Phillips Edison - ARC Shopping Center REIT Inc. Reports Third Quarter 2012 Results

Phillips Edison - ARC Shopping Center REIT Inc. Reports Third Quarter 2012 Results

CINCINNATI--(BUSINESS WIRE)-- Phillips Edison - ARC Shopping Center REIT Inc. ("Phillips Edison - ARC" or the "Company"), a public, non-traded REIT focused on the acquisition and management of well-occupied grocery-anchored neighborhood and community shopping centers, today announced its operating results for the three months and nine months ended September 30, 2012.

Highlights for the third quarter and first nine months of 2012:

  • For the third quarter ended September 30, 2012, the Company acquired six properties containing 706,364 square feet for an aggregate purchase price of approximately $84.4 million, as compared to acquiring five properties containing 529,256 square feet for an aggregate purchase price of $49.7 million during the prior quarter. In the first nine months of 2012, the Company acquired 13 grocery-anchored shopping centers totaling 1,364,892 square feet for an aggregate purchase price of approximately $145.7 million.
  • As of September 30, 2012, the Company reported total portfolio occupancy of 94.7 percent.
  • The Company generated Modified Funds from Operations ("MFFO") of $1,154,000 and $2,435,000, respectively, during the three months and nine months ended September 30, 2012. (See the reconciliation of net loss to MFFO below.)
  • The Company paid monthly distributions totaling $986,000 and $2,119,000, respectively, for the three and nine months ended September 30, 2012, which equates to an annualized distribution rate of 6.5 percent, based on a purchase price of $10.00 per share.
  • As of September 30, 2012, the Company reported a leverage ratio (the ratio of total debt, less cash and cash equivalents, to total real estate investments, at cost) of 50.4 percent and total portfolio weighted average interest rate of 3.8 percent.

Subsequent Events:

  • Subsequent to the quarter-end, the Company acquired New Prague Commons, a 59,948 square foot shopping center located in New Prague, Minnesota, a suburb of Minneapolis-St. Paul. This was the Company's first Minnesota acquisition, which added the first Coborn's grocery store-anchored shopping center to the Company's portfolio.
  • Subsequent to the quarter-end, the Company acquired the 157,459 square foot, Giant Eagle grocery store-anchored Brook Park Plaza located in Brook Park, Ohio, a suburb of Cleveland. The acquisitions of New Prague Commons and Brook Park Plaza increased the Company's portfolio to 22 shopping centers totaling 2,170,991 square feet for an aggregate purchase price of approximately $243.0 million.
  • Subsequent to the quarter-end, the Company through a joint venture with a group of international institutional investors advised by CBRE Investors Global Multi Managers ("Joint Venture") retired the mortgage loans for Lakeside Plaza and Snow View Plaza. The loans for Lakeside Plaza and Snow View Plaza were the only loans maturing in 2012.

PORTFOLIO UPDATE:

As of September 30, 2012, the Company owned fee simple interests in 20 real estate properties, 19 of which the Company owned through the Joint Venture. All of the properties below were acquired from third parties unaffiliated with the Company, its advisor, or its sub-advisor:

                               
Average
Contract Rentable Remaining
Ownership Date Purchase Square Lease Term %
Property Name Location Interest Anchor Acquired Price (1) Footage in Years Leased
Lakeside Plaza Salem, VA 54% Kroger 12/10/2010 $ 8.75 million 82,798 4.4 years 100.0%
Snow View Plaza Parma, OH 54% Giant Eagle 12/15/2010 $ 12.30 million 100,460 6.8 years 94.0%
St. Charles Plaza Haines City, FL 54% Publix 6/10/2011 $ 10.10 million 65,000 9.4 years 96.3%
Centerpoint Easley, SC 54% Publix 10/14/2011 $ 6.85 million 72,287 9.8 years 84.7%
Southampton Village Tyrone, GA 54% Publix 10/14/2011 $ 8.35 million 77,956 8.0 years 86.5%
Burwood Village Center Glen Burnie, MD 54% Food Lion 11/9/2011 $ 16.60 million 105,834 5.7 years 100.0%
Cureton Town Center Waxhaw, NC 54% Harris Teeter 12/29/2011 $ 13.95 million 84,357 9.5 years 97.2%
Tramway Crossing Sanford, NC 54% Food Lion 2/23/2012 $ 5.50 million 62,382 3.6 years 93.7%
Westin Centre Fayetteville, NC 54% Food Lion 2/23/2012 $ 6.05 million 66,890 3.2 years 97.9%
The Village at Glynn Place Brunswick, GA 54% Publix 4/27/2012 $ 11.35 million 111,924 7.6 years 94.1%
Meadowthorpe Shopping Center Lexington, KY 54% Kroger 5/9/2012 $ 8.55 million 87,384 3.0 years 95.6%
New Windsor Marketplace Windsor, CO 54% King Soopers(2) 5/9/2012 $ 5.55 million 95,877 7.1 years 87.4%
Vine Street Square Kissimmee, FL 54% Walmart(3) 6/4/2012 $ 13.65 million 120,699 6.3 years 100.0%
Northtowne Square Gibsonia, PA 54% Giant Eagle 6/19/2012 $ 10.58 million 113,372 7.9 years 100.0%
Brentwood Commons Bensenville, IL 54% Dominick's(4) 7/5/2012 $ 14.85 million 125,550 6.4 years 98.1%
Sidney Towne Center Sidney, OH 54% Kroger 8/2/2012 $ 4.30 million 118,360 6.5 years 98.5%
Broadway Plaza Tucson, AZ 54% Sprouts 8/13/2012 $ 12.68 million 83,612 5.1 years 96.8%
Richmond Plaza Augusta, GA 54% Kroger 8/30/2012 $ 19.50 million 178,167 5.3 years 87.3%
Publix at Northridge Sarasota, FL 54% Publix 8/30/2012 $ 11.50 million 65,320 9.7 years 84.1%
Baker Hill Center Glen Ellyn, IL 100% Dominick's(4) 9/6/2012 $ 21.60 million 135,355 4.8 years 98.2%
_______________________
(1) The contract purchase price excludes closing costs and acquisition costs.
(2) King Soopers is an affiliate of Kroger.
(3) The anchor tenant of Vine Street Square is a Walmart Neighborhood Market.
(4) Dominick's is an affiliate of Safeway.
 

