Phillips Edison Grocery Center REIT I, Inc. — FY 2016 Form 10-K
Entity and period: The supplied filing is for Phillips Edison Grocery Center REIT I, Inc., not Phillips Edison & Company, Inc. It reports the fiscal year ended December 31, 2016; quarterly data include fourth quarter 2016. The financial statements were audited by Deloitte & Touche LLP, which issued an unqualified opinion.
Business context
The externally managed REIT invests in grocery-anchored neighborhood and community shopping centers. At year-end it owned 153 properties in 28 states, totaling 16.7 million square feet, with 95.6% occupancy and a 5.4-year average remaining lease term. Grocery anchors accounted for 53.1% of leased area and 40.4% of annualized base rent.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $257.7 million | $242.1 million |
| Net income attributable to stockholders | $8.9 million | $13.4 million |
| Net income per share, basic and diluted | $0.05 | $0.07 |
| FFO attributable to common stockholders | $108.8 million | $113.4 million |
| MFFO attributable to common stockholders | $106.3 million | $112.7 million |
| Cash provided by operating activities | $103.1 million | $106.1 million |
| Distributions declared per share | $0.67 | $0.67 |
Revenue rose 6.5%, while net income attributable to stockholders fell 33.1%. Same-center NOI increased 3.2% to $153.1 million. The filing reports no consolidated operating margin measure. Net income included a $4.7 million gain on a property disposal; other income also benefited from derivative gains.
Gross distributions paid were $123.1 million, including $58.9 million reinvested through the DRIP. Operating cash flow was $20.0 million below gross distributions, and FFO was $14.3 million below them; the filing says the shortfall was funded by borrowings. Net cash distributions after DRIP were $64.3 million.
At year-end, cash and cash equivalents were $8.2 million, restricted cash was $41.7 million, total assets were $2.38 billion, and mortgages and loans payable were $1.06 billion net of financing costs and debt adjustments. Reported debt to total enterprise value was 35.5%. The company had $323 million available on its $500 million revolving facility, which matures in December 2017 with extension options. A $255 million unsecured term loan matures in 2023. The debt schedule shows $218.2 million of principal due in 2017, including the revolving facility. The company reported compliance with debt covenants.
A one-percentage-point increase in rates on year-end variable-rate debt was estimated to add about $4.5 million in annual interest expense. A forward-starting swap was entered into to fix the LIBOR component on $255 million of debt from July 2017 through September 2023.
Material changes versus the prior year
- Revenue increased by $15.6 million, including $5.6 million from same-center properties and $10.0 million from non-same-center properties, including acquisitions.
- General and administrative expense rose by $16.0 million, primarily because the advisory fee shifted to 80% cash payment, recognized currently as expense, with 20% paid in Class B units. Cash asset-management fees increased by $14.6 million.
- FFO declined 4.0% and MFFO declined 5.7%. Operating cash flow decreased by $3.0 million.
- The company acquired seven shopping centers and adjacent real estate for $233.9 million of aggregate purchase price, including assumed debt; cash acquisition outlay was $201.1 million. It also sold a property in December.
- Debt increased from $845.5 million to $1.06 billion. The company issued and fully drew a $255 million term loan facility in 2016.
Outlook, risks and unusual items
Management expected revenue and expenses to increase as 2016 acquisitions contributed for a full year and if additional properties were acquired. It viewed retail real estate fundamentals as positive but expected deceleration; it cited slightly higher vacancy, rising interest rates, limited occupancy gains and modest expected job growth. No company-specific earnings or acquisition guidance was provided.
- Distribution coverage and liquidity: Distributions exceeded both operating cash flow and FFO, with the gap funded by borrowings. The company stated distributions may be changed at the board’s discretion.
- Share liquidity and valuation: There is no public trading market. The board’s estimated value was $10.20 per share, based on a March 31, 2016 valuation range of $9.95 to $11.10; it is not a GAAP fair value, liquidation value or assurance of resale proceeds. A 2016 self-tender repurchased 69,271 shares at $6.00 each. Fourth-quarter repurchase requests exceeded SRP funding limits; 5.6 million unfulfilled requests were carried forward after January 2017 pro-rata repurchases.
- Debt and interest rates: Refinancing, maturity concentration, variable rates, balloon payments, covenant restrictions and limited financing availability could pressure cash flows and distributions.
- External management and related parties: The company depends on PE-NTR and affiliated property manager; fees, overlapping sponsored REITs and allocation of properties, tenants and management time create conflicts of interest. Related-party asset-management and property-level fees are material.
- Property and tenant exposure: Results depend on tenant credit, anchor retention, leasing costs, occupancy, real estate markets and property operating costs. No single tenant represented at least 10% of annualized base rent.
- Other matters: No material pending legal proceedings, material environmental claims or real estate impairments were reported. Management concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Confirm the intended issuer: this 10-K is for Phillips Edison Grocery Center REIT I, Inc., not Phillips Edison & Company, Inc.
- Review distribution sustainability against operating cash flow, FFO, debt-funded shortfalls and future capital and leasing needs.
- Check the revolving facility’s 2017 maturity and extension terms, scheduled debt repayments, available borrowing capacity and rate exposure.
- Assess the assumptions and date behind the $10.20 estimated share value, including that it is not a market price and excludes certain sale costs and debt prepayment penalties.
- Track SRP request backlogs, funding limits and subsequent repurchases; the program can be amended, suspended or terminated.
- Evaluate the advisory and property-management agreements, related-party compensation and conflicts of interest.