 25.68 |
| | $ | 23.92 |
| | $ | 30.54 |
| | $ | 23.84 |
| |
| ABR (in thousands) | | | $ | 5,563 |
| | $ | 4,878 |
| | $ | 3,214 |
| | $ | 4,167 |
|
| ABR per square foot | | | $ | 14.56 |
| | $ | 15.08 |
| | $ | 17.84 |
| | $ | 16.54 |
|
Cost per square foot of executing new leases(3) | | | $ | 22.03 |
| | $ | 27.61 |
| | $ | 27.94 |
| | $ | 27.95 |
|
Number of comparable leases(5)(4) | | 33 |
| | 12 |
| | 33 |
| | 11 |
| | 25 |
| | 40 |
| | 25 |
| | 38 |
|
Comparable rent spread(6)(5) | | 10.5 | % | | 15.1 | % | | 10.5 | % | | 4.3 | % | | 6.8 | % | | 17.2 | % | | 6.8 | % | | 14.9 | % |
| Weighted average lease term (in years) | | 8.1 |
| | 6.0 |
| | 7.0 |
| | 5.5 |
| | 9.1 |
| | 7.1 |
| | 6.6 |
| | 6.5 |
|
| Renewals and options: | | | | | | | | | | | | | | | | |
| Number of leases | | 159 |
| | 134 |
| | 148 |
| | 124 |
| | 127 |
| | 163 |
| | 113 |
| | 152 |
|
| Square footage (in thousands) | | 716 |
| | 650 |
| | 309 |
| | 290 |
| | 739 |
| | 688 |
| | 249 |
| | 326 |
|
| First-year base rental revenue (in thousands) | | $ | 9,579 |
| | $ | 8,203 |
| | $ | 6,759 |
| | $ | 4,980 |
| |
Average rent PSF | | $ | 13.39 |
| | $ | 12.62 |
| | $ | 21.87 |
| | $ | 17.16 |
| |
| Average rent PSF prior to renewals | | $ | 12.15 |
| | $ | 11.74 |
| | $ | 19.73 |
| | $ | 15.61 |
| |
| Percentage increase in average rent PSF | | 10.2 | % | | 7.3 | % | | 10.9 | % | | 9.7 | % | |
| Average cost PSF of executing renewals and options | | $ | 2.59 |
| | $ | 2.45 |
| | $ | 4.29 |
| | $ | 3.62 |
| |
| ABR (in thousands) | | | $ | 9,720 |
| | $ | 10,550 |
| | $ | 5,364 |
| | $ | 7,106 |
|
| ABR per square foot | | | $ | 13.15 |
| | $ | 15.34 |
| | $ | 21.53 |
| | $ | 21.80 |
|
| ABR per square foot prior to renewals | | | $ | 12.33 |
| | $ | 14.15 |
| | $ | 19.18 |
| | $ | 19.32 |
|
| Percentage increase in ABR per square foot | | | 6.7 | % | | 8.4 | % | | 12.2 | % | | 12.8 | % |
| Cost per square foot of executing renewals and options | | | $ | 3.41 |
| | $ | 3.25 |
| | $ | 4.36 |
| | $ | 5.05 |
|
Number of comparable leases | | 122 |
| | 98 |
| | 117 |
| | 95 |
| | 89 |
| | 130 |
| | 86 |
| | 127 |
|
Comparable rent spread | | 10.8 | % | | 7.9 | % | | 11.0 | % | | 9.8 | % | | 11.2 | % | | 12.3 | % | | 14.4 | % | | 13.6 | % |
| Weighted average lease term (in years) | | 4.8 |
| | 5.0 |
| | 4.4 |
| | 4.6 |
| | 4.7 |
| | 4.8 |
| | 4.0 |
| | 4.7 |
|
Portfolio retention rate(7)(6) | | 87.1 | % | | 94.9 | % | | 76.2 | % | | 89.2 | % | | 71.2 | % | | 84.4 | % | | 67.3 | % | | 80.8 | % |
| |
(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 feet of GLA. |
| |
(3) | Leasing activity in 2018 does not include activity for the REIT II properties, as they were acquired in the Merger on November 16, 2018.
|
| |
(4)
| 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, are excluded, if any. |
| |
(5)(4)
| A comparable lease is a lease that is executed for the exact same space (location and square feet) in which a tenant 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 tenant physically vacated the space. |
| |
(6)(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 12twelve months. |
| |
(7)(6)
| The portfolio retention rate is calculated by dividing (a) total square feet of retained tenants with current period lease expirations by (b) the square feet of leases expiring during the period. |
Below is a summary of leasing activity for our wholly-owned properties for the six months ended June 30, 2019 and 2018(1):
|
| | | | | | | | | | | | | | | | |
| | | Total Deals | | Inline Deals |
| | | 2019 | | 2018 | | 2019 | | 2018 |
| New leases: | | | | | | | | |
| Number of leases | | 207 |
| | 118 |
| | 199 |
| | 113 |
|
| Square footage (in thousands) | | 716 |
| | 363 |
| | 479 |
| | 264 |
|
| First-year base rental revenue (in thousands) | | $ | 10,345 |
| | $ | 5,141 |
| | $ | 8,184 |
| | $ | 4,440 |
|
| Average rent PSF | | $ | 14.44 |
| | $ | 14.15 |
| | $ | 17.07 |
| | $ | 16.84 |
|
| Average cost PSF of executing new leases | | $ | 26.51 |
| | $ | 24.48 |
| | $ | 29.10 |
| | $ | 24.74 |
|
| Number of comparable leases | | 73 |
| | 33 |
| | 71 |
| | 31 |
|
| Comparable rent spread | | 14.6 | % | | 18.1 | % | | 13.0 | % | | 10.2 | % |
| Weighted average lease term (in years) | | 7.6 |
| | 6.8 |
| | 6.7 |
| | 6.7 |
|
| Renewals and options: | | | | | | | | |
| Number of leases | | 322 |
| | 251 |
| | 300 |
| | 229 |
|
| Square footage (in thousands) | | 1,404 |
| | 1,224 |
| | 635 |
| | 489 |
|
| First-year base rental revenue (in thousands) | | $ | 20,129 |
| | $ | 15,829 |
| | $ | 13,865 |
| | $ | 9,024 |
|
Average rent PSF | | $ | 14.34 |
| | $ | 12.93 |
| | $ | 21.83 |
| | $ | 18.44 |
|
| Average rent PSF prior to renewals | | $ | 13.12 |
| | $ | 11.95 |
| | $ | 19.52 |
| | $ | 16.65 |
|
| Percentage increase in average rent PSF | | 9.3 | % | | 8.2 | % | | 11.9 | % | | 10.6 | % |
| Average cost PSF of executing renewals and options | | $ | 2.91 |
| | $ | 2.76 |
| | $ | 4.68 |
| | $ | 4.02 |
|
| Number of comparable leases | | 252 |
| | 185 |
| | 244 |
| | 177 |
|
| Comparable rent spread | | 11.6 | % | | 9.4 | % | | 12.4 | % | | 11.6 | % |
| Weighted average lease term (in years) | | 4.8 |
| | 4.9 |
| | 4.6 |
| | 4.8 |
|
| Portfolio retention rate | | 85.5 | % | | 91.6 | % | | 78.4 | % | | 82.9 | % |
| |
(1)
| See the footnotes to the summary of leasing activity table for the three months ended June 30, 2019, for more detail regarding certain items throughout this table. |
Non-GAAP Measures
Pro Forma Same-Center Net Operating Income (“NOI”)—We present Same-Center NOI as a supplemental measure of our performance. We define NOI as total operating revenues, adjusted to exclude non-cash revenue items, less property operating expenses and real estate taxes. For the three months ended March 31, 2020, Same-Center NOI represents the NOI for the 279 properties that were ownedwholly-owned and operational for the entire portion of both comparable reporting periods. For purposes of evaluatingWe believe Same-Center NOI onprovides useful information to our investors about our financial and operating performance because it provides a comparative basis, we are presenting Pro Formaperformance 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 which is Same-Centerexcludes the change in NOI on a pro forma basis as if the Merger had occurred on January 1, 2018. This perspective allows us to evaluate Same-Center NOI growth over a comparable period. As of June 30, 2019, we had 291 same-center properties, including 85 same-centerfrom properties acquired in the Merger. Pro Forma Same-Center NOI is not necessarily indicativeor disposed of what actual Same-Center NOI growth would have been if the Merger had occurred on January 1,after December 31, 2018, nor does it purport to represent Same-Center NOI growth for future periods.
Pro Forma Same-Center NOI highlights operating trends such as occupancy rates,levels, 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, our 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 our financial performance sinceas it does not reflect the operations of our entire portfolio, nor does it reflect the impact of general and administrative expenses, acquisition expenses, depreciation and amortization, interest expense, other income (expense), or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties that could materially impact our results from operations.
