UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington,
D. C. 20549 
 FORM 10-K 
 (Mark
One) xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE 
ACT OF 1934 For the fiscal year ended
December 31, 2012 OR  ̈TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 333-164313 
 PHILLIPS EDISON – ARC SHOPPING CENTER REIT INC. (Exact Name of
Registrant as Specified in Its Charter)  Maryland
 27-1106076(State or Other Jurisdiction of
  Incorporation
  or Organization)
 (I.R.S. Employer
  Identification
  No.)11501 Northlake Drive
  Cincinnati, Ohio
 45249(Address of Principal Executive Offices)
 (Zip Code)
 (513) 554-1110 (Registrant’s Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of
the Act:  Title of Each Class
 Name of Each Exchange on Which RegisteredNone
 None
 Securities registered pursuant to Section 12(g) of
the Act: None 
 Indicate by check mark if
the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.    Yes ̈Noþ Indicate by check mark if
the Registrant is not required to file reports pursuant to Section 13 of
Section 15(d) of the Act.    Yes ̈Noþ Indicate by check mark
whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.    YesþNo ̈ Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of Registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of the Form 10-K or any amendment of this Form
10-K.þ Indicate by check mark
whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definitions of “large
accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):  Large Accelerated Filer
  ̈
 Accelerated Filer
  ̈Non-Accelerated Filer
  ̈(Do not check if a smaller reporting company)
 Smaller reporting company
 þ
 Indicate by check mark
whether the Registrant is a shell company (as defined in rule 12b-2 of the
Securities Exchange Act).    Yes ̈Noþ Aggregate market value of
the voting stock held by non-affiliates: There is no established public market
for the registrant's shares of common stock. The registrant is currently
conducting the ongoing initial public offering of its shares of common stock
pursuant to its Registration Statement on Form S-11 (File No. 333-164313), in which
shares are being sold at $10.00 per share, with discounts available for certain
categories of purchasers. The aggregate market value of the registrant's common
stock held by non-affiliates of the registrant as of June 30, 2012, the last
business day of the registrant's most recently completed second fiscal quarter,
was $52.7 million based on a per share value of $10.00 (or $9.50 for shares
issued under the distribution reinvestment plan). As of February 28, 2013,
there were 18,498,738 outstanding shares of common stock of the Registrant.


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PHILLIPS EDISON – ARC SHOPPING CENTER REIT INC. FORM
10-K 2012 INDEX  PART I
 3ITEM 1.
 BUSINESS
 3ITEM 1A.
 RISK FACTORS
 5ITEM 1B.
 UNRESOLVED STAFF
  COMMENTS
 36ITEM 2.
 PROPERTIES
 36ITEM 3.
 LEGAL PROCEEDINGS
 38ITEM 4.
 MINE SAFETY DISCLOSURES
 39PART II
 40ITEM 5.
 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
  STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 40ITEM 6.
 SELECTED FINANCIAL DATA
 44ITEM 7.
 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
  CONDITION AND RESULTS OF OPERATIONS
 45ITEM 7A.
 QUANTITATIVE AND
  QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 61ITEM 8.
 FINANCIAL STATEMENTS AND
  SUPPLEMENTARY DATA
 61ITEM 9.
 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
  ACCOUNTING AND FINANCIAL DISCLOSURE
 62ITEM 9A.
 CONTROLS AND
  PROCEDURES
 62ITEM 9B.
 OTHER INFORMATION
 62PART III
 64ITEM 10.
 DIRECTORS, EXECUTIVE
  OFFICERS AND CORPORATE GOVERNANCE
 64ITEM 11.
 EXECUTIVE COMPENSATION
 64ITEM 12.
 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
  MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 64ITEM 13.
 CERTAIN RELATIONSHIPS AND
  RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
 64ITEM 14.
 PRINCIPAL ACCOUNTING FEES
  AND SERVICES
 64PART IV
 65ITEM 15.
 EXHIBITS, FINANCIAL
  STATEMENT SCHEDULES
 65INDEX TO FINANCIAL STATEMENTS
 F-1
 1


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FORWARD-LOOKING STATEMENTS Certain
statements contained in this Form 10-K of Phillips Edison—ARC Shopping Center
REIT Inc. (“Phillips Edison—ARC Shopping Center REIT,” “we,” “the Company,”
“our” or “us”) other than historical facts may be considered forward-looking
statements within the meaning of Section 27A of the Securities Act of
1933, as amended (the “Securities Act”), and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). We intend for all such
forward-looking statements to be covered by the applicable safe harbor
provisions for forward-looking statements contained in those acts. Such
statements include, in particular, statements about our plans, strategies, and
prospects and are subject to certain risks and uncertainties, including known
and unknown risks, which could cause actual results to differ materially from
those projected or anticipated. Therefore, such statements are not intended to
be a guarantee of our performance in future periods. Such forward-looking
statements can generally be identified by our use of forward-looking
terminology such as “may,” “will,” “expect,” “intend,” “anticipate,”
“estimate,” “believe,” “continue,” or other similar words. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date this report is filed with the U.S. Securities
and Exchange Commission (“SEC”). We make no representations or warranties
(express or implied) about the accuracy of any such forward-looking statements
contained in this Form 10-K, and we do not intend to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events, or otherwise. See Item 1A herein for a discussion of some of the
risks and uncertainties, although not all risks and uncertainties, that could
cause actual results to differ materially from those presented in our
forward-looking statements. 2


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PART I  ITEM 1.      BUSINESS  Overview  Phillips Edison—ARC Shopping Center REIT Inc. was
formed as a Maryland corporation on October 13, 2009 and has elected to be
taxed as a real estate investment trust (“REIT”) commencing with the taxable
year ended December 31, 2010. Substantially all of our business is expected to
be conducted through Phillips Edison—ARC Shopping Center Operating Partnership,
L.P. (the “Operating Partnership”), a Delaware limited partnership formed on
December 3, 2009. We are the sole limited partner of the Operating
Partnership, and our wholly owned subsidiary, Phillips Edison Shopping Center
OP GP LLC, is the sole general partner of the Operating Partnership.  We are offering to the public pursuant to a
registration statement $1.785 billion in shares of common stock in our initial
public offering on a “best efforts” basis. Our offering consists of a primary
offering of $1.5 billion in shares offered to investors at a price of $10.00
per share, with discounts available for certain categories of purchasers, and
$285 million in shares offered to stockholders pursuant to a dividend
reinvestment plan (the “DRP”) at a price of $9.50 per share. We have the right
to reallocate the shares of common stock offered between the primary offering
and the DRP.  As of December 31, 2012, we had issued 13,801,251
shares of common stock since inception, including 155,940 shares issued through
the DRP, generating gross cash proceeds of $136.1 million.  Our advisor is American Realty Capital II Advisors,
LLC (the “Advisor”), a limited liability company that was organized in the
State of Delaware on December 28, 2009 and that is indirectly wholly owned
by AR Capital LLC (formerly American Realty Capital II, LLC) (the “AR Capital
sponsor”). Under the terms of the advisory agreement between the Advisor and
us, the Advisor is responsible for the management of our day-to-day activities
and the implementation of our investment strategy. The Advisor has delegated
most of its duties under the advisory agreement, including the management of
our day-to-day operations and our portfolio of real estate assets, to Phillips
Edison NTR LLC (the “Sub-advisor”), which is indirectly wholly owned by
Phillips Edison Limited Partnership (the “Phillips Edison sponsor”).
Notwithstanding such delegation to the Sub-advisor, the Advisor retains
ultimate responsibility for the performance of all the matters entrusted to it
under the advisory agreement.  We invest primarily in well-occupied grocery-anchored
neighborhood and community shopping centers having a mix of creditworthy
national and regional retailers selling necessity-based goods and services in
strong demographic markets throughout the United States. In addition, we may
invest in other retail properties including power and lifestyle shopping
centers, multi-tenant shopping centers, free-standing single-tenant retail
properties, and other real estate and real estate-related loans and securities
depending on real estate market conditions and investment opportunities that we
determine are in the best interests of our stockholders. We expect that retail
properties primarily would underlie or secure the real estate-related loans and
securities in which we may invest.  As of December 31, 2012, we owned fee
simple interests in 26 real estate properties, 20 of which we owned through the
Joint Venture, acquired from third parties unaffiliated with us, the Advisor,
or the Sub-advisor.  On September 20, 2011, we entered into a joint venture
with a group of institutional international investors advised by CBRE Investors
Global Multi Manager (each a “CBRE Investor”). The joint venture is in the form
of PECO-ARC Institutional Joint Venture I., L.P., a Delaware limited
partnership (the “Joint Venture”). We, through an indirectly wholly owned
subsidiary, hold an approximate 54% interest in the Joint Venture.  We serve as
the general partner and manage the operations of the Joint Venture. The CBRE
Investors hold the remaining approximate 46% interest.  We contributed
approximately $58.7 million, in the form of equity interests in six wholly
owned real estate properties and cash, to the Joint Venture (defined below),
and the CBRE Investors contributed $50 million in cash.  Segment Data  We currently view our real estate assets as one
reportable segment. Accordingly, we did not report any other segment
disclosures in 2012.  Tax Status  We elected to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the “Internal
Revenue Code”) beginning with the tax year ended December 31, 2010.
Because we qualify for taxation as a REIT, we generally will not be subject to
federal income tax on taxable income that is distributed to stockholders. If we
fail to qualify as a REIT in any taxable year, without the benefit of certain
relief provisions, we will be subject to federal (including any applicable
alternative minimum tax) and state income tax on our taxable income at regular
corporate rates. Even if we qualify for taxation as a REIT, we may be subject
to 3


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certain state and local taxes on our income,
property or net worth, respectively, and to federal income and excise taxes on
our undistributed income.  Competition  We are subject to significant competition in seeking
real estate investments and tenants. We compete with many third parties engaged
in real estate investment activities including other REITs, specialty finance
companies, savings and loan associations, banks, mortgage bankers, insurance
companies, mutual funds, institutional investors, investment banking firms,
lenders, hedge funds, governmental bodies and other entities. Some of these
competitors, including larger REITs, have substantially greater financial
resources than we do and generally enjoy significant competitive advantages
that result from, among other things, a lower cost of capital and enhanced
operating efficiencies.  Economic Dependency  We are dependent on the Advisor, the Sub-advisor,
Realty Capital Securities, LLC (the “Dealer Manager”), Phillips
Edison & Company, Ltd. (the “Property Manager”) and their respective
affiliates for certain services that are essential to us, including the sale of
our shares of common stock, asset acquisition and disposition decisions, and other
general and administrative responsibilities. In the event that any of the
above-mentioned affiliates are unable to provide such services, we would be
required to find alternative service providers.  Employees  We do not have any employees. In addition, all of our
executive officers are officers of Phillips Edison & Company or one or
more of its affiliates and will be compensated by those entities, in part, for
their service rendered to us. We do not separately compensate our executive
officers for their service as officers.  The employees of Phillips Edison- or AR
Capital-affiliated entities perform substantially all of the services related
to our company. The expenses related to providing these services are charged to
us based on time spent by these employees while providing services to us,
excluding those acquisition, disposition, property management, asset
management, financing, and other services that are covered under separate fees
charged to us. The employee-related expenses related to organization and offering
costs charged to us for the years ended December 31, 2012 and December 31, 2011
were $0 and $0.6 million, respectively. Also, $6.9 million of organization and
offering costs incurred by the Sub-advisor on our behalf has not been charged
to us or recorded in our consolidated financial statements for the year ended December
31, 2012. Whether these costs will be billed to us in the future is at the
discretion of the Sub-advisor and will likely depend upon the success of our
offering.  Insurance  We believe that our properties are adequately insured.  Environmental Matters  As an owner of real estate, we are subject to various
environmental laws of federal, state and local governments. Compliance with
federal, state and local environmental laws has not had a material adverse
effect on our business, assets, or results of operations, financial condition
and ability to pay distributions, and we do not believe that our existing
portfolio will require us to incur material expenditures to comply with these
laws and regulations.  Access to Company Information  We electronically file our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments
to those reports with the United States Securities and Exchange Commission
(“SEC”). The public may read and copy any of the reports that are filed with
the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at (800)-SEC-0330. The SEC maintains an
Internet site at www.sec.gov that contains reports, proxy and information
statements and other information regarding issuers that file electronically.  We make available, free of charge, by responding to requests
addressed to our investor relations group, the Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments
to those reports on our website, www.phillipsedison-arc.com. These reports are
available as soon as reasonably practicable after such material is
electronically filed or furnished to the SEC. 4


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ITEM 1A.   RISK
FACTORS  The factors described below represent our principal
risks. Other factors may exist that we do not consider to be significant based
on information that is currently available or that we are not currently able to
anticipate. The occurrence of any of the risks discussed below could have a
material adverse effect on our business, financial condition, results of
operations and ability to pay distributions to our stockholders. Potential
investors and our stockholders may be referred to as “you” or “your” in this
Item 1A, “Risk Factors,” section.  Risks Related to an Investment in Us  Because no public trading market
for our shares currently exists, it is difficult for our stockholders to sell
their shares and, if our stockholders are able to sell their shares, it will
likely be at a substantial discount to the public offering price.  Our charter does not require our directors to seek stockholder
approval to liquidate our assets by a specified date, nor does our charter
require our directors to list our shares for trading on a national securities
exchange by a specified date. There is no public market for our shares, and we
currently have no plans to list our shares on a national securities exchange.
Until our shares are listed, if ever, stockholders may not sell their shares
unless the buyer meets the applicable suitability and minimum purchase
standards. In addition, our charter prohibits the ownership of more than 9.8%
in value of our aggregate outstanding stock or more than 9.8% in value or
number of shares, whichever is more restrictive, of our aggregate outstanding
common stock, unless exempted by our board of directors, which may inhibit
large investors from purchasing your shares. In its sole discretion, our board
of directors could amend, suspend or terminate our share repurchase program
upon 30 days’ notice. Further, the share repurchase program includes numerous
restrictions that would limit a stockholder’s ability to sell his or her
shares. Therefore, it is difficult for our stockholders to sell their shares
promptly or at all. If a stockholder is able to sell his or her shares, it
would likely be at a substantial discount to the public offering price. It is
also likely that our shares would not be accepted as the primary collateral for
a loan. Because of the illiquid nature of our shares, investors should purchase
our shares only as a long-term investment and be prepared to hold them for an
indefinite period of time.  We have a limited operating history,
and neither the Advisor nor the Sub-advisor has any prior operating history or
any previous experience operating a public company, which makes our future
performance difficult to predict.  We have a limited operating history and as of December
31, 2012, we owned interests in 26 real estate investments. Our stockholders
should not assume that our performance will be similar to the past performance
of other real estate investment programs sponsored by affiliates of the Advisor
or affiliates of the Sub-advisor.  The Advisor and the Sub-advisor have limited
operations as of the date of this report. Because previous Phillips
Edison-sponsored programs were conducted through privately held entities, they
were not subject to the up-front commissions, fees and expenses associated with
a public offering nor all of the laws and regulations that will apply to us.
Our executive officers and directors have limited experience managing public
companies. For all of these reasons, our stockholders should be especially
cautious when drawing conclusions about our future performance, and you should
not assume that it will be similar to the prior performance of other Phillips
Edison- or AR Capital-sponsored programs. Our lack of an operating history, the
Advisor’s and the Sub-advisor’s lack of experience operating a public company,
the differences between us and the private Phillips Edison-sponsored programs
and our AR Capital sponsor’s limited experience in connection with investments
of the type to be made by us significantly increase the risk and uncertainty
our stockholders face in making an investment in our shares.  Our ability to implement our
investment strategy is dependent, in part, upon the ability of our Dealer
Manager to successfully conduct our offering, which makes an investment in us
more speculative.  We have retained Realty Capital Securities, LLC, an
affiliate of the Advisor, to conduct our offering.  The success of our
offering, and our ability to implement our business strategy, is dependent upon
the ability of Realty Capital Securities, LLC to build and maintain a network
of broker-dealers to sell our shares to their clients. These broker-dealers may
also be engaged by other REITs, and they may choose to emphasize the sale of
those REITs’ shares over the sale of our shares. If Realty Capital Securities,
LLC is not successful in establishing, operating and managing this network of
broker-dealers, our ability to raise proceeds through our offering will be
limited, and we may not have adequate capital to implement our investment
strategy. If we are unsuccessful in implementing our investment strategy, our
stockholders could lose all or a part of their investment.  If our Dealer Manager terminates
its dealer manager relationship with us, our ability to successfully complete
our offering and implement our investment strategy would be significantly
impaired.  Our Dealer Manager has the right to terminate its
relationship with us if, among other things, any of the following occur:
(1) our voluntary or involuntary bankruptcy; (2) we materially change
our business; (3) we become subject to a material action, suit, 5


