Phillips Edison & Company, Inc. quarterly report, Q2 FY2011

Phillips Edison-ARC Shopping Center REIT Inc. — Form 10-Q

Reporting period: Quarter and six months ended June 30, 2011. The filing’s registrant is Phillips Edison-ARC Shopping Center REIT Inc. (not Phillips Edison & Company, Inc.). The early-stage REIT owned three grocery-anchored shopping centers and was raising capital through a continuous public offering.

Financial performance and position

MetricThree months ended June 30, 2011Six months ended June 30, 2011
Total revenue$620,000$1.223 million
Operating loss$467,000$566,000
Interest expense$138,000$287,000
Net loss$605,000$853,000
Net loss as a share of revenueApproximately 98%Approximately 70%
Net cash used in operating activities$153,000 for the six months
  • Six-month expenses included $494,000 of acquisition-related costs, $508,000 of depreciation and amortization, and $376,000 of general and administrative expenses. The company reported MFFO of $334,000 for the six months; this non-GAAP measure excludes, among other items, acquisition costs and should not be treated as cash available for distributions.
  • At June 30, total assets were $31.9 million, cash and cash equivalents were $216,000, and restricted cash was $26,000. Total liabilities were $27.4 million, including $19.94 million of mortgage debt and $6.41 million payable to affiliates. Stockholders’ equity was $4.53 million.
  • Debt was variable-rate and non-recourse, secured by the respective properties. The filing reported debt equal to approximately 64% of gross real estate and related assets, net of gross intangible lease liabilities. Stated rates were 3.25% on Lakeside Plaza and Snow View Plaza and 3.10% on St. Charles Plaza. A one-percentage-point rate increase was estimated to add about $200,000 to annual interest expense.
  • During the six months, investing activities used $10.12 million, primarily for acquisitions; financing activities provided $9.78 million. Cash declined by $491,000 from $707,000 at year-end 2010.

Portfolio and changes from the prior period

  • St. Charles Plaza, a 65,000-square-foot grocery-anchored center in Haines City, Florida, was acquired in June for approximately $10.1 million. The company’s other properties were Lakeside Plaza and Snow View Plaza, acquired in December 2010. The three centers totaled approximately 247,500 square feet and had reported occupancy of 98.9%, 92.0%, and 98.2%, respectively.
  • Portfolio annualized base rent was concentrated in the grocery anchors: Kroger generated about 50% of Lakeside Plaza base rent, Giant Eagle more than 60% of Snow View Plaza base rent, and Publix more than 55% of St. Charles Plaza base rent.
  • Revenue and expenses were zero in the comparable 2010 periods because operations had not commenced before September 17, 2010. Thus, the filing does not provide a meaningful year-over-year operating comparison.
  • At June 30, the company had raised $12.3 million gross through its offering, including $5.7 million during the first half. It had issued 1,353,998 shares. Subsequent to quarter-end, it raised approximately $700,000 through July 31.

Outlook, risks, and unusual items

  • Management expected revenues and expenses to grow as additional offering proceeds funded further acquisitions. It anticipated meeting near-term needs through property operations, offering proceeds, and sponsor or affiliate support; it also expected to refinance mortgages at maturity. No specific earnings or revenue guidance was provided.
  • Distributions were set at an annualized 6.5% of the $10 offering price. First-half gross distributions were $311,000, versus MFFO of $334,000, but the company had negative GAAP earnings and operating cash flow. Distributions were funded from operations and Sub-advisor advances; management cautioned that future distributions depend on operating and financial conditions.
  • The company had only $216,000 cash at quarter-end and owed affiliates $6.4 million, principally for offering and organization expenses. Approximately $892,000 of Sub-advisor internal costs had not been charged, and could be billed at its discretion, subject to the offering-cost reimbursement limit. Sponsor contributions and fee waivers are not assured to continue.
  • Mortgage principal maturities were concentrated in 2012 ($13.19 million) and 2013 ($6.75 million), with required principal payments before maturity and extension options subject to fees. All debt was exposed to floating interest rates; no interest-rate hedges were in place.
  • On July 20, Lakeside and Snow View loan spreads were reduced retroactively to June 22, lowering their rates to LIBOR plus 2.40%–2.85% from LIBOR plus 3.00%. The filing reported no material pending litigation or known environmental matter with a material adverse effect.
  • Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  • Whether offering proceeds, property cash flow, or additional affiliate support can fund operations, affiliate payables, upcoming debt payments, and distributions.
  • Actual distribution coverage by recurring operating cash flow; reported MFFO is non-GAAP and differs from cash available for distributions.
  • Floating-rate exposure, refinancing prospects and the ability to meet 2012–2013 loan maturities and required principal amortization.
  • Tenant and grocery-anchor concentration, lease expirations, occupancy, and the durability of reported base rents.
  • The final amount and timing of reimbursable affiliate costs, including the uncharged internal costs, and the effects of related-party fees and services.