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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, 2011

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  x    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 2, 2011 of the registrant’s common stock, $0.01 par value per share: 30,289,813 shares

 

 

 


Table of Contents

PART 1 — FINANCIAL INFORMATION

EXCEL TRUST, INC.

FORM 10-Q — QUARTERLY REPORT

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011

TABLE OF CONTENTS

 

PART I

 

Financial Information

  

Item 1.

  Financial Statements   
  Condensed Consolidated Balance Sheets of Excel Trust, Inc. as of September 30, 2011 (unaudited) and December 31, 2010, respectively      3   
  Condensed Consolidated Statements of Operations and Comprehensive Loss of Excel Trust, Inc. for the three months ended September 30, 2011 and 2010 (unaudited)      4   
  Condensed Consolidated and Combined Statements of Operations and Comprehensive (Loss) Income of Excel Trust, Inc. for the nine months ended September 30, 2011 and 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 (unaudited)      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 (unaudited)      6   
  Condensed Consolidated Statement of Equity of Excel Trust, Inc. for the nine months ended September 30, 2011 (unaudited)      7   
  Condensed Consolidated and Combined Statements of Cash Flows of Excel Trust, Inc. for the nine months ended September 30, 2011 and 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 (unaudited)      8   
  Notes to Condensed Consolidated and Combined Financial Statements of Excel Trust, Inc. and Excel Trust, Inc. Predecessor (unaudited)      10   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      35   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      43   

Item 4.

  Controls and Procedures      43   

PART II

 

Other Information

     44   

Item 1.

 

Legal Proceedings

     44   

Item 1A.

 

Risk Factors

     44   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     44   

Item 3.

 

Defaults Upon Senior Securities

     44   

Item 4.

 

Reserved

     44   

Item 5.

 

Other Information

     44   

Item 6.

 

Exhibits

     45   

Signatures

       46   

 

2


Table of Contents

PART 1 — FINANCIAL INFORMATION

 

Item 1. Financial Statements

EXCEL TRUST, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

     September 30, 2011
(unaudited)
    December 31,
2010
 

ASSETS:

    

Property:

    

Land

   $ 226,097      $ 153,601   

Buildings

     260,085        178,374   

Site improvements

     24,423        18,832   

Tenant improvements

     23,139        18,242   

Construction in progress

     18,797        4,423   

Less accumulated depreciation

     (15,630     (8,360
  

 

 

   

 

 

 

Property, net

     536,911        365,112   

Cash and cash equivalents

     45,885        6,525   

Restricted cash

     3,879        5,870   

Tenant receivables, net

     2,582        1,945   

Lease intangibles, net

     66,520        53,024   

Mortgage loan receivable

     2,000        2,000   

Deferred rent receivable

     2,656        1,148   

Other assets

     13,941        5,464   
  

 

 

   

 

 

 

Total assets

   $ 674,374      $ 441,088   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY:

    

Liabilities:

    

Mortgages payable, net

   $ 245,983      $ 137,043   

Notes payable

     —          85,384   

Accounts payable and other liabilities

     24,511        12,944   

Lease intangibles, net

     13,129        7,150   

Dividends/distributions payable

     5,642        1,957   
  

 

 

   

 

 

 

Total liabilities

     289,265        244,478   

Equity:

    

Stockholders’ equity

    

Preferred stock, 50,000,000 shares authorized; 7.0% Series A cumulative convertible perpetual preferred stock, $50,000,000 liquidation preference ($25.00 per share), 2,000,000 and 0 shares issued and outstanding, at September 30, 2011 and December 31, 2010, respectively

     47,703        —     

Common stock, $.01 par value, 200,000,000 shares authorized; 30,289,813 and 15,663,331 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively

     302        156   

Additional paid-in capital

     324,277        191,453   

Cumulative distributions in excess of net income

     (3,555     (3,725
  

 

 

   

 

 

 
     368,727        187,884   

Accumulated other comprehensive loss

     (1,089     (373
  

 

 

   

 

 

 

Total stockholders’ equity

     367,638        187,511   

Non-controlling interests

     17,471        9,099   
  

 

 

   

 

 

 

Total equity

     385,109        196,610   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 674,374      $ 441,088   
  

 

 

   

 

 

 

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

 

3


Table of Contents

EXCEL TRUST, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share data)

(Unaudited)

 

     Three Months Ended
September 30, 2011
    Three Months Ended
September 30, 2010
 

Revenues:

    

Rental revenue

   $ 12,538      $ 4,006   

Tenant recoveries

     2,702        559   

Other income

     143        52   
  

 

 

   

 

 

 

Total revenues

     15,383        4,617   

Expenses:

    

Maintenance and repairs

     932        164   

Real estate taxes

     1,724        705   

Management fees

     155        32   

Other operating expenses

     732        185   

General and administrative

     3,187        1,863   

Depreciation and amortization

     6,375        2,064   
  

 

 

   

 

 

 

Total expenses

     13,105        5,013   
  

 

 

   

 

 

 

Net operating income (loss)

     2,278        (396

Interest expense

     (3,561     (1,273

Interest income

     144        84   

Changes in fair value of financial instruments

     (596     —     
  

 

 

   

 

 

 

Loss from continuing operations

     (1,735     (1,585

Income from discontinued operations

     —          440   
  

 

 

   

 

 

 

Net loss

     (1,735     (1,145

Net (income) loss attributable to non-controlling interests

     (2     45   
  

 

 

   

 

 

 

Net loss attributable to Excel Trust, Inc.

     (1,737     (1,100

Preferred stock dividends

     (875     —     
  

 

 

   

 

 

 

Net loss attributable to the common stockholders

   $ (2,612   $ (1,100
  

 

 

   

 

 

 

Loss from continuing operations per share attributable to the common stockholders - basic and diluted

     (0.09     (0.10

Net loss per share attributable to the common stockholders - basic and diluted

   $ (0.09   $ (0.07
  

 

 

   

 

 

 

Weighted-average common shares outstanding - basic and diluted

     29,634        15,510   
  

 

 

   

 

 

 

Dividends declared per common share

   $ 0.155      $ 0.08   
  

 

 

   

 

 

 

Net loss

   $ (1,735   $ (1,145

Other comprehensive loss:

    

Change in unrealized loss on investment in equity securities

     (23     —     

Change in unrealized loss on interest rate swaps

     (334     —     
  

 

 

   

 

 

 

Comprehensive loss

     (2,092     (1,145

Comprehensive loss attributable to non-controlling interests

     14        45   
  

 

 

   

 

 

 

Comprehensive loss attributable to Excel Trust, Inc.

   $ (2,078   $ (1,100
  

 

 

   

 

 

 

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

 

4


Table of Contents

EXCEL TRUST, INC. AND

EXCEL TRUST, INC. PREDECESSOR

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE

(LOSS) INCOME

(In thousands, except per share data)

(Unaudited)

 

     The Company     The Company     The Predecessor  
     Nine Months Ended
September 30, 2011
    Period from April  28,
2010 to September 30, 2010
    Period from January  1,
2010 to April 27, 2010
 

Revenues:

      

Rental revenue

   $ 31,481      $ 5,216      $ 1,455   

Tenant recoveries

     6,821        651        113   

Other income

     349        86        —     
  

 

 

   

 

 

   

 

 

 

Total revenues

     38,651        5,953        1,568   

Expenses:

      

Maintenance and repairs

     2,351        220        98   

Real estate taxes

     4,236        825        140   

Management fees

     405        34        43   

Other operating expenses

     2,294        251        98   

Changes in fair value of earn-outs

     (328     —          —     

General and administrative

     8,977        3,999        8   

Depreciation and amortization

     16,937        2,738        542   
  

 

 

   

 

 

   

 

 

 

Total expenses

     34,872        8,067        929   
  

 

 

   

 

 

   

 

 

 

Net operating income (loss)

     3,779        (2,114     639   

Interest expense

     (9,629     (1,623     (483

Interest income

     228        158        —     

Gain on acquisition of real estate

     937        —          —     

Changes in fair value of financial instruments

     (84     —          —     
  

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (4,769     (3,579     156   

Income from discontinued operations before gain on sale of real estate assets

     1,023        610        —     

Gain on sale of real estate assets

     3,976        —          —     
  

 

 

   

 

 

   

 

 

 

Income from discontinued operations

     4,999        610        —     
  

 

 

   

 

 

   

 

 

 

Net income (loss)

     230        (2,969     156   

Net (income) loss attributable to non-controlling interests

     (60     117        (290
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Excel Trust, Inc. and Excel Trust, Inc. Predecessor

     170        (2,852     (134

Preferred stock dividends

     (2,353     —          —     
  

 

 

   

 

 

   

 

 

 

Net loss attributable to the common stockholders and controlling interest of the Predecessor

   $ (2,183   $ (2,852   $ (134
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations per share attributable to the common stockholders - basic and diluted

     (0.36   $ (0.22  

Net loss per share attributable to the common - basic and diluted stockholders

   $ (0.13   $ (0.18  
  

 

 

   

 

 

   

Weighted-average common shares outstanding - basic

     20,386        15,509     
  

 

 

   

 

 

   

Dividends declared per common share

   $ 0.445      $ 0.08     
  

 

 

   

 

 

   

Net income (loss)

   $ 230      $ (2,969   $ 156   

Other comprehensive loss:

      

Change in unrealized loss on investment in equity securities

     (23     —          —     

Change in unrealized loss on interest rate swaps

     (752     —          —     
  

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

     (545     (2,969     156   

Comprehensive (income) loss attributable to non-controlling interests

     (1     117        (290
  

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to Excel Trust, Inc. and Excel Trust, Inc. Predecessor

   $ (546   $ (2,852   $ (134
  

 

 

   

 

 

   

 

 

 

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

 

5


Table of Contents

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 at January 1, 2010

   $ 8,622      $ 900      $ 9,522   

Contributions

     316        63        379   

Distributions

     (707     (290     (997

Net loss

     (134     290        156   
  

 

 

   

 

 

   

 

 

 

Balance at April 27, 2010

   $ 8,097      $ 963      $ 9,060   
  

 

 

   

 

 

   

 

 

 

The Company

 

     Common Stock      Additional
Paid-in
Capital
    Accumulated
Earnings
(Deficit)
    Total
Stockholders’
Equity
    Non-
controlling
Interests
    Owner’s
Equity
    Total
Equity
 
   Shares      Amount               

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   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

6


Table of Contents

EXCEL TRUST, INC.