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proceeding or investigation; (4) we materially
reduce the rate of any distribution we may pay in the future without its prior
written consent; (5) we suspend or terminate our share repurchase program
without its prior written consent; (6) the value of our common shares
materially adversely changes; (7) a material breach of the dealer manager
agreement by us (which breach has not been cured within the required
timeframe); (8) our willful misconduct or a willful or grossly negligent
breach of our obligations under the dealer manager agreement; (9) the
issuance of a stop order suspending the effectiveness of our registration
statement by the SEC and not rescinded within 10 business days of its issuance;
or (10) the occurrence of any event materially adverse to us and our
prospects or our ability to perform our obligations under the dealer manager
agreement. If our Dealer Manager elects to terminate its relationship with us,
our ability to complete our offering and implement our investment strategy
would be significantly impaired and would increase the likelihood that our
stockholders could lose all or a part of their investment.  Our joint venture arrangement with
the CBRE Investors reduces our control over our assets and could give rise to
disputes with our joint venture partners, which could adversely affect the
value of your investment in us.  Our joint venture with the CBRE Investors
involves risks not otherwise present when we own properties through wholly
owned entities. For example: •     Certain major decisions with respect to the
Joint Venture require the approval of a majority of the executive committee of
the Joint Venture. The committee includes two members appointed by the CBRE
Investors and two members appointed by us. Our inability to obtain majority
approval may prevent us from executing transactions that would be in our best interest. •     A dispute with respect to certain major
decisions may give either party the right to trigger buy/sell rights. Should we
initiate the buy/sell procedures, we would (at the election of the CBRE
Investors) have to sell our interests in the Joint Venture or buy the CBRE
Investors’ interest in the Joint Venture. Should the CBRE Investors initiate
the buy/sell procedures, we would have to choose between buying and selling our
interest in the Joint Venture. If we are a seller under the buy/sell procedures,
the terms of the sale may be less attractive than if we had held onto our
investment; and if we are a buyer, we may be unable to finance such a buy-out
or may have to incur indebtedness on unattractive terms or at levels that might
not be in our best interest. •     Our agreement with the CBRE Investors limits
certain direct and indirect transfers of our interest in the Joint Venture. As a
result, we may be unable to sell our interest in the Joint Venture when we
would otherwise like and we may be unable to sell large equity interests in us
or certain subsidiaries to a large investor that would, as a result of the
sale, directly or indirectly own 20.0% or more of the subsidiary through which
we own our interest in the Joint Venture.  Our investments made through the Joint
Venture are held in a subsidiary REIT. If such subsidiary REIT were to fail to
qualify as a REIT, our own REIT qualification could be threatened.  If we pay distributions from sources other than our
cash flows from operations, we may not be able to sustain our distribution rate
and we may have fewer funds available for investment in properties and other
assets and our stockholders’ overall returns may be reduced.  Our organizational documents permit us to pay
distributions from any source without limit. If we fund distributions from
financings or the net proceeds from this offering, we will have fewer funds
available for investment in real estate properties and other real
estate-related assets and our stockholders’ overall returns may be reduced. At
times, we may be forced to borrow funds to pay distributions during unfavorable
market conditions or during periods when funds from operations are needed to
make capital expenditures and other expenses, which could increase our operating
costs. We may also fund such distributions from advances or contributions from
our sponsors or from any deferral or waiver of fees by our advisor and
sub-advisor. Furthermore, if we cannot cover our distributions with cash flows
from operations, we may be unable to sustain our distribution rate.  For the
year ended December 31, 2012, we paid distributions of approximately
$3,673,000, including distributions reinvested through our dividend
reinvestment plan, and our cash flows from operations under accounting
principles generally accepted in the United States (“GAAP”) were approximately
$4,033,000. For the year ended December 31, 2011, we paid distributions of approximately
$873,000, including distributions reinvested through our dividend reinvestment
plan, and our GAAP cash flows from operations were approximately $593,000.  If we are unable to find suitable
investments, we may not be able to achieve our investment objectives or pay
distributions.  Our ability to achieve our investment objectives and
to pay distributions depends primarily upon the performance of the Sub-advisor,
acting on behalf of the Advisor, with respect to the acquisition of our
investments, including the ability to source loan origination opportunities for
us. Competition from competing entities may reduce the number of suitable
investment opportunities offered to us or increase the bargaining power of
property owners seeking to sell. Additionally, disruptions and dislocations in
the credit markets have materially impacted the cost and availability of debt
to finance real estate acquisitions, which is a key component of our
acquisition 6


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strategy. This lack of available debt could result in
a further reduction of suitable investment opportunities and create a
competitive advantage to other entities that have greater financial resources
than we do. We are also subject to competition in seeking to acquire real
estate-related investments. The more shares we sell in our offering, the
greater our challenge will be to invest all of the net offering proceeds on
attractive terms. We can give no assurance that the Sub-advisor, acting on
behalf of the Advisor, will be successful in obtaining suitable investments on
financially attractive terms or that our objectives will be achieved. If we are
unable to find suitable investments promptly, we will hold the proceeds from
our offering in an interest-bearing account or invest the proceeds in
short-term assets. If we would continue to be unsuccessful in locating suitable
investments, we may ultimately decide to liquidate. In the event we are unable
to timely locate suitable investments, we may be unable or limited in our
ability to pay distributions, and we may not be able to meet our investment
objectives.  Disruptions in the financial
markets and challenging economic conditions could adversely impact the
commercial mortgage market as well as the market for real estate-related debt
investments generally, which could hinder our ability to implement our business
strategy and generate returns to our stockholders.  We intend to allocate a small percentage of our
portfolio to real estate-related investments such as mortgage, mezzanine,
bridge and other loans; debt and derivative securities related to real estate
assets, including mortgage-backed securities; and the equity securities of
other REITs and real estate companies. The returns available to investors in
these investments are determined by: (1) the supply and demand for such
investments, (2) the performance of the assets underlying the investments
and (3) the existence of a market for such investments, which includes the
ability to sell or finance such investments.  During periods of volatility, the number of buyers
participating in the market may change at an accelerated pace. As liquidity or
“demand” increases, the returns available to investors on new investments will
decrease. Conversely, a lack of liquidity will cause the returns available to
investors on new investments to increase.  Disruptions in the
financial markets and challenging economic conditions could adversely affect
our ability to secure debt financing on attractive terms, our ability to
service any future indebtedness that we may incur and the values of our
investments.  Despite improved access to
capital for some companies, the capital and credit markets continue to be
affected by extreme volatility and disruption during the past four years. The
health of the global capital markets remains a concern. The banking industry
has been experiencing improved earnings, but the relatively low growth economic
environment has caused the markets to question whether financial institutions
are truly appropriately capitalized. The downgrade of the U.S. government debt
has increased these concerns, especially for the larger, money center banks.
Smaller financial institutions have continued to work with borrowers to amend
and extend existing loans; however, as these loans reach maturity, there is the
potential for future credit losses. The FDIC’s list of troubled financial
institutions is still quite large and the threat of more bank closings will
weigh heavily on the financial markets.  Looking forward, it is widely
assumed that mortgage delinquencies have not yet peaked. Liquidity in the
global credit market has been severely contracted by market disruptions, and
new lending is expected to remain subdued in the near term. We have relied on
debt financing to finance most of our grocery-anchored shopping centers. As a
result of the uncertainties in the credit market, we may not be able to
refinance our existing indebtedness or to obtain additional debt financing on
attractive terms. If we are not able to refinance existing indebtedness on
attractive terms at its maturity, we may be forced to dispose of some of our
assets.  Further disruptions in the financial
markets and uncertain economic conditions could adversely affect the values of
our investments. Turmoil in the capital markets has constrained equity and debt
capital available for investment in commercial real estate, resulting in fewer
buyers seeking to acquire commercial properties and possible increases in
capitalization rates and lower property values. Furthermore, declining economic
conditions could negatively impact commercial real estate fundamentals and
result in lower occupancy, lower rental rates and declining values in our real
estate portfolio and in the collateral securing our loan investments, which
could have the following negative effects on us: •
 
 the
  values of our investments in grocery-anchored shopping centers could decrease
  below the amounts we paid for such investments;•
 
 the
  value of collateral securing any loan investment that we may make could
  decrease below the outstanding principal amounts of such loans;•
 
 revenues
  from properties we acquire could decrease due to fewer tenants or lower
  rental rates, making it more difficult for us to pay distributions or meet
  our debt service obligations on future debt financings; and•
 
 revenues
  on the properties and other assets underlying any loan investments we may
  make could decrease, making it more difficult for the borrower to meet its
  payment obligations to us.
  All of these factors could impair our ability to make
distributions to our investors and decrease the value of an investment in us.  7


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We may
suffer from delays in locating suitable investments, which could limit our
ability to make distributions and lower the overall return on your investment.  We rely upon our sponsors and the real estate
professionals affiliated with our sponsors to identify suitable investments.
The private Phillips Edison-sponsored programs, especially those for which the
offering proceeds have not been fully invested, rely on our Phillips Edison
sponsors for investment opportunities. Similarly, the AR Capital-sponsored
programs rely on our AR Capital sponsor for investment opportunities. To the
extent that our sponsors and the other real estate professionals employed by
the Advisor and Sub-advisor face competing demands upon their time at times
when we have capital ready for investment, we may face delays in locating
suitable investments. Further, the more money we raise in our offering, the
more difficult it will be to invest the net offering proceeds promptly and on
attractive terms. Therefore, the large size of our offering and the continuing
high demand for the types of properties and other investments we desire to
purchase increase the risk of delays in investing our net offering proceeds.
Delays we encounter in the selection and acquisition or origination of
income-producing assets would likely limit our ability to pay distributions to
our stockholders and lower their overall returns. Further, if we acquire
properties prior to the start of construction or during the early stages of
construction, it will typically take several months to complete construction
and rent available space. Therefore, we could experience delays in the payment
of cash distributions attributable to those particular properties.  We may change our targeted
investments without stockholder consent.  We expect to allocate at least 90.0% of our portfolio
to investments in well-occupied, grocery-anchored neighborhood and community
shopping centers leased to a mix of national, creditworthy retailers selling
necessity-based goods and services in strong demographic markets throughout the
United States. We intend to allocate no more than 10.0% of our portfolio to
other real estate properties and real estate-related loans and securities such
as mortgage, mezzanine, bridge and other loans; debt and derivative securities
related to real estate assets, including mortgage-backed securities; and the
equity securities of other REITs and real estate companies. We do not expect
our noncontrolling equity investments in other public companies to exceed 5.0%
of the proceeds of this offering, assuming we sell the maximum offering amount.
Though this is our current target portfolio, we may make adjustments to our
target portfolio based on real estate market conditions and investment
opportunities, and we may change our targeted investments and investment
guidelines at any time without the consent of our stockholders, which could
result in our making investments that are different from, and possibly riskier
than, our current targeted investments. A change in our targeted investments or
investment guidelines may increase our exposure to interest rate risk, default
risk and real estate market fluctuations, all of which could adversely affect
the value of our common stock and our ability to make distributions to our
stockholders.  If we raise substantially less than the maximum
offering amount under our offering, we will not be able to invest in as diverse
a portfolio of properties as we otherwise would, which may cause the value of
your investment to vary more widely with the performance of specific assets,
and cause our general and administrative expenses to constitute a greater
percentage of our revenue. Raising fewer proceeds in our offering, therefore,
could increase the risk that you will lose money in your investment.  Our offering is being made on a “best efforts” basis,
whereby the brokers participating in the offering have no firm commitment or
obligation to purchase any of the shares. As of December 31, 2012, we had
raised aggregate gross offering proceeds of approximately $136.1 million from
the sale of approximately 13.8 million shares in our offering, including
shares sold under our dividend reinvestment plan.  At this time, it is unknown
whether or not we will raise the maximum offering amount.  We are not limited in the number or size of our
investments or the percentage of net proceeds we may dedicate to a single
investment. If we are unable to raise the maximum offering amount, we will make
fewer investments than originally intended resulting in less diversification in
terms of the number of investments owned, the geographic regions in which our
investments are located, and the length of lease terms with our tenants. In
that case, adverse developments with respect to a single property, a geographic
region, a small number of tenants, or rental rates when we renew a lease or
re-lease a property would have a greater adverse impact on our operations than
they otherwise would.  Because we are dependent upon the
Advisor, the Sub-advisor and their affiliates to conduct our operations, any
adverse changes in the financial health of the Advisor, the Sub-advisor or
their affiliates or our relationship with them could hinder our operating
performance and the return on our stockholders’ investments.  We are dependent on the Sub-advisor, which is
responsible for our day-to-day operations and is primarily responsible for the
selection of our investments on behalf of the Advisor, and on the Advisor,
which consults with the Sub-advisor with respect to acquisitions to be
recommended to our board of directors. We are also dependent on the Property
Manager to manage our portfolio of real estate assets. Neither the Advisor nor
the Sub-advisor has any previous operating history, and they depend upon the
fees and other compensation that they receive from us in connection with the
purchase, management and sale of assets to conduct their operations. Any
adverse changes in the financial condition of the Advisor, the Sub-advisor, the
Property Manager or certain of their affiliates or in our relationship with
them could hinder their ability to successfully manage our operations and our
portfolio of investments. 8


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The loss of or the inability to
obtain key real estate professionals at the Advisor, the Sub-advisor or the
Dealer Manager could delay or hinder implementation of our investment
strategies, which could limit our ability to make distributions and decrease
the value of your investment.  Our success depends to a significant degree upon the
contributions of Nicholas Schorsch and William Kahane at the Advisor and Dealer
Manager, and Jeffrey Edison and Michael Phillips, the Co-Chairs of our Board of
Directors, John B. Bessey, our President, R. Mark Addy, our Chief Operating
Officer, and Richard J. Smith, our Chief Financial Officer, at the Sub-advisor.
We do not have employment agreements with these individuals, and they may not
remain associated with us. If any of these persons were to cease their
association with us, our operating results could suffer. We do not intend to
maintain key person life insurance on any person. We believe that our future
success depends, in large part, upon the Advisor’s, the Sub-advisor’s, and
their respective affiliates’ ability to hire and retain highly skilled
managerial, operational and marketing professionals. Competition for such
professionals is intense, and the Advisor, the Sub-advisor and their respective
affiliates may be unsuccessful in attracting and retaining such skilled
individuals. Further, we intend to establish strategic relationships with
firms, as needed, that have special expertise in certain services or detailed
knowledge regarding real properties in certain geographic regions. Maintaining
such relationships will be important for us to effectively compete with other
investors for properties and tenants in such regions. We may be unsuccessful in
establishing and retaining such relationships. If we lose or are unable to
obtain the services of highly skilled professionals or do not establish or
maintain appropriate strategic relationships, our ability to implement our
investment strategies could be delayed or hindered, and the value of our
stockholders’ investments may decline.  Our rights and the rights of our
stockholders to recover claims against our independent directors are limited,
which could reduce our stockholders’ and our recovery against them if they
negligently cause us to incur losses.  Maryland law provides that a director has no liability
in that capacity if he performs his duties in good faith, in a manner he
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. Our charter generally provides that no independent director
shall be liable to us or our stockholders for monetary damages and that we will
indemnify them for losses unless they are grossly negligent or engage in
willful misconduct. As a result, we and our stockholders may have more limited
rights against our independent directors than might otherwise exist under
common law, which could reduce our stockholders’ and our recovery from these
persons if they act in a negligent manner. In addition, we may be obligated to
fund the defense costs incurred by our independent directors (as well as by our
other directors, officers, employees (if we ever have employees) and agents) in
some cases, which would decrease the cash otherwise available for distribution
to our stockholders.  Risks Related to Conflicts of Interest  Our sponsors and their respective
affiliates, including all of our executive officers, some of our directors and
other key real estate professionals, face conflicts of interest caused by their
compensation arrangements with us, which could result in actions that are not
in the long-term best interests of our stockholders.  The Advisor and Sub-advisor and their
respective affiliates receive substantial fees from us. These fees could
influence the Advisor’s and Sub-advisor’s advice to us as well as their
judgment with respect to: •      the continuation, renewal or enforcement of our
agreements with affiliates of our AR Capital sponsor, including the advisory
agreement and the dealer-manager agreement; •      the continuation, renewal or enforcement of our
agreements with Phillips Edison and its affiliates, including the property management
agreement; •      the continuation, renewal or enforcement of the
Advisor’s agreements with the Sub-advisor and their respective affiliates,
including the sub-advisory agreement; •      public offerings of equity by us, which will
likely entitle the Advisor and the Sub-advisor to increased acquisition and
asset-management fees; •      sales of properties and other investments to
third parties, which entitle the Advisor and the Sub-advisor to disposition
fees and possible subordinated incentive fees; •      acquisitions of properties and other
investments from other Phillips Edison- or AR Capital-sponsored programs, which
might entitle affiliates of AR Capital or Phillips Edison to disposition fees
and possible subordinated incentive fees in connection with its services for
the seller; •      acquisitions of properties and other
investments from third parties, which entitle the Advisor and the Sub-advisor
to acquisition and asset-management compensation and loan originations to third
parties; 9


