Phillips Edison & Company, Inc. (PECO) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our accompanying consolidated financial statements and notes thereto. See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I.
KEY PERFORMANCE INDICATORS AND DEFINED TERMS
We use certain key performance indicators (“KPIs”), which include both financial and nonfinancial metrics, to measure the performance of our operations. We believe these KPIs, as well as the core concepts and terms defined below, allow our Board, management, and investors to analyze trends around our business strategy, financial condition, and results of operations in a manner that is focused on items unique to the retail real estate industry.
We do not consider our non-GAAP measures to be alternatives to measures required in accordance with accounting principles generally accepted in the United States (“GAAP”). Certain non-GAAP measures should not be viewed as an alternative measure of our financial performance as they may not reflect the operations of our entire portfolio, and they may not reflect the impact of general and administrative expenses, depreciation and amortization, interest expense, other income (expense), or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our shopping centers that could materially impact our results from operations. Additionally, certain non-GAAP measures should not be considered as an indication of our liquidity, nor as an indication of funds available to cover our cash needs, including our ability to fund distributions, and may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate our business in the manner currently contemplated. Accordingly, non-GAAP measures should be reviewed in connection with other GAAP measurements and should not be viewed as more prominent measures of performance than net income (loss) or cash flows from operations prepared in accordance with GAAP. Other REITs may use different methodologies for calculating similar non-GAAP measures, and accordingly, our non-GAAP measures may not be comparable to other REITs.
Our KPIs and terminology can be grouped into three key areas:
PORTFOLIO—Portfolio metrics help management to gauge the health of our centers overall and individually.
•Anchor space—We define an anchor space as a space greater than or equal to 10,000 square feet of gross leasable area (“GLA”).
•Annualized Base Rent (“ABR”)—We use ABR to refer to the monthly contractual base rent at the end of the period multiplied by twelve months.
•ABR Per Square Foot (“PSF”)—This metric is calculated by dividing ABR by leased GLA. Increases in ABR PSF can be an indication of our ability to create rental rate growth in our centers, as well as an indication of demand for our spaces, which generally provides us with greater leverage during lease negotiations.
•GLA—We use GLA to refer to the total occupied and unoccupied square footage of a building that is available for tenants (whom we refer to as a “Neighbor” or our “Neighbors”) or other retailers to lease.
•Inline space—We define an inline space as a space containing less than 10,000 square feet of GLA.
•Leased Occupancy—This metric is calculated as the percentage of total GLA for which a lease has been signed regardless of whether the lease has commenced or the Neighbor has taken possession. High occupancy is an indicator of demand for our spaces, which generally provides us with greater leverage during lease negotiations.
•Underwritten incremental unlevered yield—This reflects the yield we target to generate from a project upon expected stabilization and is calculated as the estimated incremental net operating income (“NOI”) for a project at stabilization divided by its estimated net project investment. The estimated incremental NOI is the difference between the estimated annualized NOI we target to generate by a project upon stabilization and the estimated annualized NOI without the planned improvements. Underwritten incremental unlevered yield does not include peripheral impacts, such as lease rollover risk or the impact on the long term value of the property upon sale or disposition. Actual incremental unlevered yields may vary from our underwritten incremental unlevered yield range based on the actual total cost to complete a project and its actual incremental NOI at stabilization.
LEASING—Leasing is a key driver of growth for our company.
•Comparable lease—We use this term to refer to a lease with consistent terms that is executed for substantially the same space that has been vacant less than twelve months.
•Comparable rent spread—This metric is calculated as the percentage increase or decrease in first-year ABR (excluding any free rent or escalations) on new or renewal leases (excluding options) where the lease was considered a comparable lease. This metric provides an indication of our ability to generate revenue growth through leasing activity.
•Cost of executing new leases—We use this term to refer to certain costs associated with new leasing, namely, leasing commissions, tenant improvement costs, and tenant concessions.
•Portfolio retention rate—This metric is calculated by dividing (i) the total square feet of retained Neighbors with current period lease expirations by (ii) the total square feet of leases expiring during the period. The portfolio retention rate provides insight into our ability to retain Neighbors at our shopping centers as their leases approach expiration. Generally, the costs to retain an existing Neighbor are lower than costs to replace with a new Neighbor.
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| PHILLIPS EDISON & COMPANYDECEMBER 31, 2023 FORM 10-K | 29 |
•Recovery rate—This metric is calculated by dividing (i) total recovery income by (ii) total recoverable expenses during the period. A high recovery rate is an indicator of our ability to recover certain property operating expenses and capital costs from our Neighbors.
FINANCIAL PERFORMANCE—In addition to financial metrics calculated in accordance with GAAP, such as net income or cash flows from operations, we utilize non-GAAP metrics to measure our operational and financial performance. See “Non-GAAP Measures” below for further discussion on the following metrics.
•Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization for Real Estate (“Adjusted EBITDAre”)—To arrive at Adjusted EBITDAre, we adjust EBITDAre, as defined below, to exclude certain recurring and non-recurring items including, but not limited to: (i) changes in the fair value of the earn-out liability; (ii) other impairment charges; (iii) amortization of basis differences in our investments in our unconsolidated joint ventures; (iv) transaction and acquisition expenses; and (v) realized performance income. We use EBITDAre and Adjusted EBITDAre as additional measures of operating performance which allow us to compare earnings independent of capital structure and evaluate debt leverage and fixed cost coverage.
•Core Funds From Operations Attributable to Stockholders and OP Unit Holders (“Core FFO”)—To arrive at Core FFO, we adjust Nareit FFO, as defined below, to exclude certain recurring and non-recurring items including, but not limited to: (i) depreciation and amortization of corporate assets; (ii) changes in the fair value of the earn-out liability; (iii) amortization of unconsolidated joint venture basis differences; (iv) gains or losses on the extinguishment or modification of debt and other; (v) other impairment charges; (vi) transaction and acquisition expenses; and (vii) realized performance income. We believe Nareit FFO provides insight into our operating performance as it excludes certain items that are not indicative of such performance. Core FFO provides further insight into the sustainability of our operating performance and provides an additional measure to compare our performance across reporting periods on a consistent basis by excluding items that may cause short-term fluctuations in net income (loss).
•EBITDAre—The National Association of Real Estate Investment Trusts (“Nareit”) defines EBITDAre as net income (loss) computed in accordance with GAAP before: (i) interest expense; (ii) income tax expense; (iii) depreciation and amortization; (iv) gains or losses from disposition of depreciable property; and (v) impairment write-downs of depreciable property. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect EBITDAre on the same basis.
•Equity Market Capitalization—We calculate equity market capitalization as the total dollar value of all outstanding shares using the closing price for the applicable date.
•Nareit FFO Attributable to Stockholders and OP Unit Holders (“Nareit FFO”)—Nareit defines Funds From Operations (“FFO”) as net income (loss) computed in accordance with GAAP, excluding: (i) gains (or losses) from sales of property and gains (or losses) from change in control; (ii) depreciation and amortization related to real estate; (iii) impairment losses on real estate and impairments of in-substance real estate investments in investees that are driven by measurable decreases in the fair value of the depreciable real estate held by the unconsolidated partnerships and joint ventures; and (iv) adjustments for unconsolidated partnerships and joint ventures, calculated to reflect FFO on the same basis. We calculate Nareit FFO in a manner consistent with the Nareit definition.
•Net Debt—We calculate net debt as total debt, excluding discounts, market adjustments, and deferred financing expenses, less cash and cash equivalents.
•Net Debt to Adjusted EBITDAre—This ratio is calculated by dividing net debt by Adjusted EBITDAre (included on an annualized basis within the calculation). It provides insight into our leverage rate based on earnings and is not impacted by fluctuations in our equity price.
•Net Debt to Total Enterprise Value—This ratio is calculated by dividing net debt by total enterprise value, as defined below. It provides insight into our capital structure and usage of debt.
