10-Q 1 10Q_Q32012.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

¨ 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 – ARC SHOPPING CENTER REIT INC.

(Exact Name of Registrant as Specified in Its Charter)


Maryland	27-1106076
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)


11501 Northlake Drive Cincinnati, Ohio	45249
(Address of Principal Executive Offices)	(Zip Code)

(513) 554-1110

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large Accelerated Filer	¨	Accelerated Filer	¨

Non-Accelerated Filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of November 1, 2012, there were 10.4 million outstanding shares of common stock of Phillips Edison – ARC Shopping Center REIT Inc.

PHILLIPS EDISON – ARC SHOPPING CENTER REIT INC.

FORM 10-Q

September 30, 2012

INDEX


PART I. FINANCIAL INFORMATION		2

Item 1.	Financial Statements	2

	Condensed Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011	3

	Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2012 and 2011 (unaudited)	4

	Condensed Consolidated Statements of Equity for the nine months ended September 30, 2012 and 2011 (unaudited)	5

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 (unaudited)	6

	Notes to Condensed Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32

Item 4.	Controls and Procedures	33

PART II. OTHER INFORMATION		34

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 3.	Defaults upon Senior Securities	35

Item 4.	Mine Safety Disclosures	35

Item 5.	Other Information	35

Item 6.	Exhibits	36

SIGNATURES		37

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

The information furnished in the accompanying condensed consolidated financial statements reflect all normal and recurring adjustments that are, in management’s opinion, necessary for a fair and consistent presentation of the aforementioned consolidated condensed financial statements.

The accompanying condensed consolidated financial statements should be read in conjunction with the condensed consolidated notes to Phillips Edison – ARC Shopping Center REIT Inc.’s condensed consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this quarterly report on Form 10-Q. Phillips Edison – ARC Shopping Center REIT Inc.’s results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the operating results expected for the full year.

PHILLIPS EDISON – ARC SHOPPING CENTER REIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2012 AND DECEMBER 31, 2011
(Unaudited)
(In thousands, except share and per share amounts)

		September 30, 2012		December 31, 2011
ASSETS
Investment in real estate:
	Land	$	65,066	$	21,338
	Building and improvements		146,326		49,415
	Total investment in real estate assets		211,392		70,753
	Accumulated depreciation and amortization		(5,079)		(1,261)
Total investment in real estate assets, net			206,313		69,492
Acquired intangible lease assets, net of accumulated amortization of $2,776 and $807, respectively			15,434		6,799
Cash and cash equivalents			15,737		6,969
Restricted cash			582		214
Accounts receivable, net of bad debt reserve of $57 and $35, respectively			1,819		786
Deferred financing expense, less accumulated amortization of $592 and $203, respectively			1,809		599
Prepaid expenses and other			1,164		333
Total assets		$	242,858	$	85,192

LIABILITIES AND EQUITY
Liabilities:
	Mortgage loans payable	$	129,815	$	46,788
	Acquired below market lease intangibles, less accumulated amortization of $564 and $161, respectively		4,323		1,203
	Accounts payable		115		47
	Accounts payable – affiliates		3,960		8,395
	Accrued and other liabilities		5,007		1,574
Total liabilities			143,220		58,007
Commitments and contingencies (Note 9)			-		-
Equity:
Preferred stock, $0.01 par value per share, 10,000,000 shares authorized, zero shares issued and outstanding at September 30,
	2012 and December 31, 2011	$	-	$	-
Common stock, $0.01 par value per share, 180,000,000 shares authorized, 8,644,356 and 2,658,159 shares issued and
	outstanding at September 30, 2012 and December 31, 2011, respectively		86		27
Additional paid-in capital			71,837		17,980
Accumulated deficit			(8,633)		(4,126)
Total stockholders’ equity			63,290		13,881
Noncontrolling interests			36,348		13,304
Total equity			99,638		27,185
Total liabilities and equity		$	242,858	$	85,192

See notes to condensed consolidated financial statements.

PHILLIPS EDISON – ARC SHOPPING CENTER REIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE PERIODS ENDED SEPTEMBER 30, 2012 AND 2011
(Unaudited)
(In thousands, except share and per share amounts)

		Three Months Ended September 30,				Nine Months Ended September 30,
			2012		2011		2012		2011
Revenues:
	Rental income	$	4,044	$	634	$	8,255	$	1,575
	Tenant recovery income		1,037		202		2,110		484
	Other property income		67		3		103		3
Total revenues			5,148		839		10,468		2,062
Expenses:
	Property operating		785		154		1,701		358
	Real estate taxes		674		123		1,295		330
	General and administrative		509		212		1,178		588
	Acquisition-related expenses		1,097		246		2,416		740
	Depreciation and amortization		2,507		345		5,079		853
Total expenses			5,572		1,080		11,669		2,869
Operating loss			(424)		(241)		(1,201)		(807)
Other expense:
	Interest expense, net		(902)		(199)		(1,771)		(486)
	Other income		1		-		1		-
Net loss			(1,325)		(440)		(2,971)		(1,293)
Net loss attributable to noncontrolling interests			289		-		872		-
Net loss attributable to Company stockholders		$	(1,036)	$	(440)	$	(2,099)	$	(1,293)
Per share information - basic and diluted:
Loss per share - basic and diluted		$	(0.15)	$	(0.29)	$	(0.43)	$	(1.05)
Weighted-average common shares outstanding - basic and diluted			6,928,167		1,540,917		4,935,127		1,228,970

Comprehensive loss		$	(1,325)	$	(440)	$	(2,971)	$	(1,293)
Comprehensive loss attributable to noncontrolling interests			289		-		872		-
Comprehensive loss attributable to Company stockholders		$	(1,036)	$	(440)	$	(2,099)	$	(1,293)


See notes to condensed consolidated financial statements.

PHILLIPS EDISON-ARC SHOPPING CENTER REIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(Unaudited)
(In thousands, except share and per share amounts)

								Total
	Common Stock			Additional		Accumulated		Stockholders'		Noncontrolling
	Shares	Amount		Paid-In Capital		Deficit		Equity		Interest		Total
Balance at January 1, 2011	730,570	$	7	$	1,934	$	(784)	$	1,157	$	-	$	1,157
Issuance of common stock	1,116,681		12		10,655		-		10,667		-		10,667
Contributions from Sponsors	-		-		88		-		88		-		88
Dividend reinvestment plan (DRP)	8,538		-		81		-		81		-		81
Common distributions declared, $0.49 per share	-		-		-		(598)		(598)		-		(598)
Offering costs	-		-		(2,313)		-		(2,313)		-		(2,313)
Net loss	-		-		-		(1,293)		(1,293)		-		(1,293)
Balance at September 30, 2011	1,855,789	$	19	$	10,445	$	(2,675)	$	7,789	$	-	$	7,789

Balance at January 1, 2012	2,658,159	$	27	$	17,980	$	(4,126)	$	13,881	$	13,304	$	27,185
Issuance of common stock	5,915,722		59		58,774		-		58,833		-		58,833
Share repurchases	(2,500)		-		(25)		-		(25)		-		(25)
Dividend reinvestment plan (DRP)	72,975		-		693		-		693		-		693
Contributions from noncontrolling interests	-		-		-		-		-		25,344		25,344
Common distributions declared, $0.49 per share	-		-		-		(2,408)		(2,408)		-		(2,408)
Distributions to noncontrolling interests	-		-		-		-		-		(1,428)		(1,428)
Offering costs	-		-		(5,585)		-		(5,585)		-		(5,585)
Net loss	-		-		-		(2,099)		(2,099)		(872)		(2,971)
Balance at September 30, 2012	8,644,356	$	86	$	71,837	$	(8,633)	$	63,290	$	36,348	$	99,638

See notes to condensed consolidated financial statements.

PHILLIPS EDISON-ARC SHOPPING CENTER REIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(Unaudited)
(In thousands, except share and per share amounts)
				Nine Months Ended September 30,
					2012		2011

CASH FLOWS FROM OPERATING ACTIVITIES:
	Net loss			$	(2,971)	$	(1,293)
	Adjustments to reconcile net loss to net cash provided by operating activities:
		Depreciation and amortization			4,986		853
		Net amortization of above- and below- market leases			337		214
		Amortization of deferred financing costs			389		116
		Straight-line rental income			(286)		(34)
	Changes in operating assets and liabilities:
		Accounts receivable			(747)		(186)
		Prepaid expenses and other			(452)		28
		Accounts payable			36		(80)
		Accounts payable – affiliates			(805)		349
		Accrued and other liabilities			2,626		464
			Net cash provided by operating activities		3,113		431

CASH FLOWS FROM INVESTING ACTIVITIES:
	Real estate acquisitions				(111,948)		(10,102)
	Capital expenditures				(368)		(29)
	Change in restricted cash				(368)		(15)
			Net cash used in investing activities		(112,684)		(10,146)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from issuance of common stock				58,833		10,667
	Redemptions of common stock				(25)		-
	Payment of offering costs				(9,215)		(613)
	Payments on mortgage loans payable				(88,952)		(9,905)
	Proceeds from mortgage loans payable				136,289		10,500
	Payments for notes payable – affiliates				-		(600)
	Distributions paid, net of DRP				(1,426)		(462)
	Contributions from noncontrolling interests				25,344		-
	Distributions to noncontrolling interests				(910)		-
	Payments of loan financing costs				(1,599)		(175)
			Net cash provided by financing activities		118,339		9,412

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS					8,768		(303)

CASH AND CASH EQUIVALENTS:
	Beginning of period				6,969		707

	End of period			$	15,737	$	404

SUPPLEMENTAL CASHFLOW DISCLOSURE, INCLUDING NON-CASH INVESTING AND FINANCING ACTIVITIES:
		Change in offering costs payable to sub-advisor		$	(3,630)	$	1,697
		Distributions payable			289		55
		Distributions payable – noncontrolling interests			518		-
		Assumed debt			35,772		-
		Accrued capital expenditures			32		-
		Cash paid for interest			1,194		352
		Distributions reinvested			693		81
		Contributions from sponsors			-		88

See notes to condensed consolidated financial statements.

PHILLIPS EDISON – ARC SHOPPING CENTER REIT INC.

PART I. FINANCIAL INFORMATION (CONTINUED)

Phillips Edison—ARC Shopping Center REIT Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Readers of this Quarterly Report on Form 10-Q should refer to the audited financial statements of Phillips Edison-ARC Shopping Center REIT Inc. (”we,” “our,” or “us”) for the year ended December 31, 2011, which are included in our 2011 Annual Report on Form 10-K as certain footnote disclosures contained in such audited financial statements have been omitted from this Quarterly Report on Form 10-Q. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for the fair presentation have been included in this Quarterly Report.

1. ORGANIZATION

Phillips Edison—ARC Shopping Center REIT Inc. was formed as a Maryland corporation on October 13, 2009 and has elected to be taxed as a real estate investment trust (“REIT”) commencing with the taxable year ended December 31, 2010. Substantially all of our business is expected to be conducted through Phillips Edison—ARC Shopping Center Operating Partnership, L.P. (the “Operating Partnership”), a Delaware limited partnership formed on December 3, 2009. We are the sole limited partner of the Operating Partnership, and our wholly owned subsidiary, Phillips Edison Shopping Center OP GP LLC, is the sole general partner of the Operating Partnership.

We are offering to the public, pursuant to a registration statement, $1.785 billion in shares of common stock on a “best efforts” basis in our initial public offering (“our offering”). Our offering consists of a primary offering of $1.5 billion in shares offered to investors at a price of $10.00 per share, with discounts available for certain categories of purchasers, and $285 million in shares offered to stockholders pursuant to a dividend reinvestment plan (the “DRP”) at a price of $9.50 per share. We have the right to reallocate the shares of common stock offered between the primary offering and the DRP.

As of September 30, 2012, we had issued 8,644,356 shares of common stock since inception, including 89,658 shares issued through the DRP, generating gross cash proceeds of $84.8 million.

Our advisor is American Realty Capital II Advisors, LLC (the “Advisor”), a limited liability company that was organized in the State of Delaware on December 28, 2009 and that is indirectly wholly owned by AR Capital, LLC (formerly American Realty Capital II, LLC) (the “AR Capital sponsor”). Under the terms of the advisory agreement between the Advisor and us, the Advisor is responsible for the management of our day-to-day activities and the implementation of our investment strategy. The Advisor has delegated most of its duties under the advisory agreement, including the management of our day-to-day operations and our portfolio of real estate assets, to Phillips Edison NTR LLC (the “Sub-advisor”), which is indirectly wholly owned by Phillips Edison Limited Partnership (the “Phillips Edison sponsor”). Notwithstanding such delegation to the Sub-advisor, the Advisor retains ultimate responsibility for the performance of all the matters entrusted to it under the advisory agreement.

We invest primarily in well-occupied grocery-anchored neighborhood and community shopping centers having a mix of creditworthy national and regional retailers selling necessity-based goods and services in strong demographic markets throughout the United States. In addition, we may invest in other retail properties including power and lifestyle shopping centers, multi-tenant shopping centers, free-standing single-tenant retail properties, and other real estate and real estate-related loans and securities depending on real estate market conditions and investment opportunities that we determine are in the best interests of our stockholders. We expect that retail properties primarily would underlie or secure the real estate-related loans and securities in which we may invest.

