PECO

Business Context and Reporting Period

Company: Phillips Edison & Company, Inc. (Phillips Edison - ARC Shopping Center REIT Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: The Company is a non-listed REIT in the early stages of its public offering and portfolio acquisition. It intends to invest primarily in necessity-based neighborhood and community shopping centers, specifically grocery-anchored properties. Operations commenced on September 17, 2010, after breaking escrow. As of the reporting date, the Company owned two properties: Lakeside Plaza (Salem, VA) and Snow View Plaza (Parma, OH).

Key Financial Metrics

Capital Raised: During the quarter, the Company raised approximately $3.6 million in gross offering proceeds from the issuance of 402,725 shares. Cumulative gross proceeds as of March 31, 2011, were $10.2 million.

Material Changes vs. Prior Period

• Operational Commencement: The Company had no operations or revenues for the three months ended March 31, 2010. The current period reflects the first full quarter of active operations following the acquisition of two properties in December 2010.
• Revenue Generation: Total revenues of $603,000 were recognized, comprised of $460,000 in rental income and $143,000 in tenant recovery income.
• Expense Structure: Total expenses were $702,000, driven by property operating costs ($203,000), general and administrative expenses ($208,000), acquisition-related expenses ($47,000), and depreciation/amortization ($244,000).
• Debt Reduction: Mortgage loans payable decreased from $14.7 million to $11.2 million due to principal payments of $3.45 million. The Company also repaid a $600,000 bridge loan from affiliates.
• Equity Growth: Stockholders' equity increased from $1.16 million to $3.91 million, primarily due to the issuance of common stock ($3.65 million) and sponsor contributions ($60,000), partially offset by the net loss and distributions.

Guidance, Outlook, and Risks

Management Commentary:

• Performance Metrics: The Company reported a Net Loss of $248,000. However, Modified Funds From Operations (MFFO) were $144,000, which excludes acquisition costs, straight-line rent adjustments, and amortization of intangibles. Management views MFFO as a better indicator of sustainable operating performance post-offering.
• Distributions: The Company declared and paid distributions totaling $121,000 (gross) for the quarter, equating to a 6.50% annualized yield on the $10.00 offering price. Distributions were funded by a combination of operating cash flow and advances from the Sub-advisor.
• Asset Management Fees: Asset management fees of $53,000 were incurred but waived by the Advisor and Sub-advisor because the Company's operating performance did not meet the threshold relative to distributions.

Risks and Contingencies:

• Liquidity Dependence: The Company relies heavily on the Sub-advisor and affiliates for financial support, including advances to fund distributions and cover operating expenses. There is no assurance sponsors will continue these contributions.
• Offering Costs: The Company owes affiliates approximately $5.9 million for offering, organization, and acquisition fees. Reimbursement is capped at 1.5% of gross proceeds raised.
• Interest Rate Risk: The Company holds approximately $11.2 million in variable-rate debt (3.32% as of March 31, 2011). A 1% increase in interest rates would result in approximately $100,000 in additional annual interest expense.
• Tenant Concentration: Two major tenants (Kroger and Giant Eagle) account for approximately 50% and 60% of the annualized base rental revenues for their respective properties.

Key Facts for Investor Verification

• Offering Status: Verify the remaining capacity of the $1.5 billion primary offering and the timeline for closing the offering.
• Sponsor Support: Confirm the extent of ongoing financial support (advances and fee waivers) from the Sub-advisor and the conditions under which this support might cease.
• Debt Maturities: Note that the mortgage loans on both properties mature in December 2012, with required principal repayments due in July 2012.
• FFO vs. MFFO: Understand the significant difference between GAAP Net Loss and MFFO due to the expensing of acquisition costs and amortization of intangibles in the early acquisition phase.
• Related Party Transactions: Review the $5.9 million payable to affiliates and the structure of fees (acquisition, asset management, property management) paid to related parties.