UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 8-K/A

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of Report (Date of earliest event reported): January 15, 2013

   

 

PHILLIPS EDISON – ARC

SHOPPING CENTER REIT INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland

  

006-54691

  

27-1106076

(State or other jurisdiction of incorporation

  

(Commission File Number)

  

(I.R.S. Employer

or organization)

  

  

  

Identification No.)

 

11501 Northlake Drive

Cincinnati, Ohio 45249

(Address of principal executive offices)

(Zip Code)

 

(513) 554-1110

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name or former address, if changed since last report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

o    Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

o            Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

o            Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

o            Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 


 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, Phillips Edison – ARC Shopping Center REIT Inc. (the “Company”) hereby amends the following Current Reports on Form 8-K to provide the required financial information:

 

·         Current Report on Form 8-K filed on January 22, 2013 and amended on February 19, 2013 to provide the required financial information relating to the Company’s acquisition of a portfolio consisting of seven shopping centers (the “Atlanta Portfolio”), located in Acworth, Georgia; Ellenwood, Georgia; Alpharetta, Georgia; Buford, Georgia; Mableton, Georgia; McDonough, Georgia; and Marietta, Georgia, as described in that Current Report; and

 

·         Current Report on Form 8-K filed on February 4, 2013 to provide the required financial information relating to the Company’s acquisition of Fairlawn Town Centre, located in Fairlawn, Ohio, as described in that Current Report.

 

After reasonable inquiry, the Company is not aware of any material factors relating to the Atlanta Portfolio or Fairlawn Town Centre that would cause the reported revenues and certain operating expenses relating to it not to be necessarily indicative of future operating results.

 

Item 9.01                               Financial Statements and Exhibits.

 

 

 

Page

 

 

 

(a)

Financial Statements of Businesses Acquired.

 

 

 

 

 

Atlanta Portfolio

 

 

 

 

 

Independent Auditors’ Report

3

 

 

 

 

Combined Statement of Revenues and Certain Operating Expenses for the year ended December 31, 2012

4

 

 

 

 

Notes to the Combined Statement of Revenues and Certain Operating Expenses for the year ended December 31, 2012

5

 

 

 

 

Fairlawn Town Centre

 

 

 

 

 

Independent Auditors’ Report

7

 

 

 

 

Statement of Revenues and Certain Operating Expenses for the year ended December 31, 2012

8

 

 

 

 

Notes to the Statement of Revenues and Certain Operating Expenses for the year ended December 31, 2012

9

 

 

 

(b)

Pro Forma Financial Information.

 

 

 

 

 

Unaudited Pro Forma Condensed Consolidated Financial Information

11

 

 

 

 

Unaudited Pro Forma Condensed Consolidated Balance Sheet as of December 31, 2012

12

 

 

 

 

Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 2012

13

 

 

 

 

Notes to Unaudited Pro Forma Condensed Consolidated Financial Information

14

2

 


 

 

INDEPENDENT AUDITORS' REPORT

 

To the Board of Directors and Stockholders of

Phillips Edison – ARC Shopping Center REIT Inc.

Cincinnati, Ohio

 

We have audited the accompanying combined statement of revenues and certain operating expenses of the Atlanta Portfolio, a group of seven shopping centers in the Atlanta, Georgia area (collectively, the “Properties”), for the year ended December 31, 2012, and the related notes (the “Combined Historical Summary”).  These entities are under common ownership and management.

 

Management's Responsibility for the Combined Historical Summary

 

Management is responsible for the preparation and fair presentation of this Combined Historical Summary in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the Combined Historical Summary that is free from material misstatement, whether due to fraud or error.

 

Auditors' Responsibility

 

Our responsibility is to express an opinion on the Combined Historical Summary based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Combined Historical Summary is free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the Combined Historical Summary. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the Combined Historical Summary, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Properties’ preparation and fair presentation of the Combined Historical Summary in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Properties’ internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the Combined Historical Summary.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the Combined Historical Summary referred to above presents fairly, in all material respects, the combined revenue and certain operating expenses described in Note 1 of the Properties for the year ended December 31, 2012, in accordance with accounting principles generally accepted in the United States of America.

 

Emphasis-of-Matter

 

We draw attention to Note 1 to the Combined Historical Summary, which describes that the accompanying Combined Historical Summary was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission and is not intended to be a complete presentation of the Properties’ combined revenues and expenses. Our opinion is not modified with respect to this matter.