The table below compares Pro Forma Same-Center NOI (dollars in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Favorable | | Six Months Ended | | Favorable |
| | June 30, | | (Unfavorable) | | June 30, | | (Unfavorable) |
| | 2019 | | 2018(1) | | $ Change | | % Change | | 2019 | | 2018(1) | | $ Change | | % Change |
| Revenues: | | | | | | | | | | | | | | | |
Rental income(2) | $ | 92,448 |
| | $ | 92,072 |
| | $ | 376 |
| | | | $ | 184,159 |
|
| $ | 182,928 |
| | $ | 1,231 |
| | |
| Tenant recovery income | 28,452 |
| | 29,908 |
| | (1,456 | ) | | | | 58,346 |
|
| 61,541 |
| | (3,195 | ) | | |
| Other property income | 458 |
| | 508 |
| | (50 | ) | | | | 1,079 |
|
| 1,195 |
| | (116 | ) | | |
| Total revenues | 121,358 |
| | 122,488 |
| | (1,130 | ) | | (0.9 | )% | | 243,584 |
| | 245,664 |
| | (2,080 | ) | | (0.8 | )% |
| Operating expenses: | | | | | | | | | | | | | | | |
| Property operating expenses | 16,859 |
|
| 18,211 |
| | 1,352 |
| | | | 35,575 |
|
| 38,466 |
| | 2,891 |
| | |
| Real estate taxes | 17,488 |
|
| 18,585 |
| | 1,097 |
| | | | 34,209 |
|
| 36,871 |
| | 2,662 |
| | |
| Total operating expenses | 34,347 |
| | 36,796 |
| | 2,449 |
| | 6.7 | % | | 69,784 |
| | 75,337 |
| | 5,553 |
| | 7.4 | % |
| Total Pro Forma Same-Center NOI | $ | 87,011 |
| | $ | 85,692 |
| | $ | 1,319 |
| | 1.5 | % | | $ | 173,800 |
| | $ | 170,327 |
| | $ | 3,473 |
| | 2.0 | % |
| |
(1)
| Adjusted for the same-center operating results of the Merger prior to the transaction for these periods. For additional information and details about the operating results of the Merger included herein, refer to the REIT II Same-Center NOI table below. |
| |
(2)
| Excludes straight-line rental income, net amortization of above- and below-market leases, and lease buyout income. In accordance with ASC 842, revenue amounts deemed uncollectible are included in rental income for 2019 and property operating expense in 2018.
|
Pro Forma Same-Center Net Operating Income Reconciliation—Below is a reconciliation of Net Loss to NOI for our real estate investments and Pro Forma Same-Center NOI (in thousands): |
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| Net loss | $ | (42,172 | ) | | $ | (14,076 | ) | | $ | (47,960 | ) |
| $ | (15,913 | ) |
| Adjusted to exclude: | | | | |
|
|
|
|
|
| Fees and management income | (3,051 | ) | | (9,137 | ) | | (6,312 | ) |
| (17,849 | ) |
| Straight-line rental income | (2,819 | ) | | (1,409 | ) | | (4,532 | ) |
| (2,489 | ) |
| Net amortization of above- and below-market leases | (1,091 | ) | | (983 | ) | | (2,224 | ) |
| (1,990 | ) |
| Lease buyout income | (223 | ) | | (43 | ) | | (456 | ) |
| (66 | ) |
| General and administrative expenses | 13,540 |
| | 13,450 |
| | 26,750 |
|
| 23,911 |
|
| Depreciation and amortization | 59,554 |
| | 46,385 |
| | 120,543 |
|
| 92,812 |
|
| Impairment of real estate assets | 25,199 |
| | 10,939 |
| | 38,916 |
| | 10,939 |
|
| Interest expense, net | 25,758 |
| | 17,051 |
| | 50,842 |
| | 33,830 |
|
| Loss (gain) on disposal of property, net | 1,266 |
| | (985 | ) | | (5,855 | ) | | (985 | ) |
| Other impairment charges | 9,661 |
| | — |
| | 9,661 |
| | — |
|
| Other | 912 |
|
| 1,087 |
|
| (6,624 | ) |
| 1,100 |
|
Property management expense allocations to third-party
assets under management | 3,462 |
| | 4,001 |
| | 6,725 |
| | 7,791 |
|
| NOI for real estate investments | 89,996 |
| | 66,280 |
| | 179,474 |
| | 131,091 |
|
| Less: NOI from centers excluded from same-center | (2,985 | ) | | (8,783 | ) | | (5,674 | ) | | (17,290 | ) |
| NOI from same-center properties acquired in the Merger, prior to acquisition | — |
| | 28,195 |
| | — |
| | 56,526 |
|
| Total Pro Forma Same-Center NOI | $ | 87,011 |
| | $ | 85,692 |
| | $ | 173,800 |
| | $ | 170,327 |
|
Pro Forma Same-Center Properties—Below is a breakdown of our property count, including same-center properties by origin as well as non-same-center properties: |
| |
| Six Months Ended |
| June 30, 2019 |
Same-center properties owned since January 1, 2018 | 206 |
Same-center properties acquired in the Merger | 85 |
Properties acquired after January 1, 2018 | 7 |
Total properties | 298 |
REIT II Same-Center Net Operating Income—NOI from the REIT II properties acquired in the Merger, prior to acquisition, was obtained from the accounting records of REIT II without adjustment. The accounting records were subject to internal review by us. The table below provides Same-Center NOI detail for the non-ownership period of REIT II (in thousands): | | | | Three Months Ended | | Six Months Ended | Three Months Ended March 31, | | Favorable (Unfavorable) |
| | June 30, 2018 | | June 30, 2018 | 2020 | | 2019 | | $ Change | | % Change |
| Revenues: | | | | | | | | | | |
Rental income(1) | $ | 30,731 |
| | $ | 61,304 |
| $ | 90,447 |
|
| $ | 89,684 |
| | $ | 763 |
| | |
| Tenant recovery income | 10,946 |
| | 22,821 |
| 31,036 |
|
| 28,947 |
| | 2,089 |
| | |
| Other property income | 172 |
| | 443 |
| 878 |
|
| 613 |
| | 265 |
| | |
| Total revenues | 41,849 |
| | 84,568 |
| 122,361 |
| | 119,244 |
| | 3,117 |
| | 2.6 | % |
| Operating expenses: | | | | | | | | | | |
| Property operating expenses | 6,823 |
| | 14,275 |
| 18,281 |
|
| 18,112 |
| | (169 | ) | | |
| Real estate taxes | 6,831 |
| | 13,767 |
| 17,155 |
|
| 16,418 |
| | (737 | ) | | |
| Total operating expenses | 13,654 |
| | 28,042 |
| 35,436 |
| | 34,530 |
| | (906 | ) | | (2.6 | )% |
| Total Same-Center NOI | $ | 28,195 |
| | $ | 56,526 |
| $ | 86,925 |
| | $ | 84,714 |
| | $ | 2,211 |
| | 2.6 | % |
| |
(1) | Excludes straight-line rental income, net amortization of above- and below-market leases, and lease buyout income. |
Same-Center NOI Reconciliation—Below is a reconciliation of Net Income (Loss) to NOI for our real estate investments and Same-Center NOI (in thousands): |
| | | | | | | |
| | Three Months Ended March 31, |
| 2020 | | 2019(1) |
| Net income (loss) | $ | 11,199 |
|
| $ | (5,788 | ) |
| Adjusted to exclude: |
|
|
|
|
|
| Fees and management income | (2,165 | ) |
| (3,261 | ) |
| Straight-line rental income and expense | (2,312 | ) |
| (1,713 | ) |
| Net amortization of above- and below-market leases | (788 | ) |
| (1,133 | ) |
| Lease buyout income | (94 | ) |
| (232 | ) |
| General and administrative expenses | 10,740 |
|
| 13,285 |
|
| Depreciation and amortization | 56,227 |
|
| 60,989 |
|
| Impairment of real estate assets | — |
| | 13,717 |
|
| Interest expense, net | 22,775 |
| | 25,009 |
|
| Loss (gain) on disposal of property, net | 1,577 |
| | (7,121 | ) |
| Other income, net | (9,869 | ) |
| (7,536 | ) |
| Property operating expenses related to fees and management income | 646 |
| | 1,295 |
|
| NOI for real estate investments | 87,936 |
| | 87,511 |
|
Less: Non-same-center NOI(2) | (1,011 | ) | | (2,797 | ) |
| Total Same-Center NOI | $ | 86,925 |
| | $ | 84,714 |
|
| |
(1) | Certain prior period amounts have been reclassified to conform with current year presentation. |
| |
(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 Modified Funds from Operations (“MFFO”)Core FFO—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”Nareit”) defines FFO as net income (loss) attributable to common stockholders 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 NAREITNareit definition, with an additional adjustment made for noncontrolling interests that are not convertible into common stock.