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(Dollars in thousands)

(Unaudited)

 

     Series A
Preferred
Stock
     Common Stock     Additional
Paid-in
Capital
    Cumulative
Distributions
in Excess of
Net Income
    Accumulated
other
Comprehensive
Loss
    Total
Stockholders’
Equity
    Non-
controlling
Interests
    Total
Equity
 
      Shares     Amount              

Balance at January 1, 2011

   $ —           15,663,331      $ 156      $ 191,453      $ (3,725   $ (373   $ 187,511      $ 9,099      $ 196,610   

Net proceeds from sale of preferred stock

     47,703         —          —          —          —          —          47,703        —          47,703   

Net proceeds from sale of common stock

     —           14,375,000        144        149,743        —          —          149,887        —          149,887   

Issuance of restricted common stock awards

     —           929,348        9        (9     —          —          —          —          —     

Repurchase of common stock

     —           (674,866     (7     (6,735     —          —          (6,742     —          (6,742

Forfeitures of restricted common stock awards

     —           (3,000     —          —          —          —          —          —          —     

Noncash amortization of share-based compensation

     —           —          —          3,126        —          —          3,126        —          3,126   

Common stock dividends

     —           —          —          (11,660     —          —          (11,660     —          (11,660

Issuance of non-controlling interests

     —           —          —          —          —          —          —          9,035        9,035   

Distributions to non-controlling interests

     —           —          —          —          —          —          —          (669     (669

Contributions from non-controlling interests

     —           —          —          —          —          —          —          717        717   

Net income

     —           —          —          —          170        —          170        60        230   

Preferred stock dividends

     —           —          —          (2,353     —          —          (2,353     —          (2,353

Change in unrealized loss on investment in equity securities

     —           —          —          —          —          (22     (22     (1     (23

Change in unrealized loss on interest rate swaps

     —           —          —          —          —          (694     (694     (58     (752

Adjustment for non-controlling interest

     —           —          —          712        —          —          712        (712     —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

   $ 47,703         30,289,813      $ 302      $ 324,277      $ (3,555   $ (1,089   $ 367,638      $ 17,471      $ 385,109   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

7


Table of Contents

EXCEL TRUST, INC. AND

EXCEL TRUST, INC. PREDECESSOR

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

     The Company     The Company     The Predecessor  
     Nine Months Ended
September 30, 2011
    Period from April  28,
2010 to September 30, 2010
    Period from January 1,
2010 to April 27, 2010
 

Cash flows from operating activities:

      

Net income (loss)

   $ 230      $ (2,969   $ 156   

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

      

Depreciation and amortization

     17,352        2,994        542   

Gain on acquisition of real estate

     (937     —          —     

Changes in fair value of earn-outs

     (328     —          —     

Changes in fair value of financial instruments

     84        —          —     

Gain on sale of real estate assets

     (3,976     —          —     

Deferred rent receivable

     (1,575     (173     (66

Amortization of above and below market leases

     75        (111     (20

Amortization of deferred financing costs

     956        129        22   

Bad debt expense

     440        47        16   

Amortization of share-based compensation

     3,126        227        —     

Change in assets and liabilities:

      

Tenant and other receivables

     (1,010     (1,277     64   

Other assets

     (535     (197     (86

Accounts payable and other liabilities

     4,510        3,902        (327
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     18,412        2,572        301   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Acquisitions of property, development and property improvements

     (61,763     (131,518     (132

Capitalized leasing costs

     (933     (93     (94

Purchase of equity securities

     (6,061     —          —     

Restricted cash

     2,684        (26,147     (12
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (66,073     (157,758     (238
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Issuance of common stock

     150,579        210,000        —     

Common stock offering costs

     (692     (15,398     —     

Repurchase of common stock

     (6,742     —          —     

Issuance of preferred stock

     48,425        —          —     

Preferred stock offering costs

     (722     —          —     

Payments on mortgages payable

     (5,603     (11,529     (227

Payments on notes payable

     (114,849     —          —     

Borrowings from notes payable

     30,000        35,000        —     

Purchase of Predecessor non-controlling interests

     —          (1,812     —     

(Payments) and proceeds from Predecessor controlling interests

     —          (1,337     121   

Contributions from non-controlling interests

     130        —          —     

Contributions from Predecessor controlling interests

     —          —          316   

Contributions from Predecessor non-controlling interests

     —          —          63   

Distributions to Predecessor controlling interests

     —          —          (707

Distributions to Predecessor non-controlling interests

     —          —          (290

Dividends/distributions

     (10,997     —          —     

 

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Table of Contents
     The Company     The Company     The Predecessor  
     Nine Months Ended
September 30, 2011
    Period from April  28,
2010 to September 30, 2010
    Period from January 1,
2010 to April 27, 2010
 

Deferred financing costs

     (2,508     (1,992  

Tenant security deposits

     —          116     
  

 

 

   

 

 

   

 

 

 

Net cash provided (used) by financing activities

     87,021        213,048        (724
  

 

 

   

 

 

   

 

 

 

Net increase (decrease)

     39,360        57,862        (661

Cash and cash equivalents, beginning of period

     6,525        —          661   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 45,885      $ 57,862      $ —     
  

 

 

   

 

 

   

 

 

 

Supplemental cash flow information:

      
  

 

 

   

 

 

   

 

 

 

Cash payments for interest, net of amounts capitalized

   $ 8,060      $ 1,523      $ 480   
  

 

 

   

 

 

   

 

 

 

Non-cash investing and financing activity:

      
  

 

 

   

 

 

   

Contribution of properties for common shares and operating partnership units

   $ —        $ 9,060      $ —     
  

 

 

   

 

 

   

 

 

 

Acquisition of real estate for operating partnership units

   $ 9,034      $ —        $ —     
  

 

 

   

 

 

   

 

 

 

Assumption of net mortgage debt in connection with property acquisitions

   $ 114,543      $ 51,535      $ —     
  

 

 

   

 

 

   

 

 

 

Assets received in connection with property acquisitions

   $ 693      $ 2,083      $ —     
  

 

 

   

 

 

   

 

 

 

Liabilities assumed in connection with property acquisitions

   $ 4,409      $ 2,359      $ —     
  

 

 

   

 

 

   

 

 

 

Dispositions of real estate assets classified as a 1031 exchange (including gain on sale of real estate assets of $3,976)

   $ 39,300      $ —        $ —     
  

 

 

   

 

 

   

 

 

 

Acquisitions of real estate assets classified as a 1031 exchange

   $ 39,300      $ —        $ —     
  

 

 

   

 

 

   

 

 

 

Dividends/distributions payable

   $ 5,642      $ 1,304      $ —     
  

 

 

   

 

 

   

 

 

 

Conversion of note payable to contribution from non-controlling interests

   $ 587      $ —        $ —     
  

 

 

   

 

 

   

 

 

 

Accrued additions to development

   $ 2,964      $ 96      $ —     
  

 

 

   

 

 

   

 

 

 

Change in unrealized loss on interest rate swaps

   $ 752      $ 388      $ —     
  

 

 

   

 

 

   

 

 

 

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

(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 $210.0 million. In connection with the Offering, the Company and its operating partnership subsidiary, Excel Trust, L.P. (the “Operating Partnership”), of 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 elected 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 ended 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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The unaudited interim condensed consolidated and combined financial statements should be read in conjunction with the audited financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. In the opinion of management, 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, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. 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 is comprised of impound reserve accounts for property taxes, insurance, capital improvements and tenant improvements.

Accounts Payable and Other Liabilities:

Included in accounts payable and other liabilities are deferred rents in the amount of $2.8 million and $3.1 million at September 30, 2011 and December 31, 2010, respectively.

Revenue Recognition:

The Company commences revenue recognition on its leases based on a number of factors. In most cases, revenue recognition under a lease begins when the lessee takes possession of or controls the physical use of the leased asset. Generally, this occurs on the lease commencement date. In determining what constitutes the leased asset, the Company evaluates whether the Company or the lessee is the owner, for accounting purposes, of the tenant improvements. If the Company is the owner, for accounting purposes, of the tenant improvements, then the leased asset is the finished space and revenue recognition begins when the lessee takes possession of the finished space, typically when the improvements are substantially complete. If the Company concludes that it is not the owner, for accounting purposes, of the tenant improvements (the lessee is the owner), then the leased asset is the unimproved space and any tenant improvement allowances funded under the lease are treated as lease incentives, which reduce revenue recognized on a straight-line basis over the remaining non-cancelable term of the respective lease. In these circumstances, the Company begins revenue recognition when the lessee takes possession of the unimproved space for the lessee to construct improvements. The determination of who is the owner, for accounting purposes, of the tenant improvements is highly subjective and determines the nature of the leased asset and when revenue recognition under a lease begins. The Company considers a number of different factors to evaluate whether it or the lessee is the owner of the tenant improvements for accounting purposes. These factors include:

 

   

whether the lease stipulates how and on what a tenant improvement allowance may be spent;

 

   

whether the tenant or landlord retains legal title to the improvements;

 

   

the uniqueness of the improvements;

 

   

the expected economic life of the tenant improvements relative to the length of the lease;

 

   

the responsible party for construction cost overruns; and

 

   

who constructs or directs the construction of the improvements.

Minimum rental revenues are recognized on a straight-line basis over the terms of the related lease. The difference between the amount of cash 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 $777,000 and $100,000 in the three months ended September 30, 2011 and 2010, respectively, and $1.6 million and $253,000 (comprising $80,000 from the Company and $173,000 from the Predecessor) in the nine months ended September 30, 2011 and 2010, 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.

 

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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 include 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
  

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed:

The Company reviews long-lived assets and certain identifiable intangible assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. This assessment considers 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, expected to result from the long-lived asset’s use and eventual disposition. The Company’s evaluation as to whether an impairment may exist, including estimates of future anticipated cash flows, are highly subjective and could differ materially from actual results in future periods. 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. Although the Company’s strategy is to hold its properties over a long-term period, if the strategy changes or market conditions dictate that the sale of properties at an earlier date would be preferable, an impairment loss may be recognized to reduce the property to the lower of the carrying amount or fair value.

Investments in Partnerships and Limited Liability Companies:

The Company evaluates its investments in limited liability companies and partnerships to determine whether such entities may be a variable interest entity (“VIE”) and, if a VIE, whether the Company is the primary beneficiary. Generally, an entity is determined to be a VIE when either (1) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support provided by any parties or (2) as a group, the holders of the equity investment lack one or more of the essential characteristics of a controlling financial interest. The primary beneficiary is the entity that has both (1) the power to direct matters that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The Company considers a variety of factors in identifying the entity that holds the power to direct matters that most significantly impact the VIE’s economic performance including, but not limited to, the ability to direct financing, leasing, construction and other operating decisions and activities. In addition, the Company considers the form of ownership interest, voting interest, the size of the investment (including loans) and the rights of other investors to participate in policy making decisions, to replace or remove the manager and to liquidate or sell the entity. The obligation to absorb losses and the right to receive benefits when a reporting entity is affiliated with a VIE must be based on ownership, contractual, and/or other pecuniary interests in that VIE.

If the foregoing conditions do not apply, the Company considers whether a general partner or managing member controls a limited partnership or limited liability company. The general partner in a limited partnership or managing member in a limited liability company is presumed to control that limited partnership or limited liability company. The presumption may be overcome if the limited partners or members have either (1) the substantive ability to dissolve the limited partnership or limited liability company or otherwise remove the general partner or managing member without cause or (2) substantive participating rights, which provide the limited partners or members with the ability to effectively participate in significant decisions that would be expected to be made in the ordinary course of the limited partnership’s or limited liability company’s business and thereby preclude the general partner or managing member from exercising unilateral control over the partnership or company. If these criteria are met and the Company is the general partner or the managing member, as applicable, the consolidation of the partnership or limited liability company is required.

 

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Table of Contents

Investments in Equity Securities:

The Company, through its Operating Partnership, holds investments in equity securities in certain publicly-traded companies. The Company does not acquire investments for trading purposes and, as a result, all of the Company’s investments in publicly-traded companies are considered “available-for-sale” and are recorded at fair value. Changes in the fair value of investments classified as available-for-sale are recorded in other comprehensive income. The fair value of the Company’s equity securities in publicly-traded companies is determined based upon the closing trading price of the equity security as of the balance sheet date. The cost of investments sold is determined by the specific identification method, with net realized gains and losses included in other income. For all investments in equity securities, if a decline in the fair value of an investment below its carrying value is determined to be other-than-temporary, such investment is written down to its estimated fair value with a non-cash charge to earnings. The factors that the Company considers in making these assessments include, but are not limited to, severity and duration of the unrealized loss, market prices, market conditions, the occurrence of ongoing financial difficulties, available financing, new product initiatives and new collaborative agreements.

During the three months ended September 30, 2011, the Company purchased approximately 245,000 shares of preferred stock in public companies within the real estate industry for an initial cost basis of approximately $6.1 million. Investments in equity securities, which are included in other assets on the accompanying condensed consolidated balance sheets, consisted of the following:

 

      September 30, 2010  

Equity securities, initial cost basis

   $ 6,061   

Unrealized gain/(loss)

     (23
  

 

 

 

Equity securities, fair value(1)

   $ 6,038   
  

 

 

 

 

(1) 

Determination of fair value is classified as Level 1 in the fair value hierarchy based on the use of quoted prices in active markets (see section entitled “Fair Value of Financial Instruments” that follows herein).

The fair value of some of the Company’s investments in equity securities is less than the initial cost basis due to a decrease in their respective stock prices during the three months ended September 30, 2011. However, the Company has the ability and intent to retain the investments for a period of time sufficient to allow for an anticipated recovery in market value. The Company will continue to periodically evaluate whether an other-than-temporary impairment exists for any investment when the fair value is less than the initial cost basis.