On September 20, 2011, we entered into a joint venture with a group of institutional international investors advised by CBRE Investors Global Multi Manager (each a “Non-Controlling Interest”). The joint venture is in the form of PECO-ARC Institutional Joint Venture I, L.P., a Delaware limited partnership (the “Joint Venture”). We, through an indirectly wholly owned subsidiary, hold an approximate 54% interest in the Joint Venture. We serve as the general partner and manage the operations of the Joint Venture. The Non-Controlling Interests hold the remaining approximate 46% interest.

$46.7 million, in the form of equity interests in six wholly owned real estate properties and cash, to the Joint Venture, and the Non-Controlling Interests have contributed approximately $39.8 million in cash to the Joint Venture. Until March 20, 2013 (or the investment of all of the capital that is to be contributed to the Joint Venture), neither we nor the Sub-advisor or its affiliates may acquire properties meeting the Joint Venture’s investment strategy, except through the Joint Venture.

We owned fee simple interests in 20 real estate properties, 19 of which we owned through the Joint Venture, acquired from
third parties unaffiliated with us, the Advisor, or the Sub-advisor as of September 30, 2012.

										Average
						Contract			Rentable	Remaining
			Ownership		Date	Purchase			Square	Lease Term		%
Property Name		Location	Interest	Anchor	Acquired	Price ⁽¹⁾			Footage	in Years		Leased
Lakeside Plaza		Salem, VA	54%	Kroger	12/10/2010	$	8.75	million	82,798	4.4	years	100.0%
Snow View Plaza		Parma, OH	54%	Giant Eagle	12/15/2010	$	12.30	million	100,460	6.8	years	94.0%
St. Charles Plaza		Haines City, FL	54%	Publix	6/10/2011	$	10.10	million	65,000	9.4	years	96.3%
Centerpoint		Easley, SC	54%	Publix	10/14/2011	$	6.85	million	72,287	9.8	years	84.7%
Southampton Village		Tyrone, GA	54%	Publix	10/14/2011	$	8.35	million	77,956	8.0	years	86.5%
Burwood Village Center		Glen Burnie, MD	54%	Food Lion	11/9/2011	$	16.60	million	105,834	5.7	years	100.0%
Cureton Town Center		Waxhaw, NC	54%	Harris Teeter	12/29/2011	$	13.95	million	84,357	9.5	years	97.2%
Tramway Crossing		Sanford, NC	54%	Food Lion	2/23/2012	$	5.50	million	62,382	3.6	years	93.7%
Westin Centre		Fayetteville, NC	54%	Food Lion	2/23/2012	$	6.05	million	66,890	3.2	years	97.9%
The Village at Glynn Place		Brunswick, GA	54%	Publix	4/27/2012	$	11.35	million	111,924	7.6	years	94.1%
Meadowthorpe Shopping Center		Lexington, KY	54%	Kroger	5/9/2012	$	8.55	million	87,384	3.0	years	95.6%
New Windsor Marketplace		Windsor, CO	54%	King Soopers⁽²⁾	5/9/2012	$	5.55	million	95,877	7.1	years	87.4%
Vine Street Square		Kissimmee, FL	54%	Walmart⁽³⁾	6/4/2012	$	13.65	million	120,699	6.3	years	100.0%
Northtowne Square		Gibsonia, PA	54%	Giant Eagle	6/19/2012	$	10.58	million	113,372	7.9	years	100.0%
Brentwood Commons		Bensenville, IL	54%	Dominick's⁽⁴⁾	7/5/2012	$	14.85	million	125,550	6.4	years	98.1%
Sidney Towne Center		Sidney, OH	54%	Kroger	8/2/2012	$	4.30	million	118,360	6.5	years	98.5%
Broadway Plaza		Tucson, AZ	54%	Sprouts	8/13/2012	$	12.68	million	83,612	5.1	years	96.8%
Richmond Plaza		Augusta, GA	54%	Kroger	8/30/2012	$	19.50	million	178,167	5.3	years	87.3%
Publix at Northridge		Sarasota, FL	54%	Publix	8/30/2012	$	11.50	million	65,320	9.7	years	84.1%
Baker Hill Center		Glen Ellyn, IL	100%	Dominick's⁽⁴⁾	9/6/2012	$	21.60	million	135,355	4.8	years	98.2%


⁽¹⁾	The contract purchase price excludes closing costs and acquisition costs.
⁽²⁾	King Soopers is an affiliate of Kroger.
⁽³⁾	The anchor tenant of Vine Street Square is a Walmart Neighborhood Market.
⁽⁴⁾	Dominick's is an affiliate of Safeway, Inc.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our condensed consolidated interim financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and required the application of significant judgment by management. As a result, these estimates are subject to a degree of uncertainty. There have been no changes to our significant accounting policies for the nine months ended September 30, 2012. For a summary of our significant accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2011.

Investment Property and Lease Intangibles—Real estate assets we have acquired are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method. The estimated useful lives for computing depreciation are generally 5-7 years for furniture, fixtures and equipment, 15 years for land improvements and 30 years for buildings and building improvements. Tenant improvements are amortized over the shorter of the respective lease term or the expected useful life of the asset. Major replacements that extend the useful life of the assets are capitalized, and maintenance and repair costs are expensed as incurred.

Acquisitions of properties are accounted for utilizing the acquisition method and, accordingly, the results of operations of acquired properties are included in our results of operations from their respective dates of acquisition. Estimates of future cash flows and other valuation techniques that we believe are similar to those used by independent appraisers are used to allocate the purchase price of each identifiable asset acquired and liabilities assumed such as land, buildings and improvements, equipment and identifiable intangible assets and liabilities, such as amounts related to in-place leases, acquired above- and below-market leases, tenant relationships, asset

retirement obligations, mortgage notes payable and any goodwill or gain on purchase. Acquisition-related costs are expensed as incurred. Values of buildings and improvements are determined on an as-if-vacant basis.

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

Acquired above- and below-market lease values are recorded based on the present value (using interest rates that reflect the risks associated with the leases acquired) of the difference between the contractual amounts to be paid pursuant to the in-place leases and management’s estimate of the market lease rates for the corresponding in-place leases. The capitalized above- and below-market lease values are amortized as adjustments to rental revenue over the remaining terms of the respective leases. Should a tenant terminate its lease, the unamortized portion of the in-place lease value is charged to amortization expense, and the unamortized portion of above- and below-market lease value is charged to rental revenue.

Management estimates the fair value of assumed mortgage notes payable based upon indications of then-current market pricing for similar types of debt with similar maturities. Assumed mortgage notes payable are initially recorded at their estimated fair value as of the assumption date, and the difference between such estimated fair value and the note’s outstanding principal balance is amortized over the life of the mortgage note payable as an adjustment to interest expense.

Revenue Recognition—We commence revenue recognition on our leases based on a number of factors. In most cases, revenue recognition under a lease begins when the lessee takes possession of or controls the physical use of the leased asset. Generally, this occurs on the lease commencement date. The determination of who is the owner, for accounting purposes, of the tenant improvements determines the nature of the leased asset and when revenue recognition under a lease begins. If we are the owner, for accounting purposes, of the tenant improvements, then the leased asset is the finished space and revenue recognition begins when the lessee takes possession of the finished space, typically when the improvements are substantially complete.

If we conclude that we are not the owner, for accounting purposes, of the tenant improvements (the lessee is the owner), then the leased asset is the unimproved space and any tenant improvement allowances funded under the lease are treated as lease incentives, which reduce revenue recognized over the term of the lease. In these circumstances, we begin revenue recognition when the lessee takes possession of the unimproved space to construct their own improvements. We consider a number of different factors in evaluating whether we or the lessee is the owner of the tenant improvements for accounting purposes. These factors include:

• whether the lease stipulates how and on what a tenant improvement allowance may be spent;

• whether the tenant or landlord retains legal title to the improvements;

• the uniqueness of the improvements;

• the expected economic life of the tenant improvements relative to the length of the lease; and

• who constructs or directs the construction of the improvements.

We recognize rental income on a straight-line basis over the term of each lease. The difference between rental income earned on a straight-line basis and the cash rent due under the provisions of the lease agreements is recorded as deferred rent receivable and is included as a component of accounts receivable. Due to the impact of the straight-line basis, rental income generally will be greater than the cash collected in the early years and decreases in the later years of a lease. 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 periodically review the collectability of outstanding receivables. Allowances will be taken for those balances that we deem to be uncollectible, including any amounts relating to straight-line rent receivables.

Reimbursements from tenants for recoverable real estate tax and operating expenses are accrued as revenue in the period in which the applicable 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 materially differ from the estimated reimbursements.

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.

Income Taxes—We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). Our qualification and taxation as a REIT depends on our ability, on a continuing basis, to meet certain organizational and operational qualification requirements imposed upon REITs by the Code. If we fail to qualify as a REIT for any reason in a taxable year, we will be subject to tax on our taxable income at regular corporate rates. We would not be able to deduct distributions paid to stockholders in any year in which we fail to qualify as a REIT. We will also be disqualified for the four taxable years following the year during which qualification was lost unless we are entitled to relief under specific statutory provisions.

Noncontrolling Interests—Noncontrolling interests in the condensed consolidated balance sheets represent the economic equity interests of the Joint Venture that are not owned by us. Noncontrolling interests in the condensed consolidated statements of equity represent contributions, distributions and allocated earnings to the group of international investors advised by CBRE Investors Global Multi Manager. Noncontrolling interests in earnings of the Joint Venture in the condensed consolidated statements of operations represents earnings (loss) allocated to noncontrolling interests based on the economic ownership percentage of the consolidated Joint Venture held by these investors.

Earnings Per Share—Earnings per share are calculated based on the weighted-average number of common shares outstanding during each period. Diluted earnings per share considers the effect of any potentially dilutive share equivalents, of which we had none for the three and nine months ended September 30, 2012 and 2011.

Impact of Recently Issued Accounting Pronouncements—In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. ASU 2011-04 clarifies some existing concepts, eliminates wording differences between U.S. GAAP and International Financial Reporting Standards (“IFRS”), and in some limited cases, changes some principles to achieve convergence between U.S. GAAP and IFRS. ASU 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. ASU 2011-04 was effective for us as of January 1, 2012. The adoption of this pronouncement did not materially impact our condensed consolidated interim financial statements.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of equity. ASU 2011-05 was effective for us as of January 1, 2012. The adoption of this pronouncement did not materially impact our condensed consolidated interim financial statements.

In August 2012, the FASB issued ASU 2012-03, Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22 (SEC Update). This update amends a number of SEC sections in the FASB Accounting Standards Codification as a result of (1) the issuance of SAB 114, (2) the issuance of SEC Final Rule 33-9250, and (3) corrections related to ASU 2010-22. ASU 2012-03 was effective upon issuance. The adoption of this pronouncement did not have a material impact on our condensed consolidated financial statements.

In October 2012, the FASB issued ASU 2012-04, Technical Corrections and Improvements. The amendments in this update cover a wide range of Topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. ASU 2012-04 will be effective for us as of January 1, 2013. The adoption of this pronouncement is not expected to have a material impact on our condensed consolidated financial statements.

3. EQUITY

General—We have the authority to issue a total of 180,000,000 shares of common stock with a par value of $0.01 per share and 10,000,000 shares of preferred stock, $0.01 par value per share. As of September 30, 2012, we had issued 8,644,356 shares of common stock generating gross cash proceeds of $84.8 million, and we had issued no shares of preferred stock. The holders of shares of the common stock are entitled to one vote per share on all matters voted on by stockholders, including election of the board of directors. Our charter does not provide for cumulative voting in the election of directors.

Dividend Reinvestment Plan—We have adopted the DRP that allows stockholders to have distributions invested in additional shares of our common stock at a price equal to $9.50 per share. Stockholders who elect to participate in the DRP, and who are subject to U.S. federal income taxation laws, will incur a tax liability on an amount equal to the fair value on the relevant distribution date of the shares of our common stock purchased with reinvested distributions, even though such stockholders have elected not to receive the distributions used to purchase those shares of common stock in cash. Distributions reinvested through the DRP for the three months

ended September 30, 2012 and 2011, were $351,000 and $38,000, respectively. Distributions reinvested through the DRP for the nine months ended September 30, 2012 and 2011, were $693,000 and $81,000, respectively.

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.

Repurchase of shares of common stock will be made monthly upon written notice received by us at least five days prior to the end of the applicable month. Stockholders may withdraw their repurchase request at any time up to five business days prior to the repurchase date.

The board of directors may, in its sole discretion, amend, suspend, or terminate the share repurchase program at any time. If the board of directors decides to amend, suspend or terminate the share repurchase program, stockholders will be provided with no less than 30 days’ written notice. During the three months ended September 30, 2012, there were no shares repurchased under the share repurchase program. During the nine months ended September 30, 2012, there were 2,500 shares repurchased for $24,625 under the share repurchase program for an average repurchase price of $9.85 per share. There were no shares submitted for repurchase during the three or nine months ended September 30, 2011.

