Item 5. Market for Registrant’s Common Equity
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
As of March 1, 2021, we had approximately 280.7 million shares of common stock outstanding, held by a total of 61,585 stockholders of record. The number of stockholders is based on the records of our registrar and transfer agent. Our common stock is not currently traded on any exchange, and there is no established trading market for our common stock. Therefore, there is a risk that a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder, or at all.
Valuation Overview
On May 6, 2020, the independent directors of our Board declared the estimated value per share (“EVPS”) of our common stock as $8.75. The valuation was based substantially on the estimated “as is” market value of our portfolio of real estate properties
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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 estimated value of in-place contracts of our third-party asset management business as of March 31, 2020.
We provided the EVPS to assist broker-dealers that participated in our public offering in meeting their customer account statement reporting obligations under Financial Industry Regulatory Authority (“FINRA”) Rule 2231. This valuation was performed in accordance with the provisions 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 range 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 estimated value of in-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 ascertain 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 EVPS 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, with the exception of the weighting adjustments described previously. 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 Operating Partnership units (“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.
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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 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 values 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
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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 of assets, (2) the issuance of common stock under the Dividend Reinvestment Plan (“DRIP”), (3) NOI and dividends declared (see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Measures - Same-Center Net Operating Income” of this filing on Form 10-K for the calculation of NOI), (4) the repurchase of shares, and (5) 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.
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Distributions —We elected to be taxed as a real estate investment trust (“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).
On March 27, 2020, our Board suspended stockholder distributions, effective after the payment of the March 2020 distribution on April 1, 2020, as a result of the uncertainty surrounding the COVID-19 pandemic. On November 4, 2020, our Board authorized distributions for the month of December 2020, for stockholders of record at the close of business on December 28, 2020, equal to a monthly amount of $0.02833333 per share of common stock, or $0.34 annualized. On December 14, 2020, our Board announced that the date of record for December distributions was moved to December 31, 2020. OP unit holders received distributions at the same rate as common stockholders. We paid this distribution on January 12, 2021.
Amended and Restated DRIP —We have adopted the DRIP, through which stockholders may elect to reinvest an amount equal to the distributions declared on their shares of common stock into additional shares of our common stock in lieu of receiving cash distributions. In accordance with the DRIP, participants acquire shares of common stock at a price equal to the estimated value per share. Participants in the DRIP may purchase fractional shares so that 100% of the distributions may be used to acquire additional shares of our common stock. For the year ended December 31, 2020, 1.4 million shares were issued through the DRIP, resulting in proceeds of approximately $15.9 million. For the year ended December 31, 2019, 6.1 million shares were issued through the DRIP, resulting in proceeds of approximately $67.4 million.
On March 27, 2020, the DRIP was suspended, and the March 2020 distribution was paid in all cash on April 1, 2020. On November 4, 2020, our Board reinstated the DRIP, which became effective beginning with the December 2020 distribution paid in January 2021.
Unregistered Sales of Equity Securities —During the year ended December 31, 2020, we issued an aggregate of 3.0 million shares of common stock in redemption of 3.0 million OP 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.
Share Repurchases —On August 7, 2019, the Board suspended the Share Repurchase Program (“SRP”) with respect to standard repurchases. The SRP for death, qualifying disability, or determination of incompetence (“DDI”) was suspended effective March 27, 2020, in response to the uncertainty of COVID-19.
On January 8, 2021, the Board adopted the Fourth Amended and Restated Share Repurchase Program (“Fourth Amended SRP”), effective January 14, 2021. Under the Fourth Amended SRP, share repurchases for DDI have been reinstated at $5.75 per share, and as of March 1, 2021, we have repurchased 0.1 million shares for a total value of $0.4 million. The SRP with respect to standard repurchases remains suspended.
Our Board may amend, suspend, or terminate the program upon 30 days’ notice. We may provide notice by including such information (a) in a current report on Form 8-K or in our annual or quarterly reports, all publicly filed with the U.S. Securities and Exchange Commission (“SEC”), or (b) in a separate mailing to the stockholders.