Share-Based Payments:

All share-based payments to employees are recognized in earnings based on their fair value on the date of grant. Through September 30, 2011, the Company has awarded only restricted stock awards under its incentive award plan, which are based on shares of the Company’s common stock. The fair value of equity awards that include only service or performance vesting conditions is determined based on the closing market price of the underlying common stock on the date of grant. The fair value of equity awards that include one or more market vesting conditions is determined based on the use of a widely accepted valuation model. The fair value of equity grants is amortized to general and administrative expense ratably over the requisite service period for awards that include only service or performance vesting conditions and utilizing a graded vesting method for awards that include one or more market vesting conditions, adjusted for anticipated forfeitures.

Mortgage Loan Receivable:

Mortgage loan receivable consists of loans originated by the Company. Mortgage loan receivables are recorded at stated principal amounts net of any discount or premium or deferred loan origination costs or fees. The related discounts or premiums on mortgage loan receivables are amortized or accreted over the life of the related loan receivable. The Company defers certain loan origination and commitment fees, net of certain origination costs and amortizes them as an adjustment of the loan’s yield over the term of the related loan. The Company evaluates the collectability of both interest and principal on each loan to determine whether it is impaired. A loan is considered to be impaired, when based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the existing contractual terms. When a loan is considered to be impaired, the amount of loss is calculated by comparing the recorded investment to the value determined by discounting the expected future cash flows at the loan’s effective interest rate or to the value of the underlying collateral if the loan is collateralized. Interest income on performing loans is accrued as earned. Interest income on impaired loans is recognized on a cash basis.

 

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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 consolidated balance sheets and are amortized to interest expense over the remaining term of the assumed mortgage.

Tenant receivables:

Tenant receivables and deferred rent are carried net of the allowances for uncollectible current tenant receivables and 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 receivable 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 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, 2011 and December 31, 2010, the Company had $597,000 and $605,000, respectively, in allowances for uncollectible accounts as determined to be necessary to reduce receivables to the estimate of the amount recoverable. During the three months ended September 30, 2011 and 2010, $109,000 and $25,000, respectively, of receivables were charged to bad debt expense. During the nine months ended September 30, 2011, the period from April 28, 2010 to September 30, 2010, and the period from January 1, 2010 to April 27, 2010, $440,000, $47,000 and $16,000, respectively, of receivables were charged to bad debt expense.

Non-controlling Interests

At September 30, 2011 and December 31, 2010, non-controlling interest represented the portion of equity that the Company did not own in those entities it consolidates. Non-controlling interests also include OP Units not held by the Company.

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 interests in the Company’s consolidated financial statements. The OP Units not held by the Company may be redeemed by the holder for cash. The Company, at its option, may satisfy the redemption obligation with common stock on a one-for-one basis.

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 $250,000. At various times during the periods, the Company and ETP had deposits in excess of the FDIC insurance limit.

In the three and nine months ended September 30, 2011 and during the period from April 28, 2010 to September 30, 2010, no tenant accounted for more than 10% of revenues. During the period from January 1, 2010 to April 27, 2010, one tenant accounted for 29.1% of the Predecessor’s total revenues.

 

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Table of Contents

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.

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 assets or liabilities, 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 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 has used interest rate swaps to manage its interest rate risk (see Note 11). The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair-values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair-value measurements. In adjusting the fair-value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

Although the Company has determined that the majority of the inputs used to value its derivatives classified as cash flow hedges fall within Level 2 of the fair-value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2011, the Company has determined that the impact of the credit valuation adjustments on the overall valuation of its derivative positions is not significant. As a result, the Company has determined that its valuations related to derivatives classified as cash flow hedges in their entirety are classified in Level 2 of the fair-value hierarchy (see Note 17).

Changes in the fair value of financial instruments (other than derivative instruments for which an effective hedging relationship exists) are recorded as a charge against earnings in the condensed consolidated and combined statements of operations in the period in which they occur. The Company estimates the fair value of financial instruments at least quarterly based on current facts and circumstances, projected cash flows, quoted market prices, and other criteria. The Company may also utilize the services of independent third-party valuation experts to estimate the fair value of financial instruments, as necessary.

The Company’s investments in equity securities fall within Level 1 of the fair value hierarchy as the Company utilizes observable market-based inputs, based on the closing trading price of securities as of the balance sheet date, to determine the fair value of the investments.

Derivative Instruments:

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, from time to time the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the

 

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receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.

In addition, from time to time the Company may execute agreements in connection with business combinations that include embedded derivative instruments as part of the consideration provided to the sellers of the properties. Although these embedded derivative instruments are not intended as hedges of risks faced by the Company, they can provide additional consideration to the Company’s selling counterparties and may be a key component of negotiations.

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The Company records all derivative instruments on the consolidated balance sheets at their fair value. In determining the fair value of derivative instruments, the Company also considers the credit risk of its counterparties, which typically constitute larger financial institutions engaged in providing a wide variety of financial services. These financial institutions generally face similar risks regarding changes in market and economic conditions, including, but not limited to, changes in interest rates, exchange rates, equity and commodity pricing and credit spreads.

Accounting for changes in the fair value of derivative instruments depends on the intended use of the derivative, whether it has been designated as a hedging instrument and whether the hedging relationship has continued to satisfy the criteria to apply hedge accounting. For derivative instruments qualifying as cash flow hedges, the effective portion of changes in the fair value is initially recorded in Accumulated Other Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in the cash flows of the derivative hedging instrument with the changes in the cash flows of the hedged item or transaction.

The Company formally documents the hedging relationship for all derivative instruments, has accounted for its interest rate swap agreements as cash flow hedges and does not utilize derivative instruments for trading or speculative purposes.

Recent Accounting Pronouncements:

In December 2010, the FASB issued ASU No. 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations (“ASU 2010-29”), which amended ASC Topic 805, Business Combinations (“ASC 805”). The objective of this guidance is to eliminate diversity in the interpretation of pro forma revenue and earnings disclosure requirements for business combinations. The guidance specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The guidance also expands the supplemental pro forma disclosures under ASC 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination(s) included in the reported pro forma revenue and earnings. ASU 2010-29 is effective for business combinations for which the acquisition date occurs following the first annual reporting period which commences after December 15, 2010. The guidance is required in interim and annual reporting periods. Early adoption is permitted. The Company’s adoption of this guidance effective January 1, 2011 did not have a material effect on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Amendment to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which amended ASC Topic 820, Fair Value Measurement. The objective of this guidance is to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Standards. The guidance further explains how to measure fair value, but does not require additional fair value measurements. ASU 2011-04 is to be applied prospectively for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is not permitted. The Company’s adoption of this guidance on January 1, 2012 will primarily affect some of the Company’s fair value disclosures, but is not expected to have a material effect on the Company’s consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”), which amended ASC Topic 220, Comprehensive Income. The objective of this guidance is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The

 

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guidance requires that an entity present the components of net income, the components of other comprehensive income and the total of comprehensive income in either a single continuous statement of comprehensive income or in two separate, but consecutive statements. ASU 2011-05 is to be applied retrospectively for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted. The Company’s adoption of this guidance effective January 1, 2011did not have a material effect on the Company’s consolidated financial statements.

3. Acquisitions:

The Company completed four acquisitions in the nine months ended September 30, 2011 (in thousands):

 

Property

  

Date Acquired

  

Location

   Square
Footage
     Percent
Leased
 

Edwards Theatres

  

March 11, 2011

  

San Marcos, CA

     100,551         100.0

Rite Aid

  

March 22, 2011

  

Vestavia Hills, AL

     11,180         100.0

Gilroy Crossing

  

April 5, 2011

  

Gilroy, CA

     325,431         99.6

The Promenade

  

July 11, 2011

  

Scottsdale, AZ

     433,538         97.1

The following summary provides an allocation of purchase price for the above acquisitions (in thousands).

 

     Building      Land      Above  Market
Lease
     Below Market Lease     In-Place Lease      Debt
Premium/(Discount)
    Purchase
Price
 

Edwards Theatres(1)

   $ 13,600       $ 10,283       $ —         $ (405   $ 3,109       $ (437   $ 26,150   

Rite Aid(2)

     911         340         —           —          214         —          1,465   

Gilroy Crossing

     40,420         22,154         610         (2,989     8,305         —          68,500   

The Promenade(3)

     47,202         51,024         4,500         (3,879     11,178         —          110,025   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 102,133       $ 83,801       $ 5,110       $ (7,273   $ 22,806       $ (437   $ 206,140   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) 

In addition to the cash consideration paid in connection with the acquisition, 764,343 OP Units were issued with a fair value of $11.82 per unit at the time of issuance. These OP Units can be redeemed after one year for cash or, at the Company’s election, for shares of the Company’s common stock. If the redemption takes place in the second year after the acquisition and the price of shares of the Company’s common stock is less than $14.00 per share at the date of redemption, the Company must issue additional shares or cash for the difference. The Company originally recorded a liability of approximately $4.2 million within accounts payable and other liabilities on the accompanying condensed consolidated balance sheets to reflect the estimated fair value of this redemption provision (see footnote 17 for a discussion of changes in the fair value of this liability after the initial acquisition).

 

(2) 

A gain of $0.9 million was recognized on the acquisition of this property which represented the difference between the fair value at the date of closing and the price paid.

 

(3) 

The purchase price allocation for the acquisition of The Promenade is preliminary as of September 30, 2011 and subject to adjustment within the measurement period in accordance with ASC 805.

The following summary provides an allocation of purchase price for property acquisitions in 2010.

 

    Building     Land     Above  Market
Lease
    Below Market Lease     In-Place Lease     Debt
Premium/(Discount)
    Purchase
Price
 

5000 South Hulen

  $ 16,495      $ 2,204      $ 8      $ (509   $ 2,476      $ 1,314      $ 21,988   

Plaza at Rockwall

    20,783        15,752        78        (2,138     6,296        —          40,771   

Vestavia Hills City Center

    18,955        7,806        1,346        (635     5,917        —          33,389   

Other Property Acquisitions

    50,895        27,827        1,489        (444     9,020        (58     88,729   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 107,128      $ 53,589      $ 2,921      $ (3,726   $ 23,709      $ 1,256      $ 184,877   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Company recorded revenues and net (loss)/income for the three months ended September 30, 2011 of approximately $4.9 million and ($128,000) respectively, and for the nine months ended September 30, 2011 of approximately $7.4 million and $356,000, respectively, related to the 2011 acquisitions. The Company recorded revenues and net (loss)/income for the three months ended September 30, 2010 of approximately $3.3 million and ($137,000) respectively, and for the nine months ended September 30, 2010 of approximately $3.8 million and ($213,000), respectively, related to the 2010 acquisitions.

 

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The following unaudited pro forma information for the nine months ended September 30, 2011 has been prepared to reflect the incremental effect of the properties acquired in 2011 as if such acquisitions had occurred on January 1, 2010 (in thousands).

 

     Nine Months  Ended
September 30, 2011
     Nine Months  Ended
September 30, 2010
 

Revenues

   $ 45,228       $ 41,749   

Net income

     1,058         (1,060

4. Lease Intangible Assets, Net

Lease intangible assets, net consisted of the following at September 30, 2011 and December 31, 2010 (in thousands):

 

     September 30,
2011
     December 31,
2010
 

In-place leases, net of accumulated amortization of $10,916 and $4,703 as of September 30, 2011 and December 31, 2010, respectively (with a weighted average remaining life of 83 and 101 months as of September 30, 2011 and December 31, 2010, respectively)

   $ 43,771       $ 32,328   

Above market leases, net of accumulated amortization of $2,440 and $1,212 as of September 30, 2011 and December 31, 2010, respectively (with a weighted average remaining life of 71 and 97 months as of September 30, 2011 and December 31, 2010, respectively)

     10,551         7,803   

Leasing commissions, net of accumulated amortization of $2,773 and $1,568 as of September 30, 2011 and December 31, 2010, respectively (with a weighted average remaining life of 115 and 151 months as of September 30, 2011 and December 31, 2010, respectively)

     12,198         12,893   
  

 

 

    

 

 

 
   $ 66,520       $ 53,024   
  

 

 

    

 

 

 

Estimated amortization of lease intangible assets as of September 30, 2011 and for each of the next five years and thereafter is as follows (in thousands):

 

Year

   Amount  

2011 (remaining three months)

   $ 3,651   

2012

     13,384   

2013

     11,683   

2014

     9,571   

2015

     6,256   

Thereafter

     21,975   
  

 

 

 

Total

   $ 66,520   
  

 

 

 

Amortization expense recorded on the lease intangible assets for the three months ended September 30, 2011 and 2010 was $3.3 million and $1.1 million, respectively. Included in these amounts are $625,000 and $77,000, respectively, of amortization of above market lease intangible assets recorded against rental income. Amortization expense recorded on the lease intangible assets for the nine months ended September 30, 2011 and 2010 was $9.0 million and $1.5 million, respectively. Included in these amounts are $1.4 million and $117,000, respectively, of amortization of above market lease intangible assets recorded against rental income.