 

/s/ Deloitte & Touche LLP

 

Cincinnati, Ohio

April 3, 2013

3

 


 

 

Atlanta Portfolio

Combined Statement of Revenues and Certain Operating Expenses

For the Year Ended December 31, 2012

(in thousands)

  

  

  

  

  

  

  

  

  

  

Year Ended

  

  

  

  

December 31,

  

  

  

  

2012 

  

  

  

  

  

  

Revenues

  

  

  

  

  

Rental income

  

  

$

5,618 

  

Tenant recovery income

  

  

  

1,348 

  

Other property income

  

  

  

28 

  

  

Total revenues

  

  

  

6,994 

  

  

  

  

  

  

  

Certain Operating Expenses

  

  

  

  

  

Property operating

  

  

  

1,256 

  

Real estate taxes

  

  

  

814 

  

General and administrative

  

  

  

  

  

Total certain operating expenses

  

  

  

2,071 

  

  

  

  

  

  

  

Revenues in excess of certain operating expenses

  

  

$

4,923 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

See accompanying Notes to the Combined Statement of Revenues and Certain Operating Expenses.

4

 


 

 

Atlanta Portfolio

Notes to the Combined Statement of Revenues and Certain Operating Expenses

For the Year Ended December 31, 2012

 

1.  ORGANIZATION AND BASIS OF PRESENTATION

 

Between January 15, 2013 and February 13, 2013, Phillips Edison – ARC Shopping Center REIT Inc. (the “Company”) purchased the Atlanta Portfolio, a portfolio consisting of seven shopping centers containing 587,367 rentable square feet (unaudited) located in Acworth, Georgia; Ellenwood, Georgia; Alpharetta, Georgia; Buford, Georgia; Mableton, Georgia; McDonough, Georgia; and Marietta, Georgia, from one seller for approximately $69.7 million, exclusive of closing costs.  The acquisition and related expenses were funded with proceeds from the Company’s ongoing public offering, proceeds from a secured syndicated revolving credit facility led by KeyBank National Association, and proceeds from an unsecured syndicated revolving credit facility led by KeyBank National Association.

 

The combined statement of revenues and certain operating expenses (the “Combined Historical Summary”) of the Atlanta Portfolio has been prepared for the purpose of complying with the provisions of Rule 3-14 of Regulation S-X promulgated by the United States Securities and Exchange Commission (the “SEC”), which requires certain information with respect to real estate operations to be included in certain filings with the SEC.  The Combined Historical Summary is not intended to be a complete presentation of the combined revenues and operating expenses of the Atlanta Portfolio.  The combined statement of revenues and certain operating expenses excludes items that may not be comparable to the future operations of the Atlanta Portfolio, such as depreciation, amortization, and interest on debt not assumed.

 

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Reporting and Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions of the reported amounts of revenues and certain operating expenses during the reporting period.  Actual results may differ from those estimates.

 

Revenue Recognition — The Atlanta Portfolio leases space to retail tenants under leases with varying terms, which are accounted for as operating leases. The properties recognize minimum rents on the straight-line method over the terms of the leases regardless of when payments are due. Certain leases also provide for additional revenue based on contingent percentage revenue, which is recorded on an accrual basis once the specified target that triggers this type of revenue is achieved. Percentage revenue was $18,000 for the year ended December 31, 2012.  The leases also typically provide for tenant recoveries of common area maintenance (CAM) costs, real estate taxes, and other operating expenses. These recoveries are recognized as revenue in the period the applicable costs are incurred. Most tenants pay estimated monthly CAM amounts and are billed the shortfalls or credited the overpayments annually, with the exclusion of tenants with gross leases.

 

Straight-line rental revenue was higher than the current amount required to be paid by tenants by $76,000 for the year ended December 31, 2012.

 

Repairs and Maintenance — Expenditures for normal, recurring, or periodic maintenance are charged to expense when incurred and are included in property operating expenses. Renovations which improve or extend the life of the asset are capitalized.

 

Subsequent Events —  The Company has evaluated subsequent events through April 3, 2013, the date the Combined Historical Summary was available to be issued, to determine if either recognition or disclosure of significant events or transactions is required.  The Company has determined that no such recognition or disclosure is required.

 

3.  LEASES

 

Minimum future rentals of the Atlanta Portfolio to be received under noncancelable operating leases in effect as of December 31, 2012, assuming no new or renegotiated leases or option extensions on lease agreements are as follows:

 

5

 


 

 

Years Ending

  

  

December 31

  

  

  

  

  

2013 

$

5,303,000 

2014 

  

4,945,000 

2015 

  

4,454,000 

2016 

  

3,965,000 

2017 

  

2,995,000 

Thereafter

  

7,842,000 

  

  

  

Total

$

29,504,000 

  

  

  

The minimum future rental income represents the base rent required to be paid by the tenants under the terms of their leases, exclusive

of operating expense recoveries.

