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EX-23.1 - EXHIBIT 23.1 - Phillips Edison & Company, Inc.pentr-20151231xex231.htm
EX-21.1 - EXHIBIT 21.1 - Phillips Edison & Company, Inc.pentr-20151231xex211.htm
EX-31.2 - EXHIBIT 31.2 - Phillips Edison & Company, Inc.pentr-20151231xex312.htm
EX-99.2 - EXHIBIT 99.2 - Phillips Edison & Company, Inc.pentr-20151231xex992.htm
EX-31.1 - EXHIBIT 31.1 - Phillips Edison & Company, Inc.pentr-20151231xex311.htm
EX-32.1 - EXHIBIT 32.1 - Phillips Edison & Company, Inc.pentr-20151231xex321.htm
EX-32.2 - EXHIBIT 32.2 - Phillips Edison & Company, Inc.pentr-20151231xex322.htm
EX-10.8 - EXHIBIT 10.8 - Phillips Edison & Company, Inc.pentr-20151231xex108.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, 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)
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.  ¨
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
þ  (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 Securities Exchange Act).    Yes  ¨    No  þ  
While there is no established public market for the Registrant’s shares of common stock, the Registrant has made a public offering of its shares of common stock pursuant to a Registration Statement on Form S-11 in which shares were sold at $10.00 per share, with discounts available for certain categories of purchasers. The Registrant ceased offering shares of common stock in its primary public offering on February 7, 2014, while it continues offering shares under its dividend reinvestment plan. On August 24, 2015, the board of directors of the Registrant approved an estimated value per share of the Registrant’s common stock of $10.20 based substantially on the estimated market value of its portfolio of real estate properties as of July 31, 2015. For a full description of the methodologies used to establish the estimated value per share, see Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Market Information.”
There were approximately 181.1 million shares of common stock held by non-affiliates as of June 30, 2015, the last business day of the registrant’s most recently completed second fiscal quarter.





As of February 29, 2016, there were 182.2 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 2016 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           
 
 
 
 



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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.


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PART I
 
ITEM 1. BUSINESS
 
Overview
 
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.

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, 2015, we owned fee simple interests in 147 real estate properties acquired from third parties unaffiliated with us or PE-NTR.

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 2015. 

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, increased access to capital, and lower cost of capital.

Employees
 
We do not have any employees. In addition, all of our executive officers are officers of our Phillips Edison sponsor 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.
 

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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 to us. These restrictions have limited us from repurchasing shares submitted to us under the share repurchase program in the past and may do so again in the future. 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.

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. To the extent we fund distributions from borrowings or the net proceeds from the issuance of securities, as we have done, 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 pay 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, 2015, we paid gross distributions to our common stockholders of $123.2

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million, including distributions reinvested through the dividend reinvestment plan (“DRIP”) of $63.8 million. For the year ended December 31, 2015, our net cash provided by operating activities was $106.1 million, which represents a shortfall of $17.1 million, or 13.9%, of our distributions paid, while our funds from operations (“FFO”) were $113.4 million, which represents a shortfall of $9.8 million, or 8.0%, of the distributions paid. The shortfall was funded by proceeds from borrowings. For the year ended December 31, 2014, we paid distributions of $119.6 million, including distributions reinvested through the DRIP of $63.0 million. For the year ended 2014, our net cash provided by operating activities was $75.7 million, which represents a shortfall of $43.9 million, or 36.7%, of our distributions paid, while our FFO were $56.5 million, which represents a shortfall of $63.1 million, or 52.8% of our distributions paid. The shortfall was funded by proceeds from borrowings.
 
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.

Initially, we offered shares in the DRIP at $9.50 per share. Effective as of August 24, 2015, we offer shares in the DRIP at $10.20 per share, which is the estimated value per share of our common stock. Our estimated value per share was calculated as of a specific date and is expected to fluctuate over time in response to future events such as developments related to individual assets and changes in the real estate and financial markets. However, we anticipate only determining an estimated value per share annually. As such, the actual value of an investment through the DRIP may be less than the DRIP offering price. 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. Our net tangible book value reflects dilution in the value of our common stock from the issue price as a result of (1) operating losses, excluding accumulated depreciation and amortization of real estate investments, (2) cumulative distributions in excess of our earnings, (3) 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, (4) the fees and expenses paid to PE-NTR and ARC in connection with the selection, acquisition, and management of our investments and (5) general and administrative expenses. As of December 31, 2015, our net tangible book value per share was $7.91.
 
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 Phillips Edison & Company Ltd. (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.

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 our stockholders’ investments.
 
Our success depends to a significant degree upon the contributions of Jeffrey S. Edison, Chief Executive Officer and the Chairman of our Board of Directors; R. Mark Addy, President and Chief Operating Officer; and Devin I. Murphy, 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

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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, which 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;
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, as acquisitions and investments increase the acquisition 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

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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.
 
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

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they are involved. Should PE-NTR breach its 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 (1) allocation of new investments and management time and services between us and the other entities, (2) our purchase of properties from, or sale of properties to, affiliated entities, (3) development of our properties by affiliates, (4) investments with affiliates of PE-NTR, (5) compensation to PE-NTR, and (6) 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 use an estimated value of our shares that is based on a number of assumptions that may not be accurate or complete and is also subject to a number of limitations.

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 initially estimated the value of our common shares as $10.00 per share based on the offering price of our shares of common stock in our initial public offering of $10.00 per share (ignoring purchase price discounts for certain categories of purchasers). On August 24, 2015, our board of directors established an estimated value per share of our common stock of $10.20 based on the estimated fair value range of our real estate portfolio as indicated in a third party valuation report plus the value of our cash and cash equivalents less the value of our mortgages and loans payable as of July 31, 2015. We expect to update the estimated value per share of our common stock annually.

Our estimated value per share is based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different estimated value per share, and this difference could be significant. The estimated value per share is not audited and does not represent a determination of the fair value of our assets or liabilities based on GAAP, nor does it represent a liquidation value of our assets and liabilities or the amount at which our shares of common stock would trade if they were listed on a national securities exchange. Accordingly, with respect to the estimated value per share, there can be no assurance that: (1) a stockholder would be able to resell his or her shares at the estimated value per share; (2) a stockholder would ultimately realize distributions per share equal to our estimated value per share upon liquidation of our assets and settlement of our liabilities or a sale of our company; (3) our shares of common stock would trade at the estimated value per share on a national securities exchange; (4) a third party would offer the estimated value per share in an arm’s-length transaction to purchase all or substantially all of our shares of common stock; (5) an independent third-party appraiser or third-party valuation firm would agree with our estimated value per share; or (6) the methodology used to calculate our estimated value per share would be acceptable to FINRA or for compliance with ERISA reporting requirements.

Further, the estimated value per share as of July 31, 2015 is based on the estimated values as of July 31, 2015. We have not made any adjustments to the valuation for the impact of other transactions occurring subsequent to July 31, 2015, including, but not limited to, (1) the issuance of common stock under the DRIP, (2) net operating income earned and dividends declared, (3) the repurchase of shares and (4) changes in leases, tenancy or other business or operational changes. The value of our shares will fluctuate over time in response to developments related to individual real estate assets, the management of those assets and changes in the real estate and finance markets. Because of, among other factors, the high concentration of our total assets in real estate and the number of shares of our common stock outstanding, changes in the value of individual real estate assets or changes in valuation assumptions could have a very significant impact on the value of our shares. In addition, the estimated value per share reflects a real estate portfolio premium as opposed to the sum of the individual property values; however, it does not reflect a discount for the fact that we are externally managed. The estimated value per share also does not take into account any disposition costs or fees for real estate properties, debt prepayment penalties that could apply upon the prepayment

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of certain of our debt obligations or the impact of restrictions on the assumption of debt. Accordingly, the estimated value per share of our common stock may or may not be an accurate reflection of the fair market value of our stockholders’ 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.
 
Initially, under our share repurchase program, shares could be repurchased at varying prices depending on (1) the number of years the shares had been held, (2) the purchase price paid for the shares and (3) whether the redemptions were sought upon a stockholder’s death, qualifying disability or determination of incompetence, with a maximum price of $10.00 per share. Effective as of August 24, 2015, we repurchase shares under our share repurchase program at $10.20 per share, which is the estimated value per share of our common stock. This 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 may 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 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.
 

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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 repurchase no more than 5% 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, 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 repurchases 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. For example, in the fourth quarter of 2015, repurchase requests exceeded the funding limits provided under the share repurchase program, and we were unable to repurchase all of the shares submitted to us. These restrictions would severely limit our stockholders’ ability to sell their shares should they require liquidity and would limit their ability to recover the value they 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. Additionally, 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, our stockholders’ 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 its 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 and its affiliates perform services for us in connection with 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, the investment-return thresholds may be reduced subject to approval by our conflicts committee.

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

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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.
 

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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.
 

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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. See Item 2. Properties for information related to concentration of our tenants.
 
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.

We may be unable to successfully integrate and operate acquired properties, which may have a material adverse effect on our business and operating results.

