Phillips Edison Grocery Center REIT I, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. The filing registrant is Phillips Edison Grocery Center REIT I, Inc. (the supplied company metadata names Phillips Edison & Company, Inc.). The REIT invests in grocery-anchored shopping centers and reported 147 properties across 28 states at quarter-end.
Financial performance and position
| Metric | Q2 2015 / June 30, 2015 | Comparable period / prior year-end |
|---|---|---|
| Revenue | Three months: $59.2 million; six months: $118.1 million | Three months: $43.9 million; six months: $79.6 million |
| Net income attributable to stockholders | Three months: $5.4 million ($0.03 per share); six months: $10.3 million ($0.06 per share) | Loss of $1.9 million ($0.01 per share) and $2.3 million ($0.01 per share), respectively |
| Operating cash flow | Six months: $63.4 million | $35.1 million for first-half 2014 |
| Cash and cash equivalents | $32.8 million | $15.6 million at December 31, 2014 |
| Debt | $755.9 million principal outstanding; $763.4 million carrying value including adjustments | $650.5 million carrying value at December 31, 2014 |
| Total assets / equity | $2.24 billion / $1.33 billion | $2.15 billion / $1.38 billion at December 31, 2014 |
Revenue growth primarily reflected the ownership of 46 properties acquired during 2014 and 2015. Same-center NOI for 83 properties increased 3.5% to $46.7 million in the first half, supported by higher minimum rent per square foot, 0.7% occupancy improvement, and lower bad-debt expense. Portfolio occupancy was 95.4% at June 30.
Depreciation and amortization was $50.0 million in the first half, while net interest expense rose to $14.3 million from $8.6 million. Acquisition expenses fell to $3.2 million from $11.3 million. First-half FFO was $59.6 million ($0.32 per share) and MFFO was $58.6 million ($0.32 per share); these are non-GAAP measures and should not be treated as cash available for distributions.
Liquidity, debt, and distributions
- Cash provided by operations was $63.4 million; investing activities used $98.8 million, principally for real estate acquisitions and capital expenditures; financing activities provided $52.6 million. Cash increased $17.2 million during the first half.
- The company had a $700 million unsecured revolver, expandable to $1 billion, with $426.5 million principal outstanding. Its stated maturity is December 2017, with two six-month extension options. The filing reports $39.5 million of variable-rate revolver debt and $387.0 million effectively fixed through swaps.
- Weighted-average debt interest rate was 3.85%, with 3.3 years weighted-average time to maturity. The reported leverage ratio was 32.1%; the company said it complied with debt covenants.
- First-half gross distributions were $61.2 million, including $32.0 million reinvested through the DRIP; net cash distributions were $29.3 million. The filing says distributions were funded from operating cash flow. The board authorized continued daily distributions of $0.00183562 per share through October 31, 2015, and management noted some distributions may be treated as return of capital for tax purposes.
Changes, outlook, and risks
- Nine centers were acquired in the first half for approximately $109.2 million, including assumed debt; acquisitions were materially below the 2014 first-half pace. A further property was acquired in Florida for $10.1 million on July 10, 2015.
- Management expects revenue and expenses to increase as properties acquired in 2015 are owned for a full year, and expects general and administrative expense to decline as a percentage of revenue. No specific earnings or full-year numerical guidance is provided.
- Three swaps entered into in April fixed the LIBOR portion of $387.0 million of revolver debt. The filing estimates that a one-percentage-point rise in interest rates on the remaining $39.5 million of unhedged variable-rate debt would add about $0.4 million of annual interest expense.
- Management cautions that distributions may not be sustainable if operating cash flows are insufficient; the company may use borrowings or other sources to fund them. The filing compares first-half 2015 distributions of $61.2 million with operating cash flow of $63.4 million, but the prior-year comparison shows 2014 full-year distributions exceeded operating cash flow.
- The company depends on its sponsor-affiliated advisor and property manager for core services. Related-party property management fees and reimbursements were $11.0 million in the first half, versus $6.0 million in 2014. The filing reports no material pending litigation or identified material environmental claims.
- The DRIP price was $9.50 per share while reported net tangible book value was $8.05 per share; the company says the DRIP price was not independently established and does not represent estimated asset value. Share repurchases are subject to program limits and board discretion.
Important facts for investors to verify
- Whether same-center leasing, occupancy, and rent growth continue to offset higher taxes, interest expense, and property costs.
- Debt maturities and refinancing capacity, particularly the $473.8 million of principal shown due in 2017, and the effect of interest rates on unhedged borrowings.
- Whether operating cash flow can sustain distributions after capital expenditures, tenant improvements, and leasing costs; also confirm the tax character of distributions.
- The extent and terms of related-party fees, advisor incentives, and any future share repurchase restrictions or changes to the DRIP.
- How the post-quarter acquisition is reflected once purchase accounting is completed, and whether management’s stated operating expectations are borne out.