•NOI—We calculate NOI as total operating revenues, adjusted to exclude non-cash revenue items, less property operating expenses and real estate taxes. NOI provides insight about our financial and operating performance because it provides a performance measure of the revenues and expenses directly involved in owning and operating real estate assets and provides a perspective not immediately apparent from net income (loss).
•Same-Center—We use this term to refer to a property, or portfolio of properties, that have been owned and operational for the entirety of the last two reporting periods (i.e., since January 1, 2022).
•Total Enterprise Value—We calculate total enterprise value as our net debt plus our equity market capitalization on a fully diluted basis.
OVERVIEW
We are a REIT and one of the nation’s largest owners and operators of omni-channel grocery-anchored shopping centers. Our portfolio primarily consists of neighborhood centers anchored by the #1 or #2 grocer tenants by sales within their respective formats by trade area. Our Neighbors are a mix of national, regional, and local retailers that primarily provide necessity-based goods and services.
As of December 31, 2023, we owned equity interests in 301 shopping centers, including 281 wholly-owned shopping centers and 20 shopping centers owned through one unconsolidated joint venture, which comprised approximately 34.4 million square feet in 31 states. In addition to managing our shopping centers, our third-party investment management business provides comprehensive real estate management services to our unconsolidated joint ventures and one private fund (collectively, the “Managed Funds”).
| Column 1 | Column 2 | Column 3 | Column 4 |
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| PHILLIPS EDISON & COMPANYDECEMBER 31, 2023 FORM 10-K | 30 |
BASIS OF PRESENTATION—The basis of presentation of our shares of common stock is described as follows:
•Reverse Stock Split—On July 2, 2021, our Board approved an amendment to our charter to effect a one-for-three reverse stock split. Concurrent with the reverse split, the Operating Partnership enacted a one-for-three reverse split of its outstanding OP units. Unless otherwise indicated, the information in this Form 10-K gives effect to the reverse stock and OP unit splits (see Note 12).
•Recapitalization—On June 18, 2021, our stockholders approved an amendment to our charter (the “Articles of Amendment”) that effected a change of each share of our common stock outstanding at the time the amendment became effective into one share of a newly created class of Class B common stock (the “Recapitalization”). The Articles of Amendment became effective upon filing with, and acceptance by, the State Department of Assessments and Taxation of Maryland on July 2, 2021. Unless otherwise indicated, all information in this Form 10-K gives effect to the Recapitalization and references to “shares” and per share metrics refer to our common stock and Class B common stock, collectively. Our Class B common stock automatically converted into our publicly traded common stock on January 18, 2022 (see Note 12). Prior to the conversion, we have presented common stock and Class B common stock as separate classes within our consolidated balance sheets and consolidated statements of equity. On May 5, 2022, we filed Articles Supplementary to our charter with the Maryland State Department of Assessments and Taxation in order to reclassify and designate all of the 350 million authorized shares of our Class B common stock, $0.01 par value per share, all of which were unissued at such time, as shares of our common stock, $0.01 par value per share. We no longer have Class B common stock authorized for issue.
AT-THE-MARKET OFFERING (“ATM”)—On February 10, 2022, we and the Operating Partnership entered into a sales agreement relating to the potential sale of shares of common stock pursuant to a continuous offering program. In accordance with the terms of the sales agreement, we may offer and sell shares of our common stock having an aggregate offering price of up to $250 million from time to time through our sales agents, or, if applicable, as forward sellers. During the three months ended December 31, 2023, we issued 2.2 million shares of our common stock at a gross weighted average price of $35.92 per share under the ATM program for net proceeds of $77.5 million, after approximately $0.8 million in commissions. During the year ended December 31, 2023, we issued 4.2 million shares of our common stock at a gross weighted average price of $35.76 per share under the ATM program for net proceeds of $147.6 million, after approximately $1.5 million in commissions. During the three months ended December 31, 2022, no shares were issued under the ATM program. During the year ended December 31, 2022, we issued 2.6 million shares of our common stock at a gross weighted average price of $34.23 per share under the ATM program for net proceeds of $89.2 million, after approximately $0.9 million in commissions. As of December 31, 2023, approximately $10.8 million of common stock remained available for issuance under the ATM program.
Subsequent to December 31, 2023, we issued approximately 46,000 additional shares of our common stock at a gross weighted average price of $37.05 per share under the ATM program for net proceeds of $1.7 million, after approximately $17,000 in commissions.
PORTFOLIO AND LEASING STATISTICS—Below are statistical highlights of our wholly-owned portfolio as of December 31, 2023 and 2022 (dollars and square feet in thousands):
| 2023 | 2022 | |||||
|---|---|---|---|---|---|---|
| Number of properties | 281 | 271 | ||||
| Number of states | 31 | 31 | ||||
| Total square feet | 32,153 | 31,093 | ||||
| ABR | $ | 470,819 | $ | 435,712 | ||
| % ABR from omni-channel grocery-anchored shopping centers | 97.2 | % | 97.2 | % | ||
| Leased occupancy %: | ||||||
| Total portfolio spaces | 97.4 | % | 97.4 | % | ||
| Anchor spaces | 98.9 | % | 99.3 | % | ||
| Inline spaces | 94.7 | % | 93.8 | % | ||
| Average remaining lease term (in years)(1) | 4.4 | 4.5 |
(1)The average remaining lease term in years excludes future options to extend the term of the lease.
FINANCIAL HIGHLIGHTS—Owning, operating, and managing well-occupied omni-channel grocery-anchored real estate is a core part of our business strategy, and as of December 31, 2023, 97.2% of our ABR was derived from omni-channel grocery-anchored shopping centers. As of December 31, 2023, total leased occupancy remained high at 97.4% and inline occupancy improved 0.9% to 94.7%, when compared to December 31, 2022. Our financial performance highlights during 2023 are as follows:
•Net income of $63.8 million, an increase of $9.2 million from a year ago, primarily due to strong operating performance attributable to our Same-Center portfolio and the net impact of our 2023 acquisition and disposition activity.
•Core FFO per diluted share improved by $0.07 to $2.34, primarily due to our strong operating performance.
•Same-Center NOI improved 4.2% to $396.6 million.
•Acquired $278.5 million and disposed of $6.3 million of assets, executing our external growth strategy while improving portfolio quality with our dispositions.
| Column 1 | Column 2 | Column 3 | Column 4 |
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| PHILLIPS EDISON & COMPANYDECEMBER 31, 2023 FORM 10-K | 31 |
•Declared and paid monthly distributions of $0.0933 per share, or $1.12 annualized, for each month beginning January 2023 through August 2023, and increased monthly distributions to $0.0975 per share, or $1.17 annualized, for the remainder of 2023.
EXECUTING OUR STRATEGY—Our performance for the year is linked to our key initiatives: differentiated and focused strategy, integrated operating platform, and responsible balance sheet management. We believe these initiatives will result in long-term growth and value creation to all of our stakeholders.
Differentiated and Focused Strategy—We actively monitor the commercial real estate sector for shopping centers that meet our investment objectives. Our effective shelf registration statement and ATM program allow us to access equity and debt capital that we intend to use, in part, to grow our portfolio of assets. Highlights of our asset composition and acquisitions are as follows:
•97.2% of our ABR was derived from omni-channel grocery-anchored shopping centers as of December 31, 2023.
•Our grocer health ratio, or occupancy cost, remains strong at 2.3% at December 31, 2023, which is favorable compared to the national grocer average occupancy cost.
•In 2023, our grocer sales increased 6% year-over-year to $681 per square foot. Grocer sales per square foot have increased approximately 30% since 2019.
•70.4% of our ABR was derived from Neighbors providing necessity-based goods and services.
•The average PECO space, excluding anchors, is approximately 2,300 square feet. This size is attractive to many retailers, whereas large box format retailers are fewer and demand is thinner.
•Acquired eleven properties and three outparcels for a net cash outlay of $270.3 million, adding 1.1 million of GLA to our portfolio.