2010 Long-Term Incentive Plan—We have adopted a 2010 Long-Term Incentive Plan which may be used to attract and retain officers, advisors, and consultants. We have not issued any shares under this plan as of September 30, 2012.

2010 Independent Director Stock Plan—We have also adopted an Amended and Restated 2010 Independent Director Stock Plan which may be used to offer independent directors an opportunity to participate in our growth through awards of shares of restricted common stock subject to time-based vesting. We have not issued any shares under this plan as of September 30, 2012.

4. FAIR VALUE MEASUREMENTS

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. ASC 820 emphasizes that fair value is intended to be a market-based measurement, as opposed to a transaction-specific measurement. Fair value is defined by ASC 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate the fair value. Assets and liabilities are measured using inputs from three levels of the fair value hierarchy, as follows:

Level 1—Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).

Level 3—Unobservable inputs, only used to the extent that observable inputs are not available, reflect our assumptions about the pricing of an asset or liability.

The following describes the methods we use to estimate the fair value of our financial assets and liabilities:

Cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued expenses—We consider the carrying values of these financial instruments to approximate fair value because of the short period of time between origination of the instruments and their expected realization.

Real estate investments—The purchase prices of the investment properties, including related lease intangible assets and liabilities, were allocated at estimated fair value based on Level 3 inputs, such as discount rates, capitalization rates, income and expense growth rates and current market rents and allowances, from a third party appraisal or as determined by management.

Mortgage loans payable —We estimate the fair value of our debt by discounting the future cash flows of each instrument at rates currently offered for similar debt instruments of comparable maturities by our lenders using Level 3 inputs. The discount rates used approximate current lending rates for loans or groups of loans with similar maturities and credit quality, ranging from 2.5% to 3.0% for variable rate debt and 3.25% to 5.0% for fixed rate debt, as of September 30, 2012, assuming the debt is outstanding through maturity and considering the debt’s collateral (if applicable). We have utilized market information as available or present value

techniques to estimate the amounts required to be disclosed. The carrying amount of our borrowings approximates their fair value as of September 30, 2012 and December 31, 2011.

Considerable judgment is necessary to develop estimated fair values of financial assets and liabilities. Accordingly, the estimates presented herein are not necessarily indicative of the amounts we could realize on disposition of the financial assets and liabilities.

5. REAL ESTATE ACQUISITIONS

For the nine months ended September 30, 2012, we acquired one wholly owned grocery-anchored retail center and acquired interests in 12 other grocery-anchored retail centers through the Joint Venture, for a combined purchase price of approximately $147.3 million, including $34.1 million of assumed debt with a fair value of $35.8 million. We allocated the purchase price of these properties to the fair value of the assets acquired and liabilities assumed as follows:

Category	Allocation
Land	$	43,540
Building and improvements		96,749
Acquired in-place leases		8,972
Acquired above-market leases		1,584
Acquired below-market leases		(3,524)

Total	$	147,321

The following information summarizes selected financial information from our combined results of operations, as if all of our acquisitions for 2011 and 2012 had been acquired on January 1, 2011.

We estimated that revenues, on a pro forma basis, for the three months ended September 30, 2012 and 2011, would have been approximately $6.4 million and $6.5 million, respectively, and our net loss attributable to Company stockholders, on a pro forma basis excluding acquisition-related expenses, would have been approximately $0.2 million and $0.5 million, respectively. The pro forma net loss per share excluding acquisition-related expenses would have been $0.03 and $0.07, respectively, for the three months ended September 30, 2012 and 2011.

We estimated that revenues, on a pro forma basis, for the nine months ended September 30, 2012 and 2011, would have been approximately $19.3 million and $19.3 million, respectively, and our net loss attributable to Company stockholders, on a pro forma basis excluding acquisition-related expenses of $3.4 million, would have been approximately $0.5 million and $1.4 million, respectively. The pro forma net loss per share excluding acquisition-related expenses would have been $0.07 and $0.20, respectively, for the nine months ended September 30, 2012 and 2011.

This pro forma information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transactions occurred at the beginning of the period, nor does it purport to represent the results of future operations.

6. ACQUIRED INTANGIBLE ASSETS

Acquired intangible lease assets consisted of the following:

			September 30,		December 31,
			2012		2011

	Acquired in-place leases, net of accumulated
		amortization of $1,547,000 and $318,000,
		respectively	$	10,960,000	$	3,169,000
	Acquired above-market leases, net of accumulated
		amortization of $1,229,000 and $489,000,
		respectively		4,474,000		3,630,000

	Total		$	15,434,000	$	6,799,000

Amortization expense recorded on the intangible assets for the three months ended September 30, 2012 and 2011 was $919,000 and
$195,000, respectively. Amortization expense recorded on the intangible assets for the nine months ended September 30, 2012 and
2011 was $1,969,000 and $476,000, respectively.

Estimated amortization expense of the respective acquired intangible lease assets as of September 30, 2012 for each of the five
succeeding calendar years is as follows:

	Year	In-Place Leases		Above Market Leases

	October 1 to December 31, 2012	$	732,000	$	295,000
	2013		3,030,000		1,207,000
	2014		2,893,000		1,177,000
	2015		2,055,000		956,000
	2016		1,384,000		431,000
	2017 and thereafter		866,000		408,000

	Total	$	10,960,000	$	4,474,000

The weighted-average amortization periods for acquired in-place lease and above-market lease intangibles are 5 years.

7. MORTGAGE LOANS PAYABLE

As of September 30, 2012, we had approximately $129.8 million of outstanding mortgage notes payable outstanding, including a below-market assumed debt adjustment of $1.6 million. As of December 31, 2011, we had approximately $46.8 million of outstanding mortgage notes payable outstanding. Each of the mortgage notes payable is secured by the respective property on which the debt was placed. Certain of the mortgage notes allow us to generally make additional principal payments on the loan and draw those amounts back, not to exceed the initial loan amount, as needed. As of September 30, 2012 and December 31, 2011, the weighted-average interest rate for the loans was 3.76% and 2.91%, respectively.

We hold $116.2 million of our debt obligations through the Joint Venture, in which we have a 54% interest, and $12.0 million through our Baker Hill loan. We also have an unsecured credit facility with $10.0 million of available funds, on which we have not drawn any funds as of September 30, 2012. As of September 30, 2012 and December 31, 2011, our leverage ratio, or the ratio of total debt, less cash and cash equivalents, to total real estate investments, at cost, was approximately 50.4% and 51.7%, respectively.

In conjunction with our acquisition of four real estate properties, we assumed debt of $34.1 million with a fair value of $35.8 million. The assumed debt market adjustment will be amortized over the remaining life of the loans. The amortization recorded on the assumed below-market debt adjustment was $69,000 and $82,000 for the three months and nine months ended September 30, 2012, respectively.

The following is a summary of our debt obligations as of September 30, 2012 and December 31, 2011:

		September 30, 2012				December 31, 2011
		Outstanding		Maximum		Outstanding		Maximum
		Principal		Loan		Principal		Loan
		Balance		Capacity		Balance		Capacity

Fixed rate mortgages payable	$	40,364,000	$	40,364,000	$	-	$	-
Variable rate mortgages payable		87,863,000		95,661,000		46,788,000		53,400,000
Unsecured credit facility		-		10,000,000		-		-
Assumed below-market debt adjustment		1,588,000		N/A		-		N/A

Total	$	129,815,000	$	146,025,000	$	46,788,000	$	53,400,000

Below is a listing of the mortgage loans payable with their respective principal payment obligations (in thousands) and weighted-
average interest rates:

		2012 ⁽¹⁾		2013		2014		2015		2016		Thereafter		Total

Maturing debt:⁽²⁾
	Fixed rate mortgages payable	$	178	$	738	$	16,815	$	490	$	9,695	$	12,448	$	40,364
	Variable rate mortgages payable		12,986		22,549		665		665		15,653		35,345		87,863
Total maturing debt		$	13,164	$	23,287	$	17,480	$	1,155	$	25,348	$	47,793	$	128,227

Weighted-average interest rate on debt:
	Fixed rate mortgages payable		6.5%		6.6%		7.5%		5.2%		5.9%		4.6%		6.2%
	Variable rate mortgages payable		3.1%		2.7%		2.6%		2.6%		2.8%		2.4%		2.7%
Total			3.1%		2.8%		7.3%		3.7%		4.0%		3.0%		3.8%

⁽¹⁾	Includes only October 1, 2012 through December 31, 2012.
⁽²⁾	The debt maturity table does not include any below-market debt adjustment, of which $1,588,000, net of accumulated
	amortization, was outstanding as of September 30, 2012.

As of September 30, 2012, we were in compliance with all debt covenants.

8. ACQUIRED BELOW-MARKET LEASE INTANGIBLES

Acquired below-market lease intangibles consisted of the following:

			September 30,		December 31,
			2012		2011

	Acquired below-market leases, net of accumulated
		amortization of $564,000 and $161,000,
		respectively	$	4,323,000	$	1,203,000

Amortization recorded on the intangible liabilities for the three months ended September 30, 2012 and 2011 was $211,000 and
$29,000, respectively. Amortization recorded on the intangible liabilities for the nine months ended September 30, 2012 and 2011
was $403,000 and $88,000, respectively.

Estimated amortization income of the intangible lease liabilities as of September 30, 2012 for each of the five succeeding
calendar years is as follows:

	Year	Below Market Leases

	October 1 to December 31, 2012	$	240,000
	2013		991,000
	2014		929,000
	2015		712,000
	2016		580,000
	2017 and thereafter		871,000

	Total	$	4,323,000

The weighted-average amortization period for below market lease intangibles is 5 years.

9. COMMITMENTS AND CONTINGENCIES

Sponsor Organization and Offering Costs

In addition to the accounts payable to affiliates, there are approximately $5.4 million of offering costs incurred by the Sub-advisor on our behalf that have not been charged to us. Organization and offering cost reimbursements may not exceed 1.5% of the gross proceeds raised through the continuous offering. Whether these costs incurred by the Sub-advisor will be billed is dependent upon the success of our offering and the discretion of the Sub-advisor.

Litigation

In the ordinary course of business, we may become subject to litigation or claims. There are no material legal proceedings pending, or known to be contemplated, against us.

Environmental Matters

In connection with the ownership and operation of real estate, we may be potentially liable for costs and damages related to environmental matters. We have not been notified by any governmental authority of any non-compliance, liability or other claim, and we are not aware of any other environmental condition that we believe will have a material impact on our condensed consolidated financial statements.

10. RELATED PARTY TRANSACTIONS

Advisory Agreement—Pursuant to our advisory agreement, the Advisor is entitled to specified fees for certain services, including managing our day-to-day activities and implementing our investment strategy. The Advisor has entered into a sub-advisory agreement with the Sub-advisor, which manages our day-to-day affairs and our portfolio of real estate investments, subject to the board’s supervision and certain major decisions requiring the consent of both the Advisor and Sub-advisor. The expenses to be reimbursed to the Advisor and Sub-advisor will be reimbursed in proportion to the amount of expenses incurred on our behalf by the Advisor and Sub-advisor, respectively.

Organization and Offering Costs—Under the terms of the advisory agreement, we are to reimburse on a monthly basis the Advisor, the Sub-advisor or their respective affiliates for cumulative organization and offering costs and future organization and offering costs they may incur on our behalf but only to the extent that the reimbursement would not exceed 1.5% of gross offering proceeds over the life of our offering. As of September 30, 2012, the Advisor, Sub-advisor and their affiliates have incurred approximately $7.2 million of organization and offering costs, and we have reimbursed $3.6 million of such costs, resulting in a net payable of $3.6 million. In addition, approximately $5.4 million of offering costs incurred by the Sub-advisor on our behalf has not been charged to us or been recorded in our condensed consolidated financial statements. Whether these costs incurred by the Sub-advisor will be billed is dependent upon the success of our offering and the discretion of the Sub-advisor. As of December 31, 2011, the Advisor, Sub-advisor or their affiliates had incurred $7.1 million of organization and offering costs which had not been reimbursed.

Acquisition Fee—We pay the Advisor an acquisition fee related to services provided in connection with the selection and purchase or origination of real estate and real estate-related investments. The acquisition fee is equal to 1.0% of the cost of investments we acquire or originate, including acquisition or origination expenses and any debt attributable to such investments for the same periods. We

incurred acquisition fees payable to the Advisor, Sub-advisor and their affiliates of $564,000 and $0, respectively, for the three months ended September 30, 2012 and 2011 in connection with our property acquisitions. We incurred acquisition fees payable to the Advisor, Sub-advisor and their affiliates of $900,000 and $104,000, respectively, for the nine months ended September 30, 2012 and 2011.

