PECO

Business Context and Reporting Period

Company: Phillips Edison – ARC Shopping Center REIT Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Status: The Company is a newly organized Maryland corporation in the pre-operational stage of its initial public offering (IPO). It intends to qualify as a Real Estate Investment Trust (REIT) and invest primarily in necessity-based neighborhood and community shopping centers. As of the reporting date, the Company has not yet acquired any real estate assets.

Key Financial Metrics

Note: The Company has no outstanding debt as of September 30, 2010. Liabilities primarily consist of accrued expenses and amounts owed to the Sub-advisor for organization and offering costs.

Material Changes vs. Prior Period

• Capital Raise: The Company broke escrow on September 17, 2010, following the effectiveness of its Registration Statement on August 12, 2010. Through September 30, 2010, it raised approximately $4.0 million in gross offering proceeds, issuing 441,611 shares of common stock.
• Asset Growth: Total assets increased from $1.143 million (December 31, 2009) to $3.958 million (September 30, 2010), driven primarily by cash inflows from the IPO.
• Liabilities: Liabilities increased from $0.943 million to $2.989 million, largely due to accrued offering costs and expenses funded by the Sub-advisor pending reimbursement.
• Operations: The Company incurred a net loss of $80,000 for both the three and nine months ended September 30, 2010, attributable to general and administrative expenses, as no operating revenue was generated.

Outlook, Risks, and Management Commentary

• Investment Strategy: The Company plans to invest in grocery-anchored shopping centers typically costing less than $20 million. It expects to leverage debt up to 50% of the value of real estate investments once fully invested.
• Distributions: On October 8, 2010, the Board declared distributions of $0.00178082 per share for the period December 1–31, 2010, equating to a 6.50% annualized yield. Distributions are expected to be funded from operations or debt, not IPO proceeds, though the charter permits distributions from any source.
• Subsequent Event: On October 12, 2010, the Company announced an agreement to acquire a shopping center in Parma, Ohio, for $12.3 million. The property is 98% leased and anchored by a Giant Eagle grocery store. Closing is subject to conditions.
• Risks:
  • No Operating History: The Company has no track record of investing in real estate, making future performance difficult to predict.
  • Conflicts of Interest: Executive officers and directors have significant roles in the Advisor and Sub-advisor, creating potential conflicts regarding fee arrangements and time allocation.
  • Liquidity Dependence: The Company is dependent on the success of its IPO to fund operations and acquisitions. If the offering is not fully subscribed, the portfolio may lack diversification.
  • Return of Capital: Distributions may exceed net income, representing a return of capital to stockholders rather than current income.

Investor Verification Checklist

• Verify the status of the $12.3 million Parma, Ohio property acquisition announced in October 2010.
• Confirm the total amount raised in the IPO as of the most recent filing to assess capitalization progress toward the $1.5 billion target.
• Review the specific terms of the Advisory Agreement regarding the 1.5% cap on reimbursable organization and offering costs.
• Monitor the Company's ability to maintain REIT qualification status, which requires distributing at least 90% of taxable income.
• Assess the extent of accrued liabilities owed to the Sub-advisor and the timeline for reimbursement from offering proceeds.