MFFOCore FFO is an additional performance financial measure used by us as FFO includes certain non-comparable items that affect our performance over time. We believe that MFFOCore FFO is helpful in assisting management and investors with the assessment of the sustainability of 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 by excluding items that may cause short-term fluctuations in net income (loss). To arrive at Core FFO, we adjust FFO attributable to stockholders and convertible noncontrolling interests to exclude certain recurring and non-recurring items including, but have no impactnot limited to, depreciation and amortization of corporate assets, changes in the fair value of the earn-out liability, gains or losses on cash flows.the extinguishment or modification of debt, transaction and acquisition expenses, and amortization of unconsolidated joint venture basis differences.
FFO, FFO Attributable to Stockholders and Convertible Noncontrolling Interests, and MFFOCore FFO should not be considered alternatives to net income (loss) or income (loss) from continuing operations 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. MFFOCore FFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate our business plan in the manner currently contemplated.
Accordingly, FFO, FFO Attributable to Stockholders and Convertible Noncontrolling Interests, and MFFOCore 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 FFO, FFO Attributable to Stockholders and Convertible Noncontrolling Interests, and MFFO,Core FFO, as presented, may not be comparable to amounts calculated by other REITs.
The following table presents our calculation of FFO, FFO Attributable to Stockholders and Convertible Noncontrolling Interests, and MFFOCore FFO and provides additional information related to our operations (in thousands, except per share amounts): |
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 |
| 2018 |
Calculation of FFO Attributable to Stockholders and
Convertible Noncontrolling Interests | | | | | |
| |
| Net loss | $ | (42,172 | ) | | $ | (14,076 | ) | | $ | (47,960 | ) |
| $ | (15,913 | ) |
| Adjustments: | | | | |
|
|
|
|
|
| Depreciation and amortization of real estate assets | 57,828 |
| | 42,841 |
| | 117,170 |
|
| 85,140 |
|
| Impairment of real estate assets | 25,199 |
| | 10,939 |
| | 38,916 |
| | 10,939 |
|
| Loss (gain) on disposal of property, net | 1,266 |
| | (985 | ) | | (5,855 | ) |
| (985 | ) |
| Adjustments related to unconsolidated joint ventures | 1,051 |
| | — |
| | 2,106 |
| | — |
|
| FFO attributable to the Company | 43,172 |
| | 38,719 |
| | 104,377 |
|
| 79,181 |
|
Adjustments attributable to noncontrolling interests not
convertible into common stock | (41 | ) | | (31 | ) | | (231 | ) |
| (128 | ) |
FFO attributable to stockholders and convertible
noncontrolling interests | $ | 43,131 |
| | $ | 38,688 |
| | $ | 104,146 |
|
| $ | 79,053 |
|
| Calculation of MFFO | |
| | |
| | |
|
| |
|
FFO attributable to stockholders and convertible
noncontrolling interests | $ | 43,131 |
| | $ | 38,688 |
| | $ | 104,146 |
|
| $ | 79,053 |
|
| Adjustments: | |
| | |
| | |
|
| |
|
| Net amortization of above- and below-market leases | (1,091 | ) | | (982 | ) | | (2,224 | ) |
| (1,990 | ) |
| Depreciation and amortization of corporate assets | 1,726 |
| | 3,544 |
| | 3,373 |
|
| 7,672 |
|
| Straight-line rent | (2,743 | ) | | (1,414 | ) | | (4,456 | ) |
| (2,471 | ) |
| Amortization of market debt adjustment | 2,255 |
| | (465 | ) | | 4,482 |
|
| (737 | ) |
| Change in fair value of earn-out liability | — |
| | 1,500 |
| | (7,500 | ) | | 1,500 |
|
| Other impairment charges | 9,661 |
| | — |
| | 9,661 |
| | — |
|
| Adjustments related to unconsolidated joint ventures | 353 |
| | — |
| | 697 |
| | — |
|
| Other | 188 |
| | 74 |
| | 276 |
|
| 104 |
|
| MFFO | $ | 53,480 |
| | $ | 40,945 |
| | $ | 108,455 |
|
| $ | 83,131 |
|
| | | | | | | | |
FFO Attributable to Stockholders and Convertible
Noncontrolling Interests/MFFO per share | | | | | | | |
Weighted-average common shares outstanding - diluted(1) | 326,607 |
|
| 228,909 |
|
| 326,124 |
|
| 229,628 |
|
FFO attributable to stockholders and convertible
noncontrolling interests per share - diluted(1) | $ | 0.13 |
| | $ | 0.17 |
| | $ | 0.32 |
|
| $ | 0.34 |
|
MFFO per share - diluted (1) | $ | 0.16 |
| | $ | 0.18 |
| | $ | 0.33 |
|
| $ | 0.36 |
|
|
| | | | | | | |
| | Three Months Ended March 31, |
| | 2020 |
| 2019(1) |
| Calculation of FFO Attributable to Stockholders and Convertible Noncontrolling Interests | |
| |
| Net income (loss) | $ | 11,199 |
| | $ | (5,788 | ) |
| Adjustments: | | | |
| Depreciation and amortization of real estate assets | 54,817 |
| | 59,342 |
|
| Impairment of real estate assets | — |
| | 13,717 |
|
| Loss (gain) on disposal of property, net | 1,577 |
| | (7,121 | ) |
| Adjustments related to unconsolidated joint ventures | 654 |
| | 1,055 |
|
| FFO attributable to the Company | 68,247 |
|
| 61,205 |
|
Adjustments attributable to noncontrolling interests not convertible
into common stock | — |
| | (190 | ) |
| FFO attributable to stockholders and convertible noncontrolling interests | $ | 68,247 |
|
| $ | 61,015 |
|
| Calculation of Core FFO | |
|
| |
|
| FFO attributable to stockholders and convertible noncontrolling interests | $ | 68,247 |
|
| $ | 61,015 |
|
| Adjustments: | |
|
| |
|
| Depreciation and amortization of corporate assets | 1,410 |
| | 1,647 |
|
| Change in fair value of earn-out liability | (10,000 | ) | | (7,500 | ) |
| Amortization of unconsolidated joint venture basis differences | 467 |
| | 344 |
|
| Loss on extinguishment or modification of debt, net | 73 |
| | — |
|
| Transaction and acquisition expenses | 45 |
| | 88 |
|
| Core FFO | $ | 60,242 |
|
| $ | 55,594 |
|
| | | | |
| FFO Attributable to Stockholders and Convertible Noncontrolling Interests per share and Core FFO per share | | | |
Weighted-average common shares outstanding - diluted(2) | 333,228 |
| | 325,922 |
|
FFO attributable to stockholders and convertible noncontrolling interests
per share - diluted | $ | 0.20 |
|
| $ | 0.19 |
|
| Core FFO per share - diluted | $ | 0.18 |
|
| $ | 0.17 |
|
| |
(1) | Certain prior period amounts have been reclassified to conform with current year presentation. |
| |
(2) | Restricted stock awards were dilutive to FFO Attributable to Stockholders and Convertible Noncontrolling Interests and MFFOCore FFO for the three and sixmonths ended June 30, 2019March 31, 2020 and 20182019, and, accordingly, their impact was included in the weighted-average common shares used to calculate diluted FFO Attributable to Stockholders and Convertible Noncontrolling Interests per share and MFFOCore FFO per share. For the three months ended March 31, 2019, restricted stock awards with a weighted-average impact of 0.7 million shares had an anti-dilutive effect upon the calculation of earnings per share, as further detailed in Note 10, and thus were excluded. As these shares were not anti-dilutive to diluted FFO Attributable to Stockholders and Convertible Noncontrolling Interests and Core FFO per share, they are included here. |
Liquidity and Capital Resources
General—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;stockholders to comply with REIT requirements;
capital expenditures and leasing costs;
investments in real estate; and
redevelopment and repositioning projects;
repurchases of common stock; and
principal and interest payments on our outstanding indebtedness.
projects.
We expect our primary sources of liquidity to be:
operating cash flows;
proceeds received from dispositions of properties;
reinvested distributions;
proceeds from debt financings, including borrowings under our unsecured revolving credit facility;
proceeds received from the disposition of properties;
distributions received from joint ventures; and
available, unrestricted cash and cash equivalents.equivalents; and
reinvested distributions once distributions to stockholders and thus the DRIP are reactivated/reinstated.
We anticipate that cash from operations may be reduced at least in the near term as a result of the immediate impact of the COVID-19 pandemic as we may temporarily experience reduced cash payments and/or revenue from tenants. Additionally,
our cash from financing activities will be impacted by actions taken to preserve liquidity, as we have temporarily suspended our distributions, the DRIP, and the SRP for death, qualifying disability, or determination of incompetence (standard SRP repurchases remain suspended). We are monitoring events closely and managing our cash usage, which also includes delaying capital spending and redevelopment where possible as well as reducing other property and corporate expenses. At this time, we believe our current sources of liquidity, most significantly our operating cash will provide adequate liquidityflows and borrowing availability on our revolving credit facility, are sufficient to fundmeet our obligations.short- and long-term cash demands.
