Phillips Edison REIT Launches Plan For IPO

Summary

  • Phillips Edison has filed to raise $100 million in an IPO, although the final figure may be much higher.
  • The firm owns interests in 300 neighborhood shopping centers in the United States.
  • PECO has been hurt by the COVID-19 pandemic, but appears to be rebounding in early 2021.
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Supermarket in suburban area
Photo by MasaoTaira/iStock via Getty Images

Quick Take

Phillips Edison & Company (NASDAQ:PECO) has filed to raise $100 million in an IPO, according to an S-11 registration statement.

The firm acquires and operates primarily grocery-anchored neighborhood shopping center properties.

PECO has contracted somewhat during the pandemic period as we might expect, but appears to be rebounding so far in 2021, although uncertainties exist as to the speed of a rebound.

I’ll provide a final opinion when we learn more about the IPO details.

Company

Cincinnati, Ohio-based Phillips is one of the largest U.S. owners of ‘omni-channel’ grocery neighborhood shopping centers, with equity interests in 300 shopping centers in 31 states, of which 278 were wholly owned as of March 31, 2021.

Management is headed by founder, Chairman and CEO Jeffrey Edison, who was previously Chairman and CEO of REIT III prior to its merger with PECO in October 2019 and has held various senior roles in the real estate industry in his career.

Below is a brief overview video of the firm’s footprint and sample properties:

(Source)

Below is a map of the firm’s wholly-owned shopping center footprint:

(Source)

Market and Competition

According to a 2020 research report by Kidder Mathews, shopping centers have been affected by the rise in e-commerce activity but the expected fall in demand for space has generally been mild, COVID-19 pandemic notwithstanding.

A reason is that retailers seek an omni-channel footprint for their customer base, allowing buyers to either receive delivery or to go pick up products in the nearest store location.

Forward-thinking owners of larger properties are differentiating their locations by outfitting them with ‘beacons, compact, inexpensive Bluetooth transponders for continuous connectivity, that send out information of sales and other types of offers from retailers in the mall directly to shopper’s smartphones as they are walking through the mall.’ (Source)

Other property owners are working to expand the ‘experiential’ effects of their properties to improve the destination experience for shoppers that cannot be replicated by e-commerce-only activity.

Major competitive REITs that operate in the shopping center industry include:

  • Kimco Realty

  • Cedar Realty Trust

  • Kite Realty

  • Macerich Company

  • Ramco-Gershenson Properties

  • Others

Financial Performance

PECO’s recent financial results can be summarized as follows:

  • Contracting topline revenue

  • Increasing adjusted FFO in Q1 2021

  • 73% of its in-place NOI was unencumbered for the three months ended March 31, 2021

Below are the company’s operating results for the past two and ¼ years:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

Three Months To March 31, 2021

$ 130,381,000

-0.9%

2020

$ 498,017,000

-7.2%

2019

$ 536,706,000

Operating Income (Margin)

Period

% Variance vs. Prior

Three Months To March 31, 2021

$ 108,179,000

-1.4%

2020

$ 410,527,000

-7.9%

2019

$ 445,806,000

Adjusted FFO

Period

Adjusted FFO

% Variance vs. Prior

Three Months To March 31, 2021

$56,879,000

7.68%

2020

$187,613,000

-0.9%

2019

$189,330,000

EBITDAre

Period

EBITDAre

% Variance vs. Prior

Three Months To March 31, 2021

$ 67,978,000

26.9%

2020

$315,219,000

4.4%

2019

$ 329,797,000

Net Income

Period

Net Income

% Variance vs. Prior

Three Months To March 31, 2021

$ 103,000,000

954.4%

2020

$ 4,772,000

-107.5%

2019

$ (63,532,000)

(Glossary Of Terms)

(Source)

As of December 31, 2021, the company had $4.56 billion in assets and $2.28 billion in total debt obligations.

IPO Details

PECO intends to raise $100 million in gross proceeds from an IPO of its common stock, although the final figure will likely be higher.

No existing investors have indicated an interest in investing in the IPO at the IPO price.

The firm says it will use the net proceeds from the IPO as follows:

pay off the $375 million unsecured term loan maturing in April 2022, which currently bears interest at LIBOR plus 1.30% and is fully prepayable without penalty;

fund external growth with property acquisitions; and

fund other general corporate uses.

Listed managers of the IPO are Morgan Stanley, BofA Securities and J.P. Morgan.

Commentary

PECO is seeking public investment capital to pay down debt and fund its growth plans.

The company’s recent financials show contracting total revenue, likely heavily impacted by the COVID-19 pandemic’s effects on retail sales.

Adjusted Funds From Operations dropped in the calendar year 2020 but bounced back in Q1 2021.

The market opportunity for developing neighborhood shopping centers is changing and may have a brighter future as people exit the dense cities for the suburbs in the wake of the pandemic.

Additionally, the Millennial generation is well into their child-rearing years and seeking more space for family needs, pushing them into the suburbs as well and furthering the trend outside of city centers.

Morgan Stanley is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 20.4% since their IPO. This is a mid-tier performance for all major underwriters during the period.

The primary risk to the company’s outlook is the ever-present vulnerability to the ‘shops’ portion of their shopping centers, which are populated by smaller ‘mom and pop’ stores paying higher rent but are more susceptible to economic disruption.

PECO is a relatively large shopping center owner with enough scale to operate efficiently across major U.S. regions, ex-upper Midwest.

When we learn more about the IPO’s pricing and valuation assumptions, I’ll provide a final opinion.

Expected IPO Pricing Date: To be announced.

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This article was written by

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