S-11/A 1 ds11a.htm AMENDMENT NO.6 TO FORM S-11 Amendment No.6 to Form S-11
Table of Contents

As filed with the Securities and Exchange Commission on April 22, 2010

Registration No. 333-164031

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 6

to

FORM S-11

FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933

OF CERTAIN REAL ESTATE COMPANIES

Excel Trust, Inc.

(Exact name of registrant as specified in its governing instruments)

 

 

17140 Bernardo Center Drive, Suite 300

San Diego, California 92128

(858) 613-1800

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Gary B. Sabin

Chairman and Chief Executive Officer

Excel Trust, Inc.

17140 Bernardo Center Drive, Suite 300

San Diego, California 92128

(858) 613-1800

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Craig M. Garner, Esq.

Latham & Watkins LLP

12636 High Bluff Drive, Suite 400

San Diego, California 92130

(858) 523-5400

 

Jay L. Bernstein, Esq.

Andrew S. Epstein, Esq.

Clifford Chance US LLP

31 West 52nd Street

New York, NY 10019

(212) 878-8000

 

 

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:    As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.    ¨

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.

 

Large accelerated filer    ¨

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

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 


Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission becomes effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus, dated April 22, 2010

PROSPECTUS

15,000,000 Shares

LOGO

Common Stock

 

 

Excel Trust, Inc. is a vertically integrated, self-administered, self-managed real estate firm with the principal objective of acquiring, financing, developing, leasing, owning and managing value oriented community and power centers, grocery anchored neighborhood centers and freestanding retail properties. We intend to elect to be treated as a real estate investment trust, or REIT, for U.S. federal income tax purposes.

This is our initial public offering and no public market currently exists for our common stock. We are offering 15,000,000 shares of our common stock. All of the shares of our common stock offered by this prospectus are being sold by us. We expect that the initial public offering price for our common stock will be between $16.00 and $18.00 per share. Our common stock has been authorized for listing on the New York Stock Exchange under the symbol “EXL.”

To assist us in complying with certain federal income tax requirements applicable to REITs, our charter contains certain restrictions relating to the ownership and transfer of our stock, including an ownership limit of 9.8% on our common stock. See “Restrictions on Ownership and Transfer” beginning on page 156.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 21 of this prospectus for certain risks regarding an investment in our common stock, including, among others:

 

   

We may be unable to invest the proceeds of this offering on acceptable terms or at all, which may harm our financial condition and operating results.

 

   

We have no operating history as a REIT or a public company and may not be successful in operating as a public REIT, which may adversely affect our ability to make distributions to stockholders.

 

   

We have not obtained any recent appraisals for the 20 properties we expect to acquire in our formation transactions. The terms of the contribution agreements related to four of these properties, each of which is wholly or majority owned by our directors and officers, were not negotiated in an arm’s length transaction, and the consideration we pay for these and the other properties we expect to acquire in our formation transactions may exceed their aggregate fair market value.

 

   

We may be unable to identify, acquire, develop or operate properties successfully, which could harm our financial condition and ability to pay distributions to you.

 

   

Our success depends on key personnel with extensive experience dealing with the commercial real estate industry, and the loss of these key personnel could threaten our ability to operate our business successfully.

 

   

Conflicts of interest could result in our management acting other than in our stockholders’ best interests.

 

   

Our failure to qualify as a REIT under the Internal Revenue Code of 1986, as amended, would result in significant adverse tax consequences to us and would adversely affect our business and the value of our stock.

 

 

    

Per Share

  

Total

Public offering price

   $             $             

Underwriting discounts and commissions

   $      $  

Proceeds, before expenses, to us

   $      $  

We have granted the underwriters the right to purchase up to an additional 2,250,000 shares of common stock to cover over-allotments.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The shares of common stock sold in this offering will be ready for delivery on or about             , 2010.

 

 

 

Morgan Stanley   Barclays Capital    UBS Investment Bank
Wells Fargo Securities    KeyBanc Capital Markets
Raymond James   Stifel Nicolaus   HFF Securities L.P.   PNC Capital Markets LLC

 

 

The date of this prospectus is             , 2010


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page

Prospectus Summary

   1

Summary Selected Financial Data

   18

Risk Factors

   21

Forward-Looking Statements

   46

Use of Proceeds

   47

Distribution Policy

   50

Capitalization

   51

Dilution

   52

Selected Financial Data

   53

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   56

Retail Industry Overview

   71

Business and Properties

   91

Management

   123

Policies with Respect to Certain Activities

   137

Certain Relationships and Related Transactions

   141

Structure and Formation of Our Company

   146

Description of the Partnership Agreement of Excel Trust, L.P.

   147

Principal Stockholders

   153

Description of Securities

   154

Restrictions on Ownership and Transfer

   156

Certain Provisions of Maryland Law and of Our Charter and Bylaws

   158

Shares Eligible for Future Sale

   163

Material United States Federal Income Tax Considerations

   165

ERISA Considerations

   184

Underwriting

   186

Legal Matters

   191

Experts

   191

Where You Can Find More Information

   191

Index to Financial Statements

   F-1

You should rely only on the information contained in this prospectus or any free writing prospectus prepared by us. We have not, and the underwriters have not, authorized anyone to provide you with information that is different from that contained in this prospectus. We are offering to sell shares of common stock and seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock.

 

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PROSPECTUS SUMMARY

You should read the following summary together with the more detailed information regarding our company and the historical and pro forma financial statements of our predecessor appearing elsewhere in this prospectus, including under the caption “Risk Factors.” References in this prospectus to “Excel Trust,” “we,” “our,” “us” and “our company” refer to Excel Trust, Inc., a Maryland corporation, Excel Trust, L.P., and any of our other subsidiaries. Excel Trust, L.P. is a Delaware limited partnership of which we are the sole general partner and to which we refer in this prospectus as our operating partnership. Unless otherwise indicated, the information contained in this prospectus is as of December 31, 2009 and assumes that (1) the underwriters’ over-allotment option is not exercised, (2) our formation transactions described herein have been completed, (3) the common stock to be sold in this offering will be sold at $17.00 per share, which is the mid-point of the range of prices set forth on the cover page of this prospectus, and (4) the units of partnership in our operating partnership, or operating partnership units, issued in our formation transactions are valued at $17.00 per unit.

Excel Trust, Inc.

Overview

We are a vertically integrated, self-administered, self-managed real estate firm with the principal objective of acquiring, financing, developing, leasing, owning and managing value oriented community and power centers, grocery anchored neighborhood centers and freestanding retail properties. Our strategy is to acquire high quality, well-located, dominant retail properties that generate attractive risk-adjusted returns. We will target competitively protected properties in communities that have stable demographics and have historically exhibited favorable trends, such as strong population and income growth. We consider competitively protected properties to be located in the most prominent shopping districts in their respective markets, ideally situated at major “Main and Main” intersections. We generally lease our properties to national and regional supermarket chains, big-box retailers and select national retailers that offer necessity and value oriented items and generate regular consumer traffic. Our tenants carry goods that are less impacted by fluctuations in the broader U.S. economy and consumers’ disposable income, which we believe generates more predictable property-level cash flows.

Upon the completion of this offering and our formation transactions, we expect to own an initial portfolio consisting of 16 retail properties totaling 1,222,517 square feet of gross leasable area, which were approximately 93.5% leased and had a weighted average age of approximately 5.8 years as of December 31, 2009 based on gross leasable area. We have also agreed to acquire one additional retail shopping center consisting of approximately 85,600 square feet of gross leasable area upon the completion of its development and the occupancy of its key tenants. In addition, we expect to own one commercial office property totaling 82,157 square feet of gross leasable area, which was 100% leased as of December 31, 2009. We utilize a portion of this commercial building as our headquarters. We also expect to own two land parcels comprising approximately 32.6 acres that we will have the ability to develop.

We believe the current market environment will create a substantial number of favorable investment opportunities with attractive yields on investment and significant upside potential. We have identified a pipeline of potential acquisitions from which we will seek to purchase properties that best meet our acquisition criteria and that will enhance our initial portfolio. Since December 15, 2009, the date of our incorporation, we have signed agreements contingent upon the completion of this offering to acquire eleven properties from our pipeline having an aggregate purchase price of approximately $163.8 million. As of March 31, 2010, we were actively negotiating an additional 13 potential property acquisitions from our pipeline, which have an estimated aggregate purchase price of approximately $550 million and comprise approximately 3.5 million square feet of gross leasable area. These properties include neighborhood centers, community centers and power centers located in Alabama, California, South Carolina, Texas and Virginia. Our management team sourced the properties in our

 

 

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pipeline through their extensive relationships with banks, insurance companies, public institutions, fund managers, real estate investment trusts, or REITs, retailers, private investors and developers, established over the last three decades. More than 75% of the potential property acquisitions we are actively negotiating from our pipeline are off-market transactions sourced through these relationships. Upon the completion of this offering and our formation transactions, we expect to have approximately $86.7 million of equity growth capital, in addition to funds available under a $150.0 million unsecured revolving credit facility that we intend to have in place after the completion of this offering, to invest in retail properties.

Gary Sabin, our Chairman and Chief Executive Officer, has over 30 years of experience in the real estate sector having overseen more than $4 billion of retail-related acquisitions and developments. We have an integrated team of 20 professionals with experience across all stages of the real estate investment cycle. Our senior management team includes Spencer Plumb, our President and Chief Operating Officer, James Nakagawa, our Chief Financial Officer, Mark Burton, our Chief Investment Officer and Senior Vice President of Acquisitions, and Eric Ottesen, our Senior Vice President and General Counsel. Mr. Sabin has worked with Mr. Plumb for 12 years, Mr. Nakagawa for 15 years, Mr. Burton for 26 years and Mr. Ottesen for 15 years. Excel Trust will represent our senior management team’s fifth U.S. publicly listed company focused on retail real estate. See “Business and Properties — Management History and Experience.”

We were organized as a Maryland corporation on December 15, 2009 and intend to elect to be taxed as a REIT beginning with our taxable year ending December 31, 2010. We will conduct substantially all of our business through Excel Trust, L.P., a Delaware limited partnership, or our operating partnership. We are the sole general partner of our operating partnership. Our primary offices are located in San Diego, California and Salt Lake City, Utah. Our headquarters is located at 17140 Bernardo Center Drive, Suite 300, San Diego, California 92128. Our telephone number is (858) 613-1800. Our Internet address is www.ExcelTrust.com. Our Internet website and the information contained therein or connected thereto does not constitute a part of this prospectus or any amendment or supplement hereto.

Market Opportunity

We believe the challenging real estate capital markets in conjunction with weakened economic and real estate fundamentals have pushed the broader real estate sector near its cyclical low, presenting a rare opportunity for well-capitalized companies to acquire high quality retail properties at attractive prices. From 2003 to 2007, increased discretionary spending, fueled by factors such as household wealth creation and easy access to credit, contributed to robust sales growth for the U.S. retail market and strong fundamentals for the retail property market. In addition, record levels of capital flowed into the debt and equity commercial real estate markets which compressed capitalization rates to record low levels and boosted asset values. During this time, many commercial real estate buyers flush with liquidity due, in part, to relaxed lending standards paid “Class A” prices for “Class B” properties. We believe a unique opportunity exists today to accomplish the reverse – acquire “Class A” properties for “Class B” prices. The distinctions between classes of properties are subjective and are determined independently by each real estate buyer, seller or tenant, and may vary by region or city. We believe that “Class A” properties are properties that have premium location and access, attract investors and high quality tenants, are managed professionally, are constructed from high quality building materials and command competitive rents. “Class B” properties, which may still attract high quality tenants, have average (as compared to premium) locations, management and construction.

In late 2007, with the onset of the sub-prime mortgage contagion and the ensuing credit crisis, the U.S. consumer retrenched, leading to a severe decline in the retail industry. Significantly reduced consumer spending resulted in lower retail sales, causing retailers to close stores or curtail expansion plans and landlords to confront increasing vacancies and declining rents. At the same time, the real estate capital markets froze, access to traditional sources of financing for retail properties became limited and real estate company capital structures began to fail. The confluence of these events that began in late 2007 contributed to retail real estate asset values posting their biggest decline in over 30 years.

 

 

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In spite of the overall weakness in the retail sector, our target property types, which are anchored by necessity oriented retailers, which are retailers that sell items that consumers purchase on a regular basis, such as food, clothing, household supplies and health care items, and value oriented retailers, which are retailers that sell items ranging from necessity items to household appliances and sporting goods generally at lower prices than other retailers that carry such goods, have fared better than other retail property types in terms of operating fundamentals. This is primarily because consumer spending on necessity and value oriented goods has remained strong. In addition, we believe we may be at the beginning of an economic recovery period and the ensuing rebound in the retail market may be similar to those of past economic downturns. According to the U.S. Census data, retail sales recorded average year-over-year growth rates of 6.4%, 6.4% and 5.1% during the three years following the recessions of 1982, 1990 and 2001, respectively; however, there is no guarantee that comparable growth rates will occur in the future.

We believe that the current environment, which is characterized by the difficulty of refinancing existing debt and the risk of foreclosure, has resulted and will continue to result in distressed sellers. We believe that many cash-constrained landlords may not be able to fund required tenant improvements, leasing commissions and building improvements to attract or retain tenants and, because of this, these landlords may seek to dispose of their properties. As a result, we believe we will have the opportunity to purchase high quality, well-located, retail properties, and on a select basis, distressed assets, at attractive prices that can potentially generate substantial initial yields with the opportunity to grow cash flow over time through active management.

Given our liquidity and the proven track record of our senior management team, we believe we will be well positioned to take advantage of the current dislocation in the market and acquire retail properties at attractive pricing. Our management team has extensive contacts in the U.S. real estate market to source investment opportunities, in particular through access to both distressed and more conventional sellers such as banks, insurance companies, public institutions, fund managers, REITs, retailers, private investors and developers.

Our Competitive Advantages

We distinguish ourselves from our peers through the following competitive advantages:

 

   

Experienced and committed senior management team with a proven track record.    Mr. Sabin and our senior management team have repeatedly demonstrated both public and private market success in the retail property industry while generating significant returns on invested capital. Excel Trust will represent our senior management team’s fifth U.S. publicly listed company focused on retail real estate. Mr. Sabin has worked with each member of our senior management team for a minimum of twelve years, a consistency in executive leadership that we believe differentiates us from most existing and prospective public REITs. In addition, upon the completion of this offering and our formation transactions, our executive officers are expected to own approximately 7.2% of our aggregate equity interests on a fully diluted basis (assuming the exchange of all operating partnership units for shares of our common stock), which we believe will strongly align their interests with those of our stockholders.

 

   

Vertically integrated real estate platform.    Our vertically integrated real estate platform includes in-house capabilities in the areas of asset underwriting, leasing, property management, legal and construction management. We have the flexibility and experience to take advantage of opportunities across market cycles, as demonstrated by our willingness to sell assets when it meets our investment objectives and to refrain from making investments in unfavorable market conditions or at unattractive valuations. As economic challenges and the consumer landscape continue to evolve, we believe that companies such as ours with experience and a platform covering all aspects of the real estate investment cycle will operate at a competitive advantage.

 

 

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Cornerstone portfolio which supports future growth.    Upon the completion of this offering and our formation transactions, we expect to own an initial portfolio consisting of 16 retail properties, one additional retail shopping center upon the completion of its development and the occupancy of its key tenants, one commercial office property and two land parcels that we expect will generate cash flow in an amount that will exceed our first year general and administrative expenses. The retail properties that are part of our initial portfolio fit within our target property acquisition profile as they are competitively protected, anchored by tenants that sell necessity and value oriented items, such as supermarkets and drug stores, and are located in local markets that exhibit stable demographics and have historically exhibited favorable trends, such as strong population and income growth. These properties represent a component of the larger portfolio that we expect to build over time.

 

   

Access to an extensive pipeline of investment opportunities through quality relationships and reputation.    We have identified a pipeline of potential acquisitions from which we will seek to purchase properties that best meet our acquisition criteria and that will enhance our initial portfolio. Since December 15, 2009, the date of our incorporation, we have signed agreements contingent upon the completion of this offering to acquire eleven properties from our pipeline having an aggregate purchase price of approximately $163.8 million. As of March 31, 2010, we were actively negotiating an additional 13 potential property acquisitions from our pipeline, which have an estimated aggregate purchase price of approximately $550 million and comprise approximately 3.5 million square feet of gross leasable area. These properties include neighborhood centers, community centers and power centers located in Alabama, California, South Carolina, Texas and Virginia. Our existing pipeline has been sourced primarily through the quality relationships our management team has formed over the past 30 years transacting with banks, insurance companies, public institutions, fund managers, REITs, retailers, private investors and developers. We believe the breadth of our relationships will generate a continual source of attractive investment opportunities that we can execute by utilizing our integrated platform. For example, more than 75% of the potential property acquisitions we are actively negotiating from our pipeline are off-market transactions sourced through these relationships. Furthermore, we believe our reputation as a preferred counterparty, established by executing fair and timely transactions through several real estate cycles, will provide access to off-market transactions. The ability to source quality investment opportunities and target acquisitions employing our proprietary underwriting methodologies will enhance our ability to utilize our growth capital in an efficient timeframe.

 

   

Growth oriented capital structure with no legacy issues.    Upon the completion of this offering and our formation transactions, we expect to have approximately $86.7 million of equity growth capital, in addition to funds available under a $150.0 million unsecured revolving credit facility that we intend to have in place after the completion of this offering, to invest in retail properties. Some of our peers face challenges from the recent economic downturn, which we refer to as legacy issues, such as significant declines in cash flows, excessive leverage with near-term maturities and funding requirements for joint venture partnerships. We believe that being free of such legacy issues positions us well to acquire properties and selectively leverage our assets to make future investments. We also believe that as a well-capitalized public company we will have access to multiple sources of financing currently unavailable to our private market peers or overleveraged public competitors.

 

 

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Our Business Objective and Growth Strategies

Our objective is to maximize total returns to our stockholders through the pursuit of the following business and growth strategies:

Pursue value oriented investment strategy targeting core retail properties.    Our strategy is to acquire high quality, well-located, dominant retail properties that generate attractive risk-adjusted returns. We will acquire retail properties based on identified market and property characteristics, including:

 

   

Property type.    We intend to focus our investment strategy on value oriented community and power centers, grocery anchored neighborhood centers and freestanding retail properties. We intend to target a leasing mix where anchor tenants consist of 50 to 70% of our portfolio’s gross leasable area.

 

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Neighborhood centers.    A neighborhood center is designed to provide convenience shopping for the day-to-day needs of consumers in the immediate neighborhood. Neighborhood centers are often anchored by a supermarket or drugstore.

 

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Community centers.    A community center typically offers a wider range of apparel and other soft goods relative to a neighborhood center and in addition to supermarkets and drugstores, can include discount department stores as anchor tenants.

 

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Power centers.    A power center is dominated by several large anchors, including discount department stores, warehouse clubs or category killers. Category killers are stores that offer tremendous selection in a particular merchandise category at low prices.

 

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Freestanding retail properties.    A freestanding retail property constitutes any retail building that is typically occupied by a single tenant.

 

   

Anchor tenant type.    We will target properties with anchor tenants that offer necessity and value oriented items that are less impacted by fluctuations in consumers’ disposable income. We believe nationally and regionally recognized anchor tenants that offer necessity and value oriented items provide more predictable property-level cash flows as they are typically higher credit quality tenants that generate stable revenues.

 

   

Lease terms.    In the near term, we intend to acquire properties that feature one or more of the following characteristics in their tenants’ lease structure: properties with long-term leases for anchor tenants; properties under triple-net leases, which are leases where the tenant agrees to pay rent as well as all taxes, insurance and maintenance expenses that arise from the use of the property thereby minimizing our expenses; and properties with leases which incorporate percentage rent and/or rental escalations that act as an inflation hedge while maximizing operating cash flows. As a longer-term strategy, we will look to acquire properties with shorter-term lease structures for in-line tenants, which are tenants that rent smaller spaces around the anchor tenants within a property, that have below market rents that can be renewed at higher market rates.

 

   

Geographic markets and demographics.    We plan to seek investment opportunities throughout the United States; however, we will focus on the Northeast, Northwest and Sunbelt regions, which are characterized by attractive demographic and property fundamental trends. We will target competitively protected properties in communities that have stable demographics and have historically exhibited favorable trends, such as strong population and income growth.

Capitalize on network of relationships to pursue off-market transactions.    We plan to pursue off-market transactions in our target markets through the long-term relationships we have developed over the past three decades. These relationships have been the source of approximately 75% of the properties that we expect to acquire from third parties in our formation transactions, as well as the source of more than 75% of the potential property

 

 

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acquisition that we are actively negotiating from our pipeline. We believe the current dislocation in the real estate capital markets will allow us to supplement this strategy in the near term by targeting opportunities resulting from both troubled owners and distressed real estate. We will target overleveraged property owners facing liquidity constraints or solvency issues. We also intend to target properties that, although well-located, are challenged by tenant bankruptcies, mismanagement or neglect. We believe these sellers will provide us the opportunity to obtain high quality, well-located, dominant retail properties at attractive valuations.

Maximize value through proactive asset management.    We believe our market expertise, targeted leasing strategies and proactive approach to asset management will enable us to maximize the operating performance of our portfolio. We will continue to implement an active asset management program to increase the long-term value of each of our properties. This may include expanding existing tenants, re-entitling site plans to allow for additional outparcels, which are small tracts of land used for freestanding development not attached to the main buildings, and repositioning tenant mixes to maximize traffic, tenant sales and percentage rents. As we grow our portfolio, we will seek to maintain a diverse pool of assets with respect to both geographic distribution and tenant mix, helping to minimize our portfolio risk. We continually monitor our markets for opportunities to selectively dispose of properties where returns appear to have been maximized and redeploy proceeds into new acquisitions that have greater return prospects.

Leverage our experienced property management platform.    Our management team has an extensive track record of managing, operating and leasing retail properties. We believe tenants value our commitment to maintaining the high standards of our properties through our handling of many property management functions in-house. Furthermore, we consider ourselves to be in the best position to oversee the day-to-day operations of our properties, which in turn helps us service our tenants. We feel this generates higher renewal and occupancy rates, minimizes rent interruptions, reduces renewal costs and helps us achieve stronger operating results. Along with this, a major component of our leasing strategy is to cultivate long-term relationships through consistent tenant dialogue in conjunction with a proactive approach to meeting the space requirements of our tenants.

Grow our platform through a comprehensive financing strategy.    Our capital structure will provide us with significant financial capacity and flexibility to fund future growth. As a well-capitalized public company, we believe we will have access to multiple sources of financing that are currently unavailable to many of our private market peers or overleveraged public competitors, which will provide us with a competitive advantage. Over time, these financing alternatives may include follow-on offerings of our common stock, unsecured corporate level debt, preferred equity and credit facilities.

Summary Risk Factors

 

   

We may be unable to invest the proceeds of this offering on acceptable terms or at all, which may harm our financial condition and operating results.

 

   

We have no operating history as a REIT or a public company and may not be successful in operating as a public REIT, which may adversely affect our ability to make distributions to stockholders.

 

   

We have not obtained any recent appraisals for the 20 properties we expect to acquire in our formation transactions. The terms of the contribution agreements related to four of these properties, each of which is wholly or majority owned by our directors and officers, were not negotiated in an arm’s length transaction, and the consideration we pay for these and the other properties we expect to acquire in our formation transactions may exceed their aggregate fair market value.

 

   

Because the value of the consideration paid to our directors and officers in connection with our formation transactions may increase if our initial public offering price increases, the consideration we pay for our contribution properties may exceed the fair market value of the properties.

 

 

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Our expansion strategy may not yield the returns expected, may result in disruptions to our business, may strain our management resources and may adversely affect our operations.

 

   

We may be unable to identify, acquire, develop or operate properties successfully, which could harm our financial condition and ability to pay distributions to you.

 

   

Our success depends on key personnel with extensive experience dealing with the commercial real estate industry, and the loss of these key personnel could threaten our ability to operate our business successfully.

 

   

Failure by any major tenant to make rental payments to us, because of a deterioration of its financial condition or otherwise, could seriously harm our performance.

 

   

The assets we acquire in connection with our formation transactions may be subject to unknown liabilities that affect the value and profitability of these properties.

 

   

Significant competition may decrease or prevent increases in our properties’ occupancy and rental rates and may reduce our investment opportunities

 

   

Our properties depend on anchor stores or major tenants to attract shoppers and could be adversely affected by the loss of, or a store closure by, one or more of these tenants.

 

   

Illiquidity of real estate investments may make it difficult for us to sell properties in response to market conditions and could harm our financial condition and ability to make distributions.

 

   

Conflicts of interest could result in our management acting other than in our stockholders’ best interests. We may choose not to enforce, or to enforce less vigorously, our rights under contribution and other agreements because of conflicts of interest with certain of our directors and officers. In addition, members of our executive management team have outside business interests that could require time and attention.

 

   

Our board of directors may amend our investing and financing guidelines without stockholder approval, and, accordingly, you would have limited control over changes in our policies that could increase the risk we default under our debt obligations or that could harm our business, results of operations and share price.

 

   

Debt obligations expose us to increased risk of property losses and may have adverse consequences on our business operations and our ability to make distributions.

 

   

If we fail to obtain external sources of capital, which is outside of our control, we may be unable to make distributions to our stockholders, maintain our REIT status, or fund growth.

 

   

Our failure to qualify as a REIT under the Internal Revenue Code of 1986, as amended, or the Code, would result in significant adverse tax consequences to us and would adversely affect our business and the value of our stock.

 

   

To maintain our REIT status, we may be forced to borrow funds during unfavorable market conditions to make distributions to our stockholders.

 

 

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Our Properties

Upon the completion of this offering and our formation transactions, we expect to own 20 properties. These properties will include four assets that will be contributed to us in exchange for cash, shares of our common stock and operating partnership units. We refer to these properties as our contribution properties, and they consist of Five Forks Place, Newport Towne Center, Excel Centre and Red Rock Commons. In addition to the contribution properties, we have signed agreements contingent upon the completion of this offering to acquire an additional 16 properties. We refer to these properties as our acquisition properties, and they consist of six retail shopping centers, including Plaza at Rockwall Phase I, 5000 South Hulen, Grant Creek Town Center, Main Street Plaza, St. Mariner’s Point Shopping Center and Merchants Central Shopping Center, one single tenant retail property leased by Lowe’s Home Centers, Inc., one single tenant retail property leased by SuperValu Inc., the parent of the grocery store Shop ’n Save, one single tenant retail property leased by the grocery store Jewel-Osco, a subsidiary of SuperValu, five single tenant retail properties leased by Walgreen Co., Shops at Foxwood, which we have agreed to acquire upon the completion of this retail shopping center’s development and the occupancy of its key tenants, and Plaza at Rockwall Phase II, a 12.7 acre land parcel located adjacent to Plaza at Rockwall Phase I. We refer to the contribution and acquisition properties, collectively, as our initial portfolio. The table below sets forth relevant information with respect to the operating properties in our initial portfolio as of December 31, 2009.

 

Property/Location(1)

  Year
Built(2)
    Total
GLA(3)
    Percent
Leased
    Number
of
Tenants
   

Major

Tenant(4)

  Major
Lease
Expiration
Date
  Annualized
Base
Rent(5)
($ in 000s)
    % Base
Annualized
Rent
Related to
Anchor
Tenants(6)
 

Retail Properties

               

Five Forks Place, Simpsonville, SC

  2002      61,191      100.0   13      Publix*   2022   $ 744      63.0

Newport Towne Center, Newport, TN

  2006      60,100      55.5 (7)    11      Dollar Tree Stores, Inc.(7)   2011     408 (7)    (7) 

Plaza at Rockwall Phase I, Rockwall, TX

  2007      334,027 (8)    93.6      13      J.C. Penney*   2028     2,977 (9)    72.6   

5000 South Hulen, Fort Worth, TX

  2005      86,838      94.3 (10)    19 (10)    Barnes & Noble*   2015     1,915 (10)    35.8   

Grant Creek Town Center, Missoula, MT

  1998      163,774      90.7 (11)    26 (11)    Ross Dress for Less*   2013     1,656 (11)    44.7 (11) 

Main Street Plaza,
El Cajon, CA

  1993 (12)    79,797      96.6      3      24 Hour Fitness*   2024     1,482      91.3   

Lowe’s, Shippensburg, PA

  2008      171,069      100.0      1      Lowe’s Home Centers*   2031     1,475      100.0   

Shop ’n Save, Ballwin, MO

  2007      53,411      100.0      1      Shop ’n Save*   2027     721 (13)    100.0   

Jewel-Osco, Morris, IL

  1999 (14)    51,762      100.0      1      Jewel-Osco*   2024     660      100.0   

Walgreens, Beckley, WV

  2009      14,820      100.0      1      Walgreens*(15)   2034     575      100.0   

St. Mariner’s Point Shopping Center, St. Marys, GA

  2001      45,215      86.9      16      Shoe Show(16)   2011     573      (16) 

Merchants Central Shopping Center, Milledgeville, GA

  2004      45,013      93.8      16      Dollar Tree(17)   2014     567      (17) 

Walgreens, Cross Lanes, Charleston, WV

  2009      14,550      100.0      1      Walgreens*(15)   2034     400      100.0   

Walgreens, Barbourville, KY

  2008      13,650      100.0      1      Walgreens*(15)   2033     337      100.0   

Walgreens, Corbin, KY – South

  2009      13,650      100.0      1      Walgreens*(15)   2034     335      100.0   

Walgreens, Corbin, KY – North

  2009      13,650      100.0      1      Walgreens*(15)   2034     282      100.0   
                                     

Subtotal/Weighted Average Retail Properties

    1,222,517      93.5   125          $ 15,107      67.5

Office Property

               

Excel Centre, San Diego, CA

  1999      82,157      100.0      12      Kaiser Permanente   2019     2,959      39.7   
                                     

Total/Weighted Average

    1,304,674      93.9   137          $ 18,066      62.9
                                     

 

 

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* Denotes anchor tenant.

 

(1)

We have entered into agreements pursuant to which we expect that these properties will be contributed to, or acquired by, us at or promptly following the completion of this offering. We cannot assure you that any of these transactions will be completed. Our operating portfolio does not include Shops at Foxwood, which we have agreed to acquire upon the completion of this retail shopping center’s development and the occupancy of its key tenants, Red Rock Commons, a 19.9 acre land parcel that we will have the ability to develop, or Plaza at Rockwall Phase II, a 12.7 acre land parcel located adjacent to Plaza at Rockwall Phase I that we will have the ability to develop.

 

(2)

Year built represents the year in which construction was completed.

 

(3)

Total GLA represents total gross leasable area owned by us at the property.

 

(4)

Major tenant represents the tenant in each property that has the highest annualized base rent.

 

(5)

Annualized base rent means the annualized fixed base rental amount in effect under existing leases as of December 31, 2009. In the case of triple-net leases, annualized base rent does not include real estate taxes and insurance, common area and other operating expenses, substantially all of which are borne by the tenants. Does not reflect amounts attributable to percentage rent increases, where applicable.

