Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

Commission File No. 001-34698

 

 

EXCEL TRUST, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland		27-1493212
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

Excel Centre

17140 Bernardo Center Drive, Suite 300

San Diego, California 92128

(Address of principal executive office, including zip code)

(858) 613-1800

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ¨    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		¨				Accelerated filer		¨
Non-accelerated filer		x		(Do not check if a smaller reporting company)		Smaller reporting company		¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

Number of shares outstanding as of November 12, 2010 of the registrant’s common stock, $0.01 par value per share: 15,663,331 shares

 

 

 

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PART 1 — FINANCIAL INFORMATION

 

Item 1.

Financial Statements

EXCEL TRUST, INC.

FORM 10-Q — QUARTERLY REPORT

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010

TABLE OF CONTENTS

 

PART I		Financial Information
Item 1.		Financial Statements (unaudited)			3
		Condensed Consolidated and Combined Balance Sheets of Excel Trust, Inc. and Excel Trust Inc. Predecessor as of September 30, 2010 and December 31, 2009, respectively			3
		Condensed Consolidated and Combined Statements of Operations of Excel Trust, Inc. for the three months ended September 30, 2010 and Excel Trust, Inc. Predecessor for the three months ended September 30, 2009			4
		Condensed Consolidated and Combined Statements of Operations of Excel Trust, Inc. for the period from April 28, 2010 to September 30, 2010 and Excel Trust, Inc. Predecessor for the period from January 1, 2010 to April 27, 2010 and the nine months ended September 30, 2009			5
		Condensed Consolidated and Combined Statements of Equity of Excel Trust, Inc. for the period from April 28, 2010 to September 30, 2010 and Excel Trust, Inc. Predecessor for the period from January 1, 2010 to April 27, 2010 and the nine months ended September 30, 2009			6
		Condensed Consolidated and Combined Statements of Cash Flows or Excel Trust, Inc. and Excel Trust, Inc. Predecessor for the period from April 28, 2010 to September 30, 2010 and Excel Trust, Inc. Predecessor for the period from January 1, 2010 to April 27, 2010 and the nine months ended September 30, 2009			7
		Notes to Condensed Consolidated and Combined Financial Statements of Excel Trust, Inc. and Excel Trust, Inc. Predecessor			8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			27
Item 4.		Controls and Procedures			27
PART II		Other Information			28
Item 1.		Legal Proceedings			28
Item 1A.		Risk Factors			28
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			28
Item 3.		Defaults Upon Senior Securities			28
Item 4.		Reserved			28
Item 5.		Other Information			28
Item 6.		Exhibits			28
Signatures					30

 

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Table of Contents

 

PART 1 — FINANCIAL INFORMATION

 

Item 1.

Financial Statements

EXCEL TRUST, INC. AND

EXCEL TRUST, INC. PREDECESSOR

CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

 

		The Company				The Predecessor
		September 30, 2010				December 31, 2009
ASSETS:
Property:
Land		$	68,889			$	15,300
Buildings			112,717				20,538
Site improvements			10,193				2,445
Tenant improvements			14,201				6,629
Construction in progress			1,869				1,438
Less accumulated depreciation			(6,501	)			(4,481	)
Property, net			201,368				41,869
Cash and cash equivalents			57,862				661
Restricted cash			26,683				524
Tenant receivables, net			1,247				97
Lease intangibles, net			26,274				1,118
Deferred rent receivable			822				583
Other assets			3,974				604
Total assets		$	318,230			$	45,456
LIABILITIES AND EQUITY:
Liabilities:
Mortgages payable, net		$	69,469			$	30,190
Notes payable			35,000				—
Accounts payable and other liabilities			10,119				3,973
Lease intangibles, net			4,034				555
Dividends/distributions payable			1,304				—
Due to owner			—				1,216
Total liabilities			119,926				35,934
Commitments and contingencies
Equity:
Stockholders’ equity and owner’s equity
Common stock, $.01 par value, 200,000,000 shares authorized; 15,663,331 shares issued and outstanding			156				—
Additional paid-in capital			193,203				—
Accumulated deficit			(2,852	)			—
Total stockholders’ equity			190,507				—
Owner’s equity			—				8,622
Non-controlling interests			7,797				900
Total equity			198,304				9,522
Total liabilities and equity		$	318,230			$	45,456

The accompanying notes are an integral part of these condensed consolidated and combined financial statements.

 

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EXCEL TRUST, INC. AND

EXCEL TRUST, INC. PREDECESSOR

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

(Dollars in thousands)

(Unaudited)

 

		The Company				The Predecessor
		Three Months Ended September 30, 2010				Three Months Ended September 30, 2009
REVENUES:
Rental revenue		$	4,660			$	1,255
Tenant recoveries			559				92
Other income			52				—
Total revenues			5,271				1,347
Expenses:
Maintenance and repairs			164				65
Real estate taxes			705				74
Management fees			39				32
Other operating expenses			186				196
General and administrative			1,885				8
Depreciation and amortization			2,248				457
Total expenses			5,227				832
Net operating income			44				515
Interest expense			(1,273	)			(368	)
Interest income			84				—
Net (loss) income			(1,145	)			147
Non-controlling interest			(45	)			—
Net (loss) income attributable to the common stockholders and controlling interest		$	(1,100	)		$	147
Basic and diluted loss per share		$	(0.07	)
Weighted-average common shares outstanding - basic and diluted			15,510
Dividends declared per common share		$	0.08

The accompanying notes are an integral part of these condensed consolidated and combined financial statements.

 

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EXCEL TRUST, INC. AND

EXCEL TRUST, INC. PREDECESSOR

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

(Dollars in thousands)

(Unaudited)

 

		The Company				The Predecessor				The Predecessor
		Period from April 28, 2010 to September 30,  2010				Period January 1, 2010 to April 27, 2010				Nine Months Ended September 30, 2009
REVENUES:
Rental revenue		$	6,113			$	1,455			$	3,498
Tenant recoveries			651				113				246
Other income			86				—				—
Total revenues			6,850				1,568				3,744
Expenses:
Maintenance and repairs			220				98				176
Real estate taxes			825				140				291
Management fees			42				43				97
Other operating expenses			252				98				405
General and administrative			4,021				8				43
Depreciation and amortization			2,994				542				1,611
Total expenses			8,354				929				2,623
Net operating (loss) income			(1,504	)			639				1,121
Interest expense			(1,623	)			(483	)			(1,023	)
Interest income			158				—				3
Net (loss) income			(2,969	)			156				101
Non-controlling interests			(117	)			290				—
Net (loss) income attributable to the common stockholders and controlling interest		$	(2,852	)		$	(134	)		$	101
Basic and diluted loss per share		$	(0.18	)
Weighted-average common shares outstanding - basic and diluted			15,509
Dividends declared per common share		$	0.08

The accompanying notes are an integral part of these condensed consolidated and combined financial statements.

 

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EXCEL TRUST, INC. AND

EXCEL TRUST, INC. PREDECESSOR

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY

(Dollars in thousands)

(Unaudited)

The Predecessor

 

		Total Owner’s Equity				Non-controlling Interests				Total         Equity
Balance January 1, 2009		$	7,930			$	756			$	8,686
Contributions			306				64				370
Distributions			(508	)			—				(508	)
Net income			101				—				101
Balance September 30, 2009		$	7,829			$	820			$	8,649
		Total Owner’s Equity				Non-controlling Interests				Total Equity
Balance January 1, 2010		$	8,622			$	900			$	9,522
Contributions			316				63				379
Distributions			(707	)			(290	)			(997	)
Net (loss) income			(134	)			290				156
Balance April 27, 2010		$	8,097			$	963			$	9,060

The Company

 

		Number of Shares				Common Stock				Additional Paid-in Capital				Accumulated Deficit				Total Stockholders’ Equity				Non-controlling Interests				Owner’s Equity				Total Equity
Balance at April 28, 2010			—			$	—			$	—			$	—			$	—			$	963			$	8,097			$	9,060
Issuance of common stock			15,000,000				150				209,850				—				210,000				—								210,000
Offering costs			—				—				(15,398	)							(15,398	)			—				—				(15,398	)
Initial contribution and acquisition of Predecessor interests:
Exchange of Predecessor equity for Company common stock			454,008				4				8,507				—				8,511				—				(8,097	)			414
Exchange of Predecessor non-controlling interest for Company common stock			53,985				—				1,049				—				1,049				(963	)			—				86
Predecessor non-controlling interests purchased			—				—				(1,812	)			—				(1,812	)			—				—				(1,812	)
Adjustment for non-controlling interest			—				—				(7,965	)			—				(7,965	)			7,965				—				—
Issuance of restricted common stock awards			155,338				2				(2	)			—				—				—				—				—
Noncash amortization of share-based compensation			—				—				227				—				227				—				—				227
Dividends/distributions			—				—				(1,253	)			—				(1,253	)			(51	)							(1,304	)
Net loss			—				—				—				(2,852	)			(2,852	)			(117	)			—				(2,969	)
Balance at September 30, 2010			15,663,331			$	156			$	193,203			$	(2,852	)		$	190,507			$	7,797			$	—			$	198,304

The accompanying notes are an integral part of these condensed consolidated and combined financial statements.

 

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EXCEL TRUST, INC. AND

EXCEL TRUST, INC. PREDECESSOR

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

		The Company				The Predecessor				The Predecessor
		Period from April 28, 2010 to September 30,  2010				Period from January 1, 2010 to April 27, 2010				Nine Months Ended September 30, 2009
Cash flows from operating activities:
Net (loss) income		$	(2,969	)		$	156			$	101
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization			2,994				542				1,611
Deferred rent receivable			(173	)			(66	)			(157	)
Amortization of above and below market leases			(111	)			(20	)			(147	)
Amortization of deferred financing costs			129				22				—
Bad debt expense			47				16				157
Amortization of share-based compensation			227				—				—
Change in assets and liabilities:
Tenant and other receivables			(1,277	)			64				(38	)
Other assets			(197	)			(86	)			(13	)
Accounts payable and other liabilities			3,902				(327	)			3,558
Net cash provided by operating activities			2,572				301				5,072
Cash flows from investing activities:
Acquisitions of property, development and property improvements			(131,518	)			(132	)			(5,395	)
Capitalized leasing costs			(93	)			(94	)			(400	)
Restricted cash			(26,147	)			(12	)			742
Net cash used in investing activities			(157,758	)			(238	)			(5,053	)
Cash flows from financing activities:
Issuance of common stock			210,000				—				—
Offering costs			(15,398	)			—				—
Purchase of Predecessor non-controlling interests			(1,812	)			—				—
Payments on mortgages payable			(11,529	)			(227	)			(778	)
Borrowings from notes payable			35,000				—				—
(Payments) and proceeds from Predecessor controlling interests			(1,337	)			121				1,076
Contributions from Predecessor controlling interests			—				316				306
Contributions from Predecessor non-controlling interests			—				63				64
Distributions to Predecessor controlling interests			—				(707	)			(508	)
Distributions to Predecessor non-controlling interests			—				(290	)			—
Deferred financing costs			(1,992	)			—				—
Tenant security deposits			116				—				(307	)
Net cash provided (used) by financing activities			213,048				(724	)			(147	)
Net increase (decrease)			57,862				(661	)			(128	)
Cash and cash equivalents, beginning of period			—				661				538
Cash and cash equivalents, end of period		$	57,862			$	—			$	410
Supplemental cash flow information:
Cash payments for interest, net of amounts capitalized		$	1,523			$	480			$	987
Non-cash investing and financing activity:
Contribution of properties for common shares and operating partnership units		$	9,060			$	—			$	—
Assumption of net mortgage debt in connection with property acquisitions		$	51,535			$	—			$	—
Assets received in connection with property acquisitions		$	2,083			$	—			$	—
Liabilities assumed in connection with property acquisitions		$	2,359			$	—			$	—
Dividends/distributions payable		$	1,304			$	—			$	—
Accrued additions to development		$	96			$	—			$	—
Exchange of notes receivable for real estate		$	33,400			$	—			$	—

The accompanying notes are an integral part of these condensed consolidated and combined financial statements.