5. Lease Intangible Liabilities, Net

Lease intangible liabilities, net consisted of the following at September 30, 2011 and December 31, 2010 (in thousands):

 

     September,
30, 2011
     December
31, 2010
 

Below market leases, net of accumulated amortization of $2,030 and $1,173 as of September 30, 2011 and December 31, 2010, respectively (with a weighted average remaining life of 109 and 121 months as of September 30, 2011 and December 31, 2010, respectively)

   $ 13,129       $ 7,150   
  

 

 

    

 

 

 

Amortization recorded on the lease intangible liabilities for the three months ended September 30, 2011 and 2010 was $577,000 and $151,000, respectively. Amortization recorded on the lease intangible liabilities for the nine months ended September 30, 2011 and 2010 was $1.3 million and $248,000, respectively. These amounts were recorded to rental income in the Company and ETP’s condensed consolidated and combined statements of operations.

 

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Estimated amortization of lease intangible liabilities as of September 30, 2011 and for each of the next five years and thereafter is as follows (in thousands):

 

Year

   Amount  

2011 (remaining three months)

   $ 552   

2012

     2,072   

2013

     1,921   

2014

     1,719   

2015

     1,219   

Thereafter

     5,646   
  

 

 

 

Total

   $ 13,129   
  

 

 

 

6. Variable Interest Entities

Consolidated Variable Interest Entities

Included within the consolidated financial statement is the 50% joint venture with AB Dothan, LLC, that is deemed a VIE, and for which the Company is the primary beneficiary as it has the power to direct activities that most significantly impact the economic performance of the VIE.

In August 2011, the Company and its partner in the AB Dothan joint venture contributed additional funds to the joint venture in the amount of approximately $717,000 each pursuant to a capital call. The partner’s contribution was comprised of cash in the amount of approximately $129,000 and the conversion of a note payable from the joint venture to the Company’s partner with a principal balance of approximately $536,000 and accrued interest of approximately $52,000. The partner’s contribution is reflected as an increase within the non-controlling interest component of equity on the accompanying condensed consolidated statement of equity.

As of September 30, 2011 and December 31, 2010, total carrying amount of assets was approximately $17.2 million and $18.6 million, respectively, which includes approximately $13.6 million and $8.3 million, respectively of real estate assets. As of September 30, 2011 and December 31, 2010, the total carrying amount of liabilities was approximately $15.2 million and $15.9 million, respectively.

Unconsolidated Variable Interest Entities

On December 9, 2010, the Company loaned $2.0 million to an unaffiliated borrower which has been identified as a VIE. The Company does not consolidate the VIE because it does not have the ability to control the activities that most significantly impact the VIE’s economic performance. See Note 7 for additional description of the loan.

7. Mortgage Loan Receivable

On December 9, 2010, the Company loaned $2.0 million to an unaffiliated borrower. The proceeds were used to facilitate the land acquisition and development of a shopping center anchored by Publix in Brandon, Florida. The loan is secured with a second mortgage trust deed on the property and is personally guaranteed by members of the borrower. The loan bears interest at 8.0% per annum, with interest accruing and paid on a monthly basis. In connection with the loan, the Company also entered into a purchase and sale agreement to acquire this property upon maturity. The loan matures on the earlier of April 2012 or upon the acquisition of the property.

 

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8. Mortgages Payable, net

Mortgages payable at September 30, 2011 and December 31, 2010 consist of the following (in thousands):

 

     Carrying Amount of
Mortgage Notes
    Contractual
Interest Rate
    Effective
Interest Rate
    Monthly
Payment(1)
     Maturity
Date
 

Property Pledged as Collateral

   September 30,
2011
    December  31,
2010
          

Excel Centre

   $ 12,591      $ 12,768        6.08     6.08   $ 85         2014   

Five Forks Place

     5,111        5,242        5.50     5.50     39         2013   

5000 South Hulen

     13,930        14,086        5.60     6.90     83         2017   

Lowe’s, Shippensburg

     13,919        14,147        7.20     7.20     110         2031   

Merchant Central

     4,581        4,647        5.94     6.75     30         2014   

Grant Creek Town Center

     15,780        16,029        5.75     5.75     105         2013   

Mariner’s Point(2)

     —          3,482        7.10     5.75     25         2011   

Park West Place(3)

     55,800        55,800        2.75     3.91     182         2013   

Northside Mall(4)

     12,000        12,000        0.16     1.16     3         2035   

Rite Aid — Vestavia Hills

     1,379        —          7.25     7.25     21         2018   

Edwards Theatres

     12,248        —          6.74     5.50     95         2014   

Gilroy Crossing

     47,590        —          5.01     5.01     263         2014   

The Promenade

     51,757        —          4.80     4.80     344         2015   
  

 

 

   

 

 

          
   $ 246,686      $ 138,201            

Less: discount(5)

     (703     (1,158         
  

 

 

   

 

 

          

Mortgage notes payable, net

   $ 245,983      $ 137,043            
  

 

 

   

 

 

          

 

(1)

This represents the monthly payment of principal and interest at September 30, 2011.

 

(2)

The loan, with an original maturity date of November 1, 2011, was voluntarily prepaid by the Company in September 2011 with no prepayment penalty or additional cost.

 

(3)

The loan bears interest at a rate of LIBOR plus 2.50% (interest rate of 2.75% at September 30, 2011). In December 2010, the Company entered into interest rate swap contracts, which fix LIBOR at an average of 1.41% for the term of the loan.

 

(4)

The debt represents redevelopment revenue bonds to be used for the redevelopment of this property, which mature in November 2035. Interest is reset weekly and determined by the bond remarketing agent based on the market value of the bonds ( interest rate of 0.16% at September 30, 2011). The interest rate on the bonds is currently priced off of the Securities Industry and Financial Markets Association, or SIFMA, index but could change based on the credit of the bonds. The bonds are secured by a $12.1 million letter of credit issued by the Company from the Company’s revolving credit facility. An underwriter’s discount related to the original issuance of the bonds with a remaining balance of $116,000 at September 30, 2011 will be amortized as additional interest expense through November 2035.

 

(5)

Represents (a) the fair value adjustment on assumed debt on acquired properties at the time of acquisition to account for below or above market interest rates and (b) underwriter’s discount for the issuance of redevelopment bonds.

Total interest cost capitalized for the three months ended September 30, 2011 and 2010 was $134,000 and $0, respectively. Total interest cost capitalized for the nine months ended September 30, 2011 and 2010 was $243,000 and $106,000, respectively.

The Company’s mortgage debt maturities at September 30, 2011 and during the next five years are as follows (in thousands):

 

Year Ending December 31,

   Amount  

2011 (remaining three months)

   $ 881   

2012

     4,375   

2013

     80,110   

2014

     76,506   

2015

     46,838   

Thereafter

     37,976   
  

 

 

 
   $ 246,686   
  

 

 

 

 

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9. Notes Payable

On June 3, 2011, the Company entered into a Third Amendment to Credit Facility (the “Credit Agreement”), which provided an increase in borrowings available under its revolving credit facility from $125.0 million to $200.0 million, decreased the fees pertaining to the unused capacity and the applicable interest rate, and extended the maturity date. The Company has the ability from time to time to increase the size of the revolving credit facility by up to an additional $200.0 million to a total borrowing capacity of $400.0 million, subject to receipt of lender commitments and other conditions precedent. The amended maturity date is July 7, 2014 and may be extended for one additional year at the Company’s option. The Company, among other things is subject to covenants requiring the maintenance of (1) maximum leverage ratios on unsecured, secured and overall debt, and (2) minimum fixed coverage ratios. At September 30, 2011, the Company was in compliance with all the covenants in the Credit Agreement.

The revolving credit facility bears interest at the rate of LIBOR plus a margin of 220 basis points to 300 basis points, depending on the Company’s leverage ratio. The Company will also pay a 0.35% fee for any unused portion of the revolving credit facility. Borrowings from the revolving credit facility were $0 at September 30, 2011. The Company issued a $12.1 million letter of credit from the revolving credit facility, which secures an outstanding $12.0 million bond payable for the Northside Mall. This bond is included with the mortgages payable on the Company’s condensed consolidated balance sheet. At September 30, 2011, there was approximately $79.6 million available for borrowing under the revolving credit facility.

In August 2011, the Company’s note payable from a consolidated joint venture to the Company’s partner in the amount of approximately $536,000 (not including accrued interest of approximately $52,000) was converted to capital pursuant to its inclusion in a capital contribution by the Company’s AB Dothan joint venture partner (see Note 6 above for additional discussion).

10. Earnings Per Share

Basic earnings (loss) per share is computed by dividing (loss) income available to common stockholder by the weighted average shares outstanding, as adjusted for the effect of participating securities. The Company’s unvested restricted share awards are participating securities as they contain non-forfeiture rights to dividends. The impact of unvested restricted share awards on earnings (loss) per share has been calculated using the two-class method whereby earnings are allocated to the unvested restricted share awards based on dividends and the unvested restricted shares’ participation rights in undistributed earnings (losses).

 

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The calculation of diluted earnings per share for the three and nine months ended September 30, 2011 does not include unvested restricted common shares, contingently issuable shares (Note 3), or OP units as the effect of including these equity securities was anti-dilutive to loss from continuing operations and net loss attributable to the common stockholders. In addition, common shares issuable upon settlement of the conversion feature of the 7.00% Series A Cumulative Convertible Perpetual Preferred Stock (the “Preferred Stock”) were anti-dilutive and were not included in the calculation of diluted earnings per share based on the “if converted” method for the three and nine months ended September 30, 2011. Computations of basic and diluted earnings per share for the three months ended September 30, 2011 and 2010 and for the nine months ended September 30, 2011 (in thousands, except share data) were as follows:

 

     Three Months Ended
September 30, 2011
    Three Months Ended
September 30, 2010
 

Basic earnings per share:

    

Loss from continuing operations

   $ (1,735   $ (1,585

Preferred dividends

     (875     —     

Allocation to participating securities

     (160     (45

(Loss) income from continuing operations attributable to non-controlling interests

     (2     62   
  

 

 

   

 

 

 

Loss from continuing operations attributable to the common stockholders

   $ (2,772   $ (1,568
  

 

 

   

 

 

 

Net loss attributable to the common stockholders

     (2,612   $ (1,100

Allocation to participating securities

     (160     (45
  

 

 

   

 

 

 

Net loss applicable to the common stockholders

   $ (2,772   $ (1,145
  

 

 

   

 

 

 

Weighted-average common shares outstanding:

    

Basic

     29,634,347        15,509,907   
  

 

 

   

 

 

 

Basic and diluted earnings per share:

    

Loss from continuing operations per share attributable to the common stockholders

   $ (0.09   $ (0.10

Income from discontinued operations per share attributable to the common stockholders

     —          0.03   
  

 

 

   

 

 

 

Net loss per share attributable to the common stockholders

   $ (0.09   $ (0.07
  

 

 

   

 

 

 

Computations of basic and diluted earnings per share for the nine months ended September 30, 2011 (in thousands, except share data) were as follows:

 

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     Nine Months Ended
September 30, 2011
    Period from April 28, 2010
to September 30, 2010
 

Basic earnings per share:

    

Loss from continuing operations

   $ (4,769   $ (3,579

Preferred dividends

     (2,353     —     

Allocation to participating securities

     (465     (117

Loss from continuing operations attributable to non-controlling interests

     157        141   
  

 

 

   

 

 

 

Loss from continuing operations attributable to the common stockholders

   $ (7,430   $ (3,555
  

 

 

   

 

 

 

Net loss attributable to the common stockholders

   $ (2,183   $ (2,852

Allocation to participating securities

     (465     (117
  

 

 

   

 

 

 

Net loss applicable to the common stockholders

   $ (2,648   $ (2,969
  

 

 

   

 

 

 

Weighted-average common shares outstanding:

    

Basic and diluted

     20,386,280        15,509,302   
  

 

 

   

 

 

 

Basic and diluted earnings per share:

    

Loss from continuing operations per share attributable to the common stockholders

   $ (0.36   $ (0.22

Income from discontinued operations per share attributable to the common stockholders

     0.23        0.04   
  

 

 

   

 

 

 

Net loss per share attributable to the common stockholders

   $ (0.13   $ (0.18
  

 

 

   

 

 

 

11. Derivatives and Hedging Activities

In December 2010, the Company executed two pay-fixed interest rate swaps with a notional value of $55.8 million (weighted average interest rate of 1.41%) to hedge the variable cash flows associated with one of the Company’s mortgage payables. As a result of the interest rate swaps, the Company either (1) receives the difference between a fixed interest rate (the “Strike Rate”) and one-month LIBOR if the Strike Rate is less than LIBOR or (2) pays such difference if the Strike Rate is greater than LIBOR. No initial investment was made to enter into either of the interest rate swap agreements. The Company had no derivative financial instruments prior to the execution of the two swaps.

During the three and nine months ended September 30, 2011, the Company recorded no amounts in earnings attributable to hedge ineffectiveness. During the next twelve months, the Company estimates that an additional $562,000 will be reclassified from other comprehensive income as an increase to interest expense.

As of September 30, 2011, the Company had the following outstanding interest rate swaps and other derivatives instruments (in thousands):

 

     Fair Value(1)      Current Notional
Amount
     Strike Rate   Expiration Date

Type of Derivative Instrument

   September 30,
2011
     December 31,
2010
         

Interest rate swaps(2)

   $ 1,141       $ 388       $ 55,800       1.34% to 1.48%   December 2013

Other derivative instrument(3)

     4,288         —              March 2013
  

 

 

    

 

 

         

Total derivative instruments

   $ 5,429       $ 388           
  

 

 

    

 

 

         

 

(1) 

Fair value of derivative instruments does not include any related accrued interest payable to the counterparty.

 

(2) 

The interest rate swaps are classified within accounts payable and other liabilities on the accompanying condensed consolidated balance sheets.

 

(3)

The Company’s purchase agreement executed in connection with the acquisition of the Edwards Theatres property in March 2011 contained a provision determined to be an embedded derivative instrument. The embedded derivative provides a guaranteed fair value for the OP units provided to the sellers of the property if redeemed for shares of the Company’s common stock or cash, at the Company’s election, prior to March 2013. The fair value of the embedded derivative at each period is calculated through the use of a Monte Carlo valuation model based on the historical volatility and closing price of the Company’s common stock and a risk-free interest rate (see Note 17 for discussion of changes in the fair value of this derivative). The embedded derivative is classified within accounts payable and other liabilities in the accompanying condensed consolidated balance sheets.

 

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Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement

The tables below present the effect of the Company’s derivative financial instruments on the Statement of Operations for the three months ended September 30, 2011 (in thousands):

 

     Income Statement Impact of Derivative Instruments
For the Three Months Ended September 30, 2011
 
     Amount of
Unrealized
Gain/(loss)
Recognized in
OCI on
Derivative
(Effective
Portion)
    Location of Loss
Reclassified from
Accumulated OCI
into Income
(Effective Portion)
     Amount of
Gain/(loss)
Reclassified from
Accumulated
OCI into Income
(Effective
Portion)
   

Location of Gain/
(loss) Recognized in
Income on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)

   Amount of
Gain/(loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
 

Derivative instruments:

            

Interest rate swaps

   $ (502     Interest expense       $ (168   Interest expense    $ —     

Other derivatives

     —                  —        Loss on changes in fair value of financial instruments      (596
  

 

 

      

 

 

      

 

 

 

Total

   $ (502      $ (168      $ (596
  

 

 

      

 

 

      

 

 

 

The tables below present the effect of the Company’s derivative financial instruments on the Statement of Operations for the nine months ended September 30, 2011 (in thousands):

 

     Income Statement Impact of Derivative Instruments
For the Nine Months Ended September 30, 2011
 
     Amount of
Unrealized
Gain/(loss)
Recognized in
OCI on
Derivative
(Effective
Portion)
    Location of Loss
Reclassified from
Accumulated OCI
into Income
(Effective Portion)
     Amount of
Gain/(loss)
Reclassified from
Accumulated
OCI into Income
(Effective
Portion)
   

Location of Gain/
(loss) Recognized in
Income on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)

   Amount of
Gain/(loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
 

Derivative instruments:

            

Interest rate swaps

   $ (1,235     Interest expense       $ (483   Interest expense    $ —     

Other derivatives

     —                  —        Loss on changes in fair value of financial instruments      (84
  

 

 

      

 

 

      

 

 

 

Total

   $ (1,235      $ (483      $ (84
  

 

 

      

 

 

      

 

 

 

 

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Credit-risk-related Contingent Features

Under the terms of the two interest rate swaps detailed above, the Company could be declared in default on its obligations under the swap agreements in the event that it defaults on any of its indebtedness, even if repayment of the indebtedness has not been accelerated by the lender. Additionally, because the Company’s derivative counterparty is also the lender for the hedged floating rate Credit Agreement, the swap agreements incorporate the loan covenant provisions of the Company’s indebtedness. Failure to comply with the loan covenant provisions would result in the Company being in default on any derivative instrument obligations covered by the agreement.

If the Company had breached any of these provisions at September 30, 2011, it could have been required to settle its obligations under the agreements at their termination value. As of September 30, 2011, the termination value defined as the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, was a liability of approximately $1.2 million. As of September 30, 2011, the Company has not posted any collateral related to these agreements.

Although the Company’s derivative contracts are subject to a master netting arrangement, the Company does not net its derivative fair values or any existing rights or obligations to cash collateral on the consolidated balance sheet.

12. Equity

The Company issued 15,000,000 shares of common stock in conjunction with the Offering, resulting in net proceeds of approximately $194.6 million after deducting the underwriters’ discount and commissions and offering expenses. In conjunction with the Formation Transactions, the Company also issued 507,993 shares of common stock and 641,062 OP Units. The Company has issued restricted stock awards to senior executives, directors and employees totaling 1,081,686 shares of common stock (net of forfeitures of 3,000 shares), which are included in the total shares of common stock outstanding as of September 30, 2011.

On January 28, 2011, the Company issued 2,000,000 shares of Preferred Stock, with a liquidation preference of $25.00 per share. The Company pays cumulative dividends on the Preferred Stock when, as and if declared by the Company’s Board of Directors, from the date of original issue at a rate of 7.00% per annum, subject to adjustment in certain circumstances. The annual dividend on each share of Preferred Stock is $1.75, payable quarterly in arrears on the 15th calendar day of each January, April, July and October of each year, as and if declared by the Company’s Board of Directors.

The Preferred Stock is convertible, at the holders’ option, at any time and from time to time, into common stock of the Company at an initial conversion rate of 1.6667 shares of common stock per share of Preferred Stock, which is equivalent to an initial conversion price of $15.00 per share. The conversion price will be subject to customary adjustments in certain circumstances. On or after April 1, 2014, the Company may, at its option, convert some or all of the Preferred Stock if the closing price of the common stock equals or exceeds 140% of the conversion price for at least 20 of the 30 consecutive trading days ending the day before the notice of exercise of conversion is sent and the Company has either declared and paid, or declared and set apart for payment, any unpaid dividends that are in arrears on the Preferred Stock. Net proceeds from this offering were approximately $47.7 million. The Company used the net proceeds of this offering to repay a portion of the outstanding indebtedness under the unsecured revolving credit facility.

On June 29, 2011, the Company completed the issuance of 14,375,000 shares of common stock, including the exercise of an overallotment option of 1,875,000 shares, resulting in net proceeds of approximately $149.9 million, after deducting the underwriters’ discount and commissions and offering expenses. A portion of the net proceeds of this offering were used to repay the outstanding indebtedness on the Company’s revolving credit facility, with the remainder intended to fund future acquisitions and for other general corporate and working capital purposes.

In August 2011, the Company announced that its Board of Directors had authorized a stock repurchase program under which the Company could acquire up to $30.0 million of its common stock in open market and negotiated purchases with no expiration date.

During the three months ended September 30, 2011 the Company repurchased 674,866 shares of its common stock for an aggregate cost of approximately $6.7 million (including transaction costs) at a weighted average purchase price of $9.99 per share. The shares were subsequently retired by the Company, resulting in a decrease in the number of common shares issued and outstanding at September 30, 2011.

Consolidated net income is reported in the Company’s condensed consolidated and combined 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 641,062 OP Units. In March 2011, the Company issued an additional 764,343 OP Units in connection with the acquisition of the Edwards Theatres

 

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Table of Contents

property. OP Units not held by the Company are reflected as non-controlling interest in the Company’s condensed consolidated and combined financial statements and included as equity. OP Units not held by the Company have redemption provisions that permit the Operating Partnership to settle in either cash or common stock at the option of the Operating Partnership, which have been further evaluated to determine that permanent equity classification on the balance sheet is appropriate.

The following table shows the vested ownership interests in the Operating Partnership as of September 30, 2011 and December 31, 2010:

 

     September 30, 2011     December 31, 2010  
     OP
Units
     Percentage
of Total
    OP
Units
     Percentage
of Total
 

Excel Trust, Inc.

     29,260,164         95.4     15,512,755         96.0

Non-controlling interest consisting of:

          

OP Units

     1,405,405         4.6     641,062         4.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     30,665,569         100.0     16,153,817         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. Ownership interests held by the Company do not include unvested restricted stock.

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.

The following shares of restricted common stock have been issued as of September 30, 2011:

 

Grant Data

   Price at Grant
Date
     Number      Vesting
Period (yrs.)
 

April 23, 2010 (1)

   $ 13.30         126,766         4   

April 23, 2010 (2)

   $ 13.30         28,572         4   

March 7, 2011 (1)

   $ 11.96         295,000         4   

March 7, 2011 (3)

   $ 11.96         618,500         3   

Nine months ended September 30, 2011 (1)(2)(3)

   $ 11.62-11.68         15,848         1-4   

 

(1) 

Shares issued to certain of the Company’s senior management and other employees. These shares vest over four years with 25% vesting on the first anniversary date of the grant date and the remainder vesting in equal quarterly installments thereafter.

 

(2) 

Shares issued to members of the Company’s Board of Directors. These shares vest pro-rata over four years (2010 grants) and one year (2011 grants) in monthly installments.

 

(3) 

Shares issued to certain of the Company’s senior management and other employees. These shares vest over three years depending on the Company’s common stock achieving certain market conditions. The Company calculated the fair value of the restricted common stock to be $8.87 per share on the date of grant with the assistance of independent valuation specialists. The corresponding compensation expense of approximately $5.5 million will be recognized utilizing a graded vesting method over the three-year period, as long as the recipients of the grants remain employed at the Company, regardless of whether the Company’s common stock satisfies the market conditions.

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 upon grant. During the three and nine months ended September 30, 2011, the Company recognized compensation expense of $1.3 million and $3.1 million related to the restricted common stock grants ultimately expected to vest. During the three months ended September 30, 2010 and for the period from April 28, 2010 to September 30, 2010, the Company recognized compensation expense of $131,000 and $227,000, 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. Stock compensation expense is included in general and administrative in the Company’s accompanying condensed consolidated statements of operations.