 

(6)

Amount represents the percentage of annualized base rent attributable to anchor tenants.

 

(7)

The anchor tenant of Newport Towne Center, Goody’s Family Clothing, declared bankruptcy in January 2009 and vacated its space. Although Dollar Tree Stores is the largest current tenant at Newport Towne Center, it is not the anchor tenant of the property. We have signed a lease agreement for 20,020 square feet with Stage Stores Inc., which purchased the Goody’s Family Clothing name out of bankruptcy. The lease commences in April 2010 and Stage Stores is expected to operate a retail clothing store under the Goody’s Family Clothing name. Under the lease with Stage Stores, we will receive 6.5% of gross sales as rental income. The previous tenant, Goody’s Family Clothing, for the two years immediately prior to vacating its space, had an estimated average of $2,547 of annual sales. As of March 2, 2010, the date of this lease, Newport Towne Center was 88.8% leased.

 

(8)

Of the total GLA for Plaza at Rockwall Phase I, 104,294 square feet and 75,524 square feet are leased under ground leases to J.C. Penney and Belk Department Store, respectively.

 

(9)

Amount includes rent attributable to ground leases to J.C. Penney and Belk Department Store.

 

(10)

Percent leased, number of tenants and annualized base rent include two tenants who have ceased paying their rent and vacated their space. The first tenant, which is under a lease for 1,661 square feet and annualized base rent of $49.8, stopped paying rent in October 2009. The seller is negotiating the terms of the lease with this tenant. The other tenant, which is under a lease for 1,685 square feet and annualized base rent of $56.9, stopped paying rent and vacated its space in March 2010.

 

(11)

Percent leased and number of tenants include Recreational Equipment, Inc.’s, or REI’s, lease of 27,251 square feet executed on December 22, 2009. Annualized base rent and percentage of base annualized rent related to anchor tenants do not include rent from the lease with REI, as REI is not required to commence paying rent until May 2010 under the terms of its lease. Upon the commencement of rent payments, REI will have an annualized base rent of $282.3. REI will be an anchor tenant of the property. Percent leased, number of tenants and annualized base rent do not include three additional leases that were executed subsequent to December 31, 2009 for an aggregate of 8,003 square feet and an aggregate annualized base rent of $103.8.

 

(12)

Main Street Plaza was originally constructed in 1993 and was completely renovated in 2009.

 

(13)

Amount does not include $13.8 related to a cell tower lease.

 

(14)

Jewel-Osco was originally constructed in 1999 and was completely renovated in 2008.

 

(15)

Represents the earliest date these leases can be terminated by the tenant. Without early termination, the leases for Walgreens, Corbin, KY – North, Walgreens, Corbin, KY – South, Walgreens, Beckley, WV, and Walgreens, Cross Lanes, WV will expire in 2084 and the lease for Walgreens, Barbourville, KY will expire in 2083.

 

(16)

Shoe Show is not the anchor tenant of this property. St. Mariner’s Point Shopping Center is anchored by a non-owned Super Wal-Mart.

 

(17)

Dollar Tree is not the anchor tenant of this property. Merchants Central Shopping Center is anchored by a non-owned Super Wal-Mart.

Structure and Formation of Our Company

Formation Transactions and Contribution and Acquisition of Properties

We refer to the following series of transactions as our formation transactions:

 

   

Excel Trust, Inc. was formed as a Maryland corporation on December 15, 2009.

 

   

Excel Trust, L.P., our operating partnership, was organized as a Delaware limited partnership on December 16, 2009.

 

 

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We will sell 15,000,000 shares of our common stock in this offering, and an additional 2,250,000 shares if the underwriters exercise their over-allotment option in full, and we will contribute the net proceeds of this offering to our operating partnership. In return for our capital contribution, we will receive operating partnership units and initially will own 96.0% of the operating partnership units in our operating partnership. Individuals and entities who will contribute the contribution properties will own the remaining 4.0% of the operating partnership units and will be limited partners of our operating partnership.

 

   

Four properties wholly or majority owned by our directors and officers will be contributed to our operating partnership. In exchange for these properties, we will make cash payments of approximately $1.8 million, issue 449,597 shares of our common stock and 632,484 operating partnership units to the contributors and assume $18.4 million of debt. The amount of cash and number of shares of common stock and operating partnership units to be issued in exchange for our contribution properties will increase to the extent that debt relating to our contribution properties is repaid subsequent to September 30, 2009 and prior to our acquisition of the contribution properties, which repayments amounted to an aggregate of approximately $363,000 as of December 31, 2009 (an aggregate of approximately $590,000 as of March 31, 2010). In addition, we will repay approximately $13.1 million of indebtedness with the net proceeds of this offering, including $6.2 million for debt secured by Newport Towne Center, $5.6 million for debt secured by Red Rock Commons and $1.4 million of payables due to Mr. Sabin for net advances made for mortgage debt repayments and other capital items relating to Red Rock Commons. Mr. Sabin will use this $1.4 million in its entirety to repay his personal credit facility that was used to fund the advances. These amounts reflect outstanding debt balances as of December 31, 2009. We will also pay approximately $0.2 million of costs related to the assumption of debt on these properties. None of our directors or officers will receive any cash in exchange for our contribution properties.

 

   

Our operating partnership will purchase 16 acquisition properties, located in California, Florida, Georgia, Illinois, Kentucky, Missouri, Montana, Pennsylvania, Texas and West Virginia, from unaffiliated third parties for an aggregate purchase price of approximately $187.9 million. We will fund the cash consideration of $133.6 million using the net proceeds of this offering. We will also assume $54.3 million of existing mortgage debt associated with five of these properties. The consideration to be paid for these acquisition properties was negotiated between us and the sellers of the properties.

 

   

We have obtained commitment letters for a $150.0 million unsecured revolving credit facility that we intend to have in place after the completion of this offering. We intend to use this new credit facility principally to fund growth opportunities and for working capital purposes. We are currently negotiating the terms of this facility with a principal lender, and we anticipate that this facility will contain customary restrictive covenants. We cannot assure you that we will be able to enter into this new facility.

 

 

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The following chart reflects the value of consideration (dollars in thousands) to be paid in exchange for each of our contribution properties. The total value of consideration represents the cash payments, the value of the shares of common stock and operating partnership units issued and the value of the debt assumed or repaid in exchange for 100% of the property interests. Debt amounts reflect outstanding balances as of December 31, 2009.

 

Property/Location

  Cash
Payments(1)
    Shares of
Common
Stock Issued(1)
  Operating
Partnership
Units  Issued(1)
  Debt Repaid
Subsequent to
September 30,
2009(1)
  Debt to be
Repaid
Upon
Acquisition
    Debt to be
Assumed
and Not
Repaid
Upon
Acquisition
  Total Value of
Consideration(2)

Five Forks Place, Simpsonville, SC

  $      167,962     $ 39   $      $ 5,408   $ 8,302

Newport Towne Center, Newport, TN

         16,349       19     6,198            6,495

Excel Centre, San Diego, CA

    1,792 (3)      632,484    
65
           12,989     25,598

Red Rock Commons, St. George, UT

         265,286       240     6,950 (4)          11,700
                                         

Total

  $ 1,792 (3)    449,597   632,484   $ 363   $ 13,148      $ 18,397   $ 52,095
                                         

 

 

(1)

The amount of cash and number of shares of common stock and operating partnership units to be issued in exchange for our contribution properties will increase to the extent that debt relating to our contribution properties is repaid subsequent to September 30, 2009 and prior to our acquisition of the contribution properties. During the period from September 30, 2009 to March 31, 2010, the following amounts of debt were repaid: (a) $81 relating to Five Forks Place, (b) $57 relating to Newport Towne Center, (c) $122 relating to Excel Centre and (d) $330 relating to Red Rock Commons. See “Certain Relationships and Related Transactions — Contribution Agreements.”

 

(2)

Based on the mid-point of the range of prices set forth on the cover page of this prospectus.

 

(3)

None of our directors or officers will receive any cash in exchange for our contribution properties.

 

(4)

Includes approximately $1,355 of payables due to Mr. Sabin for net advances made for mortgage debt repayments and other capital items relating to Red Rock Commons. Mr. Sabin will use this amount in its entirety to repay his personal credit facility that was used to fund the advances.

The amount of cash, shares of common stock and operating partnership units that we will pay, or issue, in exchange for our contribution properties was determined by our executive officers based on a discounted cash flow analysis, a capitalization rate analysis, an internal rate of return analysis and an assessment of the fair market value of the properties. No single factor was given greater weight than any other in valuing the properties, and the values attributed to the properties do not necessarily bear any relationship to the book value for the applicable property. We did not obtain any recent third-party property appraisals of the properties to be contributed to us in our formation transactions, or any other independent third-party valuations or fairness opinions in connection with our formation transactions. As a result, the consideration we pay for these properties and other assets in our formation transactions may exceed their fair market value.

We anticipate completing the acquisition of the contribution properties and the acquisition properties at or promptly following the completion of this offering. Following the completion of this offering and our formation transactions, substantially all of our assets will be held by, and our operations conducted through, our operating partnership. Our interest in our operating partnership will entitle us to share in cash distributions from, and in the profits and losses of, our operating partnership in proportion to our percentage ownership. As sole general partner of our operating partnership, we generally will have the exclusive power under the partnership agreement to manage and conduct its business, including with respect to property sales and refinancing decisions, subject to certain limited approval and voting rights of the limited partners. Our board of directors will manage the affairs of our company by directing the affairs of our operating partnership.

 

 

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Benefits to Related Parties

Four of our officers, Messrs. Sabin, Nakagawa, Burton and Ottesen, directly or indirectly own 62.5%, 7.5%, 7.5% and 7.5%, respectively, of the ownership interests of the entity that owns Excel Centre. Mr. Sabin owns 100% of the ownership interests of the entities that own Five Forks Place and Newport Towne Center. Four of our officers, Messrs. Sabin, Plumb and Burton, as well as Matthew S. Romney, our Senior Vice President of Capital Markets, directly or indirectly own 82.8%, 0.6%, 0.4% and 1.7%, respectively, of the ownership interests of the entity that owns Red Rock Commons. In exchange for these properties, we will pay to our officers total consideration valued at $17.7 million in the form of 411,130 shares of our common stock and 632,484 operating partnership units. The amount of cash and number of shares of common stock and operating partnership units to be issued in exchange for our contribution properties will increase to the extent that debt relating to our contribution properties is repaid subsequent to September 30, 2009 and prior to our acquisition of the contribution properties. In addition, we will pay approximately $1.4 million of payables due to Mr. Sabin for net advances made for mortgage debt repayments and other capital items relating to Red Rock Commons. Mr. Sabin will use this amount in its entirety to repay his personal credit facility that was used to fund the advances. None of our directors or officers will receive any cash in exchange for our contribution properties.

The following chart reflects the shares of common stock and operating partnership units to be issued and the total value of consideration (dollars in thousands) to be received by our directors and officers in connection with our formation transactions:

 

Contributor(1)

   Shares of Common  Stock
Issued(2)
   Operating Partnership
Units Issued(2)
   Total Value  of
Consideration(2)(3)

Gary B. Sabin

   403,967    465,063    $ 14,774

Spencer G. Plumb

   1,592         27

James Y. Nakagawa

      55,807      949

Mark T. Burton

   1,061    55,807      967

S. Eric Ottesen

      55,807      949

Matthew S. Romney

   4,510         77
                

Total

   411,130    632,484    $ 17,743
                

 

(1)

None of our directors or officers will receive any cash in exchange for our contribution properties.

(2)

The amount of cash and number of shares of common stock and operating partnership units to be issued in exchange for our contribution properties will increase to the extent that debt relating to our contribution properties is repaid subsequent to September 30, 2009 and prior to our acquisition of the contribution properties, which repayments amounted to an aggregate of approximately $363 as of December 31, 2009 (an aggregate of approximately $590 as of March 31, 2010). See “Certain Relationships and Related Transactions — Contribution Agreements.”

(3)

Based on the mid-point of the range of prices set forth on the cover page of this prospectus.

We will provide registration rights to holders of our common stock (including common stock issuable upon redemption of operating partnership units) that will be issued in connection with our formation transactions. See “Shares Eligible for Future Sale — Registration Rights.”

 

 

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Our Structure

The following diagram depicts our expected ownership structure upon the completion of this offering and our formation transactions. Our operating partnership expects to directly or indirectly own the various properties depicted below.

LOGO

 

 

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Conflicts of Interest

The terms of the contribution agreements relating to the properties to be contributed to our operating partnership were not negotiated in an arm’s length transaction but were determined by our management team. In connection with our formation transactions, Messrs. Sabin, Plumb, Nakagawa, Burton, Ottesen and Romney will receive shares of our common stock and/or operating partnership units that are exchangeable for shares of our common stock. The amount of cash, shares of common stock and operating partnership units that we will pay in exchange for our contribution properties was determined by our executive officers based on a discounted cash flow analysis, a capitalization rate analysis, an internal rate of return analysis and an assessment of the fair market value of the properties. No single factor was given greater weight than any other in valuing the properties, and the values attributed to the properties do not necessarily bear any relationship to the book value for the applicable property. We did not obtain any recent third-party property appraisals of the properties to be contributed to us in our formation transactions, or any other independent third-party valuations or fairness opinions in connection with our formation transactions. As a result, the consideration we pay for these properties and other assets in our formation transactions may exceed their fair market value. As of December 31, 2009, the aggregate historical carrying value of the interests in the contribution properties, net of accumulated depreciation and amortization, was approximately $41.9 million. Other than Messrs. Sabin, Plumb, Nakagawa, Burton, Ottesen and Romney, the contributors are not affiliated with us or our management.

Upon the completion of this offering and our formation transactions, there will exist conflicts of interest with respect to certain transactions between the operating partnership unit holders, including some of our directors and officers, on the one hand, and us and our stockholders, on the other. Under the debt maintenance obligations of the contributors’ contribution agreements for the Excel Centre property, we have agreed for a period of up to ten years following the date of this offering to use commercially reasonable efforts consistent with our fiduciary duties to maintain at least $457,500 of debt to enable these contributors to guarantee such debt in order to defer any taxable gain they may incur if our operating partnership repays existing debt.

Each of our executive officers will also have conflicts of interest with us because they will be parties to employment agreements with us. Because of our desire to maintain our relationships with the members of our senior management team with whom we have entered into contribution agreements in connection with our formation transactions and employment agreements, we may choose not to enforce, or may enforce less vigorously, our rights under these agreements. In addition, Mr. Sabin and members of our senior management team own interests in and will continue to manage properties that have not been contributed to us, and their outside business interests could require time and attention away from the management of our affairs. See “Business and Properties — Excluded Properties.”

We will adopt a code of business conduct and ethics and corporate governance guidelines that are designed to eliminate or minimize certain potential conflicts of interest, and the limited partners of our operating partnership will agree that if there is a conflict in the duties we owe to our stockholders and, in our capacity as general partner of our operating partnership, to such limited partners, we will act in the best interests of our stockholders. In addition, our initial board of directors will consist of four independent directors, out of a total of seven, and the listing standards of the New York Stock Exchange, or NYSE, require that a majority of our board of directors be independent directors. Transactions between us and our directors and other entities in which our directors have a material financial interest are subject to certain provisions of Maryland law that address such transactions. We cannot assure you that these policies and protections always will be successful in eliminating the influence of such conflicts. If they are not successful, decisions could be made that might not fully reflect the interests of all of our stockholders.

 

Restrictions on Ownership and Transfer of Our Capital Stock

Due to limitations on the concentration of ownership of REIT stock imposed by the Code, our charter generally prohibits any person from actually or constructively owning more than 9.8% of the outstanding shares

 

 

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of our common stock. Our charter, however, does permit our board of directors, in its sole discretion, to make exceptions for stockholders if our board of directors determines such exceptions will not jeopardize our tax status as a REIT.

Unsecured Revolving Credit Facility

We have obtained commitment letters from Wells Fargo Bank, National Association, which will act as administrative agent, Barclays Bank PLC, KeyBank National Association, Morgan Stanley Senior Funding, Inc., PNC Bank, National Association, Raymond James Bank, FSB, UBS Loan Finance LLC and U.S. Bank National Association, for a $150.0 million unsecured revolving credit facility. We expect the facility to have a term of three years and that we will have the option to extend the facility for one additional year if we meet specified requirements. We also expect the facility to have an accordion feature that may allow us to increase the availability thereunder by $250.0 million to $400.0 million. We intend to use this facility principally to fund growth opportunities and for working capital purposes. We anticipate that the facility will contain customary restrictive covenants for credit facilities of this type. We expect to enter into this facility following the completion of this offering. Although we have received commitment letters for this facility, we may be unable to close on the facility based on the terms described in this prospectus or at all.

 

 

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The Offering

 

Common stock offered by us

   15,000,000 shares
Common stock to be outstanding upon the completion of this offering and our formation transactions    15,599,891 shares(1)

Use of proceeds(1)

  

We will contribute the net proceeds of this offering to our operating partnership. Our operating partnership will subsequently use the net proceeds, which we estimate will be approximately $236.0 million, as follows:

 

•$1.8 million to acquire the interests of the contributors of our contribution properties who are not receiving common stock or operating partnership units,

 

•$13.1 million to repay indebtedness related to our contribution properties,

 

•$0.2 million to pay costs related to the assumption of debt on our contribution properties,

 

•$133.6 million to fund the equity portion of our acquisition properties, excluding closing costs, and

 

•$0.5 million to pay costs related to the assumption of debt on our acquisition properties.

 

The net proceeds remaining after the uses described above, which are estimated to be $86.7 million, as well as the proceeds intended for any of the acquisitions that are not consummated, will be used to pay closing costs on our acquisition properties, to acquire additional properties and for general corporate and working capital purposes. See “Use of Proceeds.”

New York Stock Exchange symbol    “EXL”

 

(1)

Includes 449,597 shares of common stock to be issued in connection with our formation transactions and 150,294 shares of restricted stock to be issued to our directors, officers and employees in connection with this offering (the number of shares of restricted stock to be granted to independent directors is calculated based on awards with an aggregate value of $400,000 divided by the public offering price in this offering) and excludes (a) up to 2,250,000 shares issuable upon exercise of the underwriters’ over-allotment option in full, (b) 632,484 shares issuable upon conversion of outstanding operating partnership units and (c) 1,199,706 shares available for future issuance under our equity incentive award plan. The amount of cash and the number of shares of common stock and operating partnership units to be issued in our formation transactions will increase to the extent that debt relating to our contribution properties is repaid subsequent to September 30, 2009 and prior to the acquisition of the contribution properties, which repayments amounted to an aggregate of approximately $363,000 as of December 31, 2009 (an aggregate of approximately $590,000 as of March 31, 2010).

 

 

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Distribution Policy

We intend to elect to be taxed as a REIT under Sections 856 through 860 of the Code commencing with our taxable year ending December 31, 2010. U.S. federal income tax law requires that a REIT distribute annually at least 90% of its REIT taxable income excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its REIT taxable income including capital gains. For more information, see “Material United States Federal Income Tax Considerations.” Our current policy is to target the payment of regular quarterly distributions to our stockholders and holders of operating partnership units in a range of 70% to 90% of our adjusted funds from operations, or AFFO, or such other amount as will be sufficient to enable us to qualify and maintain our status as a REIT and to avoid the payment of corporate level taxes on our undistributed taxable income. Our derivation of AFFO is described below. We plan to pay our first dividend in respect of the period from the closing of this offering through September 30, 2010, which may be prior to the time that we have fully used the net proceeds of this offering to acquire retail properties.

The timing, form, frequency and amount of distributions will be authorized by our board of directors based upon a variety of factors, including:

 

   

actual results of operations,

 

   

our level of retained cash flows,

 

   

the timing of the investment of the net proceeds of this offering,

 

   

the terms and provisions of our financing agreements, including our unsecured revolving credit facility,

 

   

any debt service requirements,

 

   

capital expenditure requirements for our properties,

 

   

our taxable income,

 

   

the annual distribution requirements under the REIT provisions of the Code,

 

   

our operating expenses, and

 

   

other factors that our board of directors may deem relevant, including the amount of distributions made by our peers.

We anticipate that our estimated cash available for distribution will exceed the annual distribution requirements applicable to REITs. However, under some circumstances, we may be required to pay distributions in excess of cash available for distribution in order to meet these distribution requirements and we may need to use the proceeds from future equity and debt offerings, sell assets or borrow funds to make some distributions. We cannot assure you that our distribution policy will not change in the future.

We compute funds from operations, or FFO, in accordance with standards established by the Board of Governors of NAREIT in its March 1995 White Paper (as amended in November 1999 and April 2002). As defined by NAREIT, FFO represents net income (computed in accordance with generally accepted accounting principles, or GAAP), excluding gains (or losses) from sales of property, plus real estate related depreciation and amortization (excluding amortization of loan origination costs) and after adjustments for unconsolidated partnerships and joint ventures. We compute AFFO by deducting non-incremental revenue generating capital expenditures from FFO and adding back non-cash items, including straight line rents and non-cash components of compensation expense, and by making similar adjustments for unconsolidated partnerships and joint ventures.

Our computation may differ from the methodology for calculating FFO or AFFO utilized by other equity REITs and, accordingly, may not be comparable to such other REITs. Further, FFO and AFFO do not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations, or other commitments and uncertainties. FFO and AFFO should not be considered as an alternative to net income (loss) (computed in accordance with GAAP) as an indicator of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity, nor are they indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions.

 

 

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SUMMARY SELECTED FINANCIAL DATA

The following table sets forth summary selected financial and operating data on a pro forma basis and on a historical basis for Excel Trust, Inc. Predecessor, or our Predecessor. Our Predecessor is not a legal entity, but rather a combination of real estate entities and operations invested in the properties that we refer to as Five Forks Place, Newport Towne Center, Excel Centre and Red Rock Commons. We have not presented historical information for Excel Trust because we have not had any corporate activity since our formation other than the issuance of 1,000 shares of common stock in connection with the initial capitalization of our company and because we believe that a discussion of the results of Excel Trust would not be meaningful.

The following pro forma and historical information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our unaudited pro forma condensed combined financial statements and historical financial statements and related notes thereto included elsewhere in this prospectus. The historical combined balance sheet information as of December 31, 2009 and 2008 of our Predecessor and the historical combined statements of operations information for the years ended December 31, 2009, 2008 and 2007 of our Predecessor have been derived from the historical combined financial statements and related notes appearing elsewhere in this prospectus. The historical combined balance sheet information as of December 31, 2007 has been derived from the audited combined financial statements of our Predecessor.

The unaudited pro forma condensed combined balance sheet data are presented as if this offering and our formation transactions all had occurred on December 31, 2009, and the unaudited pro forma condensed combined statement of operations and other data for the year ended December 31, 2009 are presented as if this offering and our formation transactions all had occurred on January 1, 2009. The pro forma information is not necessarily indicative of what our actual financial position or results of operations would have been as of or for the period indicated, nor does it purport to represent our future financial position or results of operations.

 

 

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    Year Ended December 31,  
    Pro Forma
2009
    2009     2008     2007(1)  
   

(Dollars in thousands)

 

Operating Data

       

Total revenues

  $ 18,776      $ 4,990      $ 3,832      $ 4,533   

Expenses:

       

Property operating expenses

    4,459        1,229        1,148        1,002   

Administrative and miscellaneous

    2,639        45        43        15   

Depreciation and amortization

    7,646        2,045        1,403        1,575   
                               

Total expenses

    14,744        3,319        2,594        2,592   

Net operating income

    4,032        1,671        1,238        1,941   

Interest expense

    (4,259     (1,359     (1,593     (1,593

Interest income

    6        6        29        35   
                               

Net income (loss)

    (221     318        (326     383   

Net income attributable to non-controlling interest

    (9     75        56        272   
                               

Net income (loss) attributable to controlling interest

  $ (212   $ 243      $ (382   $ 111   
                               

Pro Forma consolidated basic and diluted net loss per share

  $ (0.01                     

Pro Forma consolidated weighted average common shares — basic

    15,468,384                        

Pro Forma consolidated weighted average common shares — diluted

    15,599,891                        

Other Data

       

Funds from operations(2)

  $ 7,425      $ 2,363      $ 1,077      $ 1,958   

 

    As of December 31,
    Pro Forma
2009
  2009   2008   2007(1)
   

(Dollars in thousands)

Balance Sheet Data

       

Properties, net

  $ 212,842   $ 41,869   $ 37,642   $ 37,688

Cash and cash equivalents

    87,468     661     538     706

Total assets

    324,598     45,456     42,131     43,112

Mortgage notes payable

    71,126     30,190     31,182     32,899

Total liabilities

    80,915     35,934     33,445     34,328

Owners’ equity

    234,099     8,622     7,930     8,132

Non-controlling interests

    9,584     900     756     652

Total liabilities and equity

    324,598     45,456     42,131     43,112

Other Data

       

Operating properties

       

Number

    17     3     3     3

Total owned gross leasable area

    1,304,674     203,448     203,448     203,448

Other properties

    3     1     1     1

 

(1)

In January 2007, we acquired Newport Towne Center and Red Rock Commons. The operating results of Newport Towne Center are included in the combined statement of operations from the acquisition date.

 

(2)

We present FFO because we consider it an important supplemental measure of our operating performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. FFO is intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO excludes depreciation and amortization unique to real estate, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared year-over-year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from net income. We compute FFO in accordance with standards established by the Board of Governors of NAREIT in its March 1995 White Paper (as amended in November 1999 and April 2002). As defined by NAREIT, FFO represents net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus real estate related depreciation and amortization (excluding amortization of loan origination costs) and after adjustments for unconsolidated partnerships and joint ventures. Our computation may differ from the methodology for calculating FFO utilized by other equity REITs and, accordingly, may not be comparable to such other REITs. Further, FFO does not represent amounts available for management’s discretionary use because

 

 

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  of needed capital replacement or expansion, debt service obligations, or other commitments and uncertainties. FFO should not be considered as an alternative to net income (loss) (computed in accordance with GAAP) as an indicator of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions. The following table presents a reconciliation of our pro forma and historical FFO for the period presented (in thousands):

 

     Year Ended December 31, 2009
     Pro Forma     Historical

Net income (loss)

   $ (221   $ 318

Adjustments:

    

Real estate depreciation and amortization

     7,646        2,045
              

Funds from operations

   $ 7,425      $ 2,363
              

 

 

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RISK FACTORS

An investment in our common stock involves risks. In addition to other information contained in this prospectus, you should carefully consider the following factors before acquiring shares of our common stock offered by this prospectus. The occurrence of any of the following risks might cause you to lose all or a part of your investment. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled “Forward-Looking Statements.”

Risks Related to Our Properties, Our Business and Our Growth Strategy

We may be unable to invest the proceeds of this offering on acceptable terms or at all, which may harm our financial condition and operating results.

We expect to receive net offering proceeds of $236.0 million upon the completion of this offering. In addition, we intend to have in place a $150.0 million unsecured revolving credit facility after the completion of this offering. However, we cannot assure you that we will be able to enter into this new facility. We intend to use $133.6 million of these proceeds to fund the equity portion of our acquisition properties, excluding closing costs. We will also pay approximately $1.8 million to acquire the interests of the contributors of our contribution properties who are not receiving common stock or operating partnership units, which amount will increase to the extent that debt relating to our contribution properties is repaid subsequent to September 30, 2009 and prior to our acquisition of the contribution properties, which repayments amounted to an aggregate of approximately $363,000 as of December 31, 2009 (an aggregate of approximately $590,000 as of March 31, 2010). We expect to use approximately $13.1 million to repay indebtedness related to our contribution properties, and we will pay approximately $0.7 million of costs relating to our assumption of debt on our contribution and acquisition properties. The net proceeds remaining after these uses, which are estimated to be $86.7 million, as well as the proceeds intended for any of the acquisitions described below that are not consummated, will be used to acquire additional properties and for general corporate and working capital purposes. However, such additional properties have not yet been identified and, as a result, you will be unable to evaluate the economic merits of our investments prior to your investment decision. We will have broad authority to use such net proceeds to acquire any properties that we may identify in the future, and we may use those proceeds to make investments with which you may not agree. In addition, our investment policies may be amended or revised from time to time at the discretion of our board of directors, without a vote of our stockholders. These factors will increase the uncertainty, and thus the risk, of investing in our common stock. Until we are able to acquire the properties we have under contract and to identify and purchase additional properties, we intend to invest temporarily the net proceeds remaining after these uses in interest-bearing accounts and short-term, interest-bearing securities. We do not have any policies that limit the duration of these temporary investments or the amount of the offering proceeds that may be invested in those securities. If we are unable to complete the acquisitions of properties under contract or acquire other properties on acceptable terms or timeframes, our operating results and ability to pay distributions to you may suffer.

Our planned property acquisitions are subject to due diligence, closing and other conditions that may prevent us from acquiring those properties.

We have entered into agreements for the contribution of four properties to us. In addition, we are under contract to acquire 16 new properties, totaling 1,186,826 square feet of gross leasable area, including a 12.7 acre land parcel, for an aggregate purchase price of approximately $187.9 million. Our ability to complete these acquisitions depends on many factors, including the completion of our due diligence and satisfaction of customary closing conditions. In addition, the purchase of the Lowe’s property and each of the portions of the Shops at Foxwood property leased to Publix Supermarkets, McDonald’s and Gateway Bank are subject to the right of first refusal of the respective tenants to purchase such properties, or portions thereof, and there can be no assurance that the tenants will not exercise their right to purchase these properties. Furthermore, the contribution of, and our assumption of debt on, Excel Centre, Five Forks Place, 5000 South Hulen, Grant Creek Town Center,

 

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Lowe’s, St. Mariner’s Point Shopping Center and Merchants Central Shopping Center is subject to the prior consent of the lenders of the financing for such properties and there can be no assurance that we will be able to obtain the consent of these lenders. The inability to complete any of these acquisitions or obtain the required consents within our anticipated time frames may harm our financial condition, results of operations, cash flow and ability to pay distributions to you.

Current challenging economic conditions facing us and our tenants may have a material adverse effect on our financial condition and results of operations.

We and our tenants are susceptible to adverse economic developments in the United States. The United States has been in a recession and this challenging economic environment may continue into the future. There can be no assurance that government responses to disruptions in the economy and in the financial markets will restore consumer confidence. General economic factors that are beyond our control, including, but not limited to, the current recession, decreases in consumer confidence, reductions in consumer credit availability, increasing consumer debt levels, rising energy costs, tax rates, increasing business layoffs, downsizing and industry slowdowns, and/or rising inflation, could have a negative impact on the business of our tenants. In turn, this could have a material adverse effect on our business because current or prospective tenants may, among other things (1) have difficulty paying us rent as they struggle to sell goods and services to consumers, (2) be unwilling to enter into or renew leases with us on favorable terms or at all, (3) seek to terminate their existing leases with us or seek downward rental adjustment to such leases, or (4) be forced to curtail operations or declare bankruptcy. This may have a material adverse effect on our financial condition and results of operations.