Debt—The following table summarizes information about our debt as of June 30, 2019March 31, 2020 and December 31, 20182019 (dollars in thousands): | | | | June 30, 2019 | | December 31, 2018 | March 31, 2020 | | December 31, 2019 |
Total debt obligations, gross(1) | $ | 2,443,395 |
| | $ | 2,461,438 |
| $ | 2,374,011 |
| | $ | 2,372,521 |
|
| Weighted average interest rate | 3.5 | % | | 3.5 | % | |
| Weighted average maturity | 4.7 |
| | 4.9 |
| |
| Weighted average interest rate at end of period | | 3.3 | % | | 3.4 | % |
| Weighted average term (in years) at end of period | | 4.7 |
| | 5.0 |
|
| | | | | | | |
| Revolving credit facility capacity | $ | 500,000 |
| | $ | 500,000 |
| $ | 500,000 |
| | $ | 500,000 |
|
Revolving credit facility availability(2)(1) | 491,423 |
| | 426,182 |
| 454,705 |
| | 489,805 |
|
Revolving credit facility maturity(3)(2) | October 2021 |
| | October 2021 |
| October 2021 |
| | October 2021 |
|
| |
(1) | Excludes assumed market debt adjustmentsNet of any outstanding balance and deferred financing expenses.letters of credit. |
| |
(2) | Net of outstanding letters of credit. |
| |
(3)
| The revolving credit facility has an additional optionsoption to extend the maturity to October 2022.2022, with its execution being subject to compliance with certain terms included in the loan agreement, including the absence of any defaults and the payment of relevant fees. As of March 31, 2020, we were in compliance with these terms and expect to be in compliance over the next twelve months. |
In January 2020, we paid down $30.0 million of term loan debt maturing in 2021 using proceeds from property dispositions in 2019. Following this repayment, our next term loan maturity is in April 2022. In March 2020, we borrowed $34 million on our $500 million revolving credit facility in order to satisfy general operating needs. In April 2020, we borrowed an additional $200 million on our revolving credit facility to meet our operating needs for a sustained period due to the COVID-19 pandemic. To the extent we continue to maintain a balance on our revolving credit facility, our interest expense will be higher in future quarters. As of May 11, 2020, total availability on our revolving credit facility, net of any letters of credit, was $254.7 million.
Our debt is subject to certain covenants, and as of June 30, 2019,March 31, 2020, we were in compliance with the restrictive covenants of our outstanding debt obligations. We expect to continue to meet the requirements of our debt covenants over the short- and long-term. Ournext twelve months.
We believe our debt to total enterprise value and debt covenant compliance as of June 30, 2019, allowMarch 31, 2020 allows us access to future borrowings as needed.
needed in the near term. The following table presents our calculation of net debt to total enterprise value, inclusive of our prorated portion of net debt and cash and cash equivalents owned through our joint ventures, as of June 30, 2019March 31, 2020 and December 31, 20182019 (dollars in thousands): | | | | June 30, 2019 | | December 31, 2018 | March 31, 2020 | | December 31, 2019 |
| Net debt: | | | | | | |
Total debt, excluding below-market adjustments and deferred financing expenses | $ | 2,504,389 |
| | $ | 2,522,432 |
| |
| Total debt, excluding market adjustments and deferred financing expenses | | $ | 2,421,098 |
| | $ | 2,421,520 |
|
| Less: Cash and cash equivalents | 18,492 |
| | 18,186 |
| 37,445 |
| | 18,376 |
|
| Total net debt | $ | 2,485,897 |
| | $ | 2,504,246 |
| $ | 2,383,653 |
| | $ | 2,403,144 |
|
| Enterprise value: | | | | | | |
| Total net debt | $ | 2,485,897 |
| | $ | 2,504,246 |
| $ | 2,383,653 |
| | $ | 2,403,144 |
|
Total equity value(1) | 3,627,314 |
| | 3,583,029 |
| 2,914,555 |
| | 3,682,161 |
|
| Total enterprise value | $ | 6,113,211 |
| | $ | 6,087,275 |
| $ | 5,298,208 |
| | $ | 6,085,305 |
|
| | | | | | | |
| Net debt to total enterprise value | 40.7 | % | | 41.1 | % | 45.0 | % | | 39.5 | % |
| |
(1) | Total equity value is calculated as the product of the number of dilutedcommon shares and OP units outstanding multiplied by the EVPS as of March 31, 2020 and the estimated net asset value per share at the end of the period.December 31, 2019, respectively. There were 326.8 million and 324.6333.1 million diluted shares outstanding with an EVPS of $8.75 and 331.7 million diluted shares outstanding with an EVPS of $11.10as of June 30, 2019March 31, 2020 and December 31, 20182019, respectively. |
AsCapital Expenditures and Redevelopment Activity—We make capital expenditures during the course of June 30,normal operations, which include maintenance capital expenditures and tenant improvements as well as value-enhancing anchor space repositioning and redevelopment, ground-up outparcel development, and other accretive projects. Currently, we are delaying all capital projects to the extent possible in order to maximize our available capital in response to the uncertainty around the duration and negative impact of the COVID-19 pandemic.
During the three months ended March 31, 2020 and 2019, we had cashcapital spend of $16.0 million and cash equivalents and restricted cash of $52.6$8.6 million, a net decrease of $31.7 millionrespectively. Our capital spend during the sixthree months ended June 30,March 31, 2020 included development and redevelopment spend of $8.8 million primarily related to projects originating in 2019.
Below is a summary These projects have an estimated total remaining spend of our cash flow activity (dollars$30.8 million, of which $4.1 million of expected spend in thousands): |
| | | | | | | | | | | | | | |
| | Six Months Ended | | | | |
| | June 30, | | | | |
| | 2019 | | 2018 | | $ Change | | % Change |
| Net cash provided by operating activities | $ | 100,069 |
| | $ | 77,812 |
| | $ | 22,257 |
| | 28.6 | % |
| Net cash used in investing activities | (26,987 | ) | | (13,268 | ) | | (13,719 | ) | | 103.4 | % |
| Net cash used in financing activities | (104,830 | ) | | (66,951 | ) | | (37,879 | ) | | 56.6 | % |
Operating Activities—Our net cash provided by operating activities was primarily impacted by2020 has been paused due to the following:
Property operations—Most of our operating cash comes from rental income and is offset by property operating expenses, real estate taxes, and general and administrative costs. Our changedelay in cash flows from property operations primarily results from owning a larger portfolio year-over-yearcapital projects as a result of the Merger with REIT II.
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 $6.3 millionCOVID-19 pandemic. for the six months ended June 30, 2019, a decreaseUpon resumption of $11.5 millionincreased capital expenditures, we anticipate that obligations related to capital improvements as compared to the same period in 2018, primarily due to feewell as redevelopment and management income no longer received from the properties acquired in the Mergerdevelopment can be met with REIT II, offset by increased fee and management income as a result of our joint ventures.
Cash paid for interest—During the six months endedJune 30, 2019, we paid $44.2 million for interest, an increase of $11.7 million over the same period in 2018. This increase was largely due to $464.5 million of debt assumed and new debt entered into in connection with the Merger with REIT II.
Working capital—During the six months endedJune 30, 2019, the increase in cash used for working capital was primarily driven by higher prepaid expenses, partially offset by higher third party payables as a result of owning a larger portfolio.
Accounting for lease costs—The adoption of ASC 842 has caused us to expense as incurred significant lease origination costs which were previously capitalized. Such origination costs are now included as operating expenses and are therefore included as a reduction of our cash flows from operations, rather than classified as capital expenditures on the statements of cash flows from dispositions, or borrowings on our unsecured revolving line of credit.
Merger and 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 current period. Asuncertainty around the COVID-19 pandemic as well as the resulting market conditions, we expect a resultlower volume of acquisition activity for the adoption, we recognized an additional $1.9 millionremainder of lease origination costs as operating cash outflows during2020. During the sixthree months ended June 30, 2019,March 31, 2020, we acquired two parcels of land, as compareddescribed in Note 4 to the same period in 2018.
Investing Activities—Our net cash used in investing activities was primarily impacted by the following:
Real estate acquisitions and dispositions—During the six months endedJune 30, 2019, we acquired one property and one outparcelconsolidated financial statements, for a total cash outlay of $49.9 million, as compared to one property acquisition$4.3 million. We did not acquire any properties during the same period in 2019.