The terms and expirations of our operating leases vary. The leases frequently contain provisions for the extension of the lease agreement and other terms and conditions as negotiated. We retain substantially all of the risks and benefits of ownership of the real estate assets leased to tenants.

The weighted-average remaining lease term of grocery anchor tenants at the properties listed above was approximately 10 years as of September 30, 2012.

FINANCIAL UPDATE

Funds from operations, or FFO, is a non-GAAP performance financial measure that is widely recognized as a measure of REIT operating performance. The Company uses FFO as defined by the National Association of Real Estate Investment Trusts to be net income (loss), computed in accordance with GAAP excluding extraordinary items, as defined by GAAP, and gains (or losses) from sales of property (including deemed sales and settlements of pre-existing relationships), plus depreciation and amortization on real estate assets and impairment charges, and after related adjustments for unconsolidated partnerships, joint ventures and subsidiaries and non-controlling interests. The Company believes that FFO is helpful to its investors and its management as a measure of operating performance because it excludes real estate-related depreciation and amortization, gains and losses from property dispositions, impairment charges, and extraordinary items, and as a result, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which are not immediately apparent from net income. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate and intangibles diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, the Company's management believes that the use of FFO, together with the required GAAP presentations, is helpful for its investors in understanding the Company's performance. In particular, because GAAP impairment charges are not allowed to be reversed if the underlying fair values improve or because the timing of impairment charges may lag the onset of certain operating consequences, the Company believes FFO provides useful supplemental information related to current consequences, benefits and sustainability related to rental rate, occupancy and other core operating fundamentals. Factors that impact FFO include start-up costs, fixed costs, delay in buying assets, lower yields on cash held in accounts, income from portfolio properties and other portfolio assets, interest rates on acquisition financing and operating expenses. In addition, FFO will be affected by the types of investments in the Company's targeted portfolio which will consist of, but is not limited to, grocery-anchored neighborhood and community shopping centers, first- and second-priority mortgage loans, mezzanine loans, bridge and other loans, mortgage-backed securities, collateralized debt obligations, and debt securities of real estate companies. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, as impairments are based on estimated future undiscounted cash flows, investors are cautioned that the Company may not recover any impairment charges. FFO is not a useful measure in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO.

Since FFO was promulgated, GAAP has expanded to include several new accounting pronouncements, such that management and many investors and analysts have considered the presentation of FFO alone to be insufficient. Accordingly, in addition to FFO, the Company uses modified funds from operations, or MFFO, as defined by the Investment Program Association ("IPA"). MFFO excludes from FFO the following items:

     
(1) acquisition fees and expenses;
(2) straight-line rent amounts, both income and expense;
(3) amortization of above- or below-market intangible lease assets and liabilities;
(4) amortization of discounts and premiums on debt investments;
(5) gains or losses from the early extinguishment of debt;
(6) gains or losses on the extinguishment or sales of hedges, foreign exchange, securities and other derivatives holdings except where the trading of such instruments is a fundamental attribute of the Company's operations;
(7) gains or losses related to fair-value adjustments for derivatives not qualifying for hedge accounting, including interest rate and foreign exchange derivatives;
(8) gains or losses related to consolidation from, or deconsolidation to, equity accounting;
(9) gains or losses related to contingent purchase price adjustments; and
(10) adjustments related to the above items for unconsolidated entities in the application of equity accounting.
 