The decrease in demand for retail space may have a material adverse effect on our financial condition and results of operations.

Our portfolio of properties consists primarily of retail properties and because we seek to acquire similar properties, a decrease in the demand for retail space may have a greater adverse effect on our business and financial condition than if we owned a more diversified real estate portfolio. The market for retail space has been, and could continue to be, adversely affected by weakness in the national, regional and local economies, the adverse financial condition of some large retailing companies, the ongoing consolidation in the retail sector, the excess amount of retail space in a number of markets and increasing consumer purchases through catalogues or the Internet. Although we will take current economic conditions into account in acquiring properties in the future, our long-term success depends in part on improving economic conditions and the eventual return of a stable and dependable financing market for retail real estate. To the extent that these conditions continue, they are likely to negatively affect market rents for retail space and could materially and adversely affect our financial condition, results of operations, cash flow, the trading price of our common stock, our ability to satisfy our debt service obligations and our ability to make distributions to our stockholders.

Our debt maintenance obligations require us to maintain certain debt, which could limit our operating flexibility.

In our formation transactions, Messrs. Sabin, Nakagawa, Burton and Ottesen and certain other individuals will contribute the Excel Centre property to our operating partnership. We have agreed for a period of up to ten years following the date of this offering to use commercially reasonable efforts consistent with our fiduciary duties to maintain at least $457,500 of debt to enable the contributors of the Excel Centre property to guarantee such debt in order to defer any taxable gain they may incur if our operating partnership repays existing debt. The debt maintained must meet certain requirements, including, in certain cases, with respect to the value of the property securing such indebtedness. Accordingly, this debt maintenance obligation may affect the way in which we conduct our business or incur indebtedness. During this period, the existence of the debt maintenance obligations could require us to maintain debt at a higher level than we might otherwise choose. Higher debt levels could adversely affect our ability to make distributions to our stockholders.

 

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We have no operating history as a REIT or a public company and may not be successful in operating as a public REIT, which may adversely affect our ability to make distributions to stockholders.

We were formed in December 2009, and have no operating history as a REIT or a public company. We cannot assure you that our management team’s past experience will be sufficient to operate our company successfully as a REIT or a public company. Failure to maintain REIT status would have an adverse effect on our cash available for distribution to stockholders.

We have not obtained any recent appraisals for the 20 properties we expect to acquire in our formation transactions. The terms of the contribution agreements related to four of these properties, each of which is wholly or majority owned by our directors and officers, were not negotiated in an arm’s length transaction, and the consideration we pay for these and the other properties we expect to acquire in our formation transactions may exceed their aggregate fair market value.

Our directors and officers, including Messrs. Sabin, Plumb, Nakagawa, Burton, Ottesen and Romney, will receive total consideration in our formation transactions valued at $17.7 million in the form of 411,130 shares of our common stock and 632,484 operating partnership units. These amounts will increase to the extent that debt relating to our contribution properties is repaid subsequent to September 30, 2009 and prior to our acquisition of the contribution properties, which repayments amounted to an aggregate of approximately $363,000 as of December 31, 2009 (an aggregate of approximately $590,000 as of March 31, 2010). We have not obtained any recent third-party appraisals of the contribution properties or the acquisition properties to be obtained by our operating partnership in our formation transactions, nor have we obtained any independent third-party valuations or fairness opinions in connection with our formation transactions. The terms of the contribution agreements relating to these properties were not negotiated in an arm’s length transaction but were determined by our management team. As a result, the consideration we pay for these and the other properties we expect to acquire in our formation transactions may exceed the fair market value of these properties. As of December 31, 2009, the aggregate historical carrying value of the interests in the contribution properties, net of accumulated depreciation and amortization, was approximately $41.9 million.

The amount of cash and number of shares of common stock and operating partnership units to be issued to the contributors has been fixed, except to the extent that debt relating to our contribution properties is repaid subsequent to September 30, 2009 and prior to our acquisition of the contribution properties, and because of this, the actual value of the consideration we pay to these individuals for our contribution properties will depend on the initial public offering price. The initial public offering price of our common stock will be determined in consultation with the underwriters. Among the factors to be considered are our record of operations, our management, our estimated net income, our estimated FFO, our estimated cash available for distribution to you, our anticipated dividend yield, our growth prospects, the current market valuations, financial performance and dividend yields of publicly traded companies considered by us and the underwriters to be comparable to us and the current state of the commercial real estate industry and the economy as a whole. The initial public offering price will not necessarily bear any relationship to our book value or the fair market value of our assets. Accordingly, these individuals and other contributors of the contribution properties receiving shares of our common stock or operating partnership units may receive value greater than the fair market value of the contribution properties if the initial public offering price of our common stock increases.

Our expansion strategy may not yield the returns expected, may result in disruptions to our business, may strain our management resources and may adversely affect our operations.

We expect to expand rapidly after we complete this offering and our formation transactions. This anticipated rapid growth will require substantial attention from our existing management team, which may divert management’s attention from our current properties and impair our relationships with our current tenants and employees. Implementing our growth plan also will require that we expand our management and staff with qualified and experienced personnel and that we implement administrative, accounting and operational systems

 

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sufficient to integrate new properties into our portfolio. We also must manage future property acquisitions without incurring unanticipated costs or disrupting the operations at our existing properties. Managing new properties requires a focus on leasing and retaining tenants. If we fail to successfully integrate future acquisitions into our portfolio, or if newly acquired properties fail to perform as we expect, our results of operations, financial condition and ability to pay distributions could suffer.

We may be unable to identify, acquire, develop or operate properties successfully, which could harm our financial condition and ability to pay distributions to you.

We continue to evaluate the market for available properties and may acquire additional properties when attractive opportunities exist. We also may develop or substantially renovate other properties. Acquisition, development and renovation activities are subject to significant risks, including:

 

   

we may be unable to obtain financing on favorable terms (or at all),

 

   

changing market conditions, including competition from others, may diminish our opportunities for acquiring a desired property on favorable terms or at all. Even if we enter into agreements for the acquisition of properties, these agreements are likely to be subject to customary conditions to closing, including completion of due diligence investigations to our satisfaction,

 

   

we may spend more time or money than we budget to improve or renovate acquired properties or to develop properties,

 

   

we may abandon development activities after expending significant resources,

 

   

we may be unable to quickly and efficiently integrate new properties, particularly if we acquire portfolios of properties, into our existing operations,

 

   

we may fail to obtain the financial results expected from the properties we acquire or develop, making them unprofitable or less profitable than we had expected,

 

   

market and economic conditions may result in higher than expected vacancy rates and lower than expected rental rates,

 

   

when we develop properties, we may encounter delays or refusals in obtaining all necessary zoning, land use, building, occupancy and other required governmental permits and authorizations,

 

   

we may experience difficulty in obtaining any required consents of third parties such as tenants and mortgage lenders,

 

   

acquired and developed properties may have defects we do not discover through our inspection processes, including latent defects that may not reveal themselves until many years after we put a property in service, and

 

   

we may acquire land, properties or entities owning properties which are subject to liabilities and for which, in the case of unknown liabilities, we may have limited or no recourse.

The realization of any of the above risks could significantly and adversely affect our financial condition, results of operations, cash flow, per share trading price of our common stock, ability to satisfy our debt service obligations and ability to pay distributions to you.

We may fail to obtain the financial results expected from the properties we acquire or develop, making them unprofitable or less profitable than we had expected.

We expect to acquire and/or develop a number of properties in the near future. In deciding whether to acquire or develop a particular property, we make certain assumptions regarding the expected future performance

 

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of that property. If a number of these properties do not perform as expected, such properties may be unprofitable or less profitable than we expected and our financial performance may be adversely affected.

We may not be successful in identifying acquisitions or development projects that meet our investment criteria, which may impede our growth.

Part of our business strategy is expansion through acquisitions and development projects, which requires us to identify acquisition and development candidates that satisfy our investment criteria and are compatible with our growth strategy. We may not be successful in identifying real estate properties or other assets that meet our acquisition or development criteria or in completing acquisitions or developments on satisfactory terms. Failure to identify or complete acquisitions or developments may slow our growth, which may materially adversely affect our operations.

We may suffer economic harm as a result of allocating resources to unprofitable efforts to enter new markets.

The properties in our initial portfolio are located in 13 states, and as we grow our business we will expand our operations into markets where we do not currently operate. We may fail to accurately gauge conditions in a new market prior to entering it, and therefore may not achieve our anticipated results in the new market. If this occurs, our cash flow from operations may be adversely affected.

We may be unable to generate sufficient cash flows from our operations to make distributions to our stockholders at expected levels.

To qualify for taxation as a REIT, we will be required to annually distribute to our stockholders at least 90% of our REIT taxable income excluding capital gains. Our current policy is to target the payment of regular quarterly distributions to our stockholders and holders of operating partnership units in a range of 70% to 90% of our AFFO, or such other amount as will be sufficient to enable us to qualify and maintain our status as a REIT and to avoid the payment of corporate level taxes on our undistributed taxable income. Our board of directors has the sole discretion to determine the timing, form, frequency and amount of any distributions to our stockholders. The timing, form, frequency and amount of distributions will be authorized by our board of directors based upon a variety of factors, including:

 

   

actual results of operations,

 

   

our level of retained cash flows,

 

   

the timing of the investment of the net proceeds of this offering,

 

   

the terms and provisions of our financing agreements, including our unsecured revolving credit facility,

 

   

any debt service requirements,

 

   

capital expenditure requirements for our properties,

 

   

our taxable income,

 

   

the annual distribution requirements under the REIT provisions of the Code,

 

   

our operating expenses, and

 

   

other factors that our board of directors may deem relevant, including the amount of distributions made by our peers.

Until such time as we are able to acquire the properties we have under contract, identify and purchase additional properties with our equity growth capital and build a portfolio of income-producing properties, the amount of distributions to our stockholders may be limited. Under some circumstances, we may be required to pay distributions in excess of cash available for distribution in order to meet these distribution requirements and we may need to use the proceeds from future equity and debt offerings, sell assets or borrow funds to make some distributions, or reduce the level of distributions to our stockholders. We cannot assure you that our distribution policy will not change in the future. If we need to borrow funds on a regular basis to meet our distribution requirements or if we reduce the amount of our distributions, our business, financial condition and results of operations and the trading price of our common stock may be materially and adversely affected.

 

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Inflation may adversely affect our financial condition and results of operations.

Many of our leases require the tenant to pay its share of operating expenses, including common area maintenance, real estate taxes and insurance. However, increased inflation may have a more pronounced negative impact on our mortgage and debt interest and general and administrative expenses because these costs could increase at a rate higher than our rents. Also, inflation may adversely affect tenant leases with stated rent increases or limits on such tenant’s obligation to pay its share of operating expenses, which could be lower than the increase in inflation at any given time. For example, certain of our triple-net and bond leases for freestanding retail properties do not include rent escalation clauses and therefore tenants under such leases pay a flat rental rate throughout the life of their lease. Inflation could also have an adverse effect on consumer spending, which may impact our tenants’ sales and, in turn, our average rents.

Our property taxes could increase due to property tax rate changes or reassessment, which may adversely impact our cash flows.

Even if we qualify as a REIT for federal income tax purposes, we will be required to pay some state and local taxes on our properties. The real property taxes on our properties may increase as property tax rates change or as our properties are assessed or reassessed by taxing authorities. Therefore, the amount of property taxes we pay in the future may increase substantially. If the property taxes we pay increase, our cash flow would be impacted, and our ability to pay expected dividends to our stockholders may be adversely affected.

Our success depends on key personnel with extensive experience dealing with the commercial real estate industry, and the loss of these key personnel could threaten our ability to operate our business successfully.

Our future success depends, to a significant extent, on the continued services of our management team. In particular, we depend on the efforts of Gary Sabin, our Chairman and Chief Executive Officer, Spencer Plumb, our President and Chief Operating Officer, James Nakagawa, our Chief Financial Officer, Mark Burton, our Chief Investment Officer and Senior Vice President of Acquisitions, and Eric Ottesen, our Senior Vice President and General Counsel. Among the reasons that Messrs. Sabin, Plumb, Nakagawa, Burton and Ottesen are important to our success is that each has a national or regional reputation in the commercial real estate industry based on their extensive experience in running public and private companies, including REITs, devoted to real estate investment, management and development. Each member of our management team has developed informal relationships through past business dealings with numerous members of the commercial real estate community, including current and prospective tenants, lenders, real estate brokers, developers and managers. We expect that their reputations will attract business and investment opportunities before the active marketing of properties and will assist us in negotiations with lenders, existing and potential tenants, and industry personnel. If we lost their services, our relationships with such lenders, existing and prospective tenants, and industry personnel could suffer. We will enter into employment agreements with each of our executive officers, but we cannot guarantee that they will not terminate their employment prior to the end of the term.

Failure by any major tenant to make rental payments to us, because of a deterioration of its financial condition or otherwise, could seriously harm our performance.

As of December 31, 2009, our two largest retail tenants were Walgreen Co. and Lowe’s Home Centers, the scheduled annualized base rents for which represented 12.8% and 9.8%, respectively, of our total retail annualized base rent. As of December 31, 2009, our three largest office tenants were Kaiser Permanente, Swinerton, Inc. and UBS Financial Services, the scheduled annualized base rents for which represented 39.7%, 16.7% and 15.2%, respectively, of our total office annualized base rent. Our performance depends on our ability to collect rent from these and other tenants. At any time, our tenants may experience a downturn in their business that may significantly weaken their financial condition, whether as a result of general economic conditions or otherwise. As a result, our tenants may fail to make rental payments when due under a number of leases, delay a

 

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number of lease commencements, decline to extend or renew a number of leases upon expiration, close a number of stores or declare bankruptcy. Any of these actions could result in the termination of the tenant’s leases and the loss of rental income attributable to the terminated leases. In addition, lease terminations by a major tenant or non-owned anchor or a failure by that major tenant or non-owned anchor to occupy the premises could result in lease terminations or reductions in rent by other tenants in the same shopping centers under the terms of some leases. In that event, we may be unable to re-lease the vacated space at attractive rents or at all. Furthermore, because many of our leases are triple-net, the failure of a tenant to make payments could result not only in lost rental income, but also in an increase in our operating expenses. The occurrence of any of the situations described above, particularly if it involves a substantial tenant or non-owned anchor with leases in multiple locations, could seriously harm our performance.

The bankruptcy of a tenant may adversely affect the income produced by and the value of our properties.

The bankruptcy or insolvency of a tenant may adversely affect the income produced by our properties. For example, in January 2009, the anchor tenant of Newport Towne Center, Goody’s Family Clothing, declared bankruptcy, defaulted on its lease and vacated its space. We did not re-lease this vacated space until March 2010. We cannot assure you that any tenant that files for bankruptcy protection will continue to pay rent. If any tenant becomes a debtor in a case under the Bankruptcy Code, we cannot evict the tenant solely because of the bankruptcy. The bankruptcy court also might authorize the tenant to reject and terminate its lease with us, which would generally result in any unpaid, pre-bankruptcy rent being treated as an unsecured claim. An unsecured claim may be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims. In addition, our claim against the tenant for unpaid, future rent would be subject to a statutory cap equal to the greater of (1) one year of rent or (2) 15% of the remaining rent on the lease (not to exceed three years of rent). This cap might be substantially less than the remaining rent actually owed under the lease. Additionally, a bankruptcy court may require us to turn over to the estate all or a portion of any deposits, amounts in escrow, or prepaid rents. Our claim for unpaid, pre-bankruptcy rent, our lease termination damages and claims relating to damages for which we hold deposits or other amounts that we were forced to repay would likely not be paid in full.

The assets we acquire in connection with our formation transactions may be subject to unknown liabilities that affect the value and profitability of these properties.

As part of our formation transactions, we expect to acquire the contribution properties and the acquisition properties. These assets may be subject to existing liabilities that are unknown at the time we complete this offering which could affect such properties’ valuation or revenue potential. Unknown liabilities might include liabilities for cleanup or remediation of undisclosed environmental conditions; claims of tenants, vendors or other persons dealing with the entities prior to this offering (that had not been asserted or threatened prior to this offering); tax liabilities and accrued but unpaid liabilities incurred in the ordinary course of business. The existence of such liabilities could significantly adversely affect the value of the property subject to such liability and our ability to make distributions to you.

Risks Related to the Real Estate Industry

Significant competition may decrease or prevent increases in our properties’ occupancy and rental rates and may reduce our investment opportunities.

We compete with numerous owners, operators and developers for acquisitions and development of retail shopping centers, including institutional investors, other REITs and other owner-operators of community and neighborhood shopping centers, some of which own or may in the future own properties similar to ours in the same submarkets in which our properties are located. We also face significant competition in leasing available space to prospective tenants at our operating properties. Recent economic conditions have caused a greater than normal amount of space to be available for lease generally and in the markets in which our properties are located

 

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due to increased tenant delinquencies and/or defaults under leases, generally lower demand for rentable space, as well as potential oversupply of rentable space. In addition, business failures and downsizings have led to reduced consumer demand for retail products and services, which in turn has led to retail business failures or downsizings and reduced demand for retail space. The actual competition for tenants varies depending upon the characteristics of each local market (including current economic conditions) in which we own and manage property. We believe that the principal competitive factors in attracting tenants in our market areas are location, demographics, price, the presence of anchor stores and appearance of properties. Increased competition for tenants may require us to make unbudgeted capital improvements, while decreased occupancy could lower our revenues and cause us to incur expenses on vacant spaces, both of which may reduce cash available for distributions to stockholders. Our competitors may have substantially greater financial resources than we do and may be able to accept more risk than we can prudently manage. In the future, competition from these entities may reduce the number of suitable investment opportunities offered to us or increase the bargaining power of property owners seeking to sell. Further, as a result of their greater resources, those entities may have more flexibility than we do in their ability to offer rental concessions to attract tenants. If our competitors offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, we may lose potential tenants and we may be pressured to reduce our rental rates below those we currently charge in order to retain tenants when our tenants’ leases expire. As a result, our financial condition, results of operations, cash flow, per share trading price of our common stock, ability to satisfy our debt service obligations and ability to pay distributions to you may be adversely affected. As of December 31, 2009, leases were scheduled to expire in 2010 and 2011 on a total of approximately 3.3% and 7.7%, respectively, of the gross leasable area of our operating properties.

Uninsured and underinsured losses could adversely affect our operating results and our ability to make distributions to our stockholders.

We carry comprehensive general liability, fire and extended coverage and loss of rental insurance covering all of the contribution properties under a blanket portfolio policy. We believe the policy specifications and insured limits are adequate given the relative risk of loss, cost of the coverage and standard industry practice. We intend to carry similar insurance with respect to future acquisitions as appropriate. Our headquarters is one of the contribution properties and is located in San Diego, California, which is an area that is more likely to be subject to earthquakes. We presently do not carry earthquake insurance on our headquarters. In the future, we may be unable to renew or duplicate our current insurance coverage in adequate amounts or at reasonable prices. Insurance companies may no longer offer coverage against certain types of losses, such as losses due to terrorist acts, environmental liabilities, or other catastrophic events, or, if offered, the expense of obtaining these types of insurance may not be justified.

If we experience a loss that is uninsured or that exceeds policy limits, we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties. We may choose not to use insurance proceeds to replace a property after it has been damaged or destroyed, if inflation, changes in building codes and ordinances, environmental considerations and other factors make it impractical or undesirable. In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged. If any of our properties were to experience a catastrophic loss, it could seriously disrupt our operations, delay revenue and result in large expenses to repair or rebuild the property. Events such as these could adversely affect our results of operations, our ability to meet our obligations and our ability to make distributions to our stockholders.

While we evaluate the credit ratings of each of our insurance companies at the time we enter into or renew our policies, the financial condition of one or more of these insurance companies could significantly deteriorate to the point that they may be unable to pay future insurance claims. This risk has increased as a result of the current economic environment and ongoing disruptions in the financial markets. The inability of any of these insurance companies to pay future claims under our policies may adversely affect our financial condition and results of operations.

 

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Our properties depend on anchor stores or major tenants to attract shoppers and could be adversely affected by the loss of, or a store closure by, one or more of these tenants.

Regional shopping centers are typically anchored by large, nationally recognized tenants. The value of our retail properties with anchor tenants, as well as the value of retail properties we may seek to acquire, could be adversely affected if these tenants fail to comply with their contractual obligations, seek concessions in order to continue operations or cease their operations. Consolidations among large retail establishments typically result in the closure of existing stores or duplicate or geographically overlapping store locations. We will not be able to control the disposition of those large retail establishments following a consolidation, nor will we control the vacant space that is not re-leased to closed stores. Some of our tenants are entitled to modify the terms of their existing leases in the event of such closures. The modification could be unfavorable to us as the lessor and could decrease rents or expense recovery charges. Additionally, major tenant closures may result in decreased customer traffic which could lead to decreased sales at other stores. If the sales of stores operating in our properties were to decline significantly due to closing of anchors, economic conditions or other reasons, tenants may be unable to pay their minimum rents or expense recovery charges. In the event of default by a tenant or anchor store, we may experience delays and costs in enforcing our rights as landlord to recover amounts due to us under the terms of our agreements with those parties.

Illiquidity of real estate investments may make it difficult for us to sell properties in response to market conditions and could harm our financial condition and ability to make distributions.

Equity real estate investments are relatively illiquid and therefore will tend to limit our ability to vary our portfolio promptly in response to changing economic or other conditions. To the extent the properties are not subject to triple-net leases, some significant expenditures such as real estate taxes and maintenance costs are generally not reduced when circumstances cause a reduction in income from the investment. Should these events occur, our income and funds available for distribution could be adversely affected. Properties subject to triple-net leases may, in certain circumstances, be more illiquid than other properties as they may have been developed to suit the needs of a particular tenant. In addition, as a REIT, we may be subject to a 100% tax on net income derived from the sale of property considered to be held primarily for sale to customers in the ordinary course of our business. We may seek to avoid this tax by complying with certain safe harbor rules that generally limit the number of properties we may sell in a given year, the aggregate expenditures made on such properties prior to their disposition, and how long we retain such properties before disposing of them. However, we can provide no assurance that we will always be able to comply with these safe harbors. If compliance is possible, the safe harbor rules may restrict our ability to sell assets in the future and achieve liquidity that may be necessary to fund distributions. In addition, some of our tenants, including Gateway Bank, Kaiser Permanente, Lowe’s Home Centers, McDonald’s, Publix Supermarkets and Walgreens, have rights of first refusal or rights of first offer to purchase the properties, or portions thereof, in which they lease space in the event that we seek to dispose of such properties, or portions thereof. The presence of these rights of first refusal and rights of first offer could make it more difficult for us to sell these properties, or portions thereof, in response to market conditions.

We may be unable to renew leases, lease vacant space or re-lease space as leases expire, which could adversely affect our business and our ability to pay distributions to you.

If we cannot renew leases, we may be unable to re-lease our properties at rates equal to or above the current rate. Even if we can renew leases, tenants may be able to negotiate lower rates as a result of market conditions. Our properties currently are located in 13 states. The economic condition of each of our markets may be dependent on one or more industries. An economic downturn in one of these industry sectors or in the markets in which our properties are located may result in an increase in tenant bankruptcies, which may harm our performance in the affected market. Economic and market conditions also may affect the ability of our tenants to make lease payments. Market conditions may also hinder our ability to lease vacant space in newly developed properties. In addition, we may enter into or acquire leases for properties with spaces that are specially suited to

 

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the needs of a particular tenant. Such properties may require renovations, tenant improvements or other concessions in order to lease them to other tenants if the initial leases terminate. Any of these factors could adversely impact our financial condition, results of operations, cash flow, per share trading price of our common stock, our ability to satisfy our debt service obligations and our ability to pay distributions to you.

We may be unable to secure funds for future tenant or other capital improvements, which could limit our ability to attract or replace tenants and adversely impact our ability to make cash distributions to our stockholders.

When tenants do not renew their leases or otherwise vacate their space, it is common that, in order to attract replacement tenants, we will be required to expend funds for tenant improvements and other concessions related to the vacated space. Such tenant improvements may require us to incur substantial capital expenditures. We may not be able to fund capital expenditures solely from cash provided from our operating activities because we must distribute at least 90% of our REIT taxable income excluding net capital gains each year to maintain our qualification as a REIT for U.S. federal income tax purposes. As a result, our ability to fund tenant and other capital improvements through retained earnings may be limited. If we have insufficient capital reserves, we will have to obtain financing from other sources. We may also have future financing needs for other capital improvements to refurbish or renovate our properties. If we are unable to secure financing on terms we feel are acceptable or at all, we may be unable to make tenant and other capital improvements or we may be required to defer such improvements. If this happens, it may cause one or more of our properties to suffer from a greater risk of obsolescence or a decline in value, as a result of fewer potential tenants being attracted to the property or existing tenants not renewing their leases. If we do not have access to sufficient funding in the future, we may not be able to make necessary capital improvements to our properties, pay other expenses or pay distributions to our stockholders.

We could incur significant costs related to government regulation and private litigation over environmental matters involving the presence, discharge or threat of discharge of hazardous or toxic substances, which could adversely affect our operations, the value of our properties, and our ability to make distributions to you.

Our properties may be subject to environmental liabilities. Under various federal, state and local laws, a current or previous owner, operator or tenant of real estate can face liability for environmental contamination created by the presence, discharge or threat of discharge of hazardous or toxic substances. Liabilities can include the cost to investigate, clean up and monitor the actual or threatened contamination and damages caused by the contamination (or threatened contamination).

The liability under such laws may be strict, joint and several, meaning that we may be liable regardless of whether we knew of, or were responsible for, the presence of the contaminants, and the government entity or private party may seek recovery of the entire amount from us even if there are other responsible parties. Liabilities associated with environmental conditions may be significant and can sometimes exceed the value of the affected property. The presence of hazardous substances on a property may adversely affect our ability to sell or rent that property or to borrow using that property as collateral.

Environmental laws also:

 

   

may require the removal or upgrade of underground storage tanks,

 

   

regulate the discharge of storm water, wastewater and other pollutants,

 

   

regulate air pollutant emissions,

 

   

regulate hazardous materials’ generation, management and disposal, and

 

   

regulate workplace health and safety.

 

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We are unaware of any of our existing tenants or any of the tenants in the acquisition properties violating applicable laws and regulations, but we and our tenants cannot completely eliminate the risk of contamination or injury from these materials. If our properties become contaminated, or if a party is injured, we could be held liable for any damages that result. Such liability could exceed our resources and any environmental remediation insurance coverage we have, which could adversely affect our operations, the value of our properties, and our ability to make distributions to you.

Existing conditions at some of our properties may expose us to liability related to environmental matters.

Independent environmental consultants have conducted Phase I or similar environmental site assessments on all of the properties in our initial portfolio. Each of the site assessments has been completed as part of the due diligence in the acquisition process. Site assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed property and surrounding properties. These assessments do not generally include subsurface investigations or mold or asbestos surveys. None of the recent site assessments revealed any past or present environmental liability that we believe would have a material adverse effect on our business, assets or results of operations. However, the assessments may have failed to reveal all environmental conditions, liabilities or compliance concerns. Material environmental conditions, liabilities or compliance concerns may have arisen after the review was completed or may arise in the future; and future laws, ordinances or regulations may impose material additional environmental liability.

We cannot assure you that costs of future environmental compliance will not affect our ability to make distributions to you or that such costs or other remedial measures will not have a material adverse effect on our business, assets or results of operations.

Our properties may contain asbestos or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem, which could adversely affect the value of the affected property and our ability to make distributions to you.

We are required by federal regulations with respect to our properties to identify and warn, via signs and labels, of potential hazards posed by workplace exposure to installed asbestos-containing materials, or ACMs, and potential ACMs. We may be subject to an increased risk of personal injury lawsuits by workers and others exposed to ACMs and potential ACMs at our properties as a result of these regulations. The regulations may affect the value of any of our properties containing ACMs and potential ACMs. Federal, state and local laws and regulations also govern the removal, encapsulation, disturbance, handling and/or disposal of ACMs and potential ACMs when such materials are in poor condition or in the event of construction, remodeling, renovation or demolition of a property.

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing because exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions.

The presence of ACMs or significant mold at any of our properties could require us to undertake a costly remediation program to contain or remove the ACMs or mold from the affected property. In addition, the presence of ACMs or significant mold could expose us to liability to our tenants, their or our employees, and others if property damage or health concerns arise.

Compliance with the Americans with Disabilities Act and similar laws may require us to make significant unanticipated expenditures.

All of our contribution and acquisition properties are required to comply with the Americans with Disabilities Act of 1990, or the ADA. The ADA requires that all public accommodations must meet federal

 

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requirements related to access and use by disabled persons. We believe that the contribution properties were built in substantial conformance with the building codes of their respective cities, including in substantial compliance with the applicable ADA requirements at the time of construction. Although we believe that the acquisition properties substantially comply with present requirements of the ADA, we have not conducted an audit of all such properties to determine compliance. If one or more properties is not in compliance with the ADA, then we would be required to bring the non-compliant properties into compliance. Compliance with the ADA could require removing access barriers. Non-compliance could result in imposition of fines by the U.S. government or an award of damages and/or attorneys’ fees to private litigants, or both. Additional federal, state and local laws also may require us to modify properties or could restrict our ability to renovate properties. Complying with the ADA or other legislation at non-compliant properties could be very expensive. If we incur substantial costs to comply with such laws, our financial condition, results of operations, cash flow, per share trading price of our common stock, our ability to satisfy our debt service obligations and our ability to pay distributions to you could be adversely affected.

We may incur significant unexpected costs to comply with fire, safety and other regulations, which could adversely impact our financial condition, results of operations, and ability to make distributions.

Our contribution and acquisition properties are subject to various federal, state and local regulatory requirements, such as state and local fire and safety requirements, building codes and land use regulations. If we fail to comply with these requirements, we could be subject to governmental fines or private damage awards. We believe that the contribution and acquisition properties are currently in material compliance with all applicable regulatory requirements. However, we do not know whether existing requirements will change or whether future requirements, including any requirements that may emerge from pending or future climate change legislation, will require us to make significant unanticipated expenditures that will adversely impact our financial condition, results of operations, cash flow, the per share trading price of our common stock, our ability to satisfy our debt service obligations and our ability to pay distributions to you.

Litigation may result in unfavorable outcomes.

Like many real estate operators, we may be involved in lawsuits involving premises liability claims and alleged violations of landlord-tenant laws, which may give rise to class action litigation or governmental investigations. Any material litigation not covered by insurance, such as a class action, could result in us incurring substantial costs, harm our financial condition, results of operations, cash flow and ability to pay distributions to you.

Risks Related to Our Organizational Structure

Conflicts of interest could result in our management acting other than in our stockholders’ best interests.