Disposition and Contribution Activity2018—We are actively evaluating our portfolio of assets for a total cash outlayopportunities to make strategic dispositions of $9.2 million. Duringassets 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 it is possible that our disposition activity, including any activity to expand our investment management business through seeded joint ventures, may be delayed or otherwise disrupted depending on the six months endedJune 30, 2019, we disposedimpact of six properties for a net cash inflow of $47.9 million, as compared to twothe COVID-19 pandemic. The following table highlights our property dispositions for a net cash inflow of $13.3 million during the same period in 2018.
Capital expenditures—We invest capital into leasing our properties and maintaining or improving the condition of our properties. During the six months endedJune 30, 2019, we paid $27.2 million for capital expenditures, an increase of $9.9 million over the same period in 2018, primarily driven by tenant improvements due to higher leasing activity, and an increase in building improvements due to our larger portfolio. Additionally, we have invested in other value-added redevelopment and new development in our existing centers.
Financing Activities—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. As our debt obligations mature, we intend to refinance the remaining balance, if possible, or pay off the balances at maturity using proceeds from operations and/or corporate-level debt. During the six months endedJune 30, 2019, our cash from borrowings decreased by $47.7 million as a result of an increase in cash flows received from the sale of properties as well as higher cash flows from operations. In May 2019, we executed a $60 million delayed draw feature on one of our term loans, the proceeds of which were used to to pay down our revolving credit facility balance. As of June 30, 2019, we had no outstanding balance on our revolver.
Distributions to stockholders and OP unit holders—Cash used for distributions to common stockholders and OP unit holders increased $22.7 million for the sixthree months ended June 30,March 31, 2020 and 2019, as compared to the same period (dollars and square feet in thousands):2018 primarily due to the increase in the number of common stockholders as a result of the Merger.Share repurchases—Our SRP provides an opportunity for stockholders to have shares of common stock repurchased, subject to certain restrictions and limitations (see Note 11). Cash outflows for share repurchases decreased by $32.7 million due to the timing of our standard share repurchase in the third quarter of 2019 as compared to the second quarter of 2018. |
| | | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
| Number of properties sold | 3 |
| | 3 |
|
| GLA | 264 |
| | 281 |
|
| Proceeds from the sale of real estate | $ | 17,447 |
| | $ | 35,755 |
|
(Loss) gain on sale of properties, net(1) | (826 | ) | | 7,399 |
|
| |
(1) | The (loss) gain on sale of properties, net does not include miscellaneous write-off activity, which is also recorded in (Loss) Gain on Disposal of Property, Net on the consolidated statements of operations. |
Distributions—Activity related to distributionsDistributions to our common stockholders and OP unit holders, including key financial metrics for comparison purposes, for the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, wasare as follows (in thousands):
|
| | | | |
| | Cash distributions to OP unit holders | | | Net cash provided by operating activities |
| | | | | |
| | Cash distributions to common stockholders | | | FFO attributable to stockholders and nonconvertible noncontrolling interests(1) |
| | | |
| | Distributions reinvested through the DRIP | | | |
| |
(1) | See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Measures - Funds from Operations and Modified Funds from Operations for the definition of FFO, for information regarding why we present FFO, as well as for a reconciliation of this non-GAAP financial measure to Net Loss.Income (Loss). |
We paid distributions monthly of $0.05583344 per share for the months of January, February, and expect to continue paying distributions monthly (subject to Board authorization) unless our results of operations, our general financial condition, general economic conditions, or other factors, as determined by our Board, make it imprudent to do so.March 2020. 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 Code.Internal Revenue Code, as well as our results of operations, our general financial condition, general economic conditions, and other factors.
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) 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.
On March 27, 2020, our Board temporarily suspended stockholder distributions, effective after the payment of the March 2020 dividend on April 1, 2020. The DRIP was also temporarily suspended, and the March 2020 distribution paid on April 1, 2020 was paid all in cash. In August 2019, our Board suspended the SRP with respect to standard repurchases. On March 27, 2020, our Board temporarily suspended the SRP for death, qualifying disability, or determination of incompetence. In determining to suspend the payment of distributions and the operation of the DRIP and the SRP, the Board considered various factors, including the impact that the COVID-19 pandemic and the measures taken by governmental agencies and tenants in response
to the COVID-19 pandemic are expected to continue to have on our shopping centers and our financial condition, liquidity sources, and capital needs.
Cash Flow Activities—As of March 31, 2020, we had cash and cash equivalents and restricted cash of $84.6 million, a net cash decrease of $10.5 million during the three months ended March 31, 2020.
Below is a summary of our cash flow activity for the three months ended March 31, 2020 and 2019 (dollars in thousands): |
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | | | |
| | 2020 | | 2019 | | $ Change | | % Change |
| Net cash provided by operating activities | $ | 35,613 |
| | $ | 41,244 |
| | $ | (5,631 | ) | | (13.7 | )% |
| Net cash (used in) provided by investing activities | (2,413 | ) | | 28,378 |
| | (30,791 | ) | | (108.5 | )% |
| Net cash used in financing activities | (43,733 | ) | | (67,168 | ) | | 23,435 |
| | (34.9 | )% |
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. Our change in cash flows from property operations is primarily due to fluctuations in working capital accounts attributable to slightly lower cash receipts at the end of March during the normal course of our property operations.
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 $2.2 million for the three months ended March 31, 2020, a decrease of $1.1 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.
Cash paid for interest—During the three months endedMarch 31, 2020, we paid $20.3 million for interest, a decrease of $1.4 million over the same period in 2019 largely due to our repricing activity executed during 2019.
Investing Activities—Our net cash (used in) provided by investing activities was primarily impacted by the following:
Real estate acquisitions—During the three months endedMarch 31, 2020, we acquired two parcels of land, as described in Note 4 to the consolidated financial statements, for a total cash outlay of $4.3 million. We did not acquire any properties during the same period in 2019.
Real estate dispositions—During the three months endedMarch 31, 2020, we disposed of three properties for a net cash inflow of $17.4 million, as compared to three property dispositions for a net cash inflow of $35.8 million during the same period in 2019.
Capital expenditures—We invest capital into leasing our properties and maintaining or improving the condition of our properties. During the three months endedMarch 31, 2020, we paid $16.0 million for capital expenditures, an increase of $7.4 million over the same period in 2019, primarily driven by our investment in value-added redevelopment and new development in our existing centers during the three months endedMarch 31, 2020.
Financing 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. As our debt obligations mature, we intend to refinance the remaining balance, if possible, or pay off the balances at maturity using proceeds from operations and/or corporate-level debt. During the three months endedMarch 31, 2020, we had net borrowings of $1.5 million, primarily as a result of drawing $34.0 million on our revolving credit facility, offset by a pay down in January 2020 of $30.0 million on term loan debt maturing in 2021. During the three months ended March 31, 2019 our net borrowings decreased$24.4 million primarily as a result of payments on our revolving credit facility, funded by cash inflows from the disposition of properties.
Distributions to stockholders and OP unit holders—Cash used for distributions to common stockholders and OP unit holders increased$2.8 million for the three months ended March 31, 2020, primarily due to an increase in shares outstanding as compared to the same period in 2019.
Share repurchases—Cash outflows for share repurchases decreased by $0.3 million for the three months ended March 31, 2020 as compared to the same period in 2019 due to the suspension of the SRP for death, qualifying disability, or determination of incompetence which became effective March 27, 2020.
Critical Accounting Policies and Estimates
Our 20182019 Annual Report on Form 10-K, filed with the SEC on March 11, 2020, contains a description of our critical accounting policies and estimates, including those relating to real estate assets, revenue recognition,acquisitions, rental income, and the valuation of real estate investments, and related intangible assets. There have been no significant changes to our critical accounting policies during 2019, except for the policies related to the accounting for leases as a result2020.
Because of the adoptionadverse economic conditions and uncertainty regarding the negative impacts of ASC 842 asthe COVID-19 pandemic, it is possible that the estimates and assumptions that have been utilized in the preparation of January 1, 2019, as described in Notethe consolidated financial statements could change or vary significantly from actual results. Please refer to Notes 2 and Note 3 in12 for additional discussion on the accompanying consolidated financial statements.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
ReferIn response to the COVID-19 pandemic, in April 2020, the FASB issued interpretive guidance addressing the accounting treatment of lease concessions stemming from the pandemic. Under this guidance, entities may make an election to account for lease concessions granted in conjunction with the pandemic consistent with how those concessions would be accounted for
under ASC 842 if those enforceable rights and obligations for those concessions already existed within the lease agreement. This accounting treatment may be applied regardless of whether enforceable rights and obligations for those concessions are explicitly outlined within the lease. 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. We continue to assess the impact of this accounting pronouncement.
Please refer to Note 2 for discussion of the impact of other recently issued accounting pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the quantitative and qualitative disclosures about market risk disclosed in Part II, Item 7A of our 20182019 Annual Report on Form 10-K filed with the SEC on March 13, 2019.11, 2020.
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 June 30, 2019.March 31, 2020. 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 June 30, 2019.March 31, 2020.