Even if we are able to make acquisitions on favorable terms, we may not be able to successfully integrate and operate them. We may be required to invest significant capital and resources after an acquisition to maintain or grow the properties that we acquire. In addition, we may need to adapt our management, administrative, accounting, and operational systems, or hire and retain sufficient operational staff, to integrate and manage successfully any future acquisitions of additional assets. These and other integration efforts may disrupt our operations, divert PE-NTR’s attention away from day-to-day operations and cause us to incur unanticipated costs. The difficulties of integration may be increased by the necessity of coordinating operations in geographically dispersed locations. Our failure to integrate successfully any acquisitions into our portfolio could have a material adverse effect on our business and operating results. Further, acquired properties may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the acquisition. The failure to discover such issues prior to such acquisition could have a material adverse effect on our business and results of operations.

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.
 

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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 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.
 

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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 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

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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 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

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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 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.


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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.

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.
 

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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:
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.
 

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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% (20.0% for taxable years after 2017) 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.
 
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, (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 or (3) to manage risk with respect to prior hedging transactions described in (1) or (2) above, and, in each case, 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% (20.0% for taxable years after 2017) 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% (or 20.0% as applicable) value limitation on ownership

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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.
 
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.
 
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

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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 (1) we are a “pension-held REIT,” (2) a tax-exempt stockholder has incurred debt to purchase or hold our common stock, or (3) 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.
 
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;

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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.
 
With respect to the annual valuation requirements described above, on August 24, 2015, our board of directors established an estimated value per share of our common stock of $10.20 based on the estimated fair value range of our real estate portfolio as indicated in a third party valuation report plus the value of our cash and cash equivalents less the value of our mortgages and loans payable as of July 31, 2015. We expect to update the estimated value per share of our common stock annually. 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 stockholders invested in our shares through an IRA or other retirement plan, they may be limited in their ability to withdraw required minimum distributions.
 
If stockholders established an IRA or other retirement plan through which they invested in our shares, federal law may require them 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, our stockholders will not be eligible to have their shares repurchased until they have held their shares for at least one year. As a result, they may not be able to have their shares repurchased at a time in which they need liquidity to satisfy the RMD requirements under their IRA or other retirement plan. Even if they are able to have their shares repurchased, our share repurchase price is based on the estimated value per share of our common stock as determined by our board of directors, and this value is expected to fluctuate over time. As such, a repurchase may be at a price that is less than the price at which the shares were initially purchased. If stockholders fail to withdraw RMDs from their IRA or other retirement plan, they may be subject to certain tax penalties.

ITEM 1B. UNRESOLVED STAFF COMMENTS
 
Not applicable.
 

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ITEM 2. PROPERTIES
 
Real Estate Investments

As of December 31, 2015, we owned 147 properties, throughout the continental United States, acquired from third parties unaffiliated with us or PE-NTR. The following table presents information regarding our properties as of December 31, 2015 (dollars and square feet in thousands). For additional portfolio information, refer to “Real Estate and Accumulated Depreciation (Schedule III)” herein.
State
 
Number of Properties
 
GLA(1)
 
% GLA
 
Annualized Effective Rent(AER)(2)
 
% AER
 
AER/SF(3)
 
% Leased
 
 
 
 
 
 
 
Florida
 
23

 
1,753

 
11.3
%
 
$
22,487

 
12.4
%
 
$
13.51

 
94.9
%
Georgia
 
21

 
2,123

 
13.6
%
 
22,104

 
12.2
%
 
10.95

 
95.1
%
Ohio
 
13

 
1,619

 
10.4
%
 
15,623

 
8.6
%
 
9.94

 
97.1
%
California
 
7

 
713

 
4.6
%
 
12,395

 
6.8
%
 
18.50

 
94.0
%
Virginia
 
6

 
674

 
4.3
%
 
10,123

 
5.6
%
 
15.62

 
96.1
%
Texas
 
4

 
600

 
3.9
%
 
9,920

 
5.5
%
 
16.72

 
99.0
%
Illinois
 
6

 
641

 
4.1
%
 
8,409

 
4.6
%
 
13.37

 
98.1
%
North Carolina
 
7

 
604

 
3.9
%
 
7,778

 
4.3
%
 
13.27

 
97.1
%
Massachusetts
 
5

 
608

 
3.9
%
 
7,223

 
4.0
%
 
12.88

 
92.3
%
Colorado
 
6

 
580

 
3.7
%
 
5,675

 
3.1
%
 
10.32

 
94.8
%
South Carolina
 
6

 
458

 
2.9
%
 
5,651

 
3.1
%
 
12.89

 
95.6
%
Pennsylvania
 
4

 
600

 
3.9
%
 
5,615

 
3.1
%
 
9.37

 
99.8
%
Minnesota
 
5

 
410

 
2.6
%
 
5,212

 
2.9
%
 
12.95

 
98.1
%
Oregon
 
4

 
338

 
2.2
%
 
4,531

 
2.5
%
 
13.74

 
97.7
%
Michigan
 
3

 
525

 
3.4
%
 
4,328

 
2.4
%
 
8.62

 
95.7
%
Maryland
 
2

 
228

 
1.5
%
 
4,056

 
2.2
%
 
17.81

 
100.0
%
Kentucky
 
3

 
424

 
2.7
%
 
3,994

 
2.2
%
 
9.94

 
94.9
%
New Mexico
 
3

 
326

 
2.1
%
 
3,895

 
2.1
%
 
14.58

 
81.9
%
Tennessee
 
2

 
526

 
3.4
%
 
3,731

 
2.1
%
 
7.22

 
98.2
%
Indiana
 
2

 
345

 
2.2
%
 
3,417

 
1.9
%
 
10.11

 
98.0
%
Iowa
 
3

 
359

 
2.3
%
 
2,956

 
1.6
%
 
8.22

 
100.0
%
Arizona
 
3

 
249

 
1.6
%
 
2,612

 
1.4
%
 
12.39

 
84.5
%
Wisconsin
 
3

 
259

 
1.7
%
 
2,433

 
1.3
%
 
9.61

 
97.7
%
Washington
 
2

 
170

 
1.1
%
 
2,309

 
1.3
%
 
13.98

 
96.9
%
Nevada
 
1

 
116

 
0.7
%
 
1,868

 
1.0
%
 
16.32

 
99.0
%
Connecticut
 
1

 
124

 
0.8
%
 
1,627

 
0.9
%
 
14.34

 
91.3
%
Kansas
 
1

 
77

 
0.5
%
 
998

 
0.5
%
 
13.24

 
98.2
%
Missouri
 
1

 
112

 
0.7
%
 
843

 
0.4
%
 
7.51

 
100.0
%
 
 
147

 
15,561

 
100.0
%
 
$
181,813

 
100.0
%
 
$
12.19

 
95.9
%
(1) 
Gross leasable area (“GLA”) is defined as portion of the total floor area of a building that is available for tenant leasing.
(2) 
We calculate AER as monthly contractual rent as of December 31, 2015 multiplied by 12 months, less any tenant concessions.
(3) 
We calculate by using the AER divided by the total leased square feet (“SF”).

24



Lease Expirations
 
The following table lists, on an aggregate basis, all of the scheduled lease expirations after December 31, 2015 for each of the next ten years and thereafter for our 147 shopping centers. The table shows the rentable square feet and AER represented by the applicable lease expirations (dollars and square feet in thousands):
Year
 
Number of Expiring Leases
 
AER(1)
 
% of Total Portfolio AER
 
Leased Rentable Square Feet Expiring
 
% of Leased Rentable Square Feet Expiring
2016(1)
 
339
 
$
13,999

 
7.7
%
 
1,170

 
7.8
%
2017
 
316
 
17,703

 
9.7
%
 
1,443

 
9.7
%
2018
 
322
 
20,911

 
11.5
%
 
1,635

 
11.0
%
2019
 
338
 
25,350

 
13.9
%
 
1,915

 
12.8
%
2020
 
278
 
20,906

 
11.5
%
 
1,642

 
11.0
%
2021
 
122
 
12,990

 
7.1
%
 
1,209

 
8.1
%
2022
 
59
 
8,903

 
4.9
%
 
862

 
5.8
%
2023
 
75
 
15,294

 
8.5
%
 
1,286

 
8.6
%
2024
 
101
 
10,658

 
5.9
%
 
1,116

 
7.5
%
2025
 
100
 
10,939

 
6.1
%
 
746

 
5.0
%
Thereafter
 
99
 
24,160

 
13.2
%
 
1,896

 
12.7
%
 
 
2,149
 
$
181,813

 
100.0
%
 
14,920

 
100.0
%
(1) 
We calculate AER as monthly contractual rent as of December 31, 2015 multiplied by 12 months, less any tenant concessions.
(2) 
Subsequent to December 31, 2015, we renewed 36 of the 339 leases expiring in 2016, which accounts for 238,672 total square feet and total AER of $2.5 million.

During the year ended 2015, we noted a 10.7% overall increase in rent per square foot for renewed leases when compared to rent per square foot on expired leases for the same period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Leasing Activity” for further discussion of leasing activity. Based on current market base rental rates, we believe we will achieve overall positive increases in our average base rental income for leases expiring in 2016. However, changes in base rental income associated with individual signed leases on comparable spaces may be positive or negative, and we can provide no assurance that the base rents on new leases will continue to increase from current levels.