Asset Management Fee—We pay the Advisor an asset management fee for the asset management services it provides pursuant to the advisory agreement. The asset management fee, payable monthly in arrears (based on assets we held during the previous month) will be equal to 0.08333% of the sum of the cost of all real estate and real estate-related investments we own and of our investments in joint ventures, including certain expenses and any debt attributable to such investments. However, the Advisor reimburses all or a portion of the asset management fee for any applicable period to the extent that as of the date of the payment, our modified funds from operations (as defined in accordance with the then-current practice guidelines issued by the Investment Program Association with an additional adjustment to add back capital contribution amounts received from the Sub-advisor or an affiliate thereof, without any corresponding issuance of equity to the Sub-advisor or its affiliate), during the quarter were not at least equal to our declared distributions during the quarter. We cannot avoid payment of an asset management fee by raising our distribution rate beyond $0.65 per share on an annualized basis. Total asset management fees incurred for the three months ended September 30, 2012 and 2011 were $480,000 and $79,000, respectively, with $268,000 and $79,000 of these fees being waived or reimbursed by the Advisor and Sub-advisor. For the three months ended September 30, 2012, the net asset management fees of $212,000 were paid by the Non-Controlling Interests, as the amount of asset management fees for which we are responsible was waived or reimbursed to us by the Advisor and Sub-advisor pursuant to the advisory agreement between the Joint Venture and the Advisor. Total asset management fees incurred for the nine months ended September 30, 2012 and 2011 were $995,000 and $195,000, respectively, with $546,000 and $195,000 of these fees being waived or reimbursed by the Advisor and Sub-advisor. For the nine months ended September 30, 2012, the net asset management fees of $449,000 were paid by the Non-Controlling Interests, as the amount of asset management fees for which we are responsible was waived or reimbursed to us by the Advisor and Sub-advisor pursuant to the advisory agreement between the Joint Venture and the Advisor.

Financing Fee—We pay the Advisor or Sub-advisor a financing fee equal to 0.75% of all amounts made available under any loan or line of credit. We incurred financing fees payable to the Advisor, Sub-advisor and their affiliates of $304,000 and $0 for the three months ended September 30, 2012 and 2011, respectively. We incurred financing fees of $382,000 and $51,000 for the nine months ended September 30, 2012 and 2011, respectively.

Disposition Fee—For substantial assistance by the Advisor, Sub-advisor or any of their affiliates in connection with the sale of properties or other investments, we will pay the Advisor or its assignee 2.0% of the contract sales price of each property or other investment sold. The conflicts committee will determine whether the Advisor, Sub-advisor or their respective affiliates have provided substantial assistance to us in connection with the sale of an asset. Substantial assistance in connection with the sale of a property includes the Advisor’s or Sub-advisor’s preparation of an investment package for the property (including an investment analysis, rent rolls, tenant information regarding credit, a property title report, an environmental report, a structural report and exhibits) or such other substantial services performed by the Advisor or Sub-advisor in connection with a sale. However, if we sell an asset to an affiliate, our organizational documents will prohibit us from paying the Advisor a disposition fee. There were no disposition fees incurred during the three or nine months ended September 30, 2012 and 2011.

General and Administrative Expenses—The sponsors did not make any capital contributions to fund our general and administrative expenses during the three months ended September 30, 2012 and 2011. The sponsors provided $0 and $88,000, respectively, during the nine months ended September 30, 2012 and 2011, for certain of our general and administrative expenses as capital contributions. The sponsors have not received, and will not receive, any reimbursement for these contributions. The sponsors do not intend to make further capital contributions to continue to fund our general and administrative expenses. As of September 30, 2012, we owed the Advisor, Sub-advisor and their affiliates $8,000 for general and administrative expenses paid on our behalf. The amount payable to the Advisor, Sub-advisor and their affiliates as of December 31, 2011, for general and administrative expenses was $1,140,000. As of September 30, 2012, the Advisor, Sub-advisor and their affiliates have not allocated any portion of their employees’ salaries to general and administrative expenses.

Subordinated Share of Cash Flows—After investors who have not redeemed their shares have received a return of their net capital contributions and a 7.0% per year cumulative, non-compounded return, the Advisor is entitled to receive a total of 15.0% of our net cash flows, whether from continuing operations, net sale proceeds or otherwise. This fee is payable only if our shares are not listed on a national securities exchange.

Subordinated Incentive Fee—Upon the listing of our common stock on a national securities exchange, we will pay to the Advisor a fee equal to 15.0% of the amount by which the market value of the outstanding stock plus distributions paid by us prior to listing to investors who have not redeemed their shares exceeds the sum of the total amount of capital raised from investors who have not redeemed their shares and the amount of cash flow necessary to generate a 7.0% per year cumulative, non-compounded return to those investors.

Property Manager—All of our real properties are managed and leased by Phillips Edison & Company Ltd. (the “Property Manager”), an affiliated property manager. The Property Manager is wholly owned by our Phillips Edison sponsor and was organized on September 15, 1999. The Property Manager also manages real properties acquired by the Phillips Edison affiliates or other third parties.

We pay to the Property Manager monthly property management fees equal to 4.5% of the gross cash receipts of the properties managed by the Property Manager. In the event that we contract directly with a non-affiliated third-party property manager with respect to a property, we will pay the Property Manager a monthly oversight fee equal to 1.0% of the gross revenues of the property managed. In addition to the property management fee or oversight fee, if the Property Manager provides leasing services with respect to a property, we will pay the Property Manager leasing fees in an amount equal to the leasing fees charged by unaffiliated persons rendering comparable services in the same geographic location of the applicable property. We will reimburse the costs and expenses incurred by the Property Manager on our behalf, including legal, travel and other out-of-pocket expenses that are directly related to the management of specific properties, as well as fees and expenses of third-party accountants.

If we engage the Property Manager to provide construction management services with respect to a particular property, we will pay a construction management fee in an amount that is usual and customary for comparable services rendered to similar projects in the geographic market of the property.

The Property Manager hires, directs and establishes policies for employees who have direct responsibility for the operations of each real property it manages, which may include, but is not limited to, on-site managers and building and maintenance personnel. Certain employees of the Property Manager may be employed on a part-time basis and may also be employed by the Sub-advisor or certain of its affiliates. The Property Manager also directs the purchase of equipment and supplies and will supervise all maintenance activity.

Transactions involving the Property Manager consisted of the following:

	For the Three Months Ended				For the Nine Months Ended				Unpaid Amount as of
	September 30,				September 30,				September 30,		December 31,
	2012		2011		2012		2011		2012		2011

Property management fees	$	212,000	$	41,000	$	450,000	$	100,000	$	88,000	$	21,000
Leasing commissions		71,000		-		157,000		8,000		10,000		-
Construction management fees		10,000		1,000		20,000		1,000		11,000		2,000
Other fees and reimbursements		89,000		11,000		145,000		29,000		32,000		4,000

Total	$	382,000	$	53,000	$	772,000	$	138,000	$	141,000	$	27,000

Dealer Manager—Our dealer manager is Realty Capital Securities, LLC (the “Dealer Manager”). The Dealer Manager is a member firm of the Financial Industry Regulatory Authority, Inc. (“FINRA”) and was organized on August 29, 2007. The Dealer Manager is indirectly wholly owned by our AR Capital sponsor and provides certain sales, promotional and marketing services in connection with the distribution of the shares of common stock offered under our offering. Excluding shares sold pursuant to the “friends and family” program, the Dealer Manager is generally paid a sales commission equal to 7.0% of the gross proceeds from the sale of shares of the common stock sold in the primary offering and a dealer manager fee equal to 3.0% of the gross proceeds from the sale of shares of the common stock sold in the primary offering.

Dealer manager fees incurred during the three months ended September 30, 2012 were $686,000, of which $229,000 was reallowed to participating broker-dealers. Selling commissions incurred during the three months ended September 30, 2012 were $2,257,000, all of which was reallowed to participating broker-dealers. Dealer manager fees incurred during the three months ended September 30, 2011, were $122,000, $33,000 of which was reallowed to participating broker-dealers. Selling commissions incurred during the three months ended September 30, 2011 were $353,000, all of which was reallowed to participating broker-dealers.

Dealer manager fees incurred during the nine months ended September 30, 2012 were $1,338,000, of which $439,000 was reallowed to participating broker-dealers. Selling commissions incurred during the nine months ended September 30, 2012 were $4,246,000, all of which was reallowed to participating broker-dealers. Dealer manager fees incurred during the nine months ended September 30, 2011, were $160,000, $33,000 of which was reallowed to participating broker-dealers. Selling commissions incurred during the nine months ended September 30, 2011 were $453,000, all of which was reallowed to participating broker-dealers.

Share Purchases by Sub-advisor—The Sub-advisor has agreed to purchase on a monthly basis sufficient shares sold in our public offering such that the total shares owned by the Sub-advisor is equal to at least 0.10% of our outstanding shares (excluding shares

issued after the commencement of, and outside of, the initial public offering) at the end of each immediately preceding month. The Sub-advisor will purchase shares at a purchase price of $9.00 per share, reflecting no dealer manager fee or selling commissions being paid on such shares. The Sub-advisor may not sell any of these shares while serving as the Sub-advisor.

As of September 30, 2012, the Sub-advisor owns 22,541 shares of our common stock, or approximately 0.26% of our outstanding common stock.

11. ECONOMIC DEPENDENCY

We are dependent on the Advisor, Sub-advisor, the Property Manager, the Dealer Manager and their respective affiliates for certain services that are essential to us, including the sale of our shares of common stock, asset acquisition and disposition decisions, advances or contributions for distributions, bridge financing, and other general and administrative responsibilities. In the event that the Advisor, the Sub-advisor, the Property Manager and/or the Dealer Manager are unable to provide such services, we would be required to find alternative service providers or sources of capital.

As of September 30, 2012 , we owe the Advisor, the Sub-advisor and their respective affiliates approximately $4.0 million for offering
and organization expenses and asset management, property management, and other fees payable.

Offering and organization expenses payable	$	3.6	million

Asset management, property management, and other fees payable		0.4	million

Total due as of September 30, 2012	$	4.0	million

In addition, approximately $5.4 million of offering costs incurred by the Sub-advisor on our behalf has not been charged to us or recorded in our consolidated financial statements. Whether these costs will be billed to us in the future will depend on the success of our offering and the discretion of the Sub-advisor. The sponsors provided $0 and $88,000, respectively, during the three and nine months ended September 30, 2011 and $228,000 since inception for certain of our general and administrative expenses as capital contributions. The sponsors have not received, and will not receive, any reimbursement for these contributions. There was no sponsor contribution for the three or nine months ended September 30, 2012. Our sponsors do not intend to make further capital contributions to continue to fund certain of our general and administrative expenses.

12. FUTURE MINIMUM RENTS

Our operating leases’ terms and expirations vary. The leases frequently have provisions to extend the lease agreement and other terms and conditions as negotiated. We retain substantially all of the risks and benefits of ownership of the real estate assets leased to tenants.

Approximate future rentals to be received under non-cancelable operating leases in effect at September 30, 2012, assuming no new or
renegotiated leases or option extensions on lease agreements, are as follows:

	Year	Amount

	October 1 to December 31, 2012	$	4,864,000
	2013		18,866,000
	2014		17,220,000
	2015		14,908,000
	2016		13,519,000
	2017 and thereafter		63,116,000

	Total	$	132,493,000

The following table sets forth information regarding the tenant comprising ten percent or more of the aggregate annualized
effective rent of our 20 shopping centers as of September 30, 2012:

	Publix	14.0%

13. SUBSEQUENT EVENTS

Acquisition of New Prague Commons

On October 12, 2012, the Joint Venture acquired a 100% interest in a Coborn’s-anchored shopping center, New Prague Commons, located in New Prague, Minnesota, a suburb of Minneapolis-St.Paul, for a purchase price of approximately $10.2 million. This acquisition was financed with the proceeds from a term loan agreement with U.S. Bank, proceeds from our initial public offering, and cash provided by the Non-Controlling Interests. The 59,948 square foot property is 98.2% occupied.

Acquisition of Brook Park Plaza

On October 23, 2012, we acquired a 100% interest in a Giant Eagle-anchored shopping center, Brook Park Plaza, located in Brook Park, Ohio, a suburb of Cleveland, for a purchase price of approximately $10.1 million. This acquisition was partially financed through the assumption of existing mortgage indebtedness. The remainder of the purchase price was funded with proceeds from our ongoing public offering. The 157,459 square foot property is 87.8% occupied.

Sale of Shares of Common Stock

From October 1, 2012 through October 31, 2012, we raised approximately $16.3 million through the issuance of 1,634,639 shares of common stock under our offering. As of November 1, 2012, approximately 139.6 million shares remained available for sale to the public under our offering, exclusive of shares available under the DRP.

Distributions

On October 1, 2012, we paid a distribution equal to a daily amount of $0.00178082 per share of common stock outstanding for stockholders of record for the period from September 1, 2012 through September 30, 2012. The total gross amount of the distribution was approximately $431,000, with $168,000 being reinvested in the DRP, for a net cash distribution of $263,000.

On November 1, 2012, we paid a distribution equal to a daily amount of $0.00178082 per share of common stock outstanding for stockholders of record for the period from October 1, 2012 through October 31, 2012. The total gross amount of the distribution was approximately $524,000, with $214,000 being reinvested in the DRP, for a net cash distribution of $310,000.

