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EX-32.2 - EXHIBIT 32.2 - Phillips Edison & Company, Inc.pentr_20150331-ex322.htm
EX-31.2 - EXHIBIT 31.2 - Phillips Edison & Company, Inc.pentr_20150331-ex312.htm
EX-32.1 - EXHIBIT 32.1 - Phillips Edison & Company, Inc.pentr_20150331-ex321.htm
EX-31.1 - EXHIBIT 31.1 - Phillips Edison & Company, Inc.pentr_20150331-ex311.htm
EXCEL - IDEA: XBRL DOCUMENT - Phillips Edison & Company, Inc.Financial_Report.xls


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
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)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ¨ 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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  x    No  ¨  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the 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
x (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of April 30, 2015, there were 183.8 million outstanding shares of common stock of Phillips Edison Grocery Center REIT I, Inc.





INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1



PART I.        FINANCIAL INFORMATION
 
Item 1.          Financial Statements

PHILLIPS EDISON GROCERY CENTER REIT I, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2015 AND DECEMBER 31, 2014
(Unaudited)
(In thousands, except per share amounts)
  
March 31, 2015
 
December 31, 2014
ASSETS
  
 
  
Investment in real estate:
  
 
  
Land and improvements
$
705,098

 
$
675,289

Building and improvements
1,356,989

 
1,305,345

Acquired intangible lease assets
229,659

 
220,601

Total investment in real estate assets
2,291,746

 
2,201,235

Accumulated depreciation and amortization
(152,706
)
 
(126,965
)
Total investment in real estate assets, net
2,139,040

 
2,074,270

Cash and cash equivalents
14,161

 
15,649

Restricted cash
7,309

 
6,803

Deferred financing expense, net of accumulated amortization of $6,195 and $5,107, respectively
12,979

 
13,727

Other assets, net
43,520

 
40,320

Total assets
$
2,217,009

 
$
2,150,769

LIABILITIES AND EQUITY
  

 
  

Liabilities:
  

 
  

Mortgages and loans payable
$
729,983

 
$
650,462

Acquired below-market lease intangibles, less accumulated amortization of $9,276 and $7,619, respectively
44,117

 
42,454

Accounts payable – affiliates
2,469

 
975

Accounts payable and other liabilities
41,421

 
48,738

Total liabilities
817,990

 
742,629

Commitments and contingencies (Note 9)

 

Redeemable common stock
84,387

 
29,878

Equity:
  

 
  

Preferred stock, $0.01 par value per share, 10,000 shares authorized, zero shares issued and outstanding at March 31, 2015
  
 
  
and December 31, 2014

 

Common stock, $0.01 par value per share, 1,000,000 shares authorized, 183,279 and 182,131 shares issued and
  
 
  
outstanding at March 31, 2015 and December 31, 2014, respectively
1,833

 
1,820

Additional paid-in capital
1,525,588

 
1,567,653

Accumulated deficit
(239,240
)
 
(213,975
)
Total stockholders’ equity
1,288,181

 
1,355,498

Noncontrolling interests
26,451

 
22,764

Total equity
1,314,632

 
1,378,262

Total liabilities and equity
$
2,217,009

 
$
2,150,769


See notes to consolidated financial statements.

2



PHILLIPS EDISON GROCERY CENTER REIT I, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(Unaudited)
(In thousands, except per share amounts)
  
 
  
2015
 
2014
Revenues:
  
 
  
Rental income
$
44,500

 
$
27,224

Tenant recovery income
14,104

 
8,306

Other property income
343

 
147

Total revenues
58,947

 
35,677

Expenses:
  

 
  

Property operating
9,986

 
6,125

Real estate taxes
8,179

 
4,282

General and administrative
2,362

 
1,771

Acquisition expenses
1,735

 
5,386

Depreciation and amortization
24,730

 
15,403

Total expenses
46,992

 
32,967

Other income (expense):
  

 
  

Interest expense, net
(6,794
)
 
(3,680
)
Other (expense) income, net
(122
)
 
547

Net income (loss)
5,039

 
(423
)
Net income attributable to noncontrolling interests
(68
)
 

Net income (loss) attributable to stockholders
$
4,971

 
$
(423
)
Earnings per common share:
  

 
  

Net income (loss) per share - basic and diluted
$
0.03

 
$
(0.00
)
Weighted-average common shares outstanding:
 
 
 
Basic
182,988

 
176,855

Diluted
185,495

 
176,855

 
 
 
 
Comprehensive income (loss):
  

 
  

Net income (loss)
$
5,039

 
$
(423
)
Other comprehensive income:
  

 
  

Change in unrealized loss on interest rate swaps, net

 
(690
)
Comprehensive income (loss)
5,039

 
(1,113
)
Comprehensive income attributable to noncontrolling interests
(68
)
 

Comprehensive income (loss) attributable to stockholders
$
4,971

 
$
(1,113
)

See notes to consolidated financial statements.

3



PHILLIPS EDISON GROCERY CENTER REIT I, INC.
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(Unaudited)
(In thousands, except per share amounts)
  
Common Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income
 
Accumulated Deficit
 
Total Stockholders’ Equity
 
Noncontrolling Interest
 
Total Equity
  
Shares
 
Amount
 
 
 
 
 
 
Balance at January 1, 2014
175,595

 
$
1,756

 
$
1,538,185

 
$
690

 
$
(71,192
)
 
$
1,469,439

 
$
93

 
$
1,469,532

Issuance of common stock
256

 
2

 
2,531

 

 

 
2,533

 

 
2,533

Share repurchases
(16
)
 

 
(153
)
 

 

 
(153
)
 

 
(153
)
Dividend reinvestment plan (DRIP)
1,601

 
16

 
15,195

 

 

 
15,211

 

 
15,211

Change in unrealized loss on interest rate swaps

 

 

 
(690
)
 

 
(690
)
 

 
(690
)
Common distributions declared, $0.17 per share

 

 

 

 
(29,235
)
 
(29,235
)
 

 
(29,235
)
Distributions to noncontrolling interests

 

 

 

 

 

 
(4
)
 
(4
)
Offering costs

 

 
(1,455
)
 

 

 
(1,455
)
 

 
(1,455
)
Net loss

 

 

 

 
(423
)
 
(423
)
 

 
(423
)
Balance at March 31, 2014
177,436

 
$
1,774

 
$
1,554,303

 
$

 
$
(100,850
)
 
$
1,455,227

 
$
89

 
$
1,455,316

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2015
182,131

 
$
1,820

 
$
1,567,653

 
$

 
$
(213,975
)
 
$
1,355,498

 
$
22,764

 
$
1,378,262

Share repurchases
(514
)
 
(3
)
 
(3,338
)
 

 

 
(3,341
)
 

 
(3,341
)
Change in redeemable common stock

 

 
(54,509
)
 

 

 
(54,509
)
 

 
(54,509
)
DRIP
1,662

 
16

 
15,782

 

 

 
15,798

 

 
15,798

Common distributions declared, $0.17 per share

 

 

 

 
(30,236
)
 
(30,236
)
 

 
(30,236
)
Issuance of partnership units

 

 

 

 

 

 
4,047

 
4,047

Distributions to noncontrolling interests

 

 

 

 

 

 
(428
)
 
(428
)
Net income

 

 

 

 
4,971

 
4,971

 
68

 
5,039

Balance at March 31, 2015
183,279

 
$
1,833

 
$
1,525,588

 
$

 
$
(239,240
)
 
$
1,288,181

 
$
26,451

 
$
1,314,632


See notes to consolidated financial statements.

