Phillips Edison Grocery Center REIT I, Inc. — Q1 2015 Form 10-Q
Filing identity: The filing is for Phillips Edison Grocery Center REIT I, Inc., not Phillips Edison & Company, Inc. It covers the quarter ended March 31, 2015; financial statements are unaudited.
Business context
The REIT invests in grocery-anchored neighborhood and community shopping centers. At quarter-end it owned 146 properties in 28 states, with 95.3% of rentable space leased and a 6.2-year average remaining lease term. It acquired eight centers during the quarter for approximately $86.4 million, including assumed debt.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 / prior period |
|---|---|---|
| Total revenue | $58.9 million | $35.7 million |
| Net income attributable to stockholders | $5.0 million | Net loss of $0.4 million |
| Basic and diluted EPS | $0.03 | $(0.00) |
| Cash from operating activities | $28.7 million | $16.4 million |
| Cash and cash equivalents | $14.2 million | $15.6 million at Dec. 31, 2014 |
| Debt carrying amount | $730.0 million | $650.5 million at Dec. 31, 2014 |
| Total assets | $2.22 billion | $2.15 billion at Dec. 31, 2014 |
Net cash used in investing was $65.3 million, primarily reflecting acquisitions and capital expenditures. Financing provided $35.2 million, including a $66.8 million net increase in credit-facility borrowings. The company reported a 31.8% leverage ratio. Its $700 million unsecured revolving facility had $358.5 million outstanding and a 1.30% spread over LIBOR; debt’s weighted-average interest rate was 3.5%.
Quarterly distributions declared were $0.17 per share. Gross distributions were $30.2 million, of which $15.8 million was reinvested through the DRIP; net cash distributions were $14.4 million. Same-center NOI increased 2.0% to $23.5 million. FFO was $29.4 million and MFFO was $29.1 million; both are non-GAAP measures and should not be treated as cash available for distributions.
Changes versus comparable periods
- Revenue increased $23.3 million year over year, principally due to properties acquired in 2014 and 2015. Same-center revenue rose $1.1 million; management cited higher rent per square foot and a 1.1% increase in leased occupancy.
- Net income improved from a $0.4 million loss to $5.0 million. However, same-center net income was lower by $1.7 million, reflecting higher real estate taxes, general and administrative costs, and interest expense.
- Acquisition expense declined to $1.7 million from $5.4 million, partly offsetting increased depreciation and interest costs associated with the larger portfolio and added debt.
- Debt increased by $79.5 million from year-end, while cash declined by $1.5 million.
Outlook, risks and unusual items
- No formal earnings or revenue guidance is provided. Management expects revenue and expenses to rise as recently acquired properties contribute for a full year, and expects G&A to decline as a percentage of revenue.
- The company intends to continue monthly distributions, but states the amount and timing remain subject to board discretion and operating and economic conditions. It says distributions may be funded from borrowings or other sources; a portion is expected to be a return of capital for tax purposes.
- As of March 31, $358.5 million of unsecured variable-rate debt was unhedged. A 1 percentage-point rate increase was estimated to add approximately $3.6 million to annual interest expense. Subsequent to quarter-end, the company entered swaps fixing the LIBOR portion of $387 million of credit-facility debt beginning May 1, 2015.
- Approximately $49.5 million of debt was due in 2015, excluding scheduled principal payments; $32.2 million was repaid after quarter-end. The credit facility matures in December 2017, with two six-month extension options. The company reported compliance with debt covenants.
- Subsequent to quarter-end, the company acquired Coronado Center in Santa Fe for $22.7 million; it was 89.6% leased at acquisition.
- Management reported no material pending legal proceedings or known material environmental claims. It also disclosed dependence on the sponsor-affiliated advisor and property manager, and limitations on the share repurchase program.
Most important facts for investors to verify
- Whether operating cash flow can sustain distributions: gross distributions exceeded quarterly operating cash flow, although DRIP reinvestment reduced cash paid and net cash distributions were $14.4 million.
- Debt maturity, refinancing capacity, covenant headroom, and the effect of the post-quarter swaps on interest-rate exposure.
- Whether portfolio occupancy, same-center NOI growth, leasing costs, and acquisition performance support expected cash generation.
- The distinction between GAAP earnings, FFO/MFFO, and cash available for distributions; FFO and MFFO exclude items and are not liquidity measures.
- Share repurchase limits and the reported $8.07 net tangible book value per share versus the $9.50 DRIP price.