 

4.  CONCENTRATIONS

 

The percentages of rental income from tenants who individually represent more than 10% of the rental income of the Atlanta Portfolio for the year ended December 31, 2012 are as follows:

 

Tenant

Percent of Rental Revenue

  

  

Kroger

43%

Publix

16%

  

  

* * * * * *

6

 


 

 

 

INDEPENDENT AUDITORS' REPORT

 

To the Board of Directors and Stockholders of

Phillips Edison – ARC Shopping Center REIT Inc.

Cincinnati, Ohio

 

We have audited the accompanying statement of revenues and certain operating expenses of Fairlawn Town Centre, a shopping center located in Fairlawn, Ohio, (the “Property”), for the year ended December 31, 2012, and the related notes (the “Historical Summary”).

 

Management's Responsibility for the Historical Summary

 

Management is responsible for the preparation and fair presentation of this Historical Summary in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the Historical Summary that is free from material misstatement, whether due to fraud or error.

 

Auditors' Responsibility

 

Our responsibility is to express an opinion on the Historical Summary based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Historical Summary is free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the Historical Summary. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the Historical Summary, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Property’s preparation and fair presentation of the Historical Summary in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Property’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the Historical Summary.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the Historical Summary referred to above presents fairly, in all material respects, the revenue and certain operating expenses described in Note 1 to the Historical Summary of the Property for the year ended December 31, 2012, in accordance with accounting principles generally accepted in the United States of America.

 

Emphasis-of-Matter

 

We draw attention to Note 1 to the Historical Summary, which describes that the accompanying Historical Summary was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission and is not intended to be a complete presentation of the Property’s revenues and expenses. Our opinion is not modified with respect to this matter.

   

/s/ Deloitte & Touche LLP

 

Cincinnati, Ohio

April 3, 2013

7

 


 

 

Fairlawn Town Centre

Statement of Revenues and Certain Operating Expenses

For the Year Ended December 31, 2012

(in thousands)

  

  

  

  

  

  

  

  

  

  

Year Ended

  

  

  

  

December 31,

  

  

  

  

2012 

  

  

  

  

  

  

Revenues

  

  

  

  

  

Rental income

  

  

$

3,668 

  

Tenant recovery income

  

  

  

786 

  

  

Total revenues

  

  

  

4,454 

  

  

  

  

  

  

  

Certain Operating Expenses

  

  

  

  

  

Property operating

  

  

  

689 

  

Real estate taxes

  

  

  

599 

  

General and administrative

  

  

  

  

  

Total certain operating expenses

  

  

  

1,297 

  

  

  

  

  

  

  

Revenues in excess of certain operating expenses

  

  

$

3,157 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

See accompanying Notes to the Statement of Revenues and Certain Operating Expenses.

8

 


 

 

Fairlawn Town Centre

Notes to the Statement of Revenues and Certain Operating Expenses

For the Year Ended December 31, 2012

 

1.  ORGANIZATION AND BASIS OF PRESENTATION

 

On January 30, 2013, Phillips Edison – ARC Shopping Center REIT Inc. (the “Company”) purchased Fairlawn Town Centre, a shopping center containing 348,255 rentable square feet (unaudited) located in Fairlawn, Ohio, for approximately $42.2 million, exclusive of closing costs.  The acquisition and related expenses were funded with proceeds from the Company’s ongoing public offering, proceeds from a secured syndicated revolving credit facility led by KeyBank National Association, and proceeds from an unsecured syndicated revolving credit facility led by KeyBank National Association.

 

The statement of revenues and certain operating expenses (the “Historical Summary”) of Fairlawn Town Centre has been prepared for the purpose of complying with the provisions of Rule 3-14 of Regulation S-X promulgated by the United States Securities and Exchange Commission (the “SEC”), which requires certain information with respect to real estate operations to be included in certain filings with the SEC.  The Historical Summary is not intended to be a complete presentation of the revenues and operating expenses of Fairlawn Town Centre.  The statement of revenues and certain operating expenses excludes items that may not be comparable to the future operations of Fairlawn Town Centre, such as depreciation, amortization, and interest on debt not assumed.

 

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Reporting and Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions of the reported amounts of revenues and certain operating expenses during the reporting period.  Actual results may differ from those estimates.

 

Revenue Recognition —Fairlawn Town Centre leases space to retail tenants under leases with varying terms, which are accounted for as operating leases. The property recognizes minimum rents on the straight-line method over the terms of the leases regardless of when payments are due. The leases also typically provide for tenant recoveries of common area maintenance (CAM) costs, real estate taxes, and other operating expenses. These recoveries are recognized as revenue in the period the applicable costs are incurred. Most tenants pay estimated monthly CAM amounts and are billed the shortfalls or credited the overpayments annually, with the exclusion of tenants with gross leases.