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, 2015 (dollars and square feet in thousands):
Tenant Type
 
Leased Square Feet
 
% of Leased Square Feet
 
AER(1)
 
% of AER
Grocery anchor
 
8,092

 
54.2
%
 
$
76,840

 
42.3
%
National & regional(2)
 
4,755

 
31.9
%
 
68,563

 
37.7
%
Local
 
2,073

 
13.9
%
 
36,410

 
20.0
%
  
 
14,920

 
100.0
%
 
$
181,813

 
100.0
%
(1) 
We calculate AER as monthly contractual rent as of December 31, 2015 multiplied by 12 months.
(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.

25



 
The following table presents the composition of our portfolio by tenant industry as of December 31, 2015 (dollars and square feet in thousands):
Tenant Industry
 
Leased Square Feet
 
% of Leased Square Feet
 
AER(1)
 
% of AER
Grocery
 
8,092

 
54.2
%
 
$
76,840

 
42.3
%
Retail Stores(2)
 
3,439

 
23.1
%
 
40,867

 
22.5
%
Services(2)
 
2,181

 
14.6
%
 
39,367

 
21.7
%
Restaurant
 
1,208

 
8.1
%
 
24,739

 
13.5
%
  
 
14,920

 
100.0
%
 
$
181,813

 
100.0
%
(1) 
We calculate AER as monthly contractual rent as of December 31, 2015 multiplied by 12 months.
(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, 2015 (dollars and square feet in thousands):
Tenant  
 
Number of Locations(1)
 
Leased Square Feet
 
% of Leased Square Feet
 
AER(2)
 
% of AER
Kroger(3)(9)
 
37

 
2,057

 
13.8
%
 
$
16,189

 
8.9
%
Publix
 
31

 
1,458

 
9.8
%
 
14,806

 
8.1
%
Walmart(4)
 
9

 
1,121

 
7.5
%
 
5,198

 
2.9
%
Albertsons-Safeway(5)
 
13

 
783

 
5.2
%
 
8,100

 
4.5
%
Giant Eagle
 
7

 
560

 
3.8
%
 
5,396

 
3.0
%
Ahold USA(6)
 
6

 
411

 
2.8
%
 
6,377

 
3.5
%
SUPERVALU(7)
 
4

 
273

 
1.8
%
 
2,382

 
1.3
%
Raley’s
 
3

 
193

 
1.3
%
 
3,422

 
1.9
%
Winn-Dixie
 
3

 
147

 
1.0
%
 
1,545

 
0.8
%
Delhaize America(8)
 
4

 
142

 
0.9
%
 
1,855

 
1.0
%
Hy-Vee
 
2

 
127

 
0.9
%
 
527

 
0.3
%
Schnuck’s
 
2

 
121

 
0.8
%
 
1,459

 
0.8
%
Coborn’s
 
2

 
108

 
0.7
%
 
1,388

 
0.8
%
Sprouts Farmers Market
 
3

 
94

 
0.6
%
 
1,146

 
0.6
%
H-E-B
 
1

 
81

 
0.5
%
 
1,210

 
0.7
%
Price Chopper
 
1

 
68

 
0.5
%
 
844

 
0.5
%
Big Y
 
1

 
65

 
0.4
%
 
1,048

 
0.6
%
PAQ, Inc.(9)
 
1

 
59

 
0.4
%
 
1,046

 
0.6
%
Rosauers Supermarkets, Inc.
 
4

 
55

 
0.4
%
 
921

 
0.5
%
Save Mart
 
1

 
51

 
0.3
%
 
537

 
0.3
%
Trader Joe’s
 
1

 
50

 
0.3
%
 
399

 
0.2
%
The Fresh Market
 
2

 
38

 
0.3
%
 
597

 
0.3
%
Fresh Thyme
 
1

 
30

 
0.2
%
 
450

 
0.2
%
   
 
139

 
8,092

 
54.2
%
 
$
76,840

 
42.3
%
(1) 
Number of locations excludes (a) 28 auxiliary leases with grocery anchors such as fuel stations, pharmacies, and liquor stores, (b) six locations where we do not own the portion of the shopping center that contains the grocery-anchor, and (c) two locations that have non-grocery anchors.
(2) 
We calculate AER as monthly contractual rent as of December 31, 2015 multiplied by 12 months.
(3) 
King Soopers, Harris Teeter, Smith's, Fry’s, Pick ‘n Save, and QFC are affiliates of Kroger.
(4) 
Consists of six Walmart Supercenters and three Walmart Neighborhood Markets.
(5) 
Vons, Jewel-Osco, Market Street, Albertsons, 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.

26



(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

Stockholder Information
 
As of February 29, 2016, we had approximately 182.2 million shares of common stock outstanding, held by a total of 40,374 stockholders of record.
 
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 the terms of our charter, certain restrictions are imposed on the ownership and transfer of shares.
Valuation Overview
On August 24, 2015, our board of directors established an estimated value per share of our common stock of $10.20 based substantially on the estimated market value of our portfolio of 147 real estate properties in various geographic locations in the United States (the “Portfolio”) as of July 31, 2015. We provided this estimated value per share to assist broker-dealers that participated in our public offering in meeting their customer account statement reporting obligations under National Association of Securities Dealers Conduct Rule 2340 as required by FINRA.

We engaged KPMG LLP (“KPMG”) to estimate the fair value range of the Portfolio. KPMG prepared a valuation report (the “Valuation Report”) that provided an estimated fair value range of the Portfolio of $2.61 billion to $2.72 billion as of July 31, 2015. In order to arrive at an estimated value per share, PE-NTR (1) considered the estimated fair value range of the Portfolio indicated by KPMG’s Valuation Report, and then, based on our consolidated balance sheet as of July 31, 2015, (2) added cash and cash equivalents of $10.5 million, (3) deducted mortgages and loans payable of $746.4 million, and (4) divided that amount by the 187.8 million outstanding shares of our common stock and vested Class B units of the Operating Partnership. These calculations produced an estimated value per share in the range of $9.98 to $10.57 as of July 31, 2015. Our board of directors ultimately approved $10.20 as the estimated value per share of our common stock.


27



The following table summarizes the components of the estimated value per share of our common stock as of July 31, 2015 (in millions, except per share amounts):
 
Low
 
High
Estimated Fair Value of Portfolio
$
2,610

 
$
2,720

Cash and Cash Equivalents
11

 
11

Mortgages and Loans Payable
(746
)
 
(746
)
 
$
1,875

 
$
1,985

 
 
 
 
Common Stock and Vested Class B Units
187.8

 
187.8

 
 
 
 
Estimated Value Per Share
$
9.98

 
$
10.57


As with any valuation methodology, the methodologies used are based upon a number of assumptions and estimates that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different estimated value per share, and these differences could be significant. These limitations are discussed further under “Limitations of Estimated Value per Share” below.

Valuation Methodology

Our goal in calculating an estimated value per share is to arrive at a value that is reasonable and supportable using what we deem to be appropriate valuation and appraisal methodologies and assumptions. The following is a summary of the valuation methodologies and components used to calculate the estimated value per share.

Real Estate Portfolio

Independent Valuation Firm

KPMG was recommended by PE-NTR to the conflicts committee to provide independent valuation services. The conflicts committee approved the engagement of KPMG for those services. KPMG is a leading professional services firm that has assembled a seasoned valuation team with prior relevant valuation experience that is not affiliated with us or PE-NTR. KPMG had not performed a valuation of the Portfolio in the past; however, it previously provided consulting services to the conflicts committee related to the Portfolio for which it received usual and customary compensation. KPMG may be engaged to provide professional services to us in the future. The KPMG personnel who prepared the valuation have no present or prospective interest or bias in the Portfolio and no personal interest with our company or PE-NTR.

The compensation KPMG received for its valuation of our Portfolio was based on the scope of work and was not contingent on an action or event resulting from analyses, opinions, or conclusions in its Valuation Report or from its use. In addition, KPMG’s compensation for completing the valuation of the Portfolio was not contingent upon the development or reporting of a predetermined value or direction in value, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of its Valuation Report. KPMG was responsible for providing an estimated fair value of the Portfolio; however, KPMG was not responsible for, did not calculate, and did not participate in the determination of the estimated value of our company or the estimated value per share of our common stock. We have agreed to indemnify KPMG against certain liabilities arising out of this engagement.

KPMG’s analyses, opinions, or conclusions were developed and the Valuation Report was prepared, in conformity with the Uniform Standards of Professional Appraisal Practice. The Valuation Report was reviewed, approved and signed by individuals with the professional designation of MAI (Member of the Appraisal Institute). The use of the Valuation Report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. The standard of value that KPMG used in preparing the Valuation Report is defined under the Financial Accounting Standards Board’s Accounting Standard Codification Topic 820, Fair Value Measurement and Disclosures, 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 a measurement date. In preparing the Valuation Report, KPMG did not solicit third-party indications of interest in the Portfolio.

KPMG collected and reviewed information for the Portfolio including: location, building size, tenancy, and acquisition details for each of our properties. Market data and valuation benchmarks were researched and analyzed and interviews were conducted

28



with PE-NTR’s personnel familiar with the Portfolio. Estimates of fair value were based on KPMG’s analysis as supported by the data it deemed most reliable and appropriate.

