Phillips Edison Grocery Center REIT I, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The filing’s registrant is Phillips Edison Grocery Center REIT I, Inc. It invests primarily in grocery-anchored shopping centers and reported owning 147 properties in 28 states at quarter-end. Figures below are in millions unless noted.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $61.8 | $50.0 | $180.0 | $129.6 |
| Net income (loss) | $5.2 | $2.1 | $15.7 | ($0.2) |
| Net income attributable to stockholders | $5.2 | $2.1 | $15.5 | ($0.2) |
| Basic and diluted EPS | $0.03 | $0.01 | $0.08 | ($0.00) |
| Net cash from operating activities | Not stated for quarter | Not stated for quarter | $90.8 | $58.8 |
| Same-center NOI | Not stated as a total | Not stated as a total | $70.0 | $67.3 |
- Q3 revenue rose about 24% year over year; nine-month revenue rose about 39%. Growth mainly reflected the larger portfolio, with same-center revenue also improving.
- Nine-month Same-Center NOI increased 4.1%. Management attributed growth to higher minimum rent per square foot, a 1.2 percentage-point improvement in occupancy, better tenant recoveries, and lower property operating expenses. Portfolio occupancy was 95.7% at September 30.
- Nine-month interest expense was $22.2, up from $14.0; depreciation and amortization was $75.7, up from $56.0. Acquisition expenses declined to $4.1 from $15.1.
- Cash and cash equivalents were $19.8 at September 30, versus $15.6 at December 31, 2014. Total assets were $2,224.1; total liabilities were $876.9.
- Debt principal was approximately $774.1, compared with $650.5 at year-end 2014; balance-sheet mortgages and loans payable were $781.2 including debt adjustments. The company reported a 33.2% leverage ratio and compliance with debt covenants. Weighted-average debt interest rate was 3.73%, with 4.2 years’ weighted-average maturity, adjusted for subsequent financing.
- Three cash-flow hedge swaps covered $387.0 of debt. Another $70.0 of unsecured variable-rate debt remained unhedged; a 1 percentage-point rate increase was estimated to add about $0.7 of annual interest expense.
Material changes and capital allocation
- The company acquired nine retail centers and an adjacent strip center for approximately $119.6 during the first nine months, versus 48 grocery-anchored centers and an adjacent strip center for approximately $770.9 in the comparable 2014 period. It reported 147 properties at quarter-end, versus 131 a year earlier.
- Investing activities used $102.9 of cash, primarily for real estate acquisitions ($87.8) and capital expenditures ($14.9). Financing activities provided $16.2; the company increased credit-facility borrowings and repurchased $32.5 of shares during the nine months.
- Gross distributions declared/paid during the first nine months were approximately $92.5, including $48.2 reinvested through the DRIP; net cash distributions were $44.3. Operating cash flow was $90.8. The filing states that distributions exceeding operating cash flow were funded with borrowings.
- After quarter-end, the company borrowed $400 under new term-loan tranches and used the proceeds to reduce its revolver balance; revolver capacity was reduced from $700 to $500. The tranches mature in 2019, 2020, and 2021.
- The board established an estimated share value of $10.20 in August 2015. The DRIP and repurchase price were changed to that amount. Repurchase requests exceeded program funding limits in October; the board authorized an additional one-time $10.8 for repurchases and the company said further 2015 funding was not expected.
Outlook, commentary, and risks
- No formal earnings or operating guidance is provided. Management expects revenue and expenses to rise as recently acquired properties are owned for a full year, and expects general and administrative costs to decline as a percentage of revenue.
- The company expects to continue monthly distributions, but states they depend on operating results, financial condition, economic conditions, and board judgment. It cautions that distributions may be funded from borrowings or other sources; a portion may be return of capital for tax purposes.
- Key risks include reliance on affiliated advisor and property manager services; interest-rate exposure; the limited and potentially suspended share repurchase program; and the absence of a public market for shares. The $10.20 estimated share value is not audited, is not a GAAP fair value or liquidation value, and may not reflect resale proceeds. Net tangible book value was $8.05 per share.
- Interest-rate swaps produced a $4.3 accumulated other comprehensive loss at quarter-end; the company estimated a further $3.9 would be reclassified to interest expense over the next 12 months. The filing reports no material pending legal proceedings or known material environmental claims.
- October 1 amendments ended the 0.75% financing fee paid to the advisor and revised asset-management fee arrangements. The advisory agreement was renewed through December 3, 2016.
Important facts for investors to verify
- Whether operating cash flow and recurring property cash generation can support distributions, capital spending, and debt service without continued borrowing.
- The post-quarter $400 term-loan draw, revolver paydown, resulting available liquidity, interest cost, and covenant headroom.
- Whether same-center occupancy, rents, tenant recoveries, and lease renewals sustain NOI growth; review upcoming lease expirations, including 2016–2020.
- The assumptions and limitations behind the $10.20 estimated share value, and the availability and terms of future share repurchases.
- The effects of advisor and property-manager fees and other related-party arrangements on costs and investor returns.