 

Straight-line rental revenue was higher than the current amount required to be paid by tenants by $69,000 for the year ended December 31, 2012.

 

Repairs and Maintenance — Expenditures for normal, recurring, or periodic maintenance are charged to expense when incurred and are included in property operating expenses. Renovations which improve or extend the life of the asset are capitalized.

 

Subsequent Events —  The Company has evaluated subsequent events through April 3, 2013, the date the Historical Summary was available to be issued, to determine if either recognition or disclosure of significant events or transactions is required.  The Company has determined that no such recognition or disclosure is required.

 

3.  LEASES

 

Minimum future rentals of Fairlawn Town Centre to be received under noncancelable operating leases in effect as of December 31, 2012, assuming no new or renegotiated leases or option extensions on lease agreements are as follows:

 

9

 


 

 

Years Ending

  

  

December 31

  

  

  

  

  

2013 

$

3,851,000 

2014 

  

3,356,000 

2015 

  

2,655,000 

2016 

  

2,267,000 

2017 

  

2,012,000 

Thereafter

  

12,215,000 

  

  

  

Total

$

26,356,000 

  

  

  

The minimum future rental income represents the base rent required to be paid by the tenants under the terms of their leases, exclusive

of operating expense recoveries.

 

4.  CONCENTRATIONS

 

The percentages of rental income from tenants who individually represent more than 10% of the rental income of Fairlawn Town Centre for the year ended December 31, 2012 are as follows:

 

Tenant

Percent of Rental Revenue

  

  

Giant Eagle

27%

Marc's

11%

  

  

* * * * * *

10

 


 

 

Phillips Edison – ARC Shopping Center REIT Inc.

Unaudited Pro Forma Condensed Consolidated Financial Information

 

Between January 15, 2013 and February 13, 2013, the Company purchased a portfolio consisting of seven shopping centers containing 587,367 rentable square feet located in Acworth, Georgia; Ellenwood, Georgia; Alpharetta, Georgia; Buford, Georgia; Mableton, Georgia; McDonough, Georgia; and Marietta, Georgia (the “Atlanta Portfolio”) for approximately $69.7 million, exclusive of closing costs.  The acquisition and related expenses were funded with proceeds from the Company’s ongoing public offering, proceeds from a secured syndicated revolving credit facility led by KeyBank National Association (the “Secured Credit Facility”), and proceeds from an unsecured syndicated revolving credit facility led by KeyBank National Association (the “Unsecured Credit Facility”).  The Atlanta Portfolio was purchased from Equity One, Inc., which is not affiliated with the Company, its advisor or its sub-advisor.

 

On January 30, 2013, the Company purchased a shopping center containing 348,255 rentable square feet located in Fairlawn, Ohio (“Fairlawn Town Centre”) for approximately $42.2 million, exclusive of closing costs.  The acquisition and related expenses were funded with proceeds from the Company’s ongoing public offering, proceeds from the Secured Credit Facility, and proceeds from the Unsecured Credit Facility.  Fairlawn Town Centre was purchased from AG/WP Fairlawn Owner, LLC, which is not affiliated with the Company, its advisor or its sub-advisor.

 

In the Company’s opinion, all material adjustments necessary to reflect the effects of the above transactions have been made.  Although we do not anticipate any changes in the Atlanta Portfolio or Fairlawn Town Centre fair value measurements, the measurements may be subject to change within 12 months of the business combination date if new facts or circumstances that were previously unknown but existed as of the business combination date are brought to the Company’s attention.

 

The following unaudited pro forma condensed consolidated balance sheet as of December 31, 2012 is presented as if the Company acquired the Atlanta Portfolio and Fairlawn Town Centre on December 31, 2012.  The following unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2012 is presented as if the Company had acquired the Atlanta Portfolio and Fairlawn Town Centre on January 1, 2012.  This unaudited pro forma condensed consolidated financial information should be read in conjunction with the historical financial statements and notes thereto as filed in the Company’s annual report on Form 10-K for the year ended December 31, 2012 and are not necessarily indicative of what the actual financial position or results of operations would have been had the Company completed the transactions as of the beginning of the periods presented, nor is it necessarily indicative of future results.

11

 


 

 

Phillips Edison – ARC Shopping Center REIT Inc.

