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| 8-K - 8-K - Phillips Edison & Company, Inc. | pearc-2014930x8kearningsre.htm |
Exhibit 99.1
Phillips Edison-ARC Shopping Center REIT Inc. Reports Third Quarter 2014 Results
CINCINNATI, OH, November 5, 2014 - Phillips Edison-ARC Shopping Center REIT Inc. (the “Company,” “we,” “our” or “us”), a publicly registered, non-traded REIT focused on the acquisition and management of well-occupied grocery-anchored neighborhood and community shopping centers, today announced its operating results for the three months and nine months ended September 30, 2014.
“We are pleased with our results from the third quarter which included the acquisition of 11 grocery-anchored shopping centers. As a result, all of the net equity proceeds raised during our initial public offering have been deployed, and we are following our strategy of using moderate leverage to continue to build our portfolio,” stated Jeff Edison, Chairman of the Board and Chief Executive Officer.
Highlights from the three and nine months ended September 30, 2014, include:
• | For the three months ended September 30, 2014, the Company acquired 11 grocery-anchored shopping centers in ten states totaling approximately 1.3 million square feet for an aggregate purchase price of $165.1 million. |
• | For the nine months ended September 30, 2014, the Company acquired 48 grocery-anchored shopping centers in 18 states totaling approximately 5.1 million square feet for an aggregate purchase price of $763.5 million. |
• | The Company’s portfolio now consists of 131 properties totaling approximately 13.9 million square feet anchored by 37 different grocery anchors in 27 states. |
• | As of September 30, 2014, the Company reported leased portfolio occupancy of 94.7%. |
• | As of September 30, 2014, the Company’s leverage ratio was 24.5% (calculated as total debt, less cash and cash equivalents, as a percentage of total real estate investments, including acquired intangible lease assets and liabilities, at cost). |
• | The Company generated net income of $2.1 million for the three months ended September 30, 2014 and a net loss of $159,000 for the nine months ended September 30, 2014. |
• | The Company generated MFFO of $25.4 million and $65.8 million, respectively, for the three months and nine months ended September 30, 2014 (see the reconciliation of net income [loss] to MFFO below). |
• | For the three and nine months ended September 30, 2014, the Company paid gross distributions of approximately $30.3 million and $89.3 million, respectively, including $16.0 million and $47.0 million of distributions reinvested through the DRP, respectively, for net cash distributions of $14.3 million and $42.3 million, respectively. |
Subsequent Events:
Subsequent to the end of the quarter, the Company acquired four grocery-anchored shopping centers totaling 0.5 million square feet for an aggregate purchase price of $79.3 million. The addition of these shopping centers increases the Company’s portfolio to 135 shopping centers totaling 14.4 million square feet.
Funds from Operations, Funds from Operations Adjusted for Acquisition Expenses, and Modified Funds from Operations
Funds from operations, or FFO, is a non-GAAP performance financial measure that is widely recognized as a measure of REIT operating performance. We use FFO as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) to be net income (loss), computed in accordance with GAAP excluding extraordinary items, as defined by GAAP, and gains (or losses) from sales of property (including deemed sales and settlements of pre-existing relationships), plus depreciation and amortization on real estate assets and impairment charges, and after related adjustments for unconsolidated partnerships, joint ventures and subsidiaries and noncontrolling interests. We believe that FFO is helpful to our investors and our management as a measure of operating performance because it excludes real estate-related depreciation and amortization, gains and losses from property dispositions, impairment charges, and extraordinary items, and as a result, when compared year to year,
reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which are not immediately apparent from net income. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate and intangibles diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or are requested or required by lessees for operational purposes in order to maintain the value disclosed. Since real estate values have historically risen or fallen with market conditions, including inflation, changes in interest rates, the business cycle, unemployment and consumer spending, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, our management believes that the use of FFO, together with the required GAAP presentations, is helpful for our investors in understanding our performance. In particular, because GAAP impairment charges are not allowed to be reversed if the underlying fair values improve or because the timing of impairment charges may lag the onset of certain operating consequences, we believe FFO provides useful supplemental information related to current consequences, benefits and sustainability related to rental rate, occupancy and other core operating fundamentals. Additionally, we believe it is appropriate to exclude impairment charges from FFO, as these are fair value adjustments that are largely based on market fluctuations and assessments regarding general market conditions, which can change over time. Factors that impact FFO include start-up costs, fixed costs, delay in buying assets, lower yields on cash held in accounts, income from portfolio properties and other portfolio assets, interest rates on acquisition financing and operating expenses. In addition, FFO will be affected by the types of investments in our targeted portfolio, which will consist primarily of, but is not limited to, necessity-based neighborhood and community shopping centers.