 

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EXCEL TRUST, INC. AND

EXCEL TRUST, INC. PREDECESSOR

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

1. Organization:

Excel Trust, Inc. (the “Company”) was incorporated in the State of Maryland on December 15, 2009. On April 28, 2010, the Company completed an initial public offering (the “Offering”) of 15,000,000 shares of its common stock at an aggregate public offering price of $210,000. In connection with the Offering, the Company and its operating partnership subsidiary, Excel Trust, L.P. (the “Operating Partnership”), for which the Company is the sole general partner, together with the partners and members of the affiliated partnerships and limited liability companies of Excel Trust, Inc. Predecessor (“ETP” or the “Predecessor”) and other parties which hold direct or indirect ownership interests in the Properties (defined below) engaged in certain formation transactions (the “Formation Transactions”). The Formation Transactions were designed to (1) continue the operations of ETP, (2) enable the Company to raise the necessary capital to acquire increased interests in certain of the Properties, (3) provide capital for future acquisitions, (4) fund certain development costs at the Company’s development property, (5) establish a capital reserve for general corporate purposes, and (6) fund future joint venture capital commitments.

Following the Offering, ETP was contributed to the Company and the Operating Partnership in exchange for 507,993 shares of the Company’s common stock and 641,062 partnership interests (the “OP Units”). The exchange of entities or interests therein for shares of common stock of the Company and OP Units has been accounted for as a reorganization of entities under common control, and accordingly, the related assets and liabilities of ETP have been reflected at their historical cost basis. The Company intends to elect to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”), beginning with its taxable year ending December 31, 2010.

ETP, which is not a legal entity but rather a combination of real estate entities and operations as described below, was engaged in the business of owning, managing, leasing, acquiring and developing commercial real estate, consisting of retail properties, an office property and undeveloped land (the “Properties”). The Properties are located in South Carolina, Tennessee, California and Utah. During the periods presented in the accompanying combined financial statements prior to the Offering, ETP was the general partner or managing member of the real estate entities that directly or indirectly own the Properties, and ETP had responsibility for the day-to-day operations of such entities. The ultimate owners of ETP were Mr. Gary B. Sabin and certain others who had non-controlling interests.

The accompanying condensed combined financial statements of the Predecessor do not include certain investments in real estate entities owned by Mr. Sabin that were not contributed to the Operating Partnership. Prior to the Formation Transactions, ETP was invested in the following real estate properties:

 

Acquisition Date		Property		Type		Location
May 2004		Excel Centre		Office Building		San Diego, California
July 2005		Five Forks Place		Retail Shopping Center		Simpsonville, South Carolina
January 2007		Newport Towne Center		Retail Shopping Center		Newport, Tennessee
October 2007		Red Rock Commons		Undeveloped Land		St. George, Utah

Prior to their contribution to the Operating Partnership, Five Forks Place and Newport Towne Center were directly or indirectly 100% owned by Mr. Sabin. Prior to their contribution to the Operating Partnership, Excel Centre and Red Rock Commons were directly or indirectly 62.5% and 82.8% owned, respectively, by Mr. Sabin. The remaining ownership interests of Excel Centre and Red Rock Commons are reflected in the Predecessor financial statements as non-controlling interests.

2. Summary of Significant Accounting Policies

Basis of Presentation:

The accompanying condensed consolidated financial statements of the Company include all the accounts of the Company, the Operating Partnership and the subsidiaries of the Operating Partnership. The exchange of Predecessor controlling and non-controlling interests for shares of the Company’s common stock and OP Units has been reflected on the Predecessor historical cost basis as a reorganization of entities under common control. The Predecessor’s condensed combined financial statements reflect presentation of properties on a combined historical cost basis because of their common ownership. The financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for the interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all the information and footnotes required by GAAP for complete financial statements and have not been audited by independent registered public accountants.

 

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EXCEL TRUST, INC. AND

EXCEL TRUST, INC. PREDECESSOR

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

The unaudited interim condensed consolidated and combined financial statements should be read in conjunction with the Predecessor’s audited combined financial statements and notes thereto for the year ended December 31, 2009 included in the Prospectus of the Company dated April 22, 2010 filed with the Securities and Exchange Commission on April 23, 2010 pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”). All adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the combined financial statements for the interim periods have been made. Operating results for the periods ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. The accompanying condensed combined balance sheet as of December 31, 2009 has been derived from the audited financial statements. All significant intercompany balances and transactions have been eliminated in consolidation and combination.

The significant accounting policies discussed as follows are consistent between the Company and the Predecessor.

Cash and Cash Equivalents:

The Company and ETP consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents, for which cost approximates fair value, due to their short term maturities.

Restricted Cash:

Restricted cash comprises of impound reserve accounts for property taxes, insurance, capital improvements and tenant improvements. The balance at September 30, 2010 included $24.9 million in escrow that was used to acquire two properties on October 1, 2010.

Accounts Payable and Other Liabilities:

Included in accounts payable and other liabilities is deferred rent in the amount of $3,149 and $3,427 at September 30, 2010 and December 31, 2009, respectively.

Revenues:

Minimum rental revenues are recognized on a straight-line basis over the terms of the related lease. The difference between the amount of rent due in a year and the amount recorded as rental income is referred to as the “straight-line rent adjustment.” Rental income was increased by $239 (comprising $66 from the Company and $173 from the Predecessor) and $156 in the nine months ended September 30, 2010 and 2009, respectively, and $100 and $32 in the three months ended September 30, 2010 and 2009, respectively, due to the straight-line rent adjustment.

Estimated recoveries from certain tenants for their pro rata share of real estate taxes, insurance and other operating expenses are recognized as revenues in the period the applicable expenses are incurred or as specified in the leases. Other tenants pay a fixed rate and these tenant recoveries are recognized as revenue on a straight-line basis over the term of the related leases.

Property:

Costs incurred in connection with the development or construction of properties and improvements are capitalized. Capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes and related costs and other direct costs incurred during the period of development. The Company capitalizes costs on land and buildings under development until construction is substantially complete and the property is held available for occupancy. The determination of when a development project is substantially complete and when capitalization must cease involves a degree of judgment. The Company considers a construction project as substantially complete and held available for occupancy upon the completion of landlord-owned tenant improvements or when the lessee takes possession of the unimproved space for construction of its own improvements, but no later than one year from cessation of major construction activity. The Company ceases capitalization on the portion substantially completed and occupied or held available for occupancy, and capitalizes only those costs associated with any remaining portion under construction.

Maintenance and repairs expenses are charged to operations as incurred. Costs for major replacements and betterments, which includes HVAC equipment, roofs, parking lots, etc., are capitalized and depreciated over their estimated useful lives. Gains and losses are recognized upon disposal or retirement of the related assets and are reflected in earnings.

Property is recorded at cost and is depreciated using the straight-line method over the estimated lives of the assets as follows:

 

		Building and improvements		15 to 40 years
		Tenant improvements		Shorter of the useful lives or the terms of the related leases

 

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EXCEL TRUST, INC. AND

EXCEL TRUST, INC. PREDECESSOR

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

The Company assesses whether there has been impairment in the value of its long-lived assets by considering expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Such factors include the tenants’ ability to perform their duties and pay rent under the terms of the leases. The determination of recoverability is made based upon the estimated undiscounted future net cash flows, excluding interest expense. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flows analysis, with the carrying value of the related assets. Long-lived assets classified as held for sale are measured at the lower of the carrying amount or fair value less cost to sell. There was no impairment charge recorded for the periods ended September 30, 2010 or 2009.

Purchase Accounting:

The Company, with the assistance of independent valuation specialists, allocates the purchase price of acquired properties to tangible and identified intangible assets and liabilities based on their respective fair values. The allocation to tangible assets (building and land) is based upon the Company’s determination of the value of the property as if it were vacant using discounted cash flow models similar to those used by independent appraisers. Factors considered include an estimate of carrying costs during the expected lease-up periods taking into account current market conditions and costs to execute similar leases. Additionally, the purchase price of the applicable property is allocated to the above or below market value of in place leases, the value of in place leases and above or below market value of debt assumed.

The value allocable to the above or below market component of the acquired in place leases is determined based upon the present value (using a discount rate which reflects the risks associated with the acquired leases) of the difference between: (1) the contractual amounts to be paid pursuant to the lease over its remaining term, and (2) our estimate of the amounts that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to above market leases are included in lease intangible assets, net in our accompanying condensed consolidated and combined balance sheets and amortized to rental income over the remaining non-cancelable lease term of the acquired leases with each property. The amounts allocated to below market lease values are included in lease intangible liabilities, net in the Company’s accompanying condensed consolidated and combined balance sheets and amortized to rental income over the remaining non-cancelable lease term plus any below market renewal options of the acquired leases with each property.

The value allocable to above or below market debt is determined based upon the present value of the difference between the cash flow stream of the assumed mortgage and the cash flow stream of a market rate mortgage. The amounts allocated to above or below market debt are included in mortgage payables, net on the accompanying condensed consolidated balance sheets and are amortized to interest expense over the remaining term of the assumed mortgage.