On November 4, 2020, our Board approved a voluntary tender offer that commenced on November 10, 2020 (the “Tender Offer”) for up to 4.5 million shares of our outstanding common stock at a price of $5.75 per share, for a total value of approximately $26 million. On December 14, 2020, the Tender Offer was amended to extend the expiration date to December 29, 2020, and the offer to purchase shares was increased to approximately 17.4 million shares, for a total value of approximately $100 million. All of the other terms and conditions of the Tender Offer remained unchanged. In connection with the Tender Offer, we repurchased 13.5 million shares of common stock for a total value of $77.6 million, which includes the issuance of 2.8 million common shares in redemption of 2.8 million OP units converted at the time of repurchase.
The following table presents all non-employee share repurchases for the years ended December 31, 2020 and 2019 (in thousands, except per share amounts):
2020 (1)
2019
Shares repurchased 13,746 3,311
Cost of repurchases $ 80,398 $ 35,963
Average repurchase price $ 5.85 $ 10.86
(1) The average repurchase price is comprised of share repurchases in connection with the Tender Offer, and the SRP for DDI prior to its suspension effective March 27, 2020.
In addition, during the year ended December 31, 2020, we repurchased approximately 36,000 shares for an aggregate purchase price of $0.4 million (average price of $11.07 per share) in connection with common shares surrendered to us to
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satisfy statutory minimum tax withholding obligations associated with the vesting of restricted stock awards under our equity-based compensation plan.
During the quarter ended December 31, 2020, we repurchased shares as follows (shares in thousands):
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
October 2020 — $ — — (2)
November 2020 — — — (2)
December 2020 13,452 5.75 13,452 (2)
(1) Share repurchases made during the three months ended December 31, 2020 were made in connection with the Tender Offer.
(2) As the SRP remained suspended as of December 31, 2020, the dollar value and number of shares that may be repurchased were subject to the limitations of the Tender Offer. As of December 31, 2020 all share repurchases in connection with the Tender Offer had been executed.
ITEM 6. SELECTED FINANCIAL DATA
As of and for the Years Ended December 31,
(in thousands, except per share amounts) 2020 2019 2018 2017 2016
Balance Sheet Data:
Total investment in real estate assets $ 5,295,137 $ 5,257,999 $ 5,380,344 $ 3,751,927 $ 2,584,005
Cash and cash equivalents 104,296 17,820 16,791 5,716 8,224
Total assets 4,678,563 4,828,195 5,163,477 3,526,082 2,380,188
Debt obligations, net 2,292,605 2,354,099 2,438,826 1,806,998 1,056,156
Operating Data:
Total revenues $ 498,017 $ 536,706 $ 430,392 $ 311,543 $ 257,730
Property operating expenses 87,490 90,900 77,209 53,824 41,890
Real estate tax expenses 67,016 70,164 55,335 43,456 36,627
General and administrative expenses 41,383 48,525 50,412 36,348 31,804
Impairment of real estate assets 2,423 87,393 40,782 — —
Interest expense, net 85,303 103,174 72,642 45,661 32,458
Net income (loss) 5,462 (72,826) 46,975 (41,718) 9,043
Net income (loss) attributable to stockholders 4,772 (63,532) 39,138 (38,391) 8,932
Other Operational Data: (1)
NOI for real estate investments $ 332,023 $ 355,796 $ 272,450 $ 204,407 $ 173,910
Funds from operations (“FFO”) attributable to stock-
holders and convertible noncontrolling interests 221,681 217,010 156,222 84,150 110,406
Core FFO 220,407 230,866 176,126 132,011 114,636
Cash Flow Data:
Cash flows provided by operating activities $ 210,576 $ 226,875 $ 153,291 $ 108,861 $ 103,076
Cash flows (used in) provided by investing activities (44,092) 64,183 (258,867) (640,742) (191,328)
Cash flows (used in) provided by financing activities (129,655) (280,254) 162,435 509,380 90,685
Per Share Data:
Net income (loss) per share - basic and diluted $ 0.02 $ (0.22) $ 0.20 $ (0.21) $ 0.05
Common stock distributions declared per share $ 0.19 $ 0.67 $ 0.67 $ 0.67 $ 0.67
Weighted-average shares outstanding - basic 290,280 283,909 196,602 183,784 183,876
Weighted-average shares outstanding - diluted 333,466 327,117 241,367 196,497 186,665
(1) See “Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Measures” of this filing on Form 10-K for further discussion and for a reconciliation of the non-GAAP financial measures to Net Income (Loss).
The selected financial data should be read in conjunction with the consolidated financial statements and notes appearing in this Annual Report on Form 10-K.
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