The Company believes that MFFO is helpful in assisting management and investors with the assessment of the sustainability of operating performancein future periods and, in particular, after the Company's offering and acquisition stages are complete, primarily because it excludes acquisition expenses that affect property operations only in the period in which the property is acquired. Thus, MFFO provides helpful information relevant to evaluating the Company's operating performance in periods in which there is no acquisition activity.

As explained below, management's evaluation of the Company's operating performance excludes the items considered in the calculation based on the following economic considerations. Many of the adjustments in arriving at MFFO are not applicable to the Company. Nevertheless, the Company explains below the reasons for each of the adjustments made in arriving at its MFFO definition.

  • Acquisition fees and expenses. In evaluating investments in real estate, including both business combinations and investments accounted for under the equity method of accounting, management's investment models and analyses differentiate costs to acquire the investment from the operations derived from the investment. Prior to 2009, acquisition costs for both of these types of investments were capitalized under GAAP; however, beginning in 2009, acquisition costs related to business combinations are expensed. Both of these acquisition-related costs have been and will continue to be funded from the proceeds of the Company's public offering and generally not from operations. The Company believes by excluding expensed acquisition costs, MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management's analysis of the investing and operating performance of the Company's properties. Acquisition fees and expenses include those paid to the advisor, the sub-advisor or third parties.
  • Adjustments for straight-line rents and amortization of discounts and premiums on debt investments. In the proper application of GAAP, rental receipts and discounts and premiums on debt investments are allocated to periods using various systematic methodologies. This application may result in income recognition that could be significantly different than underlying contract terms. By adjusting for these items, MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments and aligns results with management's analysis of operating performance.
  • Adjustments for amortization of above or below market intangible lease assets. Similar to depreciation and amortization of other real estate related assets that are excluded from FFO, GAAP implicitly assumes that the value of intangibles diminishes ratably over time and that these charges be recognized currently in revenue. Since real estate values and market lease rates in the aggregate have historically risen or fallen with market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the performance of the real estate.
  • Gains or losses related to fair-value adjustments for derivatives not qualifying for hedge accounting and gains or losses related to contingent purchase price adjustments. Each of these items relates to a fair value adjustment, which is based on the impact of current market fluctuations and underlying assessments of general market conditions and specific performance of the holding, which may not be directly attributable to current operating performance. As these gains or losses relate to underlying long-term assets and liabilities, management believes MFFO provides useful supplemental information by focusing on the changes in core operating fundamentals rather than changes that may reflect anticipated gains or losses.
  • Adjustment for gains or losses related to early extinguishment of hedges, debt, consolidation or deconsolidation and contingent purchase price. Similar to extraordinary items excluded from FFO, these adjustments are not related to continuing operations. By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods and to other real estate operators.

By providing MFFO, the Company believes it is presenting useful information that also assists investors and analysts with the assessment of the sustainability of its operating performance after the offering and acquisition stages are completed. The Company also believes that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry. MFFO is useful in comparing the sustainability of the Company's operating performance after its offering and acquisition stages are completed with the sustainability of the operating performance ofother real estate companies that arenot as involved in acquisition activities. However, investors are cautioned that MFFO should only be used to assess the sustainability of the Company's operating performance after its offering and acquisition stages are completed, as it excludes acquisition costs that have a negative effect on operating performance during the periods in which properties are acquired. Acquisition costs also adversely affect the Company's book value and equity.

FFO or MFFO should not be considered as an alternative to net income (loss), nor as an indication of the Company's liquidity, nor is either indicative of funds available to fund the Company's cash needs, including its ability to fund distributions. In particular, as the Company is currently in the acquisition phase of its life cycle, acquisition-related costs and other adjustments that are increases to MFFO are, and may continue to be, a significant use of cash. MFFO has limitations as a performance measure in an offering such as the Company's where the price of a share of common stock is a stated value and there is no net asset value determination during the offering stage and for a period thereafter. Accordingly, both FFO and MFFO should be reviewed in connection with other GAAP measurements. The Company's FFO and MFFO as presented may not be comparable to amounts calculated by other REITs.

The following section presents the Company's calculation of FFO and MFFO and provides additional information related to its operations (in thousands, except per share amounts). As a result of the timing of the commencement of the Company's public offering and its active real estate operations, FFO and MFFO are not relevant to a discussion comparing operations for the periods presented. The Company expects revenues and expenses to increase in future periods as it raises additional offering proceeds and uses them to acquire additional investments.

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FUNDS FROM OPERATIONS AND MODIFIED FUNDS FROM OPERATIONS
FOR THE PERIODS ENDED SEPTEMBER 30, 2012 AND 2011
(Unaudited)
(Amounts in thousands)
  Three Months Ended   Nine Months Ended
September 30, September 30,
2012   2011 2012   2011

Calculation of Funds from Operations

Net loss $ (1,036) $ (440) $ (2,099) $ (1,293)
Add:
Depreciation and amortization of real estate assets 2,507 345 5,079 853
Less:
Noncontrolling interest   (1,114)   -   (2,297)   -
TWX 0.00 65.15

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