Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - Phillips Edison & Company, Inc.Financial_Report.xls
EX-3.3 - EXHIBIT 3.3 - Phillips Edison & Company, Inc.pentr-20141231xex33.htm
EX-23.1 - EXHIBIT 23.1 - Phillips Edison & Company, Inc.pentr-20141231xex231.htm
EX-10.9 - EXHIBIT 10.9 - Phillips Edison & Company, Inc.pentr-20141231xex109.htm
EX-31.1 - EXHIBIT 31.1 - Phillips Edison & Company, Inc.pentr-20141231xex311.htm
EX-21.1 - EXHIBIT 21.1 - Phillips Edison & Company, Inc.pentr-20141231xex211.htm
EX-10.8 - EXHIBIT 10.8 - Phillips Edison & Company, Inc.pentr-20141231xex108.htm
EX-32.1 - EXHIBIT 32.1 - Phillips Edison & Company, Inc.pentr-20141231xex321.htm
EX-31.2 - EXHIBIT 31.2 - Phillips Edison & Company, Inc.pentr-20141231xex312.htm
EX-32.2 - EXHIBIT 32.2 - Phillips Edison & Company, Inc.pentr-20141231xex322.htm
EX-4.4 - EXHIBIT 4.4 - Phillips Edison & Company, Inc.pentr-20141231xex44.htm
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-K
 
 (Mark One)
x     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2014
OR
¨     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-54691
 
PHILLIPS EDISON GROCERY CENTER REIT I, INC.
(Exact Name of Registrant as Specified in Its Charter)
Maryland
27-1106076
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
None
 
None
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  þ  
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act.    Yes  ¨    No  þ  
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  þ    No  ¨  
Indicated 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 (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  þ    No  ¨  
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment of this Form 10-K.  þ
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. (Check one):  
Large Accelerated Filer
¨
Accelerated Filer
¨
 
 
 
 
Non-Accelerated Filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
þ
Indicate by check mark whether the Registrant is a shell company (as defined in rule 12b-2 of the Securities Exchange Act).    Yes  ¨    No  þ  
Aggregate market value of the voting stock held by non-affiliates: There is no established public market for the registrant’s shares of common stock. The registrant has made an initial public offering of its shares of common stock pursuant to its Registration Statement on Form S-11 (File No. 333-164313), in which shares were sold at $10.00 per share, with discounts available for certain categories of purchasers. The registrant ceased offering shares of its common stock in its primary offering on February 7, 2014. The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2014, the last business day of the registrant’s most recently completed second fiscal quarter, was $1.74 billion, which represents the aggregate purchase price paid for such common stock.
As of February 28, 2015, there were 182.9 million outstanding shares of common stock of the Registrant.
Documents Incorporated by Reference:
Registrant incorporates by reference in Part III (Items 10, 11, 12, 13, and 14) of this Form 10-K portions of its Definitive Proxy Statement for its 2015 Annual Meeting of Stockholders.
 




PHILLIPS EDISON GROCERY CENTER REIT I, INC.
FORM 10-K
TABLE OF CONTENTS
 
 
ITEM 2.    
ITEM 3.    
ITEM 4.    
 
 
 
 
ITEM 7.    
ITEM 9.    
 
 
 
 
 
 
 
PART IV           
 
 
 
 



1



Cautionary Note Regarding Forward-Looking Statements
Certain statements contained in this Form 10-K of Phillips Edison Grocery Center REIT I, Inc. (“we,” the “Company,” “our” or “us”) other than historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in those acts. Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, including known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the U.S. Securities and Exchange Commission (“SEC”). We make no representations or warranties (expressed or implied) about the accuracy of any such forward-looking statements contained in this Annual Report on Form 10-K, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Any such forward-looking statements are subject to risks, uncertainties, and other factors and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual conditions, our ability to accurately anticipate results expressed in such forward-looking statements, including our ability to generate positive cash flows from operations, make distributions to stockholders, and maintain the value of our real estate properties, may be significantly hindered. See Item 1A herein for a discussion of some of the risks and uncertainties, although not all risks and uncertainties, that could cause actual results to differ materially from those presented in our forward-looking statements.


2



PART I
 
ITEM 1. BUSINESS
 
Overview
 
Phillips Edison Grocery Center REIT I, Inc., formerly known as Phillips Edison—ARC Shopping Center REIT Inc., was formed as a Maryland corporation on October 13, 2009. Substantially all of our business is conducted through Phillips Edison Grocery Center Operating Partnership I, L.P., formerly known as Phillips Edison—ARC Shopping Center Operating Partnership, L.P. (the “Operating Partnership”), a Delaware limited partnership formed on December 3, 2009. We are a limited partner of the Operating Partnership, and our wholly owned subsidiary, Phillips Edison Grocery Center OP GP I LLC, formerly known as Phillips Edison Shopping Center OP GP LLC, is the sole general partner of the Operating Partnership. The various aforementioned name changes occurred on December 3, 2014.
 
Prior to December 3, 2014, our advisor was American Realty Capital II Advisors, LLC (“ARC”), a limited liability company that was organized in the State of Delaware on December 28, 2009 and that is under common control with AR Capital, LLC. Under the terms of the advisory agreement between ARC and us (the “ARC Agreement”), ARC was responsible for the management of our day-to-day activities and the implementation of our investment strategy. Pursuant to a sub-advisory agreement (the “Sub-advisory Agreement”) between ARC and Phillips Edison NTR LLC (“PE-NTR”), ARC had delegated most of its duties under the ARC Agreement, including the management of our day-to-day operations and our portfolio of real estate assets, to PE-NTR. PE-NTR is directly or indirectly owned by Phillips Edison Limited Partnership (the “Phillips Edison sponsor”) and Michael Phillips and Jeffrey Edison, principals of our Phillips Edison sponsor. Effective December 3, 2014, we terminated the ARC Agreement and entered into an advisory agreement with PE-NTR (the “PE-NTR Agreement”). Under the PE-NTR Agreement, PE-NTR provides the same advisory and asset management services that ARC and PE-NTR provided to us under the ARC Agreement and the Sub-advisory Agreement.
 
We invest primarily in well-occupied grocery-anchored neighborhood and community shopping centers having a mix of creditworthy national and regional retailers selling necessity-based goods and services in strong demographic markets throughout the United States. As of December 31, 2014, we owned fee simple interests in 138 real estate properties acquired from third parties unaffiliated with us, PE-NTR, or ARC.

Segment Data

We internally evaluate the operating performance of our portfolio of properties and currently do not differentiate properties by geography, size or type. Each of our investment properties is considered a separate operating segment, as each property earns revenue and incurs expenses, individual operating results are reviewed and discrete financial information is available. However, the properties are aggregated into one reportable segment as they have similar economic characteristics, we provide similar services to the tenants at each of our properties, and we evaluate the collective performance of our properties. Accordingly, we did not report any other segment disclosures in 2014. 

Tax Status
 
We elected to be taxed as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”) beginning with the tax year ended December 31, 2010. Because we qualify for taxation as a REIT, we generally will not be subject to federal income tax on taxable income that is distributed to stockholders. If we fail to qualify as a REIT in any taxable year, without the benefit of certain relief provisions, we will be subject to federal (including any applicable alternative minimum tax) and state income tax on our taxable income at regular corporate rates. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income, property or net worth, respectively, and to federal income and excise taxes on our undistributed income.
 
Competition
 
We are subject to significant competition in seeking real estate investments and tenants. We compete with many third parties engaged in real estate investment activities including other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, hedge funds, governmental bodies and other entities. Some of these competitors, including larger REITs, have substantially greater financial resources than we do and generally enjoy significant competitive advantages that result from, among other things, enhanced operating efficiencies.


3



Employees
 
We do not have any employees. In addition, all of our executive officers are officers of Phillips Edison & Company or one or more of its affiliates and will be compensated by those entities, in part, for their service rendered to us. We do not separately compensate our executive officers for their service as officers.
 
Environmental Matters
 
As an owner of real estate, we are subject to various environmental laws of federal, state and local governments. Compliance with federal, state and local environmental laws has not had a material adverse effect on our business, assets, or results of operations, financial condition and ability to pay distributions, and we do not believe that our existing portfolio will require us to incur material expenditures to comply with these laws and regulations.
 
Access to Company Information
 
We electronically file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports with the SEC. The public may read and copy any of the reports that are filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, on official business days during the hours of 10:00 AM to 3:00 PM. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically.
 
We make available, free of charge, by responding to requests addressed to our investor relations group, the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports on our website, www.grocerycenterREIT1.com. These reports are available as soon as reasonably practicable after such material is electronically filed or furnished to the SEC.

ITEM 1A. RISK FACTORS

The factors described below represent our principal risks. The occurrence of any of the risks discussed below could have a material adverse effect on our business, financial condition, results of operations and ability to pay distributions to our stockholders. Potential investors and our stockholders may be referred to as “you” or “your” in this Item 1A, “Risk Factors,” section.
 
Risks Related to an Investment in Us
 
Because no public trading market for our shares currently exists, it is difficult for our stockholders to sell their shares and, if our stockholders are able to sell their shares, it may be at a discount to the public offering price.
 
Our charter does not require our directors to seek stockholder approval to liquidate our assets by a specified date, nor does our charter require our directors to list our shares for trading on a national securities exchange by a specified date. There is no public market for our shares. Until our shares are listed, if ever, stockholders may not sell their shares unless the buyer meets the applicable suitability and minimum purchase standards. In addition, our charter prohibits the ownership of more than 9.8% in value of our aggregate outstanding stock or more than 9.8% in value or number of shares, whichever is more restrictive, of our aggregate outstanding common stock, unless exempted by our board of directors, which may inhibit large investors from purchasing your shares. In its sole discretion, our board of directors could amend, suspend or terminate our share repurchase program upon 30 days’ notice. Further, the share repurchase program includes numerous restrictions that would limit a stockholder’s ability to sell his or her shares. Therefore, it is difficult for our stockholders to sell their shares promptly or at all. If a stockholder is able to sell his or her shares, it may be at a discount to the public offering price of such shares. It is also likely that our shares would not be accepted as the primary collateral for a loan. Because of the illiquid nature of our shares, investors should purchase our shares only as a long-term investment and be prepared to hold them for an indefinite period of time.
 

4



If we pay distributions from sources other than our cash flows from operations, we may not be able to sustain our distribution rate, we may have fewer funds available for investment in properties and other assets, and our stockholders’ overall returns may be reduced.
 
Our organizational documents permit us to pay distributions from any source without limit. If we fund distributions from financings or the net proceeds from the issuance of securities, we will have fewer funds available for investment in real estate properties and other real estate-related assets, and our stockholders’ overall returns may be reduced. At times, we may be forced to borrow funds to pay distributions during unfavorable market conditions or during periods when funds from operations are needed to make capital expenditures and other expenses, which could increase our operating costs. Furthermore, if we cannot cover our distributions with cash flows from operations, we may be unable to sustain our distribution rate.  For the year ended December 31, 2014, we paid gross distributions to our common stockholders of $119.6 million, including distributions reinvested through our dividend reinvestment plan (“DRIP”) of $63.0 million, and our cash flows from operations under accounting principles generally accepted in the United States (“GAAP”) were $75.7 million. For the year ended December 31, 2013, we paid distributions of $38.0 million, including distributions reinvested through our DRIP of $18.7 million, and our GAAP cash flows from operations were $18.5 million.
 
Because the offering price in the DRIP exceeds our net tangible book value per share, investors in the DRIP will experience immediate dilution in the net tangible book value of their shares.

We are currently offering shares in the DRIP at $9.50 per share. Our net tangible book value is a rough approximation of value calculated simply as gross book value of real estate assets plus cash and cash equivalents minus total liabilities, divided by the total number of shares of common stock outstanding. Net tangible book value is used generally as a conservative measure of net worth that we do not believe reflects our estimated value per share. It is not intended to reflect the value of our assets upon an orderly liquidation of the company in accordance with our investment objectives. Our net tangible book value reflects dilution in the value of our common stock from the issue price as a result of (i) operating losses, excluding accumulated depreciation and amortization of real estate investments, (ii) cumulative distributions in excess of our earnings, (iii) fees paid in connection with our initial public offering, including selling commissions and marketing fees re-allowed by our dealer manager to participating broker dealers, (iv) the fees and expenses paid to PE-NTR and ARC in connection with the selection, acquisition, and management of our investments and (v) general and administrative expenses. As of December 31, 2014, our net tangible book value per share was $8.05. The offering price for shares in the DRIP was not established on an independent basis and bears no relationship to the net value of our assets.
 
We may change our targeted investments without stockholder consent.
 
Our portfolio is primarily invested in well-occupied, grocery-anchored neighborhood and community shopping centers leased to a mix of national, creditworthy retailers selling necessity-based goods and services in strong demographic markets throughout the United States. Though this is our current target portfolio, we may make adjustments to our target portfolio based on real estate market conditions and investment opportunities, and we may change our targeted investments and investment guidelines at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, our current targeted investments. A change in our targeted investments or investment guidelines may increase our exposure to interest rate risk, default risk and real estate market fluctuations, all of which could adversely affect the value of our common stock and our ability to make distributions to our stockholders.
 
Because we are dependent upon PE-NTR and its affiliates to conduct our operations, any adverse changes in the financial health of PE-NTR, or its affiliates or our relationship with them could hinder our operating performance and the return on our stockholders’ investments.
 
We are dependent on PE-NTR, which is responsible for our day-to-day operations and is primarily responsible for the selection of our investments. We are also dependent on the Property Manager to manage our portfolio of real estate assets. PE-NTR had no previous operating history prior to serving as our sub-advisor and advisor, and it depends upon the fees and other compensation that it receives from us in connection with the purchase, management and sale of assets to conduct its operations. Any adverse changes in the financial condition of PE-NTR, the Property Manager or certain of their affiliates or in our relationship with them could hinder their ability to successfully manage our operations and our portfolio of investments.


