Phillips Edison–ARC Shopping Center REIT Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. The registrant is Phillips Edison–ARC Shopping Center REIT Inc., a REIT focused primarily on grocery-anchored shopping centers. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
- Revenue: $35.7, up 217.5% from $11.2 in Q1 2013. Rental income was $27.2 and tenant recoveries were $8.3. The increase primarily reflects portfolio growth: the company owned 100 properties at quarter-end versus 37 a year earlier.
- Profitability: Operating income was $2.7, compared with an operating loss of $0.8. Net loss attributable to stockholders improved to $0.4 from $2.8; reported basic and diluted loss per share was $0.00 versus a loss of $0.16. Operating margin was approximately 7.6%, versus negative 7.2% in the prior-year quarter.
- Expenses: Depreciation and amortization rose to $15.4 from $5.2; acquisition expenses were $5.4 versus $2.5. Net interest expense increased to $3.7 from $2.1.
- Cash flow: Operating activities provided $16.4, compared with $3.9 in Q1 2013. Investing activities used $204.1, chiefly for acquisitions; financing activities used $15.0. Cash and cash equivalents fell $202.8 during the quarter to $257.5.
- Debt and liquidity: Mortgages and loans payable were $286.1, up from $200.9 at year-end 2013. The debt was principally fixed-rate mortgages, with a 5.62% weighted-average loan rate. The company had no balance drawn on its $350 million revolving credit facility; borrowing capacity under the borrowing base was $226.3. It reported compliance with debt covenants.
- Equity and distributions: Total equity was $1,455.3. Q1 gross distributions were $28.9, including $15.2 reinvested through the DRP, leaving $13.7 in net cash distributions. The board’s monthly distribution rate equated to a 6.70% annualized yield on a $10 share price.
Changes versus the prior comparable period
- The company acquired 17 grocery-anchored centers for approximately $285.7, including assumed debt. Real estate acquisitions used $201.8 of cash in the quarter.
- Same-center NOI for 26 comparable properties increased 3.0% to $6.1 from $5.9.
- Year-over-year revenue and expense increases largely reflect the expansion of the portfolio and the periods of ownership, rather than solely changes in performance at existing properties.
- The primary public offering closed on February 7, 2014; the company continued to offer shares through its DRP.
Outlook, risks, and unusual items
- Management expected revenue and expenses to rise as recently acquired properties contributed for a full year and further acquisitions were made. It said substantial offering proceeds remained uninvested and were being deployed on attractive terms; delays in investment could make it difficult to sustain distributions at the stated rate.
- Management intended to repay or refinance debt as it matured. It identified $22.8 of loans maturing in 2014 and reported repaying $4.6 after quarter-end. The debt maturity schedule separately lists $26.6 of 2014 principal payments.
- Distributions were not fully supported by operating cash flow when assessed on a gross basis: Q1 gross distributions of $28.9 exceeded operating cash flow of $16.4. The filing says offering proceeds have been used, and may continue to be used, to fund distributions. It warns this can reduce funds available for investment and may make the distribution rate unsustainable.
- The company sold its $50.0 interest-rate swap in February 2014 and had no active swaps at quarter-end. It recorded a $0.7 gain from accelerated reclassification of hedge amounts, alongside a $0.3 loss from changes in derivative fair value. The filing says a one-percentage-point rate change would not affect annual results at quarter-end because there was no variable-rate debt outstanding.
- Subsequent to quarter-end, three properties were acquired for a combined purchase price of approximately $80.9. The company also disclosed that DRP shares were offered at $9.50 while net tangible book value was $8.23 per share, and warned of immediate book-value dilution for DRP purchasers.
- No material legal proceedings or off-balance-sheet arrangements were reported. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether operating cash flow can support distributions as the remaining offering proceeds are invested, and how distributions are funded over time.
- Acquisition returns, occupancy, leasing costs, and same-center operating trends as the enlarged portfolio seasons.
- Debt maturities, refinancing plans, available revolver capacity, and compliance with borrowing covenants.
- The extent of related-party fees and the company’s reliance on affiliated advisor, sub-advisor, and property-management entities.
- Whether reported per-share results, supplemental FFO measures, and distribution yield adequately reflect acquisition costs, cash needs, and dilution risks.