Phillips Edison–ARC Shopping Center REIT Inc. — Q3 2011 Form 10-Q
Period: Quarter and nine months ended September 30, 2011. The registrant in this filing is Phillips Edison–ARC Shopping Center REIT Inc. The REIT began operations in September 2010, so comparisons with 2010 are limited; it reported no revenue in the comparable 2010 periods.
Business context and portfolio
The early-stage REIT invests primarily in grocery-anchored neighborhood and community shopping centers. At September 30, 2011, it owned three centers totaling 247,493 square feet, with occupancy of 92.0%–98.9%. Combined purchase price was $31.15 million; acquisition-date capitalization rates ranged from 8.3% to 8.6%.
On September 20, the company formed a joint venture with institutional investors advised by CBRE Investors. The company committed approximately $59 million and the investors $50 million; no capital or properties had been contributed by quarter-end. The company expected to contribute properties as the venture funded acquisitions.
Financial results and position
| Metric | Three months ended September 30, 2011 | Nine months ended September 30, 2011 |
|---|---|---|
| Total revenue | $839,000 | $2.062 million |
| Operating loss | $241,000 | $807,000 |
| Interest expense | $199,000 | $486,000 |
| Net loss | $440,000 | $1.293 million |
| Basic and diluted loss per share | $0.29 | $1.05 |
Quarterly revenue included $634,000 of rent and $202,000 of tenant recovery income. Nine-month expenses included $740,000 of acquisition-related costs, $853,000 of depreciation and amortization, and $588,000 of general and administrative expense. The reported periods reflect acquisition and start-up activity; the company cautioned that nine-month results are not necessarily indicative of full-year results.
For the nine months, operating cash flow was positive $431,000, investing cash outflow was $10.146 million, and financing cash inflow was $9.412 million. Cash declined $303,000 to $404,000; restricted cash was $26,000. At September 30, total assets were $31.678 million, total liabilities $23.889 million, and stockholders’ equity $7.789 million.
Mortgage debt was $15.290 million, all variable-rate and secured by the properties; the rate was 3.10% at quarter-end. Reported leverage was 48.0% under the company’s stated calculation. Most principal was due in 2012 ($9.915 million) and 2013 ($5.375 million). The loans generally had extension options and required scheduled principal repayments before maturity.
Changes, outlook, and risks
- 2011 revenue and expenses reflect active property operations and acquisitions; the 2010 comparison is not like-for-like because operations had not commenced before September 17, 2010.
- During the nine months, the company raised $10.7 million gross from stock issuance, acquired St. Charles Plaza, and issued $10.5 million of mortgage debt. Common shares outstanding at September 30 were 1.856 million.
- Subsequent to quarter-end, the company acquired Southampton Village and Centerpoint on October 14 for approximately $8.35 million and $6.85 million, respectively, and Burwood Village Center on November 9 for approximately $16.6 million. It planned to contribute these three properties to the joint venture in Q4.
- No specific earnings or revenue guidance was provided. Management expected revenue and expenses to rise as offering proceeds funded additional investments, and anticipated refinancing existing mortgages at maturity.
- The board declared distributions at a rate equivalent to a 6.50% annualized yield on a $10 share price. Management said distributions may be funded by operations, borrowings, sponsor advances or contributions, and fee waivers; a portion was expected to be return of capital for tax purposes. The filing states that distributions may be paid in advance of cash receipts and that the policy is not to use IPO proceeds, while also noting the board can use any lawful source.
- At quarter-end, $7.5 million was payable to affiliates, principally offering and organization costs and general and administrative expenses. Approximately $1.281 million of sub-advisor internal costs had not been charged and could be billed at its discretion. The company remained dependent on affiliated parties for key services and financial support; future sponsor contributions or fee waivers were not assured.
- October borrowings caused the company to exceed its charter borrowing guideline; the conflicts committee approved the excess, citing expected reduction after planned joint-venture contributions and other reasons. The company also disclosed exposure to rising rates: a 1 percentage-point increase would add approximately $0.2 million in annual interest expense on quarter-end debt. No interest-rate hedges were in place.
- Tenant concentration was material: Giant Eagle, Publix, and Kroger represented 25%, 18%, and 14% of rental revenue, respectively. The joint venture could reduce the company’s control over assets and create approval, transfer, or buy/sell disputes. No material litigation or known material environmental claim was reported.
Important facts for investors to verify
- Whether operating cash generation can support distributions and expenses without continued reliance on debt, affiliate advances, sponsor contributions, or fee waivers.
- How the company will meet 2012–2013 mortgage maturities and required principal payments, and the impact of floating rates.
- Whether the joint venture receives the planned properties and capital, and the effects of its governance and buy/sell provisions.
- The status and potential payment of the $7.5 million affiliate payable and uncharged sub-advisor costs.
- The filing reports 1.856 million shares outstanding at September 30, but 2.3 million as of November 7; verify subsequent issuance and dilution.
- Actual results and funding for the declared distributions, including the extent funded from operations versus borrowing or sponsor support.