An asset will only be evaluated for impairment if certain impairment indicators exist and if the carrying or book value exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. Although impairment charges are excluded from the calculation of FFO as described above, as impairments are based on estimated future undiscounted cash flows, investors are cautioned that we may not recover any impairment charges. FFO is not a useful measure in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO.
Since FFO was promulgated, GAAP has expanded to include several new accounting pronouncements, such that management and many investors and analysts have considered the presentation of FFO alone to be insufficient. Accordingly, in addition to FFO, we use both FFO adjusted for acquisition expenses and modified funds from operations, or MFFO, as defined by the Investment Program Association (“IPA”). FFO adjusted for acquisition expenses excludes acquisition fees and expenses from FFO. In addition to excluding acquisition fees and expenses, MFFO also excludes from FFO the following items:
(1) | straight-line rent amounts, both income and expense; |
(2) | amortization of above- or below-market intangible lease assets and liabilities; |
(3) | amortization of discounts and premiums on debt investments; |
(4) | gains or losses from the early extinguishment of debt; |
(5) | gains or losses on the extinguishment or sales of hedges, foreign exchange, securities and other derivatives holdings except where the trading of such instruments is a fundamental attribute of our operations; |
(6) | gains or losses related to fair-value adjustments for derivatives not qualifying for hedge accounting, including interest rate and foreign exchange derivatives; |
(7) | gains or losses related to consolidation from, or deconsolidation to, equity accounting; |
(8) | gains or losses related to contingent purchase price adjustments; and |
(9) | adjustments related to the above items for unconsolidated entities in the application of equity accounting. |
We believe that both FFO adjusted for acquisition expenses and MFFO are helpful in assisting management and investors with the assessment of the sustainability of operating performance in future periods and, in particular, after our acquisition stage is complete, because both FFO adjusted for acquisition expenses and MFFO exclude acquisition expenses that affect property operations only in the period in which the property is acquired. Thus, FFO adjusted for acquisition expenses and MFFO provide helpful information relevant to evaluating our operating performance in periods in which there is no acquisition activity.
In evaluating investments in real estate, including both business combinations and investments accounted for under the equity method of accounting, management’s investment models and analysis differentiate costs to acquire the investment from the operations derived from the investment. Prior to 2009, acquisition costs for both of these types of investments were capitalized under GAAP; however, beginning in 2009, acquisition costs related to business combinations are expensed. We have funded, and intend to continue to fund, both of these acquisition-related costs from offering proceeds and borrowings and generally not from operations. However, if offering proceeds and borrowings are not available to fund these acquisition-related costs, operational cash flows may be used to fund future acquisition-related costs. We believe by excluding expensed acquisition costs, FFO adjusted for acquisition expenses and MFFO provide useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Acquisition fees and expenses include those paid to the Advisor, the Sub-advisor or third parties.
As explained below, management’s evaluation of our operating performance excludes the additional items considered in the calculation of MFFO based on the following economic considerations. Many of the adjustments in arriving at MFFO are not applicable to us. Nevertheless, we explain below the reasons for each of the adjustments made in arriving at our MFFO definition.