Pro Forma Condensed Consolidated Balance Sheet (Unaudited)

(in thousands)

  

  

  

  

  

  

  

  

  

  

  

  

December 31,

  

  

  

  

  

  

  

  

2012 

  

Pro Forma

  

Pro Forma

  

  

as Reported

  

Adjustments

  

December 31,

  

  

(a)

  

  

  

  

2012 

  

  

  

  

  

  

  

  

  

  

ASSETS

  

  

  

  

  

  

  

  

Investment in real estate assets, net

$

283,858 

  

$

105,315 

(b)

$

389,173 

Cash and cash equivalents

  

7,654 

  

  

(4,464)

(c)

  

3,190 

Restricted cash

  

1,053 

  

  

(b)

  

1,061 

Accounts receivable, net

  

2,707 

  

  

  

  

2,707 

Prepaid expenses and other, net

  

30,138 

  

  

8,321 

(b)

  

38,459 

Total assets

$

325,410 

  

$

109,180 

  

$

434,590 

  

  

  

  

  

  

  

  

  

  

LIABILITIES AND EQUITY

  

  

  

  

  

  

  

  

Liabilities:

  

  

  

  

  

  

  

  

  

Mortgages and loans payable

$

159,007 

  

$

89,074 

(c)

$

248,081 

  

Acquired below market lease intangibles, net

  

4,892 

  

  

1,449 

(b)

  

6,341 

  

Accounts payable

  

533 

  

  

  

  

533 

  

Accounts payable – affiliates

  

3,634 

  

  

  

  

3,634 

  

Accrued expenses and other liabilities

  

5,073 

  

  

  

  

5,073 

  

Total liabilities

  

173,139 

  

  

90,523 

  

  

263,662 

  

  

  

  

  

  

  

  

  

  

Commitments and contingencies

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Equity:

  

  

  

  

  

  

  

  

  

Preferred stock

  

  

  

  

  

  

Common stock

  

138 

  

  

20 

(c)

  

158 

  

Additional paid-in capital

  

118,238 

  

  

20,227 

(c)

  

138,465 

  

Accumulated deficit

  

(11,720)

  

  

(1,590)

(b)

  

(13,310)

  

Total stockholders' equity

  

106,656 

  

  

18,657 

  

  

125,313 

  

Noncontrolling interests

  

45,615 

  

  

(c)

  

45,615 

  

Total equity

  

152,271 

  

  

18,657 

  

  

170,928 

Total liabilities and equity

$

325,410 

  

$

109,180 

  

$

434,590 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

See accompanying Notes to the Unaudited Pro Forma Condensed Consolidated Financial Information.

12

 


 

 

Phillips Edison – ARC Shopping Center REIT Inc.

Pro Forma Condensed Consolidated Statement of Operations (Unaudited)

For the Year Ended December 31, 2012

(in thousands, except per share amounts)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Combined

  

  

  

  

  

  

  

  

  

  

  

Statements of

  

  

  

  

  

  

  

Year Ended

  

Revenues and

  

  

  

  

  

  

  

December 31,

  

Certain

  

Other Pro

  

Pro Forma

  

  

  

2012 

  

Operating

  

Forma

  

Year Ended

  

  

  

as Reported

  

Expenses

  

Adjustments

  

December 31,

  

  

  

(a)

  

(b)

  

(c)

  

2012 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Revenues:

  

  

  

  

  

  

  

  

  

  

  

  

  

Rental income

$

13,828 

  

$

9,286 

  

$

1,942 

  

$

25,056 

  

  

Tenant recovery income

  

3,635 

  

  

2,134 

  

  

389 

  

  

6,158 

  

  

Other property income

  

87 

  

  

28 

  

  

11 

  

  

126 

  

Total revenues

  

17,550 

  

  

11,448 

  

  

2,342 

  

  

31,340 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Expenses:

  

  

  

  

  

  

  

  

  

  

  

  

  

Property operating

  

2,957 

  

  

1,945 

  

  

501 

  

  

5,403 

  

  

Real estate taxes

  

2,055 

  

  

1,413 

  

  

164 

  

  

3,632 

  

  

General and administrative

  

1,717 

  

  

10 

  

  

1,168 

  

  

2,895 

  

  

Acquisition expenses

  

3,981 

  

  

  

  

(643)

  

  

3,338 

  

  

Depreciation and amortization

  

8,094 

  

  

  

  

6,243 

  

  

14,337 

  

Total expenses

  

18,804 

  

  

3,368 

  

  

7,433 

  

  

29,605 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Operating (loss) income

  

(1,254)

  

  

8,080 

  

  

(5,091)

  

  

1,735 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Interest expense, net

  

(3,020)

  

  

  

  

(2,727)

  

