Phillips Edison Grocery Center REIT I, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The filing registrant is Phillips Edison Grocery Center REIT I, Inc.; this differs from the company name in the request metadata, Phillips Edison & Company, Inc.
Business context
The non-traded REIT invests primarily in grocery-anchored neighborhood and community shopping centers. At quarter-end it owned 149 properties across 28 states, with 96.1% of rentable space leased and a 5.6-year average remaining lease term. During the first half, it acquired two grocery-anchored centers and one adjacent strip center for approximately $93.9 million.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $63.1m | $59.2m | $126.1m | $118.1m |
| Net income | $0.6m | $5.5m | $2.8m | $10.5m |
| Net income attributable to stockholders | $0.6m | $5.4m | $2.8m | $10.3m |
| FFO attributable to common stockholders | $26.2m | $30.3m | $53.7m | $59.6m |
| MFFO attributable to common stockholders | $25.9m | $29.6m | $51.7m | $58.8m |
| Net cash provided by operating activities | Not separately stated | Not separately stated | $57.0m | $63.4m |
Same-center NOI rose 4.6% in Q2 and 5.0% for the first half year over year. Management attributed growth primarily to higher minimum rent per square foot, improved occupancy, and increased tenant recoveries. The filing does not provide a single consolidated operating-margin measure.
At June 30, total assets were $2.247bn, mortgages and loans payable net were $894.9m, total liabilities were $997.9m, and cash and cash equivalents were $6.5m. The company reported $252.5m available under its $500m revolving facility and debt to total enterprise value of 31.9%. Weighted-average interest on mortgages and loans was 3.2%.
Material changes versus the prior comparable period
- First-half revenue increased 6.8%, while net income attributable to stockholders fell 73.1% and FFO fell about 10.0%.
- General and administrative expense rose $11.1m in the first half, mainly because the advisory-fee structure changed in October 2015: 80% of the asset-management fee is now paid in cash and expensed, rather than being deferred through Class B units. The company identified a $9.3m first-half increase in cash asset-management fees.
- Same-center NOI growth was positive, but property operating costs, real estate taxes, and interest expense also increased. First-half interest expense rose $1.0m, primarily due to higher debt principal outstanding, partly offset by lower average rates.
- Operating cash flow declined $6.4m year over year. Investing cash outflow was $105.0m, including $94.4m for acquisitions; financing cash flow was $13.8m. Cash decreased $34.2m during the first half.
- Accumulated other comprehensive loss reached $9.7m, reflecting a first-half $11.5m unrealized loss on interest-rate swaps, partly offset by amounts reclassified to interest expense.
Outlook, risks, contingencies, and unusual items
- No earnings or operating guidance was provided. Management said it expects to continue monthly distributions unless operating results, financial condition, economic conditions, or other factors make them imprudent. The board authorized distributions at the stated daily rate through November 30, 2016.
- First-half gross distributions were $61.2m, compared with $57.0m of operating cash flow and $53.7m of FFO. The filing reports shortfalls of $4.2m against operating cash flow and $7.5m against FFO; it says shortfalls have been funded by borrowings. Management cautions that distributions are not guaranteed and may not be sustained.
- Share-repurchase demand exceeded program funding limits. Approximately 7.0m shares were awaiting repurchase at June 30; no funds were expected to be available in Q3 2016, and management expected Q4 funding to be insufficient for all requests. A self-tender offer ended June 7, repurchasing 69,271 shares at $6.00 each.
- Unhedged variable-rate debt was $260.5m. The company estimated that a one-percentage-point rate increase would add about $2.6m to annual interest expense. It had $387.0m of term-loan debt hedged and a swap fixing a $11.2m mortgage at 5.22%.
- Debt maturities and covenant compliance remain relevant: the revolving facility matures in December 2017, with extension options; the company reported compliance with debt covenants at June 30. No material litigation or known material environmental claim was reported.
- The company depends on its advisor and affiliated property manager for key services and pays them management, acquisition, and other fees. This related-party dependence could lead to higher costs if those providers could not perform.
Most important facts for investors to verify
- Confirm the legal entity and ticker/security being analyzed, given the difference between the requested company name and the registrant named in this filing.
- Assess whether recurring cash generation can support distributions after capital expenditures, leasing costs, and debt service; compare the reported distribution shortfalls with borrowing and DRIP funding.
- Review the advisory-fee change and related-party costs when evaluating the sharp decline in GAAP net income and the gap between net income, FFO, and MFFO.
- Check variable-rate exposure, upcoming maturities, revolving-facility availability, and covenant headroom.
- Monitor occupancy, lease expirations, tenant retention, and the backlog of share-repurchase requests, including the limits and terms of the repurchase program.