Business context and reporting period
Phillips Edison–ARC Shopping Center REIT Inc. (the filing’s registrant) filed this Form 10-K for the fiscal year ended December 31, 2013. The company is an externally advised REIT focused primarily on grocery-anchored neighborhood and community shopping centers. It owned 83 properties in 23 states at year-end, with 8.76 million rentable square feet, 94.7% occupancy and a 6.4-year average remaining lease term. The company acquired 57 properties during 2013.
Financial and operating results
- Revenue: $73.2 million in 2013, up 316.9% from $17.6 million in 2012, principally reflecting portfolio growth. Rental income was $56.9 million and tenant recoveries were $16.0 million.
- Profitability: GAAP operating loss was $2.0 million and net loss attributable to company stockholders was $12.4 million, compared with losses of $1.3 million and $3.3 million, respectively, in 2012. Basic and diluted loss per share improved to $0.18 from $0.51, as the share count increased substantially. Acquisition expenses were $18.8 million and depreciation and amortization was $30.5 million.
- Fourth quarter: Unaudited Q4 revenue was $26.6 million, versus $7.1 million in Q4 2012. Q4 operating loss was $2.8 million and net loss attributable to stockholders was $6.2 million, versus $1.2 million in Q4 2012.
- Property performance: Same-center NOI was $6.4 million, essentially flat year over year (+0.3%). New leases and renewals signed in 2013 covered 389,691 square feet; associated leasing costs averaged $7.48 per square foot.
- Cash flow and liquidity: Operating cash flow was $18.5 million, investing cash outflow was $776.2 million and financing cash inflow was $1.21 billion. Year-end cash and cash equivalents were $460.3 million; total assets were $1.72 billion and total liabilities were $252.0 million.
- Debt: Mortgages and loans payable were $200.9 million, with a 5.6% weighted-average interest rate and 3.6 years weighted-average maturity. The company reported no balance outstanding on its $350 million unsecured revolver at year-end; borrowing capacity under the borrowing base was $226.7 million. It reported compliance with debt covenants.
- Supplemental REIT measures: FFO was $12.8 million in 2013 versus $1.2 million in 2012; MFFO was $29.0 million versus $4.3 million. These are non-GAAP measures, and MFFO excludes acquisition expenses and other items; neither is a substitute for GAAP results or cash available for distributions.
Material changes versus the prior period
- Property count rose from 26 at year-end 2012 to 83 at year-end 2013. The 57 acquisitions had a combined purchase price of approximately $917.8 million, including assumed debt.
- Revenue increased sharply with the expanded portfolio, while GAAP net loss widened; acquisition costs, depreciation and interest expense were significant. Interest expense rose to $10.5 million from $3.0 million, including a $1.1 million write-off of deferred financing costs on canceled loans.
- Year-end cash increased to $460.3 million from $7.7 million, primarily due to substantial equity proceeds. Gross equity proceeds since the offering began were approximately $1.74 billion.
- On December 31, 2013, the company acquired the CBRE Investors’ remaining 46% interest in its joint venture for $57.0 million, bringing its ownership to 100%.
- Same-center NOI was nearly unchanged despite the much larger consolidated portfolio.
Outlook, distributions, risks and unusual items
- Management expected revenue and expenses to rise as 2013 acquisitions contributed for a full year and as further properties were acquired; it expected general and administrative expenses to decline as a percentage of revenue. Management cited improving retail real-estate fundamentals, while noting uncertainty from e-commerce, potential interest-rate increases, stagnant wages and the political climate. No formal earnings guidance was provided.
- The company continued to target monthly distributions at an indicated 6.7% annualized rate based on a $10 share price. 2013 distributions were $38.0 million, including $18.7 million reinvested through the DRP, while operating cash flow was $18.5 million. The filing says distributions were funded by operating cash, offering proceeds, borrowings and sub-advisor advances. For 2013, 69.05% of declared distributions were classified for tax purposes as return of capital.
- Management warned that substantial uninvested offering proceeds could earn little while distributions continue, potentially making the distribution rate difficult to sustain. The primary offering ended February 7, 2014; the DRP continued. Subsequent to year-end, the company reported additional property acquisitions and continued distributions.
- There is no established public trading market for the shares. The stated $10 estimated share value was based on offering price, not an independent valuation, and may not represent resale or liquidation value. The DRP price was $9.50; the reported net tangible book value was $8.34 per share.
- Key risks include tenant vacancies or defaults, anchor-tenant departures, retail competition, property-market and interest-rate changes, debt refinancing and balloon maturities, limited share liquidity, and reliance on affiliated advisors and property managers. The company also disclosed potential conflicts from affiliate compensation and investment allocation.
- No material legal proceedings were reported. A $450,000 environmental remediation liability was assumed for Kleinwood Center, offset by a $450,000 seller credit. No real-estate impairments were recorded in 2013, 2012 or 2011. The company reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether recurring property cash flows can support distributions without continued reliance on offering proceeds, borrowing or other non-operating sources.
- How the company deploys remaining capital after the primary offering ended, and the returns and integration risks associated with the rapid 2013 acquisition program.
- Debt maturities and refinancing capacity, particularly the $25.7 million of scheduled 2014 principal payments and the revolver’s borrowing-base limitations.
- Occupancy, leasing activity and exposure to grocery anchors; the filing reports Dominick’s vacated two centers while continuing to pay rent under its leases.
- The basis and limitations of the $10 estimated share value, the $8.34 net tangible book value per share, and the restricted share-repurchase program.
- Related-party fees, governance safeguards and the terms and accounting treatment of the advisor’s and sub-advisor’s Class B units.