Phillips Edison–ARC Shopping Center REIT Inc. — 2011 Form 10-K
Business context and reporting period
The filing is for the fiscal year ended December 31, 2011. The registrant is Phillips Edison–ARC Shopping Center REIT Inc. (not Phillips Edison & Company, Inc.). It is an early-stage, externally managed REIT focused primarily on grocery-anchored neighborhood and community shopping centers. The company reported seven properties held through a joint venture in which it owns approximately 54%; institutional investors hold the remaining 46%. Operations began in September 2010, so comparisons with 2010 are not like-for-like.
Key financial metrics
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $3.529 million | $98,000 |
| Operating loss | $1.705 million | $710,000 |
| Net loss attributable to company shareholders | $2.364 million | $747,000 |
| Basic and diluted loss per share | $1.57 | $4.44 |
| Cash from operating activities | $593,000 | $201,000 |
- Revenue included $2.762 million of rental income and $750,000 of tenant recovery income. The sharp year-over-year increase primarily reflects additional properties and a longer operating period.
- Acquisition-related expenses were $1.751 million; depreciation and amortization was $1.500 million; interest expense was $811,000.
- At year-end, total assets were $85.2 million, including $69.5 million of net real estate and $7.0 million of cash and cash equivalents. Total liabilities were $58.0 million; total equity was $27.2 million, including $13.3 million of noncontrolling interests.
- Mortgage debt was $46.8 million, all variable-rate, with a reported weighted-average rate of 2.91%. Management reported a 51.7% leverage ratio under its stated calculation. A 100-basis-point rate increase was estimated to add about $0.5 million to annual interest expense.
- The company reported $879,000 of modified funds from operations (MFFO) and negative $981,000 of funds from operations (FFO). These non-GAAP measures are not substitutes for net income, liquidity, or cash available for distributions.
Material changes versus the prior comparable period
- The portfolio expanded from two properties at year-end 2010 to seven at year-end 2011. Five properties were acquired during 2011, and the joint venture was formed in September.
- Gross offering proceeds reached $25.4 million by December 31, 2011. The company had issued 2.66 million shares; it subsequently raised about $7.2 million through March 11, 2012.
- Mortgage debt increased from $14.7 million to $46.8 million, while cash increased from $707,000 to $7.0 million.
- Operating cash flow rose to $593,000 but remained below cash distributions paid. For 2011, gross distributions were $873,000, including $158,000 reinvested through the DRP; net cash distributions were $715,000. The filing attributes the shortfall to $122,000 of advances from the Sub-advisor.
Outlook, risks, contingencies, and unusual items
- Management described retail real estate fundamentals as improving in 2011: vacancy declined, transaction volume and prices increased, and capitalization rates fell. It also noted declining average retail rents. No quantified company earnings or acquisition guidance is provided.
- The board declared distributions at a rate equating to a 6.5% annualized yield on a $10 share price and declared further distributions for April through June 2012. The company cautions that distributions may be funded from operations, advances, borrowing, or other sources; part may be a return of capital. 2011 distributions were supported by operating cash and Sub-advisor advances.
- Near-term refinancing is a key concern: $8.465 million of variable-rate debt was scheduled to mature in 2012, and $29.518 million in 2013. The Lakeside and Snow View facilities, together about $8.5 million, had an option to extend to December 2013 for a fee. The filing says the company was in compliance with debt covenants at year-end.
- Related-party and liquidity exposure is material. The company owed affiliates approximately $8.4 million for offering, administrative, and other expenses and fees; an additional $2.0 million of offering costs had not been charged or recorded, and may or may not be billed. Sponsors said they did not intend to continue capital contributions for certain expenses.
- The company has no public trading market; share repurchases are limited and the board may amend, suspend, or end the program. The $10 estimated share value was based on the offering price, not an independent valuation of assets, and may exceed realizable value.
- Joint-venture governance limits unilateral control over certain major decisions; the agreement also contains transfer restrictions and buy/sell provisions. The company is dependent on affiliated advisors, property managers, and dealer-manager services, with related-party fee and allocation conflicts.
- After year-end, the joint venture acquired two North Carolina shopping centers for $11.5 million. The company reported no material pending legal proceedings and no material environmental claim known to it. The auditor issued an unqualified opinion on the financial statements; management concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Whether debt maturities in 2012–2013 were refinanced or extended, and the terms and availability of replacement financing.
- Whether distributions are covered by recurring property cash flow rather than advances or other non-operating sources, and how much is classified as return of capital.
- The current affiliate payable balance, treatment of the unrecorded $2.0 million of costs, and total offering, advisory, acquisition, and management fees.
- Current property occupancy, rent collections, lease rollover, and dependence on Publix (21.7% of portfolio annualized effective rent) and Giant Eagle (10.4%).
- How much capital the offering has raised and invested, and whether the stated $10 share estimate reasonably reflects asset value given the lack of a trading market.