• | Adjustments for straight-line rents and amortization of discounts and premiums on debt investments. In the proper application of GAAP, rental receipts and discounts and premiums on debt investments are allocated to periods using various systematic methodologies. This application may result in income recognition that could be significantly different than underlying contract terms. By adjusting for these items, MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments and aligns results with management’s analysis of operating performance. The adjustment to MFFO for straight-line rents, in particular, is made to reflect rent and lease payments from a GAAP accrual basis to a cash basis. |
• | Adjustments for amortization of above- or below-market intangible lease assets. Similar to depreciation and amortization of other real estate related assets that are excluded from FFO, GAAP implicitly assumes that the value of intangibles diminishes ratably over time and that these charges be recognized currently in revenue. Since real estate values and market lease rates in the aggregate have historically risen or fallen with market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the performance of the real estate. |
• | Gains or losses related to fair-value adjustments for derivatives not qualifying for hedge accounting and gains or losses related to contingent purchase price adjustments. Each of these items relates to a fair value adjustment, which is based on the impact of current market fluctuations and underlying assessments of general market conditions and specific performance of the holding, which may not be directly attributable to current operating performance. As these gains or losses relate to underlying long-term assets and liabilities, management believes MFFO provides useful supplemental information by focusing on the changes in core operating fundamentals rather than changes that may reflect anticipated gains or losses. |
• | Adjustment for gains or losses related to early extinguishment of hedges, debt, consolidation or deconsolidation and contingent purchase price. Similar to extraordinary items excluded from FFO, these adjustments are not related to continuing operations. By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods and to other real estate operators. |
By providing FFO adjusted for acquisition expenses and MFFO, we believe we are presenting useful information that also assists investors and analysts to better assess the sustainability (that is, the capacity to continue to be maintained) of our operating performance after our acquisition stage is completed. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry. However, under GAAP, acquisition costs are characterized as operating expenses in determining operating net income (loss). These expenses are paid in cash by us, and therefore such funds will not be available to distribute to investors. FFO adjusted for acquisition expenses and MFFO are useful in comparing the sustainability of our operating performance after our acquisition stage is completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. However, investors are cautioned that FFO adjusted for acquisition expenses and MFFO should only be used to assess the sustainability of our operating performance after our acquisition stage is completed, as both measures exclude acquisition costs that have a negative effect on our operating performance during the periods in which properties are acquired. All paid and accrued acquisition costs negatively impact our operating performance during the period in which properties are acquired and will have negative effects on returns to investors, the potential for future distributions, and cash flows generated, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase prices of the properties we acquire. Therefore, MFFO may not be an accurate indicator of our operating performance, especially during periods in which properties are being acquired. MFFO that excludes such costs and expenses would only be comparable to that of non-listed REITs that have completed their acquisition activities and have similar operating characteristics as us. The purchase of properties, and the corresponding expenses associated with that process, is a key operational feature of our business plan to generate operational income and cash flows in order to make distributions to investors. In the event that we do not have sufficient offering proceeds to fund the payment of acquisition fees and the reimbursement of acquisition expenses, we may still be obligated to pay acquisition fees and reimburse acquisition expenses to our Advisor and Sub-advisor and the Advisor and Sub-advisor will be under no obligation to reimburse these payments back to us. As a result, such fees and expenses may need to be paid from other sources, including additional debt, operational earnings or cash flows, net proceeds from the sale of properties or from ancillary cash flows. Acquisition costs also adversely affect our book value and equity.
The additional items that may be excluded from FFO to determine MFFO are cash flow adjustments made to net income (loss) in calculating the cash flows provided by operating activities. Each of these items is considered an important overall operational factor that affects our long-term operational profitability. These items and any other mark-to-market or fair value adjustments may be based on many factors, including current operational or individual property issues or general market or overall industry conditions. Although we are responsible for managing interest rate, hedge and foreign exchange risk, we do retain an outside consultant to review our hedging agreements. Inasmuch as interest rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude such gains and losses in calculating MFFO, as such gains and losses are not reflective of ongoing operations.
Each of FFO, FFO adjusted for acquisition expenses, and MFFO should not be considered as an alternative to net income (loss) or income (loss) from continuing operations under GAAP, or as an indication of our liquidity, nor are any of these measures indicative of funds available to fund our cash needs, including our ability to fund distributions. In particular, as we are currently in the acquisition phase of our life cycle, acquisition-related costs and other adjustments that are increases to FFO adjusted for acquisition expenses and MFFO are, and may continue to be, a significant use of cash. MFFO has limitations as a performance measure in an offering such as ours where the price of a share of common stock is a stated value and there is no net asset value determination during the offering stage and for a period thereafter. Additionally, FFO adjusted for acquisition expenses, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate our business plan in the manner currently contemplated. Accordingly, FFO, FFO adjusted for acquisition expenses, and MFFO should be reviewed in connection with other GAAP measurements. FFO, FFO adjusted for acquisition expenses, and MFFO should not be viewed as more prominent measures of performance than our net income or cash flows from operations prepared in accordance with GAAP. Our FFO, FFO adjusted for acquisition expenses, and MFFO as presented may not be comparable to amounts calculated by other REITs.