Internal Growth Through Our Integrated Operating Platform—We have focused on improving our occupancy through leasing vacant spaces, increasing lease revenue through rent growth, and executing development and redevelopment opportunities. Highlights of our wholly-owned operational activity as of and for the year ended December 31, 2023 are as follows:
•Leased occupancy for our wholly-owned portfolio remained high at 97.4% as of December 31, 2023, and inline occupancy improved 0.9% to 94.7%, when compared to December 31, 2022.
•Total ABR PSF for executed new leases improved 12.6% to $21.75, and inline ABR PSF for executed new leases improved 6.8% to $25.98 during the year ended December 31, 2023.
•For the year ended December 31, 2023, we completed 13 development and redevelopment projects encompassing a total of 0.2 million square feet with a total investment of $34.1 million.
•As of December 31, 2023, we have nine development and redevelopment projects in process, which we estimate will have a total investment of $33.7 million.
•Created $2.7 million of incremental ABR in 2023 as a result of development and redevelopment projects completed in 2022.
Balance Sheet Management Positioned for External Growth—Our balance sheet has a leverage profile that well-positions us to maintain and improve our investment grade rating, fund distributions to our stockholders, and invest in our targeted acquisitions. As of December 31, 2023, we had $615.4 million of total liquidity, comprised of $8.9 million of cash, cash equivalents, and restricted cash, plus $606.6 million of borrowing capacity available on our $800 million revolving credit facility. Our balance sheet management highlights as of and for the year ended December 31, 2023 are as follows:
•We issued 4.2 million shares of our common stock under the ATM program for net proceeds of $147.6 million.
•We amended three senior unsecured term loans with a total notional amount of $475 million scheduled to mature during 2024. The three senior unsecured term loans, as amended, have a total notional amount of $484.8 million and are scheduled to mature between 2026 (extendable with two one-year options to 2028) and 2027.
•Our current investment grade ratings are Baa3 (Outlook: Stable) with Moody’s Investors Services and BBB- (Outlook: Positive) with S&P Global Ratings.
•As of December 31, 2023, our wholly-owned properties were approximately 84% unencumbered.
•Our ratio of net debt to Adjusted EBITDAre was 5.1x as of December 31, 2023, as compared to 5.3x as of December 31, 2022 (see “Liquidity and Capital Resources - Financial Leverage Ratios” below for a discussion and calculation).
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| PHILLIPS EDISON & COMPANYDECEMBER 31, 2023 FORM 10-K | 32 |
•As of December 31, 2023, our outstanding debt had a weighted-average maturity of 3.9 years excluding all extension options. As of December 31, 2023, our debt maturity profile with the respective principal payment obligations is as follows (including the impact of derivatives on weighted-average interest rates and excluding all extension options)(1):
(1)As of December 31, 2023, our outstanding debt had a weighted-average maturity of 4.1 years including all extension options. Our related debt maturities at December 31, 2023 including extension options were as follows: 2024 - $28.1 million; 2025 - $277.6 million; 2026 - $241.9 million; 2027 - $704.6 million; 2028 - $179.1 million; 2029 - $0.8 million; 2030 - $200.8 million; and 2031 - $353.4 million.
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| PHILLIPS EDISON & COMPANYDECEMBER 31, 2023 FORM 10-K | 33 |
LEASING ACTIVITY—Below is a summary of leasing activity for our wholly-owned properties for the years ended December 31, 2023 and 2022(1):
| Total Deals | Inline Deals | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2023 | 2022 | ||||||||||||
| New leases: | |||||||||||||||
| Number of leases | 348 | 390 | 334 | 375 | |||||||||||
| Square footage (in thousands) | 1,077 | 1,230 | 763 | 819 | |||||||||||
| ABR (in thousands) | $ | 23,416 | $ | 23,750 | $ | 19,813 | $ | 19,919 | |||||||
| ABR PSF | $ | 21.75 | $ | 19.31 | $ | 25.98 | $ | 24.33 | |||||||
| Cost PSF of executing new leases | $ | 33.04 | $ | 36.25 | $ | 37.22 | $ | 39.56 | |||||||
| Number of comparable leases | 137 | 145 | 135 | 143 | |||||||||||
| Comparable rent spread | 25.2 | % | 32.2 | % | 24.8 | % | 26.5 | % | |||||||
| Weighted average lease term (in years) | 8.6 | 8.1 | 7.2 | 7.4 | |||||||||||
| Renewals and options: | |||||||||||||||
| Number of leases | 648 | 611 | 590 | 551 | |||||||||||
| Square footage (in thousands) | 3,642 | 3,554 | 1,360 | 1,213 | |||||||||||
| ABR (in thousands) | $ | 58,529 | $ | 49,625 | $ | 35,311 | $ | 29,172 | |||||||
| ABR PSF | $ | 16.07 | $ | 13.96 | $ | 25.96 | $ | 24.04 | |||||||
| ABR PSF prior to renewals | $ | 14.50 | $ | 12.77 | $ | 22.44 | $ | 21.18 | |||||||
| Percentage increase in ABR PSF | 10.8 | % | 9.3 | % | 15.7 | % | 13.4 | % | |||||||
| Cost PSF of executing renewals and options | $ | 0.52 | $ | 1.89 | $ | 0.91 | $ | 1.10 | |||||||
| Number of comparable leases(2) | 485 | 472 | 470 | 459 | |||||||||||
| Comparable rent spread(2) | 16.2 | % | 14.6 | % | 17.7 | % | 15.2 | % | |||||||
| Weighted average lease term (in years) | 5.0 | 4.9 | 4.3 | 4.2 | |||||||||||
| Portfolio retention rate | 93.9 | % | 90.7 | % | 84.9 | % | 77.5 | % |
(1)PSF amounts may not recalculate exactly based on other amounts presented within the table due to rounding.
(2)Excludes exercise of options.
RESULTS OF OPERATIONS
KNOWN TRENDS AND UNCERTAINTIES—The economy continues to face inflation risk, which may negatively impact some of our Neighbors and increase our operating and construction costs. Substantially all of our leases contain provisions designed to mitigate the adverse effect of inflation, including requirements for Neighbors to pay their allocable share of operating expenses that includes common area maintenance, utilities, real estate taxes, insurance, and certain capital expenditures. Additionally, many of our leases are for terms of less than ten years, which allows us to target increased rents to current market rates upon renewal.
In addition to inflation, macroeconomic and geopolitical risks may create challenges that could negatively impact market conditions in the United States. Additionally, the policies implemented to address these risks, including raising interest rates, could result in adverse impacts on the United States economy, including a slowing of growth or potentially a recession.
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| PHILLIPS EDISON & COMPANYDECEMBER 31, 2023 FORM 10-K | 34 |
SUMMARY OF OPERATING ACTIVITIES FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022
| Favorable (Unfavorable) Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2023 | 2022 | $ | %(1) | |||||||||||
| Revenues: | |||||||||||||||
| Rental income | $ | 597,501 | $ | 560,538 | $ | 36,963 | 6.6 | % | |||||||
| Fees and management income | 9,646 | 11,541 | (1,895) | (16.4) | % | ||||||||||
| Other property income | 2,977 | 3,293 | (316) | (9.6) | % | ||||||||||
| Total revenues | 610,124 | 575,372 | 34,752 | 6.0 | % | ||||||||||
| Operating Expenses: | |||||||||||||||
| Property operating | 102,303 | 95,359 | (6,944) | (7.3) | % | ||||||||||
| Real estate taxes | 72,816 | 67,864 | (4,952) | (7.3) | % | ||||||||||
| General and administrative | 44,366 | 45,235 | 869 | 1.9 | % | ||||||||||
| Depreciation and amortization | 236,443 | 236,224 | (219) | (0.1) | % | ||||||||||
| Impairment of real estate assets | — | 322 | 322 | NM | |||||||||||
| Total operating expenses | 455,928 | 445,004 | (10,924) | (2.5) | % | ||||||||||
| Other: | |||||||||||||||
| Interest expense, net | (84,232) | (71,196) | (13,036) | (18.3) | % | ||||||||||
| Gain on disposal of property, net | 1,110 | 7,517 | (6,407) | (85.2) | % | ||||||||||
| Other expense, net | (7,312) | (12,160) | 4,848 | 39.9 | % | ||||||||||
| Net income | 63,762 | 54,529 | 9,233 | 16.9 | % | ||||||||||
| Net income attributable to noncontrolling interests | (6,914) | (6,206) | (708) | (11.4) | % | ||||||||||
| Net income attributable to stockholders | $ | 56,848 | $ | 48,323 | $ | 8,525 | 17.6 | % |
(1)Line items that result in a percent change that exceed certain limitations are considered not meaningful (“NM”) and indicated as such.
