Phillips Edison Grocery Center REIT I, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. The filing is for Phillips Edison Grocery Center REIT I, Inc., a public, non-traded REIT focused on grocery-anchored neighborhood and community shopping centers; it is not filed by an issuer named Phillips Edison & Company, Inc.
Business context and portfolio
At quarter-end, the REIT owned 150 properties across 28 states, totaling about 16.2 million square feet. Portfolio occupancy was 95.9%, and the average remaining lease term was 5.6 years. Grocery anchors represented 41.0% of annualized base rent; no single tenant represented 10% or more of annualized base rent.
Financial performance and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $65.3 million, up 5.6% from 2015 | $191.4 million, up 6.4% |
| Net income attributable to stockholders | $2.5 million vs. $5.2 million | $5.2 million vs. $15.5 million |
| Basic and diluted EPS | $0.01 vs. $0.03 | $0.03 vs. $0.08 |
| FFO attributable to common stockholders | $28.7 million vs. $30.5 million | $82.3 million vs. $90.2 million |
| MFFO attributable to common stockholders | $27.5 million vs. $29.4 million | $79.3 million vs. $88.2 million |
For the nine months, same-center NOI increased 5.4% to $118.1 million. Net cash provided by operating activities was $85.2 million, down from $90.8 million. Investing activities used $148.8 million, mainly for acquisitions and capital expenditures; financing activities provided $44.3 million. Cash and cash equivalents were $21.4 million at September 30, down from $40.7 million at December 31, 2015.
Mortgages and loans payable, net, were $946.0 million, compared with $845.5 million at year-end 2015. The weighted-average interest rate was 3.0%, versus 3.5%. The company reported $382.5 million available under its $500 million revolving facility and debt to total enterprise value of 32.7%; it was in compliance with debt covenants. A one-percentage-point rise in rates on unhedged variable-rate debt was estimated to add about $3.6 million in annual interest expense.
Changes, outlook, risks, and unusual items
- Revenue growth reflected acquisitions and higher same-center rents, occupancy, and tenant recoveries. Same-center occupancy improved 0.4 percentage points year over year, and same-center NOI rose 6.3% in the quarter.
- Net income fell materially despite revenue growth. The principal expense driver was a change in the advisory fee structure: from October 2015, 80% of the asset management fee was paid in cash and recognized currently as expense, rather than being deferred through Class B units. General and administrative expense increased $16.0 million for the nine months, including a $14.2 million increase related to this change. Higher interest expense also reflected increased debt outstanding.
- The company paid $92.3 million of gross common-stock distributions in the first nine months, versus $85.2 million of operating cash flow and $82.3 million of FFO. The filing reports the respective shortfalls as $7.1 million and $10.0 million; it says shortfalls were funded by borrowings. Management expects monthly distributions to continue but says the board may change them based on operating results, financial condition, economic conditions, or other factors. No earnings or operating guidance is provided.
- Share repurchase requests exceeded program funding limits. At September 30, 9.1 million shares were awaiting repurchase; the filing said fourth-quarter available funds would be insufficient to meet all requests and that eligible requests would be handled pro rata. Subsequent disclosure reported 7.4 million unfulfilled requests after October processing.
- Subsequent to quarter-end, the company acquired three properties for a combined stated purchase price of about $69.7 million. It also amended its new term loan commitment from $230 million to $255 million and entered into a forward-starting swap fixing LIBOR at 1.329% beginning July 1, 2017. The board authorized daily distributions of $0.00183060 per share for December 2016 and $0.00183562 per share for January–February 2017.
- Key risks include dependence on the affiliated advisor and property manager, exposure to interest rates, and the possibility that distributions may not be covered by operating cash flow or FFO. The REIT states that distributions may be funded from borrowings or other sources. It reported no material pending legal proceedings or known material environmental claims.
Important facts for investors to verify
- Confirm the issuer identity and whether this REIT filing is the intended company filing.
- Review the sustainability and funding of distributions against operating cash flow and FFO, including the reported shortfalls and use of borrowings.
- Assess debt maturities, variable-rate exposure, hedges, and the post-quarter increase in term-loan commitments.
- Check the scale and terms of queued share repurchase requests and the limits on liquidity for non-traded shares.
- Evaluate the effect of the advisory-fee accounting and cash-payment change on recurring expenses and reported earnings.
- Consider that FFO and MFFO are non-GAAP measures and may not be comparable with other REITs; the filing cautions they are not substitutes for GAAP income or cash flow.