Tenant receivables:

Tenant receivables and unbilled deferred rent receivables are carried net of the allowances for uncollectible current tenant receivables and unbilled deferred rent. An allowance is maintained for estimated losses resulting from the inability of certain tenants to meet the contractual obligations under their lease agreements. The Company maintains an allowance for deferred rent receivables arising from the straight-lining of rents. Such allowance is charged to bad debt expense which is included in other operating expenses on the accompanying condensed consolidated and combined statement of operations. The Company’s determination of the adequacy of these allowances is based primarily upon evaluations of historical loss experience, the tenant’s financial condition, security deposits, letters of credit, lease guarantees, current economic conditions and other relevant factors. At September 30, 2010 and December 31, 2009, the Company and the Predecessor had $40 and $58, respectively, in allowances for uncollectible accounts as determined to be necessary to reduce receivables to the estimate of the amount recoverable. During the period from April 28, 2010 to September 30, 2010, the period from January 1, 2010 to April 27, 2010 and for the nine months ended September 30, 2009, $47, $16 and $157, respectively, of receivables were charged to bad debt expense.

Non-controlling Interests

Non-controlling interests of the Company as of September 30, 2010 represents the issued and outstanding OP Units not held by the Company. Non-controlling interests of the Predecessor as of December 31, 2009 represents equity interest of the Predecessor not owned by the controlling interest of the Predecessor.

Concentration of Risk:

The Company maintains its cash accounts in a number of commercial banks. Accounts at these banks are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to $250. At various times during the periods, the Company and ETP had deposits in excess of the FDIC insurance limit.

In the period from April 28, 2010 to September 30, 2010, no tenant accounted for more than 10% of the Company’s revenues. In the period from January 1, 2010 to April 27, 2010, one tenant accounted for 29.1% of the Predecessor’s revenues. In the nine months ended September 30, 2009, one tenant accounted for 12.2% of the Predecessor’s revenues.

 

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EXCEL TRUST, INC. AND

EXCEL TRUST, INC. PREDECESSOR

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

In the three months ended September 30, 2010, no tenants accounted for more than 10% of the Company’s revenues. In the three months ended September 30, 2009, one tenant accounted for 25.4% of the Predecessor’s revenues.

Management Estimates:

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Earnings per Share:

Instruments granted in share-based payment transactions are considered participating securities prior to vesting and, therefore, are considered in computing basic earnings per share under the two-class method. The two-class method is an earnings allocation method for calculating earnings per share when a company’s capital structure includes either two or more classes of common stock or common stock and participating securities. Basic earnings per share under the two-class method is calculated based on dividends declared on common shares and other participating securities (distributed earnings) and the rights of participating securities in any undistributed earnings, which represents net income remaining after deduction of dividends accruing during the period. The undistributed earnings are allocated to all outstanding common shares and participating securities based on the relative percentage of each security to the total number of outstanding participating securities. Basic earnings per share represents the summation of the distributed and undistributed earnings per share class divided by the total number of shares.

On September 30, 2010, the Company accrued for a dividend of $1,253 to the common stockholders of record as of September 30, 2010 and a distribution of $51 to the holders of OP Units, each of which was paid in October 2010. The calculation of diluted earnings per share for the periods ended September 30, 2010 includes the outstanding OP Units and net loss attributable to non-controlling interests in the Operating Partnership has been added to net loss available to common stockholders.

Computations of basic and diluted earnings per share (in thousands, except share data) were as follows:

 

		Three Months Ended September 30, 2010				Period from April 28 to September 30, 2010
Basic earnings per share:
Net loss attributable to common stockholders		$	(1,100	)		$	(2,852	)
Diluted earnings per share:
Net loss attributable to common stockholders		$	(1,100	)		$	(2,852	)
Plus: net loss attributable to non-controlling interests of operating partnership			(45	)			(117	)
Net loss attributable to common stockholders and non-controlling interests of operating partnership		$	(1,145	)		$	(2,969	)
Weighted-average common shares outstanding:
Basic and diluted			15,509,907				15,509,302
Basic and diluted earnings per share:
Net loss per share available to common stockholders, basic and diluted:		$	(0.07	)		$	(0.18	)

Fair Value of Financial Instruments:

On January 1, 2008, ETP adopted Financial Accounting Standard Board (“FASB”) ASC 820-10, Fair Value Measurements and Disclosures. ASC 820-10 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The fair value hierarchy distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions.

Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value

 

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EXCEL TRUST, INC. AND

EXCEL TRUST, INC. PREDECESSOR

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The Company and the Predecessor calculate the fair value of financial instruments and includes this additional information in the notes to the condensed consolidated and combined financial statements when the fair value is different than the carrying value of those financial instruments.

Recent Accounting Pronouncements:

Effective January 1, 2010, ETP implemented the requirements of Accounting Standards Update No. 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU No. 2009-17”). Update No. 2009-17 requires enterprises to perform a qualitative approach to determining whether or not a variable interest entity (“VIE”) will need to be consolidated on a continuous basis. This evaluation is based on an enterprise’s ability to direct and influence the activities of a variable interest entity that most significantly impact that entity’s economic performance. The adoption of ASU No. 2009-17 did not have an effect on ETP’s combined financial statements.

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (“ASU No. 2010-06”). The amendments in this update require, among other things, new disclosures and clarifications of existing disclosures related to transfers in and out of Level 1 and Level 2 fair value measurements, further disaggregation of fair value measurement disclosures for each class of assets and liabilities, and additional details of valuation techniques and inputs utilized. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for the Company on January 1, 2010, except for the disclosure on the roll forward activities for any Level 3 fair value measurements, which will become effective with the reporting period beginning January 1, 2011. Adoption of this new guidance requires additional disclosures of fair value measurements but did not have a material impact on the ETP’s footnote disclosure.

3. Acquisitions

In addition to the real estate properties contributed by the Predecessor, the Company completed the following acquisitions through September 30, 2010 (the “2010 Acquisitions”) which were funded with proceeds of the Offering:

On May 12, 2010, the Company, through the Operating Partnership, completed the acquisition of 5000 South Hulen, an 86,838 square foot community shopping center located in Forth Worth, Texas, from Corrigan Hulen Joint Venture. The Operating Partnership acquired the property through its wholly owned subsidiary, Excel Hulen LLC. The purchase price, including closing costs, was $21,900 and consisted of approximately $7,700 in cash and the assumption of approximately $14,200 of debt (fair value of approximately $12,900).

On May 14, 2010, the Company, through the Operating Partnership, completed the acquisition of a 51,762 square foot single tenant grocery store leased to Jewel Food Stores, Inc. located in Morris, Illinois from Morris (EP ALEX), LLC. The Operating Partnership acquired the property through its wholly owned subsidiary, Excel Jewel LLC. The purchase price, including closing costs, was $8,200 and consisted of all cash.

On May 24, 2010, the Company, through the Operating Partnership, completed the acquisition of three 13,650 square feet single tenant properties leased to Walgreens. Two of these properties are located in Corbin, Kentucky and one is located in Barbourville, Kentucky and were acquired from MG&P Development Partnership. The Operating Partnership acquired these properties through its wholly owned subsidiaries, Excel North Corbin, LLC, Excel South Corbin, LLC and Excel Barbourville, LLC. The aggregate purchase price, including closing costs, of these properties was approximately $12,000 and consisted of all cash.

On May 28, 2010, the Company, through the Operating Partnership, completed the acquisition of a 53,411 square foot single tenant grocery store leased to Shop ‘n Save (SuperValu) located in Ballwin, Missouri from Twin Oaks-SNS, LLC. The Operating Partnership acquired the property through its wholly owned subsidiary, Excel Twin Oaks, LLC. The purchase price, including closing costs, was approximately $8,500 and consisted of all cash.

On June 17, 2010, the Company, through the Operating Partnership, completed the acquisition of a 14,820 square feet single tenant property leased to Walgreens located in Beckley, West Virginia from MG&P Development Partnership. The Operating Partnership acquired the property through its wholly owned subsidiary, Excel Beckley, LLC. The aggregate purchase price, including closing costs, was approximately $7,200 and consisted of all cash.

On June 22, 2010, the Company, through the Operating Partnership, completed the acquisition of a 171,069 square foot single tenant building leased to Lowe’s Home Centers, Inc. located in Shippensburg, Pennsylvania from Shippensburg Development, LLC.

 

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EXCEL TRUST, INC. AND

EXCEL TRUST, INC. PREDECESSOR

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

The Operating Partnership acquired the property through its wholly owned subsidiary, Excel Shippensburg, LLC. The purchase price, including closing costs, was approximately $17,600 and consisted of $3,300 of cash and the assumption of approximately $14,300 of debt, which approximated fair value.

On June 29, 2010, the Company, through the Operating Partnership, completed the acquisition of Plaza at Rockwall Phase I, a 332,989 square foot community shopping center located in Rockwall, Texas, from CNLRS Rockwall, L.P. Also acquired was Plaza at Rockwall Phase II, which is a 12.7 acre land parcel located adjacent to Plaza at Rockwall Phase I that is available for future development. The Operating Partnership acquired the properties through its wholly owned subsidiary, Excel Rockwall, LLC. The aggregate purchase price, including closing costs, for Plaza at Rockwall Phase I and Phase II was approximately $40,800 and consisted of all cash.

On June 30, 2010, the Company, through the Operating Partnership, completed the acquisition of Merchant Central Shopping Center, a 45,013 square foot community shopping center located in Milledgeville, Georgia, from Milledgeville Fiddling Company, LLC. The Operating Partnership acquired the property through its wholly owned subsidiary, Excel Milledgeville, LLC. The purchase price, including closing costs, was approximately $6,100 and consisted of $1,400 of cash and the assumption of approximately $4,700 of debt (fair value of approximately $4,600).

On July 20, 2010, the Company, through the Operating Partnership, completed the acquisition of Mariner’s Point Shopping Center, a 45,215 square foot shopping center located in St. Marys, Georgia from FWB, LLC and RFK, LLC. The Operating Partnership acquired the property through its wholly owned subsidiary, Excel St. Marys LLC. The purchase price, including closing costs, was approximately $6,600 and consisted of $3,100 in cash and the assumption of an existing loan of $3,500.

On August 27, 2010, the Company, through the Operating Partnership, completed the acquisition of Grant Creek Town Center, a 164,166 square foot shopping center located in Missoula, Montana from Woodmont Missoula. The Operating Partnership acquired the property through its wholly owned subsidiary, Excel Missoula LLC. The purchase price, including closing costs, was approximately $23,100 and consisted of $5,100 in cash and the assumption of an existing loan of $16,200. Included in the purchase price is $1,800 for an estimate of contingent consideration that may be paid to the seller after closing for additional lease-up of vacant space for a total of $24,900. This amount is also included in accounts payable and other liabilities in the accompanying Condensed Consolidated Balance Sheet.

