Phillips Edison Grocery Center REIT I, Inc. — FY 2015 Form 10-K
Period: Fiscal year ended December 31, 2015; filed March 3, 2016. Although the request identifies Phillips Edison & Company, Inc., the filing registrant is Phillips Edison Grocery Center REIT I, Inc.—verify the intended issuer. This is an annual report, not a standalone fourth-quarter filing.
Business context
The company is an externally advised REIT focused on grocery-anchored neighborhood and community shopping centers. At year-end it owned 147 properties in 28 states, totaling 15.6 million square feet, with 95.9% of rentable area leased and a 5.9-year average remaining lease term. No single tenant represented 10% or more of annualized effective rent.
Key financial metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $242.1 million | $188.2 million |
| Net income (loss) attributable to stockholders | $13.4 million | $(22.6) million |
| Net income (loss) per share | $0.07 | $(0.13) |
| Net operating income (NOI) | $163.0 million | $125.8 million |
| Same-center NOI | $94.4 million; up 3.7% | $91.0 million |
| Funds from operations (FFO) | $113.4 million | $56.5 million |
| Modified FFO (MFFO) | $112.7 million | $94.6 million |
| Cash from operating activities | $106.1 million | $75.7 million |
| Capital expenditures | $21.9 million | $15.8 million |
| Cash and cash equivalents | $40.7 million | $15.6 million |
| Debt, contractual principal | $847.4 million | $Not clearly stated on the same basis |
Revenue rose 28.6%, principally reflecting the contribution from properties acquired in 2014 and 2015. Same-center NOI increased 3.7%, supported by higher rents, a 1.1% occupancy improvement and lower bad-debt expense. The company reported a GAAP profit after a loss in 2014; the prior-year result included a $27.9 million noncash charge for vesting Class B units. 2015 interest expense rose to $32.4 million from $20.4 million, while depreciation and amortization increased to $101.5 million from $79.2 million.
Fourth quarter: Revenue was $62.1 million and net loss attributable to stockholders was $2.2 million, or $(0.01) per share. In Q4 2014, revenue was $58.6 million and net loss was $22.5 million, or $(0.12) per share.
Debt, liquidity and distributions
- Year-end balance-sheet mortgages and loans payable were $854.1 million, including debt fair-value adjustments; contractual principal was $847.4 million. Reported leverage was 35.1% under the company’s definition.
- Debt had a 3.5% weighted-average interest rate and 3.5-year weighted-average maturity. The $500 million unsecured revolving facility had $141 million drawn and matured in December 2017, with extension options. A $400 million term-loan borrowing in October 2015 was used to repay part of the revolver.
- $104.8 million of principal was scheduled to mature in 2016. Management said it intended to refinance maturities if possible or repay them from financing proceeds or operating cash. The company reported compliance with its debt covenants at year-end.
- Three swaps effectively fixed rates on $387 million of term debt. A 1 percentage-point increase in rates on the $154 million of unhedged variable-rate debt was estimated to add about $1.5 million to annual interest expense.
- Gross 2015 distributions were $123.2 million, including $63.8 million reinvested through the DRIP; net cash distributions were $59.4 million. Operating cash flow was $17.1 million below gross distributions, and FFO was $9.8 million below them. The filing says distributions were funded from operations, borrowings and offering proceeds.
Material changes, outlook and risks
- The company acquired nine grocery-anchored centers and two adjacent strip centers in 2015 for approximately $126.0 million, including assumed debt. Portfolio occupancy was 95.9% at year-end; 2015 renewal rents were 10.7% higher per square foot than the expired rents, in aggregate.
- The primary public offering had ended in February 2014; the company continued issuing shares through its DRIP at $10.20 per share. The board-approved estimated share value is not a market price or a guarantee of resale value; the filing reported net tangible book value of $7.91 per share.
- Share repurchase requests exceeded program funding limits in Q4. As of December 31, 2015, 3.4 million shares had outstanding requests; no repurchase funds were expected to be available in Q1 2016, and amounts available in Q2 and Q3 were expected to be limited. The board had made a one-time additional authorization for the October cycle.
- Management expected revenues and expenses to increase as 2015 acquisitions contributed for a full year and as potential additional acquisitions were made. It described improving retail property fundamentals but cited e-commerce growth, interest rates, slower retail sales growth and political conditions as uncertainties. No specific earnings or acquisition guidance was provided.
- Key risks include reliance on tenants and retail conditions, illiquidity of unlisted shares, distribution funding in excess of operating cash flow, refinancing and interest-rate exposure, real estate valuation uncertainty, and conflicts arising from external management and affiliate fees. The $10.20 estimated share value used a third-party portfolio valuation as of July 31, 2015 and did not reflect later operating changes, disposition costs or certain debt prepayment penalties.
- Management reported effective disclosure controls and internal control over financial reporting. Deloitte & Touche issued an unmodified audit opinion on the financial statements. The filing reported no material pending legal proceedings. John B. Bessey resigned as co-president and chief investment officer on February 29, 2016.
Important facts for investors to verify
- Confirm the issuer identity: the filing is for Phillips Edison Grocery Center REIT I, Inc., not Phillips Edison & Company, Inc.
- Review the audited statements and debt notes for the difference between $854.1 million of balance-sheet debt and $847.4 million of contractual principal, and the detailed 2016 maturity and refinancing plan.
- Assess the sustainability of distributions against operating cash flow and FFO, including reliance on borrowings and DRIP proceeds and the tax characterization of distributions.
- Check current share-repurchase availability and pending requests; the program was constrained and is not a dependable source of shareholder liquidity.
- Evaluate the assumptions and limitations behind the $10.20 estimated share value, and distinguish it from realizable market or liquidation value.