Changes in Internal Control over Financial Reporting
During the quarter ended June 30, 2019, thereMarch 31, 2020, as a result of the COVID-19 pandemic, most of our employees began working from home in March; however, these changes to the working environment did not have a material effect on our internal control over financial reporting. 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 supplementsfactors supplement the risk factors set forth in our 20182019 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 13, 2019:11, 2020:
If we continue to pay distributions from sources other than our cash flows from operations, we may not be able to sustain our distribution rate, we may have fewer funds available for investment in properties and other assets, and our stockholders’ overall returns may be reduced.
Our organizational documents permit us to pay distributions from any source without limitlimitation (other than those limitslimitations set forth under Maryland law). To the extent we continue to fund distributions from borrowings, we will have fewer funds available for investment in real estate properties and other real estate-related assets, and our stockholders’ overall returns may be reduced.
At times, we may need to borrow funds to pay distributions, which could increase our operating costs. Furthermore, if we cannot cover our distributions with cash flows from operations, we may be unable to sustain our distribution rate. For the sixthree months ended June 30, 2019,March 31, 2020, we paid gross distributions to our common stockholders and noncontrolling interests of $109.6$55.8 million, including distributions reinvested through the dividend reinvestment plan (“DRIP”) of $35.0$15.9 million. For the sixthree months ended June 30, 2019,March 31, 2020, our net cash provided by operating activities was $100.1$35.6 million, which represents a shortfall of of $9.5$20.2 million, or 8.7%36.2%, of our distributions paid, while our funds from operations (“FFO”) Attributable to Stockholders and Convertible Noncontrolling Interests were $104.1was $68.2 million, which represents a shortfallan excess of $5.5$12.4 million, or 5.0%22.2%, of the distributions paid. The shortfall was funded by proceeds from borrowings. For the sixthree months ended June 30, 2018,March 31, 2019, we paid distributions of $76.8$54.8 million, including distributions reinvested through the DRIP of $24.9$17.7 million. For the sixthree months ended June 30, 2018,March 31, 2019, our net cash provided by operating activities was $77.8$41.2 million, which represents a surplusshortfall of $1.0$13.6 million, or 1.3%24.8%, of our distributions paid, while our FFO was $79.1$61.0 million, which represents a surplusexcess of $2.3$6.2 million, or 3.0%11.3%, of our distributions paid. The shortfall was funded by borrowings.
The outbreak of the COVID-19 pandemic has had, and could continue to have, a material adverse effect on our and our tenants’ businesses, financial condition, results of operations, cash flow, liquidity, and ability to satisfy debt service obligations.
In March 2020, the World Health Organization declared COVID-19 a global pandemic. The COVID-19 pandemic has caused, and could 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, have reacted by instituting quarantines, restrictions on travel, and/or mandatory closures of businesses. Certain states and cities, including where our properties are located, have also reacted by instituting quarantines, restrictions on travel, “shelter-in-place” or “stay-at-home” rules, restrictions on types of business that may continue to operate, and/or restrictions on the types of construction projects that may continue.
Our retail and services tenants depend on in-person interactions with their customers to generate unit-level profitability, and the COVID-19 pandemic may decrease customer willingness to frequent, and mandated “shelter-in-place” or “stay-at-home” orders may prevent customers from frequenting, our tenants’ 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 across the United States, including properties in states that have been significantly impacted by the COVID-19 pandemic. We have a higher concentration of ABR from temporarily closed tenants in certain states which have implemented stay-at-home and social distancing guidelines and mandates, such as Florida, Texas, California, Illinois and Georgia. Our wholly-owned properties and those owned through our joint ventures contained approximately 5,550 tenant spaces as of May 11, 2020. As of May 11, 2020, approximately 1,640, or 30%, of these tenant spaces were temporarily closed, which represented 21% of our annualized base rent (“ABR”) and 16% of our gross leasable area (“GLA”), including some tenants that we believe are considered to be essential businesses but have temporarily closed due to sharp decreases in foot traffic and customer patronage as a result of government mandates and social distancing guidelines. Approximately 7% of tenant spaces that we believe are considered to be essential retail and service businesses, totaling approximately 3% of the ABR and 2% of the GLA associated with all essential retail and service businesses, are included in these temporary closures as of May 11, 2020. We cannot presently determine when or how many of our tenants will reopen. As of May 11, 2020, we have received 2,120 rent relief requests from tenant spaces representing approximately 29% of our ABR, all of which are still being evaluated. As of May 11, 2020, we have collected approximately 77% of rent and recoveries billed for the month of April and approximately 74% of rent and recoveries billed for the month of May. We currently anticipate the above circumstances to negatively impact our revenues for the second quarter of 2020 and potentially for the remainder of the year.
Moreover, the ongoing COVID-19 pandemic and restrictions intended to prevent and mitigate its spread could have additional adverse effects on our business, including with regards to:
the ability and willingness of our tenants 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, and obligations we may incur in connection with the replacement of an existing tenant, 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 potential tenants 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;
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 temporarily delayed to the extent 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 timely reversed;
state, local, or industry-initiated efforts, such as a rent freeze for tenants 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
a potential reduction in our operating effectiveness as employees work remotely or if key personnel become unavailable due to illness or other personal circumstances related to the COVID-19 pandemic.
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.
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’ 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Share Repurchases
During the three months ended June 30, 2019,March 31, 2020, we repurchased shares as follows (shares in thousands): |
| | | | | | | | | |
| Period | Total Number of Shares Redeemed | | Average Price Paid per Share(1) | | Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program(2) | | Approximate Dollar Value of Shares Available That May Yet Be Repurchased Under the Program |
| April 2019 | 174 | | $ | 11.05 |
| | 174 | | (3) |
| May 2019 | 172 | | 11.10 |
| | 172 | | (3) |
| June 2019 | 195 | | 11.10 |
| | 195 | | (3) |
|
| | | | | | | | | |
| Period | Total Number of Shares Repurchased | | Average Price Paid per Share(1)(2) | | Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program(1) | | Approximate Dollar Value of Shares That May Yet Be Repurchased Under the Program |
| January 2020 | 163 | | $ | 10.26 |
| | 127 | | (2) |
| February 2020 | 132 | | 10.00 |
| | 132 | | (2) |
| March 2020 | 11 | | 10.00 |
| | 11 | | (2) |
| |
(1) | On May 8, 2019, our Board increased the estimated value per share (“EVPS”) of our common stock to $11.10 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, 2019. Prior to May 8, 2019, the EVPS was $11.05 (see Note 11).
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(2)
| We announced the commencement of the Share Repurchase Program (“SRP”) in August 2010, and it was2010. It has subsequently been amended, most recently in September 2011, April 2016, and August 2019. In addition, during the three months ended March 31, 2020, we repurchased approximately 35,000 shares for an aggregate purchase price of $0.4 million (average price of $11.10 per share) in connection with common shares surrendered to us to satisfy statutory minimum tax withholding obligations associated with the vesting of restricted stock awards under our equity-based compensation plan. |
| |
(3)(2)
| We currently limit the dollar value and number of shares that may yet be repurchased under the SRP, as described in Part II Item 5 of our Annual Report on Form 10-K filed March 13, 2019. In addition, in August 2019, the SRP was suspended with respect to standard share repurchases.11, 2020. |
On August 7, 2019,Effective March 27, 2020, the Board amended the SRP, adopting the Third Amended and Restated Share Repurchase Program (the “Third Amended SRP”). Under the Third Amended SRP, the repurchase price per share will be equal to the lesser of $10.00 or our most recent EVPS. The Third Amended SRP will become effective 30 days after the date of this filing and the full text of the Third Amended SRP is attached hereto as Exhibit 99.1.
On August 7, 2019, the Boardtemporarily suspended the SRP for requests related to death, qualifying disability, or determination of incompetence. The standard repurchases. However, we will continue to fulfill repurchases sought upon a stockholder's death, “qualifying disability,” or “determination of incompetence” in accordance with the terms of the Third Amended SRP.
During the six months ended June 30, 2019, we repurchased approximately 1.1 million shares of our common stock under the SRP in connection with a stockholder’s death, “qualifying disability,” or “determination of incompetence,” which requests were completed in full. Due to the program’s funding limits, no funds were available for standard repurchases during the second quarter of 2019. In July 2019, we repurchased approximately 1.2 million shares of our common stock under the SRP. Repurchases in connection with a stockholder’s death, “qualifying disability,” or “determination of incompetence” were completed in full. The remaining repurchase requests that were in good order were fulfilled on a pro rata basis.
Unregistered Sales of Equity Securities
During the six months ended June 30, 2019, we issued an aggregate of 1.9 million shares of common stock in redemption of 1.9 million Operating Partnership units. These shares of common stock were issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended. We relied on the exemption under Section 4(a)(2) based upon factual representations received from the limited partner who received the shares of common stock.remains suspended.