4



PHILLIPS EDISON GROCERY CENTER REIT I, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(Unaudited)
(In thousands)
  
 
  
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
  
 
  
Net income (loss)
$
5,039

 
$
(423
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
  

 
  

Depreciation and amortization
23,958

 
14,870

Net amortization of above- and below-market leases
(178
)
 
89

Amortization of deferred financing expense
1,258

 
816

Loss on disposal of real estate assets
100

 

Loss on write-off of capitalized leasing commissions and deferred financing expense
81

 
10

Change in fair value of derivative
47

 
(392
)
Straight-line rental income
(1,244
)
 
(831
)
Changes in operating assets and liabilities:
  

 
  

Other assets
(2,063
)
 
60

Accounts payable and other liabilities
469

 
1,771

Accounts payable – affiliates
1,204

 
386

Net cash provided by operating activities
28,671

 
16,356

CASH FLOWS FROM INVESTING ACTIVITIES:
  

 
  

Real estate acquisitions
(61,839
)
 
(201,808
)
Capital expenditures
(2,995
)
 
(1,079
)
Change in restricted cash and investments
(506
)
 
(1,243
)
Proceeds from sale of derivative

 
520

Net cash used in investing activities
(65,340
)
 
(203,610
)
CASH FLOWS FROM FINANCING ACTIVITIES:
  

 
  

Net change in credit facility borrowings
66,800

 

Payments on mortgages and loans payable
(11,654
)
 
(900
)
Payments of deferred financing expenses
(557
)
 
(1,536
)
Distributions paid, net of DRIP
(14,366
)
 
(13,699
)
Distributions to noncontrolling interests
(134
)
 

Repurchases of common stock
(4,908
)
 
(155
)
Proceeds from issuance of common stock

 
2,533

Payment of offering costs

 
(1,759
)
Net cash provided by (used in) financing activities
35,181

 
(15,516
)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(1,488
)
 
(202,770
)
CASH AND CASH EQUIVALENTS:
  

 
  

Beginning of period
15,649

 
460,250

End of period
$
14,161

 
$
257,480

SUPPLEMENTAL CASHFLOW DISCLOSURE, INCLUDING NON-CASH INVESTING AND FINANCING ACTIVITIES:
  
 
  
Cash paid for interest
$
6,021

 
$
2,876

Fair value of debt assumed
24,982

 
86,644

Accrued capital expenditures
853

 
1,961

Change in offering costs payable to sponsor(s)

 
(304
)
Change in distributions payable
72

 
325

Change in distributions payable – noncontrolling interests
294

 
4

Change in accrued share repurchase obligation
(1,567
)
 
(2
)
Distributions reinvested
15,798

 
15,211


See notes to consolidated financial statements.

5



 Phillips Edison Grocery Center REIT I, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
 
1. ORGANIZATION
 
Phillips Edison Grocery Center REIT I, Inc., (“we”, the “Company”, “our”, or “us”) was formed as a Maryland corporation in October 2009. Substantially all of our business is conducted through Phillips Edison Grocery Center Operating Partnership I, L.P., (the “Operating Partnership”), a Delaware limited partnership formed in December 2009. We are a limited partner of the Operating Partnership, and our wholly owned subsidiary, Phillips Edison Grocery Center OP GP I LLC, is the sole general partner of the Operating Partnership.

Our advisor is Phillips Edison NTR LLC (“PE-NTR”), which 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. Under the terms of the advisory agreement between PE-NTR and us (the “PE-NTR Agreement”), PE-NTR is responsible for the management of our day-to-day activities and the implementation of our investment strategy. Prior to December 3, 2014, our advisor was American Realty Capital II Advisors, LLC (“ARC”). Under the terms of the previous advisory agreement between ARC and us (the “ARC Agreement”), ARC delegated most of its duties, including the management of our day-to-day operations and our portfolio of real estate assets, to PE-NTR.

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 March 31, 2015, we owned fee simple interests in 146 real estate properties acquired from third parties unaffiliated with us or PE-NTR.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Set forth below is a summary of the significant accounting estimates and policies that management believes are important to the preparation of our consolidated interim financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by management. As a result, these estimates are subject to a degree of uncertainty. There have been no changes to our significant accounting policies during the three months ended March 31, 2015. For a full summary of our accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the U.S. Securities and Exchange Commission (“SEC”) on March 9, 2015.
 
Basis of Presentation and Principles of Consolidation—The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Readers of this Quarterly Report on Form 10-Q should refer to the audited consolidated financial statements of Phillips Edison Grocery Center REIT I, Inc. for the year ended December 31, 2014, which are included in our 2014 Annual Report on Form 10-K, as certain footnote disclosures contained in such audited consolidated financial statements have been omitted from this Quarterly Report on Form 10-Q. In the opinion of management, all normal and recurring adjustments necessary for the fair presentation have been included in this Quarterly Report. Our results of operations for the three months ended March 31, 2015 are not necessarily indicative of the operating results expected for the full year.
 
The accompanying consolidated financial statements include our accounts and those of our majority-owned subsidiaries. All intercompany balances and transactions are eliminated upon consolidation.

Redeemable Common Stock—Under our share repurchase program, the maximum amount of common stock that we may repurchase, at the shareholder’s election, during any calendar year is limited, among other things, to 5% of the weighted-average number of shares outstanding during the prior calendar year. The maximum amount is reduced each reporting period by the current year share repurchases to date. We record amounts that may be repurchased under the share repurchase program as redeemable common stock outside of permanent equity in our consolidated balance sheets because repurchases are at the option of the holders and are not solely within our control. There were 8.4 million and 3.0 million redeemable common shares represented on the consolidated balance sheets as of March 31, 2015 and December 31, 2014, respectively. Changes in the amount of redeemable common stock from period to period are recorded as an adjustment to capital in excess of par value.
 

6



We offer a share repurchase program which may allow certain stockholders to have their shares repurchased subject to approval and certain limitations and restrictions (see Note 3). We account for those financial instruments that represent our mandatory obligation to repurchase shares as liabilities to be reported at settlement value. When shares are presented for repurchase, we will reclassify such obligations from redeemable common stock to a liability based upon their respective settlement values.

Earnings Per Share—We use the two-class method of computing earnings per share (“EPS”), which is an earnings allocation formula that determines EPS for common stock and any participating securities (in our case, the limited partnership units of the Operating Partnership designated as “Class B units” that have vested) according to dividends declared (whether paid or unpaid). Under the two-class method, basic EPS is computed by dividing the sum of distributed earnings to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from other share equivalent activity.

The vesting of the Class B units is contingent upon a market condition and service condition. The vested Class B units were included in the diluted net income per share computations for the three months ended March 31, 2015. The unvested Class B units were not included in the diluted net income (loss) per share computations since the satisfaction of the market or service condition was not probable as of March 31, 2015 and 2014. There were 2.8 million vested Class B units of the Operating Partnership outstanding as of March 31, 2015. There were 0.2 million and 0.9 million unvested Class B units outstanding as of March 31, 2015 and 2014, respectively, which had no effect on EPS. The effects on EPS of the two-class method were immaterial to the consolidated financial statements as of March 31, 2015.
 
Reclassifications—The following line items on our consolidated statement of cash flows for the three months ended March 31, 2014 were reclassified to conform to the current year presentation:

The change in accounts receivable and the change in prepaid expenses and other were reclassified to the change in other assets; and
The change in accounts payable and the change in accrued and other liabilities were reclassified to the change in
accounts payable and other liabilities.

Impact of Recently Issued Accounting Pronouncements—The following table provides a brief description of recent accounting pronouncements that could have a material effect on our financial statements:
Standard
 
Description
 
Date of Adoption
 
Effect on the Financial Statements or Other Significant Matters
ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs
 
This update amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted.
 
January 1, 2016
 
We are currently evaluating the impact the adoption of this standard will have on our consolidated financial statements.

3. EQUITY
 
General—We have the authority to issue a total of 1 billion shares of common stock with a par value of $0.01 per share and 10 million shares of preferred stock, $0.01 par value per share. As of March 31, 2015, we had issued 184.2 million shares of common stock generating gross cash proceeds of $1.82 billion.  As of March 31, 2015, there were 183.3 million shares of our common stock outstanding, which is net of 1.0 million shares repurchased from stockholders pursuant to our share repurchase program, and we had issued no shares of preferred stock. The holders of common stock are entitled to one vote per share on all matters voted on by stockholders, including election of the board of directors. Our charter does not provide for cumulative voting in the election of directors.
 
Dividend Reinvestment Plan—We have adopted a dividend reinvestment plan (the “DRIP”) that allows stockholders to invest distributions in additional shares of our common stock. We continue to offer up to a total of approximately 18.2 million shares of common stock under the DRIP. Stockholders who elect to participate in the DRIP may choose to invest all or a portion of their cash distributions in shares of our common stock at a purchase price of $9.50 per share. Stockholders who elect to participate in the DRIP, and who are subject to U.S. federal income taxation laws, will incur a tax liability on an amount equal to the fair value on the relevant distribution date of the shares of our common stock purchased with reinvested distributions, even though such stockholders have elected not to receive the distributions in cash.  Distributions reinvested through the DRIP for the three months ended March 31, 2015 and 2014, were $15.8 million and $15.2 million, respectively. 

7




Share Repurchase Program—Our share repurchase program may provide a limited opportunity for stockholders to have shares of common stock repurchased, subject to certain restrictions and limitations, at a price equal to or at a discount from the stockholders’ original purchase prices paid for the shares being repurchased.
 
Repurchase of shares of common stock will be made monthly upon written notice received by us at least five days prior to the end of the applicable month. Stockholders may withdraw their repurchase request at any time up to five business days prior to the repurchase date.
 