5



The loss of or the inability to obtain key real estate professionals at PE-NTR could delay or hinder implementation of our investment strategies, which could limit our ability to make distributions and decrease the value of your investment.
 
Our success depends to a significant degree upon the contributions of Jeffrey S. Edison, our Chief Executive Officer and the Chairman of our Board of Directors, John B. Bessey, our Co-President and Chief Investment Officer, R. Mark Addy, our Co-President and Chief Operating Officer, and Devin I. Murphy, our Chief Financial Officer, at PE-NTR. We do not have employment agreements with these individuals, and they may not remain associated with us. If any of these persons were to cease their association with us, our operating results could suffer. We do not intend to maintain key person life insurance on any person. We believe that our future success depends, in large part, upon PE-NTR and its affiliates’ ability to hire and retain highly skilled managerial, operational and marketing professionals. Competition for such professionals is intense and PE-NTR and its affiliates may be unsuccessful in attracting and retaining such skilled individuals. Further, we intend to establish strategic relationships with firms, as needed, that have special expertise in certain services or detailed knowledge regarding real properties in certain geographic regions. Maintaining such relationships will be important for us to effectively compete with other investors for properties and tenants in such regions. We may be unsuccessful in establishing and retaining such relationships. If we lose or are unable to obtain the services of highly skilled professionals or do not establish or maintain appropriate strategic relationships, our ability to implement our investment strategies could be delayed or hindered, and the value of our stockholders’ investments may decline.

Our business and operations would suffer in the event of system failures.

Despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for our internal information technology systems, our systems are vulnerable to damages from any number of sources, including computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business. We may also incur additional costs to remedy damages caused by such disruptions.

The occurrence of cyber incidents, or a deficiency in our cybersecurity or the cybersecurity of PE-NTR, could negatively impact our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity, or availability of our information resources. More specifically, a cyber incident is an intentional attack or an unintentional event that can include gaining unauthorized access to systems to disrupt operations, corrupt data, or steal confidential information. As our reliance on technology has increased, so have the risks posed to our systems, both internal and those we have outsourced. Our three primary risks that could directly result from the occurrence of a cyber incident include operational interruption, damage to our relationship with our tenants, and private data exposure. We have implemented processes, procedures and controls to help mitigate these risks, but these measures, as well as our increased awareness of a risk of a cyber incident, do not guarantee that our financial results will not be negatively impacted by such an incident.

If we decide to list our common stock on a national securities exchange, we may wish to lower our distribution rate in order to optimize the price at which our shares would trade.               

Our board of directors has the option to effect a liquidity event by listing our common stock on a national securities exchange.  If such an election were to occur, a reduction in our distribution rate could occur with or in advance of a listing, as the public market for listed REITs appears to reward those that have a more conservative distribution policy.
 
Risks Related to Conflicts of Interest
 
Our sponsor and its affiliates, including all of our executive officers, one of our directors and other key real estate professionals, face conflicts of interest caused by their compensation arrangements with us, which could result in actions that are not in the long-term best interests of our stockholders.
 
PE-NTR and its affiliates receive substantial fees from us. These fees could influence PE-NTR’s advice to us as well as their judgment with respect to:
the continuation, renewal or enforcement of our agreements with Phillips Edison and its affiliates, including the PE-NTR Agreement and property management agreement;
sales of properties and other investments to third parties, which entitle PE-NTR to disposition fees and possible subordinated incentive fees;

6



acquisitions of properties and other investments from other Phillips Edison-sponsored programs;
acquisitions of properties and other investments from third parties, which entitle PE-NTR to acquisition and asset-management compensation;
borrowings to acquire properties and other investments, which borrowings increase the acquisition fees, debt financing fees, and asset-management compensation payable to PE-NTR;
whether and when we seek to list our common stock on a national securities exchange, which listing could entitle PE-NTR to a subordinated incentive listing fee; and
whether and when we seek to sell the company or its assets, which sale could entitle PE-NTR to a subordinated participation in net sales proceeds.
 
The fees PE-NTR receives in connection with transactions involving the acquisition of assets are based initially on the cost of the investment, including costs related to loan obligations, and are not based on the quality of the investment or the quality of the services rendered to us. This may influence PE-NTR to recommend riskier transactions to us. In addition, because the fees are based on the cost of the investment, it may create an incentive for PE-NTR to recommend that we purchase assets with more debt and at higher prices.
 
Our sponsor faces conflicts of interest relating to the acquisition of assets and leasing of properties, and such conflicts may not be resolved in our favor, meaning that we could invest in less attractive assets and obtain less creditworthy tenants, which could limit our ability to make distributions and reduce our stockholders’ overall investment returns.
 
We rely on our sponsor and the executive officers and other key real estate professionals at PE-NTR to identify suitable investment opportunities for us. The key real estate professionals of PE-NTR are also the key real estate professionals at our sponsor and its other public and private programs. Many investment opportunities that are suitable for us may also be suitable for other Phillips Edison-sponsored programs. Thus, the executive officers and real estate professionals of PE-NTR could direct attractive investment opportunities to other entities or investors. Such events could result in us investing in properties that provide less attractive returns, which may reduce our ability to make distributions.
 
We and other Phillips Edison-sponsored programs also rely on these real estate professionals to supervise the property management and leasing of properties. If the Property Manager directs creditworthy prospective tenants to properties owned by another Phillips Edison-sponsored program when they could direct such tenants to our properties, our tenant base may have more inherent risk than might otherwise be the case. Further, these executive officers and key real estate professionals are not prohibited from engaging, directly or indirectly, in any business or from possessing interests in any other business venture or ventures, including businesses and ventures involved in the acquisition, development, ownership, leasing or sale of real estate investments.
 
PE-NTR faces conflicts of interest relating to the performance and incentive fee structure under the PE-NTR Agreement, which could result in actions that are not necessarily in the long-term best interests of our stockholders.
 
Under the PE-NTR Agreement, PE-NTR or its affiliates will be entitled to fees that are structured in a manner intended to provide incentives to PE-NTR to perform in our best interests and in the best interests of our stockholders. However, because neither PE-NTR, nor any of its affiliates maintain a significant equity interest in us and are entitled to receive certain minimum compensation regardless of performance, the interests of PE-NTR are not wholly aligned with those of our stockholders. In that regard, the PE-NTR could be motivated to recommend riskier or more speculative investments in order for us to generate the specified levels of performance or sales proceeds that would entitle PE-NTR to fees. In addition, PE-NTR’s entitlement to fees upon the sale of our assets and to participate in sale proceeds could result in PE-NTR recommending sales of our investments at the earliest possible time at which sales of investments would produce the level of return that would entitle PE-NTR to compensation relating to such sales, even if continued ownership of those investments might be in our best long-term interest. The PE-NTR Agreement will require us to pay a performance-based termination fee to PE-NTR or its affiliates if we terminate the PE-NTR Agreement prior to the listing of our shares for trading on an exchange or, absent such termination, in respect of their participation in net sales proceeds. To avoid paying this fee, our independent directors may decide against terminating the PE-NTR Agreement prior to our listing of our shares or disposition of our investments even if, but for the termination fee, termination of the PE-NTR Agreement would be in our best interest. In addition, the requirement to pay the fee to PE-NTR or its affiliates at termination could cause us to make different investment or disposition decisions than we would otherwise make, in order to satisfy our obligation to pay the fee to the terminated PE-NTR. For a more detailed discussion of the fees payable to PE-NTR and its affiliates in connection with the management of our company, see Note 11 to the consolidated financial statements.
 

7



Our sponsor, our officers, PE-NTR and the real estate and other professionals assembled by PE-NTR face competing demands relating to their time, and this may cause our operations and our stockholders’ investment to suffer.
 
We rely on PE-NTR for the day-to-day operation of our business. In addition, PE-NTR has the primary responsibility for the selection of our investments. PE-NTR relies on our sponsor and its affiliates to conduct our business. Our officers are principals or employees of Phillips Edison and the affiliates that manage the assets of the other Phillips Edison-sponsored programs. As a result of their interests in other Phillips Edison-sponsored programs, their obligations to other investors and the fact that they engage in and they will continue to engage in other business activities, these individuals will continue to face conflicts of interest in allocating their time among us and other Phillips Edison-sponsored programs and other business activities in which they are involved. Should PE-NTR breach its fiduciary duties to us by inappropriately devoting insufficient time or resources to our business, the returns on our investments and the value of our stockholders’ investments may decline.
 
All of our executive officers, one of our directors and the key real estate and other professionals assembled by PE-NTR face conflicts of interest related to their positions or interests in affiliates of our sponsors, which could hinder our ability to implement our business strategy and to generate returns to our stockholders.
 
All of our executive officers, one of our directors and the key real estate and other professionals assembled by PE-NTR are also executive officers, directors, managers, key professionals or holders of a direct or indirect controlling interests in PE-NTR, or other sponsor-affiliated entities. Through our sponsor’s affiliates, some of these persons work on behalf of other Phillips Edison-sponsored public and private programs. As a result, they have loyalties to each of these entities, which loyalties could conflict with the fiduciary duties they owe to us and could result in action or inaction detrimental to our business. Conflicts with our business and interests are most likely to arise from (a) allocation of new investments and management time and services between us and the other entities, (b) our purchase of properties from, or sale of properties to, affiliated entities, (c) development of our properties by affiliates, (d) investments with affiliates of PE-NTR, (e) compensation to PE-NTR, and (f) our relationship with PE-NTR and the Property Manager. If we do not successfully implement our business strategy, we may be unable to generate the cash needed to make distributions to our stockholders and to maintain or increase the value of our assets.
 
Risks Related to Our Corporate Structure
 
We may use the most recent price paid to acquire a share in our initial public or a follow-on public offering as the estimated value of our shares until we have completed our offering stage. Even when PE-NTR begins to use other valuation methods to estimate the value of our shares, the value of our shares will be based upon a number of assumptions that may not be accurate or complete.
 
To assist FINRA members and their associated persons that participated in our initial public offering, pursuant to applicable FINRA and NASD rules of conduct, we disclose in each annual report distributed to stockholders a per share estimated value of our shares, the method by which it was developed, and the date of the data used to develop the estimated value. For this purpose, PE-NTR estimated the value of our common shares as $10.00 per share as of December 31, 2014. The basis for this valuation is the fact that the offering price of our shares of common stock in our initial public offering was $10.00 per share (ignoring purchase price discounts for certain categories of purchasers). PE-NTR has indicated that it intends to use the most recent price paid to acquire a share in our initial public offering (ignoring purchase price discounts for certain categories of purchasers) or a follow-on public offering as its estimated per share value of our shares until we have completed our offering stage. We will consider our offering stage complete when we are no longer publicly offering equity securities – whether through our initial public offering or follow-on public offerings – and have not done so for up to 18 months. Our charter does not restrict our ability to conduct offerings in the future. (For purposes of this definition, we do not consider a “public equity offering” to include offerings on behalf of selling stockholders or offerings related to a dividend reinvestment plan, employee benefit plan or the redemption of interests in the Operating Partnership.)
 
Although this initial estimated value represents the most recent price at which most investors were willing to purchase shares in our initial public offering, this reported value is likely to differ from the price that a stockholder would receive in the near term upon a resale of his or her shares or upon a liquidation of the our assets because (i) there is no public trading market for the shares at this time; (ii) the $10.00 primary offering price involves the payment of underwriting compensation and other directed selling efforts, which payments and efforts are likely to produce a higher sale price than could otherwise be obtained; (iii) estimated value does not reflect, and is not derived from, the fair market value of our assets and ignores the payment of selling commissions, dealer manager fees, other organization and offering costs and acquisition fees and expenses; (iv) the estimated value does not take into account how market fluctuations affect the value of our investments; and (v) the estimated value does not take into account how developments related to individual assets may have increased or decreased the value of our portfolio.

8



 
When determining the estimated value of our shares by methods other than the last price paid to acquire a share in an offering, an independent firm we choose for that purpose will estimate the value of our shares based upon a number of assumptions that may not be accurate or complete. Accordingly, these estimates may or may not be an accurate reflection of the fair market value of our investments and will not likely represent the amount of net proceeds that would result from an immediate sale of our assets.
 
The actual value of shares that we repurchase under our share repurchase program may be less than what we pay.
 
Under our share repurchase program, shares may be repurchased at varying prices depending on (a) the number of years the shares have been held, (b) the purchase price paid for the shares and (c) whether the redemptions are sought upon a stockholder’s death, qualifying disability or determination of incompetence. The maximum price that may be paid under the program is $10.00 per share, which was the offering price of our shares of common stock in the primary portion of our initial public offering (ignoring purchase price discounts for certain categories of purchasers). Although this initial estimated value represents the most recent price at which most investors were willing to purchase shares in our primary offering, this reported value is likely to differ from the price at which a stockholder could resell his or her shares for the reasons discussed in the risk factor above. Thus, when we repurchase shares of our common stock, the repurchase is likely to be dilutive to our remaining stockholders. Even at lower repurchase prices, the actual value of the shares may be less than what we pay, and the repurchase may be dilutive to our remaining stockholders.

Our charter limits the number of shares a person may own, which may discourage a takeover that could otherwise result in a premium price to our stockholders.
 
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. To help us comply with the REIT ownership requirements of the Internal Revenue Code, among other purposes, our charter prohibits a person from directly or constructively owning more than 9.8% in value of our aggregate outstanding stock or more than 9.8% in value or number of shares, whichever is more restrictive, of our aggregate outstanding common stock, unless exempted by our board of directors. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock.
 
Our charter permits our board of directors to issue stock with terms that may subordinate the rights of our common stockholders or discourage a third party from acquiring us in a manner that could result in a premium price to our stockholders.
 