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•      borrowings to
acquire properties and other investments and to originate loans, which
borrowings increase the acquisition, and asset-management fees payable to the
Advisor and the Sub-advisor; •      whether and when we seek to list our common
stock on a national securities exchange, which listing could entitle the
Advisor and the Sub-advisor to a subordinated incentive fee; and •      whether and when we seek to sell the company or
its assets, which sale could entitle the Advisor and the Sub-advisor to a
subordinated share of cash flows.  The fees the Advisor and the Sub-advisor receive in
connection with transactions involving the acquisition of assets are based
initially on the cost of the investment, including costs related to loan
originations, and are not based on the quality of the investment or the quality
of the services rendered to us. This may influence the Advisor and the
Sub-advisor to recommend riskier transactions to us. In addition, because the
fees are based on the cost of the investment, it may create an incentive for
the Advisor and the Sub-advisor to recommend that we purchase assets with more
debt and at higher prices.  Because other real estate programs
sponsored by our sponsors and offered through our Dealer Manager may conduct offerings
concurrently with our offering, our sponsors and our Dealer Manager will face
potential conflicts of interest arising from competition among us and these
other programs for investors and investment capital, and such conflicts may not
be resolved in our favor.  An affiliate of the Advisor is also the advisor of
several other AR Capital-sponsored non-traded REITs that are raising capital in
ongoing public offerings. Our Dealer Manager is also the dealer manager or is
named in the registration statement as the dealer manager in multiple
offerings, including some AR Capital sole-sponsored offerings, that are either
effective or in registration. In addition, our sponsors may decide to sponsor
future programs that would seek to raise capital through public offerings
conducted concurrently with our offering. As a result, our sponsors and our
Dealer Manager may face conflicts of interest arising from potential
competition with these other programs for investors and investment capital. Our
sponsors generally seek to avoid simultaneous public offerings by programs that
have a substantially similar mix of investment attributes, including targeted
investment types. Nevertheless, there may be periods during which one or more
programs sponsored by our sponsors will be raising capital and might compete
with us for investment capital. Such conflicts may not be resolved in our
favor, and you will not have the opportunity to evaluate the manner in which
these conflicts of interest are resolved before or after making your
investment.  The management of multiple REITs,
especially REITs in the development stage, by the officers of the Advisor may
significantly reduce the amount of time the officers of the Advisor are able to
spend on activities related to us and may cause other conflicts of interest,
which may cause our operating results to suffer.  The officers of the Advisor are part of the senior
management or are key personnel of several other AR Capital-sponsored REITs and
their advisors. Some of the AR Capital-sponsored REITs have registration
statements that are not yet effective and are in the development phase, while
others have registration statements that became effective in the past two years.
As a result, such REITs will have concurrent and/or overlapping fundraising,
acquisition, operational and disposition and liquidation phases as us, which
may cause conflicts of interest to arise throughout the life of our company
with respect to, among other things, finding investors, locating and acquiring
properties, entering into leases and disposing of properties. Additionally,
based on our AR Capital sponsor’s experience, a significantly greater time
commitment is required of senior management during the development stage when
the REIT is being organized, funds are initially being raised and funds are
initially being invested, and less time is required as additional funds are
raised and the offering matures. The conflicts of interest each of the officers
of the Advisor will face may delay our fund raising and investment of our
proceeds due to the competing time demands and generally cause our operating
results to suffer.  We compete for investors with other
programs of our AR Capital sponsor, which could adversely affect the amount of
capital we have to invest.  Our AR Capital sponsor is currently the sponsor of
several other public offerings of non-traded REIT shares, which offerings will
be ongoing during a significant portion of our offering period. These programs
all have filed registration statements for the offering of common stock and
intend to elect to be taxed as REITs. The offerings are occurring concurrently
with our offering, and our AR Capital sponsor is likely to sponsor other
offerings during our offering period. Our Dealer Manager is the dealer manager
for these other offerings. We will compete for investors with these other
programs, and the overlap of these offerings with our offering could adversely
affect our ability to raise all the capital we seek in our offering, the timing
of sales of our shares and the amount of proceeds we have to spend on real
estate investments.  10


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Our
sponsors face conflicts of interest relating to the acquisition of assets and
leasing of properties, and such conflicts may not be resolved in our favor,
meaning that we could invest in less attractive assets and obtain less
creditworthy tenants, which could limit our ability to make distributions and
reduce our stockholders’ overall investment return.  We rely on our sponsors and the executive officers and
other key real estate professionals at the Advisor and Sub-advisor to identify
suitable investment opportunities for us, with the Sub-advisor having primary
responsibility for identifying suitable investments for us on behalf of the
Advisor. Our individual AR Capital and Phillips Edison sponsors and several of
the other key real estate professionals of the Advisor and Sub-advisor are also
the key real estate professionals at our entity sponsors and their other public
and private programs. Many investment opportunities that are suitable for us
may also be suitable for other Phillips Edison- or AR Capital-sponsored
programs. Generally, the Advisor and Sub-advisor will not pursue any
opportunity to acquire any real estate properties or real estate-related loans
and securities that are directly competitive with our investment strategies,
unless and until the opportunity is first presented to us, subject to certain
exceptions. For so long as we are externally advised, our charter provides that
it shall not be a proper purpose of the corporation for us to purchase real
estate or any significant asset related to real estate unless the Advisor or
Sub-advisor has recommended the investment to us. Thus, the executive officers
and real estate professionals of the Advisor and Sub-advisor could direct
attractive investment opportunities to other entities or investors. Such events
could result in us investing in properties that provide less attractive
returns, which may reduce our ability to make distributions.  We and other Phillips Edison- and AR Capital-sponsored
programs also rely on these real estate professionals to supervise the property
management and leasing of properties. If the Advisor or Sub-advisor directs
creditworthy prospective tenants to properties owned by another Phillips Edison-
or AR Capital-sponsored program when they could direct such tenants to our
properties, our tenant base may have more inherent risk than might otherwise be
the case. Further, our executive officers and key real estate professionals are
not prohibited from engaging, directly or indirectly, in any business or from
possessing interests in any other business venture or ventures, including
businesses and ventures involved in the acquisition, development, ownership,
leasing or sale of real estate investments.  The Advisor and Sub-advisor face conflicts of interest
relating to the incentive fee structure under our advisory agreement, which
could result in actions that are not necessarily in the long-term best
interests of our stockholders.  Under our advisory agreement, the Advisor
and Sub-advisor or their affiliates will be entitled to fees that are
structured in a manner intended to provide incentives to the Advisor and
Sub-advisor to perform in our best interests and in the best interests of our
stockholders. However, because neither Advisor, the Sub-advisor nor any of
their affiliates maintain a significant equity interest in us and are entitled
to receive certain minimum compensation regardless of performance, the
interests of the Advisor and Sub-advisor are not wholly aligned with those of
our stockholders. In that regard, the Advisor and Sub-advisor could be
motivated to recommend riskier or more speculative investments in order for us
to generate the specified levels of performance or sales proceeds that would
entitle the Advisor and Sub-advisor to fees. In addition, the Advisor’s and
Sub-advisor’s entitlement to fees upon the sale of our assets and to
participate in sale proceeds could result in the Advisor and Sub-advisor
recommending sales of our investments at the earliest possible time at which
sales of investments would produce the level of return that would entitle the
Advisor and Sub-advisor to compensation relating to such sales, even if
continued ownership of those investments might be in our best long-term
interest. Our advisory agreement will require us to pay a performance-based
termination fee to the Advisor and Sub-advisor or their affiliates if we
terminate the advisory agreement prior to the listing of our shares for trading
on an exchange or, absent such termination, in respect of their participation
in net sales proceeds. To avoid paying this fee, our independent directors may
decide against terminating the advisory agreement prior to our listing of our
shares or disposition of our investments even if, but for the termination fee,
termination of the advisory agreement would be in our best interest. In
addition, the requirement to pay the fee to the Advisor and Sub-advisor or
their affiliates at termination could cause us to make different investment or
disposition decisions than we would otherwise make, in order to satisfy our
obligation to pay the fee to the terminated Advisor and Sub-advisor. For a more
detailed discussion of the fees payable to the Advisor, Sub-advisor and their
affiliates in connection with our ongoing public offering and in connection
with the management of our company, see Note 10 to the consolidated financial
statements.  The Advisor and Sub-advisor will
face conflicts of interest relating to joint ventures that we may form with
affiliates of our sponsors, which conflicts could result in a disproportionate
benefit to the other venture partners at our expense.  If approved by a majority of our board of directors,
including a majority of our independent directors, not otherwise interested in
the transaction, we may enter into joint venture agreements with other
sponsor-affiliated programs or entities for the acquisition, development or
improvement of properties or other investments. All of our executive officers,
some of our directors and the key real estate professionals assembled by the
Advisor and Sub-advisor are also executive officers, directors, managers, key
professionals or holders of a direct or indirect controlling interest in the
Advisor, the Sub-advisor, the Dealer Manager or other sponsor-affiliated
entities. These persons will face conflicts of interest in determining which
sponsor-affiliated program should enter into any particular joint venture
agreement. These persons may also face a conflict in structuring the terms of
the relationship between our interests and the interests of the
sponsor-affiliated co-venturer and in managing the joint venture. Any joint
venture agreement or transaction between us and a sponsor-affiliated
co-venturer will not have the benefit of arm’s-length negotiation of the type
normally conducted 11


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between unrelated co-venturers. The
sponsor-affiliated co-venturer may have economic or business interests or goals
that are or may become inconsistent with our business interests or goals. These
co-venturers may thus benefit to our and your detriment.  Our sponsors, our officers, the
Advisor, the Sub-advisor and the real estate and other professionals assembled
by the Advisor and Sub-advisor face competing demands relating to their time,
and this may cause our operations and our stockholders’ investment to suffer.  We rely on the Sub-advisor, acting on behalf of the
Advisor, for the day-to-day operation of our business. In addition, the
Sub-advisor has the primary responsibility for the selection of our investments
on behalf of the Advisor. The Advisor consults with the Sub-advisor with
respect to proposed acquisitions, and the Advisor and the Sub-advisor jointly
recommend investment opportunities to our board of directors, but in the event
of a disagreement, the determination of the Sub-advisor will prevail. The
Advisor and Sub-advisor also work jointly to make major decisions affecting us,
all under the direction of our board of directors. The Advisor and Sub-advisor
rely on our sponsors and their respective affiliates to conduct our business.
Messrs. Phillips and Edison are principals of Phillips Edison and the
affiliates that manage the assets of the other Phillips Edison-sponsored
programs. Similarly, our individual AR Capital sponsors are key executives in
other AR Capital-sponsored programs. As a result of their interests in other
Phillips Edison- or AR Capital-sponsored programs, their obligations to other
investors and the fact that they engage in and they will continue to engage in
other business activities, these individuals will continue to face conflicts of
interest in allocating their time among us and other Phillips Edison- or AR
Capital-sponsored programs and other business activities in which they are
involved. Should the Advisor or Sub-advisor breach its fiduciary duties to us
by inappropriately devoting insufficient time or resources to our business, the
returns on our investments and the value of our stockholders’ investments may
decline.  All of our executive officers, some
of our directors and the key real estate and other professionals assembled by
the Advisor, Sub-advisor and Dealer Manager face conflicts of interest related
to their positions or interests in affiliates of our sponsors, which could
hinder our ability to implement our business strategy and to generate returns
to our stockholders.  All of our executive officers, some of our directors
and the key real estate and other professionals assembled by the Advisor,
Sub-advisor and Dealer Manager are also executive officers, directors,
managers, key professionals or holders of a direct or indirect controlling
interests in the Advisor, the Sub-advisor, our Dealer Manager or other
sponsor-affiliated entities. Through our AR Capital sponsor’s affiliates, some
of these persons work on behalf of AR Capital-sponsored programs that are
currently raising capital publicly or are in registration to raise capital
publicly. Through our Phillips Edison sponsor’s affiliates, some of these
persons work on behalf of other Phillips Edison-sponsored private programs. As
a result, they have loyalties to each of these entities, which loyalties could
conflict with the fiduciary duties they owe to us and could result in action or
inaction detrimental to our business. Conflicts with our business and interests
are most likely to arise from (a) allocation of new investments and
management time and services between us and the other entities, (b) our
purchase of properties from, or sale of properties to, affiliated entities,
(c) development of our properties by affiliates, (d) investments with
affiliates of the Advisor or Sub-advisor, (e) compensation to the Advisor
or Sub-advisor, and (f) our relationship with the Advisor, Sub-advisor,
Dealer Manager and Property Manager. If we do not successfully implement our
business strategy, we may be unable to generate the cash needed to make
distributions to our stockholders and to maintain or increase the value of our
assets.  Although our sponsors and their affiliates have
previously paid, forgiven or deferred certain fees and expenses related to us,
there is no obligation by our sponsors or their affiliates to do so in the
future.  The Advisor and Sub-advisor have waived
or reimbursed payment of cash asset management fees to the extent that, as of
the date of payment, our operating performance during the prior quarter was not
commensurate with our distributions during such period. Cash asset management
fees were $1,243,000 for the year ended December 31, 2012, but $546,000 of
these fees were waived by the Advisor and Sub-advisor pursuant to the advisory
agreement. In addition, our sponsors have provided $228,000 towards certain of
our general and administrative expenses as capital contributions since
inception. Our sponsors have not received, and will not receive, additional
equity securities or any reimbursement for these contributions. Our sponsors do
not intend to continue to contribute monies to fund future distributions. Also,
approximately $6.9 million of organization and offering costs have been
incurred on our behalf by the Sub-advisor that have not been charged to us
because of the uncertainty as to the amount of proceeds we will raise in our
initial public offering. Organization and offering cost reimbursements may not
exceed 1.5% of the gross proceeds raised through our offering. Whether these
costs incurred by the Sub-advisor will be billed is dependent upon the success
of this offering and the discretion of the Sub-advisor.  12