Our basis for analyzing significant fluctuations in our results of operations generally includes review of the results of our same-center portfolio, non-same-center portfolio, and revenues and expenses from our management activities. We define our same-center portfolio as the 262 properties that were owned and operational prior to January 1, 2022. We define our non-same-center portfolio as those properties that were not fully owned and operational in both periods owing primarily to real estate asset activity occurring after December 31, 2021, which includes five properties disposed of and 18 properties acquired. Below are explanations of the significant fluctuations in the results of operations for the years ended December 31, 2023 and 2022:
Rental Income increased $37.0 million as follows:
•$19.3 million increase related to our same-center portfolio primarily as follows:
▪$16.6 million increase primarily due to a $0.41 increase in average minimum rent PSF and a 1.1% improvement in average occupancy; and
▪$7.3 million increase primarily due to an increase in recoverable income attributed to an increase in real estate taxes, common area maintenance spending, and insurance costs as well as a 1.1% improvement in average occupancy; partially offset by
▪$2.2 million decrease primarily due to collections in 2022 of amounts previously reserved; and
▪$1.3 million decrease primarily due to lower lease buyout income.
•$17.7 million increase primarily related to our acquisition activity, net of dispositions.
Fees and Management Income:
•The $1.9 million decrease in fees and management income was primarily due to $0.1 million realized performance income in 2023 compared to $2.7 million in 2022 for the achievement of certain performance targets related to our Necessity Retail Partners (“NRP”) joint venture.
Property Operating Expenses increased $6.9 million primarily as follows:
•$4.3 million increase from our same-center portfolio and corporate operating activities primarily due to increases in recoverable expenses attributable to higher common area maintenance spending, along with higher insurance and compensation costs; and
•$2.6 million increase primarily due to our acquisition activity, net of dispositions.
Real Estate Tax Expenses:
•The $5.0 million increase in real estate tax expenses is primarily due to our acquisition activity, net of dispositions, and less appeal settlement income in 2023 compared to 2022.
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| PHILLIPS EDISON & COMPANYDECEMBER 31, 2023 FORM 10-K | 35 |
General and Administrative Expenses:
•The $0.9 million decrease in general and administrative expenses is primarily due to a decrease in directors and officers insurance.
Interest Expense, Net:
•The $13.0 million increase during the year ended December 31, 2023 as compared to the same period in 2022 was primarily due to higher interest rates in 2023 partially offset by lower loss on extinguishment or modification of debt. Interest Expense, Net was comprised of the following (dollars in thousands):
| Year Ended December 31, | |||||
|---|---|---|---|---|---|
| 2023 | 2022 | ||||
| Interest on unsecured term loans and senior notes, net | $ | 48,803 | $ | 40,975 | |
| Interest on secured debt | 18,614 | 20,768 | |||
| Interest on revolving credit facility, net | 8,785 | 2,069 | |||
| Non-cash amortization and other | 7,662 | 6,359 | |||
| Loss on extinguishment or modification of debt and other, net(1) | 368 | 1,025 | |||
| Interest expense, net | $ | 84,232 | $ | 71,196 | |
| Weighted-average interest rate as of end of year | 4.2 | % | 3.6 | % | |
| Weighted-average term (in years) as of end of year | 3.9 | 4.4 |
(1)Includes defeasance fees related to early repayments of debt.
Gain on Disposal of Property, Net:
•The $6.4 million decrease was primarily related to the sale of land acquired by local authorities, as well as the sale of one property and two outparcels with a net gain of $1.1 million during the year ended December 31, 2023, as compared to the sale of four properties and four outparcels with a net gain of $7.5 million during the year ended December 31, 2022 (see Note 4).
Other Expense, Net:
•Other Expense, Net was comprised of the following (in thousands):
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||
| Transaction and acquisition expenses | $ | (5,675) | $ | (10,551) | ||
| Impairment of investment in third parties (see Note 15) | (3,000) | — | ||||
| Federal, state, and local income tax expense | (438) | (806) | ||||
| Equity in net income of unconsolidated investments | 372 | 1,280 | ||||
| Change in fair value of earn-out liability (see Note 16) | — | (1,809) | ||||
| Other | 1,429 | (274) | ||||
| Other expense, net | $ | (7,312) | $ | (12,160) |
SUMMARY OF OPERATING ACTIVITIES FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
For a discussion of the year-to-year comparisons in the results of operations for the years ended December 31, 2022 and 2021, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2022 Annual Report on Form 10-K, filed with the SEC on February 21, 2023.
NON-GAAP MEASURES
See “Key Performance Indicators and Defined Terms” above for additional information related to the following non-GAAP measures.
SAME-CENTER NOI—Same-Center NOI is presented as a supplemental measure of our performance, as it highlights operating trends such as occupancy levels, rental rates, and operating costs for our same-center portfolio. Other REITs may use different methodologies for calculating Same-Center NOI, and accordingly, our Same-Center NOI may not be comparable to other REITs. For the years ended December 31, 2023 and 2022, Same-Center NOI represents the NOI for the 262 properties that were wholly-owned and operational for the entire portion of all comparable reporting periods.
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| PHILLIPS EDISON & COMPANYDECEMBER 31, 2023 FORM 10-K | 36 |
Same-Center NOI should not be viewed as an alternative measure of our financial performance as it does not reflect the operations of our entire portfolio, nor does it reflect the impact of general and administrative expenses, depreciation and amortization, interest expense, other income (expense), or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties that could materially impact our results from operations.
The table below compares Same-Center NOI for the years ended December 31, 2023 and 2022 (dollars in thousands):
| Favorable (Unfavorable) | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ Change | % Change | ||||||||||||
| Revenues: | |||||||||||||||
| Rental income(1) | $ | 415,152 | $ | 398,507 | $ | 16,645 | |||||||||
| Tenant recovery income | 134,860 | 127,776 | 7,084 | ||||||||||||
| Reserves for uncollectibility(2) | (3,409) | (1,918) | (1,491) | ||||||||||||
| Other property income | 2,717 | 2,967 | (250) | ||||||||||||
| Total revenues | 549,320 | 527,332 | 21,988 | 4.2 | % | ||||||||||
| Operating expenses: | |||||||||||||||
| Property operating expenses | 83,669 | 80,683 | (2,986) | ||||||||||||
| Real estate taxes | 69,035 | 66,184 | (2,851) | ||||||||||||
| Total operating expenses | 152,704 | 146,867 | (5,837) | (4.0) | % | ||||||||||
| Total Same-Center NOI | $ | 396,616 | $ | 380,465 | $ | 16,151 | 4.2 | % |
(1)Excludes straight-line rental income, net amortization of above- and below-market leases, and lease buyout income.
(2)Includes billings that will not be recognized as revenue until cash is collected or the Neighbor resumes regular payments and/or we deem it appropriate to resume recording revenue on an accrual basis, rather than on a cash basis.