Our board of directors may classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms or conditions of redemption of any such stock. Thus, our board of directors could authorize the issuance of preferred stock with priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Such preferred stock could also have the effect of delaying, deferring or preventing a change in control, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price to holders of our common stock.
 
Because Maryland law permits our board to adopt certain anti-takeover measures without stockholder approval, investors may be less likely to receive a “control premium” for their shares.
 
In 1999, the State of Maryland enacted legislation that enhances the power of Maryland corporations to protect themselves from unsolicited takeovers. Among other things, the legislation permits our board, without stockholder approval, to amend our charter to:
•      stagger our board of directors into three classes;
•      require a two-thirds stockholder vote for removal of directors;
•      provide that only the board can fix the size of the board; and
•      require that special stockholder meetings may only be called by holders of a majority of the voting shares entitled to be cast at the meeting.
 
Under Maryland law, a corporation can opt to be governed by some or all of these provisions if it has a class of equity securities registered under the Exchange Act, and has at least three independent directors. Our charter does not prohibit our board of

9



directors from opting into any of the above provisions permitted under Maryland law. Becoming governed by any of these provisions could discourage an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our securities.
 
Our stockholders have limited control over changes in our policies and operations, which increases the uncertainty and risks our stockholders face.
 
Our board of directors determines our major policies, including our policies regarding financing, growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise these and other policies without a vote of the stockholders. Under the Maryland General Corporation Law and our charter, our stockholders have a right to vote only on limited matters. Our board’s broad discretion in setting policies and our stockholders’ inability to exert control over those policies increases the uncertainty and risks our stockholders face.
 
Our stockholders may not be able to sell their shares under our share repurchase program and, if they are able to sell their shares under the program, they may not be able to recover the amount of their investment in our shares.
 
Our share repurchase program includes numerous restrictions that limit our stockholders’ ability to sell their shares. During any calendar year, we may purchase no more than 5.0% of the weighted-average number of shares outstanding during the prior calendar year. Our stockholders must hold their shares for at least one year in order to participate in the share repurchase program, except for repurchases sought upon a stockholder’s death or “qualifying disability.” The cash available for redemption on any particular date is generally limited to the proceeds from the DRIP during the period consisting of the preceding four fiscal quarters for which financial statements are available, less any cash already used for redemptions during the same period; however, subject to the limitations described above, we may use other sources of cash at the discretion of our board of directors. These limitations do not, however, apply to repurchase sought upon a stockholder’s death or “qualifying disability.” Only those stockholders who purchased their shares from us or received their shares from us (directly or indirectly) through one or more non-cash transactions may be able to participate in the share repurchase program. In other words, once our shares are transferred for value by a stockholder, the transferee and all subsequent holders of the shares are not eligible to participate in the share repurchase program. These limits may prevent us from accommodating all repurchase requests made in any year. These restrictions would severely limit your ability to sell your shares should you require liquidity and would limit your ability to recover the value you invested. Our board is free to amend, suspend or terminate the share repurchase program upon 30 days’ notice.
 
Our stockholders’ interests in us will be diluted if we issue additional shares, which could reduce the overall value of our stockholders’ investment.
 
Our common stockholders do not have preemptive rights to any shares we issue in the future. Our charter authorizes us to issue 1.01 billion shares of capital stock, of which 1 billion shares are designated as common stock and 10 million shares are designated as preferred stock. Our board of directors may amend our charter to increase or decrease the number of authorized shares of capital stock or the number of shares of stock of any class or series that we have authority to issue without stockholder approval. After our investors purchased shares in our initial public offering, our board may elect to (1) sell additional shares in the DRIP and future public offerings, (2) issue equity interests in private offerings, (3) issue share-based awards to our independent directors or to our officers or employees or to the officers or employees of PE-NTR or any of its affiliates, (4) issue shares to PE-NTR, or its successors or assigns, in payment of an outstanding fee obligation or (5) issue shares of our common stock to sellers of properties or assets we acquire in connection with an exchange of limited partnership interests of the Operating Partnership. To the extent we issue additional equity interests after our investors have purchased shares in our offering, their percentage ownership interest in us will be diluted. In addition, depending upon the terms and pricing of any additional offerings and the value of our real estate investments, our investors may also experience dilution in the book value and fair value of their shares.
 
Payment of fees to PE-NTR and ARC and their respective affiliates reduce cash available for investment and distribution and increases the risk that our stockholders will not be able to recover the amount of their investments in our shares.
 
PE-NTR, ARC, and their respective affiliates perform or performed services for us in connection with the sale of shares in our initial public offering, the selection and acquisition of our investments, the management and leasing of our properties and the administration of our other investments. We currently pay or have paid them substantial fees for these services, which results in immediate dilution to the value of our stockholders’ investments and reduces the amount of cash available for investment or distribution to stockholders. We may also pay significant fees during our listing/liquidation stage. Although most of the fees payable during our listing/liquidation stage are contingent on our stockholders first enjoying agreed‑upon investment returns,

10



the investment-return thresholds may be reduced subject to approval by our conflicts committee and the other limitations in our charter.

Therefore, these fees increase the risk that the amount available for distribution to common stockholders upon a liquidation of our portfolio would be less than the price paid by our stockholders to purchase shares in our initial public offering. These substantial fees and other payments also increase the risk that our stockholders will not be able to resell their shares at a profit, even if our shares are listed on a national securities exchange.
 
If we are unable to obtain funding for future capital needs, cash distributions to our stockholders and the value of our investments could decline.
 
When tenants do not renew their leases or otherwise vacate their space, we will often need to expend substantial funds for improvements to the vacated space in order to attract replacement tenants. Even when tenants do renew their leases, we may agree to make improvements to their space as part of our negotiation. If we need additional capital in the future to improve or maintain our properties or for any other reason, we may have to obtain financing from sources, beyond our funds from operations, such as borrowings or future equity offerings. These sources of funding may not be available on attractive terms or at all. If we cannot procure additional funding for capital improvements, our investments may generate lower cash flows or decline in value, or both, which would limit our ability to make distributions to our stockholders and could reduce the value of your investment.

Although we are not currently afforded the protection of the Maryland General Corporation Law relating to deterring or defending hostile takeovers, our board of directors could opt into these provisions of Maryland law in the future, which may discourage others from trying to acquire control of us and may prevent our stockholders from receiving a premium price for their stock in connection with a business combination.
 
Under Maryland law, “business combinations” between a Maryland corporation and certain interested stockholders or affiliates of interested stockholders are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. Also under Maryland law, control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by stockholders by a vote of two-thirds of the votes entitled to be cast on the matter. Should our board opt into these provisions of Maryland law, it may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer. Similarly, provisions of Title 3, Subtitle 8 of the Maryland General Corporation Law could provide similar anti-takeover protection.
 
General Risks Related to Investments in Real Estate
 
Economic and regulatory changes that impact the real estate market generally may decrease the value of our investments and weaken our operating results.
 
Our properties and their performance are subject to the risks typically associated with real estate, including:
downturns in national, regional and local economic conditions;
increased competition for real estate assets targeted by our investment strategy;
adverse local conditions, such as oversupply or reduction in demand for similar properties in an area and changes in real estate zoning laws that may reduce the desirability of real estate in an area;
vacancies, changes in market rental rates and the need to periodically repair, renovate and re-let space;
changes in interest rates and the availability of permanent mortgage financing, which may render the sale of a property or loan difficult or unattractive;
changes in tax, real estate, environmental and zoning laws;
periods of high interest rates and tight money supply; and
the illiquidity of real estate investments generally.
 
Any of the above factors, or a combination thereof, could result in a decrease in the value of our investments, which would have an adverse effect on our operations, on our ability to pay distributions to our stockholders and on the value of our stockholders’ investments.

11



 
We depend on our tenants for revenue, and, accordingly, our revenue and our ability to make distributions to our stockholders is dependent upon the success and economic viability of our tenants.
 
We depend upon tenants for revenue. Rising vacancies across commercial real estate result in increased pressure on real estate investors and their property managers to find new tenants and keep existing tenants. A property may incur vacancies either by the expiration of a tenant lease, the continued default of a tenant under its lease or the early termination of a lease by a tenant. If vacancies continue for a long period of time, we may suffer reduced revenues resulting in less cash available to distribute to stockholders. In order to maintain tenants, we may have to offer inducements, such as free rent and tenant improvements, to compete for attractive tenants. In addition, if we are unable to attract additional or replacement tenants, the resale value of the property could be diminished, even below our cost to acquire the property, because the market value of a particular property depends principally upon the value of the cash flow generated by the leases associated with that property. Such a reduction on the resale value of a property could also reduce the value of our stockholders’ investments.
 
Retail conditions may adversely affect our base rent and subsequently, our income.
 
Some of our leases provide for base rent plus contractual base rent increases. A number of our retail leases also include a percentage rent clause for additional rent above the base amount based upon a specified percentage of the sales our tenants generate. Under those leases that contain percentage rent clauses, our revenue from tenants may increase as the sales of our tenants increase.

Generally, retailers face declining revenues during downturns in the economy. As a result, the portion of our revenue which we may derive from percentage rent leases could decline upon a general economic downturn.
 
Our revenue will be affected by the success and economic viability of our anchor retail tenants. Our reliance on single or significant tenants in certain buildings may decrease our ability to lease vacated space and adversely affect the returns on our stockholders’ investments.
 
In the retail sector, a tenant occupying all or a large portion of the gross leasable area of a retail center, commonly referred to as an anchor tenant, may become insolvent, may suffer a downturn in business, may decide not to renew its lease, or may decide to cease its operations at the retail center but continue to pay rent. Any of these events could result in a reduction or cessation in rental payments to us and could adversely affect our financial condition. A lease termination or cessation of operations by an anchor tenant could result in lease terminations or reductions in rent by other tenants whose leases may permit cancellation or rent reduction if another tenant terminates its lease or ceases its operations at that shopping center. In such event, we may be unable to re-lease the vacated space. Similarly, the leases of some anchor tenants may permit the anchor tenant to transfer its lease to another retailer. The transfer to a new anchor tenant could cause customer traffic in the retail center to decrease and thereby reduce the income generated by that retail center. A lease transfer to a new anchor tenant could also allow other tenants to make reduced rental payments or to terminate their leases. In the event that we are unable to re-lease the vacated space to a new anchor tenant, we may incur additional expenses in order to re-model the space to be able to re-lease the space to more than one tenant.
 
Our properties consist primarily of retail properties. Our performance, therefore, is linked to the market for retail space generally.
 
The market for retail space has been and could be adversely affected by weaknesses in the national, regional and local economies, the adverse financial condition of some large retailing companies, the ongoing consolidation in the retail sector, excess amounts of retail space in a number of markets and competition for tenants with other shopping centers in our markets. Customer traffic to these shopping areas may be adversely affected by the closing of stores in the same shopping center, or by a reduction in traffic to such stores resulting from a regional economic downturn, a general downturn in the local area where our store is located, or a decline in the desirability of the shopping environment of a particular shopping center. Such a reduction in customer traffic could have a material adverse effect on our business, financial condition and results of operations.
 
Our retail tenants face competition from numerous retail channels, which may reduce our profitability and ability to pay distributions.
 
Retailers at our properties face continued competition from discount or value retailers, factory outlet centers, wholesale clubs, Internet shopping, mail order catalogues and operators, and television shopping networks. Such competition could adversely affect our tenants and, consequently, our revenues and funds available for distribution.
 

12



If we enter into long-term leases with retail tenants, those leases may not result in fair value over time.
 
Long-term leases do not typically allow for significant changes in rental payments and do not expire in the near term. If we do not accurately judge the potential for increases in market rental rates when negotiating these long-term leases, significant increases in future property operating costs could result in receiving less than fair value from these leases. Such circumstances would adversely affect our revenues and funds available for distribution.
 
The bankruptcy or insolvency of a major tenant may adversely impact our operations and our ability to pay distributions to stockholders.
 
The bankruptcy or insolvency of a significant tenant or a number of smaller tenants may have an adverse impact on financial condition and our ability to pay distributions to our stockholders. Generally, under bankruptcy law, a debtor tenant has 120 days to exercise the option of assuming or rejecting the obligations under any unexpired lease for nonresidential real property, which period may be extended once by the bankruptcy court. If the tenant assumes its lease, the tenant must cure all defaults under the lease and may be required to provide adequate assurance of its future performance under the lease. If the tenant rejects the lease, we will have a claim against the tenant’s bankruptcy estate. Although rent owing for the period between filing for bankruptcy and rejection of the lease may be afforded administrative expense priority and paid in full, pre-bankruptcy arrears and amounts owing under the remaining term of the lease will be afforded general unsecured claim status (absent collateral securing the claim). Moreover, amounts owing under the remaining term of the lease will be capped. Other than equity and subordinated claims, general unsecured claims are the last claims paid in a bankruptcy, and therefore, funds may not be available to pay such claims in full.
 
Competition with third parties in acquiring properties and other investments may reduce our profitability and the return on our stockholders’ investments.
 
We face competition from various entities for investment opportunities in retail properties, including other REITs, pension funds, insurance companies, investment funds and companies, partnerships, and developers. Many of these entities have substantially greater financial resources than we do and may be able to accept more risk than we can prudently manage, including risks with respect to the creditworthiness of a tenant or the geographic location of its investments. Competition from these entities may reduce the number of suitable investment opportunities offered to us or increase the bargaining power of property owners seeking to sell.
 
Properties that have significant vacancies could be difficult to sell, which could diminish the return on these properties.
 
A property may incur vacancies either by the expiration of a tenant lease, the continued default of a tenant under its lease or the early termination of a lease by a tenant. If vacancies continue for a long period of time, we may suffer reduced revenues resulting in less cash available to distribute to stockholders. In addition, the resale value of the property could be diminished because the market value of a particular property depends principally upon the value of the cash flow generated by the leases associated with that property. Such a reduction on the resale value of a property could also reduce the value of our stockholders’ investments.
 