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Risks Related
to Our Offering and Our Corporate Structure  The offering price of our shares
was not established in reliance on a valuation of our assets and liabilities;
the actual value of your investment may be substantially less than what you
pay. We may use the most recent price paid to acquire a share in our initial
public or a follow-on public offering as the estimated value of our shares
until we have completed our offering stage. Even when the Advisor begins to use
other valuation methods to estimate the value of our shares, the value of our
shares will be based upon a number of assumptions that may not be accurate or
complete.  We established the offering price of our shares on an
arbitrary basis. The selling price of our shares bears no relationship to our
book or asset values or to any other established criteria for valuing shares.
Because the offering price is not based upon any valuation (independent or
otherwise), the offering price is likely to be higher than the proceeds that
you would receive upon liquidation or a resale of your shares if they were to
be listed on an exchange or actively traded by broker-dealers, especially in
light of the upfront fees that we pay in connection with the issuance of our
shares.  To assist FINRA members and their associated persons
that participate in this offering, pursuant to FINRA Rule 2310, we disclose in
each annual report distributed to stockholders a per share estimated value of
our shares, the method by which it was developed, and the date of the data used
to develop the estimated value. For this purpose, the Advisor estimated the
value of our common shares as $10.00 per share as of December 31, 2012. The
basis for this valuation is the fact that the offering price of our shares of
common stock in our initial public offering is $10.00 per share (ignoring
purchase price discounts for certain categories of purchasers). The Advisor has
indicated that it intends to use the most recent price paid to acquire a share
in our initial public offering (ignoring purchase price discounts for certain
categories of purchasers) or a follow-on public offering as its estimated per
share value of our shares until we have completed our offering stage. We will
consider our offering stage complete when we are no longer publicly offering
equity securities – whether through our initial public offering or follow-on
public offerings – and have not done so for 18 months. If our board of
directors determines that it is in our best interest, we may conduct follow on
offerings upon the termination of our initial public offering. Our charter does
not restrict our ability to conduct offerings in the future. (For purposes of
this definition, we do not consider a “public equity offering” to include
offerings on behalf of selling stockholders or offerings related to a dividend
reinvestment plan, employee benefit plan or the redemption of interests in the Operating
Partnership.)  Although this initial estimated value represents the
most recent price at which most investors are willing to purchase shares in our
initial public offering, this reported value is likely to differ from the price
that a stockholder would receive in the near term upon a resale of his or her
shares or upon a liquidation of the our assets because (i) there is no
public trading market for the shares at this time; (ii) the $10.00 primary
offering price involves the payment of underwriting compensation and other
directed selling efforts, which payments and efforts are likely to produce a
higher sale price than could otherwise be obtained; (iii) estimated value
does not reflect, and is not derived from, the fair market value of our assets
because the amount of proceeds available for investment from our primary public
offering is net of selling commissions, dealer manager fees, other organization
and offering costs and acquisition fees and expenses; (iv) the estimated
value does not take into account how market fluctuations affect the value of
our investments, including how the current disruptions in the financial and
real estate markets may affect the values of our investments; and (v) the
estimated value does not take into account how developments related to
individual assets may have increased or decreased the value of our portfolio.  When determining the estimated value of our shares by
methods other than the last price paid to acquire a share in an offering, the
Advisor, or another firm we choose for that purpose, will estimate the value of
our shares based upon a number of assumptions that may not be accurate or
complete. Accordingly, these estimates may or may not be an accurate reflection
of the fair market value of our investments and will not likely represent the
amount of net proceeds that would result from an immediate sale of our assets.  The actual value of shares that we
repurchase under our share repurchase program may be substantially less than
what we pay.  Under our share repurchase program, shares may be
repurchased at varying prices depending on (a) the number of years the
shares have been held, (b) the purchase price paid for the shares and
(c) whether the redemptions are sought upon a stockholder’s death,
qualifying disability or determination of incompetence. The maximum price that
may be paid under the program is $10.00 per share, which is the offering price
of our shares of common stock in the primary portion of our initial public offering
(ignoring purchase price discounts for certain categories of purchasers) and,
as described above, the initial estimated value of our common shares disclosed
to assist FINRA members and their associated persons that participate in this
offering, pursuant to FINRA Rule 2310. Although this initial estimated value
represents the most recent price at which most investors are willing to
purchase shares in our primary offering, this reported value is likely to
differ from the price at which a stockholder could resell his or her shares for
the reasons discussed in the risk factor above. Thus, when we repurchase shares
of our common stock at $10.00 per share, the actual value of the shares that we
repurchase is likely to be less, and the repurchase is likely to be dilutive to
our remaining stockholders. Even at lower repurchase prices, the actual value
of the shares may be substantially less than what we pay and the repurchase may
be dilutive to our remaining stockholders. 13


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Our charter limits the number of shares
a person may own, which may discourage a takeover that could otherwise result
in a premium price to our stockholders.  Our charter, with certain exceptions, authorizes our
directors to take such actions as are necessary and desirable to preserve our
qualification as a REIT. To help us comply with the REIT ownership requirements
of the Internal Revenue Code, among other purposes, our charter prohibits a
person from directly or constructively owning more than 9.8% in value of our
aggregate outstanding stock or more than 9.8% in value or number of shares,
whichever is more restrictive, of our aggregate outstanding common stock,
unless exempted by our board of directors. This restriction may have the effect
of delaying, deferring or preventing a change in control of us, including an
extraordinary transaction (such as a merger, tender offer or sale of all or
substantially all of our assets) that might provide a premium price for holders
of our common stock.  Our charter permits our board of
directors to issue stock with terms that may subordinate the rights of our
common stockholders or discourage a third party from acquiring us in a manner
that could result in a premium price to our stockholders.  Our board of directors may classify or reclassify any
unissued common stock or preferred stock and establish the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
distributions, qualifications and terms or conditions of redemption of any such
stock. Thus, our board of directors could authorize the issuance of preferred
stock with priority as to distributions and amounts payable upon liquidation
over the rights of the holders of our common stock. Such preferred stock could
also have the effect of delaying, deferring or preventing a change in control
of us, including an extraordinary transaction (such as a merger, tender offer
or sale of all or substantially all of our assets) that might provide a premium
price to holders of our common stock.  Because Maryland law permits our board
to adopt certain anti-takeover measures without stockholder approval, investors
may be less likely to receive a “control premium” for their shares.  In 1999, the State of Maryland enacted
legislation that enhances the power of Maryland corporations to protect
themselves from unsolicited takeovers. Among other things, the legislation
permits our board, without stockholder approval, to amend our charter to: •      stagger our board of directors into three
classes; •      require a two-thirds stockholder vote for
removal of directors; •      provide that only the board can fix the size of
the board; •      provide that all vacancies on the board,
however created, may be filled only by the affirmative vote of a majority of
the remaining directors in office; and •      require that special stockholder meetings may
only be called by holders of a majority of the voting shares entitled to be
cast at the meeting.  Under Maryland law, a corporation can opt to be
governed by some or all of these provisions if it has a class of equity
securities registered under the Exchange Act, and has at least three
independent directors. Our charter does not prohibit our board of
directors from opting into any of the above provisions permitted under Maryland
law. Becoming governed by any of these provisions could discourage an
extraordinary transaction (such as a merger, tender offer or sale of all or
substantially all of our assets) that might provide a premium price for holders
of our securities.  Our stockholders have limited
control over changes in our policies and operations, which increases the
uncertainty and risks our stockholders face.  Our board of directors determines our major policies,
including our policies regarding financing, growth, debt capitalization, REIT
qualification and distributions. Our board of directors may amend or revise
these and other policies without a vote of the stockholders. Under the Maryland
General Corporation Law and our charter, our stockholders have a right to vote
only on limited matters. Our board’s broad discretion in setting policies and
our stockholders’ inability to exert control over those policies increases the
uncertainty and risks our stockholders face.  Our stockholders may not be able to
sell their shares under our share repurchase program and, if they are able to
sell their shares under the program, they may not be able to recover the amount
of their investment in our shares.  Our share repurchase program includes numerous
restrictions that limit our stockholders’ ability to sell their shares. During
any calendar year, we may purchase no more than 5.0% of the weighted-average
number of shares outstanding during the prior calendar year. Our stockholders
must hold their shares for at least one year in order to participate in the
share repurchase program, except for 14


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repurchases sought upon a
stockholder’s death or “qualifying disability.” The cash available for
redemption on any particular date is generally limited to the proceeds from the
DRP during the period consisting of the preceding four fiscal quarters for
which financial statements are available, less any cash already used for
redemptions during the same period; however, subject to the limitations
described above, we may use other sources of cash at the discretion of our
board of directors. These limitations do not, however, apply to repurchase
sought upon a stockholder’s death or “qualifying disability.” Only those
stockholders who purchased their shares from us or received their shares from
us (directly or indirectly) through one or more non-cash transactions may be
able to participate in the share repurchase program. In other words, once our
shares are transferred for value by a stockholder, the transferee and all
subsequent holders of the shares are not eligible to participate in the share
repurchase program. These limits may prevent us from accommodating all
repurchase requests made in any year. These restrictions would severely limit
your ability to sell your shares should you require liquidity and would limit
your ability to recover the value you invested. Our board is free to amend,
suspend or terminate the share repurchase program upon 30 days’ notice.  Our stockholders’ interests in us
will be diluted if we issue additional shares, which could reduce the overall
value of our stockholders’ investment.  Our common stockholders do not have preemptive rights
to any shares we issue in the future. Our charter authorizes us to issue
1,010,000,000 shares of capital stock, of which 1,000,000,000 shares are
designated as common stock and 10,000,000 shares are designated as preferred
stock. Our board of directors may amend our charter to increase or decrease the
number of authorized shares of capital stock or the number of shares of stock
of any class or series that we have authority to issue without stockholder
approval. After our investors purchase shares in our offering, our board may
elect to (1) sell additional shares in this or future public offerings,
(2) issue equity interests in private offerings, (3) issue share-based
awards to our independent directors or to our officers or employees or to the
officers or employees of the Advisor or Sub-advisor or any of their affiliates,
(4) issue shares to the Advisor or Sub-advisor, or its successors or
assigns, in payment of an outstanding fee obligation or (5) issue shares
of our common stock to sellers of properties or assets we acquire in connection
with an exchange of limited partnership interests of the Operating Partnership.
To the extent we issue additional equity interests after our investors purchase
shares in our offering, their percentage ownership interest in us will be
diluted. In addition, depending upon the terms and pricing of any additional
offerings and the value of our real estate investments, our investors may also
experience dilution in the book value and fair value of their shares.  Payment of fees to the Advisor, the
Sub-advisor and their respective affiliates reduce cash available for
investment and distribution and increases the risk that our stockholders will
not be able to recover the amount of their investments in our shares.  The Advisor, the Sub-advisor and their respective
affiliates perform services for us in connection with the sale of shares in our
offering, the selection and acquisition of our investments, the management and
leasing of our properties and the administration of our other investments. We
pay them substantial fees for these services, which results in immediate
dilution to the value of our stockholders’ investments and reduces the amount
of cash available for investment or distribution to stockholders. Depending
primarily upon the number of shares we sell in our offering and assuming a
$10.00 purchase price for shares sold in the primary offering and a $9.50
purchase price for shares sold under the dividend reinvestment plan, we
estimate that approximately 87.2% of the gross proceeds will be available to
make investments in real estate properties and other real estate-related loans
and securities. We will use the remainder of the offering proceeds to pay the
costs of our offering, including selling commissions and the dealer manager
fee, and to pay a fee to the Advisor and the Sub-advisor for their services in
connection with the selection, acquisition and financing of properties, and to
repurchase shares of our common stock under our share repurchase program.  These fees and other payments also increase the risk
that our stockholders will not be able to resell their shares at a profit, even
if our shares are listed on a national securities exchange.  If we are unable to obtain funding
for future capital needs, cash distributions to our stockholders and the value
of our investments could decline.  When tenants do not renew their leases or otherwise
vacate their space, we will often need to expend substantial funds for
improvements to the vacated space in order to attract replacement tenants. Even
when tenants do renew their leases we may agree to make improvements to their
space as part of our negotiation. If we need additional capital in the future
to improve or maintain our properties or for any other reason, we may have to
obtain financing from sources, beyond our funds from operations, such as
borrowings or future equity offerings. These sources of funding may not be
available on attractive terms or at all. If we cannot procure additional
funding for capital improvements, our investments may generate lower cash flows
or decline in value, or both, which would limit our ability to make
distributions to our stockholders and could reduce the value of your
investment. 15


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Although we are not currently afforded the protection
of the Maryland General Corporation Law relating to deterring or defending
hostile takeovers, our board of directors could opt into these provisions of
Maryland law in the future, which may discourage others from trying to acquire
control of us and may prevent our stockholders from receiving a premium price
for their stock in connection with a business combination.  Under Maryland law, “business combinations” between a
Maryland corporation and certain interested stockholders or affiliates of
interested stockholders are prohibited for five years after the most recent
date on which the interested stockholder becomes an interested stockholder.
These business combinations include a merger, consolidation, share exchange,
or, in circumstances specified in the statute, an asset transfer or issuance or
reclassification of equity securities. Also under Maryland law, control shares
of a Maryland corporation acquired in a control share acquisition have no
voting rights except to the extent approved by stockholders by a vote of
two-thirds of the votes entitled to be cast on the matter. Shares owned by the
acquirer, an officer of the corporation or an employee of the corporation who
is also a director of the corporation are excluded from the vote on whether to
accord voting rights to the control shares. Should our board opt into these
provisions of Maryland law, it may discourage others from trying to acquire
control of us and increase the difficulty of consummating any offer. Similarly,
provisions of Title 3, Subtitle 8 of the Maryland General Corporation Law could
provide similar anti-takeover protection.  General Risks Related to Investments
in Real Estate  Economic and regulatory changes that impact the real
estate market generally may decrease the value of our investments and weaken
our operating results.  Our properties and their performance are
subject to the risks typically associated with real estate, including: •      downturns in national, regional and local
economic conditions; •      increased competition for real estate assets
targeted by our investment strategy; •      adverse local conditions, such as oversupply or
reduction in demand for similar properties in an area and changes in real
estate zoning laws that may reduce the desirability of real estate in an area; •      vacancies, changes in market rental rates and
the need to periodically repair, renovate and re-let space; •      changes in interest rates and the availability
of permanent mortgage financing, which may render the sale of a property or
loan difficult or unattractive; •      changes in tax, real estate, environmental and
zoning laws; •      periods of high interest rates and tight money
supply; and •      the illiquidity of real estate investments
generally.  Any of the above factors, or a combination thereof,
could result in a decrease in the value of our investments, which would have an
adverse effect on our operations, on our ability to pay distributions to our
stockholders and on the value of our stockholders’ investments.  We depend on our tenants for
revenue, and, accordingly, our revenue and our ability to make distributions to
our stockholders is dependent upon the success and economic viability of our
tenants.  We depend upon tenants for revenue. Rising vacancies
across commercial real estate have resulted in increased pressure on real
estate investors and their property managers to find new tenants and keep
existing tenants. A property may incur vacancies either by the expiration of a
tenant lease, the continued default of a tenant under its lease or the early
termination of a lease by a tenant. If vacancies continue for a long period of
time, we may suffer reduced revenues resulting in less cash available to
distribute to stockholders. In order to maintain tenants, we may have to offer
inducements, such as free rent and tenant improvements, to compete for
attractive tenants. In addition, if we are unable to attract additional or
replacement tenants, the resale value of the property could be diminished, even
below our cost to acquire the property, because the market value of a
particular property depends principally upon the value of the cash flow
generated by the leases associated with that property. Such a reduction on the
resale value of a property could also reduce the value of our stockholders’
investments.  Retail conditions may adversely
affect our base rent and subsequently, our income.  Some of our leases may provide for base rent plus
contractual base rent increases. A number of our retail leases may also include
a percentage rent clause for additional rent above the base amount based upon a
specified percentage of the sales our tenants generate. Under those leases that
contain percentage rent clauses, our revenue from tenants may increase as the
sales of our tenants increase. 16


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Generally, retailers face
declining revenues during downturns in the economy. As a result, the portion of
our revenue which we may derive from percentage rent leases could decline upon
a general economic downturn.  Our revenue will be affected by the
success and economic viability of our anchor retail tenants. Our reliance on
single or significant tenants in certain buildings may decrease our ability to
lease vacated space and adversely affect the returns on our stockholders’
investments.  In the retail sector, a tenant occupying all or a
large portion of the gross leasable area of a retail center, commonly referred
to as an anchor tenant, may become insolvent, may suffer a downturn in
business, or may decide not to renew its lease. Any of these events would
result in a reduction or cessation in rental payments to us and would adversely
affect our financial condition. A lease termination by an anchor tenant could
result in lease terminations or reductions in rent by other tenants whose
leases may permit cancellation or rent reduction if another tenant’s lease is
terminated. In such event, we may be unable to re-lease the vacated space.
Similarly, the leases of some anchor tenants may permit the anchor tenant to
transfer its lease to another retailer. The transfer to a new anchor tenant
could cause customer traffic in the retail center to decrease and thereby
reduce the income generated by that retail center. A lease transfer to a new
anchor tenant could also allow other tenants to make reduced rental payments or
to terminate their leases. In the event that we are unable to re-lease the
vacated space to a new anchor tenant, we may incur additional expenses in order
to re-model the space to be able to re-lease the space to more than one tenant.  The recent economic downturn and
weak recovery in the United States has had an adverse impact on the retail
industry generally. Slow or negative growth in the retail industry could result
in defaults by retail tenants, which could have an adverse impact on our
financial operations.  The recent economic downturn and weak recovery in the
United States has had an adverse impact on the retail industry generally.  A
continuation of adverse economic conditions would result in an increase in
distressed or bankrupt retail companies, which in turn would result in an
increase in defaults by tenants at our commercial properties. Additionally,
slow economic growth would likely hinder new entrants into the retail market,
which would make it difficult for us to fully lease the real properties that we
plan to acquire. Tenant defaults and decreased demand for retail space would
have an adverse impact on the value of the retail properties that we plan to
acquire and our results of operations.  We anticipate that our properties
will consist primarily of retail properties. Our performance, therefore, is
linked to the market for retail space generally.  The market for retail space has been and could be
adversely affected by weaknesses in the national, regional and local economies,
the adverse financial condition of some large retailing companies, the ongoing
consolidation in the retail sector, excess amounts of retail space in a number
of markets and competition for tenants with other shopping centers in our
markets. Customer traffic to these shopping areas may be adversely affected by
the closing of stores in the same shopping center, or by a reduction in traffic
to such stores resulting from a regional economic downturn, a general downturn
in the local area where our store is located, or a decline in the desirability
of the shopping environment of a particular shopping center. Such a reduction
in customer traffic could have a material adverse effect on our business,
financial condition and results of operations.  A high concentration of our
properties in a particular geographic area, or with tenants in a similar
industry, would magnify the effects of downturns in that geographic area or
industry.  We expect that our properties will be diverse
according to geographic area and industry of our tenants. However, in the event
that we have a concentration of properties in any particular geographic area,
any adverse situation that disproportionately affects that geographic area
would have a magnified adverse effect on our portfolio. Similarly, if tenants
of our properties are concentrated in a certain industry or retail category,
any adverse effect on that industry generally would have a disproportionately
adverse effect on our portfolio.  Our retail tenants face competition
from numerous retail channels, which may reduce our profitability and ability
to pay distributions.  Retailers at our properties face continued competition
from discount or value retailers, factory outlet centers, wholesale clubs, mail
order catalogues and operators, television shopping networks and Internet
shopping. Such competition could adversely affect our tenants and,
consequently, our revenues and funds available for distribution.  If we enter into long-term leases
with retail tenants, those leases may not result in fair value over time.  Long-term leases do not allow for significant changes
in rental payments and do not expire in the near term. If we do not accurately
judge the potential for increases in market rental rates when negotiating these
long-term leases, significant increases in future property 17


