Phillips Edison–ARC Shopping Center REIT Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are with December 31, 2012. The filing is for Phillips Edison–ARC Shopping Center REIT Inc., the registrant identified in the supplied filing text.
Business context
The REIT invests primarily in grocery-anchored neighborhood and community shopping centers. At quarter-end it owned interests in 37 properties across 16 states, totaling approximately 3.7 million square feet; 20 properties were held through a joint venture in which the REIT owns approximately 54%. The portfolio was 94.1% leased. The company remained in its acquisition and public-offering phase.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenue | $11.237 million | $2.215 million |
| Operating loss | $0.811 million | $0.052 million |
| Net loss attributable to company stockholders | $2.848 million | $0.258 million |
| Net loss per share, basic and diluted | $0.16 | $0.08 |
| Cash provided by (used in) operating activities | $3.915 million | $(0.664) million |
- Rental income was $8.865 million, tenant recovery income $2.341 million, and other property income $0.031 million. Operating loss was approximately 7.2% of revenue; net loss attributable to stockholders was approximately 25.3% of revenue.
- Acquisition expenses were $2.514 million, depreciation and amortization $5.234 million, and net interest expense $2.100 million.
- Non-GAAP measures: FFO was $1.075 million, FFO adjusted for acquisition expenses $3.589 million, and MFFO $3.362 million. Management cautions that these measures are not substitutes for GAAP results or liquidity and are affected by acquisition-stage adjustments.
- Cash and cash equivalents were $8.152 million; restricted cash was $1.851 million. Total assets were $489.591 million and total equity $218.909 million.
- Debt carrying value was $252.842 million, including a $4.562 million assumed below-market debt adjustment; reported principal obligations were approximately $248.3 million. Weighted-average interest rate was 3.71%, and leverage ratio was 51.1%, up from 48.5% at year-end.
- Financing cash flow was $120.103 million, including $85.625 million from share issuance and $102.073 million of mortgage and loan proceeds; investing cash use was $123.520 million, including acquisitions.
Changes versus the prior comparable period
- Revenue rose substantially, but the comparison is not like-for-like: the company owned nine properties in Q1 2012 and had acquired 28 additional properties since March 31, 2012. It acquired 11 centers for approximately $163.9 million in Q1 2013, at a weighted-average acquisition capitalization rate of 7.7%.
- Expenses increased alongside portfolio growth; notably, acquisition costs rose to $2.514 million from $0.278 million and interest expense to $2.100 million from $0.391 million. The net loss attributable to stockholders widened.
- Operating cash flow improved from use of $0.664 million to generation of $3.915 million. Common shares outstanding increased to 22.5 million from 13.8 million at year-end 2012, primarily reflecting the ongoing offering.
Outlook, risks and unusual items
- No numerical earnings or acquisition guidance is provided. Management expected revenue and expenses to increase as offering proceeds funded further acquisitions, and anticipated refinancing or extending maturing debt where possible.
- The company had $23.1 million of mortgage loans maturing in 2013; $19.2 million had one-year extension options subject to fees and covenant compliance. It reported covenant compliance at March 31, 2013.
- Approximately $118.1 million of variable-rate debt was unhedged. A 1 percentage-point rate increase would add an estimated $1.2 million in annual interest expense. A $50 million swap fixed a portion of the secured facility at 3.05% through December 2017.
- Monthly distributions were stated at an annualized yield of approximately 6.70% on a $10 share price. Q1 gross distributions were $2.417 million, including $1.017 million reinvested; the company says its policy is not to fund distributions from offering proceeds, but notes distributions may be paid from borrowing or other sources if operating cash is insufficient. A portion was expected to be return of capital for tax purposes.
- Related-party arrangements are significant: the advisor, sub-advisor, property manager and dealer manager provide essential services. Approximately $2.8 million was payable to affiliates at quarter-end, and a further approximately $4.2 million of offering costs incurred by the sub-advisor had not been charged or recorded; whether billed depends on offering success and the sub-advisor’s discretion.
- Subsequent events included approximately $80 million raised from share issuance in April, three additional property acquisitions in April for a combined approximately $25.6 million, repayment of the $3.9 million unsecured facility, and net $35.9 million of secured-facility repayments. The primary offering was scheduled to end August 12, 2013 unless extended or followed by another offering.
- The filing reported no material pending legal proceedings, no debt defaults, and effective disclosure controls. The company cautioned that forward-looking statements are subject to risks and actual results may differ.
Investor facts to verify
- Whether post-quarter acquisitions and share issuance translated into sustainable property-level cash flow, occupancy and returns.
- Debt maturities, refinancing and extension availability, covenant compliance, and exposure to rising rates on unhedged variable-rate borrowings.
- Distribution coverage by recurring operating cash flow, including the effect of capital spending, leasing costs and any return-of-capital component.
- The potential amount and timing of unrecorded offering-cost reimbursements and the economics of related-party fees and incentive units.
- How the ongoing offering, acquisition spending and related dilution affect per-share results and the company’s ability to meet its stated investment strategy.