Same-Center NOI Reconciliation—Below is a reconciliation of Net Income to NOI and Same-Center NOI for the years ended December 31, 2023 and 2022 (in thousands):
| 2023 | 2022 | |||||
|---|---|---|---|---|---|---|
| Net income | $ | 63,762 | $ | 54,529 | ||
| Adjusted to exclude: | ||||||
| Fees and management income | (9,646) | (11,541) | ||||
| Straight-line rental income(1) | (10,185) | (12,265) | ||||
| Net amortization of above- and below-market leases | (5,178) | (4,324) | ||||
| Lease buyout income | (1,222) | (2,414) | ||||
| General and administrative expenses | 44,366 | 45,235 | ||||
| Depreciation and amortization | 236,443 | 236,224 | ||||
| Impairment of real estate assets | — | 322 | ||||
| Interest expense, net | 84,232 | 71,196 | ||||
| Gain on disposal of property, net | (1,110) | (7,517) | ||||
| Other expense, net | 7,312 | 12,160 | ||||
| Property operating expenses related to fees and management income | 2,059 | 3,046 | ||||
| NOI for real estate investments | 410,833 | 384,651 | ||||
| Less: Non-same-center NOI(2) | (14,217) | (4,186) | ||||
| Total Same-Center NOI | $ | 396,616 | $ | 380,465 |
(1)Includes straight-line rent adjustments for Neighbors for whom revenue is being recorded on a cash basis.
(2)Includes operating revenues and expenses from non-same-center properties which includes properties acquired or sold and corporate activities.
NAREIT FFO AND CORE FFO—Nareit FFO is a non-GAAP financial performance measure that is widely recognized as a measure of REIT operating performance. Core FFO is an additional financial performance measure used by us as Nareit FFO includes certain non-comparable items that affect our performance over time. We believe that Core FFO is helpful in assisting management and investors with assessing the sustainability of our operating performance in future periods.
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| PHILLIPS EDISON & COMPANYDECEMBER 31, 2023 FORM 10-K | 37 |
Nareit FFO and Core FFO should not be considered alternatives to net income (loss) under GAAP, as an indication of our liquidity, nor as an indication of funds available to cover our cash needs, including our ability to fund distributions. Core FFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate our business plan in the manner currently contemplated.
Accordingly, Nareit FFO and Core FFO should be reviewed in connection with other GAAP measurements, and should not be viewed as more prominent measures of performance than net income (loss) or cash flows from operations prepared in accordance with GAAP. Our Nareit FFO and Core FFO, as presented, may not be comparable to amounts calculated by other REITs.
The following table presents our calculation of Nareit FFO and Core FFO for the years ended December 31, 2023, 2022, and 2021 (in thousands, except per share amounts):
| 2023 | 2022 | 2021 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Calculation of Nareit FFO Attributable to Stockholders and OP Unit Holders | ||||||||||
| Net income | $ | 63,762 | $ | 54,529 | $ | 17,233 | ||||
| Adjustments: | ||||||||||
| Depreciation and amortization of real estate assets | 234,260 | 232,571 | 217,564 | |||||||
| Impairment of real estate assets | — | 322 | 6,754 | |||||||
| Gain on disposal of property, net | (1,110) | (7,517) | (30,421) | |||||||
| Adjustments related to unconsolidated joint ventures | 2,636 | 842 | 72 | |||||||
| Nareit FFO attributable to stockholders and OP unit holders | $ | 299,548 | $ | 280,747 | $ | 211,202 | ||||
| Calculation of Core FFO Attributable to Stockholders and OP Unit Holders | ||||||||||
| Nareit FFO attributable to stockholders and OP unit holders | $ | 299,548 | $ | 280,747 | $ | 211,202 | ||||
| Adjustments: | ||||||||||
| Depreciation and amortization of corporate assets | 2,183 | 3,653 | 3,869 | |||||||
| Change in fair value of earn-out liability | — | 1,809 | 30,436 | |||||||
| Impairment of investment in third parties | 3,000 | — | — | |||||||
| Transaction and acquisition expenses | 5,675 | 10,551 | 5,363 | |||||||
| Loss on extinguishment or modification of debt and other, net | 368 | 1,025 | 3,592 | |||||||
| Amortization of unconsolidated joint venture basis differences | 17 | 220 | 1,167 | |||||||
| Realized performance income(1) | (75) | (2,742) | (675) | |||||||
| Core FFO attributable to stockholders and OP unit holders | $ | 310,716 | $ | 295,263 | $ | 254,954 | ||||
| Nareit FFO/Core FFO Attributable to Stockholders and OP Unit Holders per diluted share | ||||||||||
| Weighted-average shares of common stock outstanding - diluted | 132,970 | 130,332 | 116,672 | |||||||
| Nareit FFO attributable to stockholders and OP unit holders per share - diluted | $ | 2.25 | $ | 2.15 | $ | 1.81 | ||||
| Core FFO attributable to stockholders and OP unit holders per share - diluted | $ | 2.34 | $ | 2.27 | $ | 2.19 |
(1)Realized performance income includes fees received related to the achievement of certain performance targets in our NRP joint venture.
EBITDAre and ADJUSTED EBITDAre—We use EBITDAre and Adjusted EBITDAre as additional measures of operating performance which allow us to compare earnings independent of capital structure, determine debt service and fixed cost coverage, and measure enterprise value. Additionally, we believe they are a useful indicator of our ability to support our debt obligations.
EBITDAre and Adjusted EBITDAre should not be considered as alternatives to net income (loss), as an indication of our liquidity, nor as an indication of funds available to cover our cash needs, including our ability to fund distributions. Accordingly, EBITDAre and Adjusted EBITDAre should be reviewed in connection with other GAAP measurements, and should not be viewed as more prominent measures of performance than net income (loss) or cash flows from operations prepared in accordance with GAAP. Our EBITDAre and Adjusted EBITDAre, as presented, may not be comparable to amounts calculated by other REITs.
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| PHILLIPS EDISON & COMPANYDECEMBER 31, 2023 FORM 10-K | 38 |
The following table presents our calculation of EBITDAre and Adjusted EBITDAre for the years ended December 31, 2023, 2022, and 2021 (in thousands):
| 2023 | 2022 | 2021 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Calculation of EBITDAre | ||||||||||
| Net income | $ | 63,762 | $ | 54,529 | $ | 17,233 | ||||
| Adjustments: | ||||||||||
| Depreciation and amortization | 236,443 | 236,224 | 221,433 | |||||||
| Interest expense, net | 84,232 | 71,196 | 76,371 | |||||||
| Gain on disposal of property, net | (1,110) | (7,517) | (30,421) | |||||||
| Impairment of real estate assets | — | 322 | 6,754 | |||||||
| Federal, state, and local tax expense | 438 | 806 | 327 | |||||||
| Adjustments related to unconsolidated joint ventures | 3,721 | 1,987 | 1,431 | |||||||
| EBITDAre | $ | 387,486 | $ | 357,547 | $ | 293,128 | ||||
| Calculation of Adjusted EBITDAre | ||||||||||
| EBITDAre | $ | 387,486 | $ | 357,547 | $ | 293,128 | ||||
| Adjustments: | ||||||||||
| Impairment of investment in third parties | 3,000 | — | — | |||||||
| Change in fair value of earn-out liability | — | 1,809 | 30,436 | |||||||
| Transaction and acquisition expenses | 5,675 | 10,551 | 5,363 | |||||||
| Amortization of unconsolidated joint venture basis differences | 17 | 220 | 1,167 | |||||||
| Realized performance income(1) | (75) | (2,742) | (675) | |||||||
| Adjusted EBITDAre | $ | 396,103 | $ | 367,385 | $ | 329,419 |
(1)Realized performance income includes fees received related to the achievement of certain performance targets in our NRP joint venture.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL—Aside from standard operating expenses, we expect our principal cash demands to be for:
•investments in real estate;
•cash distributions to stockholders;
•redevelopment and repositioning projects;
•capital expenditures and leasing costs; and
•principal and interest payments on our outstanding indebtedness.
We expect our primary sources of liquidity to be:
•operating cash flows;
•borrowings from our unsecured revolving credit facility and proceeds from debt financings;
•proceeds from any ATM offering activities;
•proceeds received from the disposition of properties; and
•available, unrestricted cash and cash equivalents.
At this time, we believe our current sources of liquidity are sufficient to meet our short- and long-term cash demands.