Conflicts of interest exist or could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and our operating partnership or any partner thereof, on the other. Our directors and officers have duties under applicable Maryland law to manage us in a manner consistent with the best interests of our stockholders. At the same time, we, as the general partner of our operating partnership, will have fiduciary duties to manage our operating partnership in a manner beneficial to our operating partnership and its partners. Our duties, as general partner to our operating partnership and its limited partners, therefore, may come into conflict with the duties of our directors and officers to our stockholders. We will be under no obligation to give priority to the separate interests of the limited partners of our operating partnership or our stockholders in deciding whether to cause the operating partnership to take or decline to take any actions. The limited partners of our operating partnership will expressly acknowledge that, as the general partner of our operating partnership, we are acting for the benefit of the operating partnership, the limited partners and our stockholders collectively.

 

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We may choose not to enforce, or to enforce less vigorously, our rights under contribution and other agreements because of conflicts of interest with certain of our directors and officers.    Messrs. Sabin, Plumb, Nakagawa, Burton, Ottesen and Romney and other individuals and entities not affiliated with us or our management have ownership interests in the properties to be contributed to our operating partnership in our formation transactions. Following the completion of this offering and our formation transactions, we, under the agreements relating to the contribution of those interests, will be entitled to indemnification and damages in the event of breaches of representations or warranties made by the members of our management and other contributors. In addition, certain members of senior management will enter into employment agreements with us pursuant to which they will devote substantially all of their business time to our affairs. None of these contribution and employment agreements were negotiated on an arm’s length basis. Messrs. Sabin, Nakagawa, Burton and Ottesen, as members of our management team and contributors of properties, faced conflicts in negotiating the contribution agreements, including the amount of consideration to be received by them for the contributed properties owned by them. We may choose not to enforce, or to enforce less vigorously, our rights under these contribution and employment agreements because of our desire to maintain our ongoing relationships with the individuals involved.

Members of our executive management team have outside business interests that could require time and attention.    Members of our executive management team own interests in properties that have not been contributed to us. In some cases, one or more of these individuals or their affiliates will have management and fiduciary obligations that may conflict with that person’s responsibilities as an officer of our company and may adversely affect our operations. For example, Mr. Sabin and our senior management team will continue to manage various properties that will not be contributed to us, including properties referred to as Bluffton Commons, Kennerly Crossing, Anaheim Garden Walk and LA Fitness. See “Business and Properties — Excluded Properties.”

Certain of our directors and officers may face adverse tax consequences that could prevent the repayment of indebtedness.    The repayment of indebtedness relating to our Excel Centre property will have different effects on holders of operating partnership units than on our stockholders. The parties contributing this property to our operating partnership would incur adverse tax consequences upon the repayment of related debt that differ from the tax consequences to us and our stockholders. Consequently, these holders of operating partnership units, including Messrs. Sabin, Nakagawa, Burton and Ottesen, may have different objectives regarding the appropriate timing of any such repayment of debt. Certain of our directors and officers could exercise their influence in a manner inconsistent with the interests of some, or a majority, of our stockholders, including in a manner which could delay or prevent the repayment of indebtedness.

Our charter, bylaws and Maryland law contain provisions that may delay, defer or prevent a change of control transaction and may prevent our stockholders from receiving a premium for their shares.

Our charter contains ownership limits that may delay, defer or prevent a change of control transaction.    Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, no person may own more than 9.8% of the value of our outstanding shares of capital stock or more than 9.8% in value or number (whichever is more restrictive) of the outstanding shares of our common stock. The board may not grant such an exemption to any proposed transferee whose ownership of in excess of 9.8% of the value of our outstanding shares would result in the termination of our status as a REIT. These restrictions on transferability and ownership will not apply if our board of directors determines that it is no longer in our best interests to attempt to qualify as a REIT. The ownership limit may delay or impede a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders.

 

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We could authorize and issue stock without stockholder approval that may delay, defer or prevent a change of control transaction.    Our charter authorizes us to issue additional authorized but unissued shares of our common stock or preferred stock. In addition, our board of directors may classify or reclassify any unissued shares of our common stock or preferred stock and may set the preferences, rights and other terms of the classified or reclassified shares. Our board of directors may also, without stockholder approval, amend our charter to increase the authorized number of shares of our common stock or our preferred stock that we may issue. The board of directors could establish a series of common stock or preferred stock that could, depending on the terms of such series, delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders.

Certain provisions of Maryland law could delay, defer or prevent a change of control transaction.    Certain provisions of the Maryland General Corporation Law, or MGCL, may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control. In some cases, such an acquisition or change of control could provide you with the opportunity to realize a premium over the then-prevailing market price of your shares. These MGCL provisions include:

 

   

“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” for certain periods. An “interested stockholder” is generally any person who beneficially owns 10% or more of the voting power of our shares or an affiliate or associate of ours who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then outstanding voting stock. A person is not an interested stockholder under the statute if our board of directors approved in advance the transaction by which he otherwise would have become an interested stockholder. Business combinations with an interested stockholder are prohibited for five years after the most recent date on which the stockholder becomes an interested stockholder. After that period, the MGCL imposes two super-majority voting requirements on such combinations, and

 

   

“control share” provisions that provide that “control shares” of our company acquired in a “control share acquisition” have no voting rights unless holders of two-thirds of our voting stock (excluding interested shares) consent. “Control shares” are shares that, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors. A “control share acquisition” is the direct or indirect acquisition of ownership or control of “control shares” from a party other than the issuer.

In the case of the business combination provisions of the MGCL, we opted out by resolution of our board of directors. In the case of the control share provisions of the MGCL, we opted out pursuant to a provision in our bylaws. However, our board of directors may by resolution elect to opt in to the business combination provisions of the MGCL. Further, we may opt in to the control share provisions of the MGCL in the future by amending our bylaws, which our board of directors can do without stockholder approval.

Maryland law, and our charter and bylaws also contain other provisions that may delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders. See “Restrictions on Ownership and Transfer” and “Certain Provisions of Maryland Law and of Our Charter and Bylaws.”

The ability of our board of directors to revoke our REIT status without stockholder approval may cause adverse consequences to our stockholders.

Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to

 

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qualify as a REIT. If we cease to be a REIT, we would become subject to federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on our total return to our stockholders.

Our board of directors may amend our investing and financing guidelines without stockholder approval, and, accordingly, you would have limited control over changes in our policies that could increase the risk we default under our debt obligations or that could harm our business, results of operations and share price.

Although we are not required to maintain any particular leverage ratio, we intend, when appropriate, to employ prudent amounts of leverage and to use debt as a means of providing additional funds for the acquisition of our target assets and the diversification of our portfolio. Our board of directors has adopted long-term guidelines of limiting our indebtedness to 40% of our gross undepreciated asset value. However, our organizational documents do not limit the amount or percentage of debt that we may incur, nor do they limit the types of properties we may acquire or develop. The amount of leverage we will deploy for particular investments in our target assets will depend upon our management team’s assessment of a variety of factors, which may include the anticipated liquidity and price volatility of the target assets in our investment portfolio, the potential for losses, the availability and cost of financing the assets, our opinion of the creditworthiness of our financing counterparties, the health of the U.S. economy and commercial mortgage markets, our outlook for the level, slope and volatility of interest rates, the credit quality of our target assets and the collateral underlying our target assets. Our board of directors may alter or eliminate our current guidelines on borrowing or investing at any time without stockholder approval. Changes in our strategy or in our investment or leverage guidelines could expose us to greater credit risk and interest rate risk and could also result in a more leveraged balance sheet. These factors could result in an increase in our debt service and could adversely affect our cash flow and our ability to make expected distributions to you. Higher leverage also increases the risk we would default on our debt.

Our rights and the rights of our stockholders to take action against our directors and officers are limited.

Maryland law provides that a director or officer has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Upon the completion of this offering, as permitted by the MGCL, our charter will limit the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:

 

   

actual receipt of an improper benefit or profit in money, property or services, or

 

   

active and deliberate dishonesty established by a final judgment and which is material to the cause of action.

In addition, our charter will authorize us to obligate our company, and our bylaws will require us, to indemnify and pay or reimburse our present and former directors and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist under common law. Accordingly, in the event that actions taken in good faith by any of our directors or officers impede the performance of our company, your ability to recover damages from such director or officer will be limited.

We may invest in properties with other entities, and our lack of sole decision-making authority or reliance on a co-venturer’s financial condition could make these joint venture investments risky.

We may co-invest in the future with third parties through partnerships, joint ventures or other entities. We may acquire non-controlling interests or share responsibility for managing the affairs of a property, partnership,

 

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joint venture or other entity. In such events, we would not be in a position to exercise sole decision-making authority regarding the property or entity. Investments in entities may, under certain circumstances, involve risks not present were a third party not involved. These risks include the possibility that partners or co-venturers:

 

   

might become bankrupt or fail to fund their share of required capital contributions,

 

   

may have economic or other business interests or goals that are inconsistent with our business interests or goals, and

 

   

may be in a position to take actions contrary to our policies or objectives.

Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the partner or co-venturer would have full control over the partnership or joint venture. Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. Actions of partners or co-venturers may cause losses to our investments and adversely affect our ability to qualify as a REIT. In addition, we may in certain circumstances be liable for the actions of our third-party partners or co-venturers if:

 

   

we structure a joint venture or conduct business in a manner that is deemed to be a general partnership with a third party, in which case we could be liable for the acts of that third party,

 

   

third-party managers incur debt or other liabilities on behalf of a joint venture which the joint venture is unable to pay, and the joint venture agreement provides for capital calls, in which case we could be liable to make contributions as set forth in any such joint venture agreement, or

 

   

we agree to cross-default provisions or to cross-collateralize our properties with the properties in a joint venture, in which case we could face liability if there is a default relating to those properties in the joint venture or the obligations relating to those properties.

Risks Related to Our Capital Structure

Debt obligations expose us to increased risk of property losses and may have adverse consequences on our business operations and our ability to make distributions.

After we complete this offering and our formation transactions, we expect to assume outstanding mortgage indebtedness secured by seven properties, and we may incur significant additional debt to finance future acquisition and development activities. As of December 31, 2009, the outstanding mortgage indebtedness secured by these seven properties was approximately $72.7 million. In addition, we intend to have in place a $150.0 million unsecured revolving credit facility after the completion of this offering. We cannot assure you that we will be able to enter into this new facility. In addition, under our contribution agreement with respect to the Excel Centre property, we have agreed to make $457,500 of indebtedness available for guarantee and may enter into similar agreements in the future.

Although we are not required to maintain any particular leverage ratio, we intend, when appropriate, to employ prudent amounts of leverage and to use debt as a means of providing additional funds for the acquisition of our target assets and the diversification of our portfolio. Our board of directors will adopt long-term guidelines of limiting our indebtedness to 40% of our gross undepreciated asset value. However, our organizational documents do not limit the amount or percentage of debt that we may incur, nor do they limit the types of properties we may acquire or develop. The amount of leverage we will deploy for particular investments in our target assets will depend upon our management team’s assessment of a variety of factors, which may include the anticipated liquidity and price volatility of the target assets in our investment portfolio, the potential for losses, the availability and cost of financing the assets, our opinion of the creditworthiness of our financing counterparties, the health of the U.S. economy and commercial mortgage markets, our outlook for the level,

 

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slope and volatility of interest rates, the credit quality of our target assets and the collateral underlying our target assets. Our board of directors may alter or eliminate our current guidelines on borrowing or investing at any time without stockholder approval. Changes in our strategy or in our investment or leverage guidelines could expose us to greater credit risk and interest rate risk and could also result in a more leveraged balance sheet. These factors could result in an increase in our debt service and could adversely affect our cash flow and our ability to make expected distributions to you. Higher leverage also increases the risk we would default on our debt.

We have used and will continue to use debt to finance property acquisitions. Our use of debt may have adverse consequences, including the following:

 

   

Required payments of principal and interest may be greater than our cash flow from operations.

 

   

We may be forced to dispose of one or more of our properties, possibly on disadvantageous terms, to make payments on our debt.

 

   

If we default on our debt obligations, the lenders or mortgagees may foreclose on our properties that secure those loans. Further, if we default under a mortgage loan, we will automatically be in default on any other loan that has cross-default provisions, and we may lose the properties securing all of these loans.

 

   

A foreclosure on one of our properties will be treated as a sale of the property for a purchase price equal to the outstanding balance of the secured debt. If the outstanding balance of the secured debt exceeds our tax basis in the property, we would recognize taxable income on foreclosure without realizing any accompanying cash proceeds to pay the tax (or to make distributions based on REIT taxable income).

 

   

We may not be able to refinance or extend our existing debt. If we cannot repay, refinance or extend our debt at maturity, in addition to our failure to repay our debt, we may be unable to make distributions to our stockholders at expected levels or at all.

 

   

Even if we are able to refinance or extend our existing debt, the terms of any refinancing or extension may not be as favorable as the terms of our existing debt. If the refinancing involves a higher interest rate, it could adversely affect our cash flow and ability to make distributions to stockholders.

If any one of the above were to occur, our financial condition, results of operations, cash flow, cash available for distribution to you, per share trading price of our common stock and our ability to satisfy our debt service obligations could be materially adversely affected.

The commitment letters for our credit facility include restrictive covenants relating to our operations, which could limit our ability to respond to changing market conditions and our ability to make distributions to our stockholders.

The commitment letters for our credit facility impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. For example, we will be subject to a maximum leverage ratio (defined as total liabilities to total asset value) of 0.55 : 1.00 during the term of the loan, which could have the effect of reducing our ability to incur additional debt and consequently reduce our ability to make distributions to our stockholders. The commitment letters also contain limitations on our ability to make distributions to our stockholders in excess of those required to maintain our REIT status. Specifically, our credit facility will limit distributions to the greater of 95% of FFO, or the amount required for us to qualify and maintain our REIT status. In addition, the commitment letters contain customary restrictive covenants requiring us to maintain a minimum fixed charge coverage ratio, a maximum secured indebtedness ratio, a maximum unencumbered leverage ratio, a minimum unencumbered interest coverage ratio and a minimum tangible net worth. These or other limitations may adversely affect our flexibility and our ability to achieve our operating plans.

 

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Recent disruptions in the financial markets and the downturn of the broader U.S. economy could affect our ability to obtain debt financing on reasonable terms or at all and have other adverse effects on us.

The U.S. credit markets in particular continue to experience significant dislocations and liquidity disruptions which have caused the spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the debt markets, making financing terms for borrowers less attractive, and in certain cases have resulted in the unavailability of certain types of debt financing. Continued uncertainty in the credit markets may negatively impact our ability to access additional debt financing or to refinance existing debt maturities on reasonable terms (or at all), which may negatively affect our ability to conduct operations, make acquisitions and fund current and future development and redevelopment projects. In addition, the financial position of the lenders under our credit facilities may worsen to the point that they default on their obligations to make available to us the funds under those facilities. A prolonged downturn in the credit markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan accordingly. In addition, these factors may make it more difficult for us to sell properties or may adversely affect the price we receive for properties that we do sell, as prospective buyers may experience increased costs of debt financing or difficulties in obtaining debt financing. These events in the credit markets have also had an adverse effect on other financial markets in the United States and globally, including the stock markets, which may make it more difficult or costly for us to raise capital through the issuance of common stock, preferred stock or other equity securities.

This reduced access to liquidity has had a negative impact on the U.S. economy, affecting consumer confidence and spending and negatively impacting the volume and pricing of real estate transactions. Additionally, increasing business layoffs, downsizing and industry slowdowns, and/or rising inflation, could have a negative impact on the business of our tenants. This could result in a material adverse effect on our business because current or prospective tenants may, among other things, (1) have difficulty paying rent as consumer spending decreases, (2) be unwilling to enter into or renew leases with us on favorable terms or at all, (3) seek to terminate their existing leases with us or request rent reductions, or (4) be forced to curtail operations or declare bankruptcy. If this downturn in the national economy were to continue or worsen, the value of our properties, as well as the income we receive from our properties, could be adversely affected.

We may engage in hedging transactions, which can limit our gains and increase exposure to losses.

Subject to maintaining our qualification as a REIT, we may enter into hedging transactions to protect us from the effects of interest rate fluctuations on floating rate debt. Our hedging transactions may include entering into interest rate swap agreements or interest rate cap or floor agreements, or other interest rate exchange contracts. Hedging activities may not have the desired beneficial impact on our results of operations or financial condition. No hedging activity can completely insulate us from the risks associated with changes in interest rates. Moreover, interest rate hedging could fail to protect us or adversely affect us because, among other things:

 

   

available interest rate hedging may not correspond directly with the interest rate risk for which we seek protection,

 

   

the duration of the hedge may not match the duration of the related liability,

 

   

the party owing money in the hedging transaction may default on its obligation to pay,

 

   

the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction, and

 

   

the value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value, such downward adjustments, or “mark-to-market losses,” which would reduce our stockholders’ equity.

 

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Hedging involves risk and typically involves costs, including transaction costs, that may reduce our overall returns on our investments. These costs increase as the period covered by the hedging increases and during periods of rising and volatile interest rates. These costs will also limit the amount of cash available for distribution to stockholders. We generally intend to hedge as much of the interest rate risk as management determines is in our best interests given the cost of such hedging transactions. The REIT qualification rules may limit our ability to enter into hedging transactions by requiring us to limit our income from non-qualifying hedges. If we are unable to hedge effectively because of the REIT rules, we will face greater interest rate exposure than may be commercially prudent.

Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to pay distributions to our stockholders.

Interest we pay could reduce cash available for distributions. Upon the completion of this offering and our formation transactions, we do not expect to have any variable rate debt, but we may incur variable rate debt in the future, including borrowings under a $150.0 million unsecured revolving credit facility that we intend to have in place after the completion of this offering. We cannot assure you that we will be able to enter into this new facility. Any increase in interest rates would increase our interest costs with respect to our variable rate debt. These increased interest costs would reduce our cash flows and our ability to make distributions to you. In addition, if we need to repay existing debt during a period of rising interest rates, we could be required to liquidate one or more of our investments in properties at times that may not permit realization of the maximum return on such investments.

If we fail to obtain external sources of capital, which is outside of our control, we may be unable to make distributions to our stockholders, maintain our REIT status, or fund growth.

In order to maintain our status as a REIT and to avoid incurring a nondeductible excise tax, we are required, among other things, to distribute annually at least 90% of our REIT taxable income, excluding any net capital gain. In addition, we will be subject to income tax at regular corporate rates to the extent that we distribute less than 100% of our net taxable income, including any net capital gains. Because of these distribution requirements, we may not be able to fund future capital needs, including any necessary acquisition financing, from operating cash flow. Consequently, we rely on third-party sources to fund our capital needs. We may not be able to obtain financings on favorable terms or at all. Our access to third-party sources of capital depends, in part, on:

 

   

general market conditions,

 

   

the market’s perception of our growth potential,

 

   

with respect to acquisition financing, the market’s perception of the value of the properties to be acquired,

 

   

our current debt levels,

 

   

our current and expected future earnings,

 

   

our cash flow and cash distributions, and

 

   

the market price per share of our common stock.

It will adversely affect our business and limit our growth if we are unable to obtain capital from third-party sources. Without sufficient capital, we may not be able to acquire or develop properties when strategic opportunities exist, satisfy our debt service obligations or make the cash distributions to our stockholders necessary to maintain our qualification as a REIT.

 

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Risks Related to Our REIT Status

Our failure to qualify as a REIT under the Code would result in significant adverse tax consequences to us and would adversely affect our business and the value of our stock.

We intend to operate in a manner that will allow us to qualify as a REIT for federal income tax purposes under the Code. Qualification as a REIT involves the application of highly technical and complex Code provisions, for which there are only limited judicial and administrative interpretations. The fact that we hold substantially all of our assets through a partnership further complicates the application of the REIT requirements. Even a seemingly minor technical or inadvertent mistake could jeopardize our REIT status. Our REIT status depends upon various factual matters and circumstances that may not be entirely within our control. For example, in order to qualify as a REIT, at least 95% of our gross income in any year must be derived from qualifying sources, such as rents from real property, and we must satisfy a number of requirements regarding the composition of our assets. Also, we must make distributions to stockholders aggregating annually at least 90% of our REIT taxable income, excluding net capital gains. In addition, new legislation, regulations, administrative interpretations or court decisions, each of which could have retroactive effect, may make it more difficult or impossible for us to qualify as a REIT, or could reduce the desirability of an investment in a REIT relative to other investments. We have not requested and do not plan to request a ruling from the Internal Revenue Service, or IRS, that we qualify as a REIT, and the statements in this prospectus are not binding on the IRS or any court. Accordingly, we cannot be certain that we will be successful in qualifying as a REIT.

If we fail to qualify as a REIT in any taxable year, we will face serious adverse tax consequences that would substantially reduce the funds available to distribute to you. If we fail to qualify as a REIT:

 

   

we would not be allowed to deduct distributions to stockholders in computing our taxable income and would be subject to federal income tax at regular corporate rates,

 

   

we could also be subject to the federal alternative minimum tax and possibly increased state and local taxes, and

 

   

unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year in which we were disqualified.

In addition, if we fail to qualify as a REIT, we will not be required to make distributions to stockholders. As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital and would adversely affect the value of our common stock.

To maintain our REIT status, we may be forced to borrow funds during unfavorable market conditions to make distributions to our stockholders.

To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our REIT taxable income each year, excluding any net capital gain, and we will be subject to regular corporate income taxes to the extent that we distribute less than 100% of our REIT taxable income each year. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. To maintain our REIT status and avoid the payment of income and excise taxes we may need to borrow funds to meet the REIT distribution requirements. These borrowing needs could result from:

 

   

differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes,

 

   

the effect of non-deductible capital expenditures,

 

   

the creation of reserves, or

 

   

required debt or amortization payments.

 

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We may need to borrow funds at times when the then-prevailing market conditions are not favorable for borrowing. These borrowings could increase our costs or reduce our equity and adversely affect the value of our common stock.

If our operating partnership failed to qualify as a partnership for federal income tax purposes, we would cease to qualify as a REIT and suffer other adverse consequences.

We believe that our operating partnership will be treated as a partnership for federal income tax purposes. As a partnership, our operating partnership will not be subject to federal income tax on its income. Instead, each of its partners, including us, will be required to pay tax on its allocable share of the operating partnership’s income. We cannot assure you, however, that the IRS will not challenge the status of the operating partnership or any other subsidiary partnership in which we own an interest as a partnership for federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating our operating partnership or any such other subsidiary partnership as an entity taxable as a corporation for U.S. federal income tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, we would likely cease to qualify as a REIT. Also, the failure of our operating partnership or any subsidiary partnerships to qualify as a partnership could cause it to become subject to federal and state corporate income tax, which would reduce significantly the amount of cash available for debt service and for distribution to its partners, including us.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

The maximum tax rate applicable to income from “qualified dividends” payable to U.S. stockholders that are individuals, trusts and estates has been reduced by legislation to 15% (through the end of 2010). Dividends payable by REITs, however, generally are not eligible for the reduced rates. Although these rules do not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including the market price of our common stock.

Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

The REIT provisions of the Code limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets does not constitute “gross income” for purposes of the 75% or 95% gross income tests applicable to REITs and described below under “Material United States Federal Income Tax Considerations — Taxation of Our Company.” In addition, such hedging transactions must be properly identified as provided in the Treasury regulations. If we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of the gross income tests applicable to REITs. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a Taxable REIT Subsidiary, or TRS. This could increase the cost of our hedging activities because our TRS would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear.

The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in transactions which would be treated as sales for federal income tax purposes.

A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property held in inventory

 

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primarily for sale to customers in the ordinary course of business. Although we do not intend to hold any properties that would be characterized as inventory held for sale to customers in the ordinary course of our business, subject to certain statutory safe-harbors, such characterization is a factual determination and no guarantee can be given that the IRS would agree with our characterization of our properties or that we will always be able to make use of the available safe-harbors.

To maintain our REIT status, we may be forced to forego otherwise attractive opportunities.

To qualify as a REIT, we must satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. We may be required to make distributions to stockholders at times when it would be more advantageous to reinvest cash in our business or when we do not have funds readily available for distribution. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investment in securities (other than government securities, securities of any TRS or qualified REIT subsidiary of ours and securities that are qualified real estate assets) generally may not include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities, securities of any TRS or qualified REIT subsidiary of ours and securities that are qualified real estate assets) may consist of the securities of any one issuer. If we fail to comply with these requirements at the end of any calendar quarter, we must remedy the failure within 30 days or qualify for certain limited statutory relief provisions to avoid losing status as a REIT. As a result, we may be required to liquidate otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operating flexibility and reduce the market price of our common shares.

At any time, the federal income tax laws governing REITs may be amended or the administrative and judicial interpretations of those laws may be changed. We cannot predict when or if any new federal income tax law, regulation, or administrative and judicial interpretation, or any amendment to any existing federal income tax law, regulation or administrative or judicial interpretation, will be adopted, promulgated or become effective, and any such law, regulation, or interpretation may be effective retroactively. We and our stockholders could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative and judicial interpretation.

Risks Related to This Offering

There is currently no public market for our common stock. An active trading market for our common stock may not develop following this offering.

There has not been any public market for our common stock prior to this offering. Although our common stock has been authorized for listing on the NYSE, we cannot assure you that an active trading market for our common stock will develop after this offering or, if one develops, that it will be sustained. In the absence of a public market, you may be unable to liquidate an investment in our common stock. We and our underwriters have determined the initial public offering price of our common stock, considering such factors as our record of operations, our management, our estimated net income, our estimated FFO, our estimated cash available for distribution to you, our anticipated dividend yield, our growth prospects, the current market valuations, financial performance and dividend yields of publicly traded companies considered by us and the underwriters to be

 

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comparable to us and the current state of the commercial real estate industry and the economy as a whole. The price at which shares of our common stock trade after the completion of this offering may be lower than the price at which the underwriters sell them in this offering.

The market price and trading volume of our common stock may be volatile following this offering, and you could experience a loss if you sell your shares.

Even if an active trading market develops for our common stock, the market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. If the market price of our common stock declines significantly, you may be unable to resell your shares at or above the public offering price. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future.

Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:

 

   

actual or anticipated variations in our quarterly operating results or dividends,

 

   

changes in our FFO or earnings estimates,

 

   

the extent of investor interest,

 

   

publication of research reports about us or the real estate industry,

 

   

increases in market interest rates that lead purchasers of our shares to demand a higher yield,

 

   

changes in market valuations of similar companies,

 

   

strategic decisions by us or our competitors, such as acquisitions, divestments, spin-offs, joint ventures, strategic investments or changes in business strategy,

 

   

the reputation of REITs generally and the reputation of REITs with portfolios similar to ours,

 

   

the attractiveness of the securities of REITs in comparison to securities issued by other entities (including securities issued by other real estate companies),

 

   

adverse market reaction to any additional debt we incur or acquisitions we make in the future,

 

   

additions or departures of key management personnel,

 

   

future issuances by us of our common stock,

 

   

actions by institutional stockholders,

 

   

speculation in the press or investment community,

 

   

the realization of any of the other risk factors presented in this prospectus, and

 

   

general market and economic conditions.

Market interest rates may have an adverse effect on the market price of our securities.

One of the factors that will influence the price of our common stock and preferred stock will be the dividend yield on such stock (as a percentage of the price of the stock) relative to market interest rates. An increase in

 

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market interest rates may lead prospective purchasers of our common stock to expect a higher dividend yield, and higher interest rates would likely increase our borrowing costs and potentially decrease funds available for distribution. Thus, higher market interest rates could cause the market price of our common stock to fall.

Broad market fluctuations could negatively impact the market price of our common stock.

The stock market has recently experienced extreme price and volume fluctuations that have affected the market price of many companies in industries similar or related to ours and that have been unrelated to these companies’ operating performance. These broad market fluctuations could reduce the market price of our common stock or preferred stock. Furthermore, our operating results and prospects may be below the expectations of public market analysts and investors or may be lower than those of companies with comparable market capitalizations. Either of these factors could lead to a material decline in the market price of our common stock.

The market price of our common stock could be adversely affected by our level of cash dividends.

The market’s perception of our growth potential and our current and potential future cash dividends, whether from operations, sales or refinancings, as well as the real estate market value of the underlying assets, may cause our common stock to trade at prices that differ from our net asset value per share. If we retain operating cash flow for investment purposes, working capital reserves or other purposes, these retained funds, while increasing the value of our underlying assets, may not correspondingly increase the market price of our common stock. Our failure to meet the market’s expectations with regard to future earnings and cash distributions likely would adversely affect the market price of our common stock.

The number of shares of our common stock available for future sale could adversely affect the market price of our common stock.

We cannot predict whether future issuances of shares of our common stock or the availability of shares for resale in the open market will decrease the market price per share of our common stock. Upon the completion of this offering and our formation transactions, we will have outstanding 15,599,891 shares of our common stock (17,849,891 shares if the underwriters exercise their over-allotment option in full). Of these shares, the 15,000,000 shares of our common stock sold in this offering (17,250,000 shares if the underwriters exercise their over-allotment option in full) will be freely transferable without restriction or further registration under the Securities Act of 1933, as amended, or the Securities Act, subject to limitations in our charter, except for shares held by our “affiliates” as defined in Rule 144 of the Securities Act. Sales of substantial amounts of shares of our common stock in the public market, or upon exchange of operating partnership units, or the perception that such sales might occur, could adversely affect the market price of our common stock.

Any of the following could have an adverse effect on the market price of our common stock:

 

   

the exercise of the underwriters’ over-allotment option,

 

   

the exchange of operating partnership units for common stock,

 

   

the exercise of any options granted to certain directors, executive officers and other employees under our incentive award plan,

 

   

issuances of preferred stock with liquidation or distribution preferences, and

 

   

other issuances of our common stock.

 

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Additionally, the existence of operating partnership units, options and shares of our common stock reserved for issuance upon exchange of operating partnership units may adversely affect the terms upon which we may be able to obtain additional capital through the sale of equity securities. In addition, future sales of shares of our common stock may be dilutive to existing stockholders.

Each of our directors and officers has entered into a lock-up agreement restricting the sale of his or her shares for up to 180 days. Morgan Stanley & Co. Incorporated, Barclays Capital Inc. and UBS Securities LLC, or the Representatives, at any time, may release all or a portion of the common stock subject to the foregoing lock-up provisions. If the restrictions under such agreements are waived, the affected common stock may be available for sale into the market, which could reduce the market price of our common stock.

From time to time we also may issue shares of our common stock or operating partnership units in connection with property, portfolio or business acquisitions. We may grant additional demand or piggyback registration rights in connection with these issuances. Sales of substantial amounts of our common stock, or the perception that these sales could occur, may adversely affect the prevailing market price for our common stock or may adversely affect the terms upon which we may be able to obtain additional capital through the sale of equity securities.

Future offerings of debt, which would be senior to our common stock upon liquidation, and/or preferred equity securities which may be senior to our common stock for purposes of dividend distributions or upon liquidation, may adversely affect the market price of our common stock.

