Phillips Edison Grocery Center REIT I, Inc. — FY 2014 Form 10-K
Entity note: The filing is for Phillips Edison Grocery Center REIT I, Inc., not Phillips Edison & Company, Inc. It covers the fiscal year ended December 31, 2014 and was filed March 9, 2015. The REIT owns grocery-anchored shopping centers and reports one operating segment.
Business context and portfolio
At year-end, the company owned 138 properties across 27 states, totaling approximately 14.7 million square feet. Portfolio occupancy was 94.8%, with a 6.1-year average remaining lease term. Grocery anchors represented 55.7% of leased area and 43.8% of annualized effective rent. The company acquired 56 properties during 2014; acquisitions had a weighted-average capitalization rate of 6.9%.
Key financial metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $188.2 million | $73.2 million |
| Net loss attributable to stockholders | $22.6 million | $12.4 million |
| Net loss per share | $0.13 | $0.18 |
| Net cash from operating activities | $75.7 million | $18.5 million |
| Funds from operations (FFO) | $56.5 million | $12.8 million |
| Modified FFO (MFFO) | $94.6 million | $29.0 million |
| Common distributions declared per share | $0.67 | $0.67 |
At December 31, 2014, total assets were $2.15 billion, net real estate assets were $2.07 billion, total liabilities were $742.6 million, and cash and cash equivalents were $15.6 million, down from $460.3 million a year earlier. Debt principal totaled $642.6 million: $350.9 million of fixed-rate mortgages and $291.7 million drawn on a $700 million unsecured revolving facility. Weighted-average debt cost was 3.7%; reported leverage was 29.3%. The company said it had access to the facility, which may be expanded to $1 billion, and was in compliance with debt covenants.
Same-center NOI increased 1.2% to $25.2 million for the 26 properties in the comparison. The company reported a 6.7% annualized distribution rate based on a $10 share price, but the filing says a portion of distributions was expected to be return of capital for tax purposes.
Material changes versus prior periods
- Revenue rose substantially, primarily because the portfolio expanded from 83 properties at year-end 2013 to 138 at year-end 2014. Annual results are not directly comparable on a same-property basis; only 26 properties were included in the 2014/2013 same-center comparison.
- Net loss widened despite higher revenue. A major unusual item was a $27.9 million non-cash charge for vesting 2.8 million Class B units following termination of the ARC advisory agreement and confirmation that the 6% investor-return hurdle had been met.
- Interest expense increased by $9.8 million, mainly reflecting debt associated with acquired properties. Acquisition expenses declined to $17.4 million from $18.8 million.
- Operating cash flow increased, but investment activity used $715.8 million and the company ended the year with substantially less cash. Financing activities provided $195.5 million, including $291.7 million of credit-facility borrowings.
- Gross distributions were $119.6 million, including $63.0 million reinvested through the DRIP; net cash distributions were $56.6 million. Distributions were funded from a mix of operations, offering proceeds, and borrowings.
- Effective December 3, 2014, the company replaced ARC with PE-NTR as its advisor. The primary public offering ended February 7, 2014; the company continued its DRIP at $9.50 per share.
Outlook, risks, and unusual items
Management expected revenue and expenses to increase as 2014 acquisitions contributed for a full year and further acquisitions were made; it expected general and administrative expense to decline as a percentage of revenue. The company intended to continue monthly distributions, subject to operating results, financial condition, and other factors, and targeted a portfolio loan-to-value ratio of approximately 30% to 40%. No formal earnings or FFO guidance was provided.
Key risks include the absence of a public trading market and limited share repurchases; reliance on affiliated advisor and property manager; conflicts of interest and affiliate fees; tenant, anchor-retailer, vacancy, and retail-market exposure; refinancing and interest-rate risk; and the possibility that distributions may exceed cash generated by operations. Of $291.7 million in variable-rate facility borrowings, $59.6 million of total debt principal was scheduled to mature in 2015; the filing estimated a 1 percentage-point rate increase would add about $2.9 million in annual interest expense. No material pending legal proceedings or material environmental claims were reported.
The $10.00 per-share estimated value was based on the initial public offering price, not an independent valuation or a public-market price. The filing cautions that it may not reflect resale or liquidation value. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements but was not engaged to audit internal controls.
Most important facts for investors to verify
- Whether operating cash flow can sustainably support distributions, given 2014 gross distributions of $119.6 million versus $75.7 million of operating cash flow and the use of non-operating funding sources.
- Current occupancy, leasing costs, tenant renewals, anchor tenant exposure, and the effect of upcoming lease expirations; 7.2% of leased area was scheduled to expire in 2015.
- Debt maturity and refinancing plans, revolver availability and covenants, and sensitivity to variable interest rates.
- The basis and timing of any updated share valuation, liquidity event, or listing, and the practical limits on share repurchases in the absence of a public market.
- The economic and dilution implications of the vested Class B units, future incentive compensation, and ongoing fees paid to affiliated advisor and property manager.