Business context and reporting period
Phillips Edison–ARC Shopping Center REIT Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The REIT invests primarily in grocery-anchored neighborhood and community shopping centers. Its institutional joint venture is consolidated and approximately 54%-owned by the Company; outside investors hold the remaining interest.
The portfolio comprised 14 properties at quarter-end. The filing says most year-over-year operating changes reflect growth from three properties owned in the comparable 2011 periods to 14 properties at June 30, 2012. The REIT was still conducting its initial public offering: it had raised $54.1 million gross through June 30.
Financial performance and position
Amounts below are in millions of dollars, except per-share data. The filing reports a growing portfolio alongside continuing GAAP losses.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $3.105 | $0.620 | $5.320 | $1.223 |
| Operating loss | $(0.725) | $(0.467) | $(0.777) | $(0.566) |
| Interest expense | $0.478 | $0.138 | $0.869 | $0.287 |
| Net loss attributable to Company stockholders | $(0.805) | $(0.605) | $(1.063) | $(0.853) |
| Loss per share, basic and diluted | $(0.17) | $(0.49) | $(0.27) | $(0.80) |
| FFO | $0.020 | $(0.342) | $0.326 | $(0.345) |
| MFFO | $0.767 | $0.162 | $1.281 | $0.246 |
Six-month operating cash flow was $0.805 million, versus cash used of $0.153 million in 2011. Investing activities used $57.816 million, primarily for acquisitions; financing activities provided $61.795 million. Cash and cash equivalents were $11.753 million at June 30, 2012, compared with $6.969 million at year-end 2011.
At June 30, total assets were $151.998 million, mortgage loans payable were $69.708 million, and total equity was $70.758 million. The debt schedule reports $69.550 million principal outstanding, with a 3.1% weighted-average rate and 2.1 years’ weighted-average maturity. Approximately $64.6 million of debt was variable-rate. The reported leverage ratio was 41.7%, down from 51.7% at December 31, 2011. The Company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Revenue rose substantially as the portfolio expanded; property operating costs, depreciation and amortization, acquisition expenses, and interest expense also increased.
- The joint venture acquired seven grocery-anchored retail centers in the first half for approximately $61.4 million, including $5.0 million of assumed debt. At quarter-end, reported property occupancy ranged from 82.8% to 100% across the 14 centers.
- Common shares outstanding increased from 2.66 million at December 31, 2011 to 5.56 million at June 30, 2012. The Company issued 2.86 million shares in the first half, raising $28.4 million.
- Net loss attributable to Company stockholders increased in dollars, while loss per share narrowed, with weighted-average shares rising to 3.93 million for the six-month period from 1.07 million a year earlier.
Outlook, commentary, risks, and unusual items
- Outlook: The filing provides no specific earnings or acquisition guidance. Management expects revenue and expenses to increase as offering proceeds fund additional investments, and says results for the first half are not necessarily indicative of full-year results.
- Distributions: The declared rate was $0.00178082 per share per day, equivalent to a 6.50% annualized yield on a $10 share price. First-half gross distributions were $1.133 million, exceeding operating cash flow of $0.805 million; the filing says distributions were funded by operating cash and borrowings. A portion may be a return of capital for tax purposes. Management says future distributions depend on results, financial condition, economic conditions, and other factors.
- Interest-rate exposure: The Company had not hedged variable-rate debt. Management estimated that a one-percentage-point rate increase would add approximately $0.6 million to annual interest expense and could reduce cash available for distributions.
- Acquisition costs and non-GAAP measures: First-half acquisition-related expenses were $1.319 million, including fees to affiliates and costs for acquisitions that did not close. FFO and MFFO are supplemental non-GAAP measures and are not measures of liquidity or funds available for distributions; MFFO excludes acquisition-related expenses.
- Related-party dependence: The Company relies on affiliated entities for advisory, property-management, offering, and other services. It owed affiliates approximately $6.7 million at June 30, including offering and organization costs; a further approximately $4.1 million of offering costs incurred by the Sub-advisor had not been charged or recorded. Sponsors said they did not intend to make further general and administrative expense contributions.
- Subsequent events: The joint venture acquired Brentwood Commons for approximately $14.9 million on July 5 and Sidney Towne Center for approximately $4.3 million on August 2. On July 2, the Company entered into a $10 million unsecured revolving facility, with no amount outstanding as of August 10.
- Other disclosures: Management reported effective disclosure controls and no material legal proceedings. No material tenant credit issues or tenant rent balances over 90 days were reported; Publix accounted for 15.7% of portfolio annualized effective rent.
Important facts for investors to verify
- Whether operating cash flow can sustainably support distributions as the portfolio grows, given first-half distributions exceeded operating cash flow and were partly supported by borrowings.
- Debt maturities and refinancing plans, especially $13.1 million of facilities maturing in December 2012, along with exposure to variable interest rates.
- The status and eventual treatment of the $6.7 million affiliate payable and the additional $4.1 million of unrecorded offering costs, including the offering-cost reimbursement cap.
- Portfolio leasing, anchor-tenant concentration, and lease expirations, including the 11.7% of annualized effective rent scheduled to expire in 2013.
- Post-quarter acquisition financing, subsequent offering proceeds, and the distinction between reported consolidated results and the Company’s economic share of the joint venture.