In the future, we may attempt to increase our capital resources by making additional offerings of debt or preferred equity securities, including medium-term notes, trust preferred securities, senior or subordinated notes and preferred stock. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive distributions of our available assets prior to the holders of our common stock. Our preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend payments that could limit our ability to pay a dividend or make another distribution to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the market price of our common stock and diluting their stock holdings in us.

 

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FORWARD-LOOKING STATEMENTS

We make statements in this prospectus that constitute forward-looking statements. In particular, statements pertaining to our capital resources, portfolio performance and results of operations are forward-looking statements. Likewise, our pro forma financial statements and our statements regarding anticipated growth in our FFO and anticipated market conditions, demographics and results of operations are forward-looking statements. Forward-looking statements involve numerous risks and uncertainties, and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise, and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases. You can also identify forward-looking statements by discussions of strategy, plans or intentions. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

 

   

adverse economic or real estate developments in the retail industry or the markets in which we operate,

 

   

changes in local, regional and national economic conditions,

 

   

our inability to compete effectively,

 

   

our inability to collect rent from tenants,

 

   

defaults on or non-renewal of leases by tenants,

 

   

increased interest rates and operating costs,

 

   

decreased rental rates or increased vacancy rates,

 

   

our failure to obtain necessary outside financing on favorable terms or at all,

 

   

changes in the availability of additional acquisition opportunities,

 

   

our inability to successfully complete real estate acquisitions,

 

   

our failure to successfully operate acquired properties and operations,

 

   

our failure to qualify or maintain our status as a REIT,

 

   

government approvals, actions and initiatives, including the need for compliance with environmental requirements,

 

   

financial market fluctuations, and

 

   

changes in real estate and zoning laws and increases in real property tax rates.

While forward-looking statements reflect our good faith beliefs (or those of the indicated third parties), they are not guarantees of future performance. We disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For a further discussion of these and other factors that could impact our future results, performance or transactions, see the section above entitled “Risk Factors.”

 

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USE OF PROCEEDS

We expect our net proceeds from this offering will be approximately $236.0 million, after deducting the underwriting discounts and commissions and estimated offering expenses we will pay. If the underwriters exercise their over-allotment option in full, we expect our net proceeds will be approximately $271.8 million.

We will contribute the net proceeds of this offering to our operating partnership. Our operating partnership will subsequently use the proceeds received from us as follows:

 

   

$1.8 million to acquire the interests of the contributors of our contribution properties who are not receiving common stock or operating partnership units, which amount will increase to the extent that debt relating to our contribution properties is repaid subsequent to September 30, 2009 and prior to the acquisition of the contribution properties,

 

   

$13.1 million to repay the following debt related to our contribution properties:

 

  ¡  

a loan secured by Newport Towne Center with a principal amount outstanding as of December 31, 2009 of $6.2 million, an adjustable interest rate of LIBOR plus 3.25%, and a maturity date of June 1, 2010,

 

  ¡  

a loan secured by Red Rock Commons with a principal amount outstanding as of December 31, 2009 of $5.6 million, an interest rate equal to the greater of prime or 4.5%, and a maturity date of July 1, 2010, and

 

  ¡  

$1.4 million of payables due to Mr. Sabin for net advances made for mortgage debt repayments and other capital items relating to Red Rock Commons. Mr. Sabin will use this amount in its entirety to repay his personal credit facility that was used to fund the advances,

 

   

$0.2 million to pay costs related to the assumption of debt on our contribution properties,

 

   

$133.6 million to fund the equity portion of our acquisition properties, excluding closing costs, and

 

   

$0.5 million to pay costs related to the assumption of debt on our acquisition properties.

The net proceeds remaining after the uses described above, which are estimated to be $86.7 million, as well as the proceeds intended for any of the acquisitions described below that are not consummated, will be used to pay closing costs on our acquisition properties, to acquire additional properties and for general corporate and working capital purposes. A $1.00 increase (decrease) in the assumed initial public offering price of $17.00 per share would increase (decrease) the net proceeds remaining after the uses described above by approximately $14.1 million, assuming the number of shares offered by us as set forth on the cover page of this prospectus remains the same, after deducting underwriting discounts and commissions. If the underwriters exercise their over-allotment option in full, we expect to use the additional net proceeds, which will be $35.9 million, to acquire additional properties and for general corporate and working capital purposes.

Pending application of cash proceeds, we will invest such portion of the net proceeds in interest-bearing accounts and short-term, interest-bearing securities, which are consistent with our intention to qualify for taxation as a REIT.

A tabular presentation of our estimated use of proceeds follows:

 

     Dollar Amount
(in thousands)
    Percentage of
Gross Proceeds
 

Gross offering proceeds

   $ 255,000      100.0

Underwriting discounts and commissions

     (15,937   6.3   

Other expenses of offering

     (3,100   1.2   
              

Net offering proceeds

   $ 235,963      92.5

Pay cash portion of the purchase price of our contribution properties

     1,802      0.7   

Repay indebtedness related to our contribution properties

     13,148      5.2   

Pay costs related to the assumption of debt on our contribution properties

     228      0.1   

Pay cash portion of the price of our acquisition properties

     133,642      52.4   

Pay costs related to the assumption of debt on our acquisition properties

     475      0.2   

Proceeds for the acquisition of additional properties, general corporate and working capital purposes

     86,668      34.0   
              

Total net offering proceeds used

   $ 235,963      92.5

Total underwriting discounts and commissions and other expenses

     19,037      7.5   
              

Total application of gross offering proceeds

   $ 255,000      100.0
              

 

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The following table sets forth the consideration we will pay for the contribution and acquisition properties (dollars in thousands). Debt amounts reflect outstanding balances as of December 31, 2009.

 

Property/Location

  Cash
Payments(1)
    Shares of
Common
Stock
Issued(1)
  Operating
Partnership
Units  Issued(1)
  Debt Repaid
Subsequent to
September 30,
2009(1)
  Debt to be
Repaid
Upon
Acquisition
    Debt to be
Assumed
and Not
Repaid
Upon
Acquisition
    Total Value
of
Consideration
 

Contribution Properties

             

Five Forks Place, Simpsonville, SC

  $      167,962     $ 39   $      $ 5,408      $ 8,302 (2) 

Newport Towne Center, Newport, TN

         16,349       19     6,198               6,495 (2 ) 

Excel Centre, San Diego, CA

    1,792 (3)      632,484     65            12,989        25,598 (2) 

Red Rock Commons, St. George, UT

         265,286       240     6,950 (4)             11,700 (2) 
                                             

Subtotal — Contribution Properties

  $ 1,792 (3)    449,597   632,484   $ 363   $ 13,148      $ 18,397      $ 52,095   

Acquisition Properties

             

Plaza at Rockwall Phase I, Rockwall, TX

  $ 35,031 (5)        $   $      $      $ 35,031 (5) 

5000 South Hulen,
Fort Worth, TX

    6,668                       15,182        21,850   

Grant Creek Town Center, Missoula, MT

    5,394 (6)                     16,372        21,766 (6) 

Main Street Plaza,
El Cajon, CA

    17,792                              17,792   

Lowe’s, Shippensburg, PA

    3,095                       14,455        17,550   

Shop ’n Save, Ballwin, MO

    8,450                              8,450   

Jewel-Osco, Morris, IL

    8,150                              8,150   

Walgreens, Beckley, WV

    7,187                              7,187   

St. Mariner’s Point Shopping Center, St. Marys, GA

    3,036                       3,546        6,582   

Merchants Central Shopping Center, Milledgeville, GA

    1,423                       4,729        6,152   

Walgreens, Cross Lanes, Charleston, WV

    4,995                              4,995   

Walgreens, Barbourville, KY

    4,213                              4,213   

Walgreens, Corbin,
KY – South

    4,181                              4,181   

Walgreens, Corbin,
KY – North

    3,526                              3,526   

Plaza at Rockwall Phase II, Rockwall, TX

    5,969 (5)                            5,969 (5) 

Shops at Foxwood, Ocala, FL

    14,532 (7)                            14,532 (7) 
                                             

Subtotal — Acquisition Properties

  $ 133,642          $   $      $ 54,284      $ 187,926   
                                             

Total

  $ 135,434      449,597   632,484   $ 363   $ 13,148      $ 72,681 (8)    $ 240,021   
                                             

 

(1)

The amount of cash and number of shares of common stock and operating partnership units to be issued in exchange for our contribution properties will increase to the extent that debt relating to our contribution properties is repaid subsequent to September 30, 2009 and prior to our acquisition of the contribution properties. During the period from September 30, 2009 to March 31, 2010, the following amounts of debt were repaid: (a) $81 relating to Five Forks Place, (b) $57 relating to Newport Towne Center, (c) $122 relating to Excel Centre and (d) $330 relating to Red Rock Commons. See “Certain Relationships and Related Transactions — Contribution Agreements.”

 

(2)

Based on the mid-point of the range of prices set forth on the cover page of this prospectus.

 

(3)

None of our directors or officers will receive any cash in exchange for our contribution properties.

 

(4)

Includes approximately $1,355 of payables due to Mr. Sabin for net advances made for mortgage debt repayments and other capital items relating to Red Rock Commons. Mr. Sabin will use this amount in its entirety to repay his personal credit facility that was used to fund the advances.

 

(5)

We have agreed to purchase Plaza at Rockwall Phase I and Plaza at Rockwall Phase II for an aggregate purchase price of $41,000, excluding closing costs. We have allocated $35,031 to Plaza at Rockwall Phase I and $5,969 to Plaza at Rockwall Phase II.

 

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(6)

The aggregate purchase price for Grant Creek Town Center is approximately $21,766, but may be increased for amounts to be paid to the seller after the closing date for additional lease-up of vacant space. The purchase price will be increased by an amount equal to the difference between the actual annualized net operating income on the closing date and October 1, 2011, divided by 9.00%, adjusted for certain expenses.

 

(7)

We will pay a base purchase price for Shops at Foxwood consisting of (a) an amount equal to the actual annualized net operating income generated by this property (excluding two ground leases) at the time of the closing of the sale, divided by 8.25%, and adjusted for certain expenses, plus (b) approximately $1,700 with respect to two ground leases. One year after the closing of the sale, we will pay an additional purchase price equal to (a) the difference between the actual annualized net operating income on the closing date and the one-year anniversary date, divided by 8.25%, and adjusted for certain expenses, plus (b) a vacant space fee of $0.13 per square foot for any remaining vacant building square footage. Assuming full occupancy at the time of the purchase of this property, the aggregate purchase price for Shops at Foxwood is expected to be approximately $14,532. The seller is responsible for leasing available space through the one-year anniversary date of the closing of the sale.

 

(8)

Amount does not reflect mark-to-market adjustments of $1,555, which would result in an aggregate of approximately $71,126 of condensed combined indebtedness on a pro forma basis as of December 31, 2009.

The following chart reflects the shares of common stock and operating partnership units issued and the total value of consideration (dollars in thousands) to be received by our directors and officers in connection with our formation transactions:

 

Contributor(1)

   Shares of Common
Stock Issued(2)
   Operating Partnership
Units Issued(2)
   Total Value  of
Consideration(2)(3)

Gary B. Sabin

   403,967    465,063    $ 14,774

Spencer G. Plumb

   1,592         27

James Y. Nakagawa

      55,807      949

Mark T. Burton

   1,061    55,807      967

S. Eric Ottesen

      55,807      949

Matthew S. Romney

   4,510         77
                

Total

   411,130    632,484    $ 17,743
                

 

(1)

None of our directors or officers will receive any cash in exchange for our contribution properties.

 

(2)

The amount of cash and number of shares of common stock and operating partnership units to be issued in exchange for our contribution properties will increase to the extent that debt relating to our contribution properties is repaid subsequent to September 30, 2009 and prior to our acquisition of the contribution properties, which repayments amounted to an aggregate of approximately $363 as of December 31, 2009 (an aggregate of approximately $590 as of March 31, 2010). See “Certain Relationships and Related Transactions — Contribution Agreements.”

 

(3)

Based on the mid-point of the range of prices set forth on the cover page of this prospectus.

The amount of cash, shares of common stock and operating partnership units that we will pay in exchange for our contribution properties was determined by our executive officers based on a discounted cash flow analysis, a capitalization rate analysis, an internal rate of return analysis and an assessment of the fair market value of the properties. No single factor was given greater weight than any other in valuing the properties, and the values attributed to the properties do not necessarily bear any relationship to the book value for the applicable property. We did not obtain any recent third-party property appraisals of the properties to be contributed to us in our formation transactions, or any other independent third-party valuations or fairness opinions in connection with our formation transactions. As a result, the consideration we pay for these properties and other assets in our formation transactions may exceed their fair market value.

 

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DISTRIBUTION POLICY

We intend to elect to be taxed as a REIT under Sections 856 through 860 of the Code commencing with our taxable year ending December 31, 2010. U.S. federal income tax law requires that a REIT distribute annually at least 90% of its REIT taxable income excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its REIT taxable income including capital gains. For more information, see “Material United States Federal Income Tax Considerations.” Our current policy is to target the payment of regular quarterly distributions to our stockholders and holders of operating partnership units in a range of 70% to 90% of our AFFO, or such other amount as will be sufficient to enable us to qualify and maintain our status as a REIT and to avoid the payment of corporate level taxes on our undistributed taxable income. Our derivation of AFFO is described below. We plan to pay our first dividend in respect of the period from the closing of this offering through September 30, 2010, which may be prior to the time that we have fully used the net proceeds of this offering to acquire retail properties.

The timing, form, frequency and amount of distributions will be authorized by our board of directors based upon a variety of factors, including:

 

   

actual results of operations,

 

   

our level of retained cash flows,

 

   

the timing of the investment of the net proceeds of this offering,

 

   

the terms and provisions of our financing agreements, including our unsecured revolving credit facility,

 

   

any debt service requirements,

 

   

capital expenditure requirements for our properties,

 

   

our taxable income,

 

   

the annual distribution requirements under the REIT provisions of the Code,

 

   

our operating expenses, and

 

   

other factors that our board of directors may deem relevant, including the amount of distributions made by our peers.

We anticipate that our estimated cash available for distribution will exceed the annual distribution requirements applicable to REITs. However, under some circumstances, we may be required to pay distributions in excess of cash available for distribution in order to meet these distribution requirements and we may need to use the proceeds from future equity and debt offerings, sell assets or borrow funds to make some distributions. We cannot assure you that our distribution policy will not change in the future.

We compute FFO in accordance with standards established by the Board of Governors of NAREIT in its March 1995 White Paper (as amended in November 1999 and April 2002). As defined by NAREIT, FFO represents net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus real estate related depreciation and amortization (excluding amortization of loan origination costs) and after adjustments for unconsolidated partnerships and joint ventures. We compute AFFO by deducting non-incremental revenue generating capital expenditures from FFO and adding back non-cash items, including straight line rents and non-cash components of compensation expense, and by making similar adjustments for unconsolidated partnerships and joint ventures.

Our computation may differ from the methodology for calculating FFO or AFFO utilized by other equity REITs and, accordingly, may not be comparable to such other REITs. Further, FFO and AFFO do not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations, or other commitments and uncertainties. FFO and AFFO should not be considered as an alternative to net income (loss) (computed in accordance with GAAP) as an indicator of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity, nor are they indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions.

 

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CAPITALIZATION

The following table sets forth the capitalization of our Predecessor, as of December 31, 2009, on a historical basis, on a pro forma basis to reflect our formation transactions, but excluding this offering, and on an as adjusted basis to reflect our formation transactions, this offering and the use of the net proceeds as set forth in “Use of Proceeds” and “Certain Relationships and Related Transactions — Formation Transactions and Contribution and Acquisition of Properties.” You should read this table in conjunction with “Use of Proceeds,” “Certain Relationships and Related Transactions — Formation Transactions and Contribution and Acquisition of Properties,” “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our unaudited pro forma condensed combined financial information and our financial statements and the related notes to our financial statements appearing elsewhere in this prospectus.

 

     As of December 31, 2009
     Historical    Pro Forma    As Adjusted
          ($ in 000s)     

Mortgages and other secured loans

   $ 30,190    $ 82,919    $ 71,126

Stockholders’ equity:

        

Common stock, par value $0.01 per share, 200,000,000 shares authorized, 15,599,891 shares issued and outstanding on an as adjusted basis(1)

               156

Preferred stock, par value $0.01 per share, 50,000,000 shares authorized, no shares issued and outstanding on an as adjusted basis

              

Additional paid in capital

               233,943

Owners’ equity

     8,622      8,622     

Non-controlling interests

     900      900      9,584
                    

Total stockholders’ equity

     9,522      9,522      243,683
                    

Total capitalization

   $ 39,712    $ 92,441    $ 314,809
                    

 

(1)

Includes 449,597 shares of common stock to be issued in connection with our formation transactions and 150,294 shares of restricted stock to be issued to our directors, officers and employees in connection with this offering (the number of shares of restricted stock to be granted to independent directors is calculated based on awards with an aggregate value of $400,000 divided by the public offering price in this offering) and excludes (a) up to 2,250,000 shares issuable upon exercise of the underwriters’ over-allotment option in full, (b) 632,484 shares issuable upon conversion of outstanding operating partnership units and (c) 1,199,706 shares available for future issuance under our equity incentive award plan. The amount of cash and the number of shares of common stock and operating partnership units to be issued in our formation transactions will increase to the extent that debt relating to our contribution properties is repaid subsequent to September 30, 2009 and prior to the acquisition of the contribution properties, which repayments amounted to an aggregate of approximately $363 as of December 31, 2009 (an aggregate of approximately $590 as of March 31, 2010).

 

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DILUTION

Purchasers of our common stock offered in this prospectus will experience an immediate and substantial dilution of the net tangible book value of their common stock from the initial public offering price. At December 31, 2009, we had a net tangible book value of $7.8 million, or $7.18 per share of our common stock held by existing stockholders, assuming the issuance of operating partnership units in our formation transactions and the exchange of operating partnership units into shares of our common stock on a one-for-one basis. After giving effect to the sale of the shares of our common stock offered hereby, the deduction of underwriting discounts and commissions and estimated offering and formation expenses, the receipt by us of the net proceeds of this offering and the use of these funds by our operating partnership as described in “Use of Proceeds,” “Certain Relationships and Related Transactions — Formation Transactions and Contribution and Acquisition of Properties” and our pro forma financial statements included elsewhere in this prospectus, the pro forma net tangible book value at December 31, 2009 attributable to the common stockholders, including the effect of the grants of restricted stock to our directors, officers and employees following the completion of this offering, would have been $216.2 million, or $13.86 per share of our common stock. This amount represents an immediate increase in net tangible book value of $6.68 per unit to existing stockholders and an immediate dilution in pro forma net tangible book value of $3.14 per share from the public offering price of $17.00 per share of our common stock to new public investors. The following table illustrates this per share dilution:

 

Initial public offering price per share

        $ 17.00

Net tangible book value per share before our formation transactions and this offering(1)

     $ 7.18   

Decrease in pro forma net tangible book value per share attributable to our formation transactions, but before this offering(2)

   $ (16.55     

Increase in pro forma net tangible book value per share attributable to this offering(3)

   $ 23.23        
             

Net increase in pro forma net tangible book value per share attributable to our formation transactions and this offering

     $ 6.68   
           

Pro forma net tangible book value per share after our formation transactions and this offering(4)

        $ 13.86
           

Dilution in pro forma net tangible book value per share to new investors(5)

        $ 3.14
           

 

(1)

Net tangible book value per share of our common stock before our formation transactions and this offering is determined by dividing net tangible book value based on December 31, 2009 net book value of the tangible assets of our Predecessor by the number of shares of our common stock held by continuing investors.

 

(2)

The decrease in pro forma net tangible book value per share of our common stock attributable to our formation transactions, but before this offering, is determined by dividing the difference between (a) the pro forma net tangible book value before our formation transactions and this offering and (b) the pro forma net tangible book value after our formation transactions and before this offering, by the number of shares of common stock and operating partnership units to be issued to the contributors in our formation transactions.

 

(3)

Increase in net tangible book value per share of our common stock attributable to this offering is calculated after deducting the underwriters’ discounts and commissions, financial advisory fees and estimated expenses of this offering.

 

(4)

Pro forma net tangible book value per share after our formation transactions and this offering is based on pro forma net tangible book value of $216.2 million divided by the sum of 15,449,597 shares of our common stock to be outstanding (which does not include 632,484 shares of our common stock issuable upon conversion of outstanding operating partnership units) and 150,294 shares of restricted stock to be issued to our directors, officers and employees following the completion of this offering.

 

(5)

Dilution in pro forma net tangible book value per share to new investors is determined by subtracting pro forma net tangible book value per share of our common stock after giving effect to our formation transactions and this offering from the initial public offering price paid by a new investor for a share of our common stock.

 

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SELECTED FINANCIAL DATA

The following table sets forth selected financial and operating data on a pro forma basis and on a historical basis for our Predecessor. Our Predecessor is not a legal entity, but rather a combination of real estate entities and operations invested in the properties that we refer to as Five Forks Place, Newport Towne Center, Excel Centre and Red Rock Commons. We have not presented historical information for Excel Trust, Inc. because we have not had any corporate activity since our formation other than the issuance of 1,000 shares of common stock in connection with the initial capitalization of our company and because we believe that a discussion of the results of Excel Trust, Inc. would not be meaningful.

The following pro forma and historical information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our unaudited pro forma condensed combined financial statements and historical financial statements and related notes thereto included elsewhere in this prospectus. The historical combined balance sheet information as of December 31, 2009 and 2008 of our Predecessor and the historical combined statements of operations information for the years ended December 31, 2009, 2008 and 2007 of our Predecessor have been derived from the historical combined financial statements and related notes appearing elsewhere in this prospectus. The historical combined balance sheet information as of December 31, 2007 and the historical combined statement of operations information for the year ended December 31, 2006 have been derived from the audited combined financial statements of our Predecessor. The historical combined balance sheet information as of December 31, 2006 and 2005, and the historical combined statement of operations information for the year ended December 31, 2005, have been derived from the unaudited combined financial statements of our Predecessor. In the opinion of the management of our company, the historical combined balance sheet information as of December 31, 2006 and 2005, and the historical combined statement of operations for the year ended December 31, 2005, include all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the information set forth therein.

The unaudited pro forma condensed combined balance sheet data are presented as if this offering and our formation transactions all had occurred on December 31, 2009, and the unaudited pro forma condensed combined statement of operations and other data for the year ended December 31, 2009 are presented as if this offering and our formation transactions all had occurred on January 1, 2009. The pro forma information is not necessarily indicative of what our actual financial position or results of operations would have been as of or for the period indicated, nor does it purport to represent our future financial position or results of operations.

 

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    Year Ended December 31,  
    Pro Forma
2009
    2009     2008     2007(1)     2006     2005(2)  
Operating Data  

(Dollars in thousands)

 

Total revenues

  $ 18,776      $ 4,990      $ 3,832      $ 4,533      $ 3,365      $ 2,880   

Expenses:

           

Property operating expenses

    4,459        1,229        1,148        1,002        845        663   

Administrative and miscellaneous

    2,639        45        43        15        14        16   

Depreciation and amortization

    7,646        2,045        1,403        1,575        1,092        1,092   
                                               

Total expenses

    14,744        3,319        2,594        2,592        1,951        1,771   

Net operating income

    4,032        1,671        1,238        1,941        1,414        1,109   

Interest expense

    (4,259     (1,359     (1,593     (1,593     (1,201     (1,026

Interest income

    6        6        29        35        27        20   
                                               

Net income (loss)

    (221     318        (326     383        240        103   

Net income attributable to non-controlling interest

    (9     75        56        272        205        264   
                                               

Net income (loss) attributable to controlling interest

  $ (212   $ 243      $ (382   $ 111      $ 35      $ (161
                                               

Pro Forma consolidated basic and diluted net loss per share

  $ (0.01                                   

Pro Forma consolidated weighted average common shares—basic

    15,468,384                                      

Pro Forma consolidated weighted average common shares—diluted

    15,599,891                                      

Other Data

           

Funds from operations(3)

  $ 7,425      $ 2,363      $ 1,077      $ 1,958      $ 1,332      $ 1,195   
    As of December 31,  
    Pro Forma
2009
    2009     2008     2007(1)     2006     2005(2)  
Balance Sheet Data  

(Dollars in thousands)

 

Properties, net

  $ 212,842      $ 41,869      $ 37,642      $ 37,688      $ 19,414      $ 19,934   

Cash and cash equivalents

    87,468        661        538        706        258        363   

Total assets

    324,598        45,456        42,131        43,112        23,941        24,683   

Mortgage notes payable

    71,126        30,190        31,182        32,899        19,442        19,748   

Total liabilities

    80,915        35,934        33,445        34,328        20,432        20,730   

Owners' equity

    234,099        8,622        7,930        8,132        3,509        3,953   

Non-controlling interests

    9,584        900        756        652                 

Total liabilities and equity

    324,598        45,456        42,131        43,112        23,941        24,683   

Other Data

           

Operating properties

           

Number

    17        3        3        3        2        2   

Total owned gross leasable area

    1,304,674        203,448        203,448        203,448        143,348        143,348   

Other properties

    3        1        1        1                 

 

(1)

In January 2007, we acquired Newport Towne Center and Red Rock Commons. The operating results of Newport Towne Center are included in the combined statement of operations from the acquisition date.

 

(2)

In July 2005, we acquired Five Forks Place. The operating results of Five Forks Place are included in the combined statement of operations from the acquisition date.

 

(3)

We present FFO because we consider it an important supplemental measure of our operating performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. FFO is intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO excludes depreciation and amortization unique to real estate, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared year-over-year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from net income. We compute FFO in accordance with standards established by the Board of Governors of NAREIT in its March 1995 White Paper (as amended in November 1999 and April 2002). As defined by NAREIT, FFO represents net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus real estate related depreciation and amortization (excluding amortization of loan origination costs) and after adjustments for unconsolidated partnerships and joint ventures. Our computation may differ from the methodology for calculating FFO utilized by other equity REITs and, accordingly, may not be comparable to such other REITs. Further, FFO does not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations, or other commitments and uncertainties. FFO should not be considered as an alternative to net income (loss) (computed in accordance with GAAP) as an indicator of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions.

 

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The following table presents a reconciliation of our pro forma and historical FFO for the period presented (in thousands):

 

     Year Ended December 31, 2009
     Pro Forma     Historical

Net income (loss)

   $ (221   $ 318

Adjustments:

    

Real estate depreciation and amortization

     7,646        2,045
              

Funds from operations

   $ 7,425      $ 2,363
              

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with “Selected Financial Data,” the audited combined financial statements and the related notes thereto of Excel Trust, Inc. Predecessor, or our Predecessor, as of December 31, 2009 and 2008 and for the years ended December 31, 2009, 2008 and 2007. Where appropriate, the following discussion includes analysis of the effects of this offering and our formation transactions. These effects are reflected in the unaudited pro forma condensed combined financial statements appearing elsewhere in this prospectus. References to “we,” “us” and “our” refer to Excel Trust, Inc. or to our Predecessor, as applicable. Our Predecessor is not a legal entity, but rather a combination of real estate entities and operations invested in the properties that we refer to as Five Forks Place, Newport Towne Center, Excel Centre and Red Rock Commons.

Overview

We are a vertically integrated, self-administered, self-managed real estate firm with the principal objective of acquiring, financing, developing, leasing, owning and managing value oriented community and power centers, grocery anchored neighborhood centers and freestanding retail properties. We were organized as a Maryland corporation on December 15, 2009 and intend to elect to be taxed as a REIT beginning with our taxable year ending December 31, 2010. We will conduct substantially all of our business through our operating partnership, Excel Trust, L.P., which was formed on December 16, 2009. Purchasers of shares of our common stock in this offering will own 96.2% of the outstanding shares of our common stock, or 92.4% on a fully diluted basis assuming the exchange of all operating partnership units for shares of our common stock.

Upon the completion of this offering and our formation transactions, we expect to own an initial portfolio consisting of 16 retail properties totaling 1,222,517 square feet of gross leasable area, which were approximately 93.5% leased and had a weighted average age of approximately 5.8 years as of December 31, 2009 based on gross leasable area. We have also agreed to acquire one additional retail shopping center consisting of approximately 85,600 square feet of gross leasable area upon the completion of its development and the occupancy of its key tenants. In addition, we expect to own one commercial office property totaling 82,157 square feet of gross leasable area which was 100% leased as of December 31, 2009. We will utilize a portion of this commercial building as our headquarters. We also expect to own two land parcels comprising approximately 32.6 acres that we will have the ability to develop.

We receive income primarily from rents and reimbursement payments received from tenants under existing leases at each of our properties. Potential impacts to our income include unanticipated tenant vacancies, vacancy of space that takes longer to re-lease and, for non triple-net leases, operating costs that cannot be recovered from our tenants through contractual reimbursement formulas in our leases. Our operating results therefore depend materially on the ability of our tenants to make required payments and overall real estate market conditions.

In January 2009, we experienced some disruption in our contractual rental income when the retailer, Goody’s Family Clothing, filed for bankruptcy protection, which resulted in a store closing at Newport Towne Center that accounted for 20,020 square feet of gross leasable area at the property. In March 2010, we re-leased this space to Stage Stores. Other major leasing activity that occurred in 2009 includes our leasing of 30,052 square feet of vacant space at Excel Centre to Kaiser Permanente.

We intend to maximize total returns to our stockholders by pursuing a value oriented investment strategy targeting markets throughout the United States, especially in the Northeast, Northwest and Sunbelt regions, which have historically exhibited favorable demographic trends such as strong population and income growth. We believe the current market environment will create a substantial number of favorable investment opportunities with attractive yields on investment and significant upside potential. We expect that our acquisition targets will include high quality, well-located, dominant retail properties that generate attractive risk-adjusted returns.

 

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After the completion of this offering, we expect to have funds available under a $150.0 million unsecured revolving credit facility to fund growth opportunities and for working capital purposes. Upon the completion of this offering and our formation transactions, we expect to have approximately $71.1 million of condensed combined indebtedness on a pro forma basis as of December 31, 2009. This debt is anticipated to be comprised of seven individual mortgage loans secured by Excel Centre, Five Forks Place, 5000 South Hulen, Grant Creek Town Center, Lowe’s, St. Mariner’s Point Shopping Center and Merchants Central Shopping Center. The weighted average interest rate on this pro forma indebtedness is expected to be 6.13% with the earliest maturity date in November 2011. Our board of directors will adopt long-term guidelines of limiting our indebtedness to 40% of our gross undepreciated asset value.

Our Predecessor’s financial information does not include general and administrative expense. Following the completion of this offering, we will incur general and administrative expenses including salaries, rent, professional fees and other corporate level activity associated with operating a public company. We anticipate that our staffing levels will increase from 20 employees at inception to between 25 and 30 employees during the next 12 to 24 months.