The board of directors may, in its sole discretion, amend, suspend, or terminate the share repurchase program at any time. If the board of directors decides to amend, suspend or terminate the share repurchase program, stockholders will be provided with no less than 30 days’ written notice.

The following table presents the activity of the share repurchase program for the three months ended March 31, 2015 and 2014 (in thousands, except per share amounts):
 
 
2015
 
2014
Shares repurchased
 
514

 
16

Cost of repurchases
 
$
4,908

 
$
155

Average repurchase price
 
$
9.54

 
$
9.72


We record a liability representing our obligation to repurchase shares of common stock submitted for repurchase as of period end but not yet repurchased. Below is a summary of our obligation to repurchase shares of common stock recorded as a component of accounts payable and other liabilities on our consolidated balance sheets as of March 31, 2015 and December 31, 2014 (in thousands):
 
 
March 31, 2015
 
December 31, 2014
Shares submitted for repurchase
 
11

 
177

Liability recorded
 
$
102

 
$
1,669


Class B Units—Under our prior advisory agreement, in connection with asset management services provided by ARC and PE-NTR, we issued 0.4 million Class B units during the three months ended March 31, 2015 for asset management services provided from October 1, 2014 through December 3, 2014, the date of the termination of our prior advisory agreement. In connection with the termination of the prior advisory agreement, we determined that the economic hurdle had been met as of that date and that the units issued to ARC and PE-NTR for asset management services provided through December 3, 2014 had vested.

Under the terms of the limited partnership agreement of the Operating Partnership, at any time following the first anniversary of the date of their issuance, the Class B units held by ARC may be redeemed at the election of the holder for cash or, at our option, for shares of our common stock, under the terms of exchange rights agreements to be prepared at a future date. Class B units held by PE-NTR may be redeemed in a similar fashion subsequent to the occurrence of a listing of our common stock or liquidation of our portfolio, provided that a year has passed since the issuance of the Class B Units at such time as the listing of our common stock or the liquidation of our portfolio occurs.

As the form of the redemptions for the vested Class B units is within our control, the Class B units issued as of March 31, 2015 are classified as noncontrolling interests within permanent equity on our consolidated balance sheets. As of March 31, 2015, the fair value of the vested Class B units was $27.9 million. Additionally, the cumulative distributions that have been paid on these Class B units are included in noncontrolling interests as distributions to noncontrolling interests.


8



4. FAIR VALUE MEASUREMENT

ASC 820, Fair Value Measurement (“ASC 820”) defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. ASC 820 emphasizes that fair value is intended to be a market-based measurement, as opposed to a transaction-specific measurement. Fair value is defined by ASC 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate the fair value. Assets and liabilities are measured using inputs from three levels of the fair value hierarchy, as follows:
Level 1—Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).
Level 3—Unobservable inputs, only used to the extent that observable inputs are not available, reflect our assumptions about the pricing of an asset or liability.
 
The following describes the methods we use to estimate the fair value of our financial and non-financial assets and liabilities:
 
Cash and cash equivalents, restricted cash, accounts receivable, and accounts payable—We consider the carrying values of these financial instruments to approximate fair value because of the short period of time between origination of the instruments and their expected realization.

Real estate investments—The purchase prices of the investment properties, including related lease intangible assets and liabilities, were allocated at estimated fair value based on Level 3 inputs, such as discount rates, capitalization rates, comparable sales, replacement costs, income and expense growth rates and current market rents and allowances as determined by management. Real estate assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the individual property may not be recoverable. In such an event, a comparison will be made of the projected operating cash flows of each property on an undiscounted basis to the carrying amount of such property. Such carrying amount would be adjusted, if necessary, to estimated fair values to reflect impairment in the value of the asset.

Mortgages and loans payable —We estimate the fair value of our debt by discounting the future cash flows of each instrument at rates currently offered for similar debt instruments of comparable maturities by our lenders using Level 3 inputs.  The discount rate used approximates current lending rates for loans or groups of loans with similar maturities and credit quality, assuming the debt is outstanding through maturity and considering the debt’s collateral (if applicable).  We have utilized market information, as available, or present value techniques to estimate the amounts required to be disclosed.

The following is a summary of discount rates and borrowings as of March 31, 2015 and December 31, 2014 (dollars in thousands):
 
 
March 31, 2015
 
December 31, 2014
Discount rates:
 
 
 
 
Fixed-rate debt
 
3.35
%
 
3.40
%
Secured variable-rate debt
 
2.59
%
 
2.48
%
Unsecured variable-rate debt
 
1.99
%
 
1.93
%
Borrowings:
 
 
 
 
Fair value
 
$
739,214

 
$
665,982

Recorded value
 
729,983

 
650,462


Derivative instruments As of March 31, 2015 and December 31, 2014, we were party to one interest rate swap agreement with a notional amount of $11.5 million and $11.6 million, respectively. The interest rate swap was assumed as part of an acquisition and is measured at fair value on a recurring basis. The interest rate swap agreement effectively fixes the variable interest rate of our secured variable-rate mortgage note at an annual interest rate of 5.22% through June 10, 2018.

9



 
The fair value of the interest rate swap agreement as of March 31, 2015 and December 31, 2014 was based on the estimated amount we would receive or pay to terminate the contract at the reporting date and was determined using interest rate pricing models and interest rate related observable inputs.  Although we determined that the significant inputs used to value our derivative fell within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our counterparties and our own credit risk utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, as of March 31, 2015 and December 31, 2014, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative position and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivative. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
 
Considerable judgment is necessary to develop estimated fair values of financial and non-financial assets and liabilities. Accordingly, the estimates presented herein are not necessarily indicative of the amounts we did or could actually realize upon disposition of the financial assets and liabilities previously sold or currently held (see Note 10).
 
This interest rate swap was our only financial liability that was measured at fair value as of March 31, 2015 and December 31, 2014. The value recorded as a component of accounts payable and other liabilities for the interest rate swap was $0.6 million as of March 31, 2015 and December 31, 2014.

5. REAL ESTATE ACQUISITIONS
 
During the three months ended March 31, 2015, we acquired eight retail centers for a purchase price of approximately $86.4 million, including $24.0 million of assumed debt with a fair value of $25.0 million. The following tables present certain additional information regarding our acquisitions of properties that were deemed individually immaterial when acquired, but are material in the aggregate. 

For the three months ended March 31, 2015 and 2014, we allocated the purchase price of acquisitions to the fair value of the assets acquired and liabilities assumed as follows (in thousands):
 
 
2015
 
2014
Land and improvements
 
$
29,516

 
$
86,106

Building and improvements
 
51,186

 
168,704

Acquired in-place leases
 
8,703

 
24,127

Acquired above-market leases
 
356

 
9,257

Acquired below-market leases
 
(3,319
)
 
(2,485
)
Total assets and lease liabilities acquired
 
86,442

 
285,709

Debt assumed
 
24,982

 
86,644

Net assets acquired
 
$
61,460

 
$
199,065


The weighted-average amortization periods for acquired in-place lease, above-market lease, and below-market lease intangibles acquired during the three months ended March 31, 2015 and 2014 are as follows (in years):
 
 
2015
 
2014
Acquired in-place leases
 
16
 
6
Acquired above-market leases
 
16
 
11
Acquired below-market leases
 
21
 
6

The amounts recognized for revenues, acquisition expenses and net loss from each respective acquisition date to March 31, 2015 and 2014 related to the operating activities of our acquisitions are as follows (in thousands):
 
 
2015
 
2014
Revenues
 
$
752

 
$
2,164

Acquisition expenses
 
1,458

 
5,188

Net loss
 
1,498

 
5,511

  

10



The following unaudited pro forma information summarizes selected financial information from our combined results of operations, as if all of our acquisitions for 2014 and 2015 had been acquired on January 1, 2014 (in thousands). This pro forma information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transactions occurred at the beginning of the period, nor does it purport to represent the results of future operations. 
 
 
For the Three Months Ended March 31,
 
 
2015
 
2014
Pro forma revenues
 
$
60,115

 
$
58,433

Pro forma net income attributable to stockholders
 
6,891

 
7,947

 
6. ACQUIRED INTANGIBLE ASSETS

Acquired intangible lease assets consisted of the following as of March 31, 2015 and December 31, 2014 (in thousands):
 
 
March 31, 2015
 
December 31, 2014
Acquired in-place leases
 
$
191,393

 
$
182,690

Acquired above-market leases
 
38,266

 
37,911

Total acquired intangible lease assets
 
229,659

 
220,601

Accumulated amortization
 
(52,856
)
 
(43,915
)
Net acquired intangible lease assets
 
$
176,803

 
$
176,686


Summarized below is the amortization recorded on the intangible assets for the three months ended March 31, 2015 and 2014 (in thousands):
  
2015
 
2014
Acquired in-place leases(1)
$
7,462

 
$
4,722

Acquired above-market leases(2)
1,479

 
978

Total 
$
8,941

 
$
5,700

(1) Amortization recorded on acquired in-place leases was included in depreciation and amortization in the consolidated statements of operations.
(2) Amortization recorded on acquired above-market leases was an adjustment to rental revenue in the consolidated statements of operations.