  

(5,747)

  

Other income

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Net (loss) income

  

(4,273)

  

  

8,080 

  

  

(7,818)

  

  

(4,011)

  

Net loss attributable to noncontrolling interests

  

927 

  

  

  

  

(378)

  

  

549 

  

Net (loss) income attributable to Company shareholders

$

(3,346)

  

$

8,080 

  

$

(8,196)

  

$

(3,462)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Per share information – basic and diluted:

  

  

  

  

  

  

  

  

  

  

  

  

Basic and diluted loss per share

$

(0.51)

  

  

  

  

  

  

  

$

(0.22)

  

Weighted-average basic and diluted common shares

  

  

  

  

  

  

  

  

  

  

  

  

  

outstanding

  

6,509,470 

  

  

  

  

  

  

  

  

15,835,508 

(j)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

See accompanying Notes to the Unaudited Pro Forma Condensed Consolidated Financial Information.

13

 


 

 

Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet as of December 31, 2012

 

a.              Reflects the Company’s historical balance sheet as of December 31, 2012.

 

b.             Reflects the acquisitions of the Atlanta Portfolio and Fairlawn Town Centre for $69,650,000 and $42,200,000, respectively.  Acquisition costs of $1,590,000 were expensed as incurred.  The Company used proceeds from its ongoing public offering, proceeds from the Secured Credit Facility, and proceeds from the Unsecured Credit Facility to fund the acquisition.  The Company has allocated its purchase price to the assets and liabilities below (amounts in thousands):

 

  

  

  

Atlanta

  

Fairlawn

  

  

  

Description

Portfolio

  

Town Centre

  

Totals

  

  

  

  

  

  

  

  

  

  

  

  

Land

$

17,338 

  

$

7,180 

  

$

24,518 

  

Building and improvements

  

48,574 

  

  

32,223 

  

  

80,797 

  

  

Total investment in real estate

  

65,912 

  

  

39,403 

  

  

105,315 

  

Acquired above-market lease values

  

1,378 

  

  

929 

  

  

2,307 

  

Acquired in-place lease values

  

3,199 

  

  

2,478 

  

  

5,677 

  

Acquired below-market lease values

  

(839)

  

  

(610)

  

  

(1,449)

  

  

Total assets acquired and liabilities assumed

$

69,650 

  

$

42,200 

  

$

111,850 

 

The Company capitalized $97,000 and $81,000 related to financing the acquisitions and $97,000 and $62,000 for prepaid insurance for the Atlanta Portfolio and Fairlawn Town Centre, respectively.  These costs, in addition to those allocated from the purchase price, are included in prepaid expenses and other assets on the unaudited pro forma condensed consolidated balance sheet as shown below (amounts in thousands):

 

  

  

  

Atlanta

  

Fairlawn

  

  

  

Description

Portfolio

  

Town Centre

  

Totals

  

  

  

  

  

  

  

  

  

  

  

  

Above-market lease values

$

1,378 

  

$

929 

  

$

2,307 

  

In-place lease values

  

3,199 

  

  

2,478 

  

  

5,677 

  

Prepaid insurance

  

97 

  

  

62 

  

  

159 

  

Deferred financing costs

  

97 

  

  

81 

  

  

178 

  

  

Total prepaid expenses and other assets

$

4,771 

  

$

3,550 

  

$

8,321 

 

The Company has allocated the purchase price to the above tangible and identified intangible assets acquired and intangible liabilities assumed based on their fair values in accordance with generally accepted accounting principles as follows: 

 

Estimates of future cash flows, estimates of replacement cost, and other valuation techniques that we believe are similar to those used by independent appraisers are used to allocate the purchase price of each identifiable asset acquired and liabilities assumed such as land, buildings and improvements, equipment and identifiable intangible assets and liabilities, such as amounts related to in-place leases, acquired above- and below-market leases, tenant relationships, asset retirement obligations, mortgage notes payable and any goodwill or gain on purchase. Acquisition-related costs are expensed as incurred.

 

The fair value of buildings and improvements is determined on an as-if-vacant basis.  The estimated fair value of acquired in-place leases is the costs we would have incurred to lease the properties to the occupancy level of the properties at the date of acquisition. Such estimates include leasing commissions, legal costs and other direct costs that would be incurred to lease the properties to such occupancy levels. Additionally, we evaluate the time period over which such occupancy levels would be achieved. Such evaluation includes an estimate of the net market-based rental revenues and net operating costs (primarily consisting of real estate taxes, insurance and utilities) that would be incurred during the lease-up period. Acquired in-place leases as of the date of acquisition are amortized over the remaining lease terms. 