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operating costs could
result in receiving less than fair value from these leases. Such circumstances
would adversely affect our revenues and funds available for distribution.  The bankruptcy or insolvency of a
major tenant may adversely impact our operations and our ability to pay
distributions to stockholders.  The bankruptcy or insolvency of a significant tenant
or a number of smaller tenants may have an adverse impact on financial
condition and our ability to pay distributions to our stockholders. Generally,
under bankruptcy law, a debtor tenant has 120 days to exercise the option of
assuming or rejecting the obligations under any unexpired lease for
nonresidential real property, which period may be extended once by the
bankruptcy court. If the tenant assumes its lease, the tenant must cure all
defaults under the lease and may be required to provide adequate assurance of its
future performance under the lease. If the tenant rejects the lease, we will
have a claim against the tenant’s bankruptcy estate. Although rent owing for
the period between filing for bankruptcy and rejection of the lease may be
afforded administrative expense priority and paid in full, pre-bankruptcy
arrears and amounts owing under the remaining term of the lease will be
afforded general unsecured claim status (absent collateral securing the claim).
Moreover, amounts owing under the remaining term of the lease will be capped.
Other than equity and subordinated claims, general unsecured claims are the
last claims paid in a bankruptcy, and therefore, funds may not be available to
pay such claims in full.  Competition with third parties in
acquiring properties and other investments may reduce our profitability and the
return on our stockholders’ investments.  We face competition from various entities for
investment opportunities in retail properties, including other REITs, pension
funds, insurance companies, investment funds and companies, partnerships, and
developers. Many of these entities have substantially greater financial
resources than we do and may be able to accept more risk than we can prudently
manage, including risks with respect to the creditworthiness of a tenant or the
geographic location of its investments. Competition from these entities may
reduce the number of suitable investment opportunities offered to us or
increase the bargaining power of property owners seeking to sell.  Properties that have significant vacancies could be
difficult to sell, which could diminish the return on these properties.  A property may incur vacancies either by the
expiration of a tenant lease, the continued default of a tenant under its lease
or the early termination of a lease by a tenant. If vacancies continue for a
long period of time, we may suffer reduced revenues resulting in less cash
available to distribute to stockholders. In addition, the resale value of the
property could be diminished because the market value of a particular property
depends principally upon the value of the cash flow generated by the leases
associated with that property. Such a reduction on the resale value of a
property could also reduce the value of our stockholders’ investments.  Changes in supply of or demand for
similar real properties in a particular area may increase the price of real
properties we seek to purchase and decrease the price of real properties when
we seek to sell them.  The real estate industry is subject to market forces.
We are unable to predict certain market changes including changes in supply of,
or demand for, similar real properties in a particular area. Any potential
purchase of an overpriced asset could decrease our rate of return on these
investments and result in lower operating results and overall returns to our
stockholders.  We may be unable to adjust our
portfolio in response to changes in economic or other conditions or sell a
property if or when we decide to do so, limiting our ability to pay cash
distributions to our stockholders.  Many factors that are beyond our control affect the
real estate market and could affect our ability to sell properties for the
price, on the terms or within the time frame that we desire. These factors
include general economic conditions, the availability of financing, interest
rates and other factors, including supply and demand. Because real estate
investments are relatively illiquid, we have a limited ability to vary our
portfolio in response to changes in economic or other conditions. Further,
before we can sell a property on the terms we want, it may be necessary to
expend funds to correct defects or to make improvements. However, we can give
no assurance that we will have the funds available to correct such defects or
to make such improvements. We may be unable to sell our properties at a profit.
Our inability to sell properties at the time and on the terms we want could
reduce our cash flow and limit our ability to make distributions to our
stockholders and could reduce the value of our stockholders’ investments.
Moreover, in acquiring a property, we may agree to restrictions that prohibit
the sale of that property for a period of time or impose other restrictions,
such as a limitation on the amount of debt that can be placed or repaid on that
property. We cannot predict the length of time needed to find a willing
purchaser and to close the sale of a property. Our inability to sell a property
when we desire to do so may cause us to reduce our selling price for the property.
Any delay in our receipt of proceeds, or diminishment of proceeds, from the
sale of a property could adversely impact our ability to pay distributions to
our stockholders.  18


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We may
acquire or finance properties with lock-out provisions, which may prohibit us
from selling a property, or may require us to maintain specified debt levels
for a period of years on some properties.  A lock-out provision is a provision that prohibits the
prepayment of a loan during a specified period of time. Lock-out provisions may
include terms that provide strong financial disincentives for borrowers to
prepay their outstanding loan balance and exist in order to protect the yield
expectations of lenders. We expect that many of our properties will be subject
to lock-out provisions. Lock-out provisions could materially restrict us from
selling or otherwise disposing of or refinancing properties when we may desire
to do so. Lock-out provisions may prohibit us from reducing the outstanding
indebtedness with respect to any properties, refinancing such indebtedness on a
non-recourse basis at maturity, or increasing the amount of indebtedness with
respect to such properties. Lock-out provisions could impair our ability to
take other actions during the lock-out period that could be in the best
interests of our stockholders and, therefore, may have an adverse impact on the
value of our shares relative to the value that would result if the lock-out
provisions did not exist. In particular, lock-out provisions could preclude us
from participating in major transactions that could result in a disposition of
our assets or a change in control even though that disposition or change in
control might be in the best interests of our stockholders.  If we sell a property by providing
financing to the purchaser, we will bear the risk of default by the purchaser,
which could delay or reduce the distributions available to our stockholders.  If we decide to sell any of our properties, we intend
to use our best efforts to sell them for cash; however, in some instances, we
may sell our properties by providing financing to purchasers. When we provide
financing to a purchaser, we will bear the risk that the purchaser may default,
which could reduce our cash distributions to stockholders. Even in the absence
of a purchaser default, the distribution of the proceeds of the sale to our
stockholders, or the reinvestment of the proceeds in other assets, will be
delayed until the promissory notes or other property we may accept upon a sale
are actually paid, sold, refinanced or otherwise disposed. In some cases, we
may receive initial down payments in cash and other property in the year of
sale in an amount less than the selling price, and subsequent payments will be
spread over a number of years. If any purchaser defaults under a financing
arrangement with us, it could negatively impact our ability to pay cash
distributions to our stockholders.  Potential development and
construction delays and resultant increased costs and risks may hinder our
operating results and decrease our net income.  We may from time to time acquire unimproved real
property or properties that are under development or construction. Investments
in such properties are subject to the uncertainties associated with the
development and construction of real property, including those related to
re-zoning land for development, environmental concerns of governmental entities
or community groups and our builders’ ability to build in conformity with
plans, specifications, budgeted costs and timetables. If a builder fails to
perform, we may resort to legal action to rescind the purchase or the
construction contract or to compel performance. A builder’s performance may
also be affected or delayed by conditions beyond the builder’s control. Delays
in completing construction could also give tenants the right to terminate
preconstruction leases. We may incur additional risks when we make periodic
progress payments or other advances to builders before they complete
construction. These and other factors can result in increased costs of a
project or loss of our investment.  In addition, we will be subject to normal lease-up
risks relating to newly constructed projects. We also must rely on rental
income and expense projections and estimates of the fair market value of
property upon completion of construction when agreeing upon a purchase price at
the time we acquire the property. If our projections are inaccurate, we may pay
too much for a property, and the return on our investment could suffer.  19


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If we
contract with a development company for newly developed property, our earnest
money deposit made to the development company may not be fully refunded.  We may enter into one or more contracts,
either directly or indirectly through joint ventures with affiliates or others,
to acquire real property from a development company that is engaged in
construction and development of commercial real properties. Properties acquired
from a development company may be either existing income-producing properties,
properties to be developed or properties under development. We anticipate that
we will be obligated to pay a substantial earnest money deposit at the time of
contracting to acquire such properties. In the case of properties to be
developed by a development company, we anticipate that we will be required to
close the purchase of the property upon completion of the development of the
property. At the time of contracting and the payment of the earnest money
deposit by us, the development company typically will not have acquired title
to any real property. Typically, the development company will only have a
contract to acquire land, a development agreement to develop a building on the
land and an agreement with one or more tenants to lease all or part of the
property upon its completion. We may enter into such a contract with the
development company even if at the time we enter into the contract, we have not
yet raised sufficient proceeds in our offering to enable us to close the
purchase of such property. However, we may not be required to close a purchase
from the development company, and may be entitled to a refund of our earnest
money, in the following circumstances: •      the development company fails to develop the
property; •      all or a specified portion of the pre-leased
tenants fail to take possession under their leases for any reason; or •      we are unable to raise sufficient proceeds from
our offering to pay the purchase price at closing.  The obligation of the development company to refund
our earnest money will be unsecured, and we may not be able to obtain a refund
of such earnest money deposit from it under these circumstances since the
development company may be an entity without substantial assets or operations.  Our joint venture partners could
take actions that decrease the value of an investment to us and lower our
stockholders’ overall return.  We have entered into the Joint Venture
and may enter into additional joint ventures with third parties, including
entities that are affiliated with the Advisor or Sub-advisor, to acquire
properties and other assets. We may also purchase and develop properties in
joint ventures or in partnerships, co-tenancies or other co-ownership
arrangements with the sellers of the properties, affiliates of the sellers, developers
or other persons. Such investments may involve risks not otherwise present with
other methods of investment, including, for example, the following risks: •      that our co-venturer, co-tenant or partner in
an investment could become insolvent or bankrupt; •      that such co-venturer, co-tenant or partner may
at any time have economic or business interests or goals that are or that
become inconsistent with our business interests or goals; •      that such co-venturer, co-tenant or partner may
be in a position to take action contrary to our instructions or requests or
contrary to our policies or objectives; •      the possibility that we may incur liabilities
as a result of an action taken by such co-venturer, co-tenant or partner; •      that disputes between us and a co-venturer,
co-tenant or partner may result in litigation or arbitration that would
increase our expenses and prevent our officers and directors from focusing
their time and effort on our business; •      the possibility that if we have a right of
first refusal or buy/sell right to buy out a co-venturer, co-owner or partner,
we may be unable to finance such a buy-out if it becomes exercisable, or we may
be required to purchase such interest at a time when it would not otherwise be
in our best interest to do so; or •      the possibility that we may not be able to sell
our interest in the joint venture if we desire to exit the joint venture.  Under certain joint venture arrangements, neither
venture partner may have the power to control the venture, and an impasse could
be reached, which might have a negative influence on the joint venture and
decrease potential returns to our stockholders. In addition, to the extent that
our venture partner or co-tenant is an affiliate of the Advisor or Sub-advisor,
certain conflicts of interest will exist. Any of the above might subject a
property to liabilities in excess of those contemplated and thus reduce our
returns on that investment and the value of our stockholders’ investments.  20


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We may obtain
only limited warranties when we purchase a property and would have only limited
recourse in the event our due diligence did not identify any issues that lower
the value of our property.  The seller of a property often sells such property in
its “as is” condition on a “where is” basis and “with all faults,” without any
warranties of merchantability or fitness for a particular use or purpose. In
addition, purchase agreements may contain only limited warranties,
representations and indemnifications that will only survive for a limited
period after the closing. The purchase of properties with limited warranties
increases the risk that we may lose some or all of our invested capital in the
property, as well as the loss of rental income from that property.  CC&Rs may restrict our ability
to operate a property.  We expect that some of our properties will be
contiguous to other parcels of real property, comprising part of the same
retail center. In connection with such properties, we will be subject to significant
covenants, conditions and restrictions, known as “CC&Rs,” restricting the
operation of such properties and any improvements on such properties, and
related to granting easements on such properties. Moreover, the operation and
management of the contiguous properties may impact such properties. Compliance
with CC&Rs may adversely affect our operating costs and reduce the amount
of funds that we have available to pay distributions to our stockholders.  If we set aside insufficient
capital reserves, we may be required to defer necessary capital improvements.  If we do not have enough reserves for capital to
supply needed funds for capital improvements throughout the life of the
investment in a property and there is insufficient cash available from our operations,
we may be required to defer necessary improvements to a property, which may
cause that property to suffer from a greater risk of obsolescence or a decline
in value, or a greater risk of decreased cash flow as a result of fewer
potential tenants being attracted to the property. If this happens, we may not
be able to maintain projected rental rates for affected properties, and our
results of operations may be negatively impacted.  Our operating expenses may increase
in the future and, to the extent such increases cannot be passed on to tenants,
our cash flow and our operating results would decrease.  Operating expenses, such as expenses for fuel,
utilities, labor and insurance, are not fixed and may increase in the future.
There is no guarantee that we will be able to pass such increases on to our
tenants. To the extent such increases cannot be passed on to tenants, any such
increase would cause our cash flow and our operating results to decrease.  Our real properties are subject to
property taxes that may increase in the future, which could adversely affect
our cash flow.  Our real properties are subject to real property taxes
that may increase as tax rates change and as the real properties are assessed
or reassessed by taxing authorities. We anticipate that certain of our leases
will generally provide that the property taxes, or increases therein, are
charged to the lessees as an expense related to the real properties that they
occupy, while other leases will generally provide that we are responsible for
such taxes. In any case, as the owner of the properties, we are ultimately
responsible for payment of the taxes to the applicable government authorities.
If real property taxes increase, our tenants may be unable to make the required
tax payments, ultimately requiring us to pay the taxes even if otherwise stated
under the terms of the lease. If we fail to pay any such taxes, the applicable
taxing authority may place a lien on the real property and the real property
may be subject to a tax sale. In addition, we are generally responsible for
real property taxes related to any vacant space.  Uninsured losses relating to real
property or excessively expensive premiums for insurance coverage could reduce
our cash flows and the return on our stockholders’ investments.  We will attempt to adequately insure all of our real
properties against casualty losses. There are types of losses, generally
catastrophic in nature, such as losses due to wars, acts of terrorism,
earthquakes, floods, hurricanes, pollution or environmental matters, that are
uninsurable or not economically insurable, or may be insured subject to
limitations, such as large deductibles or co-payments. Insurance risks
associated with potential acts of terrorism could sharply increase the premiums
we pay for coverage against property and casualty claims. Additionally,
mortgage lenders in some cases have begun to insist that commercial property
owners purchase coverage against terrorism as a condition for providing
mortgage loans. Such insurance policies may not be available at reasonable
costs, if at all, which could inhibit our ability to finance or refinance our
properties. In such instances, we may be required to provide other financial
support, either through financial assurances or self-insurance, to cover
potential losses. We may not have adequate, or any, coverage for such losses.
Changes in the cost or availability of insurance could expose us to uninsured
casualty losses. If any of our properties incurs a casualty loss that is not
fully insured, the value of our assets will be reduced by any such uninsured
loss, which may reduce the value of our stockholders’ investments. In addition,
other than any working capital reserve or other reserves we may establish, we
have no source of funding to repair or reconstruct any uninsured property.
Also, to the extent we must pay unexpectedly large amounts for insurance, we
could suffer reduced earnings that would result in lower distributions to
stockholders. The Terrorism 21