In preparing the Valuation Report, KMPG relied upon the accuracy and completeness of data, material and other information supplied to it by us and PE-NTR regarding the Portfolio. For example, we and PE-NTR provided information regarding physical occupancies, year built/renovated, gross leasable area, our prior acquisitions, business model information, operating expenses and contractual revenues. KPMG assumed the retail sales and operating figures were consistent with our expectations. KPMG did not independently verify the physical and legal characteristics of the Portfolio nor did it make personal inspections. KPMG’s review also assumed that there were no adverse environmental conditions or toxic materials that might adversely impact the value of the Portfolio. KPMG’s Valuation Report was prepared using the special limiting condition that there was a portfolio premium. The portfolio premium assumes that a buyer will pay more for the aggregation of a large collection of individual properties as compared to pricing on an individual property basis. The Valuation Report contains other assumptions, qualifications and limitations that qualify the analysis, opinions and conclusions set forth therein. Furthermore, the prices at which our real estate properties may actually be sold could differ from their appraised values.

The foregoing is a summary of the standard assumptions, qualifications and limitations that generally apply to the Valuation Report.

Real Estate Valuation

KPMG estimated the fair value of the Portfolio as of July 31, 2015, using various methodologies. Generally accepted valuation practice suggests assets may be valued using a range of methodologies, which can be broadly classified into three general approaches: the income approach, the sales comparison approach, and the cost approach. In completing its work, KPMG principally focused on the income and sales comparison approaches to value. The income approach was the primary valuation method and the sales comparison approach was utilized to validate the findings. The cost approach was considered but not utilized because the Portfolio consists of income producing assets. The scope of the analysis included: the application of a capitalization rate and a consistent portfolio premium to each property; a discounted cash flow (“DCF”) approach for the Portfolio in its entirety; a sales comparison approach on the Portfolio based on net operating income (“NOI”) per square foot tiers (“NOI Tiers”); and research regarding comparable portfolio transactions, market portfolio premiums, individual property transactions and third party market reports.

KPMG applied a portfolio premium in its analysis. A portfolio premium indicates that a buyer will pay more for the aggregation of a large portfolio as compared to individual properties. According to KPMG’s research, the value of the Portfolio exceeds the aggregate individual property values due to the following benefits: (1) the magnitude of the Portfolio coupled with the investment appetite of institutional buyers; (2) the concentrated Portfolio product type (e.g. grocery-anchored) tends to be very marketable and generally easier to finance with long-term debt; (3) the time associated with accumulation of the Portfolio through individual acquisitions; and (4) the increased cash flows that result from operating efficiencies, synergies of management, and cost savings on fees such as legal and brokerage fees. KPMG performed research regarding historical quantitative data and market observations in determining to apply a 75 basis point adjustment to the stabilized capitalization rate to account for the portfolio premium.

Under the income approach, KPMG performed a direct capitalization analysis. For each property, KPMG capitalized the projected stabilized NOI with a market-derived capitalization rate, inclusive of the portfolio premium. KPMG also performed a discounted cash flow analysis under the income approach based on PE-NTR’s projected Portfolio level cash flow. KPMG reviewed third party industry benchmarks to estimate the discount and terminal capitalization rates.

Under the sales comparison approach, KPMG performed a tier analysis by researching comparable transactions and classifying the comparable transactions into various NOI Tiers. KPMG then computed the average price per square foot value of the sales comparables under each NOI Tier. The implied value indication for the Portfolio was computed as the product of the average price per square foot of the comparable set in each NOI Tier and the total area of the properties under the respective NOI Tier. KPMG calculated the implied going-in capitalization rate from the aforementioned analysis based on the aggregate NOI from the direct capitalization approach and applied the portfolio premium. The portfolio premium adjusted going-in capitalization rate was then reapplied to the aggregate NOI estimate to arrive at the implied Portfolio fair value. In addition, KPMG performed a regression analysis under the sales comparison approach. Based on the sales comparables obtained for each of the properties, KPMG computed the implied NOI per square foot of all the relevant sales comparables. KPMG performed the regression analysis using the NOI per square foot and sale price per square foot of the comparables. Using the sales comparable data set, a trend line and a regression equation was derived.


29



The following summarizes the range of implied capitalization rates that were used to arrive at the estimated value of the Portfolio (in thousands):
 
Implied Capitalization Rate without Portfolio Premium
 
Estimated Portfolio Value without Portfolio Premium
 
Implied Capitalization Rate with Portfolio Premium
 
Estimated Portfolio Value with Portfolio Premium
Income Approach
 
 
 
 
 
 
 
Direct Capitalization
6.81%
 
$
2,420,000

 
6.06%
 
$
2,720,000

Portfolio-Level DCF(1)
6.40%
 
2,610,000

 
6.40%
 
2,610,000

 
 
 
 
 
 
 
 
Sales Comparison Approach
 
 
 
 
 
 
 
Tier Analysis
6.90%
 
2,390,000

 
6.15%
 
2,680,000

Regression Analysis
6.81%
 
2,420,000

 
6.06%
 
2,720,000

(1) 
A portfolio premium was not applied in the Portfolio-Level DCF approach. The discount and terminal capitalization rates were determined based on a three-year holding period and third party industry benchmarks that reflect comparable portfolio transactions.

Numerous assumptions were made in calculating the estimated fair value range of the Portfolio. KPMG performed a comprehensive search of recent portfolio transactions to benchmark the implied going-in capitalization rates that resulted from its various approaches. This search found that there were nine highly comparable transactions between the second quarter of 2014 and the valuation date of July 31, 2015, which indicated a capitalization rate range of 5.50% to 7.00% with an average capitalization rate of 6.27%. Of these transactions, five took place in 2015 and indicated a capitalization rate range of 5.50% to 6.60% with an average capitalization rate of 6.10%. These transactions presented a mix of both power centers and grocery-anchored shopping centers. It was noted that the Portfolio had a higher concentration of grocery-anchored shopping centers in relation to the comparable transactions, and that 12 month capitalization rate data for the second quarter of 2015 implied that grocery-anchored shopping centers had capitalization rates that were approximately 25 basis points lower than power centers.

In performing its portfolio-level DCF approach, KPMG utilized a discount rate of 7.75% and a terminal capitalization rate of 6.50%. These were determined based on a three-year holding period and third party industry benchmarks that reflected comparable portfolio transactions; however, a separate portfolio premium was not applied in the portfolio-level DCF approach because the discount and terminal capitalization rates were based on comparable portfolio transactions.

A 75 basis point adjustment was applied to account for a portfolio premium in the direct capitalization, tier analysis and regression analysis approaches. This adjustment was made in order to achieve comparability with recent market transactions after the data from the market research implied a current portfolio premium of 25 to 100 basis points for historical portfolio transactions versus single property transactions. The impact of the portfolio premium adjustment on these three approaches was an increase to the total estimated Portfolio value of $290 million to $300 million.

The implied capitalization rates that resulted from the valuation approaches ranged from 6.06% to 6.40%. KPMG found that these capitalization rates were consistent with numerous independent transactions. As such, each approach to value was viewed as a reliable indication of fair value.

KPMG used its valuation analysis to conclude that the estimated fair value range of the Portfolio as of July 31, 2015, was in the range of $2.61 billion to $2.72 billion.

Sensitivity Analysis

While we believe that KPMG’s assumptions and inputs are reasonable, a change in these assumptions would impact the calculations of the estimated value of the Portfolio (under the Income Approach Direct Capitalization and Portfolio-Level DCF). Assuming all other factors remained unchanged:
A decrease in capitalization rates of 25 basis points would increase the estimated fair value range of the Portfolio by approximately $120.0 million under the direct capitalization method.
An increase in capitalization rates of 25 basis points would decrease the estimated fair value range of the Portfolio by approximately $110.0 million under the direct capitalization method.
A decrease in the discount rates of 25 basis points would increase the estimated fair value range of the Portfolio by approximately $20.0 million under the Portfolio-Level DCF method.

30



An increase in the discount rates of 25 basis points would decrease the estimated fair value range of the Portfolio by approximately $10.0 million under the Portfolio-Level DCF method.

This sensitivity analysis is only hypothetical to illustrate possible results if only one change in assumptions was made, with all other factors held constant. Further, each of these assumptions could change by more than 25 basis points.

Cash and Cash Equivalents and Mortgages and Loans Payable

Our management used a balance sheet as of July 31, 2015, to determine the amount of its cash and cash equivalents ($10.5 million) and mortgages and loans payable ($746.4 million). We consider the carrying value of our cash and cash equivalents to approximate fair value because of the short period of time between origination of the instruments and their expected realization. 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. 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 these amounts.

Common Stock and Vested Class B Units

In determining the estimated value per share of our common stock, we took into consideration the total number of shares of its common stock outstanding and vested Class B units of the Operating Partnership as of July 31, 2015. The number of shares of common stock outstanding on that date was approximately 185.0 million. The Operating Partnership issues units of limited partnership that are designated as Class B units in exchange for asset management services in accordance with the PE-NTR Agreement and the limited partnership agreement of the Operating Partnership. The vesting of the Class B units is contingent upon a market condition and a service condition. Subject to the terms of the partnership agreement, vested Class B units will convert to operating partnership units when the economic capital account balance attributable to those Class B units is equal to the operating partnership unit economic balance. Upon conversion, such operating partnership units may be exchanged at the election of the holder for cash or, at the option of the operating partnership, for shares of our common stock. As of July 31, 2015, there were approximately 2.8 million vested Class B units outstanding.

