Business context and reporting period
Phillips Edison Grocery Center REIT I, Inc. (the registrant named in this filing) is a public, non-traded REIT focused on grocery-anchored neighborhood and community shopping centers. This unaudited Form 10-Q covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016, and balance-sheet amounts are compared with December 31, 2016.
At quarter-end, the REIT owned 154 properties across 28 states, totaling 16.8 million square feet, with 96.0% of rentable area leased. Grocery anchors represented 40.4% of portfolio annualized base rent; no single tenant represented 10% or more of annualized base rent.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Total revenue | $68.3 million | $63.1 million |
| Net income | $1.1 million | $2.3 million |
| Net income attributable to stockholders | $1.1 million; $0.01 per share | $2.2 million; $0.01 per share |
| FFO attributable to common stockholders | $28.3 million; $0.15 per share | $27.5 million; $0.15 per share |
| MFFO attributable to common stockholders | $28.3 million; $0.15 per share | $25.8 million; $0.14 per share |
| Net cash from operating activities | $20.5 million | $25.0 million |
| Cash and cash equivalents | $5.9 million | $8.2 million at Dec. 31, 2016 |
| Mortgages and loans payable, net | $1,075.2 million | $1,056.2 million at Dec. 31, 2016 |
| Total assets | $2,341.5 million | $2,380.2 million at Dec. 31, 2016 |
Net margin was approximately 1.7%, down from 3.6% in Q1 2016. The filing reports total expenses of $57.1 million, including $27.6 million of depreciation and amortization and $8.4 million of net interest expense. Total revenue less property operating expenses and real estate taxes was $46.6 million; same-center NOI increased 2.9% to $39.4 million.
Cash and cash equivalents decreased $2.3 million during the quarter. Investing activities provided $15.4 million, including $36.2 million of real-estate sale proceeds, while financing activities used $38.2 million. The company paid $30.4 million of gross common distributions, of which $13.7 million was reinvested through the DRIP; net cash distributions were $16.7 million.
Debt included $234.0 million drawn on a $500 million revolving facility, with $266.0 million available. The facility carried a 2.23% reported rate and matured in December 2017, with an extension option to December 2018. Weighted-average interest on all debt was 3.0%. Debt to total enterprise value was 36.2%, and the company reported compliance with its debt covenants. The board’s estimated value per share was $10.20, reaffirmed May 9, 2017; this is an estimate, not a trading or liquidation value.
Material changes versus the prior comparable period
- Revenue grew 8.3%, principally reflecting seven more properties than in the prior-year period; same-center revenue increased $0.7 million. Same-center rental income benefited from higher minimum rent per square foot and occupancy up 0.7 percentage points year over year.
- Net income attributable to stockholders declined 50.2%, despite revenue growth. Higher depreciation and amortization, interest expense, and other expense contributed to the decrease.
- Other expense increased to $1.6 million from $0.1 million, primarily due to additional consulting, legal, and advisory expenses. Interest expense rose $0.7 million, primarily because of increased revolving-credit borrowings.
- Operating cash flow fell by $4.5 million, which management attributed primarily to increases in prepaid insurance, accounts receivable, and other expenses.
- The company acquired one grocery-anchored shopping center for approximately $15.0 million, including acquisition costs; it acquired none in Q1 2016. Under newly adopted ASU 2017-01, most acquisition-related costs are now capitalized rather than expensed.
- Share repurchases were $40.3 million, compared with $1.2 million in Q1 2016. At quarter-end, 6.5 million shares had unfulfilled repurchase requests; funding limits meant requests would not all be met during the remainder of 2017.
Outlook, risks and unusual items
- No numerical earnings or operating guidance was provided. Management said it expects to continue monthly distributions unless operating results, financial condition, economic conditions, or other factors make them imprudent. The board authorized daily distributions at the existing rate for June through August 2017.
- Subsequent to quarter-end, the company acquired Rocky Ridge Town Center for $36.0 million and Greentree Centre for $12.1 million. It also reported renewing 28 leases after quarter-end.
- At March 31, $502.0 million of unsecured variable-rate debt was not fixed through derivatives. Management estimated a one-percentage-point rate increase would add about $5.0 million of annual interest expense. A forward-starting swap was scheduled to fix the LIBOR component on $255 million of debt beginning July 2017.
- The REIT depends on its external advisor and affiliated property manager for key services; replacing them could increase costs. Its share repurchase program is limited, and requests exceeded available funding. The $10.20 estimated share value relies on valuation assumptions and does not assure resale proceeds; the filing notes the properties were not inspected by the valuation firm and that the estimate excludes certain disposition costs and debt prepayment penalties.
- The filing reported no material pending legal proceedings and no known environmental matters expected to materially affect the financial statements. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether operating cash flow and property-level performance can sustain distributions, given GAAP net income of $1.1 million versus $30.4 million in gross quarterly distributions.
- How the revolving facility’s December 2017 maturity and extension option will be addressed, and how variable-rate exposure affects interest costs and covenant headroom.
- The volume and timing of outstanding share repurchase requests, and the practical limits on investor liquidity.
- The assumptions underlying the $10.20 estimated share value, including property values, capitalization and discount rates, and excluded transaction costs.
- Whether occupancy, lease renewals, leasing costs, and grocery-anchor tenant performance support continued same-center NOI growth.