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Risk Insurance Act of 2002
is designed for a sharing of terrorism losses between insurance companies and
the federal government. We cannot be certain how this act will impact us or
what additional cost to us, if any, could result.  Terrorist attacks and other acts of
violence or war may affect the markets in which we plan to operate, which could
delay or hinder our ability to meet our investment objectives and reduce our
stockholders’ overall return.  Terrorist attacks
or armed conflicts may directly impact the value of our properties through
damage, destruction, loss or increased security costs. We expect that we will
invest in major metropolitan areas. We may not be able to obtain insurance
against the risk of terrorism because it may not be available or may not be
available on terms that are economically feasible. The terrorism insurance that
we obtain may not be sufficient to cover loss for damages to our properties as
a result of terrorist attacks. The inability to obtain sufficient terrorism
insurance or any terrorism insurance at all could limit our investment options
as some mortgage lenders have begun to insist that specific coverage against
terrorism be purchased by commercial owners as a condition of providing loans.  Costs of complying with
governmental laws and regulations related to environmental protection and human
health and safety may reduce our net income and the cash available for
distributions to our stockholders.  Real property and the operations conducted on real
property are subject to federal, state and local laws and regulations relating
to protection of the environment and human health. We could be subject to
liability in the form of fines, penalties or damages for noncompliance with
these laws and regulations. These laws and regulations generally govern wastewater
discharges, air emissions, the operation and removal of underground and
above-ground storage tanks, the use, storage, treatment, transportation and
disposal of solid and hazardous materials, the remediation of contamination
associated with the release or disposal of solid and hazardous materials, the
presence of toxic building materials, and other health and safety-related
concerns.  Some of these laws and regulations may impose joint
and several liability on the tenants, owners or operators of real property for
the costs to investigate or remediate contaminated properties, regardless of
fault, whether the contamination occurred prior to purchase, or whether the
acts causing the contamination were legal. Our tenants’ operations, the
condition of properties at the time we buy them, operations in the vicinity of
our properties, such as the presence of underground storage tanks, or
activities of unrelated third parties may affect our properties.  The presence of hazardous substances, or the failure
to properly manage or remediate these substances, may hinder our ability to
sell, rent or pledge such property as collateral for future borrowings.
Environmental laws also may impose liens on property or restrictions on the
manner in which property may be used or businesses may be operated, and these
restrictions may require substantial expenditures or prevent us from entering
into leases with prospective tenants that may be impacted by such laws. Some of
these laws and regulations have been amended so as to require compliance with
new or more stringent standards as of future dates. Compliance with new or more
stringent laws or regulations or stricter interpretation of existing laws may
require us to incur material expenditures. Future laws, ordinances or regulations
may impose material environmental liability. Any material expenditures, fines,
penalties, or damages we must pay will reduce our ability to make distributions
and may reduce the value of our stockholders’ investments.  The costs of defending against claims
of environmental liability or of paying personal injury claims could reduce the
amounts available for distribution to our stockholders.  Environmental laws provide for sanctions for
noncompliance and may be enforced by governmental agencies or, in certain
circumstances, by private parties. Certain environmental laws and common law
principles could be used to impose liability for the release of and exposure to
hazardous substances, including asbestos-containing materials and lead-based
paint. Third parties may seek recovery from real property owners or operators
for personal injury or property damage associated with exposure to released
hazardous substances. The costs of defending against claims of environmental
liability or of paying personal injury claims could reduce the amounts
available for distribution to our stockholders. Generally, we expect that the
real estate properties that we acquire will have been subject to Phase I
environmental assessments at the time they were acquired. A Phase I environmental
assessment or site assessment is an initial environmental investigation to
identify potential environmental liabilities associated with the current and
past uses of a given property.  Costs associated with complying
with the Americans with Disabilities Act may decrease cash available for
distributions.  Our properties may be subject to the Americans with
Disabilities Act of 1990, as amended. Under the Disabilities Act, all places of
public accommodation are required to comply with federal requirements related
to access and use by disabled persons. The Disabilities Act has separate
compliance requirements for “public accommodations” and “commercial facilities”
that generally require that buildings and services be made accessible and
available to people with disabilities. The Disabilities Act’s requirements
could require removal of access barriers and could result in the imposition of
injunctive relief, monetary penalties or, in some cases, an award of damages.
We will attempt to acquire properties that comply with the ADA or place the
burden on the seller or other third party, such as a tenant, to ensure
compliance with the ADA. We cannot assure our stockholders that we will be able
to acquire 22


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properties or allocate
responsibilities in this manner. Any of our funds used for Disabilities Act
compliance will reduce our net income and the amount of cash available for
distributions to our stockholders.  The failure of any bank in which we deposit our funds
could reduce the amount of cash we have available to pay distributions and make
additional investments.  We intend to diversify our cash and cash equivalents
among several banking institutions in an attempt to minimize exposure to any
one of these entities. However, the Federal Deposit Insurance Corporation, or
“FDIC,” only insures amounts up to $250,000 per depositor per insured bank. We
expect to have cash and cash equivalents and restricted cash deposited in
certain financial institutions in excess of federally insured levels. If any of
the banking institutions in which we have deposited funds ultimately fails, we
may lose our deposits over $250,000. The loss of our deposits could reduce the
amount of cash we have available to distribute or invest and could result in a
decline in the value of our stockholders’ investments.  Risks Related to Real Estate-Related
Investments  Our investments in mortgage,
mezzanine, bridge and other loans as well as our investments in mortgage-backed
securities, collateralized debt obligations and other debt may be affected by
unfavorable real estate market conditions, which could decrease the value of
those assets and the return on your investment.  If we make or invest in mortgage, mezzanine or other
real estate-related loans, we will be at risk of defaults by the borrowers on
those loans. These defaults may be caused by many conditions beyond our
control, including interest rate levels and local and other economic conditions
affecting real estate values. We will not know whether the values of the
properties ultimately securing our loans will remain at the levels existing on
the dates of origination of those loans. If the values of the underlying
properties drop, our risk will increase because of the lower value of the
security associated with such loans. Our investments in mortgage-backed
securities, collateralized debt obligations and other real estate-related debt
will be similarly affected by real estate market conditions.  If we make or invest in mortgage,
mezzanine, bridge or other real estate-related loans, our loans will be subject
to interest rate fluctuations that will affect our returns as compared to
market interest rates; accordingly, the value of your investment would be
subject to fluctuations in interest rates.  If we make or invest in fixed-rate, long-term loans
and interest rates rise, the loans could yield a return that is lower than
then-current market rates. If interest rates decrease, we will be adversely
affected to the extent that loans are prepaid because we may not be able to
make new loans at the higher interest rate. If we invest in variable-rate loans
and interest rates decrease, our revenues will also decrease. For these
reasons, if we invest in mortgage, mezzanine, bridge or other real
estate-related loans, our returns on those loans and the value of your
investment will be subject to fluctuations in interest rates.  We have not established investment
criteria limiting geographical concentration of our mortgage investments or
requiring a minimum credit quality of borrowers.  We have not established any limit upon the geographic
concentration of properties securing mortgage loans acquired or originated by
us or the credit quality of borrowers of uninsured mortgage assets acquired or
originated by us. As a result, properties securing our mortgage loans may be
overly concentrated in certain geographic areas, and the underlying borrowers
of our uninsured mortgage assets may have low credit quality. We may experience
losses due to geographic concentration or low credit quality.  Mortgage investments that are not
United States government insured and non-investment-grade mortgage assets
involve risk of loss.  We may originate and acquire uninsured and
non-investment-grade mortgage loans and mortgage assets, including mezzanine
loans, as part of our investment strategy. While holding these interests, we
will be subject to risks of borrower defaults, bankruptcies, fraud and losses
and special hazard losses that are not covered by standard hazard insurance.
Also, the costs of financing the mortgage loans could exceed the return on the
mortgage loans. In the event of any default under mortgage loans held by us, we
will bear the risk of loss of principal and non-payment of interest and fees to
the extent of any deficiency between the value of the mortgage collateral and
the principal amount of the mortgage loan. To the extent we suffer such losses
with respect to our investments in mortgage loans, the value of our
stockholders’ investments may be adversely affected.  We may invest in non-recourse
loans, which will limit our recovery to the value of the mortgaged property.  Our mortgage loan assets may be non-recourse loans.
With respect to our non-recourse mortgage loan assets, in the event of a
borrower default, the specific mortgaged property and other assets, if any,
pledged to secure the relevant mortgage loan, may be less than the amount owed
under the mortgage loan. As to those mortgage loan assets that provide for
recourse against the borrower and its 23


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assets
generally, we cannot assure our stockholders that the recourse will provide a
recovery in respect of a defaulted mortgage loan greater than the liquidation
value of the mortgaged property securing that mortgage loan.  Interest rate fluctuations will affect the value of
our mortgage assets, net income and common stock.  Interest rates are highly sensitive to many factors,
including governmental monetary and tax policies, domestic and international
economic and political considerations and other factors beyond our control.
Interest rate fluctuations can adversely affect our income in many ways and
present a variety of risks including the risk of variances in the yield curve,
a mismatch between asset yields and borrowing rates, and changing prepayment
rates.  Variances in the yield curve may reduce our net
income. The relationship between short-term and longer-term interest rates is
often referred to as the “yield curve.” Short-term interest rates are
ordinarily lower than longer-term interest rates. If short-term interest rates
rise disproportionately relative to longer-term interest rates (a flattening of
the yield curve), our borrowing costs may increase more rapidly than the
interest income earned on our assets. Because our assets may bear interest
based on longer-term rates than our borrowings, a flattening of the yield curve
would tend to decrease our net income and the market value of our mortgage loan
assets.  Additionally, to the extent cash flows from
investments that return scheduled and unscheduled principal are reinvested in
mortgage loans, the spread between the yields of the new investments and
available borrowing rates may decline, which would likely decrease our net
income. It is also possible that short-term interest rates may exceed
longer-term interest rates (a yield curve inversion), in which event our
borrowing costs may exceed our interest income and we could incur operating
losses.  Prepayment rates on our mortgage
loans may adversely affect our yields.  The value of our mortgage loan assets may be affected
by prepayment rates on investments. Prepayment rates are influenced by changes
in current interest rates and a variety of economic, geographic and other
factors beyond our control, and consequently, such prepayment rates cannot be
predicted with certainty. To the extent we originate mortgage loans, we expect
that such mortgage loans will have a measure of protection from prepayment in
the form of prepayment lock-out periods or prepayment penalties. However, this
protection may not be available with respect to investments that we acquire but
do not originate. In periods of declining mortgage interest rates, prepayments
on mortgages generally increase. If general interest rates decline as well, the
proceeds of such prepayments received during such periods are likely to be reinvested
by us in assets yielding less than the yields on the investments that were
prepaid. In addition, the market value of mortgage investments may, because of
the risk of prepayment, benefit less from declining interest rates than from
other fixed-income securities. Conversely, in periods of rising interest rates,
prepayments on mortgages generally decrease, in which case we would not have
the prepayment proceeds available to invest in assets with higher yields. Under
certain interest rate and prepayment scenarios, we may fail to fully recoup our
cost of acquisition of certain investments.  Before making any investment, we will consider the
expected yield of the investment and the factors that may influence the yield
actually obtained on such investment. These considerations will affect our
decision whether to originate or purchase such an investment and the price
offered for such an investment. No assurances can be given that we can make an
accurate assessment of the yield to be produced by an investment. Many factors
beyond our control are likely to influence the yield on the investments,
including, but not limited to, competitive conditions in the local real estate
market, local and general economic conditions and the quality of management of
the underlying property. Our inability to accurately assess investment yields
may result in our purchasing assets that do not perform as well as expected,
which may adversely affect the value of our stockholders’ investments.  Volatility of values of mortgaged
properties may adversely affect our mortgage loans.  Real estate property values and net operating income
derived from real estate properties are subject to volatility and may be
affected adversely by a number of factors, including the risk factors described
in this report relating to general economic conditions and owning real estate
investments. In the event its net operating income decreases, a borrower may
have difficulty paying our mortgage loan, which could result in losses to us.
In addition, decreases in property values reduce the value of the collateral
and the potential proceeds available to a borrower to repay our mortgage loans,
which could also cause us to suffer losses.  Mezzanine loans involve greater
risks of loss than senior loans secured by income producing properties.  We may make and acquire mezzanine loans. These types
of mortgage loans are considered to involve a higher degree of risk than
long-term senior mortgage lending secured by income-producing real property due
to a variety of factors, including the loan being entirely unsecured or, if
secured, becoming unsecured as a result of foreclosure by the senior lender. We
may not recover some or all of our investment in these loans. In addition,
mezzanine loans may have higher loan-to-value ratios than conventional mortgage
loans, resulting in less equity in the property and increasing the risk of loss
of principal.  24


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Our
investments in subordinated loans and subordinated mortgage-backed securities
may be subject to losses.  We may acquire or originate subordinated loans and
invest in subordinated mortgage-backed securities. In the event a borrower
defaults on a subordinated loan and lacks sufficient assets to satisfy our
loan, we may suffer a loss of principal or interest. In the event a borrower
declares bankruptcy, we may not have full recourse to the assets of the
borrower, or the assets of the borrower may not be sufficient to satisfy the
loan. If a borrower defaults on our loan or on debt senior to our loan, or in
the event of a borrower bankruptcy, our loan will be satisfied only after the
senior debt is paid in full. Where debt senior to our loan exists, the presence
of intercreditor arrangements may limit our ability to amend our loan
documents, assign our loans, accept prepayments, exercise our remedies (through
“standstill periods”), and control decisions made in bankruptcy proceedings
relating to borrowers.  The CMBS in which we may invest are
subject to all of the risks of the underlying mortgage loans and the risks of
the securitization process.  CMBS, or commercial mortgage-backed securities, are
securities that evidence interests in, or are secured by, a single commercial
mortgage loan or a pool of commercial mortgage loans. Accordingly, these
securities are subject to all of the risks of the underlying mortgage loans.  In a rising interest rate environment, the value of
CMBS may be adversely affected when payments on underlying mortgages do not
occur as anticipated, resulting in the extension of the security’s effective
maturity and the related increase in interest rate sensitivity of a longer-term
instrument. The value of CMBS may also change due to shifts in the market’s
perception of issuers and regulatory or tax changes adversely affecting the
mortgage securities market as a whole. In addition, CMBS are subject to the
credit risk associated with the performance of the underlying mortgage
properties. In certain instances, third-party guarantees or other forms of
credit support can reduce the credit risk.  CMBS are also subject to several risks created through
the securitization process. Subordinate CMBS are paid interest only to the
extent that there are funds available to make payments. To the extent the
collateral pool includes delinquent loans, there is a risk that the interest
payment on subordinate CMBS will not be fully paid. Subordinate CMBS are also
subject to greater credit risk than those CMBS that are more highly rated.  Our investments in real
estate-related common equity securities will be subject to specific risks
relating to the particular issuer of the securities and may be subject to the
general risks of investing in subordinated real estate securities, which may
result in losses to us.  We may make equity investments in other REITs and
other real estate companies. If we make such investments, we will target a
public company that owns commercial real estate or real estate-related assets
when we believe its stock is trading at a discount to that company’s net asset
value. We may eventually seek to acquire or gain a controlling interest in the
companies that we target. We do not expect our noncontrolling equity
investments in other public companies to exceed 5.0% of the proceeds of our
offering, assuming we sell the maximum offering amount, or to represent a substantial
portion of our assets at any one time. Our investments in real estate-related
common equity securities will involve special risks relating to the particular
issuer of the equity securities, including the financial condition and business
outlook of the issuer. Issuers of real estate-related common equity securities
generally invest in real estate or real estate-related assets and are subject
to the inherent risks associated with real estate-related investments discussed
in this report.  Real estate-related common equity securities are
generally unsecured and may also be subordinated to other obligations of the
issuer. As a result, investments in real estate-related common equity
securities are subject to risks of: (1) limited liquidity in the secondary
trading market, (2) substantial market price volatility resulting from
changes in prevailing interest rates, (3) subordination to the prior
claims of banks and other senior lenders to the issuer, (4) the operation
of mandatory sinking fund or call/redemption provisions during periods of
declining interest rates that could cause the issuer to reinvest redemption
proceeds in lower yielding assets, (5) the possibility that earnings of
the issuer may be insufficient to meet its debt service and distribution obligations
and (6) the declining creditworthiness and potential for insolvency of the
issuer during periods of rising interest rates and economic downturn. These
risks may adversely affect the value of outstanding real estate-related common
equity securities and the ability of the issuers thereof to make distribution
payments.  Risks Associated with Debt Financing  We have incurred mortgage
indebtedness, and we may incur other indebtedness, which increases our risk of
loss due to foreclosure.  We have obtained, and are likely to continue to
obtain, lines of credit and other long-term financing that are secured by our
properties and other assets. Under our charter, we have a limitation on
borrowing which precludes us from borrowing in excess of 300% of the 25