IMPACT OF THE UNDERWRITTEN IPO—On July 19, 2021, we closed our underwritten IPO, through which we issued 19.6 million shares, including the underwriters’ overallotment election, of a new class of common stock, $0.01 par value per share, at an initial price to the public of $28.00 per share. As a result of the underwritten IPO, we received gross proceeds of $547.4 million. The underwritten IPO allowed us access to forms of capital not previously available to us, as follows:
•In October 2021, the Operating Partnership completed the registered offering of $350 million aggregate principal amount of 2.625% senior notes (“2021 Bond Offering”) priced at 98.692% of the principal amount and maturing in November 2031. The 2021 Bond Offering resulted in gross proceeds of $345.4 million. The notes are fully and unconditionally guaranteed by us.
•In February 2022, we filed an automatically effective shelf registration statement on Form S-3 providing for the public offering and sale, from time to time, by us of our preferred stock, common stock, debt securities, depository shares, warrants, rights, units, and guarantees of debt securities and by the Operating Partnership of its debt securities, in each case in unlimited amounts.
•In connection with our February 2022 Form S-3 filing, we commenced the ATM program through which we may offer and sell shares of our common stock having an aggregate offering price of up to $250 million. During the three months ended December 31, 2023, we issued 2.2 million shares of our common stock at a gross weighted average
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| PHILLIPS EDISON & COMPANYDECEMBER 31, 2023 FORM 10-K | 39 |
price of $35.92 per share under the ATM program for net proceeds of $77.5 million, after approximately $0.8 million in commissions. During the year ended December 31, 2023, we issued 4.2 million shares of our common stock at a gross weighted average price of $35.76 per share under the ATM program for net proceeds of $147.6 million, after approximately $1.5 million in commissions. During the three months ended December 31, 2022, no shares were issued under the ATM program. During the year ended December 31, 2022, we issued 2.6 million shares of our common stock at a gross weighted average price of $34.23 per share under the ATM program for net proceeds of $89.2 million, after approximately $0.9 million in commissions. As of December 31, 2023, approximately $10.8 million of common stock remained available for issuance under the ATM program.
DEBT—The following table summarizes information about our debt as of December 31, 2023 and 2022 (dollars in thousands):
| 2023 | 2022 | |||||
|---|---|---|---|---|---|---|
| Total debt obligations, gross | $ | 1,986,735 | $ | 1,912,784 | ||
| Weighted-average interest rate | 4.2 | % | 3.6 | % | ||
| Weighted-average term (in years) | 3.9 | 4.4 | ||||
| Revolving credit facility capacity(1) | $ | 800,000 | $ | 800,000 | ||
| Revolving credit facility availability(2) | 606,550 | 709,385 |
(1)The revolving credit facility matures in January 2026, extendable at our option to January 2027. In addition, the revolving credit facility also includes an accordion feature that permits us to increase our aggregate borrowing capacity thereunder to up to $1 billion, subject to the satisfaction of certain conditions.
(2)Net of any outstanding balance and letters of credit.
Debt Activity—During the years ended December 31, 2023 and 2022, we took steps to appropriately ladder our debt maturities and increase debt amounts available to us for future investment activity. Our debt activity during the year ended December 31, 2023 was as follows:
•On July 31, 2023, we amended three senior unsecured term loans with a total notional amount of $475 million scheduled to mature during 2024. The three senior unsecured term loans, as amended, have a total notional amount of $484.8 million. The $161.8 million unsecured term loan is priced based on a leverage grid, which is currently at the Secured Overnight Financing Rate (“SOFR”) plus 1.35% and is scheduled to mature on January 31, 2026 extendable with two one-year options to 2028. The $158 million and $165 million unsecured term loans are priced based on a leverage grid, which is currently at SOFR plus 1.35% and mature on January 31, 2027.
•During the year ended December 31, 2023, we repaid $47.3 million in mortgage debt.
Our debt activity during the year ended December 31, 2022 was as follows:
•In May 2022, we amended our credit facility agreement to, among other things, increase the total amount available under our unsecured revolving credit facility from $500 million to $800 million. The unsecured revolving credit facility also includes an accordion feature that permits us to increase our aggregate borrowing capacity thereunder to up to $1 billion, subject to the satisfaction of certain conditions. The unsecured revolving credit facility is scheduled to mature in January 2026, extendable at our option to January 2027.
•During 2022, we repaid $80.1 million in mortgage debt.
Future Debt Obligations—As of December 31, 2023, including the impact of our swap agreements, our future contractual debt obligations were $115.7 million of debt principal and interest payments during 2024, and $2.2 billion of debt principal and interest payments thereafter (see Note 8). The average annual maturities of our outstanding debt over the next four years as of December 31, 2023 was approximately $313 million including all extension options and approximately $354 million excluding all extension options.
Debt Obligation Guarantees—The 2.625% senior notes issued by the Operating Partnership pursuant to an effective registration statement in October 2021 were, and debt securities of the Operating Partnership registered under our automatically effective shelf registration statement on Form S-3 filed in February 2022 will be, fully and unconditionally guaranteed by us. At December 31, 2023, the Operating Partnership had issued and outstanding its 2.625% senior notes. The obligations of the Operating Partnership to pay principal, premiums, if any, and interest on the 2.625% senior notes are fully and unconditionally guaranteed by us on a senior basis. As a result of the amendments to SEC Rule 3-10 of Regulation S-X, subsidiary issuers of obligations guaranteed by the parent are not required to provide separate financial statements, provided that: (i) the subsidiary obligor is consolidated into the parent company’s consolidated financial statements; (ii) the parent guarantee is “full and unconditional”; and (iii) subject to certain exceptions as set forth below, the alternative disclosure required by Rule 13-01 of Regulation S-X is provided, which includes narrative disclosure and summarized financial information. We meet the conditions of this requirement and thus, are not presenting separate financial statements. Furthermore, as permitted under Rule 13-01(a)(4)(vi) of Regulation S-X, we have excluded the summarized financial information for the Operating Partnership because the assets, liabilities, and results of operations of the Operating Partnership are not materially different than the corresponding in our consolidated financial statements, and management believes such summarized financial information would be repetitive and would not provide incremental value to investors.
Covenants—Credit agreements for our unsecured revolving credit facility and unsecured term loans contain customary financial covenants, including a leverage ratio of 60% or less, with a surge to 65% or less following a material acquisition, and require the fixed-charge ratio to be 1.5:1 or greater. Our unsecured senior notes due 2031 are also subject to customary financial covenants, including a leverage ratio of 65% or less, and require the fixed-charge ratio to be 150% or greater. As of December 31, 2023, we were in compliance with the restrictive covenants of our outstanding debt obligations and we expect to continue to meet the requirements of these covenants over the next twelve months.
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| PHILLIPS EDISON & COMPANYDECEMBER 31, 2023 FORM 10-K | 40 |
OTHER CONTRACTUAL COMMITMENTS AND CONTINGENCIES AND OFF BALANCE SHEET ARRANGEMENTS—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. Currently, neither our operating leases nor our finance leases have residual value guarantees or other restrictions or covenants. We expect to fund these obligations through existing financing or cash flows from operations. As of December 31, 2023, our future contractual obligations as a lessee included operating lease obligations of $0.7 million during 2024, and $7.3 million thereafter. As of December 31, 2023, our future contractual finance lease obligations included $0.3 million during 2024.
We have an off-balance sheet arrangement that includes being the limited guarantor of a $175 million mortgage loan secured by Grocery Retail Partners I LLC (“GRP I”) properties. Our guaranty for the GRP I debt is limited to being the non-recourse carveout guarantor and the environmental indemnitor. Further, we are also party to an agreement with our institutional joint venture partner in which any potential liability under such guarantee will be apportioned between us and our joint venture partner based on our respective ownership percentage in the joint venture. As of December 31, 2023, GRP I had an outstanding debt balance of $174.0 million.