Estimated future amortization on the respective acquired intangible lease assets as of March 31, 2015 for the remainder of 2015 and for each of the four succeeding calendar years and thereafter is as follows (in thousands):
Year
In-Place Leases
 
Above-Market Leases
April 1 to December 31, 2015
$
22,240

 
$
4,241

2016
27,427

 
4,819

2017
24,477

 
3,996

2018
19,284

 
3,213

2019
14,136

 
2,457

2020 and thereafter
41,404

 
9,109

Total
$
148,968

 
$
27,835


7. MORTGAGES AND LOANS PAYABLE
 
As of March 31, 2015 and December 31, 2014, we had approximately $363.3 million and $350.9 million, respectively, of outstanding mortgage notes payable, excluding fair value of debt adjustments.  Each mortgage note payable is secured by the respective property on which the debt was placed. 
 
As of March 31, 2015, we also had access to a $700 million unsecured revolving credit facility, which may be expanded to $1 billion, with a $358.5 million outstanding principal balance from which we may draw additional funds to pay certain long-term

11



debt obligations as they mature. The interest rate on amounts outstanding under this credit facility is currently LIBOR plus 1.30%. The credit facility matures on December 18, 2017, with two six-month options to extend the maturity to December 18, 2018.

Of the amount outstanding on our mortgage notes and loans payable at March 31, 2015, $49.5 million is for loans that mature in 2015, excluding monthly scheduled principal payments. Of the amount that matures in 2015, $32.2 million was repaid subsequent to March 31, 2015. As of March 31, 2015 and December 31, 2014, the weighted-average interest rates for the loans were 3.5% and 3.7%, respectively.

The table below summarizes our loan assumptions in conjunction with property acquisitions for the three months ended March 31, 2015 and 2014 (dollars in thousands):
 
2015
 
2014
Number of properties acquired with loan assumptions
5

 
7
Carrying value of assumed debt
$
24,000

 
$
84,425

Fair value of assumed debt
24,982

 
86,644


The assumed net below-market debt adjustment will be amortized over the remaining life of the loans, and this amortization is classified as a component of interest expense. The amortization recorded on the assumed below-market debt adjustment was $0.6 million and $0.5 million for the three months ended March 31, 2015 and 2014, respectively.

The following is a summary of our debt obligations as of March 31, 2015 and December 31, 2014 (in thousands):
  
March 31, 2015
 
December 31, 2014
Fixed-rate mortgages payable(1)(2)
$
363,268

 
$
350,922

Unsecured credit facility - variable-rate(3)
358,500

 
291,700

Assumed below-market debt adjustment
8,215

 
7,840

Total
$
729,983

 
$
650,462

(1) 
Due to the non-recourse nature of certain mortgages, the assets and liabilities of the following properties are neither available to pay the debts of the consolidated property-holding limited liability companies nor constitute obligations of such consolidated limited liability companies as of March 31, 2015: Broadway Plaza, Publix at Northridge, Kleinwood Center, Murray Landing, Vineyard Center, Sunset Center, Westwoods Shopping Center, Stockbridge Commons, East Burnside Plaza, Fresh Market, Collington Plaza, Stop & Shop Plaza, Savoy Plaza, Coppell Market Center, Statler Square, Hamilton Village, Waynesboro Plaza, Thompson Valley Towne Center, Lumina Commons, Driftwood Village, Orchard Square, Breakfast Point Marketplace, Falcon Valley, Lakeshore Crossing, Lake Wales, and Onalaska. The outstanding principal balance of these non-recourse mortgages as of March 31, 2015 and December 31, 2014 was $265.3 million and $252.1 million, respectively.
(2) 
As of March 31, 2015, the interest rate on $11.5 million outstanding under one of our variable-rate mortgage notes payable was, in effect, fixed at 5.22% by an interest rate swap agreement (see Notes 4 and 10).
(3) 
As of March 31, 2015 and December 31, 2014, the maximum borrowing capacity of the unsecured credit facility was $700.0 million. The gross borrowings under credit facilities were $70.3 million during the the three months ended March 31, 2015. The gross payments on credit facilities were $3.5 million during the the three months ended March 31, 2015.

Below is a listing of our maturity schedule with the respective principal payment obligations (in thousands) and weighted-average interest rates:
  
2015(1)
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total
Maturing debt:(2)
  

 
  

 
  

 
  

 
  

 
  

 
  

Fixed-rate mortgages payable(3)(4)
$
54,230

 
$
104,797

 
$
47,290

 
$
44,857

 
$
4,206

 
$
107,888

 
$
363,268

Unsecured credit facility - variable-rate

 

 
358,500

 

 

 

 
358,500

Total maturing debt
$
54,230

 
$
104,797

 
$
405,790

 
$
44,857

 
$
4,206

 
$
107,888

 
$
721,768

Weighted-average interest rate on debt:
  

 
  

 
  

 
  

 
  

 
  

 
  

Fixed-rate mortgages payable(3)(4)
5.1
%
 
5.7
%
 
5.3
%
 
5.3
%
 
5.8
%
 
5.2
%
 
5.5
%
Unsecured credit facility - variable-rate
%
 
%
 
1.5
%
 
%
 
%
 
%
 
1.5
%
Total
5.1
%
 
5.7
%
 
1.9
%
 
5.3
%
 
5.8
%
 
5.2
%
 
3.5
%

(1) 
Includes only April 1, 2015 through December 31, 2015.

12



(2) 
The debt maturity table does not include any below-market debt adjustment, of which $8.2 million, net of accumulated amortization, was outstanding as of March 31, 2015.
(3) 
As of March 31, 2015, the interest rate on $11.5 million outstanding under one of our variable-rate mortgage notes payable was, in effect, fixed at 5.22% by an interest rate swap agreement (see Notes 4 and 10).
(4) 
All but $6.3 million of the fixed-rate debt represents loans assumed as part of certain acquisitions. 

8. ACQUIRED BELOW-MARKET LEASE INTANGIBLES

Summarized is the amortization recorded on the below-market lease intangible liabilities for the three months ended March 31, 2015 and 2014 (in thousands):
 
 
2015
 
2014
Acquired below-market leases(1)
 
$
1,657

 
$
888

(1) Amortization recorded on acquired below-market leases was an adjustment to rental revenue in the consolidated statements of operations.

Estimated future amortization income of the intangible lease liabilities as of March 31, 2015 for the remainder of 2015 and for each of the four succeeding calendar years and thereafter is as follows (in thousands):
Year
Below-Market Leases
April 1 to December 31, 2015
$
4,938

2016
6,124

2017
5,192

2018
4,150

2019
3,414

2020 and thereafter
20,299

Total
$
44,117


9. COMMITMENTS AND CONTINGENCIES
 
Litigation
 
In the ordinary course of business, we may become subject to litigation or claims. There are no material legal proceedings pending, or known to be contemplated, against us.
 
Environmental Matters
 
In connection with the ownership and operation of real estate, we may be potentially liable for costs and damages related to environmental matters. We record liabilities as they arise related to environmental obligations. We have not been notified by any governmental authority of any material non-compliance, liability or other claim, nor are we aware of any other environmental condition that we believe will have a material impact on our consolidated financial statements.

10. DERIVATIVES AND HEDGING ACTIVITIES
 
Risk Management Objective of Using Derivatives
 
We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposure to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of our debt funding and the use of derivative financial instruments. Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash receipts and our known or expected cash payments principally related to our investments and borrowings.
 

13



Cash Flow Hedges of Interest Rate Risk
 
Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for our making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
 
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended March 31, 2014, such derivatives were used to hedge the variable cash flows associated with certain variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings prior to de-designation. 

During the three months ended March 31, 2014, we terminated our only designated interest rate swap and accelerated the reclassification of amounts in other comprehensive income to earnings as a result of the hedged forecasted transactions becoming probable not to occur. The accelerated amounts resulted in a gain of $690,000 recorded in other income, net in the consolidated statements of operations and comprehensive loss for the three months ended March 31, 2014. As a result of the hedged forecasted transaction becoming probable not to occur, the swap was de-designated as a cash flow hedge in February 2014, and changes in fair value of a loss of $326,000 were recorded directly in other income, net during the three months ended March 31, 2014.

As of March 31, 2015, we had no active outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk.