Changes in supply of or demand for similar real properties in a particular area may increase the price of real properties we seek to purchase and decrease the price of real properties when we seek to sell them.
 
The real estate industry is subject to market forces. We are unable to predict certain market changes including changes in supply of, or demand for, similar real properties in a particular area. Any potential purchase of an overpriced asset could decrease our rate of return on these investments and result in lower operating results and overall returns to our stockholders.
 
We may be unable to adjust our portfolio in response to changes in economic or other conditions or sell a property if or when we decide to do so, limiting our ability to pay cash distributions to our stockholders.

Many factors that are beyond our control affect the real estate market and could affect our ability to sell properties on the terms that we desire. These factors include general economic conditions, the availability of financing, interest rates and other factors, including supply and demand. Because real estate investments are relatively illiquid, we have a limited ability to vary our portfolio in response to changes in economic or other conditions. Further, before we can sell a property on the terms we want, it may be necessary to expend funds to correct defects or to make improvements. However, we can give no assurance that we will have the funds available to correct such defects or to make such improvements. We may be unable to sell our properties at a profit. Our inability to sell properties on the terms we want could reduce our cash flow and limit our ability to make distributions to our stockholders and could reduce the value of our stockholders’ investments. Moreover, in acquiring a

13



property, we may agree to restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. Our inability to sell a property when we desire to do so may cause us to reduce our selling price for the property. Any delay in our receipt of proceeds, or diminishment of proceeds, from the sale of a property could adversely impact our ability to pay distributions to our stockholders.

We have acquired, and may continue to acquire or finance, properties with lock-out provisions, which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties.
 
A lock-out provision is a provision that prohibits the prepayment of a loan during a specified period of time. Lock-out provisions may include terms that provide strong financial disincentives for borrowers to prepay their outstanding loan balance and exist in order to protect the yield expectations of lenders. We currently own properties, and may acquire additional properties in the future, that are subject to lock-out provisions. Lock-out provisions could materially restrict us from selling or otherwise disposing of or refinancing properties when we may desire to do so. Lock-out provisions may prohibit us from reducing the outstanding indebtedness with respect to any properties, refinancing such indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such properties. Lock-out provisions could impair our ability to take other actions during the lock-out period that could be in the best interests of our stockholders and, therefore, may have an adverse impact on the value of our shares relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in the best interests of our stockholders.
 
We may obtain only limited warranties when we purchase a property and would have only limited recourse in the event our due diligence did not identify any issues that lower the value of our property.
 
The seller of a property often sells such property in its “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. The purchase of properties with limited warranties increases the risk that we may lose some or all of our invested capital in the property, as well as the loss of rental income from that property.
 
CC&Rs may restrict our ability to operate a property.
 
We expect that some of our properties will be contiguous to other parcels of real property, comprising part of the same retail center. In connection with such properties, we will be subject to significant covenants, conditions and restrictions, known as “CC&Rs,” restricting the operation of such properties and any improvements on such properties, and related to granting easements on such properties. Moreover, the operation and management of the contiguous properties may impact such properties. Compliance with CC&Rs may adversely affect our operating costs and reduce the amount of funds that we have available to pay distributions to our stockholders.
 
If we set aside insufficient capital reserves, we may be required to defer necessary capital improvements.
 
If we do not have enough reserves for capital to supply needed funds for capital improvements throughout the life of the investment in a property and there is insufficient cash available from our operations, we may be required to defer necessary improvements to a property, which may cause that property to suffer from a greater risk of obsolescence or a decline in value, or a greater risk of decreased cash flow as a result of fewer potential tenants being attracted to the property. If this happens, we may not be able to maintain projected rental rates for affected properties, and our results of operations may be negatively impacted.
 
Our operating expenses may increase in the future and, to the extent such increases cannot be passed on to tenants, our cash flow and our operating results would decrease.
 
Operating expenses, such as expenses for fuel, utilities, labor and insurance, are not fixed and may increase in the future. There is no guarantee that we will be able to pass such increases on to our tenants. To the extent such increases cannot be passed on to tenants, any such increase would cause our cash flow and our operating results to decrease.
 
Our real properties are subject to property taxes that may increase in the future, which could adversely affect our cash flow.
 
Our real properties are subject to real property taxes that may increase as tax rates change and as the real properties are assessed or reassessed by taxing authorities. We anticipate that certain of our leases will generally provide that the property taxes, or

14



increases therein, are charged to the lessees as an expense related to the real properties that they occupy, while other leases will generally provide that we are responsible for such taxes. In any case, as the owner of the properties, we are ultimately responsible for payment of the taxes to the applicable government authorities. If real property taxes increase, our tenants may be unable to make the required tax payments, ultimately requiring us to pay the taxes even if otherwise stated under the terms of the lease. If we fail to pay any such taxes, the applicable taxing authority may place a lien on the real property and the real property may be subject to a tax sale. In addition, we are generally responsible for real property taxes related to any vacant space.
 
Uninsured losses relating to real property or excessively expensive premiums for insurance coverage could reduce our cash flows and the return on our stockholders’ investments.
 
We will attempt to adequately insure all of our real properties against casualty losses. There are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with potential acts of terrorism could sharply increase the premiums we pay for coverage against property and casualty claims. Additionally, mortgage lenders in some cases have begun to insist that commercial property owners purchase coverage against terrorism as a condition for providing mortgage loans. Such insurance policies may not be available at reasonable costs, if at all, which could inhibit our ability to finance or refinance our properties. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We may not have adequate, or any, coverage for such losses. Changes in the cost or availability of insurance could expose us to uninsured casualty losses. If any of our properties incur a casualty loss that is not fully insured, the value of our assets will be reduced by any such uninsured loss, which may reduce the value of our stockholders’ investments. In addition, other than any working capital reserve or other reserves we may establish, we have no source of funding to repair or reconstruct any uninsured property. Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that would result in lower distributions to stockholders. The Terrorism Risk Insurance Act of 2002 is designed for a sharing of terrorism losses between insurance companies and the federal government.

Costs of complying with governmental laws and regulations related to environmental protection and human health and safety may reduce our net income and the cash available for distributions to our stockholders.
 
Real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to protection of the environment and human health. We could be subject to liability in the form of fines, penalties or damages for noncompliance with these laws and regulations. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, the remediation of contamination associated with the release or disposal of solid and hazardous materials, the presence of toxic building materials, and other health and safety-related concerns.
 
Some of these laws and regulations may impose joint and several liability on the tenants, owners or operators of real property for the costs to investigate or remediate contaminated properties, regardless of fault, whether the contamination occurred prior to purchase, or whether the acts causing the contamination were legal. Our tenants’ operations, the condition of properties at the time we buy them, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties may affect our properties.
 
The presence of hazardous substances, or the failure to properly manage or remediate these substances, may hinder our ability to sell, rent or pledge such property as collateral for future borrowings. Environmental laws also may impose liens on property or restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us from entering into leases with prospective tenants that may be impacted by such laws. Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require us to incur material expenditures. Future laws, ordinances or regulations may impose material environmental liability. Any material expenditures, fines, penalties, or damages we must pay will reduce our ability to make distributions and may reduce the value of our stockholders’ investments.
 
The costs of defending against claims of environmental liability or of paying personal injury claims could reduce the amounts available for distribution to our stockholders.
 
Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for the release of and exposure to hazardous substances, including asbestos-containing materials and lead-based paint. Third parties

15



may seek recovery from real property owners or operators for personal injury or property damage associated with exposure to released hazardous substances. The costs of defending against claims of environmental liability or of paying personal injury claims could reduce the amounts available for distribution to our stockholders. Generally, we expect that the real estate properties that we acquire will have been subject to Phase I environmental assessments at the time they were acquired. A Phase I environmental assessment or site assessment is an initial environmental investigation to identify potential environmental liabilities associated with the current and past uses of a given property.
Costs associated with complying with the Americans with Disabilities Act may decrease cash available for distributions.

Our properties may be subject to the Americans with Disabilities Act of 1990, as amended (the “Disabilities Act”). Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The Disabilities Act has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services be made accessible and available to people with disabilities. The Disabilities Act’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages. We will attempt to acquire properties that comply with the ADA or place the burden on the seller or other third party, such as a tenant, to ensure compliance with the ADA. We cannot assure our stockholders that we will be able to acquire properties or allocate responsibilities in this manner. Any of our funds used for Disabilities Act compliance will reduce our net income and the amount of cash available for distributions to our stockholders.
 
The failure of any bank in which we deposit our funds could reduce the amount of cash we have available to pay distributions and make additional investments.
 
We intend to diversify our cash and cash equivalents among several banking institutions in an attempt to minimize exposure to any one of these entities. However, the Federal Deposit Insurance Corporation, or “FDIC,” only insures amounts up to $250,000 per depositor per insured bank. We have cash and cash equivalents and restricted cash and investments deposited in certain financial institutions in excess of federally insured levels. If any of the banking institutions in which we have deposited funds ultimately fails, we may lose our deposits over $250,000. The loss of our deposits could reduce the amount of cash we have available to distribute or invest and could result in a decline in the value of our stockholders’ investments.

Risks Associated with Debt Financing
 
We have incurred mortgage indebtedness, and we may incur other indebtedness, which increases our risk of loss due to foreclosure.
 
We have obtained, and are likely to continue to obtain, lines of credit and other long-term financing that are secured by our properties and other assets. Our charter does not limit the amount of funds that we may borrow. In some instances, we may acquire real properties by financing a portion of the price of the properties and mortgaging or pledging some or all of the properties purchased as security for that debt. We may also incur mortgage debt on properties that we already own in order to obtain funds to acquire additional properties. In addition, we may borrow as necessary or advisable to ensure that we maintain our qualification as a REIT for U.S. federal income tax purposes, including borrowings to satisfy the REIT requirement that we distribute at least 90.0% of our annual REIT taxable income to our stockholders (computed without regard to the dividends-paid deduction and excluding net capital gain). We, however, can give our stockholders no assurance that we will be able to obtain such borrowings on satisfactory terms.
 
High debt levels will cause us to incur higher interest charges, which would result in higher debt service payments and could be accompanied by restrictive covenants. If we do mortgage a property and there is a shortfall between the cash flow from that property and the cash flow needed to service mortgage debt on that property, then the amount of cash available for distributions to stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss of a property since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, reducing the value of our stockholders’ investments. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure even though we would not necessarily receive any cash proceeds. We may give full or partial guaranties to lenders of mortgage debt on behalf of the entities that own our properties. When we give a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties.
 
We may also obtain recourse debt to finance our acquisitions and meet our REIT distribution requirements. If we have insufficient income to service our recourse debt obligations, our lenders could institute proceedings against us to foreclose upon

16



our assets. If a lender successfully forecloses upon any of our assets, our ability to pay cash distributions to our stockholders will be limited, and our stockholders could lose all or part of their investment.
 
High mortgage rates may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire, our cash flows from operations and the amount of cash distributions we can make.

If mortgage debt is unavailable at reasonable rates, we may not be able to finance the purchase of properties. If we place mortgage debt on properties, we run the risk of being unable to refinance the properties when the debt becomes due or of being unable to refinance on favorable terms. If interest rates are higher when we refinance the properties, our income could be reduced. We may be unable to refinance properties. If any of these events occurs, our cash flow would be reduced. This, in turn, would reduce cash available for distribution to our stockholders and may hinder our ability to raise capital by issuing more stock or borrowing more money.
 
We may not be able to access financing or refinancing sources on attractive terms, which could adversely affect our ability to execute our business plan.
 
We may finance our assets over the long-term through a variety of means, including repurchase agreements, credit facilities, issuance of commercial mortgage-backed securities, collateralized debt obligations and other structured financings. Our ability to execute this strategy will depend on various conditions in the markets for financing in this manner that are beyond our control, including lack of liquidity and greater credit spreads. We cannot be certain that these markets will remain an efficient source of long-term financing for our assets. If our strategy is not viable, we will have to find alternative forms of long-term financing for our assets, as secured revolving credit facilities and repurchase facilities may not accommodate long-term financing. This could subject us to more recourse indebtedness and the risk that debt service on less efficient forms of financing would require a larger portion of our cash flows, thereby reducing cash available for distribution to our stockholders and funds available for operations as well as for future business opportunities.

Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
 
When providing financing, a lender may impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan agreements into which we enter may contain covenants that limit our ability to further mortgage a property, discontinue insurance coverage or replace PE-NTR. In addition, loan documents may limit our ability to replace a property’s property manager or terminate certain operating or lease agreements related to a property. These or other limitations would decrease our operating flexibility and our ability to achieve our operating objectives, which may adversely affect our ability to make distributions to our stockholders.

Our derivative financial instruments that we use to hedge against interest rate fluctuations may not be successful in mitigating our risks associated with interest rates and could reduce the overall returns on our stockholders’ investment.
 
We use derivative financial instruments to hedge exposures to changes in interest rates on loans secured by our assets, but no hedging strategy can protect us completely. We cannot assure our stockholders that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate volatility or that our hedging transactions will not result in losses. In addition, the use of such instruments may reduce the overall return on our investments. These instruments may also generate income that may not be treated as qualifying REIT income for purposes of the 75.0% or 95.0% REIT income test.
 
Interest-only indebtedness may increase our risk of default and ultimately may reduce our funds available for distribution to our stockholders.
 
We have financed certain of our property acquisitions using interest-only mortgage indebtedness. During the interest-only period, the amount of each scheduled payment is less than that of a traditional amortizing mortgage loan. The principal balance of the mortgage loan will not be reduced (except in the case of prepayments) because there are no scheduled monthly payments of principal during this period. After the interest-only period, we will be required either to make scheduled payments of amortized principal and interest or to make a lump-sum or “balloon” payment at maturity. These required principal or balloon payments will increase the amount of our scheduled payments and may increase our risk of default under the related mortgage loan. If the mortgage loan has an adjustable interest rate, the amount of our scheduled payments also may increase at a time of rising interest rates. Increased payments and substantial principal or balloon maturity payments will reduce the funds available for distribution to our stockholders because cash otherwise available for distribution will be required to pay principal and interest associated with these mortgage loans.