 

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Table of Contents

As of September 30, 2011 and December 31, 2010, there was approximately $7.8 million and $1.7 million, respectively; of total unrecognized compensation expense related to the non-vested shares of the Company’s restricted common stock. As of September 30, 2011 and December 31, 2010, this expense was expected to be recognized over a weighted-average remaining period of 3.2 years and 3.3 years, respectively.

 

     Number of Unvested
Shares of
Restricted
Common Stock
    Weighted
Average Grant
Date Fair Value
 

Balance - January 1, 2010

     —        $ —     

Granted - April 23, 2010

     155,338      $ 13.30   

Granted - March 7, 2011

     913,500      $ 9.85   

Granted - April 1, 2011 to September 30, 2011

     15,848      $ 11.10   

Forfeitures

     (3,000   $ 8.87   

Vested

     (52,037   $ 13.24   
  

 

 

   

 

 

 

Balance - September 30, 2011

     1,029,649      $ 10.69   
  

 

 

   

 

 

 

Expected to vest - September 30, 2011

     1,029,649      $ 10.69   
  

 

 

   

 

 

 

13. Discontinued Operations

On June 30, 2011, the Company sold the following properties as a portfolio, which were part of the Retail Properties segment (see Note 18):

 

     (in thousands)      Date of Sale      Acquisition Date  

Property

   Sales Price      Gain on Sale        

Walgreens - Corbin (South)

   $ 4,646       $ 510         6/30/2011         5/24/2010   

Walgreens - Beckley

     7,986         902         6/30/2011         6/17/2010   

Walgreens - Barbourville

     4,680         511         6/30/2011         5/24/2010   

Walgreens - Princeton

     4,493         458         6/30/2011         10/28/2010   

Jewel-Osco

     8,431         459         6/30/2011         5/14/2010   

Shop’n Save (SuperValu)

     9,395         1,136         6/30/2011         5/28/2010   
  

 

 

    

 

 

       

Total

   $ 39,631       $ 3,976         
  

 

 

    

 

 

       

The results of operations for the above properties is reported as discontinued operations for all periods presented in the accompanying condensed consolidated and combined statements of operations. The following table summarizes the revenue and expense components that comprise income from discontinued operations (in thousands):

 

     The Company      The Company  
     Three Months Ended
September 30, 2011
     Three Months Ended
September 30, 2010
 

Total revenues

   $ —         $ 654   

Total expenses

     —           214   
  

 

 

    

 

 

 

Income before non-controlling interest and gain on sale of real estate assets

     —           440   

Gain on sale of real estate assets

     —           —     

Non-controlling interest in discontinued operations

     —           (17
  

 

 

    

 

 

 

Income from discontinued operations available to common stockholders

   $ —         $ 423   
  

 

 

    

 

 

 

 

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Table of Contents
     The Company     The Company  
     Nine Months Ended
September 30, 2011
    Period from April 28,
2010 to September 30, 2010
 

Total revenues

   $ 1,459      $ 897   

Total expenses

     436        287   
  

 

 

   

 

 

 

Income before non-controlling interest and gain on sale of real estate assets

     1,023        610   

Gain on sale of real estate assets

     3,976        —     

Non-controlling interest in discontinued operations

     (217     (24
  

 

 

   

 

 

 

Income from discontinued operations available to common stockholders

   $ 4,782      $ 586   
  

 

 

   

 

 

 

14. Related Party Transactions

Subsequent to the Offering, many of the employees of Excel Realty Holdings, LLC (“ERH”), a company wholly owned by Mr. Sabin, 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, 2011 and 2010, approximately $169,000 and $86,000, respectively, was reimbursed to the Company from ERH and included in other income in the consolidated statements of operations.

15. Income Taxes

The Company elected to be taxed as a REIT under the Code beginning with the taxable year ended 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.

16. 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 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 balance sheets, 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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Table of Contents

Property Acquisitions:

In connection with the Company’s note receivable secured by real estate, the Company also entered into a purchase and sale agreement to acquire the property. The purchase price will be dependent upon leasing and net operating income of the property when acquired.

On July 19, 2011, the Company entered into a purchase agreement to acquire a retail shopping center totaling approximately 119,000 square feet for a purchase price of $17.5 million, excluding closing costs, subject to due diligence and other customary closing conditions.

On October 25, 2011, the Company entered into a purchase agreement to acquire two office buildings (adjacent to one of the Company’s retail properties), totaling approximately 256,000 square feet for a purchase price of $56.0 million, excluding closing costs, subject to due diligence and other customary closing conditions.

On October 26, 2011, the Company entered into a purchase agreement to acquire a retail shopping center totaling approximately 473,000 (of which approximately 196,000 is owned) square feet for a purchase price of $31.0 million, excluding closing costs, subject to due diligence and other customary closing conditions.

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 balance sheets, results of operations or cash flows. In addition, the Company expects to incur approximately $13.8 million in construction costs on two development properties.

The Company has entered into a construction loan agreement in connection with construction activities at one of its development properties. The construction loan provides for borrowings of up to $18.0 million, which bears interest at the rate of LIBOR plus a margin of 275 basis points, with a maturity date of March 1, 2013. The maturity date may be extended for each of two one-year extension periods, at the Company’s option and upon the satisfaction of conditions precedent. As of September 30, 2011, there were no outstanding borrowings on the construction loan.

17. Fair Value of Financial Instruments

The Company is required to disclose fair value information relating to financial instruments that are remeasured on a recurring basis and those that are only initially recognized at fair value (not required to be subsequently remeasured). The Company’s disclosures of estimated fair value of financial instruments were determined using available market information and appropriate valuation methods. The use of different assumptions or methods of estimation may have a material effect on the estimated fair value of financial instruments.

The following table reflects the fair values of the Company’s financial assets and liabilities that are required to be measured at fair value on a recurring basis and changes in the fair value for each reporting period (in thousands):

 

     Balance at
September  30,

2011
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Fair value measurements on a recurring basis:

           

Interest rate swaps (see Note 11)

   $ 1,141       $ —         $ 1,141       $ —     

Contingent consideration related to business combinations(1)

     2,110         —           —           2,110   

Derivative instrument related to business combinations(2)

     4,288         —           —           4,288   

Investment in equity securities (see Note 2)

     6,038         6,038         —           —     
     Balance at
December 31,
2010
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable Inputs
(Level 3)
 
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair value measurements on a recurring basis:

           

Interest rate swaps (see Note 11)

   $ 388       $ —         $ 388       $ —     

Contingent consideration related to business combinations(1)

     2,438         —           —           2,438   

 

(1)

Additional consideration may be due to the sellers of certain properties acquired in 2010 based on their ability to lease-up vacant space through October 18, 2011 and December 31, 2011. The Company has estimated the fair value of the

 

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Table of Contents
  contingent consideration based on the facts and circumstances existing at each reporting date and the likelihood of the counterparty achieving the necessary conditions. This amount is included in accounts payable and other liabilities in the accompanying condensed consolidated balance sheets, with changes in the fair value recorded directly to earnings as a gain or loss on changes in fair value of financial instruments in the accompanying condensed consolidated and combined statements of operations. The amount of contingent consideration related to one of the properties acquired in 2010 was decreased by approximately $328,000 during the nine months ended September 30, 2011 as a result of the failure to execute lease agreements by the counter-party and updated leasing assumptions pertaining to the property through September 30, 2011.

 

(2) 

Amount reflects the fair value of a provision within a purchase agreement that provides a guaranteed redemption value for OP units provided to the sellers of a property acquired in March 2011 (see Note 3 for additional details). The Company has estimated the fair value of the embedded derivative instrument using a Monte Carlo valuation model based on the historical volatility and closing price of the Company’s common stock and a risk-free interest rate. This amount is included in accounts payable and other liabilities in the accompanying consolidated balance sheets, with changes in the fair value of the embedded derivative recorded as gain (loss) on changes in fair value of financial instruments in the consolidated statements of operations.

During the three and nine months ended September 30, 2011, an increase of $596,000 and a decrease of $244,000, respectively, was recognized in the balance of financial instruments and earn-outs (liabilities) measured on a recurring basis using level three inputs (reflected in earnings) due to the Company’s updated analysis and an updated valuation as noted above. There were no additional gains or losses, purchases, sales, issuances, settlements, or transfers in or out related to fair value measurements using level three inputs.

 

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Table of Contents

The Company has not elected the fair value measurement option for any of its other financial assets or liabilities. The Company has estimated the fair value of its financial assets using a discounted cash flow analysis based on an appropriate market rate for a similar type of instrument. The Company has estimated the fair value of its financial liabilities by using either (1) a discounted cash flow analysis using an appropriate market discount rate for similar types of instruments, or (2) a present value model and an interest rate that includes a credit value adjustment based on the estimated value of the property that serves as collateral for the underlying debt. The fair values of financial instruments not included in this table are estimated to be equal to their carrying amounts. The fair values of certain additional financial assets and liabilities at September 30, 2011 and December 31, 2010 are as follows (in thousands):

 

     September 30, 2011      December 31, 2010  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial assets:

           

Mortgage loan receivable

   $ 2,000       $ 2,000       $ 2,000       $ 2,000   

Financial liabilities:

           

Mortgage notes payable(1)

     246,686         244,673         137,043         139,141   

Notes payable

     —           —           85,384         87,200   

 

(1) 

Excluding debt premiums and discounts.

18. 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 intends to develop into retail properties.

The Company and ETP evaluate the performance of the operating 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 and changes in fair value of earn-outs and financial instruments. There is no intersegment activity.

 

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Table of Contents

The following tables reconcile the Company and ETP’s segment activity to their condensed consolidated and combined results of operations and financial position for the three and nine months ended September 30, 2011 and 2010 (in thousands):

 

     For the Three Months Ended
September 30, 2011
    For the Three Months Ended
September 30, 2010
 

Office Properties:

    

Total revenues

   $ 763      $ 855   

Property operating expenses

     (170     (159

General and administrative costs

     (1     —     
  

 

 

   

 

 

 

Property net operating income, as defined

     592        696   

Depreciation and amortization

     (239     (266

Interest expense

     (202     (206

Interest income

     —          —     
  

 

 

   

 

 

 

Income from continuing operations

     151        224   

Income from discontinued operations

     —          —     
  

 

 

   

 

 

 

Net income

   $ 151      $ 224   
  

 

 

   

 

 

 

Retail Properties:

    

Total revenues

   $ 14,620      $ 3,762   

Property operating expenses

     (3,373     (927

General and administrative costs

     (3,186     (1,863
  

 

 

   

 

 

 

Property net operating income, as defined

     8,061        972   

Depreciation and amortization

     (6,136     (1,798

Interest expense

     (3,359     (1,067

Interest income

     144        84   

Loss on changes in fair value of financial instruments and earn-outs

     (596     —     
  

 

 

   

 

 

 

Loss from continuing operations

     (1,886     (1,809

Income from discontinued operations

     —          440   
  

 

 

   

 

 

 

Net loss

   $ (1,886   $ (1,369
  

 

 

   

 

 

 

Total Reportable Segments:

    

Total revenues

   $ 15,383      $ 4,617   

Property operating expenses

     (3,543     (1,086

General and administrative costs

     (3,187     (1,863
  

 

 

   

 

 

 

Property net operating income, as defined

     8,653        1,668   

Depreciation and amortization

     (6,375     (2,064

Interest expense

     (3,561     (1,273

Interest income

     144        84   

Loss on changes in fair value of financial instruments and earn-outs

     (596     —     
  

 

 

   

 

 

 

Loss from continuing operations

     (1,735     (1,585

Income from discontinued operations

     —          440   
  

 

 

   

 

 

 

Net loss

   $ (1,735   $ (1,145
  

 

 

   

 

 

 

Attributable to Controlling Interest:

    

Loss attributable to Excel Trust, Inc.

   $ (1,735   $ (1,145

Net loss attributable to non-controlling interests in operating partnership

     118        45   

Net income attributable to non-controlling interests in consolidated joint ventures

     (120     —     
  

 

 

   

 

 

 

Net loss attributable to Excel Trust, Inc.