Derivatives Not Designated as Hedging Instruments
Derivatives not designated as hedges are not speculative and are used to manage our exposure to interest rate movements and other identified risks, but do not meet the strict hedge accounting requirements to be classified as hedging instruments. Changes in the fair value of these derivative instruments are recorded directly in other (expense) income, net and resulted in a loss of $121,000 and $326,000 for the three months ended March 31, 2015 and 2014, respectively, including the loss recorded in relation to the aforementioned de-designated swap.

Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statements of Operations and Comprehensive Income (Loss)  
 
The table below presents the effect of our derivative financial instruments on the consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2015 and 2014, respectively (in thousands). 
Derivatives in Cash Flow Hedging Relationships (Interest Rate Swap)
 
2015
 
2014
Amount of gain recognized in income on derivative (ineffective portion, reclassifications of missed forecasted transactions and amounts excluded from effectiveness testing)
 
$

 
$
690


Credit-risk-related Contingent Features

We have an agreement with our derivative counterparty that contains a provision where, if we either default or are capable of being declared in default on any of our indebtedness, we could also be declared to be in default on our derivative obligations.

As of March 31, 2015, the fair value of our derivative was a net liability position including accrued interest, but excluding any adjustment for nonperformance risk related to this agreement. As of March 31, 2015, we have not posted any collateral related to this agreement.

11. RELATED PARTY TRANSACTIONS

Economic Dependency—We are dependent on PE-NTR, Phillips Edison & Company Ltd. (the “Property Manager”), and their respective affiliates for certain services that are essential to us, including asset acquisition and disposition decisions, asset management, operating and leasing of our properties, and other general and administrative responsibilities. In the event that PE-NTR, and/or the Property Manager, and their respective affiliates are unable to provide such services, we would be required to find alternative service providers, which could result in higher costs and expenses.

14



 
Advisory Agreement—Pursuant to the PE-NTR Agreement effective on December 3, 2014, PE-NTR is entitled to specified fees for certain services, including managing our day-to-day activities and implementing our investment strategy. PE-NTR manages our day-to-day affairs and our portfolio of real estate investments subject to the board’s supervision. Expenses are to be reimbursed to PE-NTR based on amounts incurred on our behalf by PE-NTR.

Pursuant to the ARC Agreement in effect through December 2, 2014, ARC was entitled to specified fees for certain services, including managing our day-to-day activities and implementing our investment strategy. ARC had entered into a Sub-advisory Agreement with PE-NTR, who managed our day-to-day affairs and our portfolio of real estate investments on behalf of ARC, subject to the board’s supervision and certain major decisions requiring the consent of PE-NTR and ARC. The expenses to be reimbursed to ARC and PE-NTR were reimbursed in proportion to the amount of expenses incurred on our behalf by PE-NTR and ARC, respectively.
 
Organization and Offering Costs—Under the terms of the ARC Agreement, we were to reimburse, on a monthly basis, PE-NTR, ARC or their respective affiliates for cumulative organization and offering costs and future organization and offering costs they might incur on our behalf, but only to the extent that the reimbursement would not exceed 1.5% of gross offering proceeds over the life of our primary initial public offering and our DRIP offering.

Summarized below are the cumulative organization and offering costs charged by and the cumulative costs reimbursed to PE-NTR, ARC and their affiliates for the three months ended March 31, 2015 and December 31, 2014, and any related amounts unpaid as of March 31, 2015 and December 31, 2014 (in thousands):
 
March 31, 2015
 
December 31, 2014
Total Organization and Offering costs charged
$
27,104

 
$
27,104

Total Organization and Offering costs reimbursed
27,029

 
27,029

Total unpaid Organization and Offering costs(1)
$
75

 
$
75

(1) 
Certain of these cumulative organization and offering costs were charged to us by ARC. The net payable of $75 was due to ARC as of March 31, 2015 and December 31, 2014.

Acquisition Fee—We pay PE-NTR under the PE-NTR Agreement and we paid ARC under the ARC Agreement an acquisition fee related to services provided in connection with the selection and purchase or origination of real estate and real estate-related investments. The acquisition fee is equal to 1.0% of the cost of investments we acquire or originate, including any debt attributable to such investments.

Acquisition Expenses—We reimburse PE-NTR for expenses actually incurred related to selecting, evaluating, and acquiring assets on our behalf.  During the three months ended March 31, 2015 and 2014, we reimbursed PE-NTR for personnel costs related to due diligence services for assets we acquired during the period.
 
Asset Management Subordinated Participation—Within 60 days after the end of each calendar quarter (subject to the approval of our board of directors), we will pay an asset management subordinated participation by issuing a number of restricted operating partnership units designated as Class B Units to PE-NTR and ARC equal to: (i) the product of (x) the cost of our assets multiplied by (y) 0.25%; divided by (ii) the value of one share of common stock as of the last day of such calendar quarter net of the selling commissions and dealer manager fees payable on shares of our common stock in our initial public offering.

PE-NTR and ARC are entitled to receive distributions on the unvested and vested Class B units they receive in connection with their asset management subordinated participation at the same rate as distributions are paid to common stockholders. Such distributions are in addition to the incentive fees that PE-NTR, ARC and their affiliates may receive from us. 

On December 3, 2014, we terminated the ARC Agreement. As a result, 2.8 million Class B units issued in connection with asset management services provided as of that date vested upon our determination that the requisite economic hurdle had been met on the same date. Such economic hurdle required that the value of the Operating Partnership’s assets plus all distributions made equaled or exceeded the total amount of capital contributed by investors plus a 6% cumulative, pre-tax, non-compounded annual return thereon.

We continue to issue Class B units to PE-NTR and ARC in connection with the asset management services provided by PE-NTR under the PE-NTR Agreement. Such Class B units will not vest until the economic hurdle is met in conjunction with (i) a termination of the PE-NTR Agreement by our independent directors without cause, (ii) a listing event, or (iii) a liquidity event;

15



provided that PE-NTR serves as our advisor at the time of any of the foregoing events. During the three months ended March 31, 2015, the Operating Partnership issued 404,735 Class B units to PE-NTR and ARC under the ARC Agreement for the asset management services performed by PE-NTR and ARC during the period from October 1, 2014 to December 3, 2014, and 189,177 Class B units to PE-NTR and ARC under the PE-NTR Agreement for the asset management services performed by PE-NTR during the period from December 3, 2014 through December 31, 2014.
 
Financing Fee—We pay PE-NTR under the PE-NTR Agreement and we paid ARC under the ARC Agreement a financing fee equal to 0.75% of all amounts made available under any loan or line of credit.
 
Disposition Fee—We pay PE-NTR under the PE-NTR Agreement and we paid ARC under the ARC Agreement for substantial assistance by PE-NTR, ARC or any of their affiliates in connection with the sale of properties or other investments, 2.0% of the contract sales price of each property or other investment sold. The conflicts committee of our board of directors will determine whether PE-NTR, ARC or their respective affiliates have provided substantial assistance to us in connection with the sale of an asset. Substantial assistance in connection with the sale of a property includes PE-NTR, ARC or their respective affiliates’ preparation of an investment package for the property (including an investment analysis, rent rolls, tenant information regarding credit, a property title report, an environmental report, a structural report and exhibits) or such other substantial services performed by PE-NTR, ARC or their respective affiliates in connection with a sale. However, if we sold an asset to an affiliate, our organizational documents would prohibit us from paying PE-NTR, ARC or their respective affiliates a disposition fee.
 
General and Administrative Expenses—As of March 31, 2015 and December 31, 2014, we owed PE-NTR $59,000 and $26,000, respectively, for general and administrative expenses paid on our behalf.  As of March 31, 2015, PE-NTR has not allocated any portion of their employees’ salaries to general and administrative expenses.

Summarized below are the fees earned by and the expenses reimbursable to PE-NTR and ARC, except for organization and offering costs and general and administrative expenses, which we disclose above, for the three months ended March 31, 2015 and 2014 and any related amounts unpaid as of March 31, 2015 and December 31, 2014 (in thousands):
  
For the Three Months Ended
 
Unpaid Amount as of
  
March 31,
 
March 31,
 
December 31,
  
2015
 
2014
 
2015
 
2014
Acquisition fees
$
855

 
$
2,842

 
$

 
$

Acquisition expenses
139

 
265

 

 

Class B unit distribution(1)
440

 
118

 
305

 
135

Financing fees
180

 
633

 

 

Total
$
1,614

 
$
3,858

 
$
305

 
$
135

(1) 
The distribution recorded for the three months ended March 31, 2015 of $440 represents the distributions paid to PE-NTR and ARC as holders of unvested and vested Class B units of the Operating Partnership. Of the amount, $12 was related to the unvested Class B units and is presented as expense on the consolidated statements of operations, with $428 related to the vested Class B units presented as distributions to noncontrolling interests on the consolidated statements of equity. The unpaid amount as of March 31, 2015 includes the distribution payable on both the vested and unvested Class B units.
 
