Business Context and Reporting Period
Company: Phillips Edison & Company, Inc. (Phillips Edison-ARC Shopping Center REIT Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: The Company is a newly formed Maryland corporation (incorporated October 13, 2009) intending to qualify as a Real Estate Investment Trust (REIT). It operates through an Operating Partnership and is externally advised by American Realty Capital II Advisors, LLC (the "Advisor") and Phillips Edison NTR LLC (the "Sub-advisor"). The Company's strategy focuses on acquiring necessity-based, grocery-anchored neighborhood and community shopping centers.
Operational Status: As of December 31, 2010, the Company was in the early stages of its public offering and had commenced operations on September 17, 2010. It owned two properties: Lakeside Plaza (Salem, VA) and Snow View Plaza (Parma, OH).
Key Financial Metrics
| Metric | 2010 Value |
|---|---|
| Total Assets | $22.7 million |
| Total Liabilities | $21.5 million |
| Stockholders' Equity | $1.2 million |
| Total Revenues | $98,000 |
| Net Loss | $(747,000) |
| Net Loss Per Share (Basic/Diluted) | $(4.44) |
| Cash and Cash Equivalents | $707,000 |
| Debt Outstanding | $15.3 million (Mortgage loans: $14.7M; Bridge loan: $0.6M) |
| Debt-to-Asset Ratio | Approx. 73% |
| Offering Proceeds Raised (Gross) | $6.6 million (730,570 shares) |
Material Changes vs. Prior Period
The Company had no operating history prior to September 17, 2010. Consequently, there are no prior period comparisons for operating results. Material changes from the formation date (December 3, 2009) to December 31, 2010 include:
- Asset Growth: Total assets increased from $1.1 million to $22.7 million, driven by the acquisition of two retail properties totaling approximately $21.1 million.
- Liabilities: Total liabilities increased from $0.9 million to $21.5 million, primarily due to the incurrence of $14.7 million in mortgage debt and $5.5 million in payables to affiliates for offering and organization costs.
- Equity: Stockholders' equity increased from $0.2 million to $1.2 million following the issuance of common stock and a capital contribution from sponsors, offset by the net loss and offering costs.
- Revenue Generation: The Company generated $98,000 in revenue (rental and tenant recovery) in 2010, compared to zero in 2009.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Guidance: The Company is in the "offering stage," with a target to raise up to $1.785 billion ($1.5 billion primary offering + $285 million DRP). Management expects to continue raising capital to acquire additional properties. Distributions are declared at an annualized rate of 6.5% ($0.001780802 per share daily), though these were funded by advances from the Sub-advisor in early 2011 as operating cash flow was insufficient.
Management Commentary:
- Acquisitions: The Company acquired Lakeside Plaza ($9.8M) and Snow View Plaza ($12.3M) in December 2010. Both properties are grocery-anchored with high occupancy (98.9% and 98.0%, respectively).
- Liquidity: The Company relies on offering proceeds, debt financing, and advances from the Sub-advisor to fund operations and distributions. As of year-end, the Company owed affiliates approximately $5.5 million for unpaid fees and expenses.
- Fee Waivers: The Advisor and Sub-advisor waived asset management fees of $18,000 for 2010 because the Company's Modified Funds From Operations (MFFO) did not cover declared distributions.
Risks and Contingencies:
- Liquidity Risk: No public trading market exists for the Company's shares, making them illiquid. The share repurchase program is limited and subject to restrictions.
- Concentration Risk: The portfolio is concentrated in only two properties. Anchor tenants (Kroger and Giant Eagle) represent significant portions of rental income (approx. 50% and 61%, respectively).
- Related Party Dependence: The Company is economically dependent on the Advisor, Sub-advisor, and Dealer Manager for all essential services, including asset acquisition and management.
- REIT Qualification: Failure to qualify as a REIT would subject the Company to corporate income tax, significantly reducing cash available for distribution.
Unusual Items:
- Acquisition Expenses: $467,000 in acquisition-related expenses were expensed as incurred, significantly impacting the net loss.
- Sponsor Contributions: Sponsors provided a $140,000 capital contribution for general and administrative expenses, which was not reimbursed.
Investor Verification Checklist
- Offering Progress: Verify the current status of the $1.785 billion public offering and the amount of capital raised since December 31, 2010.
- Distribution Funding: Confirm whether distributions are being funded by operating cash flow or continued advances from the Sub-advisor.
- Debt Maturities: Review the terms of the variable-rate mortgage loans (maturing Dec 2012) and the repayment of the bridge loan to the Sub-advisor.
- Related Party Payables: Monitor the $5.5 million owed to affiliates for offering costs, acquisition fees, and financing fees, and the timeline for reimbursement.
- Tenant Concentration: Assess the financial health of anchor tenants Kroger and Giant Eagle, given their significant contribution to rental revenue.
- REIT Status: Verify the Company's ongoing compliance with REIT qualification requirements to avoid corporate taxation.