 

Acquired above- and below-market lease values are recorded based on the present value (using interest rates that reflect the risks associated with the leases acquired) of the difference between the contractual amounts to be paid pursuant to the in-

14

 


 

 

place leases and management’s estimate of the market lease rates for the corresponding in-place leases. The capitalized above- and below-market lease values are amortized as adjustments to rental income over the remaining terms of the respective leases.  We also include fixed rate renewal options in our calculation of the fair value of both above- and below-market leases and the periods over which such leases are amortized.  If a tenant has a unilateral option to renew a below-market lease, we include such an option in the calculation of the fair value of such lease and the period over which the lease is amortized if we determine that the tenant has a financial incentive to exercise such option.

 

Although we do not anticipate any further changes in the Atlanta Portfolio or Fairlawn Town Centre fair value measurements, the measurements may be subject to change within 12 months of the business combination date if new facts or circumstances are brought to the Company’s attention that were previously unknown but existed as of the business combination date.

 

The following table summarizes the cash paid to acquire the Atlanta Portfolio and Fairlawn Town Centre (amounts in thousands):

 

  

  

  

Atlanta

  

Fairlawn

  

  

  

Description

Portfolio

  

Town Centre

  

Totals

  

  

  

  

  

  

  

  

  

  

  

  

Purchase price

$

69,650 

  

$

42,200 

  

$

111,850 

  

Acquisition costs

  

1,040 

  

  

550 

  

  

1,590 

  

Deferred financing costs

  

97 

  

  

81 

  

  

178 

  

Environmental escrow (restricted cash)

  

  

  

  

  

  

Prepaid insurance

  

97 

  

  

62 

  

  

159 

  

Proceeds from Secured Credit Facility

  

(44,335)

  

  

(27,430)

  

  

(71,765)

  

Proceeds from Unsecured Credit Facility

  

(400)

  

  

  

  

(400)

  

  

Total cash paid to acquire property

$

26,149 

  

$

15,471 

  

$

41,620 

 

c.           Reflects additional offering proceeds of $20,247,000 from the sale of 2,034,257 shares in the Company’s ongoing public offering as received on December 31, 2012 based on offering proceeds actually received as of January 30, 2013, along with additional draws of $13,909,000 from the Secured Credit Facility and $3,000,000 from the Unsecured Credit Facility.  Including the $71,765,000 proceeds from the Secured Credit Facility and $400,000 from the Unsecured Credit Facility received at closing, total loan proceeds were $89,074,000.  $26,149,363 and $15,470,637 was paid in cash at closing for the acquisition of the Atlanta Portfolio and Fairlawn Town Centre, respectively, as shown in the table below (amounts in thousands):

 

  

Description

  

  

  

  

  

  

  

Additional offering proceeds

$

20,247 

  

Draws on Secured Credit Facility

  

13,909 

  

Draws on Unsecured Credit Facility

  

3,000 

  

Cash paid to acquire Atlanta Portfolio

  

(26,149)

  

Cash paid to acquire Fairlawn Town Centre

  

(15,471)

  

  

$

(4,464)

 

Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year

Ended December 31, 2012

 

a.             Reflects the Company’s historical operations for the year ended December 31, 2012.

 

b.           Reflects the combined historical revenues and certain operating expenses of the Atlanta Portfolio and Fairlawn Town Centre for the year ended December 31, 2012.

 

15

 


 

 

c.           Reflects pro forma adjustments related to the operations of five significant acquisitions made since January 1, 2012, as if they were acquired on January 1, 2012, in addition to other pro forma adjustments related to the acquisition of the Atlanta Portfolio and Fairlawn Town Centre (amounts in thousands).

 

  

  

  

Previous

  

Previous

  

  

  

  

  

  

  

  

  

  

  

Acquisitions

  

Acquisitions

  

  

  

Atlanta

  

Fairlawn

  

  

  

  

  

Actual

  

Pro Forma

  

  

  

Portfolio

  

Town Centre

  

Total Pro

  

  

  

Results of

  

Results of

  

Pro Forma

  

Pro Forma

  

Pro Forma

  

Forma

  

Description

Operations

  

Operations

  

Adjustments

  

Adjustments

  

Adjustments

  

Adjustments

  

  

  

  

(k)

  

  

(l)

  

  

(m)

  

  

  

  

  

  

  

  

  

  

Revenue:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Rental income

$

13,828 

  

$

15,814 

  

$

1,986 

  

$

(39)

(d)

$

(5)

(d)

$

1,942 

  

  

Tenant recovery income

  

3,635 

  

  

4,024 

  

  

389 

  

  

  

  

  

  