On September 13, 2012, our board of directors authorized distributions to the stockholders of record at the close of business each day in the period commencing November 1, 2012 through and including November 30, 2012. On October 9, 2012, our board of directors authorized distributions to the stock holders of record at the close of business each day in the period commencing December 1, 2012 through and including December 31, 2012. The authorized distributions will equal an amount of $0.00178082 per share of common stock, par value $0.01 per share. This equates to a 6.50% annualized yield when calculated on a $10.00 per share purchase price. A portion of each distribution is expected to constitute a return of capital for tax purposes. Distributions for the month of November will be paid on such day of December 2012 as our President may determine, and distributions for the month of December will be paid on such day of January 2013 as our President may determine.

Payoff of Debt Obligations

On October 30, 2012 and November 5, 2012, the Joint Venture paid off the remaining balances due on the mortgage loans for Lakeside Plaza and Snow View Plaza, respectively. The mortgage payable balances for Lakeside Plaza and Snow View Plaza prior to the payments were $5.37 million and $7.52 million, respectively. The Lakeside Plaza and Snow View Plaza loans were set to mature on December 10, 2012 and December 12, 2012, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q of Phillips Edison – ARC Shopping Center REIT Inc. (“Phillips Edison – ARC Shopping Center REIT,” “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 and Section 21E of the Securities Exchange Act of 1934. We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in those acts. Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, including known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the U.S. Securities and Exchange Commission (“SEC”). We make no representations or warranties (express or implied) about the accuracy of any such forward-looking statements contained in this Quarterly Report on Form 10-Q, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Any such forward-looking statements are subject to risks, uncertainties, and other factors and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual conditions, our ability to accurately anticipate results expressed in such forward-looking statements, including our ability to generate positive cash flow from operations, make distributions to stockholders, and maintain the value of our real estate properties, may be significantly hindered. See Item 1A in Part II of this Form 10-Q and Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2011 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.

Overview

We are offering to the public pursuant to a registration statement $1.785 billion in shares of common stock in our initial public offering on a “best efforts” basis. Our offering consists of a primary offering of $1.5 billion in shares offered to investors at a price of $10.00 per share, with discounts available for certain categories of purchasers, and $285 million in shares offered to stockholders pursuant to a dividend reinvestment plan (the “DRP”) at a price of $9.50 per share. We have the right to reallocate the shares of common stock offered between the primary offering and the DRP.

As of September 30, 2012, we had issued 8,644,356 shares of common stock, including 89,658 shares issued through the DRP, generating gross cash proceeds of $84.8 million.

Our advisor is AR Capital, LLC (formerly American Realty Capital II Advisors, LLC) (the “Advisor”), a limited liability company that was organized in the State of Delaware on December 28, 2009 and that is indirectly wholly owned by American Realty Capital II, LLC (the “AR Capital sponsor”). Under the terms of the advisory agreement between the Advisor and us, the Advisor is responsible for the management of our day-to-day activities and the implementation of our investment strategy. The Advisor has delegated most of its duties under the advisory agreement, including the management of our day-to-day operations and our portfolio of real estate assets, to Phillips Edison NTR LLC (the “Sub-advisor”), which is indirectly wholly owned by Phillips Edison Limited Partnership (the “Phillips Edison sponsor”). Notwithstanding such delegation to the Sub-advisor, the Advisor retains ultimate responsibility for the performance of all the matters entrusted to it under the advisory agreement.

We invest primarily in well-occupied grocery-anchored neighborhood and community shopping centers having a mix of creditworthy national and regional retailers selling necessity-based goods and services, in strong demographic markets throughout the United States. In addition, we may invest in other retail properties including power and lifestyle shopping centers, multi-tenant shopping centers, free-standing single-tenant retail properties, and other real estate and real estate-related loans and securities depending on real estate market conditions and investment opportunities that we determine are in the best interests of our stockholders. We expect that retail properties primarily would underlie or secure the real estate-related loans and securities in which we may invest.

On September 20, 2011, we entered into a joint venture with a group of institutional international investors advised by CBRE Investors Global Multi Manager (each a “Non-Controlling Interest”). The joint venture is in the form of PECO-ARC Institutional Joint Venture I., L.P., a Delaware limited partnership (the “Joint Venture”). We, through an indirectly wholly owned subsidiary, hold an approximate 54% interest in the Joint Venture. We serve as the general partner and manage the operations of the Joint Venture. The Non-Controlling Interests hold the remaining approximate 46% interest.

The Joint Venture intends to invest in grocery-anchored neighborhood and community shopping centers with acquisition costs of no more than $20 million per property. We have committed to contribute approximately $58.7 million to the Joint Venture, and the Non-Controlling Interests have committed to contribute $50 million in cash. Through September 30, 2012, the Joint Venture holds 19 properties. As of September 30, 2012, we have contributed approximately $46.7 million, in the form of equity interests in six wholly owned real estate properties and cash, to the Joint Venture, and the Non-Controlling Interests have contributed approximately $39.8 million in cash to the Joint Venture. Until March 20, 2013 (or the investment of all of the capital that is to be contributed to the Joint Venture), neither we nor the Sub-advisor or its affiliates may acquire properties meeting the Joint Venture’s investment strategy, except through the Joint Venture.

We owned fee simple interests in 20 real estate properties, 19 of which we owned through the Joint Venture, acquired
from third parties unaffiliated with us, the Advisor, or the Sub-advisor as of September 30, 2012:

										Average
						Contract			Rentable	Remaining
			Ownership		Date	Purchase			Square	Lease Term		%
Property Name		Location	Interest	Anchor	Acquired	Price⁽¹⁾			Footage	in Years		Leased
Lakeside Plaza		Salem, VA	54%	Kroger	12/10/2010	$	8.75	million	82,798	4.4	years	100.0%
Snow View Plaza		Parma, OH	54%	Giant Eagle	12/15/2010	$	12.30	million	100,460	6.8	years	94.0%
St. Charles Plaza		Haines City, FL	54%	Publix	6/10/2011	$	10.10	million	65,000	9.4	years	96.3%
Centerpoint		Easley, SC	54%	Publix	10/14/2011	$	6.85	million	72,287	9.8	years	84.7%
Southampton Village		Tyrone, GA	54%	Publix	10/14/2011	$	8.35	million	77,956	8.0	years	86.5%
Burwood Village Center		Glen Burnie, MD	54%	Food Lion	11/9/2011	$	16.60	million	105,834	5.7	years	100.0%
Cureton Town Center		Waxhaw, NC	54%	Harris Teeter	12/29/2011	$	13.95	million	84,357	9.5	years	97.2%
Tramway Crossing		Sanford, NC	54%	Food Lion	2/23/2012	$	5.50	million	62,382	3.6	years	93.7%
Westin Centre		Fayetteville, NC	54%	Food Lion	2/23/2012	$	6.05	million	66,890	3.2	years	97.9%
The Village at Glynn Place		Brunswick, GA	54%	Publix	4/27/2012	$	11.35	million	111,924	7.6	years	94.1%
Meadowthorpe Shopping Center		Lexington, KY	54%	Kroger	5/9/2012	$	8.55	million	87,384	3.0	years	95.6%
New Windsor Marketplace		Windsor, CO	54%	King Soopers⁽²⁾	5/9/2012	$	5.55	million	95,877	7.1	years	87.4%
Vine Street Square		Kissimmee, FL	54%	Walmart⁽³⁾	6/4/2012	$	13.65	million	120,699	6.3	years	100.0%
Northtowne Square		Gibsonia, PA	54%	Giant Eagle	6/19/2012	$	10.58	million	113,372	7.9	years	100.0%
Brentwood Commons		Bensenville, IL	54%	Dominick's⁽⁴⁾	7/5/2012	$	14.85	million	125,550	6.4	years	98.1%
Sidney Towne Center		Sidney, OH	54%	Kroger	8/2/2012	$	4.30	million	118,360	6.5	years	98.5%
Broadway Plaza		Tucson, AZ	54%	Sprouts	8/13/2012	$	12.68	million	83,612	5.1	years	96.8%
Richmond Plaza		Augusta, GA	54%	Kroger	8/30/2012	$	19.50	million	178,167	5.3	years	87.3%
Publix at Northridge		Sarasota, FL	54%	Publix	8/30/2012	$	11.50	million	65,320	9.7	years	84.1%
Baker Hill Center		Glen Ellyn, IL	100%	Dominick's⁽⁴⁾	9/6/2012	$	21.60	million	135,355	4.8	years	98.2%
_______________________
⁽¹⁾	The contract purchase price excludes closing costs and acquisition costs.
⁽²⁾	King Soopers is an affiliate of Kroger.
⁽³⁾	The anchor tenant of Vine Street Square is a Walmart Neighborhood Market.
⁽⁴⁾	Dominick's is an affiliate of Safeway, Inc.

The terms and expirations of our operating leases vary. The leases frequently contain provisions for the extension of the lease
agreement and other terms and conditions as negotiated. We retain substantially all of the risks and benefits of ownership of the real
estate assets leased to tenants.

The following table lists, on an aggregate basis, all of the scheduled lease expirations after September 30, 2012 over each of the years
ending December 31, 2012 and thereafter for our 20 shopping centers. The table shows the approximate rentable square feet and
annualized effective rent represented by the applicable lease expirations:

		Number of			% of Total Portfolio
		Expiring		Annualized	Annualized	Leased Rentable	% of Rentable
	Year	Leases		Effective Rent⁽¹⁾	Effective Rent	Square Feet Expiring	Square Feet Expiring
	2012	14	$	317,805	1.6%	20,482	1.1%
	2013	45		1,576,327	8.0%	98,997	5.4%
	2014	55		2,409,077	12.3%	201,086	10.9%
	2015	45		1,834,605	9.3%	125,141	6.8%
	2016	38		1,486,574	7.6%	144,627	7.8%
	2017	35		1,342,113	6.8%	131,073	7.1%
	2018	8		1,342,709	6.8%	104,158	5.6%
	2019	13		1,619,188	8.2%	172,513	9.3%
	2020	7		1,010,525	5.1%	83,376	4.5%
	2021	8		700,813	3.6%	122,985	6.6%
	Thereafter	20		6,028,117	30.7%	646,521	34.9%

⁽¹⁾	We calculate annualized effective rent as monthly contractual rent as of September 30, 2012 multiplied by 12 months, less any tenant concessions.

The following table sets forth information regarding the tenants comprising ten percent or more of the aggregate annualized

effective rent or occupying ten percent or more of the aggregate rentable square footage at our 20 shopping centers as of

September 30, 2012:

% of Total

Portfolio

% of Total

Annualized

Rentable

Portfolio

Effective

Square

Lease

Tenant Name/Property

Tenant Industry

Rent⁽¹⁾

Rent

Footage

Expiration

Publix Super Markets/St.

Retail - Grocery Store

2,754,879

14.0%

243,630

13.2%

⁽²⁾

Charles Plaza,

Southampton Village,

Publix at Northridge,

Centerpoint, and The

Village at Glynn Place

Kroger/Lakeside Plaza,

Retail - Grocery Store

1,352,042

6.9%

300,737

16.2%

⁽³⁾

Meadowthorpe Shopping

Center, New Windsor

Market Place, Richmond

Plaza, and Sidney

Towne Center

⁽¹⁾

We calculate annualized effective rent as monthly contractual rent as of September 30, 2012 multiplied by 12 months, less any

tenant concessions.

⁽²⁾

Publix’s leases at St. Charles Plaza, Southampton Village, Publix at Northridge, Centerpoint, and The Village at Glynn Place expire in

October 2027, December 2023, December 2023, January 2023, and December 2022, respectively. Publix has seven options to extend

the term of its lease at St. Charles Plaza by five years each. Publix has six options to extend the term of its lease at Southampton Village

by five years each. Publix has eight options to extend the term of its lease at Publix at Northridge by five years each. Publix has six options

to extend the term of its lease at Centerpoint by five years each. Publix has four options to extend the term of its lease at The Village

at Glynn Place by five years each.

⁽³⁾

Kroger’s leases at Lakeside Plaza, Meadowthorpe Shopping Center, New Windsor Marketplace, Richmond Plaza, and Sidney Towne Center

expire in January 2019, February 2017, October 2028, December 2014, and September 2021, respectively. Kroger has five options to extend

the term of its lease at Lakeside Plaza by five years each. Kroger has four options to extend the term of its lease at Meadowthorpe Shopping

Center by five years each. Kroger (King Soopers) has a ground lease with ten options to extend the term at New Windsor Marketplace by

five years each. Kroger has five options to extend the term of its lease at Richmond Plaza by five years each. Kroger has six options to extend

the term of its lease at Sidney Towne Center by five years each.

No material tenant credit issues have been identified at this time. As of September 30, 2012, we had no material current tenant rent

balances outstanding over 90 days.

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, and the creditworthiness of specific tenants. 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:

					Annualized	% of
		Leased	% of Leased		Effective	Annualized
	Tenant Type	Square Feet	Square Feet		Rent⁽¹⁾	Effective Rent
	Grocery anchor	1,029,591	56%	$	8,635,572	44%
	National & regional	526,557	28%		6,744,752	34%
	Local	294,811	16%		4,287,528	22%
		1,850,959	100%	$	19,667,852	100%

⁽¹⁾	We calculate annualized effective rent as monthly contractual rent as of September 30, 2012 multiplied by 12 months, less any
	tenant concessions.