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value of our net assets
without conflicts committee approval. Net assets for purposes of this
calculation are defined to be our total assets (other than intangibles), valued
at cost prior to deducting depreciation or other non-cash reserves, less total liabilities.
Generally speaking, the preceding calculation is expected to limit our total
liabilities to 75.0% of the aggregate cost of our investments before non-cash
reserves and depreciation. We may borrow in excess of these amounts if such
excess is approved by a majority of the independent directors and is disclosed
to stockholders in our next quarterly report, along with justification for such
excess. In some instances, we may acquire real properties by financing a
portion of the price of the properties and mortgaging or pledging some or all
of the properties purchased as security for that debt. We may also incur
mortgage debt on properties that we already own in order to obtain funds to
acquire additional properties. In addition, we may borrow as necessary or
advisable to ensure that we maintain our qualification as a REIT for U.S.
federal income tax purposes, including borrowings to satisfy the REIT
requirement that we distribute at least 90.0% of our annual REIT taxable income
to our stockholders (computed without regard to the dividends-paid deduction
and excluding net capital gain). We, however, can give our stockholders no
assurance that we will be able to obtain such borrowings on satisfactory terms.  High debt levels will cause us to incur higher
interest charges, which would result in higher debt service payments and could
be accompanied by restrictive covenants. If we do mortgage a property and there
is a shortfall between the cash flow from that property and the cash flow
needed to service mortgage debt on that property, then the amount of cash
available for distributions to stockholders may be reduced. In addition,
incurring mortgage debt increases the risk of loss of a property since defaults
on indebtedness secured by a property may result in lenders initiating
foreclosure actions. In that case, we could lose the property securing the loan
that is in default, reducing the value of our stockholders’ investments. For
tax purposes, a foreclosure of any of our properties would be treated as a sale
of the property for a purchase price equal to the outstanding balance of the
debt secured by the mortgage. If the outstanding balance of the debt secured by
the mortgage exceeds our tax basis in the property, we would recognize taxable
income on foreclosure even though we would not necessarily receive any cash
proceeds. We may give full or partial guaranties to lenders of mortgage debt on
behalf of the entities that own our properties. When we give a guaranty on
behalf of an entity that owns one of our properties, we will be responsible to
the lender for satisfaction of the debt if it is not paid by such entity. If
any mortgages contain cross-collateralization or cross-default provisions, a
default on a single property could affect multiple properties.  We may also obtain recourse debt to finance our
acquisitions and meet our REIT distribution requirements. If we have
insufficient income to service our recourse debt obligations, our lenders could
institute proceedings against us to foreclose upon our assets. If a lender
successfully forecloses upon any of our assets, our ability to pay cash
distributions to our stockholders will be limited, and our stockholders could
lose all or part of their investment.  High mortgage rates may make it
difficult for us to finance or refinance properties, which could reduce the
number of properties we can acquire, our cash flows from operations and the
amount of cash distributions we can make.  If mortgage debt is unavailable at
reasonable rates, we may not be able to finance the purchase of properties. If
we place mortgage debt on properties, we run the risk of being unable to
refinance the properties when the debt becomes due or of being unable to
refinance on favorable terms. If interest rates are higher when we refinance
the properties, our income could be reduced. We may be unable to refinance
properties. If any of these events occurs, our cash flow would be reduced.
This, in turn, would reduce cash available for distribution to our stockholders
and may hinder our ability to raise capital by issuing more stock or borrowing
more money.  We expect to use leverage in
connection with our investments in real estate-related assets, which increases
the risk of loss associated with this type of investment.  We may finance the acquisition and origination of
certain real estate-related investments with warehouse lines of credit and
repurchase agreements. In addition, we may engage in various types of
securitizations in order to finance our loan originations. The use of such leverage
may substantially increase the risk of loss. There can be no assurance that
leveraged financing will be available to us on favorable terms or that, among
other factors, the terms of such financing will parallel the maturities of the
underlying assets acquired. If alternative financing is not available, we may
have to liquidate assets at unfavorable prices to pay off such financing. Our
return on our investments and cash available for distribution to our
stockholders may be reduced to the extent that changes in market conditions
cause the cost of our financing to increase relative to the income that we can
derive from the assets we acquire.  Our debt service payments will reduce our cash flow
available for distributions. We may not be able to meet our debt service
obligations and, to the extent that we cannot, we risk the loss of some or all
of our assets to foreclosure or sale to satisfy our debt obligations. We may
utilize repurchase agreements as a component of our financing strategy.
Repurchase agreements economically resemble short-term, variable-rate financing
and usually require the maintenance of specific loan-to-collateral value
ratios. If the market value of the assets subject to a repurchase agreement
declines, we may be required to provide additional collateral or make cash
payments to maintain the loan-to-collateral value ratio. If we are unable to
provide such collateral or cash repayments, we may lose our economic interest
in the underlying assets. Further, credit facility providers and warehouse
facility providers may require us 26


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to maintain a certain
amount of cash reserves or to set aside unleveraged assets sufficient to
maintain a specified liquidity position that would allow us to satisfy our
collateral obligations. As a result, we may not be able to leverage our assets
as fully as we would choose, which could reduce our return on assets. In the
event that we are unable to meet these collateral obligations, our financial
condition could deteriorate rapidly.  We may not be able to access financing
sources on attractive terms, which could adversely affect our ability to
execute our business plan.  We may finance our assets over the long-term through a
variety of means, including repurchase agreements, credit facilities, issuance
of commercial mortgage-backed securities, collateralized debt obligations and
other structured financings. Our ability to execute this strategy will depend
on various conditions in the markets for financing in this manner that are
beyond our control, including lack of liquidity and greater credit spreads. We
cannot be certain that these markets will remain an efficient source of
long-term financing for our assets. If our strategy is not viable, we will have
to find alternative forms of long-term financing for our assets, as secured
revolving credit facilities and repurchase facilities may not accommodate
long-term financing. This could subject us to more recourse indebtedness and
the risk that debt service on less efficient forms of financing would require a
larger portion of our cash flows, thereby reducing cash available for
distribution to our stockholders and funds available for operations as well as
for future business opportunities.  Lenders may require us to enter
into restrictive covenants relating to our operations, which could limit our
ability to make distributions to our stockholders.  When providing financing, a lender may impose
restrictions on us that affect our distribution and operating policies and our
ability to incur additional debt. Loan agreements we enter may contain
covenants that limit our ability to further mortgage a property, discontinue
insurance coverage or replace the Advisor. In addition, loan documents may
limit our ability to replace a property’s property manager or terminate certain
operating or lease agreements related to a property. These or other limitations
would decrease our operating flexibility and our ability to achieve our
operating objectives.  Increases in interest rates could
increase the amount of our debt payments and limit our ability to pay
distributions to our stockholders.  As of December 31, 2012, we have $113.1 million of
variable rate debt obligations. Because we have such variable rate debt
obligations, increases in interest rates would increase our interest costs and
would reduce our cash flows and our ability to pay distributions to our
stockholders. In addition, if we need to repay existing debt during periods of
rising interest rates, we could be required to liquidate one or more of our
investments at times that may not permit realization of the maximum return on
such investments.  Our derivative financial
instruments that we may use to hedge against interest rate fluctuations may not
be successful in mitigating our risks associated with interest rates and could
reduce the overall returns on our stockholders’ investment.  We may use derivative financial instruments to hedge
exposures to changes in interest rates on loans secured by our assets, but no
hedging strategy can protect us completely. We cannot assure our stockholders
that our hedging strategy and the derivatives that we use will adequately
offset the risk of interest rate volatility or that our hedging transactions
will not result in losses. In addition, the use of such instruments may reduce
the overall return on our investments. These instruments may also generate
income that may not be treated as qualifying REIT income for purposes of the
75.0% or 95.0% REIT income test.  Interest-only indebtedness may
increase our risk of default and ultimately may reduce our funds available for
distribution to our stockholders.  We may finance our property acquisitions using
interest-only mortgage indebtedness. During the interest-only period, the
amount of each scheduled payment will be less than that of a traditional
amortizing mortgage loan. The principal balance of the mortgage loan will not
be reduced (except in the case of prepayments) because there are no scheduled
monthly payments of principal during this period. After the interest-only
period, we will be required either to make scheduled payments of amortized
principal and interest or to make a lump-sum or “balloon” payment at maturity.
These required principal or balloon payments will increase the amount of our
scheduled payments and may increase our risk of default under the related
mortgage loan. If the mortgage loan has an adjustable interest rate, the amount
of our scheduled payments also may increase at a time of rising interest rates.
Increased payments and substantial principal or balloon maturity payments will
reduce the funds available for distribution to our stockholders because cash
otherwise available for distribution will be required to pay principal and
interest associated with these mortgage loans.  27


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If we
enter into financing arrangements involving balloon payment obligations, it may
adversely affect our ability to make distributions to our stockholders.  Some of our financing arrangements may require us to
make a lump-sum or “balloon” payment at maturity. Our ability to make a balloon
payment at maturity is uncertain and may depend upon our ability to obtain
additional financing or our ability to sell the property. At the time the
balloon payment is due, we may or may not be able to refinance the balloon
payment on terms as favorable as the original loan or sell the property at a
price sufficient to make the balloon payment. The effect of a refinancing or
sale could affect the rate of return to stockholders and the projected time of
disposition of our assets. In addition, payments of principal and interest made
to service our debts may leave us with insufficient cash to pay the
distributions that we are required to pay to maintain our qualification as a
REIT. Any of these results would have a significant, negative impact on our
stockholders’ investments.   We have broad authority to incur
debt and high debt levels could hinder our ability to make distributions and
decrease the value of your investment.  Our policies do not limit us from incurring debt until
our borrowings would cause our total liabilities to exceed 75.0% of the cost
(before deducting depreciation or other non-cash reserves) of our tangible
assets, and we may exceed this limit with the approval of the conflicts
committee of our board of directors. During the early stages of our offering,
our conflicts committee may approve debt in excess of this limit. High debt
levels would cause us to incur higher interest charges and higher debt service
payments and could also be accompanied by restrictive covenants. These factors
could limit the amount of cash we have available to distribute and could result
in a decline in the value of your investment.  U.S. Federal Income Tax Risks  Failure to qualify as a REIT would
reduce our net earnings available for investment or distribution.  Our qualification as a REIT depends upon our ability
to meet requirements regarding our organization and ownership, distributions of
our income, the nature and diversification of our income and assets and other
tests imposed by the Internal Revenue Code. If we fail to qualify as a REIT for
any taxable year after electing REIT status, we will be subject to U.S. federal
income tax on our taxable income at corporate rates. In addition, we would
generally be disqualified from treatment as a REIT for the four taxable years
following the year of losing our REIT status. Losing our REIT status would
reduce our net earnings available for investment or distribution to
stockholders because of the additional tax liability. In addition,
distributions to stockholders would no longer qualify for the dividends paid
deduction, and we would no longer be required to make distributions. If this
occurs, we might be required to borrow funds or liquidate some investments in
order to pay the applicable tax.  Our stockholders may have current
tax liability on distributions they elect to reinvest in our common stock.  If our stockholders participate in the DRP, they will
be deemed to have received, and for U.S. federal income tax purposes will be
taxed on, the amount reinvested in shares of our common stock to the extent the
amount reinvested was not a tax-free return of capital. In addition, our
stockholders will be treated for tax purposes as having received an additional
distribution to the extent the shares are purchased at a discount to fair
market value. As a result, unless our stockholders are a tax-exempt entity,
they may have to use funds from other sources to pay their tax liability on the
value of the shares of common stock received.  Failure to qualify as a REIT would
subject us to U.S. federal income tax, which would reduce the cash available
for distribution to our stockholders.  We operate in a manner that is intended to cause us to
qualify as a REIT for U.S. federal income tax purposes commencing with our
taxable year ended December 31, 2010. However, the U.S. federal income tax
laws governing REITs are extremely complex, and interpretations of the U.S.
federal income tax laws governing qualification as a REIT are limited.
Qualifying as a REIT requires us to meet various tests regarding the nature of
our assets and our income, the ownership of our outstanding stock, and the
amount of our distributions on an ongoing basis. While we intend to operate so
that we qualify as a REIT, given the highly complex nature of the rules governing
REITs, the ongoing importance of factual determinations, including the tax
treatment of certain investments we may make, and the possibility of future
changes in our circumstances, no assurance can be given that we will so qualify
for any particular year. If we fail to qualify as a REIT in any calendar year
and we do not qualify for certain statutory relief provisions, we would be
required to pay U.S. federal income tax on our taxable income. We might need to
borrow money or sell assets to pay that tax. Our payment of U.S. federal income
tax would decrease the amount of our income available for distribution to our
stockholders. Furthermore, if we fail to maintain our qualification as a REIT
and we do not qualify for certain statutory relief provisions, we no longer
would be required to distribute substantially all of our REIT taxable income to
our stockholders. Unless our failure to qualify as a REIT were excused under
federal tax laws, we would be disqualified from taxation as a REIT for the four
taxable years following the year during which qualification was lost. 28


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Even if we qualify as a REIT for
U.S. federal income tax purposes, we may be subject to other tax liabilities
that reduce our cash flow and our ability to make distributions to our stockholders.  Even if we qualify as a REIT for U.S.
federal income tax purposes, we may be subject to some federal, state and local
taxes on our income or property. For example: •      In order to qualify as a REIT, we must
distribute annually at least 90.0% of our REIT taxable income to our
stockholders (which is determined without regard to the dividends paid
deduction or net capital gain). To the extent that we satisfy the distribution
requirement but distribute less than 100% of our REIT taxable income, we will
be subject to U.S. federal corporate income tax on the undistributed income. •      We will be subject to a 4.0% nondeductible
excise tax on the amount, if any, by which distributions we pay in any calendar
year are less than the sum of 85.0% of our ordinary income, 95.0% of our
capital gain net income and 100% of our undistributed income from prior years. •      If we have net income from the sale of
foreclosure property that we hold primarily for sale to customers in the
ordinary course of business or other non-qualifying income from foreclosure
property, we must pay a tax on that income at the highest U.S. federal
corporate income tax rate. •      If we sell an asset, other than foreclosure
property, that we hold primarily for sale to customers in the ordinary course
of business, our gain would be subject to the 100% “prohibited transaction” tax
unless such sale were made by one of our taxable REIT subsidiaries or the sale
met certain “safe harbor” requirements under the Internal Revenue Code.  Our investments in debt instruments
may cause us to recognize “phantom income” for U.S. federal income tax purposes
even though no cash payments have been received on the debt instruments.  We may acquire debt instruments in the secondary
market for less than their face amount. The amount of such discount will
generally be treated as “market discount” for U.S. federal income tax purposes.
Moreover, pursuant to our involvement in public-private joint ventures, other
similar programs recently announced by the federal government, or otherwise, we
may acquire distressed debt investments that are subsequently modified by
agreement with the borrower. If the amendments to the outstanding debt are
“significant modifications” under the applicable regulations promulgated by the
U.S. Treasury Department (the “Treasury Regulations”), the modified debt may be
considered to have been reissued to us in a debt-for-debt exchange with the
borrower. This deemed reissuance may prevent the modified debt from qualifying
as a good REIT asset if the underlying security has declined in value.  In general, we will be required to accrue original
issue discount on a debt instrument as taxable income in accordance with
applicable U.S. federal income tax rules even though no cash payments may be
received on such debt instrument.  In the event a borrower with respect to a particular
debt instrument encounters financial difficulty rendering it unable to pay
stated interest as due, we may nonetheless be required to continue to recognize
the unpaid interest as taxable income. Similarly, we may be required to accrue
interest income with respect to subordinate mortgage-backed securities at the
stated rate regardless of when their corresponding cash payments are received.  As a result of these factors, there is a significant
risk that we may recognize substantial taxable income in excess of cash
available for distribution. In that event, we may need to borrow funds or take
other action to satisfy the REIT distribution requirements for the taxable year
in which this “phantom income” is recognized.  REIT distribution requirements
could adversely affect our ability to execute our business plan.  We generally must distribute annually at least 90.0%
of our REIT taxable income, subject to certain adjustments and excluding any
net capital gain, in order for U.S. federal corporate income tax not to apply
to earnings that we distribute. To the extent that we satisfy this distribution
requirement, but distribute less than 100% of our REIT taxable income, we will
be subject to U.S. federal corporate income tax on our undistributed REIT
taxable income. In addition, we will be subject to a 4.0% nondeductible excise
tax if the actual amount that we pay out to our stockholders in a calendar year
is less than a minimum amount specified under federal tax laws. We intend to
make distributions to our stockholders to comply with the REIT requirements of
the Internal Revenue Code.  From time to time, we may generate taxable income
greater than our taxable income for financial reporting purposes, or our
taxable income may be greater than our cash flow available for distribution to
stockholders (for example, where a borrower defers the payment of interest in
cash pursuant to a contractual right or otherwise). If we do not have other
funds available in these situations, we could be required to borrow funds, sell
investments at disadvantageous prices or find another alternative source of
funds to make distributions sufficient to enable us to pay out enough of our
taxable income to satisfy the REIT distribution requirement and to avoid 29