   $ (1,737   $ (1,100
  

 

 

   

 

 

 

 

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Table of Contents
     For the Nine Months Ended
September 30, 2011
    April 28, 2010 to
September 30, 2010
    January 1, 2010 to
April 27, 2010
 

Office Properties:

      

Total revenues

   $ 2,382      $ 1,456      $ 1,021   

Property operating expenses

     (507     (268     (212

General and administrative costs

     (2     —          (5
  

 

 

   

 

 

   

 

 

 

Property net operating income, as defined

     1,873        1,188        804   

Depreciation and amortization

     (718     (488     (326

Interest expense

     (602     (342     (269

Interest income

     —          1        —     
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     553        359        209   

Income from discontinued operations

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Net income

   $ 553      $ 359      $ 209   
  

 

 

   

 

 

   

 

 

 

Retail Properties:

      

Total revenues

   $ 36,269      $ 4,497      $ 547   

Property operating expenses

     (8,779     (1,062     (167

General and administrative costs

     (8,975     (3,999     (3
  

 

 

   

 

 

   

 

 

 

Property net operating income, as defined

     18,515        (564     377   

Depreciation and amortization

     (16,219     (2,250     (216

Interest expense

     (9,027     (1,281     (214

Interest income

     228        157        —     

Gain on acquisition of real estate

     937        —          —     

Gain, net on changes in fair value of financial instruments and earn-outs

     244        —          —     
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (5,322     (3,938     (53

Income from discontinued operations

     4,999        610        —     
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (323   $ (3,328   $ (53
  

 

 

   

 

 

   

 

 

 

Total Reportable Segments:

      

Total revenues

   $ 38,651      $ 5,953      $ 1,568   

Property operating expenses

     (9,286     (1,330     (379

General and administrative costs

     (8,977     (3,999     (8
  

 

 

   

 

 

   

 

 

 

Property net operating income, as defined

     20,388        624        1,181   

Depreciation and amortization

     (16,937     (2,738     (542

Interest expense

     (9,629     (1,623     (483

Interest income

     228        158        —     

Gain on acquisition of real estate

     937        —          —     

Gain on changes in fair value of financial instruments and earn-outs

     244        —          —     
  

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (4,769     (3,579     156   

Income from discontinued operations

     4,999        610        —     
  

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ 230      $ (2,969   $ 156   
  

 

 

   

 

 

   

 

 

 

Attributable to Controlling Interest:

      

Income (loss) attributable to Excel Trust, Inc. and Excel Trust, Inc. Predecessor

   $ 230      $ (2,969   $ 156   

Net loss (income) attributable to non-controlling interests in operating partnership

     25        117        (290

Net income attributable to non-controlling interests in consolidated joint ventures

     (85     —          —     
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Excel Trust, Inc. and Excel Trust, Inc. Predecessor

   $ 170      $ (2,852   $ (134
  

 

 

   

 

 

   

 

 

 

 

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     September 30,      December 31,  
     2011      2010  

Assets:

     

Office Properties:

     

Total assets

   $ 15,720       $ 16,081   

Retail Properties:

     

Total assets

     658,654         425,007   
  

 

 

    

 

 

 

Total Reportable Segments & Consolidated Assets:

     

Total assets

   $ 674,374       $ 441,088   
  

 

 

    

 

 

 

 

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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 consolidated and combined 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; our inability to attract and retain key personnel; government approvals, actions and initiatives, including the need for compliance with environmental requirements; financial market fluctuations; changes in real estate and zoning laws and increases in real property tax rates; the effects of earthquakes and other natural disasters; and lack of or insufficient amounts of insurance. 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 Annual Report on Form 10-K for the year ended December 31, 2010. 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 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, of 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 elected to be taxed as a REIT under the Code beginning with the taxable year ended December 31, 2010.

 

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As of September 30, 2011, we owned a portfolio consisting of 18 retail operating properties totaling approximately 3.4 million square feet of gross leasable area, which were approximately 95.2% leased, based on gross leasable area. In addition, we own one commercial office property totaling 82,157 square feet of gross leasable area, which was 92.2% leased as of September 30, 2011. We utilize a portion of this commercial building as our headquarters. We also own two land parcels comprising approximately 31 acres slated for retail development.

Our operations are carried on primarily through our Operating Partnership. Pursuant to contribution agreements, we and our 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 in connection with the Offering.

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 Annual Report on Form 10-K for the year ended December 31, 2010 which was filed with the Securities and Exchange Commission and 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, 2011, we owned 18 retail operating properties with a total of approximately 3.4 million square feet of gross leasable area.

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 18 to our condensed consolidated and combined financial statements in accordance with ASC 280, Segment Reporting. A portion of the results of operations for the three months ended September 30, 2010 reflect operations of the Predecessor properties prior to the IPO. 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 months ended September 30, 2011 and 2010 may not be indicative of our future results of operations.

Retail Properties

At September 30, 2011, we owned 18 retail operating properties totaling approximately 3.4 million square feet. The properties were 95.2% leased and 43 leases were signed or renewed in the nine months ended September 30, 2011 for a total of approximately 144,000 square feet.

Comparison of the Three Months Ended September 30, 2011 to the Three Months Ended September 30, 2010

Total revenues, which include rental revenues and tenant recoveries including insurance, property taxes and other operating expenses paid by tenants, increased by $10.8 million to $14.6 million for the three months ended September 30, 2011 compared to $3.8 million for the three months ended September 30, 2010. The increase was directly related to our acquisition of 16 retail properties since the completion of the Offering, the majority of which were acquired after September 30, 2010.

 

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Property operating expenses, which include maintenance and repair expenses, real estate taxes, management fees and other operating expenses including bad debts, increased by $2.5 million to $3.4 million for the three months ended September 30, 2011 compared to $0.9 million for the three months ended September 30, 2010. The increase primarily related to the 15 operating retail properties we acquired since the completion of the Offering whereby the tenants reimburse us for their pro rata share of property operating expenses. One of the properties we acquired is under a triple-net lease whereby the tenant pays for all the operating expenses.

General and administrative expenses increased $1.3 million to $3.2 million for the three months ended September 30, 2011 compared to $1.9 million for the three months ended September 30, 2010. The increase is primarily the result of additional non-cash compensation expense recognized in 2011 pursuant to the implementation of a long-term incentive plan in March 2011. In connection with the plan, members of senior management and other selected employees were provided restricted stock grants, a portion of which may vest only upon meeting minimum shareholder return thresholds. 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.

Depreciation and amortization expense increased $4.3 million to $6.1 million for the three months ended September 30, 2011 compared to $1.8 million for the three months ended September 30, 2010. The increase was directly related to our acquisition of 16 operating retail properties since the completion of the Offering, including the commencement of operations at a portion of one of our former development properties during 2011.

Interest expense (net of interest income) increased $2.1 million to $3.2 million for the three months ended September 30, 2011 compared to $1.1 million for the three months ended September 30, 2010. The increase was due to the increase in mortgage and notes payable. At September 30, 2011, we had approximately $246.0 million in outstanding indebtedness compared to approximately $104.5 million of outstanding indebtedness at September 30, 2010.

The loss on changes in fair value of financial instruments of approximately $0.6 million was recognized during the three months ended September 30, 2011 as a result of an increase in the estimated fair value of the redemption provision of OP units arising from a property acquired in 2011 (see Note 3 and 17 of the consolidated financial statements, contained elsewhere herein).

Comparison of the Nine Months Ended September 30, 2011 to the Nine Months Ended September 30, 2010

Total revenues, which include rental revenues and tenant recoveries including insurance, property taxes and other operating expenses paid by tenants, increased by $31.2 million to $36.2 million for the nine months ended September 30, 2011 compared to $5.0 million for the nine months ended September 30, 2010. The increase was directly related to our acquisition of 16 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 $7.6 million to $8.8 million for the nine months ended September 30, 2011 compared to $1.2 million for the nine months ended September 30, 2010. The increase primarily related to the 15 operating retail properties we acquired since the completion of the Offering whereby the tenants reimburse us for their pro rata share of property operating expenses. One of the properties we acquired is under a triple-net lease whereby the tenant pays for all the operating expenses.

General and administrative expenses increased $5.0 million to $9.0 million for the nine months ended September 30, 2011 compared to $4.0 million for the nine months ended September 30, 2010. The increase is primarily the result of additional non-cash compensation expense recognized in 2011 pursuant to the implementation of a long-term incentive plan in March 2011. In connection with the plan, members of senior management and other selected employees were provided restricted stock grants, a portion of which may vest only upon meeting minimum shareholder return thresholds. General and administrative expenses in the nine 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.

Depreciation and amortization expense increased $13.7 million, to $16.2 million for the nine months ended September 30, 2011 compared to $2.5 million for the nine months ended September 30, 2010. The increase was directly related to our acquisition of 16 operating retail properties since the completion of the Offering, including the commencement of operations at a portion of one of our former development properties during 2011.

Interest expense (net of interest income) increased $7.5 million to $8.8 million for the nine months ended September 30, 2011 compared to $1.3 million for the nine months ended September 30, 2010. The increase was due to the increase in mortgage and notes payable. At September 30, 2011, we had approximately $246.0 million in outstanding indebtedness compared to approximately $104.5 million of outstanding indebtedness at September 30, 2010.

 

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A gain on acquisition of real estate of approximately $0.9 million was recognized during the nine months ended September 30, 2011 related to a property acquired in 2011, representing the difference between the fair value at the date of closing and the price paid (see Note 3).

A gain comprised of (1) a loss on changes in fair value of financial instruments of approximately $0.1 million and (2) a gain on changes in fair value of earn-outs of approximately $0.3 million recognized during the nine months ended September 30, 2011 are the result of (1) an increase in the estimated fair value of the redemption provision of OP units arising from a property acquired in 2011 (see Note 3 and 17 of the consolidated financial statements, contained elsewhere herein) and (2) a decrease in the estimated fair value of additional consideration that may be due to the sellers of properties acquired in 2010 as a result of a decrease in the likelihood of the counterparty achieving the necessary conditions (see Note 17 of the consolidated financial statements, contained elsewhere herein).

Commercial Office Properties

At September 30, 2011, we owned one commercial office operating property (previously owned by our Predecessor) totaling 82,157 square feet. The property was 92.2% leased at September 30, 2011.

Comparison of the Three Months Ended September 30, 2011 to the Three Months Ended September 30, 2010

Total revenues decreased $0.1 million to $0.8 million for the three months ended September 30, 2011 compared to $0.9 million for the three months ended September 30, 2010, due to the expiration of two leases in late 2010 and early 2011, which were not renewed.

Property operating expenses did not change significantly (approximately $0.2 million for both the three months ended September 30, 2011 and 2010) 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, 2011 or 2010.

Depreciation and amortization expense did not change significantly (change of approximately $27,000) as there were no significant changes in operations and no significant change in tenants.

Interest expense (net of interest income) did not change significantly (approximately $0.2 million for both the three months ended September 30, 2011 and 2010) as there was no significant change in the mortgage balance outstanding other than scheduled monthly principal debt payments.

Comparison of the Nine Months Ended September 30, 2011 to the Nine Months Ended September 30, 2010

Total revenues decreased $0.1 million to $2.4 million for the nine months ended September 30, 2011 compared to $2.5 million for the nine months ended September 30, 2010, due to the expiration of two leases in late 2010 and early 2011, which were not renewed.

Property operating expenses did not change significantly (approximately $0.5 million for both the nine months ended September 30, 2011 and 2010) as there were no significant changes in operations.

There were no significant general and administrative expenses related to our commercial office property for either the nine months ended September 30, 2011 or 2010.

Depreciation and amortization expense decreased $0.1 million to $0.7 million for the three months ended September 30, 2011 compared to $0.8 million for the three months ended September 30, 2010 as a result of the full amortization of certain tangible and intangible assets associated with leases expiring in late 2010 and early 2011.

Interest expense (net of interest income) did not change significantly (approximately $0.6 million for both the nine months ended September 30, 2011 and 2010) as there was no significant change in the mortgage balance outstanding other than scheduled monthly principal debt payments.