On August 30, 2010, the Company, through the Operating Partnership completed the acquisition of Vestavia Hills City Center, a 378,805 square foot shopping center located in Vestavia Hills (Birmingham), Alabama. The Company acquired the mortgage loan that was secured by the property for approximately $33,400 of cash. Concurrently with the acquisition of the mortgage loan, the original borrower under the mortgage loan, AIG Baker Vestavia, L.L.C. (the “Borrower”), granted the Company a deed in lieu on the property. Vestavia Holdings, LLC, an affiliate of Borrower, was granted a 30% subordinate profits participation in the property as follows : (1) net cash from operations, after the Company receives an 11% return on its cash invested in the property ; and (2) net cash from a capital event, after the Company receives an 11% return on its cash invested as well as its unreimbursed capital invested in the property. Based on an assessment of current plans for the property and future operational cash flows, the Company believes there is no significant value for this agreement at the time the property was acquired, and accordingly, has not recognized a non-controlling interest in connection with this acquisition.

Business Combinations

The following summary provides a preliminary allocation of purchase price for the above acquisitions. These allocations are estimates and subject to adjustment as allowed by GAAP.

 

		Plaza at Rockwall				5000 South Hulen				Vestavia Hills City Center				Other Property Acquisitions				2010 Acquisitions Total
Land		$	15,752			$	2,204			$	7,806			$	27,827			$	53,589
Building			16,869				14,783				17,954				41,598				91,204
Site improvements			2,038				1,099				462				5,125				8,724
Tenant improvements			1,876				613				539				4,172				7,200
Lease intangible assets			6,374				2,484				7,263				10,509				26,630
Mortgage payable, net			—				(12,888	)			—				(38,647	)			(51,535	)
Lease intangible liabilities			(2,138	)			(509	)			(635	)			(444	)			(3,726	)
Real estate acquisitions		$	40,771			$	7,786			$	33,389			$	50,140			$	132,086

The following unaudited pro forma information for the nine months ended September 30, 2009 has been prepared to reflect the incremental effect of the 2010 Acquisitions as if such acquisitions had occurred on January 1, 2009. Pro forma information for the periods from January 1, 2010 to April 27, 2010 and April 28, 2010 to September 30, 2010 is impractical to determine as information for the properties is not available for these specific periods.

 

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EXCEL TRUST, INC. AND

EXCEL TRUST, INC. PREDECESSOR

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

		Nine Months Ended September 30, 2009
Revenues		$	19,261
Net income		$	1,702

4. Lease Intangible Assets, Net

Lease intangible assets, net consisted of the following at September 30, 2010 and December 31, 2009:

 

		September 30, 2010				December 31, 2009
In-place leases, net of accumulated amortization of $3,234 and $2,245 as of September 30, 2010 and December 31, 2009, respectively (with a weighted average remaining life of 99 and 41 months as of September 30, 2010 and December 31, 2009, respectively).		$	16,822			$	578
Above market leases, net of accumulated amortization of $967 and $850 as of September 30, 2010 and December 31, 2009, respectively (with a weighted average remaining life of 123 and 10 months as of September 30, 2010 and December 31, 2009, respectively).			2,861				57
Leasing commissions, net of accumulated amortization of $1,306 and $944 as of September 30, 2010 and December 31, 2009, respectively (with a weighted average remaining life of 162 and 57 months as of September 30, 2010 and December 31, 2009, respectively).			6,591				483
		$	26,274			$	1,118

Estimated amortization of lease intangible assets as of September 30, 2010 and for each of the next five years and thereafter is as follows:

 

Year		Amount
2010 (remaining three months)		$	2,622
2011			4,732
2012			3,545
2013			2,519
2014			1,970
Thereafter			10,886
Total		$	26,274

Amortization expense recorded on the lease intangible assets for the period from April 28, 2010 to September 30, 2010 was $1,322, for the period from January 1, 2010 to April 27, 2010 was $152 and for the nine months ended September 30, 2009 was $560. Included in these amounts are $100, $17 and $53, respectively, of amortization recorded against rental income in the Company and ETP’s condensed combined statements of operations for above market leases.

5. Lease Intangible Liabilities, Net

Lease intangible liabilities, net consisted of the following at September 30, 2010 and December 31, 2009:

 

		September 30, 2010				December 31, 2009
Below market leases, net of accumulated amortization of $929 and $678 as of September 30, 2010 and December 31, 2009, respectively (with a weighted average remaining life of 103 and 67 months as of September 30, 2010 and December 31, 2009, respectively).		$	4,034			$	555
		$	4,034			$	555

Amortization recorded on the lease intangible liabilities for the period from April 28, 2010 to September 30, 2010 was $210, for the period from January 1, 2010 to April 27, 2010 was $38 and for the nine months ended September 30, 2009 was $200, which is recorded to rental income in the Company and ETP’s condensed combined statements of operations.

Estimated amortization of lease intangible liabilities as of September 30, 2010 and for each of the next five years and thereafter is as follows:

 

Year		Amount
2010 (remaining three months)		$	175
2011			640
2012			561
2013			451
2014			408
Thereafter			1,799
Total		$	4,034

 

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EXCEL TRUST, INC. AND

EXCEL TRUST, INC. PREDECESSOR

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

6. Mortgages Payable, net

Mortgages payable at September 30, 2010 and December 31, 2009 consist of the following:

 

		Carrying Amount of Mortgage Notes
Property Pledged as Collateral		September 30, 2010				December 31, 2009				Interest Rate				Monthly Payment(1)				Maturity Date
Excel Centre(2)		$	12,823			$	12,989				6.08	%			85				2014
Five Forks Place			5,284				5,408				5.50	%			39				2013
Newport Towne Centre(3)			—				6,198				4.75	%			35				2010
Red Rock Commons(4)			—				5,595				5.50	%			56				2010
5000 South Hulen			14,136				—				5.60	%			83				2017
Lowe’s, Shippensburg			14,220				—				7.20	%			110				2031
Merchant Central Shopping Center			4,667				—				5.94	%			30				2014
Grant Creek Shopping Center			16,135				—				5.75	%			105				2013
Mariner’s Point Shopping Center			3,499				—				7.10	%			25				2011
		$	70,764			$	30,190
Less: discount(5)			(1,295	)			—
Mortgage notes payable, net		$	69,469			$	30,190

 

(1)	This represents the monthly payment of principal and interest at September 30, 2010.

 

(2)

Mr. Sabin’s interests in Excel Centre were pledged as collateral in connection with debt of affiliated entities. As part of the Formation Transactions. Mr. Sabin’s interests were exchanged for OP Units of the Operating Partnership which are subject to a security agreement relating to a personal loan. The lender has agreed to waive Mr. Sabin’s obligation to pledge his OP Units as security for this loan until the expiration of the twelve-month lock-up period contained in his contribution agreement. Upon the expiration of such twelve-month lock-up period, Mr. Sabin will be obligated to pledge his OP Units as security for this loan.

 

(3)	The loan was guaranteed by Mr. Sabin. The loan bore interest at a rate of LIBOR plus 3.25% at December 31, 2009 with a floor of 4.75% beginning February 1, 2010. The total interest rate was 3.50%, at December 31, 2009. The loan was repaid in conjunction with the Formation Transactions.

 

(4)

The acquisition of this land was financed with two loans: One was a $6,175 mortgage payable secured by the property and the other was a $1,192 unsecured loan guaranteed by Mr. Sabin. Both loans bore interest at a rate of LIBOR plus 1.60% and matured November 1, 2008. Upon maturity, an affiliate of Mr. Sabin advanced $1,128 to ETP to repay the unsecured loan. The new note matured in November 2009. It was guaranteed by Mr. Sabin. In 2009, this loan was paid down by $200 and the loan was extended to July 1, 2010. The new interest rate was the greater of prime + 1.0% or 5.5% (5.5% at December 31, 2009). This loan was repaid in connection with the Formation Transactions. In conjunction with the repayment, the lender discounted the loan by $500.

 

(5)	Represents the fair value adjustment on assumed debt on acquired properties.

Total interest cost capitalized for the nine months ended September 30, 2010 and 2009 was $106 and $141, respectively.

The fair value of mortgage notes payable at September 30, 2010 and December 31, 2009 was $71,073 and $29,833, respectively, based on current interest rates for comparable loans. The method for computing fair value was determined using a present value model and an interest rate that included a credit value adjustment based on the estimated value of the property that serves as collateral for the underlying debt.

The Company’s mortgage debt matures as of September 30, 2010 and during the next five years ending December 31 as follows:

 

Year Ending December 31,		Amount
2010 (remaining three months)		$	334
2011			4,839
2012			1,433
2013			21,164
2014			16,987
2015			657
Thereafter			25,350
		$	70,764

 

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EXCEL TRUST, INC. AND

EXCEL TRUST, INC. PREDECESSOR

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

7. Notes Payable

On July 8, 2010, the Company and the Operating Partnership entered into an unsecured revolving credit facility (the “Credit Agreement”). The Credit Agreement provides for a revolving credit facility of up to $125,000. The Company has the ability from time to time to increase the size of the revolving credit facility by up to an additional $275,000 to a total of $400,000, subject to receipt of lender commitments and other conditions precedent. The maturity date is July 7, 2013 and can be extended for one year at the Company’s option. At September 30, 2010, the Company is in compliance with all the covenants of the Credit Agreement.

The revolving credit facility bears interest at the rate of LIBOR plus a margin of 275 basis points to 375 basis points, depending on the Company’s leverage ratio, provided that in no event shall LIBOR be deemed to be less than 1.50%. The Company will also pay a 0.45% fee for any unused portion of the revolving credit facility. Borrowings from the credit facility were $35,000 at September 30, 2010. These proceeds were used to acquire two properties in October 2010. The interest rate at September 30, 2010 was 4.25%.

8. Equity

The Company issued 15,000,000 shares in conjunction with the Offering resulting in net proceeds of approximately $194,600 after deducting the underwriters’ discount and commissions and offering expenses. In conjunction with the Formation transaction, the Company also issued 507,993 shares of common stock and 641,062 OP Units. In 2010, the Company issued restricted stock awards to senior executives and directors totaling 155,338 shares of common stock which are included in the total shares of common stock outstanding as of September 30, 2010.

Consolidated net income is reported in the Company’s condensed consolidated financial statements at amounts that include the amounts attributable to both the common stockholders and the non-controlling interests. In conjunction with the Formation Transactions, certain interests in the Predecessor were contributed in exchange for OP Units. OP Units not held by the Company are reflected as non-controlling interest in the Company’s condensed consolidated financial statements. OP Units not held by the Company have redemption provisions that permit the issuer to settle in either cash or common stock at the option of the Company, which have been further evaluated to determine whether temporary or permanent equity classification on the balance sheet is appropriate.

The following table shows the ownership interests in the Operating Partnership:

 

		September 30, 2010
		Partnership Units				Percentage of Total
Excel Trust, Inc.			15,663,331				96.1	%
Noncontrolling interest consisting of:
OP Units			641,062				3.9	%
Total			16,304,393				100.0	%

A charge is recorded each period in the consolidated statements of income for the non-controlling interests’ proportionate share of the Company’s net income.