17



If we enter into financing arrangements involving balloon payment obligations, it may adversely affect our ability to make distributions to our stockholders.
 
Some of our financing arrangements may require us to make a lump-sum or “balloon” payment at maturity. Our ability to make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or our ability to sell the property. At the time the balloon payment is due, we may or may not be able to refinance the balloon payment on terms as favorable as the original loan or sell the property at a price sufficient to make the balloon payment. The effect of a refinancing or sale could affect the rate of return to stockholders and the projected time of disposition of our assets. In addition, payments of principal and interest made to service our debts may leave us with insufficient cash to pay the distributions that we are required to pay to maintain our qualification as a REIT. Any of these results would have a significant, negative impact on our stockholders’ investments.
 
U.S. Federal Income Tax Risks
 
Failure to qualify as a REIT would reduce our net earnings available for investment or distribution.
 
Our qualification as a REIT depends upon our ability to meet requirements regarding our organization and ownership, distributions of our income, the nature and diversification of our income and assets and other tests imposed by the Internal Revenue Code. If we fail to qualify as a REIT for any taxable year after electing REIT status, we will be subject to U.S. federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the dividends paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.
 
Our stockholders may have current tax liability on distributions they elect to reinvest in our common stock.
 
If our stockholders participate in the DRIP, they will be deemed to have received, and for U.S. federal income tax purposes will be taxed on, the amount reinvested in shares of our common stock to the extent the amount reinvested was not a tax-free return of capital. In addition, our stockholders will be treated for tax purposes as having received an additional distribution to the extent the shares are purchased at a discount to fair market value. As a result, unless our stockholders are a tax-exempt entity, they may have to use funds from other sources to pay their tax liability on the value of the shares of common stock received.
 
Failure to qualify as a REIT would subject us to U.S. federal income tax, which would reduce the cash available for distribution to our stockholders.
 
We operate in a manner that is intended to allow us to continue to qualify as a REIT for U.S. federal income tax purposes. However, the U.S. federal income tax laws governing REITs are extremely complex, and interpretations of the U.S. federal income tax laws governing qualification as a REIT are limited. Qualifying as a REIT requires us to meet various tests regarding the nature of our assets and our income, the ownership of our outstanding stock, and the amount of our distributions on an ongoing basis. While we intend to operate so that we continue to qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, including the tax treatment of certain investments we may make, and the possibility of future changes in our circumstances, no assurance can be given that we will so qualify for any particular year. If we fail to qualify as a REIT in any calendar year and we do not qualify for certain statutory relief provisions, we would be required to pay U.S. federal income tax on our taxable income. We might need to borrow money or sell assets to pay that tax. Our payment of U.S. federal income tax would decrease the amount of our income available for distribution to our stockholders. Furthermore, if we fail to maintain our qualification as a REIT and we do not qualify for certain statutory relief provisions, we no longer would be required to distribute substantially all of our REIT taxable income to our stockholders. Unless our failure to qualify as a REIT were excused under federal tax laws, we would be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost.

Even if we qualify as a REIT for U.S. federal income tax purposes, we may be subject to other tax liabilities that reduce our cash flow and our ability to make distributions to our stockholders.
 
Even if we qualify as a REIT for U.S. federal income tax purposes, we may be subject to some federal, state and local taxes on our income or property. For example:

18



•      In order to qualify as a REIT, we must distribute annually at least 90.0% of our REIT taxable income to our stockholders (which is determined without regard to the dividends paid deduction or net capital gain). To the extent that we satisfy the distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on the undistributed income.
•      We will be subject to a 4.0% nondeductible excise tax on the amount, if any, by which distributions we pay in any calendar year are less than the sum of 85.0% of our ordinary income, 95.0% of our capital gain net income and 100% of our undistributed income from prior years.
•      If we have net income from the sale of foreclosure property that we hold primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, we must pay a tax on that income at the highest U.S. federal corporate income tax rate.
•      If we sell an asset, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business, our gain would be subject to the 100% “prohibited transaction” tax unless such sale were made by one of our taxable REIT subsidiaries or the sale met certain “safe harbor” requirements under the Internal Revenue Code.
 
REIT distribution requirements could adversely affect our ability to execute our business plan.
 
We generally must distribute annually at least 90.0% of our REIT taxable income, subject to certain adjustments and excluding any net capital gain, in order for U.S. federal corporate income tax not to apply to earnings that we distribute. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed REIT taxable income. In addition, we will be subject to a 4.0% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws. We intend to make distributions to our stockholders to comply with the REIT requirements of the Internal Revenue Code.
 
From time to time, we may generate taxable income greater than our taxable income for financial reporting purposes, or our taxable income may be greater than our cash flow available for distribution to stockholders (for example, where a borrower defers the payment of interest in cash pursuant to a contractual right or otherwise). If we do not have other funds available in these situations, we could be required to borrow funds, sell investments at disadvantageous prices or find another alternative source of funds to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and to avoid U.S. federal corporate income tax and the 4.0% excise tax in a particular year. These alternatives could increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
 
To maintain our REIT status, we may be forced to forego otherwise attractive opportunities, which may delay or hinder our ability to meet our investment objectives and reduce our stockholders’ overall return.
 
To qualify as a REIT, we must satisfy certain tests on an ongoing basis concerning, among other things, the sources of our income, nature of our assets and the amounts we distribute to our stockholders. We may be required to make distributions to stockholders at times when it would be more advantageous to reinvest cash in our business or when we do not have funds readily available for distribution. Compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits and the value of our stockholders’ investments.
  
Complying with REIT requirements may force us to liquidate otherwise attractive investments.
 
To qualify as a REIT, we must ensure that at the end of each calendar quarter, at least 75.0% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans and mortgage-backed securities. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10.0% of the outstanding voting securities of any one issuer or more than 10.0% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5.0% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25.0% of the value of our total assets can be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate from our portfolio otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
 

19



Liquidation of assets may jeopardize our REIT qualification.
 
To qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as dealer property or inventory.

Complying with REIT requirements may limit our ability to hedge effectively.
 
The REIT provisions of the Internal Revenue Code may limit our ability to hedge our assets and operations. Under these provisions, any income that we generate from transactions intended to hedge our interest rate, inflation or currency risks will be excluded from gross income for purposes of the REIT 75.0% and 95.0% gross income tests if the instrument hedges (1) interest rate risk on liabilities incurred to carry or acquire real estate or (2) risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the REIT 75.0% or 95.0% gross income tests, and such instrument is properly identified under applicable Treasury Regulations. Income from hedging transactions that do not meet these requirements will generally constitute nonqualifying income for purposes of both the REIT 75.0% and 95.0% gross income tests. As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur.
 
Our ownership of and relationship with our taxable REIT subsidiaries will be limited, and a failure to comply with the limits would jeopardize our REIT status and may result in the application of a 100% excise tax.
 
A REIT may own up to 100% of the stock of one or more taxable REIT subsidiaries. A taxable REIT subsidiary may earn income that would not be qualifying income if earned directly by the parent REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a taxable REIT subsidiary. A corporation of which a taxable REIT subsidiary directly or indirectly owns more than 35.0% of the voting power or value of the stock will automatically be treated as a taxable REIT subsidiary. Overall, no more than 25.0% of the value of a REIT’s assets may consist of stock or securities of one or more taxable REIT subsidiaries. A domestic taxable REIT subsidiary will pay U.S. federal, state and local income tax at regular corporate rates on any income that it earns. In addition, the taxable REIT subsidiary rules limit the deductibility of interest paid or accrued by a taxable REIT subsidiary to its parent REIT to assure that the taxable REIT subsidiary is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a taxable REIT subsidiary and its parent REIT that are not conducted on an arm’s-length basis. We cannot assure our stockholders that we will be able to comply with the 25.0% value limitation on ownership of taxable REIT subsidiary stock and securities on an ongoing basis so as to maintain REIT status or to avoid application of the 100% excise tax imposed on certain non-arm’s length transactions.

Dividends payable by REITs do not qualify for the reduced tax rates.
 
The maximum tax rate for dividends payable to domestic stockholders that are individuals, trusts and estates is 20.0%. Dividends payable by REITs, however, are generally not eligible for the reduced rates. While this tax treatment does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates, to perceive investments in REITs to be relatively less attractive than investments in stock of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock.

If the Operating Partnership fails to maintain its status as a partnership, its income may be subject to taxation.
 
We intend to maintain the status of the Operating Partnership as a partnership for U.S. federal income tax purposes. However, if the IRS were to successfully challenge the status of the Operating Partnership as a partnership, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that the Operating Partnership could make to us. This would also result in our losing REIT status and becoming subject to a corporate level tax on our own income. This would substantially reduce our cash available to pay distributions and the yield on your investment. In addition, if any of the partnerships or limited liability companies through which the Operating Partnership owns its properties, in whole or in part, loses its characterization as a partnership for U.S. federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to the Operating Partnership. Such a recharacterization of an underlying property owner could also threaten our ability to maintain REIT status.
 

20



The tax on prohibited transactions will limit our ability to engage in transactions that would be treated as sales for federal income tax purposes.
 
A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of assets, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Therefore, in order to avoid the prohibited transactions tax, we may choose not to engage in certain sales at the REIT level, even though the sales might otherwise be beneficial to us.
 
There is a prohibited transaction safe harbor available under the Internal Revenue Code when a property has been held for at least two years and certain other requirements are met. It cannot be assured, however, that any property sales would qualify for the safe harbor. It may also be possible to reduce the impact of the prohibited transaction tax by conducting certain activities through taxable REIT subsidiaries. However, to the extent that we engage in such activities through taxable REIT subsidiaries, the income associated with such activities may be subject to full corporate income tax.
 
The taxation of distributions to our stockholders can be complex; however, distributions that we make to our stockholders generally will be taxable as ordinary income.
 
Distributions that we make to our taxable stockholders out of current and accumulated earnings and profits (and not designated as capital gain dividends, or, for tax years beginning before January 1, 2013, qualified dividend income) generally are taxable as ordinary income. However, a portion of our distributions may (1) be designated by us as capital gain dividends generally taxable as long-term capital gain to the extent that they are attributable to net capital gain recognized by us, (2) be designated by us, for taxable years beginning before January 1, 2013, as qualified dividend income generally to the extent they are attributable to dividends we receive from our taxable REIT subsidiaries, or (3) constitute a return of capital generally to the extent that they exceed our accumulated earnings and profits as determined for U.S. federal income tax purposes. A return of capital is not taxable, but has the effect of reducing the basis of a stockholder’s investment in our common stock.
 
If we were considered to actually or constructively pay a “preferential dividend” to certain of our stockholders, our status as a REIT could be adversely affected.
 
In order to qualify as a REIT, we must distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. In order for distributions to be counted as satisfying the annual distribution requirements for REITs, and to provide us with a REIT-level tax deduction, the distributions must not be “preferential dividends.” A dividend is not a preferential dividend if the distribution is pro rata among all outstanding shares of stock within a particular class, and in accordance with the preferences among different classes of stock as set forth in our organizational documents. There is no de minimis exception with respect to preferential dividends; therefore, if the IRS were to take the position that we inadvertently paid preferential dividends, we may be deemed to have failed the 90% distribution test, and our status as a REIT could be terminated for the year in which such determination is made if we were unable to cure such failure. While we believe that our operations have been structured in such a manner that we will not be treated as inadvertently paying preferential dividends, we can provide no assurance to this effect.
 
The ability of our board of directors to revoke our REIT qualification without stockholder approval may subject us to U.S. federal income tax and reduce distributions to our stockholders.

Our charter provides that our board of directors may revoke or otherwise terminate our REIT election without the approval of our stockholders if it determines that it is no longer in our best interest to continue to qualify as a REIT. While we intend to elect and qualify to be taxed as a REIT, we may not elect to be treated as a REIT or may terminate our REIT election if we determine that qualifying as a REIT is no longer in the best interests of our stockholders. If we cease to be a REIT, we would become subject to U.S. federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on our total return to our stockholders and on the market price of our common stock.
 
Potential characterization of distributions or gain on sale may be treated as unrelated business taxable income to tax-exempt investors.
 
If (a) we are a “pension-held REIT,” (b) a tax-exempt stockholder has incurred debt to purchase or hold our common stock, or (c) a holder of common stock is a certain type of tax-exempt stockholder, dividends on, and gains recognized on the sale of, common stock by such tax-exempt stockholder may be subject to U.S. federal income tax as unrelated business taxable income under the Internal Revenue Code.

21



 
Distributions to foreign investors may be treated as an ordinary income distribution to the extent that it is made out of current or accumulated earnings and profits.
 
In general, foreign investors will be subject to regular U.S. federal income tax with respect to their investment in our stock if the income derived therefrom is “effectively connected” with the foreign investor’s conduct of a trade or business in the United States. A distribution to a foreign investor that is not attributable to gain realized by us from the sale or exchange of a “U.S. real property interest” within the meaning of the Foreign Investment in Real Property Tax Act of 1980, as amended (“FIRPTA”), and that we do not designate as a capital gain distribution, will be treated as an ordinary income distribution to the extent that it is made out of current or accumulated earnings and profits. Generally, any ordinary income distribution will be subject to a U.S. federal income tax equal to 30% of the gross amount of the distribution, unless this tax is reduced by the provisions of an applicable treaty.
 
Foreign investors may be subject to FIRPTA tax upon the sale of their shares of our stock.
 