The following table presents the composition of our portfolio by tenant industry:

				Annualized		% of
		Leased	% of Leased	Effective		Annualized
	Tenant Industry	Square Feet	Square Feet	Rent⁽¹⁾		Effective Rent
	Grocery	1,029,591	56%	$	8,635,572	44%
	Retail Stores	339,522	18%		3,776,876	19%
	Services	305,967	16%		4,419,053	22%
	Restaurant	170,019	9%		2,749,895	14%
	Government	5,860	1%		86,456	1%
		1,850,959	100%	$	19,667,852	100%

⁽¹⁾	We calculate annualized effective rent as monthly contractual rent as of September 30, 2012 multiplied by 12 months, less any
	tenant concessions.

The following table presents our grocery-anchor tenants by the amount of square footage leased by each tenant:

					% of
				Leased	Leased		Annualized	% of
		Credit	Tenant	Square	Square		Effective	Annualized
	Tenant	Rating⁽¹⁾	Industry	Feet	Feet		Rent⁽²⁾	Effective Rent
	Kroger	BBB	Retail - Grocery Store	300,737	16.1%	$	1,352,042	6.9%
	Publix	NR	Retail - Grocery Store	243,630	13.2%		2,754,879	14.0%
	Giant Eagle⁽³⁾	NR/BBB	Retail - Grocery Store	144,648	7.8%		1,171,857	6.0%
	Dominick's⁽⁴⁾	BBB	Retail - Grocery Store	137,159	7.4%		1,632,099	8.3%
	Food Lion⁽⁵⁾	NR/BBB-	Retail - Grocery Store	95,665	5.2%		861,965	4.4%
	Harris Teeter	NR	Retail - Grocery Store	48,756	2.6%		400,000	2.0%
	Walmart⁽⁶⁾	AA	Retail - Grocery Store	31,979	1.7%		225,000	1.1%
	Sprouts Farmers Market	B+	Retail - Grocery Store	28,217	1.6%		271,730	1.4%
	All other tenants		Retail/ Restaurant/Services	820,168	44.4%		10,998,280	55.9%
				1,850,959	100.0%	$	19,667,852	100.0%

⁽¹⁾	A credit rating of NR signifies that the tenant's credit has not been rated by a credit agency.
⁽²⁾	We calculate annualized effective rent as monthly contractual rent as of September 30, 2012 multiplied by 12 months, less any
	tenant concessions.
⁽³⁾	The Giant Eagle lease at Snow View Plaza is guaranteed by Koninklijke Ahold N.V., which has an S&P credit rating of BBB.
⁽⁴⁾	Dominick's is an affiliate of Safeway, Inc., which has an S&P credit rating of BBB.
⁽⁵⁾	The Food Lion leases at Tramway Crossing and Westin Centre are guaranteed by Delhaize Group S.A., which has an
	S&P credit rating of BBB-.
⁽⁶⁾	The Walmart store at Vine Street Square is a Walmart Neighborhood Market.

Results of Operations

Overview

As we owned only three properties during the three- and nine-month periods ended September 30, 2011, virtually all differences when comparing that period to the three months and nine months ended September 30, 2012, are the result of the 17 properties acquired since September 30, 2011.

Summary of Operating Activities for the Three Months Ended September 30, 2012 and 2011

Total revenues for the three months ended September 30, 2012 were $5,148,000 with rental income of $4,044,000. Other revenues, largely comprised of tenant reimbursements, were $1,104,000. Total revenues for the three months ended September 30, 2011 were $839,000 with rental income of $634,000. Other revenues were $205,000.

Property operating costs were $785,000 for the three months ended September 30, 2012. The significant items comprising this expense were common area maintenance of $428,000 and property management fees paid to an affiliate of the Sub-advisor of $212,000. Property operating costs were $154,000 for the three months ended September 30, 2011. The significant items comprising this expense were common area maintenance of $70,000 and property management fees paid to an affiliate of the Sub-advisor of $41,000.

Real estate taxes were $674,000 and $123,000, respectively, for the three months ended September 30, 2012 and 2011.

General and administrative expenses were $509,000 and $212,000, respectively, for the three months ended September 30, 2012 and 2011. These amounts were comprised largely of audit and tax fees, asset management fees (2012 only), legal fees, board-related expenses and insurance expense. In addition to the acquisition of 17 properties since September 30, 2011, the primary reason for the increase in general and administrative expenses is an increase in asset management fees paid by the Non-Controlling Interests. As of September 30, 2012, the Advisor, Sub-advisor and their affiliates have not allocated any portion of their employees’ salaries to general and administrative expenses.

Under the terms of our advisory agreement, a waiver of all or a portion of the asset management fee will occur for any applicable period to the extent that, as of the date of the payment, our modified funds from operations (as defined in accordance with the then-current practice guidelines issued by the Investment Program Association with an additional adjustment to add back capital contribution amounts received from the Sub-advisor or an affiliate thereof without any corresponding issuance of equity to the Sub-advisor or affiliate) during the quarter were not at least equal to our declared distributions during the quarter, provided that the distribution rate during such quarter was no more than $0.65 per share on an annualized basis.

Asset management fees were $480,000 for the three months ended September 30, 2012, but $268,000 of these fees were waived by the Advisor and Sub-advisor pursuant to the advisory agreement provision detailed in the previous paragraph. For the three months ended September 30, 2012, the net asset management fees of $212,000 were paid by the Non-Controlling Interests, as the amount of asset management fees for which we are responsible was waived or reimbursed to us by the Advisor and Sub-advisor pursuant to the advisory agreement between the Joint Venture and the Advisor. Asset management fees were $79,000 for the three months ended September 30, 2011, but were waived by the Advisor and Sub-advisor. Acquisition-related expenses were $1,097,000 for the three months ended September 30, 2012. Included in these acquisition-related expenses were $564,000 of acquisition fees paid to the Advisor and Sub-advisor. Acquisition-related expenses were $246,000 for the three months ended September 30, 2011. Included in these acquisition-related expenses were expenses related to the formation of the Joint Venture, and approximately $49,000 of expense was incurred for acquisitions that did not close during the quarter ended September 30, 2011.

Depreciation and amortization expense for the three months ended September 30, 2012 and 2011, respectively, was $2,507,000 and $345,000.

Interest expense was $902,000 and $199,000, respectively, for the three months ended September 30, 2012 and 2011.

Our net loss attributable to our stockholders was $1,036,000 and $440,000, respectively, for the three months ended September 30, 2012 and 2011.

Summary of Operating Activities for the Nine Months Ended September 30, 2012 and 2011

Total revenues for the nine months ended September 30, 2012 were $10,468,000 with rental income of $8,255,000. Other revenues, largely comprised of tenant reimbursements, were $2,213,000. Total revenues for the nine months ended September 30, 2011 were $2,062,000 with rental income of $1,575,000 and other revenues of $487,000.

Property operating costs were $1,701,000 for the nine months ended September 30, 2012. The significant items comprising this expense were common area maintenance of $942,000 and property management fees paid to an affiliate of the Sub-advisor of $450,000. Property operating costs were $358,000 for the nine months ended September 30, 2011. The significant items comprising this expense were common area maintenance of $173,000 and property management fees paid to an affiliate of the Sub-advisor of $100,000.

Real estate taxes were $1,295,000 and $330,000, respectively, for the nine months ended September 30, 2012 and 2011.

General and administrative expenses were $1,178,000 and $588,000, respectively, for the nine months ended September 30, 2012 and 2011. These amounts were comprised largely of audit and tax fees, asset management fees (2012 only), legal fees, board-related expenses and insurance expense. In addition to the acquisition of 17 properties since September 30, 2011, the primary reason for the increase in general and administrative expenses is an increase in asset management fees paid by the Non-Controlling Interests. Our sponsors also provided $88,000 for certain of our general and administrative expenses as a capital contribution during the nine months ended September 30, 2011. Our sponsors have not received, and will not receive, any reimbursement for this contribution. Our sponsors do not intend to contribute monies to fund future expenses. There was no such capital contribution for the nine months ended September 30, 2012. As of September 30, 2012, the Advisor, Sub-advisor and their affiliates have not allocated any portion of their employees’ salaries to general and administrative expenses.

Under the terms of our advisory agreement, a waiver of all or a portion of the asset management fee will occur for any applicable period to the extent that, as of the date of the payment, our modified funds from operations, (as defined in accordance with the then-current practice guidelines issued by the Investment Program Association with an additional adjustment to add back capital contribution amounts received from the Sub-advisor or an affiliate thereof without any corresponding issuance of equity to the Sub-advisor or affiliate), during the quarter were not at least equal to our declared distributions during the quarter, provided that the distribution rate during such quarter was no more than $0.65 per share on an annualized basis.

Asset management fees were $995,000 for the nine months ended September 30, 2012, but $546,000 of these fees were waived by the Advisor and Sub-advisor pursuant to the advisory agreement provision detailed in the previous paragraph. For the nine months ended September 30, 2012, the net asset management fees of $449,000 were paid by the Non-Controlling Interests, as the amount of asset management fees for which we are responsible was waived or reimbursed to us by the Advisor and Sub-advisor pursuant to the advisory agreement between the Joint Venture and the Advisor. Asset management fees were $195,000 for the nine months ended September 30, 2011, but were waived by the Advisor and Sub-advisor. Acquisition-related expenses were $2,416,000 for the nine months ended September 30, 2012. Included in these acquisition-related expenses were $900,000 of acquisition fees paid to the Advisor and Sub-advisor and $148,000 of expense incurred for acquisitions that did not close during the period. Acquisition-related expenses were $740,000 for the nine months ended September 30, 2011. Included in these acquisition-related expenses were expenses related to the December 2010 acquisitions of Lakeside Plaza and Snow View Plaza, the June 2011 acquisition of St. Charles Plaza, expenses related to the formation of the Joint Venture and approximately $138,000 of expenses incurred for acquisitions that did not close.

Depreciation and amortization expense for the nine months ended September 30, 2012 and 2011, respectively, was $5,079,000 and $853,000.

Interest expense was $1,771,000 and $486,000, respectively, for the nine months ended September 30, 2012 and 2011. Included in the interest expense for the nine months ended September 30, 2011, was $3,000 related to a loan provided to us by the Sub-advisor.

Our net loss attributable to our stockholders was $2,099,000 and $1,293,000, respectively, for the nine months ended September 30, 2012 and 2011.

Liquidity and Capital Resources

General

Our principal demands for funds are for real estate and real estate-related investments and the payment of acquisition-related expenses, operating expenses, distributions to stockholders and principal and interest on our outstanding indebtedness. Generally, we expect cash needed for items other than acquisitions and acquisition-related expenses to be generated from operations and our current investments. The sources of our operating cash flows are primarily driven by the rental income received from leased properties. We expect to continue to raise capital through our offering of common stock and to utilize such funds and proceeds from secured or unsecured financing to complete future property acquisitions. As of September 30, 2012, we had raised approximately $84.8 million in gross proceeds from our offering, including $0.9 million through the DRP.

As of September 30, 2012, we had cash and cash equivalents of approximately $15.7 million. During the nine months ended September 30, 2012, we had a net cash increase of approximately $8.8 million.

This cash increase was the result of:

• $3.1 million provided by operating activities, largely the result of income generated from operations, a portion of which was offset by the reimbursement of general and administrative expenses to the Sub-advisor. As of September 30, 2012, the Advisor, Sub-advisor and their affiliates have not allocated any portion of their employees’ salaries to general and administrative expenses;

• $112.7 million used in investing activities, which was the result of the 13 property acquisitions; and

• $118.3 million provided by financing activities with approximately $134.7 million from the mortgage loans, $49.6 million from the net proceeds of the issuance of common stock and $25.3 million provided by the Non-Controlling Interests. Partially offsetting these amounts was $89.0 million of net payments on the mortgage loans payable, distributions paid to the Non-Controlling Interests of $0.9 million and distributions paid to our stockholders of $1.4 million, net of DRP proceeds.

Short-term Liquidity and Capital Resources

We expect to meet our short-term liquidity requirements through net cash provided by property operations, proceeds from our offering, and proceeds from secured and unsecured debt financings, along with any deferral or waiver of fees by the Advisor or Sub-advisor. Operating cash flows are expected to increase as additional properties are added to our portfolio. Other than the commissions paid to the Dealer Manager , the organization and offering costs associated with our offering are initially paid by our sponsors. Our sponsors will be reimbursed for such costs up to 1.5% of the gross capital raised in our offering. As of September 30, 2012, we owe the Advisor, Sub-advisor and their affiliates $4.0 million of organization and offering costs, general and administrative expenses and other operational expenses incurred on our behalf. In addition, approximately $5.4 million of offering costs incurred by the Sub-advisor on our behalf has not been charged to us or recorded in our consolidated financial statements. Whether these costs will be billed to us in the future will depend on the success of our offering and the discretion of the Sub-advisor. Our sponsors do not intend to continue to contribute monies to fund future expenses. Our sponsors provided $88,000 during the nine months ended September 30, 2011 and $228,000 since inception for certain of our general and administrative expenses as capital contributions. Our sponsors have not received, and will not receive, any reimbursement or additional equity for these contributions. The sponsors provided no such capital contributions for the nine months ended September 30, 2012. Our sponsors do not intend to make further capital contributions to continue to fund certain of our general and administrative expenses. Until we have sufficient cash flow to cover our expenses, we may continue to seek to rely upon the Advisor, Sub-advisor and their respective affiliates for financial support.

