Phillips Edison–ARC Shopping Center REIT Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. The company is a REIT focused primarily on grocery-anchored shopping centers. It holds an approximately 54% interest in, and manages, a joint venture that owns the properties; the joint venture’s results are consolidated, with outside investors’ share presented as noncontrolling interests.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Total revenue | $2.215 million | $0.603 million |
| Operating loss | $52,000 | $99,000 |
| Net loss | $443,000 | $248,000 |
| Net loss attributable to company shareholders | $258,000 | $248,000 |
| Basic and diluted loss per share | $0.08 | $0.28 |
| Net cash from operating activities | $(664,000) | $116,000 |
| Net cash used in investing activities | $(11.439) million | $(19,000) |
| Net cash from financing activities | $11.473 million | $(524,000) |
- Revenue growth largely reflects the expansion from two properties in Q1 2011 to nine properties held through the joint venture at March 31, 2012, including two acquired during Q1 2012. Management cautions that the periods are not directly comparable and that quarterly results are not necessarily indicative of full-year results.
- Higher depreciation and amortization ($1.044 million versus $244,000), interest expense ($391,000 versus $149,000), and acquisition-related expense ($278,000 versus $47,000) accompanied the larger portfolio. Company shareholders’ net loss rose only modestly, while the reported total net loss also includes $185,000 allocated to noncontrolling interests.
- FFO was $306,000 and modified FFO (MFFO) was $514,000, compared with FFO of $(4,000) and MFFO of $84,000 in Q1 2011. These are non-GAAP measures; the filing cautions they are not substitutes for net income or measures of liquidity or distributable cash, and MFFO excludes acquisition costs.
- At March 31, total assets were $95.438 million, cash and cash equivalents were $6.339 million, and total liabilities were $50.848 million. Mortgage debt was $40.463 million, down from $46.788 million at year-end 2011. Debt is variable-rate; its weighted-average interest rate was 2.82%. The reported leverage ratio was 38.5%.
- All borrowings were variable-rate and secured by properties. The filing estimates a one-percentage-point rate increase would add approximately $400,000 in annual interest expense. About $2.14 million of debt matured in 2012 and approximately $29.52 million in 2013; the company was in compliance with debt covenants.
- Cash declined by $630,000 during the quarter. Investing outflows mainly reflected the $11.6 million acquisition of Tramway Crossing and Westin Centre. Financing included $11.492 million from common-stock issuance and $7.844 million of noncontrolling-investor contributions, partly offset by net mortgage repayments and distributions.
Material changes, outlook, and risks
- The joint venture acquired Tramway Crossing and Westin Centre in February for a combined approximately $11.6 million. The nine-property portfolio’s tenants generated $8.104 million in annualized effective rent at quarter-end. Publix accounted for 18.3% and Food Lion 10.6% of that rent. Individual property occupancy ranged from 82.8% to 100%.
- After quarter-end, the joint venture acquired Village at Glynn Place for $11.35 million and two additional centers, New Windsor Marketplace and Meadowthorpe Shopping Center, for $5.55 million and $8.55 million. It also entered two revolving credit facilities totaling $7.1 million, secured by Tramway Crossing and Westin Centre.
- The ongoing public offering had raised $36.9 million gross through March 31. The company declared distributions at a daily rate of $0.00178082 per share, equivalent to a 6.50% annualized yield at a $10 share price. Q1 distributions were funded by borrowings; subsequent distributions were funded by operating cash and borrowings. Management expects monthly distributions to continue but says the board may change them and that a portion may represent return of capital.
- Management expects to fund near-term needs with property operating cash, offering proceeds, and secured or unsecured borrowing. The filing provides no earnings or revenue guidance and says operating cash is expected to increase as properties are added. Management’s stated distribution policy is not to use offering proceeds, although the board has authority to use other sources as permitted.
- Liquidity depends in part on continuing equity fundraising, borrowing, and support or fee deferrals from affiliates. At quarter-end, approximately $7.4 million was owed to the advisor, sub-advisor, and affiliates; another approximately $3.1 million of offering costs incurred by the sub-advisor had not been charged or recorded, and whether they will be billed depends on offering success and the sub-advisor’s discretion. Sponsors said they do not intend to make further general and administrative expense contributions.
- Related-party arrangements are significant: affiliates serve as advisor, sub-advisor, property manager, and dealer manager and receive fees for services and offering activity. The filing reports no material pending litigation or known material environmental issue. Disclosure controls were concluded effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether offering proceeds and joint-venture investor commitments will be sufficient to fund acquisitions, operating costs, debt obligations, and distributions.
- Near-term refinancing or repayment plans for variable-rate debt, especially maturities in 2012–2013, and the impact of rising interest rates.
- The sustainability of distributions given negative operating cash flow and the use of borrowing to fund Q1 distributions.
- The amount, timing, and potential payment of affiliate liabilities and unrecorded offering costs, as well as the terms and oversight of related-party services.
- Acquisition performance, occupancy and lease expirations, including tenant concentration and the results of properties acquired after quarter-end.