Phillips Edison Grocery Center REIT I, Inc. — Q2 2017 Form 10-Q
Registrant note: The supplied filing is for Phillips Edison Grocery Center REIT I, Inc., not Phillips Edison & Company, Inc. It covers the quarter and six months ended June 30, 2017; statements are unaudited.
Business context and reporting period
The company is a public, non-traded REIT focused on grocery-anchored neighborhood and community shopping centers. At June 30, 2017, it owned 158 properties across 28 states, with 17.2 million square feet and 95.9% leased occupancy. Five centers were acquired during the first half of 2017.
Financial and operating highlights
| Metric | Q2 2017 | Six months 2017 | Comparable 2016 |
|---|---|---|---|
| Total revenue | $69.9 million | $138.2 million | $63.1 million Q2; $126.1 million six months |
| Net income (loss) attributable to stockholders | $(1.2) million | $(0.1) million | $0.6 million Q2; $2.8 million six months |
| Cash provided by operating activities | Not separately reported | $49.0 million | $57.0 million six months |
| FFO attributable to common stockholders | $26.6 million | $54.9 million | $26.2 million Q2; $53.7 million six months |
| MFFO attributable to common stockholders | $29.0 million | $57.3 million | $25.9 million Q2; $51.7 million six months |
Same-center NOI increased 1.4% in Q2 to $39.4 million and 2.2% for the first half to $78.7 million. The company reported no explicit operating-margin figure. At June 30, cash and cash equivalents were $5.4 million, restricted cash was $5.5 million, and total assets were $2.41 billion. Debt, net of financing costs and market adjustments, was $1.17 billion; debt to total enterprise value was 38.1%. The $500 million revolving facility had $203 million available.
First-half investing cash outflow was $49.9 million, including $75.8 million for acquisitions and $11.5 million for capital expenditures, partly offset by $37.0 million of real estate sale proceeds. Financing cash outflow was $1.9 million. Common distributions declared were $0.34 per share for the first half.
Material changes versus the prior comparable period
- Revenue grew 10.8% in Q2 and 9.5% for the first half. Management attributed most of the first-half increase to owning nine more properties than in the comparable period; same-center revenue also improved.
- Despite higher revenue, the company moved from net income to a Q2 loss and a small first-half loss. Higher depreciation and interest costs, plus PELP transaction expenses, weighed on results.
- Same-center rental income benefited from a $0.26 increase in minimum rent per square foot and a 0.3 percentage-point rise in occupancy from a year earlier. Same-center tenant recovery income declined as recoverable property expenses fell.
- Operating cash flow declined to $49.0 million from $57.0 million, which management attributed mainly to increased receivables and prepaid insurance timing.
- Share repurchases were $43.3 million in the first half versus $3.7 million in the prior-year period. The DRIP provided $22.9 million of reinvested distributions, down from $30.2 million.
Outlook, risks, contingencies and unusual items
- Proposed PELP transaction: The May 2017 agreement is valued at approximately $1.0 billion, subject to closing adjustments. It covers 76 shopping centers and a third-party asset management business; consideration includes approximately 45.2 million OP units (including units already outstanding) and $50 million cash. Approximately $501 million of PELP debt is expected to be refinanced or assumed. Closing was expected in Q4 2017, subject to customary conditions and shareholder approval. The agreement provides for possible additional OP units tied to specified liquidity and fundraising milestones.
- Transaction costs: PELP-related expenses were $4.4 million in Q2 and $6.0 million for the first half, recorded as expenses. Separately, adoption of ASU 2017-01 led the company to capitalize most acquisition costs for property acquisitions, reducing acquisition expenses recognized in 2017.
- Debt and rates: The revolving facility matures in December 2017. The company anticipated refinancing it in connection with the PELP transaction, or exercising an extension option to 2018. Approximately $565 million of unsecured debt remained exposed to variable rates; management estimated a one-percentage-point rate increase would add about $5.6 million of annual interest expense. The company reported compliance with debt covenants.
- Shareholder liquidity: Repurchase requests exceeded program funding limits. At June 30, 9.5 million shares had unfulfilled requests, and management said no funds would be available for ordinary repurchases for the remainder of 2017; qualifying death, disability or incompetence requests continued to be handled under program terms.
- Distributions: The board authorized daily distributions of $0.00183562 per share for September through November 2017. Future distributions remain subject to board discretion and financial conditions; the company stated it had not established a minimum distribution.
- Other matters: Management said ordinary-course litigation and known environmental matters were not expected to have a material adverse effect. The company depends on its sponsor-affiliated advisor and property manager for key services and pays them management, property, leasing and other fees. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the PELP transaction received shareholder approval, closed on schedule, and resulted in the anticipated debt, cash payment and ownership changes.
- Whether the company refinanced the December 2017 credit facility and how the transaction affected leverage, interest costs and covenant headroom.
- How the 9.5 million pending repurchase requests were addressed and whether repurchase-program funding resumed.
- Whether operating cash flow and same-center NOI trends support distributions, given the first-half cash-flow decline and GAAP loss.
- The impact of variable-rate exposure, property leasing and occupancy, redevelopment activity, and related-party service costs on future results.