Subordinated Participation in Net Sales Proceeds—The Operating Partnership may pay to Phillips Edison Special Limited Partner LLC (the “Special Limited Partner”) a subordinated participation in the net sales proceeds of the sale of real estate assets equal to 15.0% of remaining net sales proceeds after return of capital contributions to stockholders plus payment to stockholders of a 7.0% cumulative, pre-tax, non-compounded return on the capital contributed by stockholders.  ARC has a 15.0% interest and PE-NTR has an 85.0% interest in the Special Limited Partner. No subordinated participation in net sales proceeds has been paid to date.
 
Subordinated Incentive Listing Distribution—The Operating Partnership may pay to the Special Limited Partner a subordinated incentive listing distribution upon the listing of our common stock on a national securities exchange.  Such incentive listing distribution is equal to 15.0% of the amount by which the market value of all of our issued and outstanding common stock plus distributions exceeds the aggregate capital contributed by stockholders plus an amount equal to a 7.0% cumulative, pre-tax non-compounded annual return to stockholders. 
 
Neither the Special Limited Partner nor any of its affiliates can earn both the subordinated participation in net sales proceeds and the subordinated incentive listing distribution.  No subordinated incentive listing distribution has been earned to date.
 

16



Subordinated Distribution Upon Termination of the Advisor Agreement—Upon termination or non-renewal of the PE-NTR Agreement, the Special Limited Partner shall be entitled to a subordinated termination distribution in the form of a non-interest bearing promissory note equal to 15.0% of the amount by which the cost of our assets plus distributions exceeds the aggregate capital contributed by stockholders plus an amount equal to a 7.0% cumulative, pre-tax non-compounded annual return to stockholders.  In addition, the Special Limited Partner may elect to defer its right to receive a subordinated distribution upon termination until either a listing on a national securities exchange or a liquidity event occurs. No such termination has occurred to date.
 
Property Manager—All of our real properties are managed and leased by the Property Manager. The Property Manager is wholly owned by our Phillips Edison sponsor. The Property Manager also manages real properties acquired by the Phillips Edison affiliates or other third parties.
 
Commencing June 1, 2014, the amount we pay to the Property Manager in monthly property management fees decreased from 4.5% to 4.0% of the monthly gross cash receipts from the properties managed by the Property Manager. In the event that we contract directly with a non-affiliated third-party property manager with respect to a property, we will pay the Property Manager a monthly oversight fee equal to 1.0% of the gross revenues of the property managed. In addition to the property management fee or oversight fee, if the Property Manager provides leasing services with respect to a property, we pay the Property Manager leasing fees in an amount equal to the leasing fees charged by unaffiliated persons rendering comparable services based on national market rates. The Property Manager shall be paid a leasing fee in connection with a tenant’s exercise of an option to extend an existing lease, and the leasing fees payable to the Property Manager may be increased by up to 50% in the event that the Property Manager engages a co-broker to lease a particular vacancy. We reimburse the costs and expenses incurred by the Property Manager on our behalf, including employee compensation, legal, travel and other out-of-pocket expenses that are directly related to the management of specific properties, as well as fees and expenses of third-party accountants.

If we engage the Property Manager to provide construction management services with respect to a particular property, we pay a construction management fee in an amount that is usual and customary for comparable services rendered to similar projects in the geographic market of the property.
 
The Property Manager hires, directs and establishes policies for employees who have direct responsibility for the operations of each real property it manages, which may include, but is not limited to, on-site managers and building and maintenance personnel. Certain employees of the Property Manager may be employed on a part-time basis and may also be employed by the Sub-advisor or certain of its affiliates. The Property Manager also directs the purchase of equipment and supplies and will supervise all maintenance activity.
 
Summarized below are the fees earned by and the expenses reimbursable to the Property Manager for the three months ended March 31, 2015 and 2014 and any related amounts unpaid as of March 31, 2015 and December 31, 2014 (in thousands):
  
 
For the Three Months Ended
 
Unpaid Amount as of
  
 
March 31,
 
March 31,
 
December 31,
  
 
2015
 
2014
 
2015
 
2014
Property management fees
 
$
2,185

 
$
1,582

 
$
846

 
$
474

Leasing commissions
 
2,028

 
570

 
774

 
191

Construction management fees
 
165

 
40

 
8

 
73

Other fees and reimbursements
 
1,003

 
292

 
361

 

Total
 
$
5,381

 
$
2,484

 
$
1,989

 
$
738


Share Purchases by PE-NTR—PE-NTR agreed to purchase on a monthly basis sufficient shares sold in our public offering such that the total shares owned by PE-NTR was equal to at least 0.10% of our outstanding shares (excluding shares issued after the commencement of, and outside of, the initial public offering) at the end of each immediately preceding month. PE-NTR purchased shares at a purchase price of $9.00 per share, reflecting no dealer manager fee or selling commissions paid on such shares.
 
As of March 31, 2015, PE-NTR owned 176,509 shares of our common stock, or approximately 0.10% of our common stock issued during our initial public offering period, which closed on February 7, 2014. PE-NTR may not sell any of these shares while serving as our advisor or sub-advisor.


17



12. OPERATING LEASES
 
The terms and expirations of our operating leases with our tenants vary. The lease agreements frequently contain options to extend the terms of leases and other terms and conditions as negotiated. We retain substantially all of the risks and benefits of ownership of the real estate assets leased to tenants.
 
Approximate future rentals to be received under non-cancelable operating leases in effect at March 31, 2015, assuming no new or renegotiated leases or option extensions on lease agreements, are as follows (in thousands):
Year
Amount
April 1 to December 31, 2015
$
129,998

2016
162,577

2017
146,906

2018
128,558

2019
106,110

2020 and thereafter
460,506

Total
$
1,134,655

 
No single tenant comprised 10% or more of our aggregate annualized effective rent as of March 31, 2015.
 
13. SUBSEQUENT EVENTS

Distributions to Stockholders

Distributions equal to a daily amount of $0.00183562 per share of common stock outstanding were paid subsequent to March 31, 2015 to the stockholders of record from March 1, 2015 through April 30, 2015 as follows (in thousands):
Distribution Period
 
Date Distribution Paid
 
Gross Amount of Distribution Paid
 
Distribution Reinvested through the DRIP
 
Net Cash Distribution
March 1, 2015 through March 31, 2015
 
4/1/2015
 
$
10,436

 
$
5,427

 
$
5,009

April 1, 2015 through April 30, 2015
 
5/1/2015
 
10,124

 
5,274

 
4,850


On March 4, 2015, our board of directors authorized distributions to the stockholders of record at the close of business each day in the period commencing May 1, 2015 through and including May 31, 2015. We expect to pay these distributions on June 1, 2015. On May 5, 2015, our board of directors authorized distributions to the stockholders of record at the close of business each day in the period commencing June 1, 2015 through and including July 31, 2015. The authorized distributions equal a daily amount of $0.00183562 per share of common stock, par value $0.01 per share.

Acquisition

Subsequent to March 31, 2015, we acquired the following property (dollars in thousands):
Property Name
 
Location
 
Anchor Tenant
 
Acquisition Date
 
Purchase Price
 
Square Footage
 
Leased % of Rentable Square Feet at Acquisition
Coronado Center
 
Santa Fe, NM
 
Trader Joe’s
 
5/1/2015
 
$
22,740

 
117,006
 
89.6
%
 
The supplemental purchase accounting disclosures required by GAAP relating to the recent acquisitions of the aforementioned properties have not been presented as the initial accounting for these acquisitions was incomplete at the time this Quarterly Report on Form 10-Q was filed with the SEC. The initial accounting was incomplete due to the late closing dates of the acquisitions.


18



Interest Rate Swap

On April 22, 2015, we entered into three interest rate swap agreements with Bank of America, N.A. to fix the LIBOR portion of the interest rate on $387.0 million of outstanding debt under our existing credit facility beginning May 1, 2015. The first swap has a notional amount $100.0 million and fixes LIBOR at 1.20625% with a maturity date of February 1, 2019. The second swap has a notional amount of $175.0 million and fixes LIBOR at 1.39750% with a maturity date of February 3, 2020. The third swap has a notional amount of $112.0 million and fixes LIBOR at 1.54875% with a maturity date of February 1, 2021. These swaps qualify and have been designated as a cash flow hedge.