A foreign investor disposing of a U.S. real property interest, including shares of stock of a U.S. corporation whose assets consist principally of U.S. real property interests, is generally subject to FIRPTA on the gain recognized on the disposition. Such FIRPTA tax does not apply, however, to the disposition of stock in a REIT if the REIT is “domestically controlled.” A REIT is “domestically controlled” if less than 50.0% of the REIT’s stock, by value, has been owned directly or indirectly by persons who are not qualifying U.S. persons during a continuous five-year period ending on the date of disposition or, if shorter, during the entire period of the REIT’s existence. While we intend to qualify as a “domestically controlled” REIT, we cannot assure you that we will. If we were to fail to so qualify, gain realized by foreign investors on a sale of shares of our stock would be subject to FIRPTA tax unless the shares of our stock were traded on an established securities market and the foreign investor did not at any time during a specified testing period directly or indirectly own more than 5.0% of the value of our outstanding common stock.

Foreign investors may be subject to FIRPTA tax upon the payment of a capital gains dividend.
 
A capital gains dividend paid to foreign investors, if attributable to gain from sales or exchanges of U.S. real property interests, would not be exempt from FIRPTA and would be subject to FIRPTA tax.
 
Retirement Plan Risks
 
If the fiduciary of an employee pension benefit plan subject to ERISA (such as profit-sharing, Section 401(k) or pension plan) or any other retirement plan or account fails to meet the fiduciary and other standards under ERISA or the Internal Revenue Code as a result of an investment in our stock, the fiduciary could be subject to penalties and other sanctions.
 
There are special considerations that apply to employee benefit plans subject to ERISA (such as profit-sharing, Section 401(k) or pension plans) and other retirement plans or accounts subject to Section 4975 of the Internal Revenue Code (such as an IRA) that are investing in our shares. Fiduciaries investing the assets of such a plan or account in our common stock should satisfy themselves that:
•      the investment is consistent with their fiduciary obligations under ERISA and the Internal Revenue Code;
•      the investment is made in accordance with the documents and instruments governing the plan or IRA, including the plan’s or account’s investment policy;
•      the investment satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA and other applicable provisions of ERISA and the Internal Revenue Code;
•      the investment in our shares, for which no public market exists, is consistent with the liquidity needs of the plan or IRA;
•      the investment will not produce an unacceptable amount of “unrelated business taxable income” for the plan or IRA;
•      our stockholders will be able to comply with the requirements under ERISA and the Internal Revenue Code to value the assets of the plan or IRA annually; and
•      the investment will not constitute a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue Code.
 

22



With respect to the annual valuation requirements described above, we expect to provide an estimated value for our shares annually. From the commencement of our initial public offering until up to 18 months have passed without a sale in a “public equity offering” of our common stock, we expect to use the gross offering price of a share of common stock in our most recent offering as the per share estimated value. For purposes of this definition, we will not consider “public equity offerings” to include offerings on behalf of selling stockholders or offerings related to any dividend reinvestment plan, employee benefit plan or the redemption of interests in the Operating Partnership.
 
This estimated value is not likely to reflect the proceeds you would receive upon our liquidation or upon the sale of your shares. Accordingly, we can make no assurances that such estimated value will satisfy the applicable annual valuation requirements under ERISA and the Internal Revenue Code. The Department of Labor or the IRS may determine that a plan fiduciary or an IRA custodian is required to take further steps to determine the value of our common shares. In the absence of an appropriate determination of value, a plan fiduciary or an IRA custodian may be subject to damages, penalties or other sanctions.
 
Failure to satisfy the fiduciary standards of conduct and other applicable requirements of ERISA and the Internal Revenue Code may result in the imposition of civil and criminal penalties and could subject the fiduciary to equitable remedies, including liability for investment losses. In addition, if an investment in our shares constitutes a non-exempt prohibited transaction under ERISA or the Internal Revenue Code, the fiduciary or IRA owner who authorized or directed the investment may be subject to the imposition of excise taxes with respect to the amount invested. In the case of a prohibited transaction involving an IRA owner, the IRA may be disqualified and all of the assets of the IRA may be deemed distributed and subject to tax.

If you invested in our shares through an IRA or other retirement plan, you may be limited in your ability to withdraw required minimum distributions.
 
If you established an IRA or other retirement plan through which you invested in our shares, federal law may require you to withdraw required minimum distributions (“RMDs”) from such plan in the future. Our share repurchase program limits the amount of repurchases (other than those repurchases as a result of a stockholder’s death or disability) that can be made in a given year. Additionally, you will not be eligible to have your shares repurchased until you have held your shares for at least one year. As a result, you may not be able to have your shares repurchased at a time in which you need liquidity to satisfy the RMD requirements under your IRA or other retirement plan. Even if you are able to have your shares repurchased, such repurchase may be at a price less than the price at which the shares were initially purchased, depending on how long you have held your shares. If you fail to withdraw RMDs from your IRA or other retirement plan, you may be subject to certain tax penalties.

ITEM 1B. UNRESOLVED STAFF COMMENTS
 
We have no unresolved staff comments.
 
ITEM 2. PROPERTIES
 
Real Estate Investments

As of December 31, 2014, we owned 138 properties, throughout the continental United States, acquired from third parties unaffiliated with us, PE-NTR, or ARC, the former advisor. The following table presents information regarding each of our properties as of December 31, 2014 (dollars in thousands). For additional portfolio information, refer to “Real Estate and Accumulated Depreciation (Schedule III)” herein.
Property Name
 
 City, State
 
Anchor Tenant
 
Date Acquired
 
 Contract Purchase Price(1) 
 
Rentable Square Footage
 
Average
Remaining
Lease Term
in Years as of December 31, 2014
 
% of Rentable Square Feet
Leased as of December 31, 2014
Five Town Plaza
 
Springfield, MA
 
Big Y
 
9/24/2014
 
$
31,007

 
328,372

 
3.1

 
86.5%
New Prague Commons
 
New Prague, MN
 
Coborn’s
 
10/12/2012
 
10,150

 
59,948

 
6.9

 
100.0%
Northstar Marketplace
 
Ramsey, MN
 
Coborn’s
 
11/27/2013
 
14,000

 
96,356

 
4.8

 
97.6%
Savage Town Square
 
Savage, MN
 
Cub Foods(2)
 
6/19/2013
 
14,903

 
87,181

 
7.5

 
98.6%
Cahill Plaza
 
Inver Grove Heights, MN
 
Cub Foods(2)
 
10/9/2013
 
8,350

 
69,000

 
1.7

 
94.6%
Hastings Marketplace
 
Hastings, MN
 
Cub Foods(2)
 
11/6/2013
 
15,875

 
97,535

 
6.7

 
98.5%
Brentwood Commons
 
Bensenville, IL
 
Dominick’s(3)
 
7/5/2012
 
14,850

 
125,550

 
5.3

 
99.1%

23



Property Name
 
 City, State
 
Anchor Tenant
 
Date Acquired
 
 Contract Purchase Price(1) 
 
Rentable Square Footage
 
Average
Remaining
Lease Term
in Years as of December 31, 2014
 
% of Rentable Square Feet
Leased as of December 31, 2014
Baker Hill Center
 
Glen Ellyn, IL
 
Dominick’s(3)
 
9/6/2012
 
21,600

 
135,355

 
3.9

 
96.7%
Boronda Plaza
 
Salinas, CA
 
Food 4 Less(4)
 
7/3/2013
 
22,700

 
93,071

 
5.8

 
98.7%
Driftwood Village
 
Ontario, CA
 
Food 4 Less(4)
 
8/7/2014
 
19,500

 
95,421

 
1.9

 
92.9%
Burwood Village Center
 
Glen Burnie, MD
 
Food Lion(5)
 
11/9/2011
 
16,600

 
105,834

 
7.2

 
100.0%
Tramway Crossing
 
Sanford, NC
 
Food Lion(5)
 
2/23/2012
 
5,500

 
62,382

 
3.8

 
100.0%
Westin Centre
 
Fayetteville, NC
 
Food Lion(5)
 
2/23/2012
 
6,050

 
66,890

 
1.5

 
100.0%
Beavercreek Towne Center
 
Beavercreek, OH
 
Fresh Thyme
 
10/24/2014
 
47,480

 
355,881

 
10.2

 
100.0%
Snow View Plaza
 
Parma, OH
 
Giant Eagle
 
12/15/2010
 
12,300

 
100,460

 
4.6

 
97.0%
Northtowne Square
 
Gibsonia, PA
 
Giant Eagle
 
6/19/2012
 
10,575

 
113,372

 
7.2

 
100.0%
Brook Park Plaza
 
Brook Park, OH
 
Giant Eagle
 
10/23/2012
 
10,140

 
148,259

 
4.1

 
100.0%
Fairlawn Town Centre
 
Fairlawn, OH
 
Giant Eagle
 
1/30/2013
 
42,200

 
347,255

 
6.5

 
95.1%
Hartville Centre
 
Hartville, OH
 
Giant Eagle
 
4/23/2013
 
7,300

 
108,412

 
5.1

 
75.7%
Yorktown Centre
 
Millcreek Township, PA
 
Giant Eagle
 
8/30/2013
 
21,400

 
196,728

 
3.8

 
100.0%
Townfair Shopping Center
 
Indiana, PA
 
Giant Eagle
 
5/29/2014
 
22,600

 
218,610

 
9.0

 
99.5%
Fairview Plaza
 
New Cumberland, PA
 
Giant Food Stores(6)
 
5/27/2014
 
12,450

 
71,979

 
2.3

 
100.0%
Collington Plaza
 
Bowie, MD
 
Giant Foods(6)
 
11/21/2013
 
30,146

 
121,955

 
6.5

 
100.0%
Hannaford
 
Waltham, MA
 
Hannaford(5)
 
6/23/2014
 
13,700

 
45,882

 
5.0

 
100.0%
Cureton Town Center
 
Waxhaw, NC
 
Harris Teeter(7)
 
12/29/2011
 
13,950

 
84,357

 
8.6

 
100.0%
Stockbridge Commons
 
Fort Mill, SC
 
Harris Teeter(7)
 
9/3/2013
 
15,250

 
99,473

 
5.4

 
95.5%
Courthouse Marketplace
 
Virginia Beach, VA
 
Harris Teeter(7)
 
10/25/2013
 
16,050

 
106,863

 
7.2

 
86.4%
Chapel Hill North
 
Chapel Hill, NC
 
Harris Teeter(7)
 
2/28/2014
 
16,100

 
96,290

 
3.6

 
93.3%
Harrison Pointe
 
Cary, NC
 
Harris Teeter(7)
 
3/11/2014
 
22,700

 
130,758

 
4.4

 
95.5%
Lumina Commons
 
Wilmington, NC
 
Harris Teeter(7)
 
8/4/2014
 
13,875

 
80,772

 
6.5

 
94.5%
The Shoppes at Ardrey Kell
 
Charlotte, NC
 
Harris Teeter(7)
 
12/17/2014
 
15,949

 
82,119

 
8.9

 
91.3%
Kleinwood Center
 
Spring, TX
 
H-E-B
 
3/21/2013
 
32,535

 
148,863

 
6.7

 
99.2%
CitiCentre Plaza
 
Carroll, IA
 
Hy-Vee
 
10/2/2013
 
3,750

 
63,518

 
3.4

 
89.6%
Southgate Shopping Center
 
Des Moines, IA
 
Hy-Vee
 
12/20/2013
 
9,725

 
161,792

 
6.9

 
96.9%
Dyer Crossing
 
Dyer, IN
 
Jewel-Osco(3)
 
9/4/2013
 
18,500

 
95,083

 
7.4

 
91.6%
Burbank Plaza
 
Burbank, IL
 
Jewel-Osco(3)
 
3/25/2014
 
8,700

 
93,279

 
1.2

 
100.0%
New Windsor Marketplace
 
Windsor, CO
 
King Soopers(7)
 
5/9/2012
 
5,550

 
95,877

 
5.7

 
97.1%
Westwoods Shopping Center
 
Arvada, CO
 
King Soopers(7)
 
8/8/2013
 
14,918

 
90,855

 
5.5

 
97.2%
Golden Town Center
 
Golden, CO
 
King Soopers(7)
 
11/22/2013
 
19,015

 
117,882

 
3.5

 
90.4%
Thompson Valley Towne Center
 
Loveland, CO
 
King Soopers(7)
 
8/1/2014
 
20,600

 
114,638

 
3.9

 
94.2%
Lakeside Plaza
 
Salem, VA
 
Kroger
 
12/10/2010
 
8,750

 
82,798

 
3.6

 
96.5%
Meadowthorpe Shopping Center
 
Lexington, KY
 
Kroger
 
5/9/2012
 
8,550

 
87,384

 
2.9

 
96.6%
Sidney Towne Center
 
Sidney, OH
 
Kroger
 
8/2/2012
 
4,300

 
118,360

 
4.8

 
100.0%
Richmond Plaza
 
Augusta, GA
 
Kroger
 
8/30/2012
 
19,500

 
178,167

 
4.6

 
92.7%
Butler Creek
 
Acworth, GA
 
Kroger
 
1/15/2013
 
10,650

 
95,597

 
3.3

 
95.6%
Fairview Oaks
 
Ellenwood, GA
 
Kroger
 
1/15/2013
 
9,300

 
77,052

 
2.1

 
100.0%
Grassland Crossing
 
Alpharetta, GA
 
Kroger
 
1/15/2013
 
9,700

 
90,906

 
5.4

 
100.0%
Hamilton Ridge
 
Buford, GA
 
Kroger
 
1/15/2013
 
11,800

 
90,996

 
6.2

 
90.7%
Mableton Crossing
 
Mableton, GA
 
Kroger
 
1/15/2013
 
11,500

 
86,819

 
2.4

 
96.1%
Shiloh Square
 
Kennesaw, GA
 
Kroger
 
6/27/2013
 
14,500

 
139,720

 
3.5

 
80.6%
Dean Taylor Crossing
 
Suwanee, GA
 
Kroger
 
3/14/2014
 
13,180

 
92,318

 
4.5

 
98.4%
Statler Square
 
Staunton, VA
 
Kroger
 
3/21/2014
 
13,900

 
134,660

 
5.1

 
98.3%
Central Station
 
Louisville , KY
 
Kroger
 
5/23/2014
 
14,497

 
101,570

 
4.9

 
96.9%
Lovejoy Village
 
Jonesboro, GA
 
Kroger
 
6/3/2014
 
9,350

 
84,711

 
5.8

 
85.0%
Lynnwood Place
 
Jackson, TN
 
Kroger
 
7/28/2014
 
9,000

 
96,666

 
6.8

 
90.8%
Battle Ridge Pavilion
 
Marietta, GA
 
Kroger
 
8/1/2014
 
14,100

 
103,517

 
3.4

 
91.2%
Orchard Square
 
Washington Township, MI
 
Kroger
 
9/8/2014
 
13,400

 
92,450

 
4.3

 
97.2%

24



Property Name
 
 City, State
 
Anchor Tenant
 
Date Acquired
 
 Contract Purchase Price(1) 
 