We anticipate managing the daily operations of our properties and do not intend to contract for such services from a third-party provider. Our Predecessor’s financial information reflects management fees that will continue after this offering and our formation transactions for internal purposes, but will not be a net cost to us since we will be self-managed. For the twelve-month periods ended December 31, 2008 and December 31, 2009, our Predecessor’s management fee expense was $118,000 and $134,000, respectively.

Excel Realty Holdings, LLC currently leases 8,274 square feet of space at Excel Centre, which we will occupy as our corporate headquarters upon the completion of this offering and our formation transactions. Our Predecessor’s financial information includes rental revenues attributable to this lease. Upon the completion of this offering and our formation transactions, this lease will be canceled and we will no longer recognize revenue for this leasable area. For the twelve-month periods ended December 31, 2008 and December 31, 2009, our Predecessor’s rental revenues related to the Excel Realty Holdings, LLC lease were $234,000 and $238,000, respectively.

In addition, the following non-recurring items associated with our formation transactions will affect our future results of operations when compared to our Predecessor’s financial information:

 

   

The repayment of approximately $13.1 million of indebtedness related to our contribution properties will reduce interest expense.

 

   

The acquisition of rental properties, including approximately $133.6 million used to fund the equity portion of our acquisition properties, will increase rental revenues and depreciation and amortization. In addition, depending on the structure of our leases, tenant recoveries and rental operations expense may also increase.

We have not had any corporate activity since our formation, other than the issuance of 1,000 shares of our common stock to Mr. Sabin in connection with our initial capitalization and activities in preparation for this offering and our formation transactions. Accordingly, we believe that a discussion of our results of operations would not be meaningful, and we have therefore set forth a discussion regarding the historical operations of our Predecessor only.

Factors That May Influence Future Results of Operations

Rental Revenue and Tenant Recoveries.    The amount of rental revenue and tenant recoveries generated by our initial portfolio upon the completion of this offering and our formation transactions depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space and space available from lease terminations. As of December 31, 2009, our retail properties were approximately 93.5% leased and our office property was 100% leased. The amount of rental revenue generated by us also depends on our ability to maintain or increase rental rates at our properties. Positive or negative trends in our geographic areas or the retail market could adversely affect our rental revenue and tenant recoveries in future

 

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periods. In addition, growth in rental income will partially depend on our ability to acquire additional retail properties that meet our investment criteria.

Lease Expirations.    Our ability to re-lease space subject to expiring leases will impact our results of operations and is affected by economic and competitive conditions in our markets as well as the desirability of our individual properties. In addition to approximately 79,661 square feet of currently available space in our initial portfolio as of December 31, 2009, the leases scheduled to expire in the twelve months ending December 31, 2010 and December 31, 2011 represent 3.3% and 7.7%, respectively, of our total gross leasable area and 6.3% and 11.4%, respectively, of our annualized base rental revenue.

Market Conditions.    We plan to seek investment opportunities throughout the United States; however, we will focus on the Northeast, Northwest and Sunbelt regions. Positive or negative changes in conditions in these markets will impact our overall performance. Future economic downturns or regional downturns affecting our target markets or downturns in the retail industry that impair our ability to renew or re-lease space as well as the ability of our tenants to fulfill their lease commitments, as such in the case of tenant bankruptcies, could adversely affect our ability to maintain or increase rental rates at our properties. Despite weakness in retail real estate throughout the United States over the past two years, we believe that our target markets are characterized by attractive demographics and property fundamental trends which could lead to outperformance as the sector rebounds.

Operating Expenses.    Our operating expenses generally consist of maintenance and repair expenses, real estate taxes, management fees and other operating expenses. For select properties, our operating expenses are controlled, in part, by negotiating expense pass-through provisions in tenant leases for most operating expenses. Leases on all of our acquisition properties require tenants to pay all of their direct operating expenses as well as their pro rata share of indirect operating expenses, including real estate taxes and insurance. Most of the leases of the contribution properties require tenants to pay all of their direct operating expenses as well as their pro rata share of substantially all of their indirect operating expenses, including common area maintenance, real estate taxes and insurance. Tenants in the office building pay for their direct operating expenses as well as their pro rata share of indirect operating expenses, including real estate taxes and insurance to the extent those expenses increase above the initial year of their respective lease. Increases or decreases in such operating expenses will impact our overall performance.

General and Administrative Expenses.    We will also incur general and administrative expenses, including legal, accounting and other expenses related to corporate governance, public reporting, and compliance with various provisions of the Sarbanes-Oxley Act of 2002. We anticipate that our staffing levels will increase from 20 employees at inception to between 25 and 30 employees during the next 12 to 24 months and, as a result, our general and administrative expenses will increase. We anticipate that our initial portfolio will generate cash flow in an amount that will exceed our first year general and administrative expenses.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our combined financial statements, which have been prepared in accordance with GAAP. Our significant accounting policies are described in the notes to our combined financial statements. The preparation of these financial statements in conformity with GAAP requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We base these estimates, judgments and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, as described below. We believe our critical accounting policies are as follows:

REIT Compliance

We intend to elect to be taxed as a REIT under the Code. Qualification as a REIT involves the application of highly technical and complex provisions of the Code to our operations and financial results and the determination

 

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of various factual matters and circumstances not entirely within our control. We believe that our current organization and proposed method of operation comply with the rules and regulations promulgated under the Code to enable us to qualify as a REIT beginning with our taxable year ending December 31, 2010. However, it is possible that we have been organized in a manner that would not allow us to qualify as a REIT, or that our future operations could cause us to fail to qualify.

If we fail to qualify as a REIT in any taxable year, then we will be required to pay federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. If we lose our REIT status, then our net earnings available for investment or distribution to stockholders would be significantly reduced for each of the years involved, and we would no longer be required to make distributions to our stockholders.

Investments in Real Estate

Investments in real estate are carried at depreciated cost. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives of the assets as follows:

 

Buildings and improvements    15 to 40 years
Tenant improvements    Shorter of the useful lives or the terms of the related leases
Acquired in-place leases    Non-cancelable term of the related lease

Our estimates of useful lives have a direct impact on our net income. If expected useful lives of our investments in real estate were shortened, we would depreciate the assets over a shorter time period, resulting in an increase to depreciation expense and a corresponding decrease to net income on an annual basis.

Management must make significant assumptions in determining the value of assets and liabilities acquired. The use of different assumptions in the allocation of the purchase cost of the acquired properties would affect the timing of recognition of the related revenue and expenses. The fair value of tangible assets of an acquired property (which includes land, buildings, and improvements) is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, buildings and improvements based on management’s determination of the relative fair value of these assets. Factors considered by us in performing these analyses include an estimate of the carrying costs during the expected lease-up periods, current market conditions and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses, and estimates of lost rental revenue during the expected lease-up periods based on current market demand.

The value allocable to the above or below market component of the acquired in-place leases is determined based upon the present value (using a discount rate which reflects the risks associated with the acquired leases) of the difference between: (1) the contractual amounts to be paid pursuant to the lease over its remaining term, and (2) our estimate of the amounts that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to above market leases are included in lease intangible assets, net in our accompanying combined balance sheets and amortized to rental income over the remaining non-cancelable lease term of the acquired leases with each property. The amounts allocated to below market lease values are included in lease intangible liabilities, net in our accompanying combined balance sheets and amortized to rental income over the remaining non-cancelable lease term plus any below market renewal options of the acquired leases with each property.

The total amount of other intangible assets acquired is further allocated to in-place lease costs and the value of tenant relationships based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant. Characteristics considered in allocating these values include the nature and extent of the credit quality and expectations of lease renewals, among other factors. The amounts allocated to in-place lease costs are included in lease intangible assets, net in the accompanying combined balance sheets and will be amortized over the average remaining non-cancelable lease term of the acquired leases

 

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with each property. The amounts allocated to the value of tenant relationships are included in lease intangible assets, net in our accompanying condensed combined balance sheets and are amortized over the average remaining non-cancelable lease term of the acquired leases plus a market lease term.

The value allocable to above or below market debt is determined based upon the present value of the difference between the cash flow stream of the assumed mortgage and the cash flow stream of a market rate mortgage. The amounts allocated to above or below market debt are included in mortgage loan payables, net on our accompanying combined balance sheets and are amortized to interest expense over the remaining term of the assumed mortgage.

Costs incurred in connection with the acquisition, development or construction of properties and improvements are capitalized. Capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs and other direct costs incurred during the period of development. We capitalize costs on land and buildings under development until construction is substantially complete and the property is held available for occupancy. The determination of when a development project is substantially complete and when capitalization must cease involves a degree of judgment. We consider a construction project as substantially complete and held available for occupancy upon the completion of landlord-owned tenant improvements or when the lessee takes possession of the unimproved space for construction of its own improvements, but no later than one year from cessation of major construction activity. We cease capitalization on the portion substantially completed and occupied or held available for occupancy, and capitalize only those costs associated with any remaining portion under construction. Capitalized costs associated with unsuccessful acquisitions are charged to expense when an acquisition is no longer considered probable.

Repair and maintenance costs are charged to expense as incurred and significant replacements and betterments are capitalized. Repair and maintenance costs include all costs that do not extend the useful life of an asset or increase its operating efficiency. Significant replacements and betterments represent costs that extend an asset’s useful life or increase its operating efficiency.

We assess whether there has been impairment in the value of a long-lived asset by considering expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Such factors include the tenants’ ability to perform their duties and pay rent under the terms of the leases. The determination of recoverability is made based upon the estimated undiscounted future net cash flows, excluding interest expense. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flows analysis, with the carrying value of the related assets. Long-lived assets classified as held for sale are measured at the lower of the carrying amount or fair value less cost to sell.

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. In determining what constitutes the leased asset, we evaluate whether we or the lessee is the owner, for accounting purposes, of the tenant improvements. 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 on a straight-line basis over the remaining non-cancelable term of the respective lease. In these circumstances, we begin revenue recognition when the lessee takes possession of the unimproved space for the lessee to construct improvements. 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. We

 

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consider a number of different factors to evaluate 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,

 

   

the responsible party for construction cost overruns, and

 

   

who constructs or directs the construction of the improvements.

The determination of who owns the tenant improvements, for accounting purposes, is subject to significant judgment. In making that determination we consider all of the above factors. However, no one factor is determinative in reaching a conclusion.

All leases are classified as operating leases and minimum rents are recognized on a straight-line basis over the term of the related lease. The excess of rents recognized over amounts contractually due pursuant to the underlying leases is included in deferred rent receivable on the accompanying combined balance sheets and contractually due but unpaid rents are included in accounts receivable. If a lease were to be terminated or if termination were determined to be likely (e.g., in the case of a tenant bankruptcy) prior to its contractual expiration, amortization of the related unamortized above or below market lease intangible would be accelerated and such amounts would be written off.

Substantially all of our retail rental operations expenses, consisting of real estate taxes, insurance and common area maintenance costs are recoverable from tenants under the terms of our lease agreements. Amounts recovered are dependent on several factors, including occupancy and lease terms. Revenues are recognized in the period the expenses are incurred. The reimbursements are recognized in revenues as tenant recoveries, and the expenses are recorded in rental operations expenses, as we are generally the primary obligor with respect to purchasing goods and services from third-party suppliers, have discretion in selecting the supplier and bear the credit risk.

Lease termination fees are recognized when the related leases are canceled, the amounts to be received are fixed and determinable and collectability is assured, and we have no continuing obligation to provide space to former tenants.

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required rent and tenant recovery payments or defaults. We may also maintain an allowance for accrued straight-line rents and amounts due from lease terminations based on our assessment of the collectability of the balance.

Results of Operations

Our Predecessor has operated through two reportable business segments: retail properties and commercial office properties. The retail segment includes Five Forks Place and Newport Towne Center, two retail properties with a total gross leasable area of 121,291 square feet, as well as Red Rock Commons, a 19.9 acre land parcel. Our Predecessor has owned and operated Five Forks Place and Newport Towne Center for more than four years and two years, respectively, and our Predecessor has owned Red Rock Commons since 2007. The commercial office segment consists of one property, Excel Centre, with a total of 82,157 leasable square feet. Our Predecessor has owned and operated Excel Centre since 2004.

 

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Our Predecessor evaluates the performance of its segments based upon net operating income. “Net Operating Income” is defined as total revenues (rental revenue and tenant recoveries) less property operating expenses (maintenance and repairs, real estate taxes, management fees, and other operating expenses) and administrative and miscellaneous expenses. Our Predecessor also evaluates interest expense, interest income and depreciation and amortization by segment.

You should read the following discussion in conjunction with the segment information disclosed in Note 11 to our combined financial statements in accordance with ASC 280, Segment Reporting. The results of operations of our Predecessor may not be indicative of our results of operations following the completion of this offering and our formation transactions. See “— Overview” for a description of the significant differences between our expected operations and the operations of our Predecessor.

Retail Properties

The following is a comparison, for the years ended December 31, 2009 and 2008 and for the years ended December 31, 2008 and 2007, of the retail property segment operating results of our Predecessor.

Comparison of the Year Ended December 31, 2009 to the Year Ended December 31, 2008

Total revenues, which include rental revenues and tenant recoveries including insurance, property taxes and other operating expenses paid by tenants, decreased by $125,000, or 6.5%, to $1,794,000 for the year ended December 31, 2009 compared to $1,919,000 for the year ended December 31, 2008. The decrease resulted from a vacancy at Newport Towne Center. In January 2009, Goody’s Family Clothing declared bankruptcy and vacated 20,020 square feet of gross leasable area at the property. The vacancy resulted in a decrease in both rental revenues and tenant recoveries at the property.

Property operating expenses, which include maintenance and repair expenses, real estate taxes, management fees and other operating expenses including bad debts, increased by $98,000, or 20.6%, to $573,000 for the year ended December 31, 2009 compared to $475,000 for the year ended December 31, 2008. The increase resulted from bad debt reserves at Five Forks Place and Newport Towne Center for delinquent tenants over the prior year.

Administrative and miscellaneous expenses increased $5,000, or 27.8%, to $23,000 for the year ended December 31, 2009 compared to $18,000 for the year ended December 31, 2008. The increase resulted from legal expenses related to collection efforts for delinquent tenants.

Depreciation and amortization expense increased $256,000, or 30.9%, to $1,084,000 for the year ended December 31, 2009 compared to $828,000 for the year ended December 31, 2008. The increase resulted from Goody’s Family Clothing vacating their space at Newport Towne Center which caused us to depreciate the remaining tangible and intangible assets related to this tenant.

Interest expense decreased $206,000, or 27.4%, to $545,000 for the year ended December 31, 2009 compared to $751,000 for the year ended December 31, 2008. The decrease was primarily attributable to our variable rate mortgage at Newport Towne Center which incurred interest at a 30-day LIBOR rate in 2009 compared to a twelve-month LIBOR rate in 2008, with the 30-day LIBOR rate in 2009 being lower than the twelve-month LIBOR rate in 2008.

Comparison of Year Ended December 31, 2008 to Year Ended December 31, 2007

Total revenues increased by $75,000, or 4.1%, to $1,919,000 for the year ended December 31, 2008 compared to $1,844,000 for the year ended December 31, 2007. The increase resulted from an outparcel that was leased in December 2007 and an increase in tenant recoveries related to property taxes at Newport Towne Center.

 

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Property operating expenses increased $91,000, or 23.7%, to $475,000 for the year ended December 31, 2008 compared to $384,000 for the year ended December 31, 2007. The increase resulted from bad debt expense in 2008 related to Goody’s Family Clothing and an increase in the assessment of property taxes at Newport Towne Center because of a new leased outparcel.

Administrative and miscellaneous expenses increased $15,000, or 500.0%, to $18,000 for the year ended December 31, 2008 compared to $3,000 for the year ended December 31, 2007. The increase was primarily due to legal costs related to delinquent tenants including Goody’s Family Clothing at Newport Towne Center.

Depreciation and amortization expense decreased $20,000, or 2.4%, to $828,000 for the year ended December 31, 2008 compared to $848,000 for the year ended December 31, 2007. The decrease was primarily related to fully amortized intangible assets at Five Forks Crossing.

Commercial Office Properties

The following is a comparison, for the years ended December 31, 2009 and 2008 and for the years ended December 31, 2008 and 2007, of the commercial office property segment operating results of our Predecessor.

Comparison of Year Ended December 31, 2009 to Year Ended December 31, 2008

Total revenues increased by $1,283,000, or 67.1%, to $3,196,000 for the year ended December 31, 2009 compared to $1,913,000 for the year ended December 31, 2008. The increase resulted from the leasing of vacant space at Excel Centre. In March 2009, vacant space was leased to a tenant, Kaiser Permanente, which resulted in an increase of rental revenue in 2009.

Property operating expenses decreased $17,000, or 2.5%, to $656,000 for the year ended December 31, 2009 compared to $673,000 for the year ended December 31, 2008. The decrease was primarily attributable to bad debt expense in 2008 related to a tenant that was replaced by Kaiser Permanente.

Administrative and miscellaneous expenses decreased $3,000, or 12.0%, to $22,000 for the year ended December 31, 2009 compared to $25,000 for the year ended December 31, 2008. In 2008, there were general and administrative costs related to a tenant that vacated the property. These were greater than new costs in 2009 relating to Kaiser Permanente which replaced this tenant.

Depreciation and amortization expense increased $386,000, or 67.1%, to $961,000 for the year ended December 31, 2009 compared to $575,000 for the year ended December 31, 2008. The increase resulted from additional depreciation of tenant improvements added in 2009.

Interest expense decreased $28,000, or 3.3%, to $814,000 for the year ended December 31, 2009 compared to $842,000 for the year ended December 31, 2008. The decrease was attributable to a decline in principal outstanding.

Comparison of Year Ended December 31, 2008 to Year Ended December 31, 2007

Total revenues decreased by $776,000, or 28.9%, to $1,913,000 for the year ended December 31, 2008 compared to $2,689,000 for the year ended December 31, 2007. The decrease resulted from vacancies in 2008 at Excel Centre. At December 31, 2008, there was 21,300 square feet of unleased space compared to 9,582 square feet of unleased space at December 31, 2007.

Property operating expenses increased $55,000, or 8.9%, to $673,000 for the year ended December 31, 2008 compared to $618,000 for the year ended December 31, 2007. The increase was primarily due to bad debt expense relating to vacancies in 2008.

 

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Administrative and miscellaneous expenses increased $13,000, or 108.3%, to $25,000 for the year ended December 31, 2008 compared to $12,000 for the year ended December 31, 2007. The increase was primarily due to legal costs related to collection of tenant receivables.

Depreciation and amortization expense decreased $152,000, or 20.9%, to $575,000 for the year ended December 31, 2008 compared to $727,000 for the year ended December 31, 2007. The decrease was primarily related to the depreciation and amortization of lease related assets at Excel Centre as a result of a lease that expired in early 2008.

Interest expense decreased $10,000, or 1.2%, to $842,000 for the year ended December 31, 2008 compared to $852,000 for the year ended December 31, 2007. The decrease was attributable to the principal amortization on our fixed rate mortgage at Excel Centre during 2008 and 2007.

Cash Flows

You should read the following discussion in conjunction with “Selected Financial Data,” the audited combined financial statements and related notes thereto of our Predecessor as of December 31, 2009 and 2008 and for the years ended December 31, 2009, 2008 and 2007 appearing elsewhere in this prospectus.

The following is a comparison, for the years ended December 31, 2009 and 2008 and for the years ended December 31, 2008 and 2007, of the combined cash flows of our Predecessor.

Comparison of the Years Ended December 31, 2009 to the Years Ended December 31, 2008

Cash and cash equivalents were $661,000 and $538,000, respectively, at December 31, 2009 and 2008.

Net cash provided by operating activities increased $4,537,000 to $5,615,000 for the year ended December 31, 2009 compared to $1,078,000 for the year ended December 31, 2008. The increase was due to an increase in deferred rents related to Kaiser Permanente. In addition, there was $642,000 of additional depreciation and amortization primarily related to tenant improvements added in 2009.

Net cash used in investing activities increased $4,570,000 to $5,248,000 for the year ended December 31, 2009 compared to $678,000 for the year ended December 31, 2008. The increase was the result of $4,776,000 of additional cash used for tenant improvements in 2009 for new tenants, primarily Kaiser Permanente. There was also $477,000 of additional deferred leasing costs related to these new tenants. These increases were offset by $844,000 of additional cash flows provided by utilization of restricted cash for the tenant improvements in the year ended December 31, 2009 over the year ended December 31, 2008.

Net cash used in financing activities decreased $324,000 to $244,000 for the year ended December 31, 2009 compared to $568,000 for the year ended December 31, 2008. The decrease in 2009 was due to a $726,000 reduction in cash used to repay mortgages payable primarily related to the repayment of the mortgage debt for Red Rock Commons in 2008. There was also an increase in cash used for tenant security deposits of $611,000 primarily related to deposits for a new tenant at Excel Centre that were applied to rents in 2009.

Comparison of Year Ended December 31, 2008 to Year Ended December 31, 2007

Cash and cash equivalents were $538,000 and $706,000, respectively, at December 31, 2008 and 2007.

Net cash provided by operating activities decreased $800,000 to $1,078,000 for the year ended December 31, 2008 compared to $1,878,000 for the year ended December 31, 2007. Of this amount, $709,000 related to net (loss) income which was $326,000 of net loss in year ended 2008 compared to net income of $383,000 in 2007.

 

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Net cash used in investing activities decreased $19,194,000 to $678,000 for the year ended December 31, 2008 compared to $19,872,000 for the year ended December 31, 2007. Cash flows used for the acquisition of property, development and property improvements declined by $18,850,000 primarily due to the acquisition of Newport Towne Center and Red Rock Commons in 2007.

Net cash provided by financing activities decreased $19,010,000 to a net use of $568,000 for the year ended December 31, 2008 compared to $18,442,000 net cash provided by financing activities for the year ended December 31, 2007. The decrease was primarily due to cash provided by new mortgage debt related to the acquisition of Newport Towne Center and Red Rock Commons in 2007 compared to no new mortgage debt in 2008. Additionally, there was a total of $676,000 of owner contributions in 2008 compared to $5,760,000 in 2007.

Liquidity and Capital Resources

Our short-term liquidity requirements consist primarily of funds to pay for operating expenses and other expenditures directly associated with our properties, including:

 

   

interest expense and scheduled principal payments on outstanding indebtedness,

 

   

general and administrative expenses,

 

   

future distributions expected to be paid to our stockholders and limited partners of our operating partnership, and

 

   

anticipated and unanticipated capital expenditures, tenant improvements and leasing commissions.

We intend to satisfy our short-term liquidity requirements through our existing working capital and cash provided by our operations. We believe our rental revenue net of operating expenses will generally provide cash inflows to meet our debt service obligations, pay general and administrative expenses and fund regular distributions.

At December 31, 2009, we had a loan secured by Newport Towne Center for $6.2 million and a loan secured by Red Rock Commons for $5.6 million, each of which matures in 2010. We anticipate that these will be repaid with proceeds from this offering. The loan secured by Newport Towne Center has two options to extend for one year each. To exercise these options, we must (1) pay an extension fee equal to 0.25% of the outstanding loan amount at the time such extension is requested, (2) pay down the outstanding loan amount so that it does not exceed 75% of the appraised fair market value of the property and (3) maintain a ratio of annualized net operating income to the outstanding amount of the loan equal to 10.4% for the first extension and 10.5% for the second extension, or pay down the loan until we meet such ratio. The loan secured by Red Rock Commons has a one year option to extend. To exercise this option, we must (1) pay an extension fee equal to 0.25% of the outstanding loan amount at the time such extension is requested and (2) pay down the loan amount so that it is equal to the lesser of (a) 70% of the appraised fair market value of the property or (b) $5.1 million. No appraisals have recently been performed on these properties. If proceeds from this offering are not available when the loans mature, we plan on exercising these options. We anticipate that amounts to pay extension fees and to pay down outstanding loan amounts in order to meet the required ratios would come from cash flow from the properties and contributions from Mr. Sabin.

We have obtained commitment letters from Wells Fargo Bank, National Association, which will act as administrative agent, Barclays Bank PLC, KeyBank National Association, Morgan Stanley Senior Funding, Inc., PNC Bank, National Association, Raymond James Bank, FSB, UBS Loan Finance LLC and U.S. Bank National Association, for a $150.0 million unsecured revolving credit facility. We expect the facility to have a term of three years and that we will have the option to extend the facility for one additional year if we meet specified requirements. We also expect the facility to have an accordion feature that may allow us to increase the availability thereunder by $250.0 million to $400.0 million. We intend to use this facility principally to fund growth opportunities and for working capital purposes.

 

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The unsecured revolving credit facility is expected to bear interest at the rate of LIBOR plus a margin of 275 basis points to 375 basis points, depending on our leverage ratio, provided that in no event shall LIBOR be deemed to be less than 1.50%. The amount available for us to borrow under the facility will be subject to the net operating income of our properties that form the borrowing base of the facility, as well as a minimum implied debt service coverage ratio.

Our ability to borrow under this unsecured revolving credit facility will be subject to our ongoing compliance with a number of customary restrictive covenants, including:

 

   

a maximum leverage ratio (defined as total liabilities to total asset value) of 0.55 : 1.00,

 

   

a minimum fixed charge coverage ratio (defined as adjusted earnings before interest, taxes, depreciation and amortization to fixed charges) of 1.75 : 1.00,

 

   

a maximum secured indebtedness ratio (defined as secured indebtedness to total asset value) of 0.35 : 1.00,

 

   

a maximum unencumbered leverage ratio (defined as unsecured indebtedness to unencumbered asset value) of 0.55 : 1.00,

 

   

a minimum unencumbered interest coverage ratio (defined as unencumbered net operating income to unsecured interest expense) of 2.00 : 1.00, and

 

   

a minimum tangible net worth equal to at least 85% of our tangible net worth at the closing of this offering plus 80% of the net proceeds of any additional equity issuances.

Under the unsecured revolving credit facility, our distributions may not exceed the greater of (1) 95.0% of our FFO or (2) the amount required for us to qualify and maintain our REIT status. If an event of default exists, we may only make distributions sufficient to qualify and maintain our REIT status.

We expect to enter into this unsecured revolving credit facility following the completion of this offering. Although we have received commitment letters for this facility, we may be unable to close on the facility based on the terms described in this prospectus or at all.

Upon the completion of this offering and our formation transactions, we expect to have approximately $86.7 million of equity growth capital, in addition to funds available under the $150.0 million unsecured revolving credit facility described above.

Our long-term liquidity requirements consist primarily of funds to pay for scheduled debt maturities, renovations, expansions and other non-recurring capital expenditures that need to be made periodically and the costs associated with acquisitions of properties that we pursue. Upon the completion of this offering and our formation transactions, we expect to assume outstanding mortgage debt related to Five Forks Place, Excel Centre, 5000 South Hulen, Grant Creek Town Center, Lowe’s, St. Mariner’s Point Shopping Center and Merchants Central Shopping Center and to pay approximately $0.5 million in costs related to the assumption of this debt. As of December 31, 2009, the outstanding mortgage indebtedness related to these properties was approximately $72.7 million. We intend to satisfy our long-term liquidity requirements through various sources of capital, including our existing working capital, cash provided by operations and long-term mortgage debt. In addition to our anticipated $150.0 million unsecured revolving credit facility, as a public company, we expect to have increased access to cost effective capital, including existing sources, as well as public and private debt and equity offerings.

As of December 31, 2009, the aggregate purchase price of our acquisition properties is expected to be approximately $187.9 million. We intend to fund the equity portion of these acquisitions with approximately $133.6 million of the net proceeds of this offering. We also intend to acquire the interests of the contributors of our contribution properties by the issuance of shares of our common stock and operating partnership units and

 

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the payment of approximately $1.8 million in cash. In addition, we will repay approximately $13.1 million of indebtedness with the net proceeds of this offering, including $6.2 million for debt secured by Newport Towne Center, $5.6 million for debt secured by Red Rock Commons and $1.4 million of payables due to Mr. Sabin for net advances made for mortgage debt repayments and other capital items relating to Red Rock Commons. Mr. Sabin will use this $1.4 million in its entirety to repay his personal credit facility that was used to fund the advances. These amounts reflect outstanding debt balances as of December 31, 2009.

We expect our debt to contain customary restrictive covenants, including provisions that may limit our ability, without the prior consent of the lender, to incur additional indebtedness, further mortgage or transfer the applicable property, purchase or acquire additional property, discontinue insurance coverage, change the conduct of our business or make loans or advances to, enter into any merger or consolidation with, or acquire the business, assets or equity of, any third party.

Upon the completion of this offering, we will have general and administrative expenses, including salaries, rent, professional fees and other corporate level activity expenses associated with operating as a public company. We anticipate that our staffing levels will increase from 20 employees at inception to between 25 and 30 employees during the next 12 to 24 months. We also expect to incur additional professional fees to meet the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and comply with the Sarbanes-Oxley Act of 2002. The timing and level of these costs and our ability to pay these costs with cash flow from our operations depends on our execution of our business plan, the number of properties we ultimately acquire and our ability to attract qualified individuals to fill these new positions. We believe that our initial portfolio will generate cash flow in an amount that will exceed our first year general and administrative expenses.

Commitments and Contingencies

The following table outlines the timing of our required payments (dollars in thousands) related to our indebtedness as of December 31, 2009:

 

     Payments by Period
     2010    2011-2012    2013-2014    Thereafter    Total

Principal payments—fixed rate debt

   $ 387    $ 844    $ 17,166      —      $ 18,397

Interest payments—fixed rate debt

     1,092      2,114      1,189      —        4,395

Principal payments—variable rate debt

     11,793      —        —        —        11,793

Interest payments—variable rate debt (based on interest rates in effect as of December 31, 2009)

     151      —        —        —        151
                                  
   $ 13,423    $ 2,958    $ 18,355    $ —      $ 34,736
                                  

The following table outlines the timing of required payments (dollars in thousands) related to our indebtedness as of December 31, 2009 on a pro forma basis to reflect the indebtedness we expect to have following completion of this offering and our formation transactions:

 

     Payments by Period(1)
     2010    2011-2012    2013-2014    Thereafter    Total

Principal payments—fixed rate debt

   $ 1,100    $ 5,792    $ 37,757    $ 26,477    $ 71,126

Interest payments—fixed rate debt

     4,692      8,852      5,930      11,293      30,767
                                  
   $ 5,792    $ 14,644    $ 43,687    $ 37,770    $ 101,893
                                  

 

(1)

We may incur significant additional debt to finance future acquisition and development activities. In addition, we intend to have in place a $150.0 million unsecured revolving credit facility after the completion of this offering. Although we are not required to maintain any particular leverage ratio, we intend, when appropriate, to employ prudent amounts of leverage and to use debt as a means of providing additional funds for the acquisition of our target assets and the diversification of our portfolio. Our board of directors has adopted long-term guidelines of limiting our indebtedness to 40% of our gross undepreciated asset value.

