Phillips Edison Grocery Center REIT I, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. The filing is for Phillips Edison Grocery Center REIT I, Inc., a grocery-anchored shopping-center REIT.
Business context and portfolio
At quarter-end, the company owned 147 properties in 28 states, comprising 15.6 million square feet. The portfolio was 95.8% leased, with an average remaining lease term of 5.8 years. Grocery tenants represented 54.5% of leased area and 42.3% of annualized effective rent. No single tenant accounted for 10% or more of annualized effective rent.
Financial performance and position
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q1 2016 | Q1 2015 / prior date | Change |
|---|---|---|---|
| Total revenue | $63.1 | $58.9 | Up 7.0% |
| Net income | $2.3 | $5.0 | Down 55.3% |
| Net income attributable to stockholders | $2.2 | $5.0 | Down 55.4% |
| Basic and diluted EPS | $0.01 | $0.03 | Down $0.02 |
| Operating cash flow | $25.0 | $28.7 | Down $3.7 |
| FFO attributable to common stockholders | $27.5 | $29.4 | Down $1.8 |
| MFFO attributable to common stockholders | $25.8 | $29.2 | Down $3.3 |
Same-center NOI increased 5.3% to $39.1 million, supported by higher minimum rent per square foot, a 1.0% occupancy improvement, and increased tenant recoveries. Rental income was $46.9 million and tenant recovery income was $15.9 million. General and administrative expense rose to $7.6 million from $2.4 million, principally reflecting the advisory-fee change: 80% of the 1%-of-asset-cost management fee is now paid in cash and recognized as expense. Net interest expense rose 13.8% to $7.7 million.
Cash and cash equivalents were $10.9 million at March 31, down from $40.7 million at year-end; restricted cash was $6.8 million. Total assets were $2.17 billion and total equity was $1.27 billion. Debt was $811.5 million on the balance sheet, net of financing costs and adjustments; contractual principal debt was $813.4 million. Weighted-average debt interest was 3.46%, and average remaining debt maturity was 3.5 years. Debt to total enterprise value was 29.8%. The company reported compliance with its debt covenants.
Net cash used in financing was $50.6 million, including $25.0 million of mortgage and loan payments, a $9.0 million net reduction in the credit facility, and $15.1 million of net cash distributions. Investing activities used $4.2 million, primarily for capital expenditures; no properties were acquired in Q1 2016. Comprehensive loss attributable to stockholders was $5.1 million, including a $7.4 million unrealized loss on interest-rate swaps recorded in other comprehensive loss.
Changes, outlook, and material items
- Revenue growth reflected contributions from 2015 acquisitions and same-center growth. The company attributed higher real estate taxes partly to assessed values and tax rates; same-center tenant recoveries also increased.
- Distributions declared were $0.17 per share for the quarter. Gross distributions paid were $30.3 million, compared with $25.0 million of operating cash flow and $27.5 million of FFO; the filing says the shortfall was funded by borrowings. Management expects monthly distributions to continue, subject to operating results, financial condition, economic conditions, and board discretion. Distributions are not guaranteed.
- At March 31, 2016, $145.0 million of unsecured variable-rate debt was not fixed through derivatives. The company estimated that a 1 percentage-point rate increase would add approximately $1.5 million to annual interest expense. It estimated a further $2.9 million of accumulated swap losses would be reclassified to interest expense over the next 12 months.
- Repurchase requests exceeded program funding limits. No funds were expected to be available for ordinary share repurchases in Q2 2016, with limited funds expected in Q3, if any. About 6.2 million shares had outstanding unfulfilled requests at March 31. Certain death, disability, or incompetence-related repurchases remained eligible.
- After quarter-end, the board reaffirmed an estimated share value of $10.20. The company launched a self-tender offer on April 25 to purchase up to 9.3 million shares, expiring June 7, 2016 unless extended or withdrawn. The repurchase program was suspended during the offer and for ten business days afterward. The board also amended the repurchase program, effective May 15, to reserve discretion to reject requests.
- Principal risks highlighted include distributions exceeding operating cash flow or FFO, interest-rate exposure, dependence on affiliated advisory and property-management providers, and potential sponsor conflicts over acquisitions and leasing. The company reported no material pending legal proceedings or known material environmental claims. No full-year earnings guidance was provided in the filing.
Most important facts for investors to verify
- Whether operating cash flow and FFO can support distributions without continued borrowing, and how the board’s distribution decision evolves.
- Debt maturities, refinancing access, covenant headroom, and the effect of higher rates on the unhedged variable-rate balance.
- Share repurchase demand, available funding, tender-offer results, and any resulting impact on liquidity and outstanding shares.
- Whether same-center occupancy, rents, tenant recoveries, and leasing trends remain strong, including retention and lease-expiration exposure.
- The basis and limitations of the $10.20 estimated share value, which the filing notes may differ from realizable value.