2010 Equity Incentive Award Plan

The Company has established the 2010 Equity Incentive Award Plan of Excel Trust, Inc. and Excel Trust, L.P. (the “2010 Plan”), pursuant to which the Company’s Board of Directors or a committee of its independent directors may make grants of stock options, restricted stock, stock appreciation rights and other stock-based awards to its non-employee directors, employees and consultants. The maximum number of shares of the Company’s common stock that may be issued pursuant to the 2010 Plan is 1,350,000.

On April 23, 2010, 126,766 shares of restricted common stock were issued to certain of the Company’s senior management. These shares vest over four years with 25% vesting on the first anniversary of the grant date and the remainder vesting in equal quarterly installments thereafter. On April 23, 2010, 28,572 shares of restricted common stock were issued to members of the Company’s Board of Directors. These shares vest pro-rata over four years in monthly installments.

Shares of the Company’s restricted common stock generally may not be sold, pledged, assigned or transferred in any manner other than by will or the laws of descent and distribution or, subject to the consent of the administrator of the 2010 Plan, a domestic relations order, unless and until all restrictions applicable to such shares have lapsed. Such restrictions expire upon vesting. Shares of the Company’s restricted common stock have full voting rights and rights to dividends. During the period from April 28, 2010 to September 30, 2010 and the three months ended September 30, 2010, the Company recognized compensation expense of $227 and $131, respectively, related to the restricted common stock grants ultimately expected to vest. ASC Topic 718, Compensation — Stock Compensation, requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company has estimated $0 in forfeitures in 2010. Stock compensation expense is included in general and administrative in the Company’s accompanying condensed consolidated statements of operations.

 

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EXCEL TRUST, INC. AND

EXCEL TRUST, INC. PREDECESSOR

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

As of September 30, 2010, there was $1,839 of total unrecognized compensation expense related to the non-vested shares of the Company’s restricted common stock. As of September 30, 2010, this expense was expected to be recognized over a remaining period of 3.4 years.

 

		Number of Nonvested Shares of Restricted Common Stock				Weighted Average Grant Date Fair Value
Balance - January 1, 2010			—			$	—
Granted - April 23, 2010			155,338			$	13.30
Vested			2,976			$	13.30
Balance - September 30, 2010			152,362			$	13.30
Expected to vest - September 30, 2010			152,362			$	13.30

9. Related Party Transactions

Prior to the Offering, Excel Realty Holdings, LLC, a company wholly-owned by Mr. Sabin (“ERH”), managed operations of ETP under various management agreements. Fees paid to ERH for property management services were $43 from January 1, 2010 to April 27, 2010 and $97 in the nine months ended September 30, 2009.

At December 31, 2009, there were $1,216 of net payables due to Mr. Sabin’s affiliates for net advances made to ETP for certain mortgage debt repayments and other capital items. This balance was included in due to owner in the accompanying condensed consolidated and combined balance sheet. In conjunction with the Formation Transactions, this payable was repaid.

Subsequent to the Offering, many of the employees of ERH became employees of the Company. ERH reimburses the Company for estimated time the Company employees spend on ERH related matters. In the nine months ended September 30, 2010, $85 was reimbursed to the Company from ERH and included in other income in the consolidated statements of operations.

10. Income Taxes

The Company intends to elect to be taxed as a REIT under the Code commencing with its taxable year ending December 31, 2010. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including the requirement that it distribute currently at least 90% of its REIT taxable income to its stockholders. It is the Company’s intention to comply with these requirements and maintain the Company’s REIT status. As a REIT, the Company generally will not be subject to corporate federal, state or local income taxes on income it distributes currently (in accordance with the Code and applicable regulations) to its stockholders. If the Company fails to qualify as a REIT in any taxable year, then it will be subject to federal, state and local income taxes at regular corporate rates and may not be able to qualify as a REIT for subsequent tax years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income, properties and operations and to federal income and excise taxes on its taxable income not distributed in the amounts and in the time frames prescribed by the Code and applicable regulations thereunder.

ETP’s real estate entities were partnerships and limited liability companies. Under applicable federal and state income tax rules, the allocated share of net income or loss from partnerships and limited liability companies is reportable in the income tax returns of the partners and members. Accordingly, no income tax provision is included in the accompanying condensed combined financial statements of the Predecessor.

11. Commitments and Contingencies

Litigation:

The Company is not presently subject to any material litigation nor, to its knowledge, is any material litigation threatened against it which if determined unfavorably, would have a material adverse effect on its condensed consolidated and combined financial position, results of operations or cash flows.

Environmental Matters:

The Company follows the policy of monitoring its properties for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist at its properties, the Company is not currently aware of any environmental liability with respect to its properties that would have a material effect on its condensed consolidated and combined financial position, results of operations or cash flows. Further, the Company is not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that it believes would require additional disclosure or the recording of a loss contingency.

 

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EXCEL TRUST, INC. AND

EXCEL TRUST, INC. PREDECESSOR

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

Other

The Company’s other commitments and contingencies include the usual obligations of real estate owners and operators in the normal course of business. In management’s opinion, these matters are not expected to have a material adverse effect on its condensed consolidated and combined financial position, results of operations or cash flows.

12. Segment Disclosure

The Company and ETP’s reportable segments consist of the two types of commercial real estate properties for which management internally evaluates operating performance and financial results: Office Properties and Retail Properties. The Company was formed for the primary purpose of owning and operating Retail Properties. As such, administrative costs after the Offering are shown under the Retail Property segment. Retail Properties also includes undeveloped land which the Company may develop into a retail property.

The Company and ETP evaluate the performance of the segments based upon property net operating income. “Property Net Operating Income” is defined as operating revenues (rental revenue and tenant recoveries) less property operating expenses (maintenance and repairs, real estate taxes, management fees, and other operating expenses) and general and administrative expenses and excludes other non-property income, interest expense, depreciation and amortization. There is no intersegment activity.

The following tables reconcile the Company and ETP’s segment activity to their combined results of operations and financial position for (1) the three months ended September 30, 2010 and 2009 and (2) the periods from January 1, 2010 to April 27, 2010, April 28, 2010 to September 30, 2010 and the nine months ended September 30, 2009.

 

		For the Three Months Ended September 30, 2010				For the Three Months Ended September 30, 2009
Office Properties:
Total revenues		$	855			$	839
Property operating expenses			159				177
General and administrative costs			—				—
Property net operating income, as defined			696				662
Depreciation and amortization			266				265
Interest expense			206				208
Interest income			—				—
Net income		$	224			$	189
Retail Properties:
Total revenues		$	4,416			$	508
Property operating expenses			934				196
General and administrative costs			1,885				2
Property net operating income, as defined			1,597				310
Depreciation and amortization			1,983				191
Interest expense			1,067				160
Interest income			84				—
Net loss		$	(1,369	)		$	(41	)
Total Reportable Segments:
Total revenues		$	5,271			$	1,347
Property operating expenses			1,093				373
General and administrative expenses			1,885				2
Property net operating income, as defined			2,293				972
Depreciation and amortization			2,249				457
Interest expense			1,273				368
Interest income			84				—
Net (loss) income			(1,145	)			147
Reconciliation to Combined Net Income Attributable to Controlling Interest:
Total net (loss) income for reportable segments			(1,145	)			147
Net income attributable to non-controlling interests			(45	)			—
Net (loss) income attributable to common shares or controlling interest		$	(1,100	)		$	147

 

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EXCEL TRUST, INC. AND

EXCEL TRUST, INC. PREDECESSOR

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

		For the Period from April 28, 2010 to September 30, 2010				For the Period from January 1, 2010 to April 27, 2010				For the Nine Months Ended September 30, 2009
Office Properties:
Total revenues		$	1,456			$	1,021			$	2,303
Property operating expenses			268				212				477
General and administrative costs			—				5				24
Property net operating income, as defined			1,188				804				1,802
Depreciation and amortization			488				326				708
Interest expense			342				269				620
Interest income			1				—				3
Net income		$	359			$	209			$	477
Retail Properties:
Total revenues		$	5,394			$	547			$	1,441
Property operating expenses			1,071				167				492
General and administrative costs			4,021				3				19
Property net operating income, as defined			302				377				930
Depreciation and amortization			2,506				216				903
Interest expense			1,281				214				403
Interest income			157				—				—
Net loss		$	(3,328	)		$	(53	)		$	(376	)
Total Reportable Segments:
Total revenues		$	6,850			$	1,568			$	3,744
Property operating expenses			1,339				379				969
General and administrative expenses			4,021				8				43
Property net operating income, as defined			1,490				1,181				2,732
Depreciation and amortization			2,994				542				1,611
Interest expense			1,623				483				1,023
Interest income			158				—				3
Net (loss) income			(2,969	)			156				101
Reconciliation to Combined Net Income Attributable to Controlling Interest:
Total net (loss) income for reportable segments			(2,969	)			156				101
Net (loss) income attributable to non-controlling interests			(117	)			290				—
Net (loss) income attributable to common shares or controlling interest		$	(2,852	)		$	(134	)		$	101
						September 30,				December 31,
						2010				2009
Assets:
Office Properties:
Total assets						$	16,230			$	17,163
Retail Properties:
Total assets							300,200				28,293
Total Reportable Segments & Combined Assets:
Total assets						$	316,430			$	45,456

 

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EXCEL TRUST, INC. AND

EXCEL TRUST, INC. PREDECESSOR

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS — (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

13. Subsequent Events

On October 1, 2010, the Company, through the Operating Partnership, completed the acquisition of Brandywine Crossing, a 197,884 square foot shopping center located in Brandywine, Maryland from Faison-Brandywine, LLC. The purchase price was approximately $45,100 and consisted of all cash. Also on October 1, 2010, the Company, through the Operating Partnership, completed the acquisition of Rosewick Crossing, a 116,609 square foot shopping center located in La Plata, Maryland from Faison-Rosewick, LLC. The purchase price was approximately $24,900 and consisted of all cash.

On October 19, 2010 the Company, through the Operating Partnership, completed the acquisition of Shops at Foxwood, a 78,660 square foot shopping center located in Ocala, Florida from Shops at Foxwood, LLC. The purchase price, including closing costs, was approximately $12,600 and consisted of all cash. Excluded in this purchase price is contingent consideration that may be paid to the seller upon additional lease up of vacant space.

On October 28, 2010 the Company, through the Operating Partnership, completed the acquisition of a 14,550 square foot building leased to Walgreens located in Princeton, West Virginia from M&M West Town, L.P. The purchase price, including closing costs, was approximately $4,100 and consisted of all cash.