ITEM 5. OTHER INFORMATION
Executive Officer and Director ElectionsCompensation
On August 7, 2019,Effective May 18, 2020, owing to the Board increasedCOVID-19 pandemic and its sizeanticipated effect on the Company’s operations, (i) Jeffrey Edison, our Chairman and Chief Executive Officer, has agreed to nine directors, effective November 1, 2019,temporarily reduce his base salary by 25% and appointed Elizabeth Fischer(ii) our other named executive officers, Tanya E. Brady, General Counsel and Jane Silfen each to serve from November 1, 2019 until the 2020 annual meeting of stockholders and until her successor is duly elected and qualified. There are no arrangements or understandings between either of Mses. Fischer or Silfen and any other persons pursuant to which either of them was elected as a director. The Board determined that each of Mses. Fischer and Silfen is independent as defined by the rules of the New York Stock Exchange. Mses. Fischer and Silfen will participate in the compensation program for non-employee directors as described under the heading “Director Compensation” in our Proxy Statement filed with the SEC on March 29, 2019.
Chief Financial Officer
As previously disclosed,Secretary, John P. Caulfield, has been promoted to the role of Chief Financial Officer effective August 15, 2019.and Treasurer, Devin I. Murphy, President, and Robert F. Myers, Chief Operating Officer, each agreed to temporarily reduce their respective base salaries by 10%. In connection with his promotion, Mr. Caulfieldaddition, each of the eight independent members of our Board agreed to temporarily reduce their respective annual base cash and equity compensation for the 2020-2021 term by 10%. Each of these reductions were unanimously approved by the Compensation Committee on May 6, 2020 and will be reevaluated as things develop.
Estimated Value Per Share
On May 6, 2020, the independent directors of our Board decreased the EVPS of our common stock to $8.75. The valuation was based substantially on the estimated “as is” market value of our portfolio of wholly-owned real estate properties in various geographic locations in the United States as well as our pro rata share of those properties owned through our joint ventures (collectively, our “Portfolio”) and the Company entered into a Participation Agreement dated August 7, 2019, pursuantestimated value of in-place contracts of our third-party asset management business as of March 31, 2020.
We provide the EVPS to which he became a participantassist broker-dealers that participated in the Company’s Executive Changeour public offering in Control and Severance Plan. The Participation Agreement is attached hereto as Exhibit 10.1.
Share Repurchase Program
On August 7, 2019, the Board amended the SRP, adopting the Third Amended SRP. Under the Third Amended SRP, the repurchase price per share will be equal to the lesser of $10.00 or our most recent EVPS. The full text of the Third Amended SRP is attached hereto as Exhibit 99.1 and incorporated by reference herein. In addition, on August 7, 2019, the Board suspended the SRP for standard repurchases. However, we will continue to fulfill repurchases sought upon a stockholder's death, “qualifying disability,” or “determination of incompetence”meeting their customer account statement reporting obligations under Financial Industry Regulatory Authority (“FINRA”) Rule 2231. This valuation was performed in accordance with the termsprovisions of Practice Guideline 2013-01, Valuations of Publicly Registered Non-Listed REITs, issued by the Institute for Portfolio Alternatives (“IPA”) in April 2013 (“IPA Valuation Guidelines”).
We engaged Duff & Phelps, LLC (“Duff & Phelps”), an independent valuation expert that has expertise in appraising commercial real estate assets, to provide a calculation of the Third Amended SRP. The Third Amended SRPrange in EVPS of our common stock as of March 31, 2020. Duff & Phelps prepared a valuation report (“Valuation Report”) that provided this range based substantially on its estimate of the “as is” market value of the Portfolio and the suspensionestimated value of standard repurchases will become effective 30 daysin-place contracts of the third-party asset management business. Duff & Phelps made adjustments to the aggregate estimated value of our Portfolio to reflect balance sheet assets and liabilities provided by our management as of March 31, 2020, before calculating a range of estimated values based on the number of outstanding shares of our common stock as of March 31, 2020. The COVID-19 pandemic has impacted the global financial markets. As of the valuation date, Duff & Phelps attached less weight to previous market evidence for comparison purposes to arrive at opinions of value. Due to a dearth of transaction activity that takes into account this impact, they were forced to infer conclusions from public market data (stock prices) and other data which are very volatile. They surveyed market participants on a daily basis to try to glean market inputs, but due to the overall uncertainty of the broader markets, the data points are not widely consistent. The valuation is, therefore, reported on the basis of “material valuation uncertainty”. Consequently, less certainty, and a higher degree of caution, should be attached to the valuation than would
normally be the case. These calculations produced an EVPS in the range of $8.45 to $9.68 as of March 31, 2020, and the independent directors, after discussions with management, approved $8.75 as the dateEVPS as of March 31, 2020. We previously established an EVPS on May 8, 2019 of $11.10 based substantially on the same methodology and process as of March 31, 2019. We expect to review the EVPS at least annually.
The following table summarizes the material components of the EVPS of our common stock as of March 31, 2020 (in thousands, except per share amounts): |
| | | | | | | |
| | Low | | High |
| Investment in Real Estate Assets: | | | |
| Phillips Edison real estate valuation | $ | 5,135,800 |
| | $ | 5,536,300 |
|
| Management company | 23,000 |
| | 23,000 |
|
Joint venture properties(1) | 87,345 |
| | 94,290 |
|
| Total market value | 5,246,145 |
| | 5,653,590 |
|
| | | | |
| Other Assets: | | | |
| Cash and cash equivalents | 35,437 |
| | 35,437 |
|
| Restricted cash | 47,866 |
| | 47,866 |
|
| Accounts receivable | 49,645 |
| | 49,645 |
|
| Derivative assets | 18 |
| | 18 |
|
| Prepaid expenses and other assets | 12,009 |
| | 12,009 |
|
| Total other assets | 144,975 |
| | 144,975 |
|
| | | | |
| Liabilities: | | | |
| Notes payable and credit facility | 2,420,714 |
| | 2,420,714 |
|
| Mark to market - debt | 10,052 |
| | 10,052 |
|
| Derivative liability | 62,756 |
| | 62,756 |
|
| Accounts payable and accrued expenses | 82,138 |
| | 82,138 |
|
| Total liabilities | 2,575,660 |
| | 2,575,660 |
|
| | | | |
| Net Asset Value | $ | 2,815,460 |
| | $ | 3,222,905 |
|
| | | | |
| Common stock and OP units outstanding | 333,092 |
| | 333,092 |
|
| Net Asset Value Per Share | $ | 8.45 |
| | $ | 9.68 |
|
| |
(1) | Represents our pro rata share of the properties owned by our joint ventures. |
Our goal is to provide an estimate of the market value of our shares. However, the majority of our assets consist of commercial real estate, and as with any valuation methodology, the methodologies used were based upon a number of assumptions and estimates that may not have been accurate or complete. Different parties with different assumptions and estimates could have derived a different EVPS, and those differences could have been significant. These limitations are discussed further under “Limitations of Estimated Value per Share” below.
Valuation Methodologies—Our goal in calculating an EVPS was to arrive at a value that was reasonable and based off of what we deemed to be appropriate valuation and appraisal methodologies and assumptions and a process that was in accordance with the IPA Valuation Guidelines. The following is a summary of the valuation methodologies and components used to calculate the EVPS.
Independent Valuation Firm—Duff & Phelps was retained by us on February 27, 2020, as authorized by the independent directors of the Board, to provide independent valuation services. Duff & Phelps, who is not affiliated with us, is a leading global valuation advisor with expertise in complex valuation work. Duff & Phelps had previously provided services to us pertaining to the allocation of acquisition purchase prices for financial reporting purposes in connection with the Portfolio, for which it received usual and customary compensation. Duff & Phelps may be engaged to provide professional services to us in the future. The Duff & Phelps personnel who prepared the valuation had no present or prospective interest in the Portfolio and no personal interest with us.
Duff & Phelps’ engagement for its valuation services was not contingent upon developing or reporting predetermined results. In addition, Duff & Phelps’ compensation for completing the valuation services was not contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of us, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of its Valuation Report. We agreed to indemnify Duff & Phelps against certain liabilities arising out of this filing.engagement.
Duff & Phelps’ analyses, opinions, or conclusions were developed, and the Valuation Report was prepared, in conformity with the Uniform Standards of Professional Appraisal Practice. The Valuation Report was reviewed, approved and signed by
individuals with the professional designation of MAI (Member of the Appraisal Institute). The use of the Valuation Report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. Duff & Phelps did not inspect the properties that formed the Portfolio.
In preparing the Valuation Report, Duff & Phelps relied on information provided by us regarding the Portfolio. For example, we provided information regarding building size, year of construction, land size and other physical, financial, and economic characteristics. We also provided lease information, such as current rent amounts, rent commencement and expiration dates, and rent increase amounts and dates. Property-level cash flow projections were negatively impacted for the estimated effects of the COVID-19 pandemic.