We have $128.2 million of debt obligations, representing variable-rate and fixed-rate credit facilities and mortgage loans secured by our real estate assets. Of the amount outstanding at September 30, 2012, $12.9 million is for the Lakeside Plaza and Snow View Plaza loans, which both mature in December 2012. We can extend these loans until December 2013 by paying a fee equal to 0.25% of the outstanding balance at the time of the maturity dates in December 2012.

Cash provided by operating activities was $3.1 million for the nine months ended September 30, 2012. Included in this total was approximately $2.4 million of real estate acquisition-related expenses incurred during the period and expensed in accordance with ASC 805, Business Combinations.

For the nine months ended September 30, 2012, gross distributions to stockholders of approximately $2,119,000 were paid, including $693,000 of distributions reinvested through the DRP, for net cash distributions of $1,426,000. These distributions were funded by a combination of cash generated from operating activities and borrowings. On October 1, 2012, gross distributions of approximately $431,000 were paid, including $168,000 of distributions reinvested through the DRP, for net cash distributions of $263,000. These distributions were funded by a combination of cash generated from operating activities and borrowings.

On July 12, 2012, our board of directors authorized distributions to the stockholders of record at the close of business each day in the period commencing September 1, 2012 through and including October 31, 2012. On September 13, 2012, our board of directors authorized distributions to the stockholders of record at the close of business each day in the period commencing November 1, 2012 through and including November 30, 2012. On October 19, 2012, our board of directors authorized distributions to the stockholders of record at the close of business each day in the period commencing December 1, 2012 through and including December 31, 2012. The authorized distributions equal an amount of $0.00178082 per share of common stock, par value $0.01 per share. This equates to a 6.50% annualized yield when calculated on a $10.00 per share purchase price. A portion of each distribution is expected to constitute a return of capital for tax purposes. Distributions for the month of October were paid on November 1, 2012. Our policy is not to fund distributions with proceeds from our offering.

Our leverage ratio was 50.4% (calculated as total debt, less cash and cash equivalents, as a percentage of total real estate investments, at cost) as of September 30, 2012.

Long-term Liquidity and Capital Resources

On a long-term basis, our principal demands for funds will be for real estate and real estate-related investments and the payment of acquisition-related expenses, operating expenses, distributions and redemptions to stockholders and interest and principal on indebtedness, as well as payments on amounts due to our sponsors. Generally, we expect to meet cash needs for items other than acquisitions and acquisition-related expenses from our cash flow from operations, and we expect to meet cash needs for acquisitions and acquisition-related expenses from the net proceeds of our offering and from debt financings. We expect that substantially all net cash generated from operations will be used to pay distributions to our stockholders after certain capital expenditures, including tenant improvements and leasing commissions, are funded; however, we may use other sources to fund distributions as necessary, including contributions or advances made to us by the Advisor, Sub-advisor and their respective affiliates and borrowings under future debt agreements.

Our charter limits our borrowings to 300% of our net assets (as defined in our charter); however, we may exceed that limit if a majority of our conflicts committee approves each borrowing in excess of our charter limitation and if we disclose such borrowing to our stockholders in our next quarterly report with an explanation from the conflicts committee of the justification for the excess borrowing. In all events, we expect that our secured and unsecured borrowings will be reasonable in relation to the net value of our assets and will be reviewed by our board of directors at least quarterly.

Careful use of debt will help us to achieve our diversification goals because we will have more funds available for investment. However, high levels of debt could cause us to incur higher interest charges and higher debt service payments, which would decrease the amount of cash available for distribution to our investors.

The table below summarizes our consolidated indebtedness at September 30, 2012.

			Principal	Weighted	Weighted
			Amount at	Average	Average Years
Debt⁽¹⁾			September 30, 2012	Interest Rate	to Maturity

Fixed rate mortgages payable		$	40,364,000	6.2%	4.1
Variable rate mortgages payable			87,863,000	2.7%	3.0

Total		$	128,227,000	3.8%	3.3

⁽¹⁾	The debt maturity table does not include any below-market debt adjustment, of which $1,588,000, net of accumulated
amortization, was outstanding as of September 30, 2012.

Contractual Commitments and Contingencies

Our contractual obligations as of September 30, 2012, were as follows:

	Payments due by period
	($000s)
	Total		2012		2013		2014		2015		2016		2017

Long-term debt obligations - principal payments	$	128,227	$	13,164	$	23,287	$	17,480	$	1,155	$	25,348	$	47,793
Long-term debt obligations - interest payments		15,507		1,193		4,294		3,323		2,454		1,874		2,369

Total	$	143,734	$	14,357	$	27,581	$	20,803	$	3,609	$	27,222	$	50,162

Certain of our debt obligations contain certain restrictive covenants. As of September 30, 2012, we are in compliance with all
restrictive covenants of our outstanding debt obligations.

Funds from Operations and Modified Funds from Operations

Funds from operations, or FFO, is a non-GAAP performance financial measure that is widely recognized as a measure of REIT operating performance. We use FFO as defined by the National Association of Real Estate Investment Trusts to be net income (loss), computed in accordance with GAAP excluding extraordinary items, as defined by GAAP, and gains (or losses) from sales of property

(including deemed sales and settlements of pre-existing relationships), plus depreciation and amortization on real estate assets and impairment charges, and after related adjustments for unconsolidated partnerships, joint ventures and subsidiaries and noncontrolling interests. We believe that FFO is helpful to our investors and our management as a measure of operating performance because it excludes real estate-related depreciation and amortization, gains and losses from property dispositions, impairment charges, and extraordinary items, and as a result, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which are not immediately apparent from net income. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate and intangibles diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, our management believes that the use of FFO, together with the required GAAP presentations, is helpful for our investors in understanding our performance. In particular, because GAAP impairment charges are not allowed to be reversed if the underlying fair values improve or because the timing of impairment charges may lag the onset of certain operating consequences, we believe FFO provides useful supplemental information related to current consequences, benefits and sustainability related to rental rate, occupancy and other core operating fundamentals. Factors that impact FFO include start-up costs, fixed costs, delay in buying assets, lower yields on cash held in accounts, income from portfolio properties and other portfolio assets, interest rates on acquisition financing and operating expenses. In addition, FFO will be affected by the types of investments in our targeted portfolio which will consist of, but is not limited to, necessity-based neighborhood and community shopping centers, first- and second-priority mortgage loans, mezzanine loans, bridge and other loans, mortgage-backed securities, collateralized debt obligations, and debt securities of real estate companies. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, as impairments are based on estimated future undiscounted cash flows, investors are cautioned that we may not recover any impairment charges. FFO is not a useful measure in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO.

Since FFO was promulgated, GAAP has expanded to include several new accounting pronouncements, such that management and many investors and analysts have considered the presentation of FFO alone to be insufficient. Accordingly, in addition to FFO, we use modified funds from operations, or MFFO, as defined by the Investment Program Association (“IPA”). MFFO excludes from FFO the following items:

(1) acquisition fees and expenses;

(2) straight-line rent amounts, both income and expense;

(3) amortization of above- or below-market intangible lease assets and liabilities;

(4) amortization of discounts and premiums on debt investments;

(5) gains or losses from the early extinguishment of debt;

(6) gains or losses on the extinguishment or sales of hedges, foreign exchange, securities and other derivatives holdings except where the trading of such instruments is a fundamental attribute of our operations;

(7) gains or losses related to fair-value adjustments for derivatives not qualifying for hedge accounting, including interest rate and foreign exchange derivatives;

(8) gains or losses related to consolidation from, or deconsolidation to, equity accounting;

(9) gains or losses related to contingent purchase price adjustments; and

(10) adjustments related to the above items for unconsolidated entities in the application of equity accounting.

We believe that MFFO is helpful in assisting management and investors with the assessment of the sustainability of operating performance in future periods and, in particular, after our offering and acquisition stages are complete, primarily because it excludes acquisition expenses that affect property operations only in the period in which the property is acquired. Thus, MFFO provides helpful information relevant to evaluating our operating performance in periods in which there is no acquisition activity.

As explained below, management’s evaluation of our operating performance excludes the items considered in the calculation based on the following economic considerations. Many of the adjustments in arriving at MFFO are not applicable to us. Nevertheless, we explain below the reasons for each of the adjustments made in arriving at our MFFO definition.

• Acquisition fees and expenses. In evaluating investments in real estate, including both business combinations and investments accounted for under the equity method of accounting, management’s investment models and analyses

differentiate costs to acquire the investment from the operations derived from the investment. Prior to 2009, acquisition costs for both of these types of investments were capitalized under GAAP; however, beginning in 2009, acquisition costs related to business combinations are expensed. Both of these acquisition-related costs have been and will continue to be funded from the proceeds of our offering and generally not from operations. We believe by excluding expensed acquisition costs, MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Acquisition fees and expenses include those paid to the Advisor, the Sub-advisor or third parties.

• Adjustments for straight-line rents and amortization of discounts and premiums on debt investments. In the proper application of GAAP, rental receipts and discounts and premiums on debt investments are allocated to periods using various systematic methodologies. This application may result in income recognition that could be significantly different than underlying contract terms. By adjusting for these items, MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments and aligns results with management’s analysis of operating performance.

• Adjustments for amortization of above- or below-market intangible lease assets. Similar to depreciation and amortization of other real estate related assets that are excluded from FFO, GAAP implicitly assumes that the value of intangibles diminishes ratably over time and that these charges be recognized currently in revenue. Since real estate values and market lease rates in the aggregate have historically risen or fallen with market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the performance of the real estate.

• Gains or losses related to fair-value adjustments for derivatives not qualifying for hedge accounting and gains or losses related to contingent purchase price adjustments. Each of these items relates to a fair value adjustment, which is based on the impact of current market fluctuations and underlying assessments of general market conditions and specific performance of the holding, which may not be directly attributable to current operating performance. As these gains or losses relate to underlying long-term assets and liabilities, management believes MFFO provides useful supplemental information by focusing on the changes in core operating fundamentals rather than changes that may reflect anticipated gains or losses.

• Adjustment for gains or losses related to early extinguishment of hedges, debt, consolidation or deconsolidation and contingent purchase price. Similar to extraordinary items excluded from FFO, these adjustments are not related to continuing operations. By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods and to other real estate operators.

By providing MFFO, we believe we are presenting useful information that also assists investors and analysts to better assess the sustainability of our operating performance after our offering and acquisition stages are completed. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry. MFFO is useful in comparing the sustainability of our operating performance after our offering and acquisition stages are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. However, investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our offering and acquisition stages are completed, as it excludes acquisition costs that have a negative effect on our operating performance during the periods in which properties are acquired. Acquisition costs also adversely affect our book value and equity.

FFO or MFFO should not be considered as an alternative to net income (loss), nor as an indication of our liquidity, nor is either indicative of funds available to fund our cash needs, including our ability to fund distributions. In particular, as we are currently in the acquisition phase of our life cycle, acquisition-related costs and other adjustments that are increases to MFFO are, and may continue to be, a significant use of cash. MFFO has limitations as a performance measure in an offering such as ours where the price of a share of common stock is a stated value and there is no net asset value determination during the offering stage and for a period thereafter. Accordingly, both FFO and MFFO should be reviewed in connection with other GAAP measurements. Our FFO and MFFO as presented may not be comparable to amounts calculated by other REITs.

The following section presents our calculation of FFO and MFFO and provides additional information related to our operations (in thousands, except per share amounts). As a result of the timing of the commencement of our offering and our active real estate operations, FFO and MFFO are not relevant to a discussion comparing operations for the two periods presented. We expect revenues and expenses to increase in future periods as we raise additional offering proceeds and use them to acquire additional investments.