The above purchases were made from available cash and borrowings from the Company’s unsecured credit facility. The Company will account for these acquisitions as business combinations. Under business combination accounting, the assets and liabilities of acquired properties will be recorded as of the acquisition dates, at their respective fair values, and consolidated in the Company’s financial statements. As of the date of this report, the initial accounting for the acquisition is incomplete and thus the disclosures related to supplemental pro forma information and amounts recognized as of the acquisition dates for each major class of assets acquired and liabilities assumed have not been provided.

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

As used herein, the terms “we,” “us,” “our” or the “Company” refer to Excel Trust, Inc., a Maryland corporation, any of our subsidiaries and Excel Trust Inc. Predecessor, or our Predecessor. Our Predecessor is not a legal entity, but rather a combination of real estate entities and operations invested in four properties that have been contributed to us.

The following discussion should be read in conjunction with the condensed financial statements and notes thereto appearing elsewhere in this report. We make statements in this report that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, statements pertaining to our capital resources, portfolio performance and results of operations contain forward-looking statements. Forward-looking statements involve numerous risks and uncertainties, and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise, and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases. You can also identify forward-looking statements by discussions of strategy, plans or intentions. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: adverse economic or real estate developments in the retail industry or the markets in which we operate; changes in local, regional and national economic conditions; our inability to compete effectively; our inability to collect rent from tenants; defaults on or non-renewal of leases by tenants; increased interest rates and operating costs; decreased rental rates or increased vacancy rates; our failure to obtain necessary outside financing on favorable terms or at all; changes in the availability of additional acquisition opportunities; our inability to successfully complete real estate acquisitions; our failure to successfully operate acquired properties and operations; our failure to qualify or maintain our status as a REIT; government approvals, actions and initiatives, including the need for compliance with environmental requirements; financial market fluctuations; and changes in real estate and zoning laws and increases in real property tax rates. While forward-looking statements reflect our good faith beliefs (or those of the indicated third parties), they are not guarantees of future performance. We disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The risks included here are not exhaustive, and additional factors could adversely affect our business and financial performance, including factors and risks included in other sections of this report. In addition, we discussed a number of material risks in our Prospectus dated April 22, 2010, filed with the Securities and Exchange Commission on April 23, 2010 pursuant to Rule 424(b) under the Securities Act. Those risks continue to be relevant to our performance and financial condition. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Management’s Overview and Summary

We are a vertically integrated, self-administered, self-managed real estate firm with the principal objective of acquiring, financing, developing, leasing, owning and managing value oriented community and power centers, grocery anchored neighborhood centers and freestanding retail properties. Our strategy is to acquire high quality, well-located, dominant retail properties that generate attractive risk-adjusted returns. We will target competitively protected properties in communities that have stable demographics and have historically exhibited favorable trends, such as strong population and income growth. We consider competitively protected properties to be located in the most prominent shopping districts in their respective markets, ideally situated at major “Main and Main” intersections. We generally lease our properties to national and regional supermarket chains, big-box retailers and select national retailers that offer necessity and value oriented items and generate regular consumer traffic. Our tenants carry goods that are less impacted by fluctuations in the broader U.S. economy and consumers’ disposable income, which we believe generates more predictable property-level cash flows.

On April 28, 2010, we completed the Offering of our common stock. In connection with the Offering , we and the Operating Partnership, for which we are the sole general partner, engaged in the Formation Transactions. The Formation Transactions were designed to (1) continue the operations of four properties that were contributed by related parties, (2) enable us to raise the necessary capital to acquire increased interests in certain of the properties, (3) provide capital for future acquisitions, (4) fund certain development costs at our development property, (5) establish a capital reserve for general corporate purposes and (6) fund future joint venture capital commitments. The exchange of entities or interests therein for shares of our common stock and OP Units was accounted for as a reorganization of entities under common control, and accordingly, the related assets and liabilities were reflected at their historical cost basis. We were organized as a Maryland corporation on December 15, 2009 and intend to elect to be taxed as a REIT beginning with our taxable year ending December 31, 2010.

 

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Our operations are carried on primarily through our Operating Partnership. Pursuant to contribution agreements, we and the Operating Partnership received a contribution of interests in four properties as well as the property management, leasing and real estate development operations of the properties in exchange for the issuance of shares of our common stock or OP Units and/or the payment of cash to the contributors and the assumption of debt and other specified liabilities.

We receive income primarily from rents and reimbursement payments received from tenants under existing leases at each of our properties. Potential impacts to our income include unanticipated tenant vacancies, vacancy of space that takes longer to re-lease and, for non triple-net leases, operating costs that cannot be recovered from our tenants through contractual reimbursement formulas in our leases. Our operating results therefore depend materially on the ability of our tenants to make required payments and overall real estate market conditions.

Critical Accounting Policies

A complete discussion of our critical accounting policies can be found in our Prospectus dated April 22, 2010, filed with the Securities and Exchange Commission on April 23, 2010 pursuant to Rule 424(b) under the Securities Act, which is accessible on the Securities and Exchange Commission’s website at www.sec.gov.

New Accounting Standards

See Note 2 to the condensed consolidated and combined financial statements included elsewhere herein for disclosure of new accounting standards.

Results of Operations

We operate through two reportable business segments: retail properties and office properties. The office segment consists of one property, Excel Centre, with a total of 82,157 leasable square feet. Our Predecessor has owned and operated Excel Centre since 2004. All of our other properties are reported in the retail segment. At September 30, 2010, we owned fifteen retail operating properties with a total of approximately 1.5 million of leasable square feet.

We evaluate the performance of our segments based upon property net operating income. “Property Net Operating Income” is defined as total revenues (rental revenue and tenant recoveries) less property operating expenses (maintenance and repairs, real estate taxes, management fees, and other operating expenses) and general and administrative expenses. We also evaluate interest expense, interest income and depreciation and amortization by segment.

You should read the following discussion in conjunction with the segment information disclosed in Note 12 to our condensed consolidated and combined financial statements in accordance with ASC 280, Segment Reporting. Our results of operations for the three and nine month periods ended September 30, 2010 and 2009 include the combination of the Predecessor properties for the period prior to the Offering. Management believes this information provides for the most meaningful comparison as the historical cost of the Predecessor properties were carried over by the Company at historical cost subsequent to the Offering and therefore, results of operations for such properties would be comparable for those periods. However, our results of operations for the three and nine month periods ended September 30, 2010 and 2009 may not be indicative of our future results of operations.

Retail Properties

In the three months ended September 30, 2010, we acquired three retail operating properties for a total of approximately $63.1 million, consisting of $41.6 million of cash, the assumption of $19.7 million of mortgage debt and $1.8 million in other liabilities. In the nine months ended September 30, 2010 we acquired thirteen retail operating properties for a total of approximately $185.4 million, consisting of $130.7 million of cash and the assumption of $52.9 million of debt. We used cash from the proceeds of the Offering to acquire these properties. The following is a comparison, for the three and nine months ended September 30, 2010 and 2009, of the retail property segment combined operating results of the Company and our Predecessor.

Comparison of the Three Months Ended September 30, 2010 to the Three Months Ended September 30, 2009

Total revenues, which include rental revenues and tenant recoveries including insurance, property taxes and other operating expenses paid by tenants, increased by $3.9 million, or 780%, to $4.4 million for the three months ended September 30, 2010 compared to $0.5 million for the three months ended September 30, 2009. The increase was directly related to our acquisition of thirteen retail properties since the completion of the Offering. Prior to the Offering, our Predecessor owned two retail properties.

Property operating expenses, which include maintenance and repair expenses, real estate taxes, management fees and other operating expenses including bad debts, increased by $0.7 million, or 350%, to $0.9 million for the three months ended September 30, 2010 compared to $0.2 million for the three months ended September 30, 2009. Seven of the properties we acquired are under triple-net leases whereby the tenant pays for all the operating expenses. The increase primarily related to the six operating retail properties we acquired in 2010 that are not under triple-net leases.

 

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General and administrative expenses were $1.9 million for the three months ended September 30, 2010 compared to $2,000 for the three months ended September 30, 2009. General and administrative expenses in the three months ended September 30, 2010 relate to our operations since the completion of the Offering, and include salaries and other costs incurred to operate as a public company. Prior to the Offering, there were no general and administrative expenses included in the Predecessor’s results of operations other than those that were directly related to the properties contributed to us by the Predecessor.

Depreciation and amortization expense increased $1.8 million, or 900%, to $2.0 million for the three months ended September 30, 2010 compared to $0.2 million for the three months ended September 30, 2009. The increase was directly related to our acquisition of the thirteen retail properties since the completion of the Offering.

Interest expense increased $0.9 million, or 450%, to $1.1 million for the three months ended September 30, 2010 compared to $0.2 million for the three months ended September 30, 2009. The increase was primarily due to the $52.9 million of mortgage debt we assumed as part of our acquisitions which was more than the decrease in interest expense from mortgages repaid as part of the Formation Transactions.

Comparison of the Nine Months Ended September 30, 2010 to the Nine Months Ended September 30, 2009

Total revenues, which include rental revenues and tenant recoveries including insurance, property taxes and other operating expenses paid by tenants, increased by $4.5 million, or 321%, to $5.9 million (comprised of $5.4 million for the Company and $0.5 million for the Predecessor) for the nine months ended September 30, 2010 compared to $1.4 million for the nine months ended September 30, 2009. The increase was directly related to our acquisition of thirteen retail properties since the completion of the Offering.

Property operating expenses, which include maintenance and repair expenses, real estate taxes, management fees and other operating expenses including bad debts, increased by $0.7 million, or 140%, to $1.2 million (comprised of $1.0 million for the Company and $0.2 million for the Predecessor) for the nine months ended September 30, 2010 compared to $0.5 million for the nine months ended September 30, 2009. Seven of the properties we acquired are under triple-net leases whereby the tenant pays for all the operating expenses. The increase primarily related to the six operating retail properties we acquired since the completion of the Offering that are not under triple-net leases.

General and administrative expenses were $4.0 million ($3,000 was for the Predecessor) for the nine months ended September 30, 2010 compared to $19,000 for the nine months ended September 30, 2009. General and administrative expenses in the nine months ended September 30, 2010 primarily relate to our operations since the completion of the Offering, and include salaries and other costs incurred to operate as a public company. Related to the preparation of the Offering, we incurred approximately $1.0 million related to the audits, legal and other various costs that were recognized at the Offering date. Prior to the Offering, there were no general and administrative expenses included in the Predecessor’s results of operations other than those that were directly related to the properties contributed to us by the Predecessor.

Depreciation and amortization expense increased $1.8 million, or 200%, to $2.7 million (comprised of $2.5 million for the Company and $0.2 million for the Predecessor) for the nine months ended September 30, 2010 compared to $0.9 million for the nine months September 30, 2009. The increase was directly related to our acquisition of thirteen retail properties since the completion of the Offering.