Role of the Conflicts Committee and the Board of Directors

The conflicts committee of our board of directors is composed of all of our independent directors. It is responsible for the oversight of the valuation process, including the review and approval of the valuation process and methodology used to determine our estimated value per share, the consistency of the valuation and appraisal methodologies with real estate industry standards and practices and the reasonableness of the assumptions used in the valuations and appraisals. The conflicts committee approved our engagement of KPMG to provide an estimation of the fair value range of the Portfolio as of July 31, 2015. The conflicts committee received a copy of the Valuation Report and discussed the report with representatives of KPMG. The Valuation Report provided an estimated fair value range of the Portfolio of $2.61 billion to $2.72 billion as of July 31, 2015. Senior management of PE-NTR also discussed with the conflicts committee its methodology and calculations in order to determine the range of the estimated value per share of $9.98 to $10.57. PE-NTR recommended to the conflicts committee that $10.20 per share be approved as the estimated value per share of our common stock. The conflicts committee discussed the rationale for this value with PE-NTR.

Following the conflicts committee’s receipt and review of the Valuation Report, the recommendation of PE-NTR, and in light of other factors considered by the conflicts committee and its own extensive knowledge of our assets and liabilities, the conflicts committee concluded that the range in estimated value per share of $9.98 and $10.57 was appropriate. The conflicts committee then recommended to our board of directors that it select $10.20 as the estimated value per share of our common stock. Our board of directors unanimously agreed to accept the recommendation of the conflicts committee and approved $10.20 as the estimated value per share of our common stock as of July 31, 2015, which determination was ultimately and solely the responsibility of the board of directors.

Limitations of Estimated Value per Share

We are providing this estimated value per share to assist broker-dealers that participated in our public offering in meeting their customer account statement reporting obligations. As with any valuation methodology, the methodologies used are based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different estimated value per share, and this difference could be significant. The estimated value per share is not audited and does not represent a determination of the fair value of our assets or liabilities based on U.S. generally

31



accepted accounting principles (GAAP), nor does it represent a liquidation value of our assets and liabilities or the amount at which our shares of common stock would trade on a national securities exchange.

Accordingly, with respect to the estimated value per share, we can give no assurance that:
a stockholder would be able to resell his or her shares at the estimated value per share;
a stockholder would ultimately realize distributions per share equal to our estimated value per share upon liquidation of our assets and settlement of its liabilities or a sale of our company;
our shares of common stock would trade at the estimated value per share on a national securities exchange;
a third party would offer the estimated value per share in an arm’s-length transaction to purchase all or substantially all of our shares of common stock;
another independent third-party appraiser or third-party valuation firm would agree with our estimated value per share; or
the methodology used to calculate our estimated value per share would be acceptable to FINRA or for compliance with ERISA reporting requirements.

Further, the estimated value per share as of July 31, 2015 is based on the estimated value of the Portfolio, cash and cash equivalents, and mortgages and loans payable as of July 31, 2015. As of December 31, 2015 we had not made any adjustments to the valuation for the impact of other transactions occurring subsequent to July 31, 2015, including, but not limited to, (1) the issuance of common stock under the dividend reinvestment plan, (2) net operating income earned and dividends declared, (3) the repurchase of shares and (4) changes in leases, tenancy or other business or operational changes. The value of our shares will fluctuate over time in response to developments related to individual assets in the Portfolio, the management of those assets and changes in the real estate and finance markets. Because of, among other factors, the high concentration of our total assets in real estate and the number of shares of our common stock outstanding, changes in the value of individual assets in the Portfolio or changes in valuation assumptions could have a very significant impact on the value of our shares. The estimated value per share reflects a real estate portfolio premium as opposed to the sum of the individual property values; however, it does not reflect a discount for the fact that we are externally managed. The estimated value per share also does not take into account any disposition costs or fees for real estate properties, debt prepayment penalties that could apply upon the prepayment of certain of our debt obligations or the impact of restrictions on the assumption of debt.

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. Initially, the purchase price per share under the DRIP was $9.50. In accordance with the DRIP, because we established an estimated value per share on August 24, 2015, participants acquire shares of common stock through the DRIP at a price of $10.20 per share. 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, 2015, 6.6 million shares were issued through the DRIP, resulting in proceeds of approximately $63.8 million. For the year ended December 31, 2014, 6.6 million shares were issued through the DRIP, resulting in proceeds of approximately $63.0 million.
 
Distribution Information
 
We pay distributions based on daily record dates, payable monthly in arrears. During the years ended December 31, 2015 and 2014, our board of directors authorized distributions based on daily record dates for each day during the periods from January 1 through December 31, 2015 and 2014. The authorized distributions for January 2014 through December 2015 were equal to a daily amount of $0.00183562 per share of common stock.

The total monthly distributions paid to common stockholders for the years ended December 31, 2015 and 2014 were as follows (in thousands):
 
2015
 
2014
Distributions paid to common stockholders
$
123,190

 
$
119,562



32



Distributions were paid subsequent to December 31, 2015 to the stockholders from December 2015 through February 2016 as follows (in thousands):
Distribution Period
 
Date Distribution Paid
 
Gross Amount of Distribution Paid
December 1, 2015 through and including December 31, 2015
 
1/4/2016
 
$
10,320

January 1, 2016 through and including January 31, 2016
 
2/2/2016
 
10,315

February 1, 2016 through and including February 29, 2016
 
3/2/2016
 
9,678


All distributions paid during the years ended December 31, 2015 and 2014 have been funded by a combination of cash generated through operations, borrowings, and offering proceeds.
 
Unregistered Sales of Equity Securities
 
During 2015, we did not sell any equity securities that were not registered under the Securities Act.

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 purchase price paid for the shares being repurchased. There are several limitations on our ability to repurchase shares under the program:
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.
We have no obligation to repurchase shares if the repurchase would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.
Under our share repurchase program, the maximum amount of common stock that we may redeem 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 redemptions to date.
The cash available for repurchases on any particular date will generally be limited to the proceeds from the DRIP during the preceding four fiscal quarters, less any cash already used for repurchases during the same period; however, subject to the limitations described above, we may use other sources of cash at the discretion of the board of directors. The limitations described above do not apply to shares repurchased due to a stockholder’s death, “qualifying disability,” or “determination of incompetence.”

Initially, shares were repurchased at a price equal to or at a discount from the stockholders’ original purchase prices paid for the shares being repurchased. Effective August 24, 2015, the repurchase price per share for all stockholders is equal to the estimated value per share of $10.20.
 
Repurchases 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.
 
Our board of directors may amend, suspend or terminate the program upon 30 days’ notice. We may provide notice by including such information (a) in a current report on Form 8-K or in our annual or quarterly reports, all publicly filed with the SEC, or (b) in a separate mailing to the stockholders.


33



The following table presents the activity under our share repurchase program for the years ended December 31, 2015 and 2014 (in thousands, except per share amounts):
 
 
2015
 
2014
Shares repurchased
 
7,386

 
346

Cost of repurchases
 
$
74,469

 
$
3,323

Average repurchase price
 
$
10.08

 
$
9.60


We record a liability representing our obligation to repurchase shares of common stock submitted for repurchase as of year end but not yet repurchased. Below is a summary of our obligation to repurchase shares of common stock as of December 31, 2015 and 2014 (in thousands):
 
 
2015
 
2014
Liability recorded
 
$

 
$
1,669

Shares submitted for repurchase
 

 
177

All of the shares that we repurchased pursuant to our share repurchase program during the quarter ended December 31, 2015 are provided below:
Period
 
Total Number of Shares Redeemed(1)
 
Average Price Paid per Share (1)(3)
 
Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program(2)
 
Approximate Dollar Value of Shares Available That May Yet Be Redeemed Under the Program
October 2015
 
3,867,091

 
$
10.20

 
3,867,091

 
(2) 
November 2015
 
175,909

 
10.20

 
175,909

 
(2) 
December 2015
 
53,298

 
10.20

 
53,298

 
(2) 
(1) 
All purchases of our equity securities by us in the three months ended December 31, 2015 were made pursuant to the share repurchase program. We announced the commencement of the share repurchase program on August 12, 2010, and it was subsequently amended on September 29, 2011.
(2) 
We currently limit the dollar value and number of shares that may yet be repurchased under the share repurchase program as described above. During the year ended December 31, 2015, we repurchased $74.5 million of common stock. See below regarding funding limitations during the fourth quarter of 2015 and beyond.
(3) 
Initially, shares were repurchased under the share repurchase program at a price equal to or at a discount from the stockholders’ original purchase prices paid for the shares being repurchased. On August 24, 2015, our board of directors established an estimated value per share of our common stock of $10.20. Effective as of that date, the repurchase price per share for all stockholders is equal to the estimated value per share.
 