19



Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Cautionary Note Regarding Forward-Looking Statements
 
Certain statements contained in this Quarterly Report on Form 10-Q 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 (express or implied) about the accuracy of any such forward-looking statements contained in this Quarterly Report on Form 10-Q, 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 flow from operations, make distributions to stockholders, and maintain the value of our real estate properties, may be significantly hindered. See Item 1A in Part II of this Form 10-Q and Item 1A in Part I of our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 9, 2015, for a discussion of some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause actual results to differ materially from those presented in our forward-looking statements.
 
Overview
 
Organization
 
Phillips Edison Grocery Center REIT I, Inc. was formed as a Maryland corporation in October 2009 and elected to be taxed as a real estate investment trust (“REIT”) commencing with the taxable year ended December 31, 2010. Our advisor is Phillips Edison NTR LLC (“PE-NTR”), which 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. Under the terms of the advisory agreement between PE-NTR and us, PE-NTR is responsible for the management of our day-to-day activities and the implementation of our investment strategy.

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.

20



Portfolio
 
Below are statistical highlights of our portfolio’s activities from inception to date and for the properties acquired during the three months ended March 31, 2015:
  
  
 
Property Acquisitions
  
Cumulative
 
during the  
  
Portfolio through
 
Three Months Ended
  
March 31, 2015
 
March 31, 2015
Number of properties
146

 
8

Number of states
28

 
6

Weighted average capitalization rate(1)
7.1
%
 
6.5
%
Weighted average capitalization rate with straight-line rent(2)
7.3
%
 
6.6
%
Total acquisition purchase price (in thousands)
$
2,200,391

 
$
85,457

Total square feet
15,383,051

 
661,745

Leased % of rentable square feet(3)
95.3
%
 
94.6
%
Average remaining lease term in years(4)
6.2

 
8.1

Annualized effective rent per square feet(5)
$
12.00

 
$
9.57

(1) 
The capitalization rate is calculated by dividing the annualized in-place net operating income of a property as of the date of acquisition by the contract purchase price of the property.  Annualized in-place net operating income is calculated by subtracting the estimated annual operating expenses of a property from the annualized rents to be received from tenants occupying space at the property as of the date of acquisition.
(2) 
The capitalization rate with straight-line rent is calculated by dividing the annualized in-place net operating income, inclusive of straight-line rental income, of a property as of the date of acquisition by the contract purchase price of the property.  This annualized in-place net operating income is calculated by subtracting the estimated annual operating expenses of a property from the straight-line annualized rents to be received from tenants occupying space at the property as of the date of acquisition.
(3) 
As of March 31, 2015
(4) 
As of March 31, 2015. The average remaining lease term in years excludes future options to extend the term of the lease.
(5) 
We calculate annualized effective rent per square foot as monthly contractual rent as of March 31, 2015 multiplied by 12 months, less any tenant concessions, divided by leased square feet.

Lease Expirations

The following table lists, on an aggregate basis, all of the scheduled lease expirations after March 31, 2015 over each of the ten years ending December 31, 2015 and thereafter for our 146 shopping centers.  The table shows the approximate rentable square feet and annualized effective rent represented by the applicable lease expirations (dollars in thousands):
  
 
Number of
 
  
 
% of Total Portfolio
 
  
 
  
  
 
Expiring
 
Annualized
 
Annualized
 
Leased Rentable
 
% of Leased Rentable
Year
 
Leases
 
Effective Rent(1)
 
Effective Rent
 
Square Feet Expiring
 
Square Feet Expiring
2015(2)
 
205
 
$
9,512

 
5.4
%
 
670,389

 
4.6
%
2016
 
328
 
15,469

 
8.8
%
 
1,253,558

 
8.5
%
2017
 
320
 
17,985

 
10.2
%
 
1,494,272

 
10.2
%
2018
 
303
 
19,920

 
11.3
%
 
1,589,550

 
10.8
%
2019
 
336
 
24,822

 
14.1
%
 
1,889,206

 
12.9
%
2020
 
161
 
14,645

 
8.3
%
 
1,260,653

 
8.6
%
2021
 
66
 
8,725

 
5.0
%
 
867,883

 
5.9
%
2022
 
53
 
8,667

 
4.9
%
 
866,649

 
5.9
%
2023
 
67
 
14,983

 
8.5
%
 
1,271,883

 
8.7
%
2024
 
98
 
10,682

 
6.1
%
 
1,117,229

 
7.6
%
Thereafter
 
134
 
30,641

 
17.4
%
 
2,385,659

 
16.3
%
 
 
2,071
 
$
176,051

 
100.0
%
 
14,666,931

 
100.0
%
(1) 
We calculate annualized effective rent as monthly contractual rent as of March 31, 2015 multiplied by 12 months, less any tenant concessions.

21



(2) 
Subsequent to March 31, 2015, we renewed 24 of the 205 leases expiring in 2015, which account for total square footage of 102,788 and total annualized effective rent of $1.4 million.
 
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 March 31, 2015 (dollars in thousands):
  
 
  
 
  
 
Annualized
 
% of
  
 
Leased
 
% of Leased
 
Effective
 
Annualized
Tenant Type
 
Square Feet
 
Square Feet
 
Rent(1)
 
Effective Rent
Grocery anchor
 
8,074,892

 
55.1
%
 
$
76,316

 
43.3
%
National and regional(2)
 
4,683,183

 
31.9
%
 
65,945

 
37.5
%
Local
 
1,908,856

 
13.0
%
 
33,789

 
19.2
%
  
 
14,666,931

 
100.0
%
 
$
176,051

 
100.0
%
(1) 
We calculate annualized effective rent as monthly contractual rent as of March 31, 2015 multiplied by 12 months, less any tenant concessions.
(2) 
We define national tenants as those that operate in at least three states.  Regional tenants are defined as those that have at least three locations.

The following table presents the composition of our portfolio by tenant industry as of March 31, 2015 (dollars in thousands):
 
 
  
 
  
 
Annualized
 
% of
  
 
Leased
 
% of Leased
 
Effective
 
Annualized
Tenant Industry
 
Square Feet
 
Square Feet
 
Rent(1)
 
Effective Rent
Grocery
 
8,074,892

 
55.1
%
 
$
76,316

 
43.3
%
Retail Stores(2)
 
3,367,394

 
22.9
%
 
39,236

 
22.4
%
Services(2)
 
2,071,095

 
14.1
%
 
37,206

 
21.1
%
Restaurant
 
1,153,550

 
7.9
%
 
23,293

 
13.2
%
  
 
14,666,931

 
100.0
%
 
$
176,051

 
100.0
%
(1) 
We calculate annualized effective rent as monthly contractual rent as of March 31, 2015 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.

22




The following table presents our grocery-anchor tenants by the amount of square footage leased by each tenant as of March 31, 2015 (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)
 
35

 
1,948,687

 
13.3
%
 
$
14,943

 
8.4
%
Publix
 
31

 
1,457,740

 
9.9
%
 
14,803

 
8.3
%
Walmart(4)
 
9

 
1,121,118

 
7.6
%
 
5,198

 
3.0
%
Albertsons-Safeway(5)
 
13

 
783,276

 
5.3
%
 
8,203

 
4.7
%
Giant Eagle
 
7

 
559,581

 
3.8
%
 
5,362

 
3.0
%
Ahold(6)
 
6

 
411,103

 
2.8
%
 
6,377

 
3.6
%
SUPERVALU(7)
 
4

 
273,067

 
1.9
%
 
2,332

 
1.3
%
Raley’s
 
3

 
192,998

 
1.3
%
 
3,422

 
1.9
%
Winn-Dixie
 
3

 
146,754

 
1.0
%
 
1,545

 
0.9
%
Delhaize America(8)
 
4

 
141,547

 
1.0
%
 
1,844

 
1.0
%
Hy-Vee
 
2

 
127,028

 
0.9
%
 
527

 
0.3
%
Schnuck’s
 
2

 
121,266

 
0.8
%
 
1,440

 
0.8
%
Pick n’ Save
 
2

 
108,561

 
0.7
%
 
1,061

 
0.6
%
Coborn’s
 
2

 
107,683

 
0.7
%
 
1,350

 
0.8
%
Sprouts Farmers Market
 
3

 
93,896

 
0.6
%
 
1,146

 
0.7
%
H-E-B
 
1

 
80,925

 
0.6
%
 
1,210

 
0.7
%
Price Chopper
 
1

 
68,000

 
0.5
%
 
844

 
0.5
%
Big Y
 
1

 
64,863

 
0.4
%
 
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

 
0.3
%
 
399

 
0.2
%
Trader Joe’s
 
3

 
38,294

 
0.3
%
 
633

 
0.4
%
The Fresh Market
 
2

 
38,101

 
0.3
%
 
597

 
0.3
%
Fresh Thyme Farmers Market
 
1

 
30,000

 
0.2
%
 
450

 
0.3
%
 
 
138

 
8,074,892

 
55.1
%
 
$
76,316

 
43.3
%
(1) 
Number of locations excludes auxiliary leases with grocery anchors such as fuel stations, pharmacies, and liquor stores, of which there were 28 as of March 31, 2015. Also excluded are the anchor tenants of Southern Hills Crossing, Sulphur Grove, East Side Square, Hoke Crossing, Fairfield Crossing, and Lakeshore Crossing, as we do not own the portion of each of these shopping centers that is leased to a Walmart Supercenter. The anchor tenant of Lake Wales (CVS) and the anchor tenant of Onalaska (Kohl’s) are also excluded, as neither is a grocery-anchor.
(2) 
We calculate annualized effective rent as monthly contractual rent as of March 31, 2015 multiplied by 12 months, less any tenant concessions.
(3) 
King Soopers, Harris Teeter, Smith’s, Fry’s, and QFC are affiliates of Kroger.
(4) 
The Walmart stores at Vine Street Square and Pavilions at San Mateo 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.
(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.