Interest expense increased $1.1 million, or 275%, to $1.5 million (comprised of $1.3 million for the Company and $0.2 million for the Predecessor) for the nine months ended September 30, 2010 compared to $0.4 million for the nine months ended September 30, 2009. The increase was primarily due to to the $52.9 million of mortgage debt we assumed as part of our acquisitions which was more than the decrease in interest expense from mortgages repaid as part of the Formation Transactions.

Office Properties

The following is a comparison, for the three and nine months ended September 30, 2010 and 2009, of the office property segment combined operating results of the Company and our Predecessor.

Comparison of the Three Months Ended September 30, 2010 to the Three Months Ended September 30, 2009

Total revenues did not change significantly (approximately $0.8 million for both the three months ended September 30, 2010 and 2009) as there were no significant changes in tenants or rents.

Property operating expenses did not change significantly (approximately $0.2 million for both the three months ended September 30, 2010 and 2009) as there were no significant changes in operations.

There were no significant general and administrative expenses related to our commercial office property in either the three months ended September 30, 2010 or 2009.

 

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Depreciation and amortization expense was relatively stable in the three months ended September 30, 2010 compared to the three months ended September 30, 2009 ($0.3 million in both periods) as there were no significant changes in tenants.

Interest expense did not change significantly (approximately $0.2 million in both the three months ended September 30, 2010 and 2009) as there was no significant change in the mortgage balance outstanding other than scheduled principal amortization from monthly debt payments.

Comparison of the Nine Months Ended September 30, 2010 to the Nine Months Ended September 30, 2009

Total revenues increased by $0.2 million, or 8.7% to $2.5 million (comprised of $1.5 million for the Company and $1.0 million for the Predecessor) for the nine months ended September 30, 2010 compared to $2.3 million for the nine months ended September 30, 2009. The increase primarily resulted from the leasing of a vacant space at Excel Centre in March 2009 to Kaiser Permanente.

Property operating expenses did not change significantly (approximately $0.5 million for both the nine months ended September 30, 2010 and 2009) as there were no significant changes in operations. For the nine months ended September 30, 2010, the $0.5 million of property operating expenses was comprised of $0.3 million for the Company and $0.2 million for the Predecessor.

General and administrative expenses were $5,000 (all from the Predecessor) for the nine months ended September 30, 2010 compared to $24,000 in the nine months ended September 30, 2009 as there were expenses incurred in 2009 relating to Kaiser Permanente’s occupancy at Excel Centre that were not incurred in 2010.

Depreciation and amortization expense was $0.8 million in the nine months ended September 30, 2010 ($0.5 million for the Company and $0.3 million for the predecessor) and $0.7 million in the nine month ended September 30, 2009 for an increase of $0.1 million or 14.3%. The increase related to additional depreciation of tenant improvements added in the first quarter of 2009 related to Kaiser Permanente.

Interest expense did not change significantly (approximately $0.6 million in both the nine months ended September 30, 2010 and 2009) as there was no significant change in the mortgage balance outstanding other than scheduled principal amortization from monthly debt payments. For the nine months ended September 30, 2010, the $0.6 million of interest expense was comprised of $0.3 million for the Company and $0.3 million for the Predecessor.

Cash Flows

The following is a comparison, for the nine months ended September 30, 2010 and 2009, of the combined cash flows of the Company and our Predecessor.

Comparison of the Nine Months Ended September 30, 2010 to the Nine Months Ended September 30, 2009

Cash and cash equivalents were $57.9 million and $0.4 million, respectively, at September 30, 2010 and 2009. The increase was primarily the result of the completion of the Offering.

Net cash provided by operating activities decreased $2.2 million to $2.9 million (comprised of $2.6 million for the Company and $0.3 million for the Predecessor) for the nine months ended September 30, 2010 compared to $5.1 million for the nine months ended September 30, 2009. The decrease was primarily due to a net loss of $2.8 million for the nine months ended September 30, 2010 compared to net income of $101,000 in the nine months ended September 30, 2009, and an increase in accounts receivable and other assets due from the properties acquired since the completion of the Offering.

Net cash used in investing activities increased $152.9 million to $158.0 million (comprised of $157.8 million for the Company and $0.2 million for the Predecessor) for the nine months ended September 30, 2010 compared to $5.1 million for the nine months ended September 30, 2009. The increase was primarily the result of $130.7 million of cash used for property acquisitions, development and property improvements in 2010.

Net cash provided by financing activities increased by $212.4 million to $212.3 million (comprised of $213.0 million provided by the Company and $0.7 million used by the Predecessor) for the nine months ended September 30, 2010 from ($0.1 million) of cash used in the nine months ended September 30, 2009. The increase was primarily due to $194.6 million in net proceeds raised from the Offering. These were partially offset by $11.5 million in mortgage debt repayments, $1.3 million repaid in owner advances to our Predecessor and $1.8 million paid to buy certain non-controlling interests in the Excel Centre office building. We also borrowed $35.0 million from our revolving credit facility to acquire two properties on October 1, 2010.

Funds From Operations

We present funds from operations (“FFO”) because we consider it an important supplemental measure of our operating performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs,

 

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many of which present FFO when reporting their results. FFO is intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO excludes depreciation and amortization unique to real estate, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared year-over-year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from net income.

We compute FFO in accordance with standards established by the Board of Governors of NAREIT in its March 1995 White Paper (as amended in November 1999 and April 2002). As defined by NAREIT, FFO represents net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus real estate related depreciation and amortization (excluding amortization of loan origination costs) and after adjustments for unconsolidated partnerships and joint ventures. Our computation may differ from the methodology for calculating FFO utilized by other equity REITs and, accordingly, may not be comparable to such other REITs. Further, FFO does not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations, or other commitments and uncertainties. FFO should not be considered as an alternative to net income (loss) (computed in accordance with GAAP) as an indicator of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions.

The following table presents a reconciliation of our FFO for the periods presented (in thousands):

 

		For the Period from April 23, 2010 to September  30, 2010				For the Nine Months Ended								For the Three Months Ended
						September 30, 2010				September 30, 2009				September 30, 2010				September 30, 2009
Net (loss) income attributable to stockholders or controlling interests of the Predecessor		$	(2,852	)		$	(2,986	)		$	101			$	(1,100	)		$	147
Adjustments:
Real estate depreciation and amortization			2,994				3,536				1,611				2,248				457
Funds from operations		$	142			$	550			$	1,712			$	1,148			$	604

Liquidity and Capital Resources

On April 28, 2010, we completed the Offering of our common stock. Net proceeds for the Operating Partnership were approximately $194.6 million, which were partially used to acquire real estate, pay for the Formation Transactions and for general corporate and working capital purposes. At September 30, 2010, we had $57.9 million of cash and cash equivalents on hand excluding $26.7 million of restricted cash of which $24.9 million was in escrow deposits. These deposits, along with cash on hand, were used to acquire two properties for approximately $71.0 million on October 1, 2010.

Our short-term liquidity requirements consist primarily of funds to pay for operating expenses and other expenditures directly associated with our properties, including:

 

•

interest expense and scheduled principal payments on outstanding indebtedness,

 

•

general and administrative expenses,

 

•

future distributions expected to be paid to our stockholders and limited partners of our Operating Partnership, and

 

•

anticipated and unanticipated capital expenditures, tenant improvements and leasing commissions.

Our long term liquidity requirements consist primarily of funds to pay for scheduled debt maturities, renovations, expansions, capital commitments, construction obligations and other non-recurring capital expenditures that need to be made periodically, and the costs associated with acquisitions and developments of properties that we pursue.

We intend to satisfy our short-term liquidity requirements through our existing working capital and cash provided by our operations. We believe our rental revenue net of operating expenses will generally provide cash inflows to meet our debt service obligations, pay general and administrative expenses and fund regular distributions once we are able to invest the remaining proceeds from the Offering. We expect to satisfy our long-term liquidity requirements through our existing working capital, cash provided by indebtedness, long-term secured and unsecured indebtedness and the use of net proceeds from the disposition of non-strategic assets. In addition, we may, from time to time, offer and sell debt securities, common stock, preferred stock, warrants and other securities to the extent necessary or advisable to meet our liquidity needs.

On July 8, 2010, we entered into an unsecured revolving credit facility with Wells Fargo Securities, LLC and KeyBanc Capital Markets, as joint lead arrangers and bookrunners, and certain other lenders (the “Credit Agreement”). The Credit Agreement provides for a revolving credit facility of up to $125.0 million. We have the ability from time to time to increase the size of the revolving credit

 

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facility by up to an additional $275.0 million to a total of $400.0 million, subject to receipt of lender commitments and other conditions precedent. The maturity date is July 7, 2013 and can be extended for one year at our option. The outstanding balance on our revolving credit facility at September 30, 2010 was $35.0 million which was used to acquire two properties on October 1, 2010.

The revolving credit facility bears interest at the rate of LIBOR plus a margin of 275 basis points to 375 basis points, depending on our leverage ratio, provided that in no event shall LIBOR be deemed to be less than 1.50% (interest rate at September 30, 2010 was 4.25%). We also pay a 0.45% fee for any unused portion of the revolving credit facility.

Our ability to borrow funds under the Credit Agreement, and the amount of funds available under the Credit Agreement at any particular time, are subject to our meeting borrowing base requirements. The amount of funds we can borrow is determined by the net operating income of our unencumbered assets that will comprise the borrowing base. We are also subject to ongoing compliance with a number of customary restrictive covenants, including:

 

•

a maximum leverage ratio (defined as total liabilities to total asset value) of 0.55 : 1.00,

 

•

a minimum fixed charge coverage ratio (defined as adjusted earnings before interest, taxes, depreciation and amortization to fixed charges) of 1.75 : 1.00 as of the end of each fiscal quarter ending on or after June 30, 2011, unless our liquidity is less than $40.0 million prior to that time, in which case the ratio would be 1.45 : 1.00 as of the end of each fiscal quarter ending 90 days thereafter and 1.60 : 1.00 as of the end of each fiscal quarter ending 180 days thereafter,

 

•

a maximum secured indebtedness ratio (defined as secured indebtedness to total asset value) of 0.35 : 1.00,

 

•

a maximum unencumbered leverage ratio (defined as unsecured indebtedness to unencumbered asset value) of 0.55 : 1.00,

 

•

a minimum unencumbered interest coverage ratio (defined as unencumbered net operating income to unsecured interest expense) of 2.00 : 1.00, and

 

•

a minimum tangible net worth equal to approximately $169.0 million plus 80% of the net proceeds of any additional equity issuances.

Under the Credit Agreement, our cash dividends may not exceed the greater of (1)(a) during the period from October 1, 2010 to June 30, 2011, 110% of our funds from operations, and (b) beginning on July 1, 2011, 95% of our funds from operations, and (2) the amount required for us to qualify and maintain our REIT status. If an event of default exists, we may only make distributions sufficient to qualify and maintain our REIT status. At September 30, 2010, we are in compliance with all the covenants under the Credit Agreement.