Additionally, our off-balance sheet arrangements include the notional amount of our interest rate swaps which we use to hedge a portion of our exposure to interest rate fluctuations. Currently, all of our interest rate swaps fix the variable rate interest on our term loan debt. We intend to fund our interest rate swap payments utilizing cash flows from operations. As of December 31, 2023, the notional amount of our interest rate swaps was $0.7 billion. As of December 31, 2023, our future interest rate swap recoverables are $15.8 million during 2024 and $11.3 million thereafter.
FINANCIAL LEVERAGE RATIOS—We believe our net debt to Adjusted EBITDAre, net debt to total enterprise value, and debt covenant compliance as of December 31, 2023 allow us access to future borrowings as needed in the near term. The following table presents our calculation of net debt and total enterprise value, inclusive of our prorated portion of net debt and cash and cash equivalents owned through our unconsolidated joint ventures, as of December 31, 2023 and 2022 (in thousands):
| 2023 | 2022 | |||||
|---|---|---|---|---|---|---|
| Net debt: | ||||||
| Total debt, excluding discounts, market adjustments, and deferred financing expenses | $ | 2,011,093 | $ | 1,937,142 | ||
| Less: Cash and cash equivalents | 5,074 | 5,740 | ||||
| Total net debt | $ | 2,006,019 | $ | 1,931,402 | ||
| Enterprise value: | ||||||
| Net debt | $ | 2,006,019 | $ | 1,931,402 | ||
| Total equity market capitalization(1)(2) | 4,955,480 | 4,178,204 | ||||
| Total enterprise value | $ | 6,961,499 | $ | 6,109,606 |
(1)Total equity market capitalization is calculated as diluted shares multiplied by the closing market price per share, which includes 135.8 million and 131.2 million diluted shares as of December 31, 2023 and 2022, respectively, and the closing market price per share of $36.48 and $31.84 as of December 31, 2023 and 2022, respectively.
(2)Fully diluted shares include common stock and OP units.
The following table presents our calculation of net debt to Adjusted EBITDAre and net debt to total enterprise value as of December 31, 2023 and 2022 (dollars in thousands):
| 2023 | 2022 | ||||
|---|---|---|---|---|---|
| Net debt to Adjusted EBITDAre - annualized: | |||||
| Net debt | $ | 2,006,019 | $ | 1,931,402 | |
| Adjusted EBITDAre - annualized(1) | 396,103 | 367,385 | |||
| Net debt to Adjusted EBITDAre - annualized | 5.1x | 5.3x | |||
| Net debt to total enterprise value: | |||||
| Net debt | $ | 2,006,019 | $ | 1,931,402 | |
| Total enterprise value | 6,961,499 | 6,109,606 | |||
| Net debt to total enterprise value | 28.8% | 31.6% |
(1)Adjusted EBITDAre is based on a trailing twelve month period. See “Non-GAAP Measures - EBITDAre and Adjusted EBITDAre” above for a reconciliation to Net Income.
CAPITAL EXPENDITURES AND REDEVELOPMENT ACTIVITY—We make capital expenditures during the course of normal operations, including maintenance capital expenditures and tenant improvements, as well as value-enhancing anchor space repositioning and redevelopment, ground-up outparcel development, and other accretive projects.
During the years ended December 31, 2023 and 2022, we had gross capital spend of $95.3 million and $104.5 million, respectively. Below is a summary of our capital spending activity, excluding leasing commissions, on a cash basis for the years ended December 31, 2023 and 2022 (in thousands):
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| PHILLIPS EDISON & COMPANYDECEMBER 31, 2023 FORM 10-K | 41 |
| 2023 | 2022 | |||||
|---|---|---|---|---|---|---|
| Capital expenditures for real estate: | ||||||
| Capital improvements | $ | 22,766 | $ | 17,828 | ||
| Tenant improvements | 26,663 | 24,194 | ||||
| Redevelopment and development | 38,206 | 53,671 | ||||
| Total capital expenditures for real estate | 87,635 | 95,693 | ||||
| Corporate asset capital expenditures | 963 | 3,292 | ||||
| Capitalized indirect costs(1) | 4,103 | 3,430 | ||||
| Total capital spending activity(2) | $ | 92,701 | $ | 102,415 |
(1)Amount includes internal salaries and related benefits of personnel who work directly on capital projects as well as capitalized interest expense.
(2)Amounts reported are net of insurance proceeds of $2.6 million and $2.1 million for property damage claims for the years ended December 31, 2023 and 2022, respectively.
We expect our capital expenditures to reach $100 million - $110 million in 2024, which includes $40 million - $50 million related to development and redevelopment projects. We anticipate that obligations related to capital improvements, as well as redevelopment and development, in 2024 can be met with cash flows from operations, cash flows from dispositions, or borrowings on our unsecured revolving credit facility.
Generally, we expect our development and redevelopment projects to stabilize within 24 months. Our underwritten incremental unlevered yields on development and redevelopment projects are expected to average between 9%-12%. Our current in process projects represent an estimated total investment of $33.7 million. Actual incremental unlevered yields may vary from our underwritten incremental unlevered yield range based on the actual total cost to complete a project and its actual incremental annual NOI at stabilization. See “Key Performance Indicators and Defined Terms” above for further information.
REAL ESTATE ACQUISITION ACTIVITY—We actively monitor the commercial real estate market for properties that have future growth potential, are located in attractive demographic markets, and support our business objectives. We are currently targeting acquisitions of $200 million - $300 million annually. The following table highlights our property acquisitions during the years ended December 31, 2023 and 2022 (dollars in thousands):
| 2023 | 2022 | |||||
|---|---|---|---|---|---|---|
| Number of properties acquired | 11 | 7 | ||||
| Number of outparcels acquired(1) | 3 | 4 | ||||
| Contract price | $ | 278,480 | $ | 280,515 | ||
| Total price of acquisitions(2) | 270,262 | 282,000 |
(1)Outparcels acquired are adjacent to shopping centers that we own.
(2)Total price of acquisitions includes closing costs less credits and assumed debt obligations.
REAL ESTATE DISPOSITION ACTIVITY—We continually evaluate our portfolio of assets for opportunities to make strategic dispositions of assets that no longer meet our growth and investment objectives or assets that have stabilized in order to capture their value. The following table highlights our property dispositions during the years ended December 31, 2023 and 2022 (dollars in thousands):
| 2023 | 2022 | ||||||
|---|---|---|---|---|---|---|---|
| Number of properties sold | 1 | 4 | |||||
| Number of outparcels sold | 2 | 4 | |||||
| Contract price | $ | 6,250 | $ | 53,987 | |||
| Proceeds from sale of real estate, net(1)(2) | 7,208 | 52,019 | |||||
| Gain on disposal of property, net(2) | 1,110 | 7,517 |
(1)Total proceeds from sale of real estate, net includes closing costs less credits.
(2)Activity for the year ended December 31, 2023 includes land acquired from us by local authorities.
DISTRIBUTIONS—We elected to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2010. As a REIT, we have made, and intend to continue to make, distributions each taxable year equal to at least 90% of our taxable income (excluding capital gains and computed without regard to the dividends paid deduction).
In 2023, we declared and paid monthly distributions of $0.0933 per share, or $1.12 annualized, for each month beginning January 2023 through August 2023. On September 1, 2023, the Board authorized a 4.5% increase of our monthly distribution rate to $0.0975 per common share. We declared and paid monthly distributions of $0.0975 per share, or $1.17 annualized, for each month beginning September 2023 through December 2023.
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| PHILLIPS EDISON & COMPANYDECEMBER 31, 2023 FORM 10-K | 42 |
The December 2023 and January 2024 distributions of $0.0975 per share were paid on January 2, 2024 and February 1, 2024, respectively. OP unit holders will receive distributions at the same rate as common stockholders, subject to any applicable withholding. The timing and amount of distributions are determined by our Board and is influenced in part by our intention to comply with REIT requirements of the IRC.