Rentable Square Footage
 
Average
Remaining
Lease Term
in Years as of December 31, 2014
 
% of Rentable Square Feet
Leased as of December 31, 2014
Cherry Hill Marketplace
 
Westland, MI
 
Kroger
 
12/17/2014
 
15,141

 
120,568

 
9.6

 
82.4%
Coppell Market Center
 
Coppell, TX
 
Market Street(3)
 
3/5/2014
 
19,175

 
90,225

 
9.4

 
100.0%
Winchester Gateway
 
Winchester, VA
 
Martin’s(6)
 
3/5/2014
 
38,350

 
157,377

 
8.2

 
94.0%
Stonewall Plaza
 
Winchester, VA
 
Martin’s(6)
 
3/5/2014
 
29,500

 
119,159

 
9.8

 
92.3%
Waynesboro Plaza
 
Waynesboro, VA
 
Martin’s(6)
 
4/30/2014
 
16,800

 
74,134

 
10.2

 
100.0%
Glenwood Crossing
 
Kenosha, WI
 
Pick ‘n Save
 
6/27/2013
 
12,822

 
87,504

 
12.1

 
99.6%
Fairacres Shopping Center
 
Oshkosh, WI
 
Pick ‘n Save
 
1/21/2014
 
9,800

 
85,523

 
3.4

 
95.4%
St. Charles Plaza
 
Haines City, FL
 
Publix
 
6/10/2011
 
10,100

 
65,000

 
8.8

 
98.2%
Centerpoint
 
Easley, SC
 
Publix
 
10/14/2011
 
6,850

 
72,287

 
8.7

 
89.8%
Southampton Village
 
Tyrone, GA
 
Publix
 
10/14/2011
 
8,350

 
77,956

 
6.6

 
97.8%
The Village at Glynn Place
 
Brunswick, GA
 
Publix
 
4/27/2012
 
11,350

 
111,924

 
5.9

 
95.2%
Publix at Northridge
 
Sarasota, FL
 
Publix
 
8/30/2012
 
11,500

 
65,320

 
7.9

 
86.2%
Heron Creek Towne Center
 
North Port, FL
 
Publix
 
12/17/2012
 
8,650

 
64,664

 
4.7

 
100.0%
The Shops at Westridge
 
McDonough, GA
 
Publix
 
1/15/2013
 
7,550

 
66,297

 
8.3

 
91.6%
Macland Pointe
 
Marietta, GA
 
Publix
 
2/13/2013
 
9,150

 
79,699

 
2.5

 
91.3%
Murray Landing
 
Irmo, SC
 
Publix
 
3/21/2013
 
9,920

 
64,359

 
6.6

 
97.8%
Vineyard Center
 
Tallahassee, FL
 
Publix
 
3/21/2013
 
6,760

 
62,821

 
7.1

 
83.8%
Lutz Lake Station
 
Lutz, FL
 
Publix
 
4/4/2013
 
9,800

 
64,986

 
6.0

 
96.1%
Publix at Seven Hills
 
Spring Hill, FL
 
Publix
 
4/4/2013
 
8,500

 
72,590

 
2.9

 
92.3%
Rivergate
 
Macon, GA
 
Publix
 
7/18/2013
 
32,354

 
207,567

 
6.2

 
78.4%
Paradise Crossing
 
Lithia Springs, GA
 
Publix
 
8/13/2013
 
9,000

 
67,470

 
4.3

 
93.8%
Crystal Beach Plaza
 
Palm Harbor, FL
 
Publix
 
9/25/2013
 
12,100

 
59,015

 
12.1

 
83.3%
Shoppes of Paradise Lakes
 
Miami, FL
 
Publix
 
11/7/2013
 
13,450

 
83,597

 
4.6

 
94.3%
Coquina Plaza
 
Davie, FL
 
Publix
 
11/7/2013
 
23,200

 
91,120

 
4.7

 
100.0%
Butler’s Crossing
 
Watkinsville, GA
 
Publix
 
11/7/2013
 
8,900

 
75,505

 
2.9

 
85.4%
Lakewood Plaza
 
Spring Hill, FL
 
Publix
 
11/7/2013
 
15,300

 
106,999

 
3.8

 
95.5%
Villages at Eagles Landing
 
Stockbridge, GA
 
Publix
 
3/13/2014
 
8,815

 
67,019

 
1.8

 
97.8%
Champions Gate Village
 
Davenport, FL
 
Publix
 
3/14/2014
 
8,170

 
62,699

 
4.9

 
98.2%
Goolsby Pointe
 
Riverview, FL
 
Publix
 
3/14/2014
 
10,348

 
75,525

 
4.3

 
95.2%
Hampton Village
 
Taylors, SC
 
Publix
 
5/21/2014
 
14,025

 
123,647

 
3.2

 
79.8%
Broadway Promenade
 
Sarasota, FL
 
Publix
 
5/28/2014
 
11,325

 
53,375

 
8.2

 
87.0%
Deerwood Lake Commons
 
Jacksonville, FL
 
Publix
 
5/29/2014
 
12,050

 
67,528

 
5.0

 
96.4%
Heath Brook Commons
 
Ocala, FL
 
Publix
 
5/29/2014
 
12,800

 
79,590

 
5.5

 
93.0%
West Creek Commons
 
Coconut Creek, FL
 
Publix
 
5/29/2014
 
11,650

 
58,537

 
7.1

 
91.7%
French Golden Gate
 
Bartow, FL
 
Publix
 
8/28/2014
 
16,120

 
141,350

 
19.2

 
83.0%
Palmetto Pavilion
 
North Charleston, SC
 
Publix
 
9/11/2014
 
11,775

 
66,428

 
6.2

 
100.0%
Grayson Village
 
Loganville, GA
 
Publix
 
10/24/2014
 
9,650

 
83,155

 
5.2

 
77.6%
East Burnside Plaza
 
Portland, OR
 
QFC(7)
 
9/12/2013
 
8,643

 
38,363

 
4.7

 
100.0%
Claremont Village
 
Everett, WA
 
QFC(7)
 
11/6/2014
 
17,575

 
86,497

 
5.6

 
95.3%
Village One Plaza
 
Modesto, CA
 
Raley’s
 
12/28/2012
 
26,500

 
105,658

 
12.1

 
94.7%
Red Maple Village
 
Tracy, CA
 
Raley’s
 
9/18/2013
 
31,140

 
97,591

 
9.9

 
100.0%
Sterling Pointe Center
 
Lincoln, CA
 
Raley’s
 
12/20/2013
 
31,925

 
136,020

 
7.3

 
86.8%
The Orchards
 
Yakima, WA
 
Rosauers
 
6/3/2014
 
16,000

 
83,911

 
8.3

 
100.0%
Sunset Center
 
Corvallis, OR
 
Safeway(3)
 
5/31/2013
 
24,900

 
164,796

 
5.0

 
95.6%
Pioneer Plaza
 
Springfield, OR
 
Safeway(3)
 
10/18/2013
 
11,850

 
96,027

 
3.7

 
100.0%
Foothills Shopping Center
 
Lakewood, CO
 
Safeway(3)
 
7/31/2014
 
4,500

 
87,697

 
6.9

 
88.1%
Contra Loma Plaza
 
Antioch, CA
 
Save Mart
 
8/19/2013
 
7,250

 
74,616

 
4.4

 
82.5%
Duck Creek Plaza
 
Bettendorf, IA
 
Schnuck’s
 
10/8/2013
 
19,700

 
134,229

 
5.3

 
98.0%
Savoy Plaza
 
Savoy, IL
 
Schnuck’s
 
1/31/2014
 
17,200

 
140,624

 
6.7

 
84.0%
Shaw’s Plaza Easton
 
Easton, MA
 
Shaw’s(3)
 
6/23/2014
 
12,394

 
104,923

 
5.2

 
96.6%

25



Property Name
 
 City, State
 
Anchor Tenant
 
Date Acquired
 
 Contract Purchase Price(1) 
 
Rentable Square Footage
 
Average
Remaining
Lease Term
in Years as of December 31, 2014
 
% of Rentable Square Feet
Leased as of December 31, 2014
Shaw’s Plaza Hanover
 
Hanover, MA
 
Shaw’s(3)
 
6/23/2014
 
8,920

 
57,181

 
6.2

 
100.0%
Cushing Plaza
 
Cohasset, MA
 
Shaw’s(3)
 
6/23/2014
 
17,702

 
71,210

 
11.2

 
100.0%
South Oaks Plaza
 
St. Louis, MO
 
Shop ‘n Save(2)
 
8/21/2013
 
9,500

 
112,300

 
9.7

 
100.0%
Southwest Marketplace
 
Las Vegas, NV
 
Smith’s(7)
 
5/5/2014
 
30,400

 
115,720

 
6.6

 
92.9%
Broadway Plaza
 
Tucson, AZ
 
Sprouts
 
8/13/2012
 
12,675

 
83,612

 
5.2

 
84.3%
Arcadia Plaza
 
Phoenix, AZ
 
Sprouts
 
12/30/2013
 
13,479

 
63,637

 
3.9

 
96.2%
Kirkwood Market Place
 
Houston, TX
 
Sprouts
 
5/23/2014
 
17,100

 
80,483

 
7.1

 
91.6%
Stop & Shop Plaza
 
Enfield, CT
 
Stop & Shop(6)
 
12/30/2013
 
26,200

 
124,218

 
3.6

 
98.6%
Fresh Market
 
Normal, IL
 
The Fresh Market
 
10/22/2013
 
11,750

 
76,017

 
5.2

 
100.0%
The Fresh Market Commons
 
Pawleys Island, SC
 
The Fresh Market
 
10/28/2014
 
8,125

 
32,325

 
11.8

 
89.6%
Hilfiker Square
 
Salem, OR
 
Trader Joe’s
 
12/28/2012
 
8,000

 
38,558

 
6.3

 
100.0%
The Shops of Uptown
 
Park Ridge, IL
 
Trader Joe’s
 
2/25/2014
 
26,961

 
70,402

 
4.1

 
93.8%
Trader Joe’s Center
 
Dublin, OH
 
Trader Joe’s
 
9/11/2014
 
11,200

 
75,859

 
4.1

 
100.0%
Quartz Hill Towne Centre
 
Lancaster, CA
 
Vons(3)
 
12/26/2012
 
20,970

 
110,306

 
2.8

 
95.7%
Vine Street Square
 
Kissimmee, FL
 
Walmart(8)
 
6/4/2012
 
13,650

 
120,699

 
5.3

 
97.6%
Northcross
 
Austin, TX
 
Walmart(8)
 
6/24/2013
 
61,500

 
280,243

 
13.7

 
99.2%
Pavilions at San Mateo
 
Albuquerque, NM
 
Walmart(8)
 
6/27/2013
 
28,350

 
149,287

 
3.9

 
82.7%
Bear Creek Plaza
 
Petoskey, MI
 
Walmart(8)
 
12/19/2013
 
25,451

 
311,894

 
4.9

 
100.0%
Flag City Station
 
Findlay, OH
 
Walmart(8)
 
12/19/2013
 
15,661

 
245,549

 
3.5

 
100.0%
Southern Hills Crossing
 
Moraine, OH
 
Walmart(8)
 
12/19/2013
 
2,463

 
10,000

 
2.6

 
100.0%
Sulphur Grove
 
Huber Heights, OH
 
Walmart(8)
 
12/19/2013
 
2,914

 
20,900

 
5.2

 
100.0%
East Side Square
 
Springfield, OH
 
Walmart(8)
 
12/19/2013
 
1,471

 
8,400

 
5.0

 
82.1%
Hoke Crossing
 
Clayton, OH
 
Walmart(8)
 
12/19/2013
 
1,718

 
8,600

 
2.1

 
100.0%
Town & Country Shopping Center
 
Noblesville, IN
 
Walmart(8)
 
12/19/2013
 
26,049

 
249,833

 
3.8

 
100.0%
Town Fair Center
 
Louisville, KY
 
Walmart(8)
 
3/12/2014
 
24,250

 
234,240

 
3.4

 
96.8%
Hamilton Village
 
Chattanooga, TN
 
Walmart(8)
 
4/3/2014
 
33,679

 
437,965

 
4.5

 
99.3%
Fairfield Crossing
 
Beavercreek, OH
 
Walmart(8)
 
10/24/2014
 
14,020

 
71,170

 
7.5

 
100.0%
Juan Tabo Plaza
 
Albuquerque, NM
 
Walmart(8)
 
11/12/2014
 
7,640

 
59,758

 
6.5

 
91.9%
Towne Centre at Wesley Chapel
 
Wesley Chapel, FL
 
Winn-Dixie
 
3/14/2014
 
8,950

 
69,425

 
4.9

 
97.4%
Park View Square
 
Miramar, FL
 
Winn-Dixie
 
5/29/2014
 
14,500

 
70,471

 
5.9

 
100.0%
St. Johns Commons
 
Jacksonville, FL
 
Winn-Dixie
 
5/29/2014
 
13,000

 
71,352

 
6.0

 
96.6%
(1) 
The contract purchase price excludes closing costs and acquisition costs.
(2) 
Cub Foods and Shop ‘n Save are affiliates of SUPERVALU INC.
(3) 
Dominick’s, Vons, Safeway, Jewel-Osco, Market Street and Shaw’s are affiliates of Albertsons-Safeway. The merger of Albertsons and Safeway was completed on January 30, 2015. Dominick’s vacated both Brentwood Commons and Baker Hill Center on December 29, 2013; however, Dominick’s continues to pay rent according to the terms of its leases.
(4) 
Food 4 Less at Boronda Plaza is owned by PAQ, Inc. and Food 4 Less at Driftwood Village is owned by Kroger.
(5) 
Food Lion and Hannaford are subsidiaries of Delhaize America.
(6) 
Giant Foods, Giant Food Stores, Stop & Shop, and Martin’s are affiliates of Ahold USA.
(7) 
King Soopers, Harris Teeter, Smith’s, and QFC are affiliates of Kroger.
(8) 
The anchor tenants of Vine Street Square, Pavilions at San Mateo and Juan Tabo Plaza are Walmart Neighborhood Markets. The anchor tenants of Northcross, Bear Creek Plaza, Flag City Station, Town & Country Shopping Center, Town Fair Center, and Hamilton Village are Walmart Supercenters. The anchor tenants of Southern Hills Crossing, Sulphur Grove, East Side Square, Hoke Crossing and Fairfield Crossing are Walmart Supercenters; however, we do not own the portion of these shopping centers that is occupied by the Walmart Supercenter.


