Business Context and Reporting Period
Company: Phillips Edison – ARC Shopping Center REIT Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2012
Business Overview: The Company is a non-traded Real Estate Investment Trust (REIT) investing primarily in well-occupied, grocery-anchored neighborhood and community shopping centers. It is currently in an ongoing initial public offering (IPO) on a "best efforts" basis, targeting $1.785 billion in gross proceeds. As of December 31, 2012, the Company owned 26 properties totaling approximately 2.49 million square feet, with 20 of these held through a Joint Venture (PECO-ARC Institutional Joint Venture I., L.P.) in which the Company holds a 54% interest.
Key Financial Metrics
| Metric | 2012 | 2011 |
|---|---|---|
| Total Revenues | $17.55 million | $3.53 million |
| Net Loss (GAAP) | $(4.27) million | $(2.52) million |
| Net Loss Attributable to Stockholders | $(3.35) million | $(2.36) million |
| Cash Flows from Operating Activities | $4.03 million | $0.59 million |
| Total Assets | $325.41 million | $85.19 million |
| Total Liabilities | $173.14 million | $58.01 million |
| Equity | $152.27 million | $27.19 million |
| Debt Obligations (Mortgage Loans Payable) | $159.01 million | $46.79 million |
| Weighted Average Interest Rate | 3.58% | 2.91% |
| Leverage Ratio (Debt less Cash / Real Estate at Cost) | 48.5% | 51.7% |
| Distributions Paid (Gross) | $3.67 million | $0.87 million |
| Offering Proceeds Raised (Cumulative) | $136.1 million | $25.9 million |
Material Changes vs. Prior Period
- Portfolio Expansion: The Company acquired 19 properties in 2012 (13 via the Joint Venture) for a combined purchase price of approximately $230.1 million, increasing the total portfolio to 26 properties. In 2011, only 5 properties were acquired.
- Revenue Growth: Total revenues increased by 397% to $17.55 million, driven primarily by the addition of new properties and increased rental income ($13.83 million in 2012 vs. $2.76 million in 2011).
- Expense Increases: Acquisition expenses rose to $3.98 million (from $1.75 million) and depreciation/amortization increased to $8.09 million (from $1.50 million) due to the larger asset base. General and administrative expenses increased to $1.72 million.
- Debt Financing: Mortgage loans payable increased significantly to $159.01 million to fund acquisitions, up from $46.79 million in 2011. The Company utilized a mix of fixed and variable rate debt.
- Net Loss: While GAAP net loss increased to $(4.27) million, this was largely due to non-cash charges (depreciation, amortization, and acquisition expenses). Cash flow from operations improved substantially to $4.03 million.
Guidance, Outlook, and Risks
Outlook and Strategy: The Company continues its "best efforts" IPO, with approximately 131.4 million shares remaining available for sale as of February 28, 2013. Management expects to continue acquiring grocery-anchored shopping centers. The Company amended its Advisory Agreement in February 2013, replacing cash asset management fees with performance-based "Class B units" that vest upon meeting a 6% cumulative return hurdle or a liquidity event.
Key Risks and Contingencies:
- Liquidity and Market Risk: There is no established public trading market for the Company's shares. Shares are illiquid, and stockholders may not be able to sell them or may sell at a substantial discount to the offering price.
- Offering Success: The ability to implement the investment strategy depends on the success of the ongoing offering. If the offering is unsuccessful, the Company may not have adequate capital to invest.
- Joint Venture Risks: The Company holds a 54% interest in a Joint Venture with CBRE Investors. Major decisions require executive committee approval, and disputes could trigger buy/sell rights.
- Interest Rate Risk: As of December 31, 2012, approximately $113.1 million of debt was variable-rate. A 1% increase in interest rates would result in approximately $1.1 million of additional annual interest expense.
- REIT Qualification: Failure to qualify as a REIT would subject the Company to federal income tax, significantly reducing cash available for distribution.
- Related Party Transactions: The Company is dependent on affiliates (Advisor, Sub-advisor, Property Manager) for essential services and incurs significant fees payable to them.
Investor Verification Checklist
- Offering Status: Verify the current amount of capital raised and the remaining capacity under the ongoing IPO registration.
- Share Liquidity: Confirm the terms of the share repurchase program and the lack of a secondary market for shares.
- Debt Maturities: Review the debt maturity schedule; $17.3 million of debt matures in 2013, requiring refinancing or extension.
- Fee Structure: Understand the new compensation structure for the Advisor (Class B units) and the potential impact on future distributions.
- Joint Venture Terms: Review the specific governance and buy/sell provisions of the PECO-ARC Institutional Joint Venture I., L.P.
- Portfolio Occupancy: Verify the 95.0% leased status and the concentration of grocery anchors (Publix and Kroger are significant tenants).