Phillips Edison–ARC Shopping Center REIT Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. The registrant is Phillips Edison–ARC Shopping Center REIT Inc., a grocery-anchored retail property REIT. Financial amounts below are in U.S. dollars; unless noted, amounts are in millions.
Business context and portfolio
- Owned 131 shopping centers across 27 states at quarter-end, with 13.9 million square feet and 94.7% of rentable area leased. Average remaining lease term was 6.1 years.
- Acquired 48 grocery-anchored centers and one adjacent strip center during the first nine months for approximately $770.9 million, including assumed debt. The portfolio had grown from 58 properties at September 30, 2013.
- Primary offering closed February 7, 2014; the company continued to issue shares through its dividend reinvestment plan (DRP).
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $50.0 | $20.1 | $129.6 | $46.5 |
| Operating income | $7.4 | $0.9 | $13.0 | $0.7 |
| Net income (loss) attributable to stockholders | $2.1 | $(1.4) | $(0.2) | $(6.2) |
| Net income (loss) per share | $0.01 | $(0.02) | $0.00 | $(0.14) |
- Q3 operating margin was approximately 14.9%, versus 4.5% a year earlier; nine-month operating margin was approximately 10.0%, versus 1.6%. These ratios are calculated from reported operating income and revenue.
- Nine-month same-center NOI was $18.6 million, up 0.5% from $18.6 million in 2013. This measure covered 26 properties and is non-GAAP.
- Nine-month FFO was $55.9 million ($0.31 per share), FFO adjusted for acquisition expenses was $71.0 million ($0.40 per share), and MFFO was $65.8 million ($0.37 per share). These are non-GAAP measures; management cautions they are not substitutes for GAAP results or liquidity measures.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $58.8 million, investing cash flow was negative $583.3 million, and financing cash flow was positive $84.1 million. Cash declined $440.4 million to $19.8 million.
- At September 30, debt principal was $510.1 million: $359.1 million of fixed-rate mortgages and $151.0 million drawn on the unsecured revolving facility. The balance sheet reported mortgages and loans payable of $518.7 million, including debt fair-value adjustments. Weighted-average debt interest rate was 4.3%; weighted-average maturity was 4.2 years.
- The revolving facility had $217.0 million of borrowing capacity at quarter-end under its then-current borrowing-base limits. An October 9 amendment removed those limits, increasing stated capacity to $350 million. Quarter-end cash plus stated undrawn capacity provided liquidity, but availability remains subject to facility terms.
- Gross distributions for the nine months were $89.3 million, of which $47.0 million was reinvested through the DRP; net cash distributions were $42.3 million. Distributions exceeded operating cash flow by approximately $30.5 million on a gross basis. The company disclosed that distributions were partly funded from offering proceeds and borrowings and that operating cash flow had been insufficient to fully fund ongoing distributions.
Changes, outlook and risks
- Year-over-year revenue growth primarily reflected the larger property portfolio and longer ownership periods, rather than comparable-store growth. Nine-month acquisition expenses increased to $15.1 million from $9.6 million.
- Management expected revenue and expenses to rise as 2014 acquisitions contributed for a full year and additional properties were acquired; it expected G&A to decline as a percentage of revenue. No specific earnings or acquisition guidance was provided.
- The company authorized monthly distributions at $0.00183562 per share per day for October and November 2014, equivalent to a stated 6.70% annualized yield on a $10 share price. It said a portion was expected to be a return of capital for tax purposes. The board may change distributions, and the filing warns the rate may not be sustainable if operations do not cover it.
- A 1-percentage-point increase in rates on the $151.0 million unhedged variable-rate debt would add approximately $1.5 million of annual interest expense. The company was in compliance with debt covenants at quarter-end.
- Material risk considerations include reliance on affiliated advisor, sub-advisor and property manager; acquisition and financing costs; refinancing and interest-rate exposure; and the potential for distribution funding to reduce investment capacity and returns. Net tangible book value was $8.15 per share versus the $9.50 DRP price, which the filing identifies as causing immediate dilution in net tangible book value.
- No material litigation, known material environmental claims or off-balance-sheet arrangements were reported. Management stated disclosure controls were effective.
- After quarter-end, the company acquired four properties for an aggregate purchase price of approximately $79.3 million.
Important facts for investors to verify
- Whether recurring property cash flows can support distributions without continued reliance on offering proceeds or borrowings.
- Same-center operating trends, occupancy, leasing costs and anchor-tenant exposure as the acquired portfolio seasons.
- Debt maturities, refinancing options, revolving-facility covenant capacity and sensitivity to higher interest rates.
- The economic comparability and limitations of FFO, adjusted FFO and MFFO, particularly during the acquisition phase.
- Related-party fees and services, including acquisition, financing, property-management and leasing charges.
- Whether reported per-share results and the DRP offering price adequately reflect dilution, share repurchases and the company’s underlying asset value.