Business context and reporting period
Phillips Edison Grocery Center REIT I, Inc. (the registrant named in this filing) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. It owned 159 grocery-anchored shopping centers in 28 states, with 96.4% of rentable space leased at quarter-end.
On October 4, 2017, after the reporting period, the company completed its acquisition of certain sponsor assets and the third-party asset management business of Phillips Edison Limited Partnership (PELP). The transaction added 76 shopping centers; the pro forma portfolio comprised 235 properties across 32 states, with 94.4% leased space.
Financial performance and position
Amounts below are in millions of dollars except per-share data and where noted.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $70.6 | $65.3 | $208.8 | $191.4 |
| Net income (loss) attributable to stockholders | $(8.2) | $2.5 | $(8.3) | $5.2 |
| Basic and diluted EPS | $(0.04) | $0.01 | $(0.05) | $0.03 |
| Operating cash flow | — | — | $67.5 | $85.2 |
| FFO attributable to common stockholders | $20.0 | $28.7 | $74.9 | $82.3 |
| MFFO attributable to common stockholders | $27.8 | $27.5 | $85.1 | $79.3 |
Revenue rose 8.2% in Q3 and 9.1% for the nine-month period. Same-center NOI increased 0.5% in Q3 to $39.5 million and 1.6% for the nine months to $118.2 million. Nine-month FFO per diluted share was $0.40, versus $0.44 in 2016; MFFO per share was $0.46, versus $0.43. FFO and MFFO are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
At September 30, total assets were $2.45 billion, total liabilities $1.34 billion, and total equity $1.11 billion. Debt, net of financing costs, was $1.225 billion; principal debt was approximately $1.228 billion, at a weighted-average interest rate of 3.1%. Debt to total enterprise value was 39.1%. The $500 million revolving facility had $121.0 million available at quarter-end. Cash and cash equivalents were $7.2 million; restricted cash was $6.0 million.
For the nine months, investing activities used $97.4 million and financing activities provided $28.9 million; cash and cash equivalents declined $1.0 million. Capital expenditures were $22.5 million, and the company acquired six centers for $111.7 million in cash. Gross distributions declared were $92.0 million; $36.2 million was reinvested through the DRIP.
Material changes versus the prior comparable period
- GAAP results shifted from income to loss: nine-month stockholder loss was $8.3 million, compared with income of $5.2 million in 2016. The 2017 period included $9.8 million of PELP transaction expenses and a $5.5 million charge for terminating affiliate arrangements.
- Revenue growth mainly reflected acquisitions: management attributed $19.3 million of the nine-month increase to acquired properties, partly offset by redevelopment and disposed properties. Same-center NOI growth was modest.
- Nine-month operating cash flow fell by $17.7 million to $67.5 million. Management cited transaction and affiliate-termination expenses among the factors behind the decline.
- Debt increased from $1.056 billion at December 31, 2016, primarily reflecting higher revolving-credit borrowings, while mortgage balances declined.
- After quarter-end, the PELP transaction materially expanded the portfolio and internalized management. The company issued 39.6 million OP units, assumed approximately $501 million of debt, and paid $25 million cash; former PELP holders owned approximately 19.4% of the combined company immediately after closing.
Outlook, risks, contingencies, and unusual items
- Management expects the larger portfolio to increase revenue and expects to earn management fees from the acquired asset-management business. The filing cautions that post-acquisition results may not be comparable and that integration costs, delays, or failure to realize expected benefits could weigh on results. No numerical earnings or revenue guidance is provided.
- Management stated that it expects to continue monthly distributions, but the board retains discretion to change them. The filing highlights that the larger share and OP-unit base increases the cash required to maintain the prior distribution rate. Distributions were authorized through February 2018 at the then-current rate.
- The share repurchase program was constrained by funding limits: 9.8 million shares had unfulfilled requests at September 30, and no funds were expected to be available for ordinary repurchases for the remainder of 2017.
- Interest-rate exposure remains: approximately $392 million of unsecured debt was not fixed through derivatives at September 30. Management estimated that a one-percentage-point rate increase would add about $3.9 million of annual interest expense, assuming no capital-structure changes. Subsequent swaps fixed rates on portions of new term loans.
- Key post-transaction risks include limited experience as a self-managed REIT, employee and integration costs, potential undiscovered liabilities, governance and change-of-control protections, and tax-protection obligations that may restrict property sales or affect financing decisions. Florida represented 12.8% of portfolio ABR, creating geographic concentration exposure.
- The company reported ordinary-course litigation and no known environmental matters expected to have a material effect; management did not expect litigation to materially affect the financial statements. The filing reports compliance with debt covenants at September 30.
Important facts for investors to verify
- Review the final purchase accounting, assumed debt fair values, and ongoing results and costs of the PELP transaction; initial acquisition accounting was incomplete when the 10-Q was filed.
- Assess post-acquisition leverage, liquidity, debt maturities, covenant headroom, and interest-rate hedging, including the effect of subsequent refinancing agreements.
- Compare recurring operating performance with GAAP losses and cash flow, separating transaction and termination charges from continuing costs; verify the assumptions and adjustments in FFO, MFFO, and same-center NOI.
- Monitor distribution coverage, board distribution decisions, and the backlog of share-repurchase requests.
- Evaluate integration execution, self-management costs, tax-protection restrictions, and the effect of the enlarged share and OP-unit base on per-share results.