In 2022, we declared and paid monthly distributions of $0.09 per share, or $1.08 annualized, for each month beginning January 2022 through August 2022. We declared and paid monthly distributions of $0.0933 per share, or $1.12 annualized, an increase of 3.7%, for each month beginning September 2022 through December 2022.
To maintain our qualification as a REIT, we must make aggregate annual distributions to our stockholders of at least 90% of our REIT taxable income (which is computed without regard to the dividends paid deduction or net capital gain, and which does not necessarily equal net income or loss as calculated in accordance with GAAP). We generally will not be subject to U.S. federal income tax on the income that we distribute to our stockholders each year due to meeting the REIT qualification requirements. However, we may be subject to certain state and local taxes on our income, property, or net worth and to federal income and excise taxes on our undistributed income.
We have not established a minimum distribution level, and our charter does not require that we make distributions to our stockholders.
SHARE REPURCHASE PROGRAM—On August 3, 2022, our Board approved a new share repurchase program of up to $250 million of common stock. The program may be suspended or discontinued at any time, and does not obligate us to repurchase any dollar amount or particular number of shares. No share repurchases have been made to date under this program.
CASH FLOW ACTIVITIES—As of December 31, 2023, we had cash and cash equivalents and restricted cash of $8.9 million, a net cash decrease of $8.5 million during the year ended December 31, 2023.
Below is a summary of our cash flow activity for the years ended December 31, 2023 and 2022 (dollars in thousands):
| 2023 | 2022 | $ Change | % Change(1) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net cash provided by operating activities | $ | 290,968 | $ | 290,890 | $ | 78 | — | % | ||||||
| Net cash used in investing activities | (353,386) | (331,245) | (22,141) | (6.7) | % | |||||||||
| Net cash provided by (used in) financing activities | 53,947 | (57,825) | 111,772 | NM |
(1)Line items that result in a percent change that exceed certain limitations are considered not meaningful (“NM”) and indicated as such.
OPERATING ACTIVITIES—Our net cash provided by operating activities was primarily impacted by the following:
•Property operations and working capital—Most of our operating cash comes from rental and tenant recovery income and is offset by property operating expenses, real estate taxes, and general and administrative costs. The increase in property operations was primarily due to a $16.2 million, or 4.2%, improvement in Same-Center NOI as compared to 2022, and the execution of our acquisition strategy. During the year ended December 31, 2023, we had a net cash outlay of $9.4 million from changes in working capital as compared to a net cash outlay of $0.2 million during the same period in 2022. This change was primarily driven by an increase in real estate tax payments.
•Cash paid for interest—During the year ended December 31, 2023, we paid $76.5 million for interest, an increase of $11.4 million over the same period in 2022, largely due to higher interest rates in 2023.
•Fees and management income—We also generate operating cash from our third-party investment management business, pursuant to various management and advisory agreements between us and the Managed Funds. Our fee and management income was $9.6 million for the year ended December 31, 2023, a decrease of $1.9 million as compared to the same period in 2022. The decrease in fees and management income was primarily due to our joint venture with NRP from which we recognized income related to NRP’s achievement of certain performance targets of $0.1 million for the year ended December 31, 2023, compared to income of $2.7 million in 2022.
INVESTING ACTIVITIES—Our net cash used in investing activities was primarily impacted by the following:
•Real estate acquisitions—During the year ended December 31, 2023, our acquisitions resulted in a total cash outlay of $270.3 million, as compared to a total cash outlay of $282.0 million during the same period in 2022.
•Capital expenditures—We invest capital into leasing our properties and maintaining or improving the condition of our properties. During the year ended December 31, 2023, we paid $95.3 million for capital expenditures, a decrease of $9.2 million over the same period in 2022.
•Real estate dispositions—During the year ended December 31, 2023, our dispositions resulted in a net cash inflow of $7.2 million, as compared to a net cash inflow of $52.0 million during the same period in 2022.
FINANCING ACTIVITIES—Our net cash provided by (used in) financing activities was primarily impacted by the following:
•Debt borrowings and payments—During the year ended December 31, 2023, we had $64.2 million in net borrowings as compared to $1.3 million in net repayment of debt during the same period a year ago. See “Debt Activity” above for more details.
•Issuance of common stock—During the year ended December 31, 2023, we issued 4.2 million shares of our common stock under the ATM program for net proceeds of $147.6 million. During the year ended December 31, 2022, we issued 2.6 million shares of our common stock under the ATM program for net proceeds of $89.2 million.
•Distributions to stockholders and OP unit holders—Cash used for distributions to common stockholders and OP unit holders increased by $7.8 million during the year ended December 31, 2023 as compared to the same period in
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| PHILLIPS EDISON & COMPANYDECEMBER 31, 2023 FORM 10-K | 43 |
2022, primarily due to an increase in shares of common stock outstanding as a result of issuances under the ATM program and our distribution increases in both 2022 and 2023.
CRITICAL ACCOUNTING ESTIMATES
Below is a discussion of our critical accounting estimates. Our accounting policies have been established to conform with GAAP. We consider these policies critical because they involve significant management judgments and assumptions, require estimates about matters that are inherently uncertain, and are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets at the dates of the consolidated financial statements, as well as the reported amounts of revenue during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our consolidated financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.
Real Estate Valuation—We assess the fair value of acquired real estate and allocate the purchase price of real estate assets and liabilities acquired based upon their estimated fair values as of the acquisition date. The allocation requires the use of market based estimates and assumptions including estimated market lease rates and comparable acquisitions, historical operating results, carrying costs during lease-up periods, discount and capitalization rates, market absorption periods, and the number of years the property will be held for investment.
Quarterly, we review our owned real estate properties, including those classified as real estate held for sale, for evidence of impairment, which requires us, at times, to estimate the fair value of our real estate assets. Valuing our investment in real estate assets requires us to utilize a significant amount of judgment in the inputs that we select for impairment testing and other analyses. We select these inputs based on all available evidence and using techniques that are commonly employed by other real estate companies. Examples of these inputs include projected revenue and expense growth rates, estimates of future cash flows, anticipated holding periods, capitalization rates, general economic conditions and trends, and other available market data.
We believe that our real estate valuation estimates are based on reasonable assumptions. However, the use of inappropriate estimates could result in an incorrect valuation of our real estate properties, at acquisition or during our ownership period, which could result in material impairment losses in the future.
Rental Income—The majority of our revenue is lease revenue derived from our real estate assets, for which we are the lessor. Lease receivables are reviewed continually to determine whether or not it is probable that we will realize substantially all remaining lease payments for each of our Neighbors (i.e., whether a Neighbor is deemed to be a credit risk). If we determine it is not probable that we will collect substantially all of the remaining lease payments from a Neighbor, revenue for that Neighbor is recorded on a cash basis (“cash-basis Neighbor”), including no longer recognizing straight-line rent receivables and/or receivables for recoverable expenses. We will resume recording lease income on an accrual basis for cash-basis Neighbors once we believe the collection of rent for the remaining lease term is probable, which will generally be after a period of regular payments and no remaining unpaid rent for a certain timeframe. Neighbors who represent approximately 2% of our ABR are on our watchlist for review for collectibility as of December 31, 2023. However, not all of our watchlist Neighbors have an open receivable balance with us at December 31, 2023.
Additionally, we record a general reserve based on our review of operating lease receivables at a company level to ensure they are properly valued based on analysis of historical uncollectible tenant receivables, outstanding balances, and the current economic climate.
The aforementioned adjustments, as well as any reserve for disputed charges, are recorded as a reduction of Rental Income on the consolidated statements of operations and comprehensive income (“consolidated statements of operations”).
Our revenue collectibility estimates are made based on historical experience, the current economic climate, and other Neighbor-specific factors. While we do not believe there is a reasonable likelihood of a material change in the estimates or assumptions that we use to recognize revenue, if actual payment levels were to vary significantly from estimates, we may be exposed to decreases in rental income that could be material or increases of non-cash straight-line income when a cash-basis Neighbor moves back to accrual accounting in accordance with GAAP.