During the fourth quarter of 2015, repurchase requests surpassed the funding limits under the share repurchase program. Our board of directors made a one-time authorization of additional funds in order to repurchase shares that were submitted for repurchase during the October repurchase cycle, which amounted to $10.8 million. As of December 31, 2015, there were outstanding requests to repurchase 3.4 million shares that had not been repurchased due to the program’s funding limits. In addition, due to these funding limits, no funds will be available for repurchases during the first quarter of 2016. The funds available for repurchases during the second and third quarters of 2016, if any, are expected to be limited. If we are unable to fulfill all repurchase requests in any month, we will attempt to honor requests on a pro rata basis. We will continue to fulfill repurchases sought upon a stockholder’s death, determination of incompetence or qualifying disability in accordance with the terms of the share repurchase program.


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ITEM 6. SELECTED FINANCIAL DATA
As of and for the years ended December 31, 2015, 2014, 2013, 2012 and 2011
(In thousands, except per share amounts)
  
2015

2014

2013

2012

2011
Balance Sheet Data:
  

  

  

  


Investment in real estate assets
$
2,350,033

 
$
2,201,235

 
$
1,136,074

 
$
291,175

 
$
70,753

Cash and cash equivalents
40,680


15,649


460,250


7,654


6,969

Total assets
2,234,812

 
2,150,769

 
1,721,527

 
325,410

 
85,192

Mortgages and loans payable
854,079


650,462


200,872


159,007


46,788

Operating Data:
  

  

  

  


Total revenues
$
242,099


$
188,215


$
73,165


$
17,550


$
3,529

Property operating expenses
(38,399
)

(32,919
)

(11,896
)

(2,957
)

(631
)
Real estate tax expenses
(35,285
)

(25,262
)

(9,658
)

(2,055
)

(507
)
General and administrative expenses
(15,829
)

(8,632
)

(4,346
)

(1,717
)

(845
)
Acquisition expenses
(5,404
)

(17,430
)

(18,772
)

(3,981
)

(1,751
)
Vesting of Class B units for asset management services(1)

 
(27,853
)
 

 

 

Interest expense, net
(32,390
)

(20,360
)

(10,511
)

(3,020
)

(811
)
Net income (loss)
13,561


(22,635
)

(12,350
)

(4,273
)

(2,516
)
Net income (loss) attributable to stockholders
13,360


(22,635
)

(12,404
)

(3,346
)

(2,364
)
Other Operational Data:
 
 
 
 
 
 
 
 
 
Net operating income(2)
$
163,023

 
$
125,816

 
$
50,152

 
$
12,493

 
$
2,624

Funds from operations(3)
113,400

 
56,513

 
12,769

 
1,209

 
(981
)
Modified funds from operations(3)
112,729

 
94,552

 
28,982

 
4,295

 
879

Cash Flow Data:
  

  

  

  


Cash flows provided by operating activities
$
106,073


$
75,671


$
18,540


$
4,033


$
593

Cash flows used in investing activities
(110,774
)

(715,772
)

(776,219
)

(198,478
)

(56,149
)
Cash flows provided by financing activities
29,732


195,500


1,210,275


195,130


61,818

Per Share Data:
  

  

  

  


Net income (loss) per share—basic and diluted
$
0.07


$
(0.13
)

$
(0.18
)

$
(0.51
)

$
(1.57
)
Common distributions declared
$
0.67


$
0.67


$
0.67


$
0.65


$
0.65

Weighted-average shares outstanding—basic
183,678


179,280


70,227


6,509


1,503

Weighted-average shares outstanding—diluted
186,394

 
179,280

 
70,227

 
6,509

 
1,503

(1) 
See “Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” for further discussion.
(2) 
See “Management's Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Measures - Net Operating Income” for the definition and information regarding why we present Net Operating Income and for a reconciliation of this non-GAAP financial measure to net income (loss).
(3) 
See “Management's Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Measures - Funds from Operations and Modified Funds from Operations” for the definition and information regarding why we present Funds from Operations and Modified Funds from Operations and for a reconciliation of these non-GAAP financial measures to net income (loss).

The selected financial data should be read in conjunction with the consolidated financial statements and notes appearing in this annual report.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with our accompanying consolidated financial statements and notes thereto. See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I.
 
Overview
 
Phillips Edison Grocery Center REIT I, Inc. was formed as a Maryland corporation on October 13, 2009 and elected to be taxed as a real estate investment trust (“REIT”) commencing with the taxable year ended December 31, 2010. We ceased offering shares of common stock in our primary offering on February 7, 2014. We continue to offer up to a total of approximately 37.8 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 $10.20 per share.

As of December 31, 2015, we had issued 189.1 million shares of common stock, including 15.3 million shares issued through the DRIP, generating gross cash proceeds of $1.9 billion since the commencement of our initial public offering.
 
Below are statistical highlights of our portfolio’s activities from inception to date and for the properties acquired during the year ended December 31, 2015:
 
Total Portfolio as of December 31, 2015
 
Property Acquisitions during the Year Ended December 31, 2015
Number of properties
147

 
9

Number of states
28

 
7

Weighted-average capitalization rate(1)
7.1
%
 
6.5
%
Weighted-average capitalization rate with straight-line rent(2)
7.3
%
 
6.5
%
Total square feet (in thousands)
15,561

 
850

Leased % of rentable square feet(3)
95.9
%
 
91.3
%
Average remaining lease term in years(3)
5.9

 
6.4

(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 December 31, 2015. The average remaining lease term in years excludes future options to extend the term of the lease.

Market Outlook—Real Estate and Real Estate Finance Markets

Management reviews a number of economic forecasts and market commentaries in order to evaluate general economic conditions and to formulate a view of the current environment’s effect on the real estate markets in which we operate.

According to the Bureau of Economic Analysis, as measured by the U.S. real gross domestic product (“GDP”), the U.S. economy’s growth increased 2.4% in 2015 as compared to 2014, according to preliminary estimates. For 2014, real GDP increased 2.4% compared to 2013. According to the Commerce Department, the increase in real GDP in 2015 reflected positive contributions from personal consumption expenditures (“PCE”), nonresidential fixed investment, exports, private inventory investment, state and local government spending, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased. Comparing real GDP growth in 2015 with growth in 2014, real GDP increased 2.4% in both
years, though there were offsetting movements in the components. Decelerations in nonresidential fixed investment and in
exports and an acceleration in imports were offset by accelerations in PCE and in residential fixed investment, a smaller
decrease in federal government spending, and accelerations in private inventory investment and in state and local government
spending.


36



According to J.P. Morgan’s 2016 REIT Outlook Equity Research Report, GDP is expected to grow approximately 2.5% in 2016. The U.S. retail real estate market displayed positive fundamentals in 2015, with vacancy rates continuing to drop and increasing average leasing spreads.

Overall, the improving retail real estate fundamentals along with the improving job creation and personal consumption
expenditure data suggests that 2016 should be another year of economic recovery in the U.S. that results in a positive market
situation. However, several factors create long-term uncertainty for the sector, including the growth in e-commerce, future
interest rate growth, slowing retail sales growth and the general political climate.

Critical Accounting Policies and Estimates
 
Below is a discussion of our critical accounting policies and estimates. Our accounting policies have been established to conform with GAAP. We consider these policies critical because they involve significant management judgments and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our consolidated financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.
 
Real Estate Assets 
 
Real Estate Acquisition Accounting—In accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations, we record real estate, consisting of land and buildings and improvements, at fair value. We allocate the cost of an acquisition to the acquired tangible assets, identifiable intangibles, and assumed liabilities based on their estimated acquisition-date fair values. In addition, ASC 805 requires that acquisition costs be expensed as incurred and restructuring costs generally be expensed in periods subsequent to the acquisition date.
 
We assess the acquisition-date fair values of all tangible assets, identifiable intangibles, and assumed liabilities using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis and replacement cost), and that utilize appropriate discount and/or capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. The fair value of tangible assets of an acquired property considers the value of the property as if it were vacant.

We generally determine the value of construction in progress based upon the replacement cost. However, for certain acquired properties that are part of a ground-up development, we determine fair value by using the same valuation approach as for all other properties and deducting the estimated cost to complete the development. During the remaining construction period, we capitalize interest expense until the development has reached substantial completion. Construction in progress, including capitalized interest, is not depreciated until the development has reached substantial completion.
 
We record above-market and below-market in-place lease values for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. We amortize any recorded above-market or below-market lease values as a reduction or increase, respectively, to rental income over the remaining non-cancelable terms of the respective lease. We also include fixed rate renewal options in our calculation of the fair value of below-market leases and the periods over which such leases are amortized. If a tenant has a unilateral option to renew a below-market lease, we include such an option in the calculation of the fair value of such lease and the period over which the lease is amortized if we determine that the tenant has a financial incentive and wherewithal to exercise such option.
 
Intangible assets also include the value of in-place leases, which represents the estimated value of the net cash flows of the in-place leases to be realized, as compared to the net cash flows that would have occurred had the property been vacant at the time of acquisition and subject to lease-up. Acquired in-place lease value is amortized to depreciation and amortization expense over the average remaining non-cancelable terms of the respective in-place leases.

We estimate the value of tenant origination and absorption costs by considering the estimated carrying costs during hypothetical expected lease-up periods, considering current market conditions. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods.