389 

  

  

Other property income

  

87 

  

  

98 

  

  

11 

  

  

  

  

  

  

11 

  

Total revenues

  

17,550 

  

  

19,936 

  

  

2,386 

  

  

(39)

  

  

(5)

  

  

2,342 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Expenses:

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Property operating

  

2,957 

  

  

3,415 

  

  

458 

  

  

21 

(e)

  

22 

(e)

  

501 

  

  

Real estate taxes

  

2,055 

  

  

2,219 

  

  

164 

  

  

  

  

  

  

164 

  

  

General and administrative

  

1,717 

  

  

2,040 

  

  

323 

  

  

527 

(f)

  

318 

(f)

  

1,168 

  

  

Acquisition expenses

  

3,981 

  

  

3,338 

  

  

(643)

(g)

  

  

  

  

  

(643)

  

  

Depreciation and amortization

  

8,094 

  

  

9,264 

  

  

1,170 

  

  

3,084 

(h)

  

1,989 

(h)

  

6,243 

  

Total expenses

  

18,804 

  

  

20,276 

  

  

1,472 

  

  

3,632 

  

  

2,329 

  

  

7,433 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Operating (loss) income

  

(1,254)

  

  

(340)

  

  

914 

  

  

(3,671)

  

  

(2,334)

  

  

(5,091)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Other income (expense):

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Interest expense, net

  

(3,020)

  

  

(3,382)

  

  

(362)

  

  

(1,618)

(i)

  

(747)

(i)

  

(2,727)

  

  

Other income

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Net loss

  

(4,273)

  

  

(3,721)

  

  

552 

  

  

(5,289)

  

  

(3,081)

  

  

(7,818)

  

Net loss (income) attributable to

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

noncontrolling interests

  

927 

  

  

549 

  

  

(378)

  

  

  

  

  

  

(378)

  

Net loss attributable to

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Company shareholders

$

(3,346)

  

$

(3,172)

  

$

174 

  

$

(5,289)

  

$

(3,081)

  

$

(8,196)

 

d.           Reflects the sum of the pro forma straight-line amortization of above- and below-market leases over the average remaining terms of the leases and the adjustment to reflect straight-line rental revenues as if the Company had acquired the properties as of January 1, 2012.

 

e.           Reflects property management fees associated with the current management, a related-party, at a rate of 4.5% of cash receipts from the properties.  Property management fees associated with the current management for the Atlanta Portfolio were $314,000, and property management fees included in the historical financial information were $293,000.  Property management fees associated with the current management for Fairlawn Town Centre were $201,000, and property management fees included in the historical financial information were $179,000.

 

f.            Reflects the asset management fees owed to the Company’s related-party advisor associated with the Atlanta Portfolio and Fairlawn Town Centre, for an annual asset management fee of 1% of the costs of the real estate investments.

 

g.          Reflects the adjustment to remove the acquisition expenses for the five significant acquisitions made since January 1, 2012.

 

h.           Reflects the depreciation and amortization of the Atlanta Portfolio and Fairlawn Town Centre using the straight-line method over the estimated useful life of 30 years for buildings, 15 years for land improvements, and average remaining terms of the leases for tenant improvements and in-place leases.

16

 


 

 

 

i.                     Reflects the approximate amount of interest based on the terms of the Secured Credit Facility at LIBOR plus 2.25% (using an average monthly LIBOR rate during the year ended December 31, 2012 of 0.24%) and the Unsecured Credit Facility at LIBOR plus 4.50% on the $85.7 million and $3.4 million loan draws, respectively, that would have been incurred for the acquisition of the Atlanta Portfolio and Fairlawn Town Centre on January 1, 2012.  Each one-eighth of a percent change in LIBOR would increase or decrease, respectively, interest expense by $111,000.

 

j.            Reflects the weighted average shares that would be outstanding if the property was acquired on January 1, 2012, based on offering proceeds received as of January 30, 2013.

 

k.         Previously presented on the Company’s annual report on Form 10-K for the year ended December 31, 2012.

 

l.            Reflects the pro forma results of operations as if all significant previously owned properties purchased after January 1, 2012 were actually purchased on January 1, 2012.

 

m.          Reflects the adjustments resulting from the differences between previous acquisitions actual results of operations and previous acquisitions pro forma results of operations.

17

 


 

 

SIGNATURE

 

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 hereunto duly authorized.

 

 

  

Phillips Edison – ARC Shopping Center REIT Inc.

 

 

 

 

 

 

Dated: April 3, 2013

By:

/s/ Richard J. Smith

  

  

Richard J. Smith

  

  

Chief Financial Officer

 

18