23



Results of Operations

Summary of Operating Activities for the Three Months Ended March 31, 2015 and 2014
(In thousands, except per share amounts)
 
 
 


 
Favorable (Unfavorable) Change
  
2015
 
2014
 
Change
 
Non-Same-Center
 
Same-Center
Operating Data:
  
 
  
 
 
 
 
 
 
Total revenues
$
58,947

 
$
35,677

 
$
23,270

 
$
22,177

 
$
1,093

Property operating expenses
(9,986
)
 
(6,125
)
 
(3,861
)
 
(3,785
)
 
(76
)
Real estate tax expenses
(8,179
)
 
(4,282
)
 
(3,897
)
 
(3,179
)
 
(718
)
General and administrative expenses
(2,362
)
 
(1,771
)
 
(591
)
 
(333
)
 
(258
)
Acquisition expenses
(1,735
)
 
(5,386
)
 
3,651

 
3,729

 
(78
)
Depreciation and amortization
(24,730
)
 
(15,403
)
 
(9,327
)
 
(9,237
)
 
(90
)
Interest expense, net
(6,794
)
 
(3,680
)
 
(3,114
)
 
(2,051
)
 
(1,063
)
Other (expense) income, net
(122
)
 
547

 
(669
)
 
(122
)
 
(547
)
Net income (loss)
5,039

 
(423
)
 
5,462

 
7,199

 
(1,737
)
Net income attributable to noncontrolling interests
(68
)
 

 
(68
)
 
(23
)
 
(45
)
Net income (loss) attributable to Company stockholders
$
4,971

 
$
(423
)
 
$
5,394

 
$
7,176

 
$
(1,782
)
 
 
 
 
 
 
 
 
 
 
Net income (loss) per share—basic and diluted
$
0.03

 
$
(0.00
)
 
$
0.03

 
 
 
 

The Same-Center column above includes the 83 properties that were owned and operational for the entire portion of both comparable reporting periods, in addition to corporate-level expenses incurred during the comparable reporting periods. In this section, we will explain significant fluctuations in activity shown in the Same-Center column. We owned 100 properties as of March 31, 2014 and 146 properties as of March 31, 2015.  Unless otherwise discussed below, year-over-year comparative differences for the three months ended March 31, 2015 and 2014, are almost entirely attributable to the number of properties owned and the length of ownership of these properties.

Total revenues—In addition to a $22.2 million increase related to the acquisition of 64 properties in 2014 and 2015, the $23.3 million increase in total revenues is primarily related to a $0.5 million increase in rental income and a $0.6 million increase in tenant recovery income. The increase in rental income was driven by a $0.23 increase in rent per square foot and a 1.1% increase in leased occupancy. The increase in tenant recovery income stemmed from an improvement in the recovery percentage from increases in property operating and real estate tax expenses.

Real estate tax expenses—The $3.9 million increase in real estate tax expenses is primarily comprised of a $3.2 million increase related to the acquisition of 64 properties in 2014 and 2015, along with approximately $0.5 million of adjustments recorded as a result of the timing and unpredictability of assessed property values.

General and administrative expenses—In addition to a $0.3 million increase related to the acquisition of 64 properties in 2014 and 2015, general and administrative expenses increased $0.3 million primarily due to a $0.4 million increase in consulting expenses.

Interest expense, net—The $3.1 million increase in interest expense is primarily comprised of $2.1 million related to debt incurred in connection with the acquisition of 64 properties in 2014 and 2015, along with a $1.2 million increase due to interest expense on the corporate-level borrowings of our revolving credit facility, a $0.2 million increase related to a reduction in amortization on the assumed below-market debt adjustment, and a $0.2 million increase in the amortization of loan closing costs. These costs were partially offset by a decrease in interest expense in the amount of $0.6 million due to the repayments of principal on certain of our fixed rate mortgage loans.

Other (expense) income, net—The $0.7 million decrease in other (expense) income, net is comprised of $0.4 million related to changes in the fair value of our derivatives and a $0.2 million decrease in interest income, resulting in lower cash balances.

We generally expect our revenues and expenses to increase in future years as a result of owning the properties acquired in 2015 for a full year. Although we expect our general and administrative expenses to increase, we expect such expenses to decrease as a percentage of our revenues.


24



Leasing Activity

Below is a summary of leasing activity for the three months ended March 31, 2015 and 2014:
 
 
2015
 
2014
New leases:
 
 
 
 
Number of leases
 
51

 
27

Square footage
 
141,508

 
41,732

First-year base rental revenue
 
$
1,967,326

 
$
610,539

    Average rent per square foot (1)
 
$
13.90

 
$
14.63

Renewals:
 
 
 
 
Number of leases
 
70

 
38

Square footage
 
428,484

 
86,605

First-year base rental revenue
 
$
4,781,470

 
$
1,686,199

    Average rent per square foot (2)
 
$
11.16

 
$
19.47

    Average rent per square foot prior to renewals
 
$
10.26

 
$
18.85


(1) 
The decrease in average rent per square foot for new leases for the three months ended March 31, 2015 as compared to the prior year is primarily due to two anchor-leases executed in 2015. Excluding these two anchor-leases, average rent per square foot in 2015 would have been $16.69.
(2) 
The decrease in average rent per square foot for leases renewed during the three months ended March 31, 2015 as compared to the prior year is primarily due to one lease for a Walmart option, which accounted for more than 40% of the square footage renewed with no rent increase. Excluding this option, the average rent per square foot would have been $17.73, compared to a prior rent rate of $16.13.

The cost of executing the leases and renewals, including leasing commissions, tenant improvement costs, and tenant concessions, was $12.57 per square foot and $9.81 per square foot for the three months ended March 31, 2015 and 2014, respectively.  This increase relates to costs incurred in connection with: (1) the renewal of a long-term lease with a grocery-anchor and significant improvements made to both the space leased by the grocery-anchor and the entire shopping center in connection with such lease renewal, which we anticipated when we acquired the property, and (2) the redevelopment of a former movie theater for a new tenant, which resulted in a significant increase in average rent per square foot for such space.

Non-GAAP Measures

Same-Center Net Operating Income
  
We present Same-Center Net Operating Income (“Same-Center NOI”) as a supplemental measure of our performance. We define Net Operating Income (“NOI”) as total operating revenues less property operating expenses. Same-Center NOI represents the NOI for the 83 properties that were operational for the entire portion of both comparable reporting periods and that were not acquired during or subsequent to the comparable reporting periods. We believe that NOI and Same-Center NOI provide useful information to our investors about our financial and operating performance because each provides a performance measure of the revenues and expenses directly involved in owning and operating real estate assets and provides a perspective not immediately apparent from net income. Because Same-Center NOI excludes the change in NOI from properties acquired after December 31, 2013, it highlights operating trends such as occupancy levels, rental rates and operating costs on properties that were operational for both comparable periods. Other REITs may use different methodologies for calculating Same-Center NOI, and accordingly, our Same-Center NOI may not be comparable to other REITs.
 
Same-Center NOI should not be viewed as an alternative measure of our financial performance since it does not reflect the operations of our entire portfolio, nor does it reflect the impact of general and administrative expenses, acquisition expenses, interest expense, depreciation and amortization, other income, or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties that could materially impact our results from operations.


25



Below is a reconciliation of net loss to Same-Center NOI for the three months ended March 31, 2015 and 2014 (in thousands): 
 
2015
 
2014
 
$ Change
 
% Change
Net income (loss)
$
5,039

 
$
(423
)