37



 
Estimates of the fair values of the tangible assets, identifiable intangibles and assumed liabilities require us to estimate market lease rates, property operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, and the number of years the property will be held for investment. The use of inappropriate estimates would result in an incorrect valuation of our acquired tangible assets, identifiable intangibles and assumed liabilities, which would impact the amount of our net income.

We calculate the fair value of assumed long-term debt by discounting the remaining contractual cash flows on each instrument at the current market rate for those borrowings, which we approximate based on the rate at which we would expect to incur a replacement instrument on the date of acquisition, and recognize any fair value adjustments related to long-term debt as effective yield adjustments over the remaining term of the instrument.
 
Impairment of Real Estate and Related Intangible Assets—We monitor events and changes in circumstances that could indicate that the carrying amounts of our real estate and related intangible assets may be impaired. When indicators of potential impairment suggest that the carrying value of real estate and related intangible assets may be greater than fair value, we will assess the recoverability, considering recent operating results, expected net operating cash flow, and plans for future operations. If, based on this analysis of undiscounted cash flows, we do not believe that we will be able to recover the carrying value of the real estate and related intangible assets, we would record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the real estate and related intangible assets as defined by ASC 360, Property, Plant, and Equipment. Particular examples of events and changes in circumstances that could indicate potential impairments are significant decreases in occupancy, rental income, operating income, and market values.

Revenue Recognition
 
We recognize minimum rent, including rental abatements and contractual fixed increases attributable to operating leases, on a straight-line basis over the terms of the related leases, and we include amounts expected to be received in later years in deferred rents receivable. Our policy for percentage rental income is to defer recognition of contingent rental income until the specified target (i.e., breakpoint) that triggers the contingent rental income is achieved.

We record property operating expense reimbursements due from tenants for common area maintenance, real estate taxes, and other recoverable costs in the period the related expenses are incurred. We make certain assumptions and judgments in estimating the reimbursements at the end of each reporting period. We do not expect the actual results to differ from the estimated reimbursement.
 
We make estimates of the collectability of our tenant receivables related to base rents, expense reimbursements and other revenue or income. We specifically analyze accounts receivable and historical bad debts, customer creditworthiness, current economic trends, and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In addition, with respect to tenants in bankruptcy, we will make estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectability of the related receivable. In some cases, the ultimate resolution of these claims can exceed one year. These estimates have a direct impact on our net income because a higher bad debt reserve results in less net income.
 
We record lease termination income if there is a signed termination letter agreement, all of the conditions of the agreement have been met, collectability is reasonably assured and the tenant is no longer occupying the property. Upon early lease termination, we provide for losses related to unrecovered intangibles and other assets.
 
We recognize gains on sales of real estate pursuant to the provisions of ASC 605-976, Accounting for Sales of Real Estate (“ASC 605-976”). The specific timing of a sale will be measured against various criteria in ASC 605-976 related to the terms of the transaction and any continuing involvement associated with the property. If the criteria for profit recognition under the full-accrual method are not met, we will defer gain recognition and account for the continued operations of the property by applying the percentage-of-completion, reduced profit, deposit, installment or cost recovery methods, as appropriate, until the appropriate criteria are met.
 
Class B Units
 
We issue to ARC and PE-NTR Class B units of the Operating Partnership as compensation for the asset management services provided by PE-NTR under our current advisory agreement. Previously, we also issued to ARC and PE-NTR Class B units as compensation for the asset management services provided by ARC and PE-NTR under our prior advisory agreement. Our prior advisory agreement was terminated on December 3, 2014 and was replaced with our current advisory agreement.

38




Under the limited partnership agreement of the Operating Partnership, the Class B units vest, and are no longer subject to forfeiture, at such time as the following events occur: (x) the value of the Operating Partnership’s assets plus all distributions made equals or exceeds the total amount of capital contributed by investors plus a 6% cumulative, pre-tax, non-compounded annual return thereon (the “economic hurdle” or the “market condition”); (y) any one of the following occurs: (1) the termination of our advisory agreement by an affirmative vote of a majority of our independent directors without cause; (2) a listing event; or (3) another liquidity event; and (z) the advisor under such advisory agreement is still providing advisory services to us (the “service condition”). Such Class B units are forfeited immediately if: (a) the advisory agreement is terminated for cause; or (b) the advisory agreement is terminated by an affirmative vote of a majority of our independent directors without cause before the economic hurdle has been met.

The Class B units have both a market condition and a service condition up to and through a Liquidity Event. A Liquidity Event (“Liquidity Event”) is defined as being the first to occur of the following: (i) a termination without cause (as discussed above), (ii) a listing, or (iii) another liquidity event. Therefore, the vesting of Class B units occurs only upon completion of both the market condition and service condition. Because PE-NTR can be terminated as the advisor without cause before a Liquidity Event occurs, and at such time the market condition and service condition may not be satisfied, any unvested Class B units may be forfeited. Additionally, if the market condition and service condition had been satisfied and a Liquidity Event had not occurred, ARC or PE-NTR could not control the Liquidity Event because each of the aforementioned events that represent a Liquidity Event must be approved by our independent directors. As a result, we have concluded that the service condition is not probable because of each party’s ability to terminate the current advisory agreement at any time without cause.

Because the satisfaction of the market or service condition is not probable, no expense for services rendered will be recognized unless the market condition or service condition becomes probable. Based on our conclusion of the market condition and service condition not being probable, the Class B Units issued under our current advisory agreement will be treated as unissued for accounting purposes until the market condition and service condition have been achieved. However, as the Class B unit holders are not required to return the distributions if the Class B units are forfeited before they vest, the distributions paid to ARC and PE-NTR will be treated as expense for services rendered. This expense will be calculated as the product of the number of unvested units issued to date and the stated distribution rate at the time such distribution is authorized.

In connection with the termination of our prior advisory agreement with ARC on December 3, 2014, we evaluated whether the market condition and service condition had been met as of that date and therefore whether the Class B units issued to ARC and PE-NTR for asset management services provided from October 1, 2012 through December 3, 2014 had vested. As part of this evaluation, PE-NTR presented information to our independent directors that illustrated PE-NTR’s belief that the market condition had been met as of December 3, 2014. Our independent directors, along with an independent advisor engaged by the independent directors, reviewed these materials and confirmed PE-NTR’s belief that the market condition had been met as of December 3, 2014. As a result, all Class B units issued to ARC and PE-NTR for asset management services provided pursuant to our prior advisory agreement are deemed to have vested as of December 3, 2014. Despite the vesting of the Class B units, our current advisory agreement with PE-NTR prohibits PE-NTR from exercising any rights it may have to exchange any Class B units for cash or shares of our common stock until the occurrence of a liquidity event for stockholders. Any and all Class B units issued to ARC and PE-NTR for asset management services provided subsequent to December 3, 2014 will remain unvested and subject to forfeiture until the occurrence of the events described above. Please refer to Note 3 to our consolidated financial statements in this annual report for additional information regarding these vested units issued under our prior advisory agreement.

Impact of Recently Issued Accounting Pronouncements—Refer to Note 2 to our consolidated financial statements in this annual report for discussion of the impact of recently issued accounting pronouncements.
 


39



Results of Operations

Summary of Operating Activities for the Years Ended December 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
$
242,099

 
$
188,215

 
$
53,884


$
51,827

 
$
2,057

Property operating expenses
(38,399
)
 
(32,919
)
 
(5,480
)

(7,188
)
 
1,708

Real estate tax expenses
(35,285
)
 
(25,262
)
 
(10,023
)

(8,860
)
 
(1,163
)
General and administrative expenses
(15,829
)
 
(8,632
)
 
(7,197
)

(6,763
)
 
(434
)
Acquisition expenses
(5,404
)
 
(17,430
)
 
12,026


11,966

 
60

Vesting of Class B units for asset management services

 
(27,853
)
 
27,853

 
27,853

 

Depreciation and amortization
(101,479
)
 
(79,160
)
 
(22,319
)

(22,555
)
 
236

Interest expense, net
(32,390
)
 
(20,360
)
 
(12,030
)

(14,145
)
 
2,115

Other income, net
248

 
766

 
(518
)

(870
)
 
352

Net income (loss)
13,561


(22,635
)

36,196


31,265


4,931

Net income attributable to noncontrolling interests
(201
)
 

 
(201
)

256

 
(457
)
Net income (loss) attributable to stockholders
$
13,360

 
$
(22,635
)
 
$
35,995


$
31,521

 
$
4,474

 

 

 



 
 
Net income (loss) per share—basic and diluted
$
0.07

 
$
(0.13
)
 
$
0.20



 


The Same-Center column above includes the 83 properties that were owned and operational prior to January 1, 2014. The Non-
Same-Center column includes properties that were acquired after January 1, 2014, in addition to corporate-level income and
expenses. In this section, we will explain significant fluctuations in activity shown in the Same-Center column as well as any significant corporate-level changes that are not attributable to the change in the number of properties owned. We owned 138 properties as of December 31, 2014 and 147 properties as of December 31, 2015. Unless otherwise discussed below, year-to-year comparative differences for the years ended December 31, 2015 and 2014, are almost entirely attributable to the number of properties owned and the length of ownership of these properties.