26



Lease Expirations
 
The following table lists, on an aggregate basis, all of the scheduled lease expirations after December 31, 2014 over each of the ten years ending December 31, 2015 and thereafter for our 138 shopping centers.  The table shows the rentable square feet and annualized effective rent represented by the applicable lease expirations (dollars in thousands):
Year
 
Number of Expiring Leases
 
Annualized Effective Rent(1)
 
% of Total Portfolio Annualized Effective Rent
 
Leased Rentable Square Feet Expiring
 
% of Leased Rentable Square Feet Expiring
2015
 
275
 
$
12,618

 
7.5%
 
1,002,648

 
7.2%
2016
 
327
 
16,762

 
10.0%
 
1,354,588

 
9.7%
2017
 
319
 
17,550

 
10.4%
 
1,430,841

 
10.2%
2018
 
289
 
19,461

 
11.6%
 
1,563,602

 
11.2%
2019
 
310
 
23,447

 
13.9%
 
1,831,371

 
13.1%
2020
 
116
 
12,245

 
7.3%
 
945,758

 
6.8%
2021
 
65
 
8,655

 
5.1%
 
868,051

 
6.2%
2022
 
41
 
7,261

 
4.3%
 
729,856

 
5.2%
2023
 
62
 
14,550

 
8.6%
 
1,228,695

 
8.8%
2024
 
82
 
7,573

 
4.5%
 
740,895

 
5.3%
Thereafter
 
112
 
28,206

 
16.8%
 
2,264,058

 
16.3%
 
 
1,998
 
$
168,328

 
100.0%
 
13,960,363

 
100.0%
(1) 
We calculate annualized effective rent as monthly contractual rent as of December 31, 2014 multiplied by 12 months, less any tenant concessions.

Portfolio Tenancy
 
Prior to the acquisition of a property, we assess the suitability of the grocery-anchor tenant and other tenants in light of our investment objectives, namely, preserving capital and providing stable cash flows for distributions. Generally, we assess the strength of the tenant by consideration of company factors, such as its financial strength and market share in the geographic area of the shopping center, as well as location-specific factors, such as the store’s sales, local competition and demographics. When assessing the tenancy of the non-anchor space at the shopping center, we consider the tenant mix at each shopping center in light of our portfolio, the proportion of national and national franchise tenants, the creditworthiness of specific tenants, and the timing of lease expirations. When evaluating non-national tenancy, we attempt to obtain credit enhancements to leases, which typically come in the form of deposits and/or guarantees from one or more individuals.
The following table presents the composition of our portfolio by tenant type as of December 31, 2014 (dollars in thousands):
Tenant Type
 
Leased Square Feet
 
% of Leased Square Feet
 
Annualized Effective Rent(1)
 
% of Annualized Effective Rent
Grocery anchor
 
7,784,381

 
55.7
%
 
$
73,688

 
43.8
%
National & regional(2)
 
4,338,800

 
31.1
%
 
62,746

 
37.3
%
Local
 
1,837,182

 
13.2
%
 
31,894

 
18.9
%
  
 
13,960,363

 
100.0
%
 
$
168,328

 
100.0
%
(1) 
We calculate annualized effective rent as monthly contractual rent as of December 31, 2014 multiplied by 12 months, less any tenant concessions.
(2) 
We define national tenants as those tenants that operate in at least three states. Regional tenants are defined as those tenants that have at least three locations.
 

27



The following table presents the composition of our portfolio by tenant industry as of December 31, 2014 (dollars in thousands):
Tenant Industry
 
Leased Square Feet
 
% of Leased Square Feet
 
Annualized Effective Rent(1)
 
% of Annualized Effective Rent
Grocery
 
7,784,381

 
55.7
%
 
$
73,688

 
43.8
%
Retail Stores(2)
 
3,067,600

 
22.0
%
 
36,858

 
21.9
%
Services(2)
 
1,996,344

 
14.3
%
 
35,563

 
21.1
%
Restaurant
 
1,112,038

 
8.0
%
 
22,219

 
13.2
%
  
 
13,960,363

 
100.0
%
 
$
168,328

 
100.0
%
(1) 
We calculate annualized effective rent as monthly contractual rent as of December 31, 2014 multiplied by 12 months, less any tenant concessions.
(2) 
We define retail stores as those that primarily sell goods, while services tenants primarily sell non-goods services.
 
The following table presents our grocery-anchor tenants by the amount of square footage leased by each tenant as of December 31, 2014 (dollars in thousands):
Tenant  
 
Number of Locations(1)
 
Leased Square Feet
 
% of Leased Square Feet
 
Annualized Effective Rent(2)
 
% of Annualized Effective Rent
Kroger(3)(9)
 
33

 
1,834,479

 
13.1
%
 
$
14,542

 
8.6
%
Publix
 
30

 
1,403,400

 
10.0
%
 
14,199

 
8.4
%
Walmart(4)
 
9

 
1,121,118

 
7.9
%
 
5,198

 
3.1
%
Albertsons-Safeway(5)
 
12

 
729,313

 
5.2
%
 
7,623

 
4.5
%
Giant Eagle
 
7

 
559,581

 
3.9
%
 
5,362

 
3.2
%
Ahold USA(6)
 
6

 
411,103

 
2.9
%
 
6,377

 
3.8
%
SUPERVALU(7)
 
4

 
273,067

 
2.0
%
 
2,332

 
1.4
%
Raley’s
 
3

 
192,998

 
1.4
%
 
3,422

 
2.0
%
Winn-Dixie
 
3

 
146,754

 
1.1
%
 
1,545

 
0.9
%
Delhaize America(8)
 
4

 
141,547

 
1.0
%
 
1,684

 
1.0
%
Hy-Vee
 
2

 
127,028

 
0.9
%
 
527

 
0.3
%
Schnuck’s
 
2

 
121,266

 
0.9
%
 
1,440

 
0.9
%
Pick n’ Save
 
2

 
108,561

 
0.8
%
 
1,056

 
0.6
%
Coborn’s
 
2

 
107,683

 
0.8
%
 
1,350

 
0.8
%
Sprouts Farmers Market
 
3

 
93,896

 
0.7
%
 
1,114

 
0.7
%
H-E-B
 
1

 
80,925

 
0.6
%
 
1,210

 
0.7
%
Big Y
 
1

 
64,863

 
0.5
%
 
1,048

 
0.6
%
PAQ, Inc.(9)
 
1

 
58,687

 
0.4
%
 
1,046

 
0.6
%
Rosauers Supermarkets, Inc.
 
1

 
51,484

 
0.4
%
 
537

 
0.3
%
Save Mart
 
1

 
50,233

 
0.4
%
 
399

 
0.2
%
Trader Joe’s
 
3

 
38,294

 
0.3
%
 
633

 
0.4
%
The Fresh Market
 
2

 
38,101

 
0.3
%
 
597

 
0.4
%
Fresh Thyme
 
1

 
30,000

 
0.2
%
 
450

 
0.4
%
   
 
133

 
7,784,381

 
55.7
%
 
73,688

 
43.8
%
(1) 
Number of locations excludes auxiliary leases with grocery anchors such as fuel stations, pharmacies, and liquor stores, of which there were 24 as of December 31, 2014. Also excluded are the anchor tenants of Southern Hills Crossing, Sulphur Grove, East Side Square, Hoke Crossing, and Fairfield Crossing, as we do not own the portion of these shopping centers that is leased to Walmart Supercenter.
(2) 
We calculate annualized effective rent as monthly contractual rent as of December 31, 2014 multiplied by 12 months, less any tenant concessions.
(3) 
King Soopers, Harris Teeter, Smith's, and QFC are affiliates of Kroger.

28



(4) 
The Walmart stores at Vine Street Square, Pavilions at San Mateo and Juan Tabo Plaza are Walmart Neighborhood Markets.  The Walmart stores at Northcross, Bear Creek Plaza, Flag City Station, Town & Country Shopping Center, Town Fair Center, and Hamilton Village are Walmart Supercenters.
(5) 
Dominick's, Vons, Jewel-Osco, Market Street, and Shaw's are affiliates of Albertsons-Safeway. The merger of Albertsons and Safeway was completed on January 30, 2015.
(6) 
Giant Foods, Giant Food Stores, Stop & Shop, and Martin's are affiliates of Ahold USA.
(7) 
Cub Foods and Shop 'n Save are affiliates of SUPERVALU INC.
(8) 
Food Lion and Hannaford are affiliates of Delhaize America.
(9) 
Food 4 Less at Boronda Plaza is owned by PAQ, Inc. and Food 4 Less at Driftwood Village is owned by Kroger.

ITEM 3.     LEGAL PROCEEDINGS

From time to time, we are party to legal proceedings, which arise in the ordinary course of our business. We are not currently involved in any legal proceedings of which the outcome is reasonably likely to have a material impact on our results of operations or financial condition, nor are we aware of any such legal proceedings contemplated by governmental authorities.
 
ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information
 
There is no established trading market for our common stock. Therefore, there is a risk that a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder, or at all. Pursuant to our offering, we sold shares of our common stock to the public in our primary offering at a price of $10.00 per share (with discounts provided for certain categories of purchasers). We also sold and continue to sell shares at a price of $9.50 per share pursuant to our DRIP. Pursuant to the terms of our charter, certain restrictions are imposed on the ownership and transfer of shares.
 
Until the later of up to 18 months after the termination of the primary portion of our initial public offering or the termination of any subsequent primary offering of our shares, we intend to use the offering price of shares in our most recent offering as the per share net asset value. The estimated value of a share of our common stock is $10.00 per share as of December 31, 2014. This estimated value may be higher than the price at which you could resell your shares because (1) our offering involved the payment of underwriting compensation and other directed selling efforts, which payments and efforts were likely to produce a higher sales price than could otherwise have been obtained, and (2) there is no public market for our shares. Moreover, this estimated value may be higher than the amount you would receive per share if we were to liquidate at this time because of the up-front fees that we paid in connection with the issuance of our shares. Beginning up to 18 months after the last offering of shares, the value of the properties and other assets will be based on valuations of either our properties or our company as a whole, whichever valuation method our board of directors determines to be appropriate.

We expect to establish an estimated value per share 18 months following the termination of the primary portion of our initial public offering, which occurred on February 7, 2014.

Stockholder Information
 
As of February 28, 2015, we had approximately 182.9 million shares of common stock outstanding, held by a total of 41,439 stockholders of record. The number of stockholders is based on the records of DST Systems, Inc., who serves as our registrar and transfer agent.
 
Dividend Reinvestment Plan
 
We have adopted the DRIP, through which stockholders may elect to reinvest an amount equal to the dividends declared on their shares of common stock into shares of our common stock in lieu of receiving cash dividends. Shares may be purchased under the DRIP for a price equal to $9.50 per share. Upon our establishment of an estimated value per share that is not based on the price to acquire a share in the primary offering or a follow-on public offering, shares issued pursuant to the DRIP will be

29



priced at the estimated value per share of our common stock, as determined by an independent firm chosen for that purpose. Participants in the DRIP may purchase fractional shares so that 100% of the dividends may be used to acquire additional shares of our common stock. For the year ended December 31, 2014, 6.6 million shares were issued through the DRIP, resulting in proceeds of approximately $63.0 million. For the year ended December 31, 2013, 2.0 million shares were issued through the DRIP, resulting in proceeds of approximately $18.7 million.
 
Distribution Information
 
We pay distributions based on daily record dates, payable monthly in arrears. During the years ended December 31, 2014 and 2013, our board of directors authorized distributions based on daily record dates for each day during the periods from January 1 through December 31, 2014 and 2013. The authorized distributions for January 2013 were equal to a daily amount of $0.00178082 per share of common stock, which equates to a 6.5% annualized rate based on a purchase price of $10.00 per share, if this rate were paid each day for a 365-day period. The authorized distributions for February 2013 through December 2014 were equal to a daily amount of $0.00183562 per share of common stock, which equates to a 6.7% annualized rate based on a purchase price of $10.00 per share, if this rate were paid each day for a 365-day period.

The total monthly distributions paid to common stockholders for the years ended December 31, 2014 and 2013 was as follows