Duff & Phelps did not investigate the legal description or legal matters relating to the Portfolio, including title or encumbrances, and title to the properties was assumed to be good and marketable. The Portfolio was also assumed to be free and clear of liens, easements, encroachments and other encumbrances, and to be in full compliance with zoning, use, occupancy, environmental and similar laws unless otherwise stated by us. The Valuation Report contains other assumptions, qualifications and limitations that qualify the analysis, opinions and conclusions set forth therein. Furthermore, the prices at which our real estate properties may actually be sold could differ from their appraised values.
The foregoing is a summary of the standard assumptions, qualifications and limitations that generally apply to the Valuation Report.
Real Estate Portfolio Valuation—Duff & Phelps estimated the “as is” market values of the Portfolio as of March 31, 2020 using various methodologies. Generally accepted valuation practice suggests assets may be valued using a range of methodologies. Duff & Phelps utilized the income capitalization approach with support from the sales comparison approach for each property. The income approach was the primary indicator of value, with secondary consideration given to the sales approach. Duff & Phelps performed a study of each market to measure current market conditions, supply and demand factors, growth patterns, and their effect on each of the subject properties.
The income capitalization approach simulates the reasoning of an investor who views the cash flows that would result from the anticipated revenue and expense on a property throughout its lifetime. Under the income capitalization approach, Duff & Phelps used an estimated net operating income (“NOI”) for each property, and then converted it to a value indication using a discounted cash flow analysis. The discounted cash flow analysis focuses on the operating cash flows expected from a property and the anticipated proceeds of a hypothetical sale at the end of an assumed holding period, with these amounts then being discounted to their present value. The discounted cash flow method is appropriate for the analysis of investment properties with multiple leases, particularly leases with cancellation clauses or renewal options, and especially in volatile markets.
The sales comparison approach estimates value based on what other purchasers and sellers in the market have agreed to as a price for comparable improved properties. This approach is based upon the principle of substitution, which states that the limits of prices, rents and rates tend to be set by the prevailing prices, rents and rates of equally desirable substitutes. Duff & Phelps gathered comparable sales data throughout various markets as secondary support for its valuation estimate.
The following summarizes the upper and lower bounds of the average terminal capitalization rates and discount rates that were used to arrive at the estimated market value of our Portfolio: |
| |
| Range in Values |
| Terminal Capitalization Rate | 7.08% - 7.58% |
| Discount Rate | 7.69% - 8.19% |
Management Company Valuation—Duff & Phelps estimated the aggregate market value associated with our third-party asset management business using various methodologies. Duff & Phelps considered various applications of the income approach, market approach, and underlying assets approach, with the income approach determined to be the most reliable method for purposes of the analysis. The income approach analysis considered the projected fee income earned for services provided pursuant to various management and advisory agreements over the expected duration of that contract, assuming normal and customary renewal provisions. Such services include property management services performed for the properties in the Portfolio, as well as property and asset management services for certain unaffiliated real estate investment portfolios. In performing this analysis, solely fee income related to properties owned as of March 31, 2020 was considered. The income approach also considered a reasonable level of expenses to support such activities, as well as other adjustments, and a discount rate that accounted for the time value of money and the risk of achieving the projected cash flows. All other assets and liabilities acquired are short term in nature and therefore the carrying value is considered to approximate the fair value. The result of the income approach analysis was the aggregate market value of the third-party asset management business, from which an estimated market value of net tangible assets (liabilities) was subtracted (added), to result in the aggregate intangible value of the management company.
Sensitivity Analysis—While we believe that Duff & Phelps’ assumptions and inputs were reasonable, a change in these assumptions would have impacted the calculations of the estimated value of the Portfolio, the estimated value of our third-party asset management business, and our EVPS. The table below illustrates the impact on Duff & Phelps’ range in EVPS if the terminal capitalization rates or discount rates were adjusted by 25 basis points and assumes all other factors remain unchanged. Additionally, the table illustrates the impact if only one change in assumptions was made, with all other factors held constant. Further, each of these assumptions could change by more than 25 basis points or 5%.
|
| | | | | | | |
| Resulting Range in Estimated Value Per Share |
| Increase of 25 basis points | | Decrease of 25 basis points | | Increase of 5% | | Decrease of 5% |
| Terminal Capitalization Rate | $8.25 - $9.42 | | $8.81 - $10.10 | | $8.13 - $9.31 | | $8.95 - $10.24 |
| Discount Rate | $8.23 - $9.43 | | $8.81 - $10.07 | | $8.06 - $9.28 | | $8.99 - $10.24 |
Other Assets and Other Liabilities—Duff & Phelps made adjustments to the aggregate estimated values of our investments to reflect our other assets and other liabilities based on balance sheet information provided by us as of March 31, 2020.
Role of the Independent Directors—The independent directors discussed the valuation process and results with representatives of Duff & Phelps. The independent directors also discussed the results, the Portfolio, the third-party asset management business, our other assets and liabilities, and other matters with management. Management recommended to the independent directors that $8.75 per share be approved as the EVPS of our common stock. The independent directors discussed the rationale for this value with management.
Following the independent directors’ discussion with Duff & Phelps and the recommendation of management, and in light of other factors considered by the independent directors, the independent directors concluded that the range in EVPS of $8.45 to $9.68 was appropriate. The independent directors agreed to accept the recommendation of management and approved $8.75 as the EVPS of our common stock as of March 31, 2020, which determination was ultimately and solely the responsibility of the independent directors.
Limitations of Estimated Value per Share—We are providing this EVPS to assist broker-dealers that participated in our public offering in meeting our customer account statement reporting obligations. This valuation was performed in accordance with the provisions of the IPA Valuation Guidelines. As with any valuation methodology, the methodologies used were based upon a number of estimates and assumptions that may not have been accurate or complete. Different parties with different assumptions and estimates could have derived a different EVPS, and this difference could have been significant. The EVPS is not audited and does not represent a determination of the fair value of our assets or liabilities based on accounting principles generally accepted in the United States (“GAAP”), nor does it represent a liquidation value of our assets and liabilities, the price a third party would pay to acquire us, the price at which our shares of common stock would trade in secondary markets, or the amount at which our shares of common stock would trade on a national securities exchange.
Accordingly, we can give no assurance that:
our shares would trade at or near the EVPS if listed on a national securities exchange;
a stockholder would be able to resell his or her shares at the EVPS;
a stockholder would ultimately realize distributions per share equal to the EVPS upon a liquidation of our assets and settlement of our liabilities;
a stockholder would receive an amount per share equal to the EVPS upon a sale of the Company;
a third party would offer the EVPS in an arm’s-length transaction to purchase all or substantially all of our shares of common stock;
another independent third-party appraiser or third-party valuation firm would agree with our EVPS; or
the methodologies used to calculate our EVPS would be acceptable to FINRA for use on customer account statements or that the EVPS will satisfy the applicable annual valuation requirements under ERISA.
Further, aside from estimates regarding the impact of the COVID-19 pandemic, we have not made any adjustments to the valuation of our EVPS for the impact of other transactions occurring subsequent to March 31, 2020, including, but not limited to, (1) acquisitions or dispositions, (2) NOI earned, (3) increases or decreases in our indebtedness or changes in interest rate swap liabilities, and (4) changes in leases, tenancy or other business and operational changes. The value of our shares of common stock will fluctuate over time in response to developments related to individual real estate assets, the management of those assets, and changes in the real estate and finance markets. Because of, among other factors, the high concentration of our total assets in real estate and the number of shares of our common stock outstanding, changes in the value of individual real estate assets or changes in valuation assumptions could have a very significant impact on the value of our shares of common stock. The EVPS does not take into account any disposition costs or fees for real estate properties, debt prepayment penalties that may be incurred upon the prepayment of certain of our debt obligations, or the impact of restrictions on the assumption of debt. Accordingly, the EVPS of our common stock may or may not be an accurate reflection of the fair market value of our stockholders’ investments and will not likely represent the amount of net proceeds that would result from an immediate sale of our assets.
ITEM 6. EXHIBITS
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| Ex. | Description |
| 10.1 | |
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| 101.1 | The following information from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019,March 31, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations and Comprehensive (Loss) Income;Loss; (iii) Consolidated Statements of Equity; and (iv) Consolidated Statements of Cash Flows* |
*Filed herewith.
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. |
| | | |
Date: AugustMay 12, 20192020 | By: | /s/ Jeffrey S. Edison |
| | | Jeffrey S. Edison |
| | | Chairman of the Board and Chief Executive Officer and President (Principal Executive Officer) |
| | | |
Date: AugustMay 12, 20192020 | By: | /s/ Devin I. MurphyJohn P. Caulfield |
| | | Devin I. MurphyJohn P. Caulfield |
| | | Chief Financial Officer, Senior Vice President and Treasurer (Principal Financial Officer) |