Total revenues— Of the $53.9 million increase in total revenues, $51.8 million was related to the acquisition of 65 properties in 2014 and 2015. The remaining $2.1 million increase was primarily related to a $1.5 million increase in same-center rental income and a $0.6 million increase in same-center tenant recovery income. The increase in same-center rental income was driven by a $0.18 increase in minimum rent per square foot and a 1.1% increase in occupancy since December 31, 2014. The increase in same-center tenant recovery income stemmed from an improvement in the occupancy and recovery percentages along with an increase in recoverable real estate tax expenses.

Property operating expenses—These expenses include (i) operating and maintenance expense, which consists of property related costs including repairs and maintenance costs, landscaping, snow removal, utilities, property insurance costs, security and various other property-related expenses; (ii) bad debt expense; and (iii) property management fees and expenses. Property operating expenses for non-same-center properties increased by $7.2 million due to the acquisition of 65 properties in 2014 and 2015. These costs were partially offset by a decrease in same-center property operating expense of $1.7 million, which was primarily related to a $0.8 million reduction in bad debt expense from 2014 and a $0.9 million reduction in common area maintenance expense due to upfront maintenance costs incurred in 2014 for the additional same-center properties acquired in 2013.

Real estate tax expenses—The $10.0 million increase in real estate tax expenses was primarily comprised of an $8.9 million increase related to the acquisition of 65 properties in 2014 and 2015, along with approximately $1.2 million of additional expenses due to changes in assessed values of same-center properties.

General and administrative expenses—General and administrative expenses include legal and professional fees, asset management fees, insurance for directors and officers, transfer agent fees, taxes and other corporate-level expenses. General and administrative expenses increased $7.2 million primarily due to non-same-center activity. Included in non-same center activity was a $4.6 million increase in corporate asset management fees paid to PE-NTR as a result of the change to our advisory fee structure as of October 1, 2015, and a $2.2 million increase primarily related to the operation of 65 properties acquired in 2014 and 2015.

40




Vesting of Class B units for asset management services—During the year ended December 31, 2014, there were non-cash expenses of $27.9 million incurred for the vesting of 2.8 million Class B units of our operating partnership that were previously issued to PE-NTR and ARC as compensation for asset management services provided from October 1, 2012 through December 3, 2014. The vesting of these units resulted from the termination of the ARC Agreement on December 3, 2014 and the determination by the independent directors that the economic hurdle of at least a 6% investor return had been met, which was calculated upon the termination of the ARC Agreement. During the year ended December 31, 2015, there was no vesting of Class B units. The vesting of Class B units occurs only upon completion of both a market condition and service condition. Because PE-NTR can be terminated as the advisor without cause before a liquidity event occurs, and at such time the market condition and service condition may not be satisfied, the unvested Class B units issued since December 3, 2014, may be forfeited. Refer to Note 2 of the Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” for more information regarding the vesting of Class B units.

Interest expense, net—Debt incurred in connection with the acquisition of 65 properties in 2014 and 2015 as well as other corporate-level debt activity resulted in a $14.1 million increase in non-same-center interest expense. During 2015 and 2014 we assumed debt with a fair value of $34.3 million and $189.0 million, respectively, related to our property acquisitions in those years, in addition to borrowings made under our credit facility. Of the corporate-level interest expense increase, $3.2 million was due to additional expense from fixing the interest rate on our unsecured credit facility by entering into interest rate swap agreements and $2.1 million was due to additional expense related to the write-off of deferred financing costs, of which $1.9 million resulted from a reduction of the capacity of our unsecured revolving credit facility. Partially offsetting the increase in non-same-center interest expense was a $2.1 million decrease in interest expense for same-center properties. This reduction was primarily as a result of lower outstanding principal balances from payments on our fixed-rate mortgages, including a reduction of $0.8 million as a result of using our unsecured credit facility to pay off higher fixed-rate mortgages in 2014 and 2015.

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 and the potential acquisition of additional properties.

Summary of Operating Activities for the Years Ended December 31, 2014 and 2013
(In thousands, except share and per share amounts)
 
 
 
Favorable (Unfavorable) Change
  
2014
 
2013
 
Change
 
Non-Same-Center
 
Same-Center
Operating Data:
  
 
  
 
 
 
 
 
 
Total revenues
$
188,215

 
$
73,165

 
$
115,050

 
$
113,482

 
$
1,568

Property operating expenses
(32,919
)
 
(11,896
)
 
(21,023
)
 
(20,203
)
 
(820
)
Real estate tax expenses
(25,262
)
 
(9,658
)
 
(15,604
)
 
(14,957
)
 
(647
)
General and administrative expenses
(8,632
)
 
(4,346
)
 
(4,286
)
 
(4,361
)
 
75

Acquisition expenses
(17,430
)
 
(18,772
)
 
1,342

 
1,320

 
22

Vesting of Class B units for asset management services
(27,853
)
 

 
(27,853
)
 
(27,853
)
 

Depreciation and amortization
(79,160
)
 
(30,512
)
 
(48,648
)
 
(48,623
)
 
(25
)
Interest expense, net
(20,360
)
 
(10,511
)
 
(9,849
)
 
(12,628
)
 
2,779

Other income, net
766

 
180

 
586

 
638

 
(52
)
Net loss
(22,635
)

(12,350
)

(10,285
)

(13,185
)

2,900

Net income attributable to noncontrolling interests

 
(54
)
 
54

 

 
54

Net loss attributable to stockholders
$
(22,635
)
 
$
(12,404
)
 
$
(10,231
)
 
$
(13,185
)
 
2,954

 
 
 
 
 
 
 
 
 
 
Net loss per share—basic and diluted
$
(0.13
)
 
$
(0.18
)
 
$
0.05

 


 


The Same-Center column above includes the 26 properties that were owned and operational prior to January 1, 2013. The Non-Same-Center column includes properties acquired after January 1, 2013, in addition to corporate-level income and expenses. In this section, we primarily explain fluctuations in activity shown in the Same-Center column as well as any notable fluctuations in the Non-Same-Center column related to corporate-level activity. We owned 83 properties as of December 31, 2013, and 138 properties as of December 31, 2014. Unless otherwise discussed below, year-to-year comparative differences for the years ended December 31, 2014 and 2013 are almost entirely attributable to the number of properties owned and the length of ownership of these properties.

41




Total revenues—In addition to a $113.5 million increase related to the acquisition of 113 properties in 2013 and 2014, the $115.1 million increase in total revenues was primarily related to a $1.6 million increase in same-center revenue, which was driven by a $0.20 increase in minimum rent per square foot and a 0.7% increase in occupancy since December 31, 2013.

General and administrative expenses—The primary reasons for the $4.4 million increase in non-same-center general and administrative expenses were a $2.3 million increase in transfer agent fee expense and a $1.1 million increase in consulting expenses related to proxy solicitation and other services. The remaining increase was primarily due to the operation of 113 additional properties acquired in 2013 and 2014. All these costs were a result of the overall growth of the company and were not directly attributable to the properties we own. These expenses were partially offset by a $0.3 million reduction in distributions related to Class B units.

Acquisition expenses—The $1.3 million decrease in acquisition expenses was primarily due to increased activity in 2013. In 2013, the acquisition of the remaining ownership interest of our joint venture (the “Joint Venture”) with a group of institutional investors advised by CBRE Global Multi-Manager (the “CBRE Investors”), caused $0.7 million of additional transaction costs, and expenses incurred for acquisitions not occurring until 2014 caused expenses to be $0.8 million higher in 2013.

Vesting of Class B units for asset management services—During the year ended December 31, 2014, there were non-cash expenses of $27.9 million incurred for the vesting of 2.8 million issued and unissued Class B units of our operating partnership that were previously issued to PE-NTR and ARC as compensation for asset management services provided from October 1, 2012 through December 3, 2014. The vesting of these units resulted from the termination of the ARC Agreement on December 3, 2014 and the determination that the economic hurdle of at least a 6% investor return had been met, which was calculated upon the termination of the ARC Agreement.

Interest expense, net—The $9.8 million increase in interest expense is primarily comprised of $11.8 million related to debt incurred in connection with the acquisition of 113 properties in 2013 and 2014, along with a $0.6 million increase in the amortization of loan closing costs. These costs were partially offset by a decrease in interest expense in the amount of $1.9 million due to the repayments of principal on certain of our fixed rate mortgage loans associated with 26 properties and a decrease in interest expense in the amount of $1.1 million due to the write-offs of loan closing costs.

Leasing Activity

Below is a summary of leasing activity for the years ended December 31, 2015 and 2014:
 
 
Total Deals
 
Inline Deals(1)
 
 
2015
 
2014
 
2015
 
2014
New leases:
 
 
 
 
 
 
 
 
Number of leases
 
186

 
123

 
179

 
123

Square footage (in thousands)
 
586

 
235

 
360

 
235

First-year base rental revenue (in thousands)
 
$
8,001

 
$
3,674

 
$
6,250

 
$
3,674

Average rent per square foot (“PSF”)
 
$
13.66

 
$
15.61

 
$
17.36

 
$
15.61

Average cost PSF of executing new leases(2)(3)
 
$
37.05