As of September 30, 2010, our ratio of debt-to-gross undepreciated asset value was approximately 36.9%. However, our organizational documents do not limit the amount or percentage of debt that we may incur, nor do they limit the types of properties we may acquire or develop, and our Board of Directors may modify our debt policy from time to time. The amount of leverage we will deploy for particular investments in our target assets will depend upon our management team’s assessment of a variety of factors, which may include the anticipated liquidity and price volatility of the target assets in our investment portfolio, the potential for losses, the availability and cost of financing the assets, our opinion of the creditworthiness of our financing counterparties, the health of the U.S. economy and commercial mortgage markets, our outlook for the level, slope and volatility of interest rates, the credit quality of our target assets and the collateral underlying our target assets. Accordingly, the ratio of debt-to-gross undepreciated asset value may increase or decrease beyond the limit described above.

Commitments and Contingencies

The following table outlines the timing of our required payments (dollars in thousands) related to our mortgage and note indebtedness as of September 30, 2010:

 

		Payments by Period
		2010				2011-2012				2013-2014				Thereafter				Total
Principal payments—fixed rate debt		$	334			$	6,272			$	38,151			$	26,007			$	70,764
Principal payments – variable rate debt			—				—				35,000				—				35,000
Interest payments—fixed rate debt			1,095				8,246				5,371				10,904				25,616
Interest payments – variable rate debt			371				2,975				744				—				4,090
		$	1,800			$	17,493			$	79,266			$	36,911			$	135,470

Off-Balance Sheet Arrangements

As of September 30, 2010, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purposes entities, which typically are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitments or intent to provide funding to any such entities. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

 

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Distribution Policy

We intend to elect to be taxed as a REIT under the Code commencing with our taxable year ending December 31, 2010. To qualify as a REIT, we must meet a number of organizational and operational requirements, including the requirement that we distribute currently at least 90% of our REIT taxable income to our stockholders. It is our intention to comply with these requirements and maintain our REIT status. As a REIT, we generally will not be subject to corporate federal, state or local income taxes on income we distribute currently (in accordance with the Code and applicable regulations) to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal, state and local income taxes at regular corporate rates and may not be able to qualify as a REIT for subsequent tax years. Even if we qualify for federal taxation as a REIT, we may be subject to certain state and local taxes on our income properties and operations and to federal income and excise taxes on our taxable income not distributed in the amounts and in the time frames prescribed by the Code and applicable regulations thereunder.

Inflation

Some of our leases contain provisions designed to mitigate the adverse impact of inflation. These provisions generally increase rental rates during the terms of the leases either at fixed rates or indexed escalations (based on the Consumer Price Index or other measures). We may be adversely impacted by inflation on our leases that do not contain indexed escalation provisions. In addition, most of our leases require the tenant to pay its share of operating expenses, including common area maintenance costs, real estate taxes and insurance. This may reduce our exposure to increases in costs and operating expenses resulting from inflation, assuming our properties remain leased and tenants fulfill their obligations to reimburse us for such expenses.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Our future income, cash flows and fair values relevant to financial instruments depend upon prevailing market interest rates. Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which we believe we are exposed is interest rate risk. Many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control contribute to interest rate risk.

All of our mortgage debt bears fixed interest rates at September 30, 2010, and as of September 30, 2010, we had no variable rate debt outstanding. The fair value of mortgage notes payable at September 30, 2010 was approximately $71.1 million. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed-rate debt by approximately $2.9 million at September 30, 2010. A 100 basis point decrease in market interest rates would result in an increase in the fair market value of our fixed-rate debt by approximately $3.1 million at September 30, 2010.

On July 8, 2010, we entered into a $125.0 million revolving credit facility. The revolving credit facility bears interest at the rate of LIBOR plus a margin of 275 basis points to 375 basis points, depending on our leverage ratio, provided that in no event shall LIBOR be deemed to be less than 1.50% (interest rate at September 30, 2010 was 4.25%). As of September 30, 2010, due to this LIBOR floor, an increase of LIBOR of 100 basis points would not result in a change to the interest rate of our revolving credit facility. Any increase in LIBOR above 1.50% would increase the interest we incur for amounts drawn under this revolving credit facility, if any, and would reduce our cash flows. At September 30, 2010, we had $35.0 million outstanding on our facility.

In order to modify and manage the interest rate characteristics of our outstanding debt and to limit the effects of interest rate risks on our operations, we may utilize a variety of financial instruments, including interest rate swaps, caps, floors and other interest rate exchange contracts. The use of these types of instruments to hedge our exposure to changes in interest rates carries additional risks, including counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates will cause a significant loss of basis in the contract. To limit counterparty credit risk we will seek to enter into such agreements with major financial institutions with high credit ratings. There can be no assurance that we will be able to adequately protect against the foregoing risks and that we will ultimately realize an economic benefit that exceeds the related amounts incurred in connection with engaging in such hedging activities. We do not enter into such contracts for speculative or trading purposes.

 

Item 4.

Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

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As required by Rule 13a-15(b) under the Exchange Act, management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on their evaluation as of September 30, 2010, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) were effective at the reasonable assurance level.

In addition, there has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

 

Item 1.

Legal Proceedings

We are not presently involved in any material litigation nor, to our knowledge, is any material litigation threatened against us or our properties that we believe would have a material adverse effect on our financial position, results of operations or liquidity. We are involved in routine litigation arising in the ordinary course of business, none of which we believe to be material.

 

Item 1A.

Risk Factors

For a discussion of our potential risks and uncertainties, see the section entitled “Risk Factors” beginning on page 21 in our Prospectus dated April 22, 2010, filed with the Securities and Exchange Commission on April 23, 2010 pursuant to Rule 424(b) under the Securities Act, which is accessible on the Securities and Exchange Commission’s website at www.sec.gov. There have been no material changes to the risk factors disclosed in the Prospectus.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

On April 22, 2010, our registration statement on Form S-11 (File No. 333-164031) relating to the Offering was declared effective by the Securities and Exchange Commission. The Offering consisted of the issuance of 15,000,000 common shares at a public offering price of $14 per share. Net proceeds after (1) underwriting discounts and commissions of approximately $13.1 million and (2) offering expenses of approximately $2.2 million were approximately $194.7 million. Additionally, we estimate that there were approximately $1.0 million of expenses associated with our Formation Transactions. The Offering has been completed and we contributed the net proceeds from the Offering to the Operating Partnership. Since the completion of the Offering and as of September 30, 2010, in addition to the properties acquired from our Predecessor, we have acquired thirteen retail operating properties for a total of approximately $185.4 million, consisting of $130.7 million of cash and the assumption of $53.0 million of debt. See Note 3 to our condensed consolidated and combined financial statements included herein. We used cash from the proceeds of the Offering to acquire these properties. All of the foregoing underwriting discounts and commissions, expenses and property purchases consisted of direct or indirect payments to persons other than: (1) our directors, officers or any of their associates, (2) persons owning ten percent or more of our common stock or (3) our affiliates.

 

Item 3.

Defaults Upon Senior Securities

None.

 

Item 4.

Reserved

 

Item 5.

Other Information

None.

 

Item 6.

Exhibits

 

Exhibit Number		Description of Exhibit
10.1		Credit Agreement, dated July 8, 2010, by and among Excel Trust, L.P., as Borrower, Excel Trust, Inc. , as Parent, Wells Fargo Securities, LLC and KeyBanc Capital Markets, as Joint Lead Arrangers and Joint Bookrunners, Wells Fargo Bank, National Association, as Administrative Agent, KeyBank National Association, as Syndication Agent, PNC Capital Markets, LLC and U.S. Bank National Association, as Documentation Agents, and certain other lenders party thereto. (1)

 

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Exhibit Number		Description of Exhibit
10.2		Loan Purchase Agreement dated August 30, 2010 between Propst Vestavia LLC and Excel Vestavia LLC.(Vestavia Hills City Center) (2)
10.3		Release Agreement and Covenant Not to Sue dated August 30, 2010 among AIG Baker Vestavia, L.L.C., AIG/Baker Partnership and Excel Vestavia LLC.(Vestavia Hills City Center) (2)
10.4		Purchase and Sale Agreement and Joint Escrow Instructions dated September 3, 2010 between Faison-Brandywine, LLC and Excel Trust, L.P.(Brandywine Crossing) (3)
10.5		Purchase and Sale Agreement and Joint Escrow Instructions dated September 3, 2010 between Faison-Rosewick, LLC and Excel Trust, L.P.(Rosewick Crossing) (3)
10.6		Purchase and Sale Agreement and Joint Escrow Instructions dated September 23, 2010.(Park West Place Shopping Center) (4)
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(1)	Incorporated herein by reference to Excel Trust, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 13, 2010.

(2)	Incorporated herein by reference to Excel Trust, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 3, 2010.

(3)	Incorporated herein by reference to Excel Trust, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 9, 2010.

(4)	Incorporated herein by reference to Excel Trust, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2010.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: November 12, 2010

 

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EXHIBIT INDEX

 

Exhibit Number		Description of Exhibit
10.1		Credit Agreement, dated July 8, 2010, by and among Excel Trust, L.P., as Borrower, Excel Trust, Inc. , as Parent, Wells Fargo Securities, LLC and KeyBanc Capital Markets, as Joint Lead Arrangers and Joint Bookrunners, Wells Fargo Bank, National Association, as Administrative Agent, KeyBank National Association, as Syndication Agent, PNC Capital Markets, LLC and U.S. Bank National Association, as Documentation Agents, and certain other lenders party thereto. (1)
10.2		Loan Purchase Agreement dated August 30, 2010 between Propst Vestavia LLC and Excel Vestavia LLC.(Vestavia Hills City Center) (2)
10.3		Release Agreement and Covenant Not to Sue dated August 30, 2010 among AIG Baker Vestavia, L.L.C., AIG/Baker Partnership and Excel Vestavia LLC.(Vestavia Hills City Center) (2)
10.4		Purchase and Sale Agreement and Joint Escrow Instructions dated September 3, 2010 between Faison-Brandywine, LLC and Excel Trust, L.P.(Brandywine Crossing) (3)
10.5		Purchase and Sale Agreement and Joint Escrow Instructions dated September 3, 2010 between Faison-Rosewick, LLC and Excel Trust, L.P.(Rosewick Crossing) (3)
10.6		Purchase and Sale Agreement and Joint Escrow Instructions dated September 23, 2010.(Park West Place Shopping Center) (4)
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(1)	Incorporated herein by reference to Excel Trust, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 13, 2010.

(2)	Incorporated herein by reference to Excel Trust, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 3, 2010.

(3)	Incorporated herein by reference to Excel Trust, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 9, 2010.

(4)	Incorporated herein by reference to Excel Trust, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2010.

 

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