FUNDS FROM OPERATIONS AND MODIFIED FUNDS FROM OPERATIONS
FOR THE PERIODS ENDED SEPTEMBER 30, 2012 AND 2011
(Unaudited)
(Amounts in thousands)
		Three Months Ended September 30,				Nine Months Ended September 30,
		2012		2011		2012		2011
Calculation of Funds from Operations
Net loss attributable to Company stockholders		$	(1,036)	$	(440)	$	(2,099)	$	(1,293)
Add:
	Depreciation and amortization of real estate assets		2,507		345		5,079		853
Less:
	Noncontrolling interest		(1,114)		-		(2,297)		-
Funds from operations		$	357	$	(95)	$	683	$	(440)

Calculation of Modified Funds from Operations
Funds from operations		$	357	$	(95)	$	683	$	(440)
Add:
	Acquisition-related expenses		1,097		246		2,416		740
	Net amortization of above- and below-market leases		62		97		337		214
Less:
	Straight-line rental income		(164)		(14)		(286)		(34)
	Amortization of market debt adjustment		(69)		-		(82)		-
	Noncontrolling interest		(129)		-		(633)		-
Modified funds from operations		$	1,154	$	234	$	2,435	$	480

Distributions

During the three months ended September 30, 2012, gross distributions paid were $986,000, with $351,000 being reinvested through the DRP for net cash distributions of $635,000. During the three months ended September 30, 2011, gross distributions paid were $232,000 with $38,000 being reinvested through the DRP for net cash distributions of $194,000. During the nine months ended September 30, 2012, gross distributions paid were $2,119,000 with $693,000 being reinvested through the DRP for net cash distributions of $1,426,000. There were gross distributions of $431,000 accrued and payable as of September 30, 2012. Distributions accrue at a daily rate of $0.00178082. Distributions paid during the nine months ended September 30, 2012 were funded by a combination of cash provided by operating activities of $1,664,000 and proceeds from borrowings of $455,000. Our net loss attributable to stockholders for the nine months ended September 30, 2012 was $2,099,000, and net cash provided by operating activities was $3,113,000. Our cumulative distributions and net loss attributable to stockholders from inception through September 30, 2012 are $2,992,000 and $5,210,000, respectively. We have funded our cumulative distributions, which includes net cash distributions and distributions reinvested by stockholders, with cash provided by operating activities, advances from the Sub-Advisor, and proceeds from debt financing.

We expect to pay distributions monthly and continue paying distributions monthly unless our results of operations, our general financial condition, general economic conditions or other factors make it imprudent to do so. The timing and amount of distributions will be determined by our board and will be influenced in part by our intention to comply with REIT requirements of the Internal Revenue Code of 1986, as amended.

We may receive income from interest or rents at various times during our fiscal year and, because we may need funds from operations during a particular period to fund capital expenditures and other expenses, we expect that at least during the early stages of our development and from time to time during our operational stage, we will declare distributions in anticipation of funds that we expect to receive during a later period. We will pay these distributions in advance of our actual receipt of these funds. In these instances, we expect to look to borrowings to fund our distributions. We may also fund such distributions from advances from our sponsors or from any deferral or waiver of fees by the Advisor or Sub-advisor. To the extent that we pay distributions from sources other than our cash provided by operating activities, we will have fewer funds available for investment in properties. The overall return to our stockholders may be reduced, and subsequent investors may experience dilution.

Our distribution policy is not to use the proceeds of our offering to pay distributions. However, our board has the authority under our organizational documents, to the extent permitted by Maryland law, to pay distributions from any source without limit, including proceeds from our offering or the proceeds from the issuance of securities in the future.

To maintain our qualification as a REIT, we must make aggregate annual distributions to our stockholders of at least 90.0% of our REIT taxable income (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). If we meet the REIT qualification requirements, we generally will not be subject to U.S. federal income tax on the income that we distribute to our stockholders each year.

We have not established a minimum distribution level, and our charter does not require that we make distributions to our stockholders.

Critical Accounting Policies

There have been no changes to our critical accounting policies during the nine months ended September 30, 2012. For a summary of our critical accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2011.

Impact of Recently Issued Accounting Pronouncements—In May 2011, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. ASU 2011-04 clarifies some existing concepts, eliminates wording differences between U.S. GAAP and International Financial Reporting Standards (“IFRS”), and in some limited cases, changes some principles to achieve convergence between U.S. GAAP and IFRS. ASU 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. ASU 2011-04 was effective for us as of January 1, 2012. The adoption of this pronouncement did not materially impact our condensed consolidated financial statements.

In October 2012, the FASB issued ASU 2012-04, Technical Corrections and Improvements. The amendments in this update cover a wide range of topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. ASU 2012-04 will be effective for us as of January 1, 2013. The adoption of this pronouncement is not expected to have a material impact on our condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of September 30, 2012, we had approximately $87.9 million of variable rate debt outstanding. In the future, we may hedge our exposure to interest rate fluctuations through the utilization of derivative financial instruments, such as interest rate swaps, in order to mitigate the risk of this exposure. We do not intend to enter into derivative or interest rate transactions for speculative purposes. Our hedging decisions will be determined based upon the facts and circumstances existing at the time of the hedge and may differ from our currently anticipated hedging strategy. If we use derivative financial instruments to hedge against interest rate fluctuations, we will be exposed to both credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty will owe us, which creates credit risk for us. If the fair value of a derivative contract is negative, we will owe the counterparty and, therefore, do not have credit risk. We will seek to minimize the credit risk in derivative instruments by entering into transactions with high-quality counterparties. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. The market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

As of September 30, 2012, we have not fixed the interest rates for our debt through derivative financial instruments, and as a result, we are subject to the potential impact of rising interest rates, which could negatively impact our profitability and cash flows.

The analysis below presents the sensitivity of the fair market value of our financial instruments to selected changes in market interest rates.

The impact on our annual results of operations of a one-percentage-point change in interest rates on the outstanding balance of variable-rate debt at September 30, 2012 would result in approximately $0.9 million of additional interest expense. We had no other outstanding interest rate contracts as of September 30, 2012.

The above amounts were determined based on the impact of hypothetical interest rates on our borrowing cost and assume no changes in our capital structure. As the information presented above includes only those exposures that exist as of September 30, 2012, it does not consider those exposures or positions that could arise after that date. Hence, the information represented herein has limited predictive value. As a result, the ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period, the hedging strategies at the time, and the related interest rates.

We do not have any foreign operations, and thus we are not exposed to foreign currency fluctuations.

Item 4. Controls and Procedures

Management’s Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report in providing a reasonable level of assurance that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods in SEC rules and forms, including providing a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Principal Executive Officer and our Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There have not been any changes in our internal control over financial reporting during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. 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 adverse effect on our results of operations or financial condition, nor are we aware of any such legal proceedings contemplated by governmental authorities.

Item 1A. Risk Factors

The following risk factors supplement the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2011.

Although our sponsors and their affiliates have previously paid, forgiven or deferred certain fees and expenses related to us, there is no obligation by our sponsors or their affiliates to do so in the future.

The Advisor and the Sub-advisor have informed us that they will waive or reimburse payment of the asset management fees to the extent that, as of the date of payment, our operating performance during the prior quarter has not been commensurate with our distributions during such period. Asset management fees were $995,000 for the nine months ended September 30, 2012, but $546,000 of these fees has been waived by the Advisor and Sub-advisor pursuant to the advisory agreement. In addition, our sponsors have provided $228,000 towards certain of our general and administrative expenses as capital contributions since inception. Our sponsors have not received, and will not receive, additional equity securities or any reimbursement for these contributions. Our sponsors do not intend to continue to contribute monies to fund future distributions. Also, approximately $5.4 million of organization and offering costs have been incurred on our behalf by the Sub-advisor that have not been charged to us. Organization and offering cost reimbursements may not exceed 1.5% of the gross proceeds raised through the continuous offering. Whether these costs incurred by the Sub-advisor will be billed is dependent upon the success of the offering and the discretion of the Sub-advisor.

Increases in interest rates would increase the amount of our debt payments and limit our ability to pay distributions to our stockholders.

As of September 30, 2012, we have $87.9 million of variable rate debt obligations. Because we have such variable rate debt obligations, increases in interest rates would increase our interest costs and would reduce our cash flows and our ability to pay distributions to our stockholders. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments at times that may not permit realization of the maximum return on such investments.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

a) We did not sell any equity securities that were not registered under the Securities Act of 1933 during the nine months ended September 30, 2012.

b) On August 12, 2010, our Registration Statement on Form S-11 (File No. 333-164313), covering our initial public offering of up to 180,000,000 shares of common stock, was declared effective under the Securities Act of 1933. We commenced our public offering on August 12, 2010 upon retaining Realty Capital Securities, LLC as the dealer manager of our offering. We are offering 150,000,000 shares of common stock in our primary offering at an aggregate offering price of up to $1.5 billion, or $10.00 per share with discounts available to certain categories of purchasers, on a “best efforts” basis. The 30,000,000 shares offered under our dividend reinvestment plan are initially being offered at an aggregate offering price of $285.0 million, or $9.50 per share. The primary offering will terminate on August 12, 2013 unless we file a registration statement for a follow-on offering. We may sell shares under the dividend reinvestment plan beyond the termination of the primary offering until we have sold all the shares under the plan. As of September 30, 2012, we have issued 8,644,356 shares of our common stock, inclusive of 89,658 shares issued pursuant to the dividend reinvestment plan, while raising $84.8 million in gross offering proceeds.

As of September 30, 2012, we have incurred the following cumulative offering costs in connection with the issuance and
distribution of the registered securities:

($000s)	Offering Costs
Offering costs to related parties	$	8,842
Offering costs to non-related parties		5,261

Total	$	14,103

From the commencement of our ongoing initial public offering through September 30, 2012, the net offering proceeds to us, after deducting the total expenses incurred as described above, were approximately $70.7 million, including net offering proceeds from our dividend reinvestment plan of $0.9 million.

We expect to use substantially all of the net proceeds from our ongoing initial public offering to invest primarily in grocery-anchored neighborhood and community shopping centers throughout the United States. We may use the net proceeds from the sale of shares under our dividend reinvestment plan for general corporate purposes, including, but not limited to, the repurchase of shares under our share repurchase program, capital expenditures, tenant improvement costs, and other funding obligations. As of September 30, 2012, we have used the net proceeds from our ongoing primary public offering and debt financing to purchase $222.6 million in real estate and to pay $3.9 million of acquisition fees and expenses.

c) We did not repurchase any of our securities during the three-month period ended September 30, 2012, and no shares eligible for redemption were the subject of any redemption requests during this period.

Item 3. Defaults upon Senior Securities

(a) There have been no defaults with respect to any of our indebtedness.

(b) Not applicable.

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

(a) On July 9, 2012, we filed a Current Report on Form 8-K to disclose our acquisition of Brentwood Commons. We included in that Form 8-K an undertaking to provide financial statements for Brentwood Commons in an amendment to the Form 8-K on or before September 18, 2012. Subsequent to the filing of this Form 8-K, we determined that we are not required to provide such financial statements for Brentwood Commons. As a result, we will not provide such financial statements for Brentwood Commons in an amendment to the Form 8-K.

(b) There are no material changes to the procedures by which stockholders may recommend nominees to our board of directors.

PART II. OTHER INFORMATION (CONTINUED)

Item 6. Exhibits


Ex.	Description

3.1	Third Articles of Amendment and Restatement (incorporated by reference to Exhibit 3.1 to Post-Effective Amendment No. 1 to the Company’s Registration Statement on Form S-11 (No. 333-164313) filed September 17, 2010)

3.2	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to Pre-Effective Amendment No. 3 to the Company’s Registration Statement on Form S-11 (No. 333-164313) filed July 2, 2010)

4.1	Form of Subscription Agreement (incorporated by reference to Appendix B to Pre-Effective Amendment No. 1 to Post-Effective Amendment No. 11 to the Company’s Registration Statement on Form S-11 (No. 333-164313) filed October 26, 2012)

4.2	Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates) (incorporated by reference to Exhibit 4.2 to Pre-Effective Amendment No. 1 to the Company’s Registration Statement on Form S-11 (No. 333-164313) filed March 1, 2010)

4.3	Dividend Reinvestment Plan (incorporated by reference to Appendix C to Pre-Effective Amendment No. 1 to Post-Effective Amendment No. 11 to the Company’s Registration Statement on Form S-11 (No. 333-164313) filed October 26, 2012)

10.1	Agreement for Sale and Purchase of Property by and between Richmond Plaza Investors, L.P. and Phillips Edison Group LLC dated June 28, 2012 (incorporated by reference to Exhibit 10.54 to Post-Effective Amendment No. 11 to the Company’s Registration Statement on Form S-11 (No. 333-164313) filed October 17, 2012)

10.2	Fourth Amendment to, and Reinstatement of, Agreement for Sale and Purchase of Property by and between Richmond Plaza Investors, L.P. and Phillips Edison Group LLC dated August 24, 2012 (incorporated by reference to Exhibit 10.55 to Post-Effective Amendment No. 11 to the Company’s Registration Statement on Form S-11 (No. 333-164313) filed October 17, 2012)

10.3	Assignment and Assumption of Rights Under Shopping Center Purchase Agreement by and between Phillips Edison Group LLC and Richmond Station LLC dated August 30, 2012 (incorporated by reference to Exhibit 10.56 to Post-Effective Amendment No. 11 to the Company’s Registration Statement on Form S-11 (No. 333-164313) filed October 17, 2012)

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002

32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002

99.1	Amended Share Repurchase Program (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed October 5, 2011 and effective November 4, 2011)

101.1	The following information from the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Equity; and (iv) Condensed Consolidated Statements of Cash Flows

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	PHILLIPS EDISON – ARC SHOPPING CENTER REIT INC.

Date: November 8, 2012	By:	/s/ Jeffrey S. Edison
		Jeffrey S. Edison
		Co-Chairman of the Board and Chief Executive Officer

Date: November 8, 2012	By:	/s/ Richard J. Smith
		Richard J. Smith
		Chief Financial Officer