Neither NAREIT nor any regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO adjusted for acquisition expenses or MFFO. In the future, industry standards or regulations may cause us to adjust our calculation and characterization of FFO, FFO adjusted for acquisition expenses or MFFO.
The following section presents our calculation of FFO, FFO adjusted for acquisition expenses, and MFFO and provides additional information related to our operations. As a result of the timing of the commencement of our initial public offering and our active real estate operations, FFO, FFO adjusted for acquisition expenses, and MFFO are not relevant to a discussion comparing operations for the periods presented.
FFO, FFO ADJUSTED FOR ACQUISITION EXPENSES, AND MFFO
FOR THE PERIODS ENDED SEPTEMBER 30, 2014 AND 2013
(Unaudited)
(Amounts in thousands, except per share amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Calculation of FFO | |||||||||||||||
Net income (loss) attributable to Company stockholders | $ | 2,143 | $ | (1,408 | ) | $ | (159 | ) | $ | (6,249 | ) | ||||
Add: | |||||||||||||||
Depreciation and amortization of real estate assets | 21,430 | 8,324 | 56,031 | 19,879 | |||||||||||
Amortization of tenant improvement allowances | — | (1 | ) | — | — | ||||||||||
Less: | |||||||||||||||
Noncontrolling interest | — | (1,331 | ) | — | (3,965 | ) | |||||||||
FFO | $ | 23,573 | $ | 5,584 | $ | 55,872 | $ | 9,665 | |||||||
Calculation of FFO Adjusted for Acquisition Expenses | |||||||||||||||
FFO | $ | 23,573 | $ | 5,584 | $ | 55,872 | $ | 9,665 | |||||||
Add: | |||||||||||||||
Acquisition expenses | 3,785 | 3,967 | 15,096 | 9,633 | |||||||||||
FFO adjusted for acquisition expenses | $ | 27,358 | $ | 9,551 | $ | 70,968 | $ | 19,298 | |||||||
Calculation of MFFO | |||||||||||||||
FFO adjusted for acquisition expenses | $ | 27,358 | $ | 9,551 | $ | 70,968 | $ | 19,298 | |||||||
Add: | |||||||||||||||
Net amortization of above- and below-market leases | (40 | ) | 127 | 189 | 465 | ||||||||||
Less: | |||||||||||||||
Straight-line rental income | (1,184 | ) | (587 | ) | (3,053 | ) | (1,135 | ) | |||||||
Amortization of market debt adjustment | (608 | ) | (371 | ) | (1,781 | ) | (830 | ) | |||||||
Change in fair value of derivative | (118 | ) | (45 | ) | (561 | ) | (55 | ) | |||||||
Noncontrolling interest | — | 79 | — | 194 | |||||||||||
MFFO | $ | 25,408 | $ | 8,754 | $ | 65,762 | $ | 17,937 | |||||||
Weighted-average common shares outstanding - basic and diluted | 180,072 | 79,797 | 178,490 | 45,208 | |||||||||||
Net income (loss) per share - basic and diluted | $ | 0.01 | $ | (0.02 | ) | $ | (0.00 | ) | $ | (0.14 | ) | ||||
FFO per share - basic and diluted | $ | 0.13 | $ | 0.07 | $ | 0.31 | $ | 0.21 | |||||||
FFO adjusted for acquisition expenses per share - basic and diluted | $ | 0.15 | $ | 0.12 | $ | 0.40 | $ | 0.43 | |||||||
MFFO per share - basic and diluted | $ | 0.14 | $ | 0.11 | $ | 0.37 | $ | 0.40 | |||||||
About Phillips Edison - ARC Shopping Center REIT Inc.
Phillips Edison-ARC Shopping Center REIT Inc. is a public non-traded REIT that seeks to acquire and manage well-occupied grocery-anchored neighborhood shopping centers having a mix of national and regional retailers selling necessity-based goods and services, in strong demographic markets throughout the United States. The Company is co-sponsored by two industry leaders: Phillips Edison & Company, who has acquired over $3.25 billion in shopping centers throughout the United States, and AR Capital, LLC, a real estate investment program sponsor dedicated to governance best practices. As of November 5, 2014, the Company owned and managed an institutional quality retail portfolio consisting of 135 grocery-anchored shopping centers totaling approximately 14.4 million square feet. For more information, please visit the Company’s website at www.phillipsedison-arc.com.