Phillips Edison–ARC Shopping Center REIT Inc. — 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. The company invests primarily in grocery-anchored U.S. neighborhood and community shopping centers. It reported 58 properties, 6.1 million square feet and 94.1% leased at quarter-end. Results are unaudited.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $20.1 million | $5.1 million | $46.5 million | $10.5 million |
| Operating income (loss) | $0.9 million | $(0.4) million | $0.7 million | $(1.2) million |
| Net loss attributable to stockholders | $(1.4) million | $(1.0) million | $(6.2) million | $(2.1) million |
| GAAP loss per share | $(0.02) | $(0.15) | $(0.14) | $(0.43) |
| Net cash from operating activities | Not separately presented | Not separately presented | $16.0 million | $3.1 million |
- Q3 total expenses were $19.2 million, including $4.0 million of acquisition expenses, $8.3 million of depreciation and amortization, and $2.2 million of net interest expense. Nine-month expenses were $45.8 million, including $9.6 million of acquisition expenses.
- At September 30, assets totaled $1.204 billion; cash and cash equivalents were $326.2 million. Reported debt was $216.3 million, including a $4.7 million below-market debt adjustment; principal debt was $211.6 million. The company reported no net leverage under its stated measure because cash exceeded debt.
- Operating, investing and financing cash flows for the nine months were $16.0 million, $(463.3) million and $765.9 million, respectively. Real estate acquisitions used $457.0 million.
- Non-GAAP FFO was $9.7 million, or $0.21 per share, for the nine months; FFO adjusted for acquisition expenses was $19.3 million, or $0.43 per share; MFFO was $17.9 million, or $0.40 per share. These measures exclude items and are not substitutes for GAAP results or cash available for distributions.
Material changes versus prior periods
- Revenue growth largely reflects portfolio expansion: 38 properties had been acquired since September 30, 2012, increasing the portfolio from 20 to 58 properties. During the first nine months of 2013, the company acquired 32 grocery-anchored centers for approximately $550 million, including assumed debt.
- Higher rental income was accompanied by increased operating costs, depreciation, interest and acquisition expenses. Nine-month net loss attributable to stockholders increased to $6.2 million from $2.1 million.
- The company issued approximately 93.1 million shares during the first nine months of 2013 and reported $923.6 million of stock issuance proceeds. Weighted-average shares rose substantially, so per-share comparisons are affected by dilution and the company’s growth phase.
- Nine-month FFO per share increased to $0.21 from $0.14, while acquisition-adjusted FFO per share declined to $0.43 from $0.50 and MFFO per share declined to $0.40 from $0.49.
Outlook, risks and notable items
- No specific full-year earnings or operating guidance is provided. Management expects to continue raising equity and using offering proceeds and secured financing to acquire properties; it cautions that interim results are not necessarily indicative of full-year results.
- Monthly distributions were set at $0.00183562 per share per day, described as an approximately 6.70% annualized yield on a $10 share price. The company states its policy is not to fund distributions with offering proceeds, but nine-month gross distributions of $17.9 million exceeded operating cash flow of $16.0 million; the filing says the excess was funded from borrowings. A portion of distributions may be a return of capital for tax purposes.
- Interest-rate exposure remains: $78.4 million of variable-rate debt was not fixed by a swap. Management estimated that a one-percentage-point rate increase would add about $0.8 million in annual interest expense. A $50 million swap effectively fixed a portion of the secured facility at 3.05% through December 2017, although mismatches caused recorded losses.
- One tenant, Publix, represented approximately 10% of annualized effective rent. The company disclosed dependence on affiliated advisor, sub-advisor, property manager and dealer manager services, and material related-party fees and offering costs.
- The filing reports no material pending litigation, environmental matter expected to materially affect the statements, or debt covenant noncompliance. Management concluded disclosure controls were effective.
- Subsequent to quarter-end, the company raised about $210.1 million in October share sales, made additional property acquisitions, and repaid $74.4 million net to revolving-line lenders. It also repaid the $16.3 million of mortgage loans that had been due in 2013.
Important facts for investors to verify
- Whether operating cash flow can sustainably cover distributions and capital needs, given distributions exceeded operating cash flow in the nine-month period.
- Acquisition-level occupancy, lease economics, integration costs and the durability of growth once the pace of acquisitions changes.
- Debt maturities, available borrowing capacity, refinancing terms and sensitivity to higher interest rates.
- Offering terms, share dilution, offering costs and the status of the proposed follow-on offering.
- Related-party compensation arrangements, including acquisition and property-management fees and performance-based Class B units.
- Tenant concentration and leasing exposure; the filing reports 94.1% leased occupancy, but lease expirations and tenant credit remain relevant risks.