Phillips Edison–ARC Shopping Center REIT Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; filed August 8, 2013. The filing entity is Phillips Edison–ARC Shopping Center REIT Inc. (the company named in the request is not the registrant name shown in the filing). Amounts below are in U.S. dollars; financial statement figures are rounded to millions unless otherwise noted.
Business context
The company is a REIT focused primarily on grocery-anchored neighborhood and community shopping centers. At June 30, 2013, it owned interests in 46 properties across 18 states, including 20 held through a joint venture in which it had an approximately 54% interest. The portfolio covered about 4.9 million square feet, was 93.6% leased, and had a 7.8% weighted-average acquisition capitalization rate. Management said year-over-year results were principally affected by acquiring 32 properties since June 30, 2012; the company owned nine and 14 properties during the respective 2012 comparison periods.
Key financial results
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue, 2013 / 2012 | $15.2m / $3.1m | $26.4m / $5.3m |
| Operating income (loss), 2013 / 2012 | $0.6m / $(0.7)m | $(0.2)m / $(0.8)m |
| Net loss attributable to company stockholders, 2013 / 2012 | $(2.0)m / $(0.8)m | $(4.8)m / $(1.1)m |
| Net loss per share, basic and diluted, 2013 / 2012 | $(0.05) / $(0.17) | $(0.18) / $(0.27) |
| Operating cash flow, 2013 / 2012 | Six-month: $8.6m / $0.8m |
For Q2 2013, operating margin was approximately 4.3%, compared with a negative 23.3% in Q2 2012. For the six-month periods, it was approximately negative 0.6% versus negative 14.6%. Revenue growth reflected the expanded property base; acquisition expenses and depreciation and amortization also rose substantially. Six-month acquisition expenses were $5.7m and depreciation and amortization was $11.6m. Interest expense was $4.4m for the six months, versus $0.9m in 2012.
Supplemental non-GAAP measures: six-month FFO was $4.1m ($0.15 per share), FFO adjusted for acquisition expenses was $9.7m ($0.35 per share), and MFFO was $9.2m ($0.33 per share). Management cautions these measures are not substitutes for GAAP results or liquidity measures; acquisition costs are real cash costs and excluded adjustments may limit comparability.
Balance sheet, cash flow and liquidity
- At June 30, total assets were $730.0m, total liabilities $235.2m, total equity $494.7m, and cash and cash equivalents $61.9m.
- Recorded mortgages and loans payable were $210.4m, including a $4.3m assumed below-market debt adjustment; debt principal was $206.2m. The weighted-average debt interest rate was 4.2%, and management reported compliance with debt covenants.
- Six-month cash flows: operating activities provided $8.6m; investing activities used $291.3m, primarily for acquisitions; financing activities provided $337.0m, including $406.3m from common-stock issuance and substantial debt repayments and borrowings.
- Management reported a 22.1% leverage ratio at June 30, compared with 48.5% at December 31, 2012, calculated as debt less cash divided by real estate investments at cost.
- At June 30, $78.4m of variable-rate debt was not fixed by a swap. A 1 percentage-point rate increase was estimated to add about $0.8m to annual interest expense. A swap effectively fixed the rate on $50m of secured credit facility borrowing at 3.05% through December 2017.
Material changes, outlook and risks
- The company acquired 20 grocery-anchored centers in the first half for a combined purchase price of approximately $346.4m, including $57.2m fair value of assumed debt. Acquisitions were funded through equity proceeds and borrowings. Subsequent to quarter-end, it acquired Boronda Plaza for about $22.7m and Rivergate for about $32.4m.
- Equity issuance accelerated: 40.97m shares were issued in the first half. The company reported $545.2m of cumulative gross offering proceeds as of June 30 and was continuing its initial public offering while pursuing registration of a follow-on offering. Offering and organization costs were substantial; cumulative offering costs were $69.7m.
- After quarter-end, the company paid $30.0m to its secured credit facility and $61.8m to various revolving lines; the secured facility had no outstanding balance as of August 8, 2013. At June 30, $21.9m of mortgage loans were scheduled to mature in 2013, with extension options subject to fees and covenants.
- Monthly distributions were authorized at a rate equivalent to an approximately 6.70% annualized yield on a $10 share price. Management stated that a portion may be treated as return of capital for tax purposes and that distributions are not intended to be funded from offering proceeds. Six-month gross distributions were $7.1m, compared with $8.6m of operating cash flow; management also disclosed that cumulative distributions had been funded from operating cash, sponsor advances, and borrowings.
- Management expects revenue and expenses to rise as offering proceeds fund additional acquisitions, but stated that interim results are not necessarily indicative of full-year results. It gave no specific earnings guidance and said distributions depend on operating results, financial condition, economic conditions, and other factors.
- Key risks include reliance on continued equity fundraising and affiliated service providers; ability to refinance or extend maturing debt; exposure to rising rates; and the possibility that operating cash flow will not sustain distributions. Publix represented approximately 11% of annualized effective rent. Management reported no material pending litigation or known environmental condition expected to materially affect the financial statements. A $0.45m environmental remediation liability at Kleinwood Center was offset by a seller credit of the same amount.
Important facts for investors to verify
- Whether property-level operating performance, occupancy, rent collections, and same-center trends support the acquisition-driven revenue growth.
- How much cash is available after acquisitions, capital expenditures, offering costs, and debt service—and whether distributions can be sustained from recurring operations.
- The status and terms of the ongoing and proposed offerings, including dilution, selling and dealer-manager costs, and proceeds available for investment.
- Debt maturities, refinancing or extension outcomes, covenant compliance, and the remaining exposure to variable interest rates.
- The assumptions behind FFO, adjusted FFO, and MFFO, and how these non-GAAP measures compare with GAAP earnings and cash flow.