Cash Flows

The following is a comparison, for the nine months ended September 30, 2011 and 2010, of the cash flows of the Company and our Predecessor.

Cash and cash equivalents were $45.9 million and $57.9 million at September 30, 2011 and 2010, respectively.

 

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Net cash provided by operating activities was $18.4 million for the nine months ended September 30, 2011 compared to $2.9 million for the nine months ended September 30, 2010, an increase of $15.5 million. Included in the adjustments to reconcile net income to cash provided by operating activities was depreciation and amortization, which increased $13.8 million from properties acquired since the Offering. Included as a reduction in the adjustments to reconcile net income to cash provided by operating activities for the nine months ended September 30, 2011 was a gain on the acquisition of real estate of $0.9 million, a gain on sale of real estate assets of $4.0 million and a gain on changes in the fair value of earn-outs of $0.3 million. Included as an increase in the adjustments to reconcile net income to cash provided by operating activities for the nine months ended September 30, 2011 was the amortization of share-based compensation of $3.1 million, as compared to an adjustment of $0.2 million for the nine months ended September 30, 2010, primarily as a result of the implementation of a long-term incentive plan in March 2011.

Net cash used in investing activities was $66.1 million for the nine months ended September 30, 2011 compared to $158.0 million for the nine months ended September 30, 2010, a decrease of $91.9 million. The decrease in net cash used was primarily the result of a decrease in property acquisitions during 2011 as compared to 2010 and a decrease in restricted cash, partially offset by the purchase of equity securities in the amount of approximately $6.1 million.

Net cash provided by financing activities was $87.0 million for the nine months ended September 30, 2011 compared to $212.3 million for the nine months ended September 30, 2010, a decrease of $125.3 million. The decrease is primarily the result of a decrease in gross offering proceeds from our common stock offering in 2011 as compared to our Offering of $150.6 million and $210.0 million, respectively. In addition, we repaid in full the outstanding borrowings on our revolving credit facility, resulting in a reduction of net cash provided by financing activities of approximately $84.8 million (net proceeds of $47.7 million from the issuance of our Preferred Stock as well as a portion of the proceeds from our common stock offering were used to repay a portion of the outstanding borrowings on our revolving credit facility) and repurchased shares of our common stock for total consideration of approximately $6.7 million.

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, 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.

 

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The following table presents a reconciliation of our FFO for the three and nine months ended September 30, 2011 and 2010 (in thousands):

 

     For the Three Months Ended     For the Nine Months Ended  
     September 30, 2011     September 30, 2010     September 30, 2011     September 30, 2010  

Net income (loss) available to common stockholders and controlling interest of the Predecessor

   $ (2,612   $ (1,100   $ (2,183   $ (2,986

Non-controlling interest in operating partnership

     (118     —          (25     —     

Depreciation and amortization

     6,375        2,248        17,352        3,536   

Depreciation and amortization related to joint venture

     (59     —          (134     —     

Gain on acquisition of real estate

     —          —          (937     —     

Gain on sale of real estate assets

     —          —          (3,976     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Funds from operations

   $ 3,586      $ 1,148      $ 10,097      $ 550   
  

 

 

   

 

 

   

 

 

   

 

 

 

Liquidity and Capital Resources

At September 30, 2011, we had $45.9 million of cash and cash equivalents on hand, primarily as a result of our recent common stock offering, which was completed on June 29, 2011 (see discussion below).

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,

 

   

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

 

   

construction of our three non-operating properties

Our long term liquidity requirements consist primarily of funds to pay for property acquisitions, 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 new 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 (excluding debt maturities), pay general and administrative expenses and fund regular distributions. We anticipate being able to refinance or will borrow from our unsecured credit facility to pay for upcoming debt maturities. We expect to incur approximately $13.8 million of additional construction costs on our two non-operating properties. Funds for these costs are expected to come from new mortgage financing, borrowings from our unsecured revolving credit facility and existing cash. We intend to satisfy our other 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 additional shares of preferred stock, as well as debt securities, common stock, warrants, rights and other securities to the extent necessary or advisable to meet our liquidity needs.

In September 2011, we prepaid one mortgage, with an original maturity date of November 2011, utilizing available cash with no prepayment penalty or additional cost.

On July 8, 2010, we entered into the Credit Agreement with Wells Fargo Securities, LLC and KeyBanc Capital Markets, as joint lead arrangers and bookrunners, and certain other lenders, as amended from time to time (the “Credit Agreement”). The Credit Agreement was amended on June 3, 2011 and provides for a revolving credit facility of up to $200.0 million. We have the ability from time to time to increase the size of the revolving credit facility by up to an additional $200.0 million to a total of $400.0 million, subject to receipt of lender commitments and other conditions precedent. The amended maturity date is July 7, 2014 and can be extended for one additional year at our option. The outstanding balance on our revolving credit facility at September 30, 2011 was $0. We have issued a $12.1 million letter of credit under the facility.

The revolving credit facility bears interest at the rate of LIBOR plus a margin of 220 basis points to 300 basis points, depending on our leverage ratio. We also pay a 0.35% fee for any unused portion of the revolving credit facility.

 

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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 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 (1) 0.60 to 1.00,

 

   

a minimum fixed charge coverage ratio (defined as adjusted earnings before interest, taxes, depreciation and amortization to fixed charges) of 1.50 to 1.00,

 

   

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

 

   

a maximum unencumbered leverage ratio (defined as unsecured indebtedness to unencumbered asset value) of 0.60 : 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, cash dividends on our common stock, as well as our preferred stock, may not exceed the greater of (1) 95% of our FFO (as defined), 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. As of September 30, 2011, we were in compliance with all of the covenants under the Credit Agreement.

On January 28, 2011, we issued 2,000,000 shares of Preferred Stock, with a liquidation preference of $25.00 per share. We will pay cumulative dividends on the Preferred Stock when, as and if declared by our Board of Directors at a rate of 7.00% per annum, subject to adjustment in certain circumstances. The annual dividend on each share of Preferred Stock is $1.75, payable quarterly in arrears on the 15th calendar day of January, April, July and October of each year, as and if declared by our Board of Directors. Net proceeds from this offering were approximately $47.7 million in cash. We used the net proceeds of this offering to repay a portion of the outstanding indebtedness under the unsecured revolving credit facility.

On June 29, 2011, we completed the issuance of 14,375,000 shares of common stock, including the exercise of an overallotment option of 1,875,000 shares, resulting in net proceeds of approximately $149.9 million, after deducting the underwriters’ discount and commissions and offering expenses. A portion of the net proceeds of this offering were used to repay the outstanding indebtedness on our revolving credit facility, with the remainder intended to fund future acquisitions and for other general corporate and working capital purposes.

We may from time to time seek to repurchase or redeem outstanding shares of our common stock or preferred stock or other securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases or redemptions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

As of September 30, 2011, our ratio of debt-to-gross undepreciated asset value was approximately 35.8%. 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 current amount.

 

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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, 2011:

 

     Payments by Period  
     2011
(three months)
     2012-2013      2014-2015      Thereafter      Total  

Principal payments — fixed rate debt(1)

   $ 881       $ 84,485       $ 123,344       $ 25,976       $ 234,686   

Principal payments — variable rate debt(2)

     —           —           —           12,000         12,000   

Interest payments — fixed rate debt

     4,127         22,889         10,268         9,441         46,725   

Interest payments — variable rate debt(2)

     19         38         38         859         954   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 5,027       $ 107,412       $ 133,650       $ 48,276       $ 293,365   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Includes a mortgage payable at our Park West Place property, which bears interest at a rate of LIBOR plus 2.50%. In December 2010, we entered into two interest rate swap contracts equal to the notional value of the mortgage payable, which fix LIBOR at an average of 1.41% for the term of the loan.

 

(2) 

Includes redevelopment revenue bonds at our Northside Mall property to be used for the redevelopment of this property and outstanding borrowings on our revolving credit facility (our revolving credit facility had a balance of $0 at September 30, 2011). Interest on the redevelopment bonds is reset weekly and determined by the bond remarketing agent based on the market value of the bonds. The revolving credit facility bears interest at the rate of LIBOR plus a margin of 220 basis points to 300 basis points, depending on our leverage ratio.

Off-Balance Sheet Arrangements

As of September 30, 2011, we had a $2.0 million note receivable related to a mezzanine loan to PC Retail, LLC to facilitate the land acquisition and development of a shopping center anchored by Publix in Brandon, Florida. The loan is secured with a second mortgage trust deed on the property and is personally guaranteed by members of PC Retail, LLC. We have also entered into a purchase and sale agreement with PC Retail, LLC to acquire the property upon completion. The purchase price will be based on the income from leasing of the center.

We do not have any other 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 other financing, liquidity, market or credit risk that could arise if we had engaged in these relationships, than as described above.

Distribution Policy

We elected to be taxed as a REIT under the Code beginning with the taxable year ended 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 United States 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 United States 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 United States federal taxation as a REIT, we may be subject to certain state and local taxes on our income properties and operations and to United States 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.

 

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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.

The fair value of mortgages payable (before premium or discount) at September 30, 2011 was approximately $244.7 million compared to the carrying amount of $246.7 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 $5.7 million at September 30, 2011. 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 $6.1 million at September 30, 2011.

We have entered into a $200.0 million unsecured revolving credit facility. The revolving credit facility bears interest at the rate of LIBOR plus a margin of 220 basis points to 300 basis points, depending on our leverage ratio. As of September 30, 2011, we had $12.1 million of debt and commitments outstanding under our unsecured revolving credit facility, comprised of a $12.1 million letter of credit issued under the facility. At September 30, 2011, the outstanding balance on our revolving credit facility was $0.

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.

As of September 30, 2011, we had two interest rate derivatives that were designated as cash flow hedges of interest rate risk. Both derivatives were interest rate swaps and the notional amount totaled $55.8 million. The interest rate swap contracts fixed LIBOR at an average of 1.41% for the term of a mortgage loan which expires in December 2013. The fair value of these derivative financial instruments was approximately $1.1 million and is classified in accounts payable and other liabilities on the accompanying condensed consolidated balance sheets.

 

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 Securities Exchange Act of 1934, as amended (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.

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 the foregoing, 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.

 

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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 9 in our Annual Report on Form 10-K for the year ended December 31, 2010 which was filed with the Securities and Exchange Commission and 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 Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table presents information regarding repurchases of our common stock during the quarter ended September 30, 2011 under the $30.0 million stock repurchase program approved by our Board of Directors in August 2011.

 

     Total Number of
Shares Purchased
     Average Price Paid
Per Share
     Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
     Maximum Dollar Value of
Shares that May Yet Be
Purchased Under the
Program
 

July 1-31, 2011

     —         $ —           —         $ 30,000,000   

August 1-31, 2011

     674,866         9.99        674,866        23,257,874   

September 1-30, 2011

     —           —           —           23,257,874   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     674,866       $ 9.99        674,866      $ 23,257,874   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Reserved

 

Item 5. Other Information

None.

 

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Item 6. Exhibits

 

Exhibit
Number

  

Description of Exhibit

  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.
101.INS    XBRL Instance Document.†
101.SCH    XBRL Taxonomy Extension Schema Document.†
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document.†
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document.†
101.LAB    XBRL Taxonomy Extension Label Linkbase Document.†
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document.†

 

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.

 

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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.

 

EXCEL TRUST, INC.
By:   /s/    GARY B. SABIN        
  Gary B. Sabin
 

Chairman and Chief Executive Officer

(Principal Executive Officer)

By:   /s/    JAMES Y. NAKAGAWA        
  James Y. Nakagawa
 

Chief Financial Officer

(Principal Financial Officer)

Date: November 3, 2011

 

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EXHIBIT INDEX

 

Exhibit
Number

  

Description of Exhibit

  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.
101.INS    XBRL Instance Document.†
101.SCH    XBRL Taxonomy Extension Schema Document.†
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document.†
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document.†
101.LAB    XBRL Taxonomy Extension Label Linkbase Document.†
101.PRE