 

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Distribution Policy

We intend to elect to be taxed as a REIT under the Code commencing with our taxable year ending December 31, 2010. To qualify as a REIT, we must meet a number of organizational and operational requirements, including the requirement that we distribute currently at least 90% of our REIT taxable income to our stockholders. It is our intention to comply with these requirements and maintain our REIT status. As a REIT, we generally will not be subject to corporate federal, state or local income taxes on income we distribute currently (in accordance with the Code and applicable regulations) to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal, state and local income taxes at regular corporate rates and may not be able to qualify as a REIT for subsequent tax years. Even if we qualify for federal taxation as a REIT, we may be subject to certain state and local taxes on our income properties and operations and to federal income and excise taxes on our taxable income not distributed in the amounts and in the time frames prescribed by the Code and applicable regulations thereunder.

Funds From Operations

We present FFO because we consider it an important supplemental measure of our operating performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. FFO is intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO excludes depreciation and amortization unique to real estate, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared year-over-year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from net income. We compute FFO in accordance with standards established by the Board of Governors of NAREIT in its March 1995 White Paper (as amended in November 1999 and April 2002). As defined by NAREIT, FFO represents net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus real estate related depreciation and amortization (excluding amortization of loan origination costs) and after adjustments for unconsolidated partnerships and joint ventures. Our computation may differ from the methodology for calculating FFO utilized by other equity REITs and, accordingly, may not be comparable to such other REITs. Further, FFO does not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations, or other commitments and uncertainties. FFO should not be considered as an alternative to net income (loss) (computed in accordance with GAAP) as an indicator of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions.

The following table presents a reconciliation of our pro forma and historical FFO for the period presented (in thousands):

 

     Year Ended December 31,
2009
    
     Pro Forma     Historical     

Net income (loss)

   $ (221   $ 318   

Adjustments:

       

Real estate depreciation and amortization

     7,646        2,045   
                 

Funds from operations

   $ 7,425      $ 2,363   
                 

 

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Inflation

Some of our leases contain provisions designed to mitigate the adverse impact of inflation. These provisions generally increase rental rates during the terms of the leases either at fixed rates or indexed escalations (based on the Consumer Price Index or other measures). We may be adversely impacted by inflation on our leases that do not contain indexed escalation provisions. In addition, most of our leases require the tenant to pay its share of operating expenses, including common area maintenance costs, real estate taxes and insurance. This may reduce our exposure to increases in costs and operating expenses resulting from inflation, assuming our properties remain leased and tenants fulfill their obligations to reimburse us for such expenses.

New Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board, or FASB, issued ASC 805-10, Business Combinations. In summary, ASC 805-10 requires the acquirer of a business combination to measure at fair value the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, with limited exceptions. In addition, this standard requires acquisition costs to be expensed as incurred. The standard is effective for fiscal years beginning after December 15, 2008, and is to be applied prospectively, with no earlier adoption permitted. Our Predecessor adopted this standard on January 1, 2009. The adoption of this standard did not have a material effect on our Predecessor’s combined financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards, or SFAS, No. 168, “The FASB Accounting Standards Codification, or FASB Codification, and the Hierarchy of Generally Accepted Accounting Principles.” This pronouncement establishes the FASB Codification as the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Our Predecessor adopted this pronouncement on July 1, 2009 and has updated its references to specific GAAP literature to reflect the codification.

On January 1, 2009, our Predecessor adopted ASC 810-10-65, Consolidation, which clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. ASC 810-10-65 also requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest and requires disclosure, on the face of the consolidated statement of operations, of the amounts of combined net income (loss) attributable to the parent and to the non-controlling interest.

ASC 810-10-65 was required to be applied prospectively after adoption, with the exception of the presentation and disclosure requirements, which were applied retrospectively for all periods presented. Any non-controlling interest that fails to qualify as permanent equity will be reclassified as temporary equity and adjusted to the greater of (1) the carrying amount, or (2) its redemption value as of the end of the period in which the determination is made.

In June 2009, the FASB issued ASC 855-10, Subsequent Events, which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or available to be issued. It is effective for interim and annual periods ending after June 15, 2009. Our Predecessor has adopted this standard as of June 30, 2009. The adoption of this standard did not have a material effect on our Predecessor’s combined financial statements.

Quantitative and Qualitative Disclosures About Market Risk

Our future income, cash flows and fair values relevant to financial instruments depend upon prevailing market interest rates. Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which we believe we are exposed is interest rate risk. Many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control contribute to interest rate risk.

 

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As of December 31, 2009, our total condensed combined debt outstanding on a pro forma basis is expected to be approximately $71.1 million, all of which is fixed rate debt. Changes in market interest rates impact the fair market value of our fixed-rate debt but have no impact on interest incurred or cash flow.

The fair value of mortgage notes payable at December 31, 2009 was approximately $29.8 million. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed-rate debt by approximately $0.6 million at December 31, 2009. A 100 basis point decrease in market interest rates would result in an increase in the fair market value of our fixed-rate debt by approximately $0.6 million at December 31, 2009.

As of December 31, 2009, on a pro forma basis, we did not have any variable rate debt, but we may incur variable rate debt in the future, including borrowings under a $150.0 million unsecured revolving credit facility that we intend to have in place after the completion of this offering. We expect that this facility will bear interest at a variable rate of LIBOR plus a margin of 275 basis points to 375 basis points, depending on our leverage ratio, provided that in no event shall LIBOR be deemed to be less than 1.50%. We cannot assure you that we will be able to enter into this new facility. Any increase in interest rates would increase our interest incurred with respect to our variable rate debt and would reduce our cash flows.

In order to modify and manage the interest rate characteristics of our outstanding debt and to limit the effects of interest rate risks on our operations, we may utilize a variety of financial instruments, including interest rate swaps, caps, floors and other interest rate exchange contracts. The use of these types of instruments to hedge our exposure to changes in interest rates carries additional risks, including counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates will cause a significant loss of basis in the contract. To limit counterparty credit risk we will seek to enter into such agreements with major financial institutions with high credit ratings. There can be no assurance that we will be able to adequately protect against the foregoing risks and that we will ultimately realize an economic benefit that exceeds the related amounts incurred in connection with engaging in such hedging activities. We do not enter into such contracts for speculative or trading purposes.

 

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RETAIL INDUSTRY OVERVIEW

The retail shopping center industry is one of the largest industries in the United States. With an estimated annual revenue of approximately $2.3 trillion in 2009, the industry has grown at an average annual rate of 3.8% within the last decade according to the International Council of Shopping Centers, or ICSC. In order to support such strong demand, the shopping center space market has grown to 7.2 billion square feet in 2009 from 2.1 billion square feet in 1970, and the amount of freestanding retail properties has grown to 7.9 billion square feet from 5.3 billion square feet.

ICSC has defined eight principal shopping center types that include: (1) neighborhood; (2) community; (3) regional; (4) superregional; (5) lifestyle; (6) power; (7) theme/festival; and (8) outlets. According to ICSC, the centers are distinguished primarily by their merchandise orientation (i.e., the type of goods and services sold) and the size of the center. Other characteristics include the number and type of anchor tenants and the anchor ratio (i.e., the share of a center’s total square footage that is attributable to its anchors) and the primary trade area (i.e., the area from which 60% to 80% of the center’s sales originate). Regional and superregional centers, or enclosed malls, comprise approximately 16% of the total shopping center market, while the six other types of open-air centers make up the remaining 84% on a square footage basis.

We will focus on owning and managing value oriented neighborhood, community and power centers as well as freestanding retail properties. We believe that these property types are the most stable assets within the retail sector because they are typically anchored by necessity and value oriented retailers. Consumer spending on goods offered by such retailers does not experience significant fluctuations. As of December 2009, neighborhood, community and power centers made up approximately 28.2%, 23.6% and 11.6%, respectively, of the open-air shopping center space market based on a square footage basis. The table below shows the characteristics of our target shopping center types.

Characteristics of Target Shopping Centers

 

Center Type

 

Concept

  Square Feet   Typical Anchors  

Anchor
Ratio

  Primary Trade
Area (miles)
  % of
Market(2)
 
      Number  

Type

 

Examples(1)

     

Neighborhood

  Convenience   30,000 - 150,000   1 or more   Supermarket   Publix   30% - 50%   3   28.2

Community

  General Merchandise, Convenience   100,000 - 350,000   2 or more   Discount Department Store, Supermarket, Drugstore, Home Improvement, Large Specialty/Discount Apparel   Best Buy, Ross Dress for Less, Walgreens   40% - 60%   3-6   23.6

Power

  Category-Dominant Anchors, Few Small Tenants   250,000 - 600,000   3 or more   Category Killer, Home Improvement, Discount Department Store, Warehouse Club, Off-Price   Dick's Sporting Goods, Lowe’s Home Centers, Staples   75% - 90%   5-10   11.6

 

(1)

These retailers are current tenants of the properties in our operating portfolio.

(2)

Represents share of the open-air shopping center market.

 

Sources: ICSC Research and CoStar Realty Information, Inc. (www.costar.com) except examples column.

Retail Property Performance

Retail real estate properties have historically outperformed all other commercial property types. According to the National Council of Real Estate Investment Fiduciaries, or NCREIF, retail properties posted a 5.7% and 10.5% total return over the last five and ten years, respectively, as of the fourth quarter of 2009. This compares favorably to the broader private real estate market that recorded a 5.6% and 8.9% total return over the same periods. In the past year, retail properties recorded a 10.9% decrease in total return compared to a 13.3% decrease for the overall NCREIF Index. The primary reasons for retail properties’ relative strong performance can be

 

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attributed to factors such as lower costs of ownership, benefit of long-term leases with anchor tenants and short-term leases for the in-line stores which allow landlords to mark-to-market store rents. In addition, retail leases typically have rent escalation clauses while passing property expenses on to tenants.

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Current and Historical Trends

According to the Bureau of Labor Statistics, in 2008, retail sales (excluding automobiles) experienced its first negative year-over-year growth since 1968. This 40-year period of uninterrupted growth was driven by several trends, including demographic shifts, population growth, easy access to credit for consumers and significant household wealth creation as a result of rising equity markets and home prices. Many of the aforementioned trends reversed in 2008 and 2009; however, we believe we may be at the beginning of an economic recovery from the sharp downturn, with the inflection point of the demand drivers creating what we believe is a historically attractive opportunity to execute our investment strategy.

 

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Retail sales declined 3.9% year-over-year in the fourth quarter of 2008 and 6.7% year-over-year in the third quarter of 2009. However, recent U.S. Census data imply consumer spending is firming and, in fact, the declining sales trend reversed in the third quarter of 2009, growing approximately 1.0% over the second quarter of 2009. The trend in sales growth exhibited further strength in the fourth quarter of 2009, growing 7.9% over the previous quarter and 1.2% year-over-year. We believe that retail sales growth typically precedes job growth by approximately six months and a turn in property fundamentals by approximately twelve months. Rosen Consulting Group, or RCG, projects sales growth in 2010 of 0.8%, increasing to 1.9% in 2011 and 3.8% in both 2012 and 2013. The chart below shows the historical and projected annual retail sales growth (excluding automobiles) from 1968 to 2013.

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The retail industry’s performance is generally correlated to the overall macroeconomic conditions in the United States; however, the properties that fit within our investment criteria, which are focused on necessity and value oriented retailers, tend to be more resilient to fluctuations in the economy. Since early 2008, weaknesses in the general economy and the credit crisis have caused U.S. consumers to shift their buying focus further towards value oriented retailers, amplifying a trend that began over 20 years ago. As shown in the chart below, retail sales on certain luxury and discretionary items have declined over 10% in the last twelve months, but in spite of the recent downturn in the economy, the U.S. consumers’ spending growth on necessity goods has been positive within the last twelve months and the last five years as of December 2009. We believe there has been a fundamental shift in demand by the consumer away from luxury, discretionary items toward necessity and value oriented, non-discretionary items in open-air shopping centers and that this trend will continue for the foreseeable future. The chart shows the average annual growth in necessity and discretionary spending.

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Over the past 15 years, discount department stores, warehouse clubs and superstores have steadily gained market share from conventional and national chain department stores. According to RCG, drugstores, wholesale clubs and discount stores were the only categories of retailers to post year-over-year same store growth, as of November 2009, at 2.3%, 1.9% and 0.6%, respectively, as consumers sought low-priced, non-discretionary goods. The spread between the market shares captured by the two different categories of retailers is near its top level in the last two decades with discount department stores, warehouse clubs and superstores owning approximately 78% of the market compared with 22% for conventional and national chain department stores. The data suggest that the tenants of properties that we expect to own, such as warehouse clubs, discounters, grocers and drugstores, are gaining additional market share from retailers that focus on discretionary or luxury items.

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Real Estate Capital Markets

While we believe the fundamentals of our target assets are faring better than those of other retail sectors, nearly all property owners are currently suffering from falling asset values, restrictive credit markets and declining operating cash flow. We believe: (1) maturity defaults may occur because many owners will not have sufficient equity in order to refinance existing debt; (2) debt service defaults may occur because operating cash flow at many properties will fall below the necessary level to cover fixed charges; (3) cash flow after debt service at many retail properties may be insufficient to fund necessary capital expenditures such as tenant improvements; and (4) some developers may lack the capital to carry high quality projects through to completion. As a result, we also believe some retail owners and developers will be unable or unwilling to invest additional equity and may choose, or be compelled, to sell their higher quality retail properties or developments. Our near-term objective is to capitalize on these trends in the near-to-medium term and be well positioned to acquire high quality assets at attractive prices.

 

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Access to Capital

An unprecedented flow of funds into real estate occurred between 2000 and 2008, with mortgage debt growing at a compounded annual growth rate of 10.8%, according to The Federal Reserve. A significant source of financing was the commercial mortgage-backed securities, or CMBS, market which originated over $200 billion of financing per annum in 2006 and 2007. That period of hyper-liquidity reversed in late 2007 with a credit freeze that did not begin to thaw until March 2009. The chart below shows the CMBS originated over the last ten years.

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Transaction Volume

The volume of shopping center transactions has declined sharply from the peak period of 2004 to 2007 due to lack of financing and a standoff between sellers and buyers on pricing. According to Real Capital Analytics, or RCA, the transaction volume fell to $6.8 billion in 2009, representing a 36.1% decline compared with the same period one year earlier. The average price per square foot paid also fell by 23.2% to $133. Although there is a lack of visibility on capitalization rates due to the low volume of transactions, RCA reported a 100 basis point increase in the average capitalization rate from 7.3% in 2008 to 8.2% in 2009. We believe that a well-capitalized company such as ours will be well-positioned to acquire high quality properties at attractive terms. The following chart shows the transaction volume and the average capitalization rates for shopping centers from 2001 through 2009.

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Distressed Situations

According to RCA, distressed retail properties (i.e., troubled properties and real estate owned by mortgage companies due to unsuccessful foreclosure auctions) totaled $38.7 billion in December 2009, compared with just $0.9 billion in June 2008. Retail properties accounted for 25.1% of all distressed properties in December 2009, ahead of hotels (20.6%) and office buildings (17.5%). In the near term, due to the continued deterioration in retail sales coupled with increasing vacancies and falling rents, which will continue to place downward pressure on cash flows for landlords, we believe that the pace of debt service defaults will continue to increase. In addition, we expect interest rates to rise, further pressuring owners as lenders will not be able or willing to “extend and pretend” troubled real estate loans. The following chart shows the increasing volume of distressed retail properties and rising delinquency rates from December 2007 to December 2009.

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In addition to debt service defaults, we anticipate maturity defaults. According to NAREIT data, over $150 billion of CMBS debt is expected to mature within the next three years, with retail properties accounting for 29.5% of all CMBS debt outstanding. With curtailed lending by financial institutions, the collapse of the CMBS market and the adoption of more conservative lending policies, we expect many retail property owners will not be able to refinance maturing debt without a substantial equity infusion. Consequently, we believe many retail properties will be sold by owners to avoid foreclosure or by lenders after foreclosure, while in receivership or in cooperation with the borrowers.

 

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As the financing markets remain challenging, we expect to see increased distressed properties sales from banks, insurance companies, public institutions, fund managers, REITs, retailers, private investors and developers. We believe the expected large volume of retail debt service and maturity defaults coupled with owners’ need to add liquidity to their balance sheets will force owners to sell high quality assets at historically attractive prices to buyers. The following charts show the amount of total upcoming CMBS maturities and percentage of total CMBS outstanding attributable to retail properties as of November 30, 2009.

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Under-Capitalized Owners

Maintaining retail properties requires significant capital investments. We believe cash flow after debt service at many retail properties may be insufficient to fund necessary capital expenditures and their owners may face capital investment demands that could require additional equity investments. In addition, we believe that many cash-constrained landlords may not be able to fund required tenant improvements, leasing commissions, and building improvements to attract or retain tenants. Some developers may also lack the capital to carry high quality projects through to completion. We believe some retail owners and developers will be unable or unwilling to make the required capital investments and may choose or be compelled to sell their retail properties or developments. Thus, we would be able to acquire attractive properties or developments at distressed pricing.

Macroeconomic Conditions

Historically, retail sales performance has been highly correlated to a number of macroeconomic factors including household wealth, personal savings, employment, consumer access to credit and consumer confidence. During the most recent recession, consumer spending fell significantly which placed downward pressure on retail sales. Consumers curbed their spending as household wealth decreased due to falling stock market values and housing prices, access to credit reduced significantly, the U.S. unemployment rate rose and overall consumer confidence reached all-time lows. In addition, the average savings rate rose to a ten year high further indicating a reduction in consumer spending. However, these trends have begun to reverse and in the third quarter of 2009, retail sales posted the first quarter-over-quarter increase since the second quarter of 2008.

 

   

Household wealth.    Consumers experienced a substantial negative wealth effect as declining stock and home prices reduced U.S. consumer assets by approximately $12.2 trillion from the peak in 2007 to September 2009, according to RCG. As indicated by the S&P/Case-Shiller Home Index, single-family home values fell 33.5% on average from the peak in June 2006 to the low in April 2009, while the S&P 500 Index fell 56.8% from an all-time high of 1,565 at closing in October 2007 to 677 in March 2009. Since reaching what we believe are likely cyclical low points, the S&P/Case-Shiller Home Index posted gains in six consecutive months beginning in May 2009 and the S&P 500 has rallied 64.8% from March 2009 to December 2009.

 

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Employment.    U.S. unemployment has risen sharply, reaching a rate of 10.1% in October 2009, the highest level since 1983. In spite of the historical high unemployment rates, the employment outlook has been exhibiting positive trends. In January 2010, the unemployment rate fell to 9.7%. The rate of job losses has declined significantly since the beginning of 2009, with the pace of monthly job losses slowing to approximately 20,000 in January 2010 from over approximately 779,000 in January 2009. Weekly jobless claims, which are viewed as a leading indicator, have been trending lower since March 2009. The most recent data suggest that the manufacturing sector may be recovering, which could further boost employment. The Institute for Supply Management, or ISM, reported that its manufacturing index, a leading indicator of trends in the overall economy, registered 58.4% in January 2010, marking the sixth consecutive monthly reading above 50% and the highest reading since August 2004. According to ISM, a reading above 50% indicates that the manufacturing economy is generally expanding. In addition, Moody’s projects that job creation will resume in 2011 and rapidly increase in 2012 and 2013, with 2.8, 4.6 and 4.5 million jobs being formed in 2011, 2012 and 2013, respectively. The charts below show the U.S. unemployment rate from 1999 through December 2009 and monthly job losses since January 2008.

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Personal savings and consumption.    In response to the weak economic fundamentals and the credit crisis, the U.S. consumer entered a period of frugality. The U.S. personal savings rate reached a ten year high in May 2009 of 6.4% from 0.8% in April 2008, and it has since fluctuated between approximately 3% and 5%. Similarly, after falling 1.8% in 2008, U.S. personal consumption has stabilized around $9.2 trillion per annum and has recently begun to increase. The rate of savings and consumption directly affects the broader retail market and the amount of disposable income set aside for consumption. Due to the fact that we focus on necessity goods retailers, an increase in personal savings rates has less of an impact on our property types.

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Consumer confidence.    The U.S. consumer confidence index, or CCI, which was at 110.2 in January 2007, reached an all-time low of 25.3 in February 2009. It has since rebounded to 53.6 as of December 2009, which represents about one-half the long-term average of 94.8 since 1977. The CCI is broken into two components: (1) the Present Situation Index, which measures consumers’ assessment of ongoing business conditions and labor market conditions, and is a barometer of consumer spending, and (2) the Expectations Index, which measures consumers’ expectations of business conditions, labor-market conditions and income prospects over the following six months and also forecasts changes in economic growth. The Present Situation Index remains under pressure due to continued job losses and continued concerns over job security as well as fears of rising inflation; however, the Expectations Index presents a more optimistic outlook with consumers expecting higher income in the future. The chart below shows the U.S. consumer confidence index from 1977 through November 2009.

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Consumer credit.    Consumer balance sheets are strengthening, but continue to be overleveraged. According to the Federal Reserve Board, the average consumer debt outstanding peaked in 2008 and has since fallen by approximately 5%. In addition, the Financial Obligation Ratio which (1) combines mortgage and consumer debt payments, automobile payments, rental payments, homeowners insurance and property taxes, and (2) divides that sum by disposable personal income, peaked in the first quarter of 2008. The reduction in debt has been caused by lenders reducing access to credit and by consumers paring back credit card spending. Stricter access to and use of credit has a negative impact on discretionary retail sales, but impacts necessity and value oriented retailers to a lesser extent. We view the adjustment in consumers’ attitudes towards debt-driven spending as a positive factor for the industry’s long-term health and for our investment strategy.

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Real Estate Fundamentals

Vacancy Rates and Supply

The pullback by the consumer and resulting decline in retail sales has adversely impacted retail shopping center vacancies. Numerous large retail chains have filed for bankruptcy, downsized or curtailed expansion plans. ICSC reported that approximately 143,000 store closings occurred in 2008, a 5.1% increase over 2007, and that 39,000 stores (an annual rate of approximately 156,000 stores) were closed in the first quarter of 2009.

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Major Retailers Recently Declaring Bankruptcy or in Closedown Mode

 

•Bennigan’s

  

•Goody’s

  

•Sigrid Olsen

•Bombay Company

  

•KB Toys

  

•Steve & Barry’s

•Buffets, Inc.

  

•Linens ‘N Things

  

•Talbot’s Kids & Men

•Children’s Place

  

•Mervyns

  

•Tweeter Electronics

•Circuit City

  

•Movie Gallery

  

•Whitehall Jewelers

•Comp USA

  

•Sharper Image

  

•Wickes Furniture

•Domain Home

  

•Shoe Pavilion

  

 

Source: Company Reports.

 

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According to REIS Inc., the vacancy rates for neighborhood and community centers increased to 10.6% in 2009 from 8.9% in 2008, the highest level since 1992. REIS projects the vacancy rates for neighborhood and community centers to reach 12.2% in 2011 and decline to 11.7%, 11.1% and 10.4% in 2012, 2013 and 2014, respectively. Given the current depressed level of retail sales and the lack of availability for construction financing, we expect limited new retail real estate supply, which will alleviate impacts on vacancies and rents. New completions decreased 60.0% from 25.0 million square feet in 2008 to 10.1 million square feet in 2009. REIS forecasts new completions will remain sparse for the next few years, reaching 2008 levels by 2014 but still remaining below the ten-year average. The chart below depicts the historical and projected supply and demand trends for shopping centers.

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Despite the recent store closings by major retailers such as Circuit City and Linens ‘N Things, some retailers have indicated plans to expand in 2010. Retailers that are expanding or absorbing some of the anchor space created by the larger bankruptcies and store closings include grocers and value oriented retailers. The table below lists a number of necessity and value oriented retailers who are expanding store counts as consumer demand for value oriented goods rises.

Necessity and Value Oriented Retailer Expansions

 

•Big 5 Sporting Goods

  

•Dollar Tree

  

•Michael’s

•Bed Bath & Beyond

  

•El Super

  

•Nordstrom Rack

•Best Buy

  

•Family Dollar

  

•PetSmart

•Big Lots

  

•Forever 21

  

•Publix

•Burlington Coat

  

•Fresh & Easy

  

•Ross Dress for Less

•Costco

  

•Fresh Market

  

•Sam’s Club

•Dick’s Sporting Goods

  

•Hobby Lobby

  

•Sprouts

•DSW

  

•Jo-Ann

  

•TJX Companies

•Dollar General

  

•Kohl’s

  

•Wal-Mart

 

Source: Company Reports.

 

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Rents

Weakening retail sales and increasing vacancies have put downward pressure on rental rates. According to REIS, asking rents, which are the listing prices, and effective rents, which are the average rents per square foot paid by tenants over the term of a lease, continued to decline in 2009 as retail property landlords faced continuing pressure from tenants who were downsizing space requirements, negotiating more favorable lease terms or going out of business altogether. Effective rents for shopping centers fell by 0.8% in the fourth quarter of 2009, resulting in seven consecutive quarters of decline since the fourth quarter of 2008. This is the first time in almost ten years that REIS has observed rent declines for four consecutive quarters, and the year-over-year declines of 3.7% and 3.6% in the third and fourth quarters, respectively, represent the largest magnitude of deterioration over a twelve-month period since REIS began tracking shopping center rent data. In addition to rent concessions, we believe the cost to attract and retain tenants (e.g., tenant improvements) has also been increasing. REIS projects modest rental rate declines in 2010 and 2011 followed by growth in 2012 through 2014. The chart below shows historical and projected effective rents for neighborhood and community shopping centers from 2000 to 2014.

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Market Outlook

Our senior management team has had a high degree of success over the past 30 years in identifying and capitalizing on opportunities that arise during times of economic weakness and the expansion periods that follow. Accordingly, we believe that in the short to intermediate term we will be able to capitalize on opportunities to purchase high quality properties from distressed owners that need to sell and, on a select basis, to acquire distressed properties that meet our investment criteria. We will seek high quality properties in dominant locations whose vacancies stem from recent retail dislocations or mismanagement rather than weak property fundamentals. As such, we expect to acquire assets with potential high initial yields and where little or no value is attributed to vacant space.

 

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Furthermore, retail property values appear to be at their cyclical lows and we believe the ensuing rebound may be similar to those of past economic downturns, which are illustrated in the chart below. Retail sales recorded average year-over-year growth rates of 6.4%, 6.4% and 5.1% during the three years following the recessions of 1982, 1990 and 2001, respectively; however, there is no guarantee that comparable growth rates will occur in the future. We believe that the recent lack of construction combined with the anticipated economic recovery will yield an environment of increasing rents and therefore increasing operating cash flows and property values. The chart below shows retail sales growth following recent recessions.

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Over the longer-term, population growth will continue to support commercial real estate, including retail properties. According to the U.S. Census, annual population growth will remain near historical averages at approximately 1%. Moreover, the number of 20- to 34-year-old consumers, one of the primary drivers of household formation, is expected to grow from 62 million in 2008 to approximately 66 million by 2015. We believe that new household formation is a primary demand driver for necessity goods that are sold at our target assets. The chart below shows the number of 20- to 34-year-old consumers since 2000 and projections through 2045.

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Conclusion

We have witnessed the worst retail contraction since the Great Depression, characterized by widespread vacancies and bankruptcies due to anemic consumer spending. While there are signs pointing to an economic recovery, for many retail property owners the recovery will be neither swift nor robust enough to stave off debt service and monetary defaults. We anticipate that the need to fix balance sheets and remargin debt will force some owners to part with their better assets, opening a window of opportunity for acquiring “Class A” assets at “Class B” prices. We believe our liquidity combined with our senior management team’s proven track record and extensive relationships with owners, landlords and retailers will allow us to capitalize on this market dislocation. Acquiring such high quality properties at discounted prices should provide significant yields which we can grow over time through aggressive property management as the economy recovers.

 

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BUSINESS AND PROPERTIES

Overview

We are a vertically integrated, self-administered, self-managed real estate firm with the principal objective of acquiring, financing, developing, leasing, owning and managing value oriented community and power centers, grocery anchored neighborhood centers and freestanding retail properties. Our strategy is to acquire high quality, well-located, dominant retail properties that generate attractive risk-adjusted returns. We will target competitively protected properties in communities that have stable demographics and have historically exhibited favorable trends, such as strong population and income growth. We consider competitively protected properties to be located in the most prominent shopping districts in their respective markets, ideally situated at major “Main and Main” intersections. We generally lease our properties to national and regional supermarket chains, big-box retailers and select national retailers that offer necessity and value oriented items and generate regular consumer traffic. Our tenants carry goods that are less impacted by fluctuations in the broader U.S. economy and consumers’ disposable income, which we believe generates more predictable property-level cash flows.

Upon the completion of this offering and our formation transactions, we expect to own an initial portfolio consisting of 16 retail properties totaling 1,222,517 square feet of gross leasable area, which were approximately 93.5% leased and had a weighted average age of approximately 5.8 years as of December 31, 2009 based on gross leasable area. We have also agreed to acquire one additional retail shopping center consisting of approximately 85,600 square feet of gross leasable area upon the completion of its development and the occupancy of its key tenants. In addition, we expect to own one commercial office property totaling 82,157 square feet of gross leasable area which was 100% leased as of December 31, 2009. We utilize a portion of this commercial building as our headquarters. We also expect to own two land parcels comprising approximately 32.6 acres that we will have the ability to develop.

We believe the current market environment will create a substantial number of favorable investment opportunities with attractive yields on investment and significant upside potential. We have identified a pipeline of potential acquisitions from which we will seek to purchase properties that best meet our acquisition criteria and that will enhance our initial portfolio. Since December 15, 2009, the date of our incorporation, we have signed agreements contingent upon the completion of this offering to acquire eleven properties from our pipeline having an aggregate purchase price of approximately $163.8 million. As of March 31, 2010, we were actively negotiating an additional 13 potential property acquisitions from our pipeline, which have an estimated aggregate purchase price of approximately $550 million and comprise approximately 3.5 million square feet of gross leasable area. These properties include neighborhood centers, community centers and power centers located in Alabama, California, South Carolina, Texas and Virginia. Our management team sourced the properties in our pipeline through their extensive relationships with banks, insurance companies, public institutions, fund managers, REITs, retailers, private investors and developers, established over the last three decades. More than 75% of the potential property acquisitions we are actively negotiating from our pipeline are off-market transactions sourced through these relationships. Upon the completion of this offering and our formation transactions, we expect to have approximately $86.7 million of equity growth capital, in addition to funds available under a $150.0 million unsecured revolving credit facility that we intend to have in place after the completion of this offering, to invest in retail properties.

Gary Sabin, our Chairman and Chief Executive Officer, has over 30 years of experience in the real estate sector having overseen more than $4 billion of retail-related acquisitions and developments. We have an integrated team of 20 professionals with experience across all stages of the real estate investment cycle. Our senior management team includes Spencer Plumb, our President and Chief Operating Officer, James Nakagawa, our Chief Financial Officer, Mark Burton, our Chief Investment Officer and Senior Vice President of Acquisitions, and Eric Ottesen, our Senior Vice President and General Counsel. Mr. Sabin has worked with Mr. Plumb for 12 years, Mr. Nakagawa for 15 years, Mr. Burton for 26 years and Mr. Ottesen for 15 years. Excel Trust will represent our senior management team’s fifth U.S. publicly listed company focused on retail real estate. See “ — Management History and Experience.”

