Phillips Edison–ARC Shopping Center REIT Inc. — Q3 2012 Form 10-Q
Period: Quarter and nine months ended September 30, 2012; interim financial statements are unaudited. The filing entity is Phillips Edison–ARC Shopping Center REIT Inc., a REIT focused primarily on grocery-anchored shopping centers. It held interests in 20 properties, including 19 through a joint venture in which it owned approximately 54%. Results grew substantially as the portfolio expanded; management cautions that interim results are not necessarily indicative of full-year performance.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $5.148 million | $0.839 million | $10.468 million | $2.062 million |
| Operating loss | $0.424 million | $0.241 million | $1.201 million | $0.807 million |
| Net loss attributable to company stockholders | $1.036 million | $0.440 million | $2.099 million | $1.293 million |
| Basic and diluted loss per share | $0.15 | $0.29 | $0.43 | $1.05 |
| Operating cash flow | Not separately stated for the quarter | $3.113 million | $0.431 million |
For the first nine months, rental income was $8.255 million and tenant recovery and other property income totaled $2.213 million. Interest expense was $1.771 million, and depreciation and amortization was $5.079 million. Acquisition-related expenses were $2.416 million. Management attributes most year-over-year changes to owning 17 additional properties compared with September 2011.
Non-GAAP measures: Nine-month FFO was $0.683 million and MFFO was $2.435 million, versus FFO of negative $0.440 million and MFFO of $0.480 million in 2011. Q3 FFO was $0.357 million and MFFO was $1.154 million. The filing cautions that FFO and MFFO are not substitutes for GAAP earnings or measures of liquidity or cash available for distributions.
Financial position, debt and liquidity
- At September 30, 2012, cash and cash equivalents were $15.737 million; total assets were $242.858 million and total equity was $99.638 million.
- Mortgage debt carrying value was $129.815 million, including a $1.588 million below-market debt adjustment; principal debt was $128.227 million. The weighted-average interest rate was 3.76%, versus 2.91% at year-end 2011. Approximately $87.9 million was variable-rate debt.
- Leverage, defined by the company as debt less cash divided by real estate investments at cost, was 50.4%, compared with 51.7% at December 31, 2011. A $10 million unsecured credit facility was undrawn. The company reported compliance with all debt covenants.
- Nine-month cash flows were $3.113 million provided by operations, $112.684 million used in investing, and $118.339 million provided by financing. Financing included common-stock proceeds and noncontrolling-interest contributions, as well as borrowing activity.
Material changes and portfolio activity
- The company acquired one wholly owned center and interests in 12 centers through the joint venture during the first nine months, for combined purchase prices of approximately $147.3 million. It reported 13 property acquisitions and a 20-property portfolio at quarter-end.
- Real estate assets, net, increased to $206.313 million from $69.492 million at December 31, 2011; mortgage debt increased from $46.788 million. Common shares outstanding rose to 8.644 million from 2.658 million.
- Portfolio leased area was 1.851 million square feet, with annualized effective rent of $19.668 million. Publix accounted for 14.0% of annualized effective rent. The filing reported no material tenant credit issues or material tenant rent balances more than 90 days past due.
Outlook, distributions, risks and unusual items
- No earnings or operating guidance is provided. Management expects to continue raising equity and using secured or unsecured financing to fund acquisitions; operating cash flows are expected to grow as properties are added. It also states future results depend on market conditions, leasing and the ability to raise capital.
- The board authorized monthly distributions of $0.00178082 per share per day for November and December 2012, described as a 6.50% annualized yield on a $10 share price. The company said a portion may be treated as return of capital. It reported that nine-month distributions were funded by operating cash and borrowings; it also states its policy is not to fund distributions with offering proceeds. Distributions are not guaranteed.
- Approximately $87.9 million of debt was variable rate and unhedged. Management estimated that a one-percentage-point rate increase would add about $0.9 million to annual interest expense. Lakeside Plaza and Snow View Plaza loans totaling about $12.9 million were due in December 2012; the company could extend them to December 2013 for a fee. Subsequent to quarter-end, the joint venture paid off both loans on October 30 and November 5, 2012.
- As of September 30, the company owed affiliates approximately $4.0 million for offering, organization and operating costs. Another approximately $5.4 million of offering costs incurred by the sub-advisor had not been charged to the company or recorded; whether they would be billed depended on offering success and the sub-advisor’s discretion. Sponsors said they did not intend to make further general and administrative expense contributions.
- Related-party arrangements include advisory, acquisition, financing and property-management fees. The filing reports no material pending litigation and no known environmental matter expected to materially affect the financial statements. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
- After quarter-end, the company reported two acquisitions, raised approximately $16.3 million from October 1–31 through share issuance, and authorized further monthly distributions.
Important facts for investors to verify
- Whether property-level operating cash flow can support distributions and debt service without continued reliance on borrowings, new equity, or fee waivers.
- Timing and funding of debt maturities, particularly variable-rate exposure and the post-quarter payoff of the two loans.
- Whether the unrecorded $5.4 million of affiliate-incurred offering costs will be billed, and the full effect of related-party fees and reimbursements.
- Occupancy, lease renewals and anchor-tenant concentration, including Publix’s 14% share of annualized effective rent.
- How acquisition spending and expenses affect future GAAP earnings, FFO/MFFO, liquidity and the sustainability of distributions.