 

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We were organized as a Maryland corporation on December 15, 2009 and intend to elect to be taxed as a REIT beginning with our taxable year ending December 31, 2010. We will conduct substantially all of our business through Excel Trust, L.P., a Delaware limited partnership, or our operating partnership. We are structured as an UPREIT, which means that we will own most of our properties through our operating partnership and its subsidiaries. We are the sole general partner of our operating partnership. As an UPREIT, we may be able to acquire properties on more attractive terms from sellers who can defer tax obligations by contributing properties to our operating partnership in exchange for operating partnership units, which will be redeemable for cash or exchangeable for shares of our common stock at our election. Our primary offices are located in San Diego, California and Salt Lake City, Utah. Our headquarters is located at 17140 Bernardo Center Drive, Suite 300, San Diego, California 92128. Our telephone number is (858) 613-1800. Our Internet address is www.ExcelTrust.com. Our Internet website and the information contained therein or connected thereto does not constitute a part of this prospectus or any amendment or supplement hereto.

Market Opportunity

We believe the challenging real estate capital markets in conjunction with weakened economic and real estate fundamentals have pushed the broader real estate sector near its cyclical low, presenting a rare opportunity for well-capitalized companies to acquire high quality retail properties at attractive prices. From 2003 to 2007, increased discretionary spending, fueled by factors such as household wealth creation and easy access to credit, contributed to robust sales growth for the U.S. retail market and strong fundamentals for the retail property market. In addition, record levels of capital flowed into the debt and equity commercial real estate markets which compressed capitalization rates to record low levels and boosted asset values. During this time, many commercial real estate buyers flush with liquidity due, in part, to relaxed lending standards paid “Class A” prices for “Class B” properties. We believe a unique opportunity exists today to accomplish the reverse — acquire “Class A” properties for “Class B” prices. The distinctions between classes of properties are subjective and are determined independently by each real estate buyer, seller or tenant, and may vary by region or city. We believe that “Class A” properties are properties that have premium location and access, attract investors and high quality tenants, are managed professionally, are constructed from high quality building materials and command competitive rents. “Class B” properties, which may still attract high quality tenants, have average (as compared to premium) locations, management and construction.

In late 2007, with the onset of the sub-prime mortgage contagion and the ensuing credit crisis, the U.S. consumer retrenched, leading to a severe decline in the retail industry. Significantly reduced consumer spending resulted in lower retail sales, causing retailers to close stores or curtail expansion plans and landlords to confront increasing vacancies and declining rents. At the same time, the real estate capital markets froze, access to traditional sources of financing for retail properties became limited and real estate company capital structures began to fail. The confluence of these events that began in late 2007 contributed to retail real estate asset values posting their biggest decline in over 30 years.

In spite of the overall weakness in the retail sector, our target property types, which are anchored by necessity and value oriented retailers, have fared better than other retail property types in terms of operating fundamentals. This is primarily because consumer spending on necessity and value oriented goods has remained strong. In addition, we believe we may be at the beginning of an economic recovery period and the ensuing rebound in the retail market may be similar to those of past economic downturns. According to the U.S. Census data, retail sales recorded average year-over-year growth rates of 6.4%, 6.4% and 5.1% during the three years following the recessions of 1982, 1990 and 2001, respectively; however, there is no guarantee that comparable growth rates will occur in the future.

We believe that the current environment, which is characterized by the difficulty of refinancing existing debt and the risk of foreclosure, has resulted and will continue to result in distressed sellers. We believe that many cash-constrained landlords may not be able to fund required tenant improvements, leasing commissions and building improvements to attract or retain tenants and, because of this, these landlords may seek to dispose of

 

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their properties. As a result, we believe we will have the opportunity to purchase high quality, well-located, retail properties, and on a select basis, distressed assets, at attractive prices that can potentially generate substantial initial yields with the opportunity to grow cash flow over time through active management.

Given our liquidity and the proven track record of our senior management team, we believe we will be well positioned to take advantage of the current dislocation in the market and acquire retail properties at attractive pricing. Our management team has extensive contacts in the U.S. real estate market to source investment opportunities, in particular through access to both distressed and more conventional sellers such as banks, insurance companies, public institutions, fund managers, REITs, retailers, private investors and developers.

Our Competitive Advantages

We distinguish ourselves from our peers through the following competitive advantages:

 

   

Experienced and committed senior management team with a proven track record.    Gary Sabin, our Chairman and Chief Executive Officer, has over 30 years of experience in the real estate sector having overseen more than $4 billion of retail-related acquisitions and developments. Furthermore, Mr. Sabin and our senior management team have repeatedly demonstrated both public and private market success in the retail property industry while generating significant returns on invested capital. Despite their prior success, our senior management team has experienced significant challenges in periods of severe industry downturn, in particular during the period that followed September 11, 2001. Excel Trust will represent our senior management team’s fifth U.S. publicly listed company focused on retail real estate. Mr. Sabin has worked with each member of our senior management team for a minimum of twelve years, a consistency in executive leadership that we believe differentiates us from most existing and prospective public REITs. In addition, upon the completion of this offering and our formation transactions, our executive officers are expected to own approximately 7.2% of our aggregate equity interests on a fully diluted basis (assuming the exchange of all operating partnership units for shares of our common stock), which we believe will strongly align their interests with those of our stockholders.

 

   

Vertically integrated real estate platform.    Our vertically integrated real estate platform includes in-house capabilities in the areas of asset underwriting, leasing, property management, legal and construction management. We have been able to establish this vertically integrated real estate platform despite having only 20 employees as a result of the expertise, experience and cohesiveness of our senior management team. Utilizing experience gained over the last 30 years in these areas, our team is prepared to pursue opportunities to acquire high quality assets held by distressed property owners and purchase distressed assets resulting from the current market environment. We also have the flexibility and experience to take advantage of opportunities across market cycles, as demonstrated by our willingness to sell assets when it meets our investment objectives and to refrain from making investments in unfavorable market conditions or at unattractive valuations. As economic challenges and the consumer landscape continue to evolve, we believe that companies such as ours with experience and a platform covering all aspects of the real estate investment cycle will operate at a competitive advantage.

 

   

Cornerstone portfolio which supports future growth.    Upon the completion of this offering and our formation transactions, we expect to own an initial portfolio consisting of 16 retail properties, one additional retail shopping center upon the completion of its development and the occupancy of its key tenants, one commercial office property and two land parcels that we expect will generate cash flow in an amount that will exceed our first year general and administrative expenses. The retail properties that are part of our initial portfolio fit within our target property acquisition profile as they are competitively protected, anchored by tenants that sell necessity and value oriented items, such as supermarkets and drug stores, and are located in local markets that exhibit stable demographics and have historically exhibited favorable trends, such as strong population and income growth. These properties represent a component of the larger portfolio that we expect to build over time.

 

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Access to an extensive pipeline of investment opportunities through quality relationships and reputation.    We have identified a pipeline of potential acquisitions from which we will seek to purchase properties that best meet our acquisition criteria and that will enhance our initial portfolio. Since December 15, 2009, the date of our incorporation, we have signed agreements contingent upon the completion of this offering to acquire eleven properties from our pipeline having an aggregate purchase price of approximately $163.8 million. As of March 31, 2010, we were actively negotiating an additional 13 potential property acquisitions from our pipeline, which have an estimated aggregate purchase price of approximately $550 million and comprise approximately 3.5 million square feet of gross leasable area. These properties include neighborhood centers, community centers and power centers located in Alabama, California, South Carolina, Texas and Virginia. Our existing pipeline has been sourced primarily through the quality relationships our management team has formed over the past 30 years transacting with banks, insurance companies, public institutions, fund managers, REITs, retailers, private investors and developers. We believe the breadth of our relationships will generate a continual source of attractive investment opportunities that we can execute by utilizing our integrated platform. For example, more than 75% of the potential property acquisitions we are actively negotiating from our pipeline are off-market transactions sourced through these relationships. Furthermore, we believe our reputation as a preferred counterparty, established by executing fair and timely transactions through several real estate cycles, will provide access to off-market transactions. The ability to source quality investment opportunities and target acquisitions employing our proprietary underwriting methodologies will enhance our ability to utilize our growth capital in an efficient timeframe.

 

   

Growth oriented capital structure with no legacy issues.    Upon the completion of this offering and our formation transactions, we expect to have approximately $86.7 million of equity growth capital, in addition to funds available under a $150.0 million unsecured revolving credit facility that we intend to have in place after the completion of this offering, to invest in retail properties. Some of our peers face challenges from the recent economic downturn, which we refer to as legacy issues, such as significant declines in cash flows, excessive leverage with near-term maturities and funding requirements for joint venture partnerships. We believe that being free of such legacy issues positions us well to acquire properties and selectively leverage our assets to make future investments. We expect to assume approximately $72.7 million of outstanding mortgage indebtedness as of December 31, 2009. This debt is comprised of seven individual mortgage loans secured by Excel Centre, Five Forks Place, 5000 South Hulen, Grant Creek Town Center, Lowe’s, St. Mariner’s Point Shopping Center and Merchants Central Shopping Center. The weighted average interest rate on this pro forma indebtedness is expected to be 6.13% with the earliest maturity date in November 2011. We plan to employ a financing strategy that takes advantage of our unencumbered asset base. We anticipate that our unencumbered asset base will enable us to have in place a $150.0 million unsecured revolving credit facility after the completion of this offering that will allow us to maintain our financial flexibility while providing us with incremental growth capital. We cannot assure you that we will be able to enter into this new facility. We also believe that as a well-capitalized public company we will have access to multiple sources of financing currently unavailable to our private market peers or overleveraged public competitors.

Our Business Objective and Growth Strategies

Our objective is to maximize total returns to our stockholders through the pursuit of the following business and growth strategies:

Pursue value oriented investment strategy targeting core retail properties.    Our strategy is to acquire high-quality, well-located, dominant retail properties that generate attractive risk-adjusted returns. We believe the types of retail properties we seek to acquire will provide better risk-adjusted returns compared to other properties in the retail asset class, as well as other property types in general, due to the anticipated improvement in consumer spending habits resulting from a strengthening economy coupled with the long-term nature of the underlying leases and predictability of cash flows.

 

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We will acquire retail properties based on identified market and property characteristics, including:

 

   

Property type.    We intend to focus our investment strategy on value oriented community and power centers, grocery anchored neighborhood centers and freestanding retail properties. We will target these types of properties because they tend to be more focused on necessity and value oriented items as opposed to enclosed malls, which we believe are more oriented to discretionary spending that is susceptible to cyclical fluctuations. We intend to target a leasing mix where anchor tenants consist of 50 to 70% of our portfolio’s gross leasable area.

 

  ¡  

Neighborhood centers.    A neighborhood center is designed to provide convenience shopping for the day-to-day needs of consumers in the immediate neighborhood. Neighborhood centers are often anchored by a supermarket or drugstore. The anchors are supported by outparcels typically occupied by restaurants, fast food operators, financial institutions and in-line stores offering various products and services ranging from soft goods, healthcare and electronics.

 

  ¡  

Community centers.    A community center typically offers a wider range of apparel and other soft goods relative to a neighborhood center and in addition to supermarkets and drugstores, can include discount department stores as anchor tenants.

 

  ¡  

Power centers.    A power center is dominated by several large anchors, including discount department stores, warehouse clubs or category killers. Power centers typically consist of several freestanding (unconnected) anchors and only a minimal amount of small specialty tenants.

 

  ¡  

Freestanding retail property.    A freestanding retail property constitutes any retail building that is typically occupied by a single tenant. The lease terms are generally structured as triple-net with the tenant agreeing to pay rent as well as all taxes, insurance and maintenance expenses that arise from the use of the property. Additionally, freestanding, single tenant retail properties often feature “bond lease” terms, wherein the tenant not only agrees to pay triple-net expenses, but also roof and structure expenses. The lease term for a single tenant, triple-net property typically ranges from 10 to 25 years.

 

   

Anchor tenant type.    We will target properties with anchor tenants that offer necessity and value oriented items that are less impacted by fluctuations in consumers’ disposable income. We believe nationally and regionally recognized anchor tenants that offer necessity and value oriented items provide more predictable property-level cash flows as they are typically higher credit quality tenants that generate stable revenues. We feel these properties will act as a catalyst for incremental leasing demand through increased property foot traffic. We will identify the credit quality of our anchor tenants by conducting a thorough analysis including, but not limited to, a review of tenant operating performance, liquidity and balance sheet strength.

 

   

Lease terms.    In the near term, we intend to acquire properties that feature one or more of the following characteristics in their tenants’ lease structure: properties with long-term leases for anchor tenants; properties under triple-net leases that minimize our expenses; and properties with leases which incorporate percentage rent and/or rental escalations that act as an inflation hedge while maximizing operating cash flows. As a longer-term strategy, we will look to acquire properties with shorter-term lease structures for in-line tenants that have below market rents that can be renewed at higher market rates. We also have the ability to utilize our integrated platform and operating experience to acquire properties with the capacity to generate incremental cash flow through lease-up and repositioning.

 

   

Geographic markets and demographics.    We plan to seek investment opportunities throughout the United States; however, we will focus on the Northeast, Northwest and Sunbelt regions, which are characterized by attractive demographic and property fundamental trends. We will target competitively protected properties in communities that have stable demographics and have historically exhibited

 

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favorable trends, such as strong population and income growth. These communities will also have a combination of the following characteristics:

 

  ¡  

established trade areas with high barriers to entry (avoid outer areas where housing construction has halted),

 

  ¡  

high population base with expected annual growth rate higher than the national average,

 

  ¡  

high retail sales per square foot compared to the national average,

 

  ¡  

above-average household income and expected growth,

 

  ¡  

above-average household density,

 

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favorable infrastructure such as schools to retain and attract residents, and

 

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below-average unemployment rate.

The graphic below illustrates that the areas with the highest projected population growth are consistent with our target markets.

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Capitalize on network of relationships to pursue off-market transactions.    We plan to pursue off-market transactions in our target markets through the long-term relationships we have developed over the past three decades. These relationships have been the source of approximately 75% of the properties that we expect to acquire from third parties in our formation transactions, as well as the source of more than 75% of the potential property acquisitions that we are actively negotiating from our pipeline. Leveraging these relationships, we will target property owners that our management team has transacted with previously, many of whom, we feel, will consider us a preferred counterparty due to our track record of completing fair and timely transactions. We believe this dynamic gives us a competitive advantage in negotiating and executing favorable acquisitions.

 

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We believe the current dislocation in the real estate capital markets will allow us to supplement this strategy in the near term by targeting opportunities resulting from both troubled owners and distressed real estate. We will target overleveraged property owners facing liquidity constraints or solvency issues. Potential sellers include banks, insurance companies, public institutions, fund managers, REITs, retailers, private investors and developers that are burdened by the demands of excessive leverage in the challenging operating environment. We also intend to target properties that, although well-located, are challenged by tenant bankruptcies, mismanagement or neglect. We believe these sellers will provide us the opportunity to obtain high quality, well-located, dominant retail properties at attractive valuations.

Maximize value through proactive asset management.    We believe our market expertise, targeted leasing strategies and proactive approach to asset management will enable us to maximize the operating performance of our portfolio. We will continue to implement an active asset management program to increase the long-term value of each of our properties. This may include expanding existing tenants, re-entitling site plans to allow for additional outparcels and repositioning tenant mixes to maximize traffic, tenant sales and percentage rents. As we grow our portfolio, we will seek to maintain a diverse pool of assets with respect to both geographic distribution and tenant mix, helping to minimize our portfolio risk. In addition, we will seek to stagger lease maturities to avoid significant turnover in any given year. We will utilize our experience and market knowledge to effectively allocate capital to implement our investment strategy. We continually monitor our markets for opportunities to selectively dispose of properties where returns appear to have been maximized and redeploy proceeds into new acquisitions that have greater return prospects.

Leverage our experienced property management platform.    Our management team has an extensive track record of managing, operating and leasing retail properties. We believe tenants value our commitment to maintaining the high standards of our properties through our handling of many property management functions in-house. Furthermore, we consider ourselves to be in the best position to oversee the day-to-day operations of our properties, which in turn helps us service our tenants. We feel this generates higher renewal and occupancy rates, minimizes rent interruptions, reduces renewal costs and helps us achieve stronger operating results. Along with this, a major component of our leasing strategy is to cultivate long-term relationships through consistent tenant dialogue in conjunction with a proactive approach to meeting the space requirements of our tenants.

Grow our platform through a comprehensive financing strategy.    Our capital structure will provide us with significant financial capacity and flexibility to fund future growth. As a well-capitalized public company, we believe we will have access to multiple sources of financing that are currently unavailable to many of our private market peers or overleveraged public competitors, which will provide us with a competitive advantage. Over time, these financing alternatives may include follow-on offerings of our common stock, unsecured corporate level debt, preferred equity and credit facilities. Initially, we will utilize growth capital raised through this offering, in addition to the funds available under a $150.0 million unsecured revolving credit facility that we intend to have in place after the completion of this offering, to fund acquisitions. This strategy will enable us to continue to grow our asset base well into the future. Our board of directors will adopt long-term guidelines of limiting our indebtedness to 40% of our gross undepreciated asset value.

Management History and Experience

Gary Sabin founded his first private real estate company in 1978 focused predominantly on the retail sector and continued private operations for over a decade. In 1989, he consolidated several properties to create a public non-traded REIT, Excel Realty Trust, Inc. Mr. Sabin served as its Chairman, President and Chief Executive Officer, while other members of our senior management team served as executive officers of the company. Excel Realty Trust was a self-administered, self-managed retail REIT focused predominantly on the acquisition, ownership and management of retail properties and was subsequently listed on the NYSE on August 4, 1993, raising gross proceeds of $118.5 million in a concurrent offering of six million shares of common stock.

In September 1998, Excel Realty Trust combined with New Plan Realty Trust in a merger of equals in which Excel Realty Trust was the surviving entity in the merger. The total consideration for Excel Realty Trust

 

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was approximately $1.4 billion, and the combined company was renamed New Plan Excel Realty Trust, Inc. This transaction created the largest community and neighborhood shopping center REIT in the United States at the time, consisting of 355 properties in 31 states, comprising approximately 37.5 million square feet of gross leasable area with total assets of approximately $2.9 billion. Investors who purchased shares in Excel Realty Trust for $19.75 per share in the concurrent offering that was conducted in connection with its initial listing on the NYSE in 1993 realized a total return of 125.3% through the date of the closing of the New Plan Realty Trust merger. Mr. Sabin became a director and served as President of New Plan Excel Realty Trust while other members of our senior management team served as executive officers of the company. New Plan Excel Realty Trust represented Mr. Sabin and our senior management team’s second public company focused on retail real estate.

In March 1998, Mr. Sabin became Chairman, President and Chief Executive Officer of Excel Legacy Corporation, a company focused on retail development and property management operations that was spun-off from Excel Realty Trust in March 1998 with a fair value, estimated at the time of the spin-off by the Excel Realty Trust board of directors, of approximately $56.0 million, or $2.39 per share of Excel Realty Trust. Excel Legacy Corporation was organized as a corporation and focused on growth, particularly through long-term real estate development projects. Excel Legacy Corporation represented Mr. Sabin and our senior management team’s third public company focused on retail real estate.

In April 1999, Mr. Sabin and our senior management team departed New Plan Excel Realty Trust to focus full time on managing Excel Legacy Corporation. In May 1999, Excel Legacy Corporation purchased 91% of the common stock of Price Enterprises, Inc. In addition to acquiring substantially all of the economic interest in Price Enterprises, our senior management team also took over the day-to-day management of Price Enterprises at that time. In September 2001, Excel Legacy Corporation merged with Price Enterprises to form Price Legacy Corporation, a REIT with a total combined asset value of approximately $1.2 billion. The purpose of the merger was to simplify the capital structure and economic ownership of the two companies, which our senior management team believed would enable investors to more easily value the combined entity. Mr. Sabin and our senior management team continued to manage Price Legacy Corporation, their fourth public company focused on retail real estate, following the merger. At its peak in 2001, Price Legacy Corporation owned directly or in joint venture with third parties a total of 55 shopping centers located in 13 states comprised of approximately 9.0 million square feet of gross leasable area.

While at Price Legacy Corporation, our senior management team engineered an important recapitalization transaction which later led to the conversion of a substantial portion of Price Legacy Corporation’s preferred stock into common stock. This recapitalization transaction was intended to improve and further simplify Price Legacy Corporation’s capital structure (which prior to the recapitalization was heavily weighted towards preferred stock) and to increase the marketability and liquidity of its common stock. This transaction was also a critical step in allowing Price Legacy Corporation to begin a formal process that would lead to its eventual sale. Aware that this process was about to commence, Mr. Sabin and most of our senior management team resigned from Price Legacy Corporation in October 2003 in order to pursue a separate bid for the company. While Mr. Sabin and our senior management team were not the successful bidders, this process ultimately led to the sale of Price Legacy Corporation to PL Retail LLC, a joint venture involving DRA Advisors LLC and Kimco Realty Corporation, in December 2004.

Since leaving Price Legacy Corporation in October 2003, and after having spent over 14 years managing public real estate companies, Mr. Sabin and our senior management team have not worked for a public company. In October 2003, Mr. Sabin and our senior management team formed Excel Realty Holdings, LLC, which has selectively acquired and/or developed properties on its own behalf. Substantially all real estate related activity of Excel Realty Holdings has been financed and conducted by Mr. Sabin as principal.

Despite the successes detailed above, our senior management team has had, on occasion, individual property transactions result in losses. For example, while at Excel Realty Trust, our senior management team sold

 

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20 properties during the period from 1995 to 1998. Of these 20 properties, seven were sold for an aggregate loss of approximately $0.5 million. In addition, our senior management team has experienced significant challenges during periods of severe industry downturn, in particular while at Price Legacy Corporation during the period that followed September 11, 2001. This period was characterized by deteriorating economic conditions and rising capitalization rates, which caused a decline in the appraised value of the assets in Price Legacy Corporation’s portfolio and resulted in a decrease in the net asset value of that company. Our senior management team did not dispose of any material properties during this time, and as a result, no material loss was realized as a result of the decline. With improved economic conditions, including increased liquidity in the financial markets, the appraised value of the assets in Price Legacy Corporation’s portfolio subsequently increased. Owing to market fluctuations, certain investors, depending on the timing of their investments and holding periods, may not have earned positive returns on their investments in our senior management team’s public companies.

Excel Realty Holdings owns several non-retail properties and manages retail and non-retail assets on behalf of third parties, but no competitive projects will be owned by Excel Realty Holdings after our formation transactions. Our initial assets will include several properties contributed by Excel Realty Holdings that are consistent with our business objectives. In addition to the business activities mentioned above, members of our senior management team are involved with several charitable organizations. For example, Mr. Sabin created The Sabin Children’s Foundation, a non-profit entity dedicated to relieving the distress of underprivileged children around the world.

Mr. Sabin and our senior management team have exclusively directed the operations of three U.S. public companies and have served as part of the senior management team of a fourth U.S. public company, all of which were focused on retail real estate. Mr. Sabin has worked with each member of our senior management team for a minimum of twelve years. We believe we will benefit from this cohesive, experienced and highly capable management team’s long standing record of acquiring, developing, owning and managing high quality commercial real estate portfolios.

All performance information detailed here regarding public companies in which Mr. Sabin and our senior management team were employees is a reflection of the past performance of these companies, and is not intended to be indicative of, or a guarantee or prediction of, the returns that we may achieve in the future. The performance of these prior companies may have been impacted by general market trends and other external factors unrelated to Mr. Sabin and our senior management team’s performance. We can offer no assurance that we will replicate the historical performance of these companies, and our returns could be substantially lower than the returns achieved by these companies. In addition, we intend to employ prudent amounts of leverage to finance the acquisition of our target assets, and our board of directors will adopt long-term guidelines of limiting our indebtedness to 40% of our gross undepreciated asset value. The prior public companies for which Mr. Sabin and our senior management team were employees incurred indebtedness in amounts that may be greater or less than the indebtedness that we may incur, and the use of leverage impacts returns.

Shareholder Total Return

The tables below set forth shareholder total return information for the public companies for which Mr. Sabin served as Chairman and Chief Executive Officer and other members of our senior management team served as executive officers. The tables below also provide a comparison of the stock performance of these companies against the FTSE NAREIT Equity REITs Index and the S&P 500, together with net income per share information during the same periods.

The FTSE NAREIT Equity REITs Index is a free-float market capitalization-weighted index measuring the performance of all publicly traded REITs that invest predominantly in the equity ownership of real estate, meet minimum size and liquidity criteria, and are traded on the NYSE, NYSE Amex Equities and the NASDAQ Stock Market. The FTSE NAREIT Equity REITs Index is calculated on a total-return basis with dividends reinvested. The REITs that are included in the FTSE NAREIT Equity REITs Index reflect a broad spectrum of real estate sectors, including the diversified, healthcare, self storage, lodging/resorts, residential, specialty, industrial/office

 

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and retail sectors. We believe that the FTSE NAREIT Equity REITs Index is a benchmark that is commonly used by investors for purposes of comparing stock performance and stockholder returns of REITs. The S&P 500, which is a market-weighted index of 500 widely held stocks and is generally viewed as a benchmark for the overall U.S. stock market, is also commonly used by investors to compare stock performance and stockholder returns. We believe the FTSE NAREIT Equity REITs Index is an appropriate benchmark for the performance of Excel Realty Trust because it was organized as a REIT and this index is commonly used by investors for purposes of comparing stock performance and stockholder returns of REITs. We believe the S&P 500 is an appropriate benchmark for the performance of Excel Legacy Corporation because it was organized as a corporation that focused on growth, particularly through long-term real estate development projects, rather than as an income producing REIT, and as such is better compared to a broad market index. We believe the FTSE NAREIT Equity REITs Index is an appropriate benchmark for the performance of Price Legacy Corporation because it was organized as a REIT and had a portfolio of income producing real estate, a portion of which included income from the projects initially under development at Excel Legacy Corporation. However, comparison of the return performance of each of these companies to the performance of the FTSE NAREIT Equity REITs Index and the S&P 500 may be limited due to the differences between these companies and the companies represented in the FTSE NAREIT Equity REITs Index and the S&P 500, including with respect to size, asset type, geographic concentration and investment strategy.

Excel Realty Trust, Ticker: XEL

 

                            Shareholder Returns  
    Date   Equity  Raised(1)   Entry
Price
($/sh)
  Exit
Value
($/sh)(4)
        For the Years Ended December 31,(2)  
  Beginning
Date(3)
  End
Date(3)
  Shares
(MM)
  $MM       Total
Returns(4)
    1998(5)     1997     1996     1995     1994     1993(6)  

Excel Realty Trust

  8/5/1993   9/28/1998   12.1   249.2   19.75   44.51   125.3   (1.8 )%    32.8   34.7   35.9   (1.2 )%    (4.4 )% 

FTSE NAREIT Equity REITs Index

              54.9   (19.6 )%    20.3   35.3   15.3   3.2   (0.5 )% 

S&P 500

              163.1   9.3   33.4   23.0   37.6   1.3   5.3

Net income per share— diluted ($/sh)

                   1.86      1.97      1.62      1.51      1.27      0.55   

Excel Legacy Corporation / Price Legacy Corporation, Ticker: XLG/PLRE

 

                            Shareholder Returns  
    Date   Equity  Raised(1)   Entry
Price
($/sh)(10)
  Exit
Value
($/sh)(11)
        For the Years Ended December 31,(7)  
    Beginning
Date(9)
  End Date(9)   Shares
(MM)
  $MM       Total
Returns(11)
    2003(12)
(End Date)
    2002     2001(13)     2000     1999     1998(14)  

Excel Legacy Corp. / Price Legacy Corp.(8)

  3/31/1998   10/15/2003       2.39   2.45   2.4   31.1   (11.4 )%    (11.3 )%    (28.3 )%    (17.2 )%    67.4

FTSE NAREIT Equity REITs Index

              53.1   29.6   3.8   13.9   26.4   (4.6 )%    (17.1 )% 

S&P 500

              2.8   20.7   (22.1 )%    (11.9 )%    (9.1 )%    21.0   12.8

Net income (loss) per share—diluted ($/sh)

                   (3.30   (0.19   0.02      (0.36   (0.02   0.02   

 

(1) Includes gross proceeds raised in initial public offerings and follow-on offerings of common stock.

 

(2) Except as otherwise indicated, shareholder returns for the years presented are calculated based on the increase or decrease in the closing price of the company’s common stock on the NYSE on December 31 of the applicable year compared to December 31 of the prior year and take into account the reinvestment of dividends paid in the applicable year as described in footnote 4 below.

 

(3) Beginning Date represents the date of the initial listing of Excel Realty Trust on the NYSE and End Date represents the date of the closing of the merger with New Plan Realty Trust on September 28, 1998. In connection with the merger with New Plan Realty Trust, holders of common stock of Excel Realty Trust participated in a six for five stock split and then became holders of common stock of New Plan Excel Realty Trust on a one-for-one basis.

 

(4) Shareholder total returns depicts the returns generated in respect of one share of Excel Realty Trust common stock assuming the share was purchased on the Beginning Date for $19.75 per share and sold on the End Date and assumes the reinvestment of all cash dividends paid by Excel Realty Trust on its common stock through such period in additional shares of common stock on the ex-dividend date and takes into account (i) the six for five stock split described in footnote 3 above on September 28, 1998, and (ii) the receipt of common stock of Excel Legacy Corporation in connection with the spin-off of Excel Legacy Corporation from Excel Realty Trust on March 31, 1998, as described in paragraph (a) below. As shown below, on the End Date, one share purchased on the Beginning Date would have grown, through reinvestment of all cash dividends and taking into account the six for five stock split, to a total of 1.818 shares.

 

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Dividend

Payment

Date

   Closing Share
Price on

Dividend
Payment Date

($)
    Dividend
Paid
($)
   Beginning Shares
Owned
   Shares Acquired
Through
Dividend
Reinvestment
    Shares Received
in Stock Split
    Ending Shares
Owned 

  9/24/1993

   19.75      0.230    1.000    0.012           1.012

12/27/1993

   18.75      0.415    1.012    0.022           1.034

  3/25/1994

   21.75      0.415    1.034    0.020           1.054

  6/24/1994

   19.50      0.430    1.054    0.023           1.077

  9/26/1994

   18.88      0.430    1.077    0.025           1.102

12/23/1994

   16.63      0.430    1.102    0.028           1.130

  3/27/1995

   18.75      0.430    1.130    0.026           1.156

  6/28/1995

   19.50      0.445    1.156    0.026           1.182

  9/27/1995

   19.38      0.445    1.182    0.027           1.209

12/27/1995

   20.50      0.445    1.209    0.026