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U.S. federal corporate income tax and the 4.0% excise tax
in a particular year. These alternatives could increase our costs or reduce our
equity. Thus, compliance with the REIT requirements may hinder our ability to
operate solely on the basis of maximizing profits.  To maintain our REIT status, we may
be forced to forego otherwise attractive opportunities, which may delay or
hinder our ability to meet our investment objectives and reduce our stockholders’
overall return.  To qualify as a REIT, we must satisfy certain tests on
an ongoing basis concerning, among other things, the sources of our income,
nature of our assets and the amounts we distribute to our stockholders. We may
be required to make distributions to stockholders at times when it would be
more advantageous to reinvest cash in our business or when we do not have funds
readily available for distribution. Compliance with the REIT requirements may
hinder our ability to operate solely on the basis of maximizing profits and the
value of our stockholders’ investments.  The “taxable mortgage pool” rules
may increase the taxes that we or our stockholders incur and may limit the
manner in which we conduct securitizations.  We may be deemed to be ourselves, or we may make
investments in entities that own or are themselves deemed to be, taxable
mortgage pools. Similarly, certain of our securitizations or other borrowings
could be considered to result in the creation of a taxable mortgage pool for
U.S. federal income tax purposes. As a REIT, provided that we own 100% of the
equity interests in a taxable mortgage pool, we generally would not be
adversely affected by the characterization of the securitization as a taxable
mortgage pool. Certain categories of stockholders, however, such as foreign
stockholders eligible for treaty or other benefits, stockholders with net
operating losses, and certain tax-exempt stockholders that are subject to
unrelated business income tax, could be subject to increased taxes on a portion
of their dividend income from us that is attributable to the taxable mortgage
pool. In addition, to the extent that our stock is owned by tax-exempt
“disqualified organizations,” such as certain government-related entities that
are not subject to tax on unrelated business income, we will incur a
corporate-level tax on a portion of our income from the taxable mortgage pool.
In that case, we are authorized to reduce and intend to reduce the amount of
our distributions to any disqualified organization whose stock ownership gave
rise to the tax by the amount of such tax paid by us that is attributable to
such stockholder’s ownership. Moreover, we would generally be precluded from
selling equity interests in these securitizations to outside investors, or
selling any debt securities issued in connection with these securitizations
that might be considered to be equity interests for U.S. federal income tax
purposes.  These limitations may prevent us from using certain
techniques to maximize our returns from securitization transactions or other
financing arrangements.  Potential characterization of distributions or gain on
sale may be treated as unrelated business taxable income to tax-exempt
investors.  If (1) all or a portion of our assets are subject
to the rules relating to taxable mortgage pools, (2) we are a
“pension-held REIT,” (3) a tax-exempt stockholder has incurred debt to
purchase or hold our common stock or (4) the residual interests in any
real estate mortgage investment conduits (“REMICs”), we acquire (if any)
generate “excess inclusion income,” then a portion of the distributions to and,
in the case of a stockholder described in clause (3), gains realized on the
sale of common stock by such tax-exempt stockholder may be subject to U.S.
federal income tax as unrelated business taxable income under the Internal
Revenue Code.  Complying with REIT requirements
may force us to liquidate otherwise attractive investments.  To qualify as a REIT, we must ensure that at the end
of each calendar quarter, at least 75.0% of the value of our assets consists of
cash, cash items, government securities and qualified REIT real estate assets,
including certain mortgage loans and mortgage-backed securities. The remainder
of our investment in securities (other than government securities and qualified
real estate assets) generally cannot include more than 10.0% of the outstanding
voting securities of any one issuer or more than 10.0% of the total value of
the outstanding securities of any one issuer. In addition, in general, no more
than 5.0% of the value of our assets (other than government securities and
qualified real estate assets) can consist of the securities of any one issuer,
and no more than 25.0% of the value of our total assets can be represented by
securities of one or more taxable REIT subsidiaries. If we fail to comply with
these requirements at the end of any calendar quarter, we must correct the
failure within 30 days after the end of the calendar quarter or qualify for
certain statutory relief provisions to avoid losing our REIT qualification and
suffering adverse tax consequences. As a result, we may be required to
liquidate from our portfolio otherwise attractive investments. These actions
could have the effect of reducing our income and amounts available for
distribution to our stockholders.  Liquidation of assets may
jeopardize our REIT qualification.  To qualify as a REIT, we must comply with requirements
regarding our assets and our sources of income. If we are compelled to liquidate
our investments to repay obligations to our lenders, we may be unable to comply
with these requirements, ultimately jeopardizing our qualification as a REIT,
or we may be subject to a 100% tax on any resultant gain if we sell assets that
are treated as dealer property or inventory. 30


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Characterization of any repurchase
agreements we enter into to finance our investments as sales for tax purposes
rather than as secured lending transactions would adversely affect our ability
to qualify as a REIT.  We may enter into repurchase agreements with a variety
of counterparties to achieve our desired amount of leverage for the assets in
which we invest. When we enter into a repurchase agreement, we generally sell
assets to our counterparty to the agreement and receive cash from the
counterparty. The counterparty is obligated to resell the assets back to us at
the end of the term of the transaction. We believe that for U.S. federal income
tax purposes we will be treated as the owner of the assets that are the subject
of repurchase agreements and that the repurchase agreements will be treated as
secured lending transactions notwithstanding that such agreement may transfer
record ownership of the assets to the counterparty during the term of the
agreement. It is possible, however, that the Internal Revenue Service (the
“IRS”) could successfully assert that we did not own these assets during the
term of the repurchase agreements, in which case we could fail to qualify as a
REIT if tax ownership of these assets was necessary for us to meet the income
and/or asset tests.  Complying with REIT requirements
may limit our ability to hedge effectively.  The REIT provisions of the Internal Revenue Code may
limit our ability to hedge our assets and operations. Under these provisions,
any income that we generate from transactions intended to hedge our interest
rate, inflation or currency risks will be excluded from gross income for
purposes of the REIT 75.0% and 95.0% gross income tests if the instrument
hedges (1) interest rate risk on liabilities incurred to carry or acquire
real estate or (2) risk of currency fluctuations with respect to any item
of income or gain that would be qualifying income under the REIT 75.0% or 95.0%
gross income tests, and such instrument is properly identified under applicable
Treasury Regulations. Income from hedging transactions that do not meet these
requirements will generally constitute nonqualifying income for purposes of
both the REIT 75.0% and 95.0% gross income tests. As a result of these rules, we
may have to limit our use of hedging techniques that might otherwise be
advantageous, which could result in greater risks associated with interest rate
or other changes than we would otherwise incur.  Our ownership of and relationship
with our taxable REIT subsidiaries will be limited, and a failure to comply
with the limits would jeopardize our REIT status and may result in the
application of a 100% excise tax.  A REIT may own up to 100% of the stock of one or more
taxable REIT subsidiaries. A taxable REIT subsidiary may earn income that would
not be qualifying income if earned directly by the parent REIT. Both the
subsidiary and the REIT must jointly elect to treat the subsidiary as a taxable
REIT subsidiary. A corporation of which a taxable REIT subsidiary directly or
indirectly owns more than 35.0% of the voting power or value of the stock will
automatically be treated as a taxable REIT subsidiary. Overall, no more than
25.0% of the value of a REIT’s assets may consist of stock or securities of one
or more taxable REIT subsidiaries. A domestic taxable REIT subsidiary will pay
U.S. federal, state and local income tax at regular corporate rates on any
income that it earns. In addition, the taxable REIT subsidiary rules limit the
deductibility of interest paid or accrued by a taxable REIT subsidiary to its
parent REIT to assure that the taxable REIT subsidiary is subject to an
appropriate level of corporate taxation. The rules also impose a 100% excise
tax on certain transactions between a taxable REIT subsidiary and its parent
REIT that are not conducted on an arm’s-length basis. We cannot assure our
stockholders that we will be able to comply with the 25.0% value limitation on
ownership of taxable REIT subsidiary stock and securities on an ongoing basis so
as to maintain REIT status or to avoid application of the 100% excise tax
imposed on certain non-arm’s length transactions.  We may be subject to adverse
legislative or regulatory tax changes.  At any time, the U.S. federal income tax laws or
regulations governing REITs or the administrative interpretations of those laws
or regulations may be amended. We cannot predict when or if any new U.S.
federal income tax law, regulation or administrative interpretation, or any
amendment to any existing U.S. federal income tax law, regulation or
administrative interpretation, will be adopted, promulgated or become effective,
and any such law, regulation or interpretation may take effect retroactively.
We and our stockholders could be adversely affected by any such change in or
any new U.S. federal income tax law, regulation or administrative
interpretation.  Dividends payable by REITs do not
qualify for the reduced tax rates.  Legislation enacted in 2003 and modified in 2005, 2010,
and 2013 generally reduces the maximum tax rate for dividends payable to certain
stockholders who are domestic individuals, trusts and estates to 20.0%.
Dividends payable by REITs, however, are generally not eligible for the reduced
rates. Although this legislation does not adversely affect the taxation of
REITs or dividends paid by REITs, the more favorable rates applicable to
regular corporate dividends could cause investors who are individuals, trusts
and estates, to perceive investments in REITs to be relatively less attractive
than investments in stock of non-REIT corporations that pay dividends, which
could adversely affect the value of the stock of REITs, including our common
stock. 31


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If the Operating Partnership fails
to maintain its status as a partnership, its income may be subject to taxation.  We intend to maintain the status of the Operating Partnership
as a disregarded entity or partnership for U.S. federal income tax purposes.
However, if the IRS were to successfully challenge the status of the Operating Partnership
as a disregarded entity or partnership, it would be taxable as a corporation.
In such event, this would reduce the amount of distributions that the Operating
Partnership could make to us. This would also result in our losing REIT status
and becoming subject to a corporate level tax on our own income. This would
substantially reduce our cash available to pay distributions and the yield on
your investment. In addition, if any of the partnerships or limited liability
companies through which the Operating Partnership owns its properties, in whole
or in part, loses its characterization as a partnership for U.S. federal income
tax purposes, it would be subject to taxation as a corporation, thereby
reducing distributions to the Operating Partnership. Such a recharacterization
of an underlying property owner could also threaten our ability to maintain
REIT status.  The tax on prohibited transactions
will limit our ability to engage in transactions, including certain methods of
securitizing mortgage loans, that would be treated as sales for federal income
tax purposes.  A REIT’s net income from prohibited transactions is
subject to a 100% tax. In general, prohibited transactions are sales or other
dispositions of assets, other than foreclosure property, held primarily for sale
to customers in the ordinary course of business. Therefore, in order to avoid
the prohibited transactions tax, we may choose not to engage in certain sales
at the REIT level, and may limit the structures we utilize for our
securitization transactions, even though the sales or structures might
otherwise be beneficial to us.  There is a prohibited transaction safe harbor
available under the Internal Revenue Code when a property has been held for at
least two years and certain other requirements are met. It cannot be assured,
however, that any property sales would qualify for the safe harbor. It may also
be possible to reduce the impact of the prohibited transaction tax by
conducting certain activities through taxable REIT subsidiaries. However, to
the extent that we engage in such activities through taxable REIT subsidiaries,
the income associated with such activities may be subject to full corporate
income tax.  The taxation of distributions to
our stockholders can be complex; however, distributions that we make to our
stockholders generally will be taxable as ordinary income.  Distributions that we make to our taxable stockholders
out of current and accumulated earnings and profits (and not designated as
capital gain dividends, or, for tax years beginning before January 1,
2013, qualified dividend income) generally are taxable as ordinary income.
However, a portion of our distributions may (1) be designated by us as
capital gain dividends generally taxable as long-term capital gain to the extent
that they are attributable to net capital gain recognized by us, (2) be
designated by us, for taxable years beginning before January 1, 2013, as
qualified dividend income generally to the extent they are attributable to
dividends we receive from our taxable REIT subsidiaries, or (3) constitute
a return of capital generally to the extent that they exceed our accumulated
earnings and profits as determined for U.S. federal income tax purposes. A
return of capital is not taxable, but has the effect of reducing the basis of a
stockholder’s investment in our common stock.  If we were considered to actually
or constructively pay a “preferential dividend” to certain of our stockholders,
our status as a REIT could be adversely affected.  In order to qualify as a REIT, we must distribute
annually to our stockholders at least 90% of our REIT taxable income (which
does not equal net income as calculated in accordance with generally accepted
accounting principles (“GAAP”)), determined without regard to the deduction for
dividends paid and excluding net capital gain. In order for distributions to be
counted as satisfying the annual distribution requirements for REITs, and to
provide us with a REIT-level tax deduction, the distributions must not be
“preferential dividends.” A dividend is not a preferential dividend if the
distribution is pro rata among all outstanding shares of stock within a
particular class, and in accordance with the preferences among different
classes of stock as set forth in our organizational documents. Currently, there
is uncertainty as to the position of the IRS regarding whether certain
arrangements that REITs have with their stockholders could give rise to the
inadvertent payment of a preferential dividend (e.g., the pricing methodology
for stock purchased under a dividend reinvestment plan inadvertently causing a
greater than 5% discount on the price of such stock purchased). There is no de
minimis exception with respect to preferential dividends; therefore, if the IRS
were to take the position that we inadvertently paid preferential dividends, we
may be deemed to have failed the 90% distribution test, and our status as a
REIT could be terminated for the year in which such determination is made if we
were unable to cure such failure. While we believe that our operations have
been structured in such a manner that we will not be treated as inadvertently
paying preferential dividends, we can provide no assurance to this effect.  The ability of our board of
directors to revoke our REIT qualification without stockholder approval may
subject us to U.S. federal income tax and reduce distributions to our
stockholders.  32


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Our charter provides that
our board of directors may revoke or otherwise terminate our REIT election
without the approval of our stockholders if it determines that it is no longer
in our best interest to continue to qualify as a REIT. While we intend to elect
and qualify to be taxed as a REIT, we may not elect to be treated as a REIT or
may terminate our REIT election if we determine that qualifying as a REIT is no
longer in the best interests of our stockholders. If we cease to be a REIT, we
would become subject to U.S. federal income tax on our taxable income and would
no longer be required to distribute most of our taxable income to our
stockholders, which may have adverse consequences on our total return to our
stockholders and on the market price of our common stock.  The share ownership restrictions of
the Internal Revenue Code for REITs and the 9.8% share ownership limit in our
charter may inhibit market activity in our shares of stock and restrict our
business combination opportunities.  In order to qualify as a REIT for each taxable year
ending on or after December 31, 2011, five or fewer individuals, as
defined in the Internal Revenue Code, may not own, actually or constructively,
more than 50% in value of our issued and outstanding shares of stock at any
time during the last half of a taxable year. Attribution rules in the Internal
Revenue Code determine if any individual or entity actually or constructively
owns our shares of stock under this requirement. Additionally, at least 100
persons must beneficially own our shares of stock during at least 335 days of a
taxable year for each taxable year after December 31, 2011. To help insure
that we meet these tests, among other purposes, our charter restricts the
acquisition and ownership of our shares of stock.  Our charter, with certain exceptions, authorizes our
directors to take such actions as are necessary and desirable to preserve our
qualification as a REIT while we so qualify. Unless exempted by our board of
directors, for so long as we qualify as a REIT, our charter prohibits, among
other limitations on ownership and transfer of shares of our stock, any person
from beneficially or constructively owning (applying certain attribution rules
under the Internal Revenue Code) more than 9.8% in value of the aggregate of
our outstanding shares of stock and not more than 9.8% (in value or in number
of shares, whichever is more restrictive) of any class or series of our shares
of stock. Our board of directors may not grant an exemption from these
restrictions to any proposed transferee whose ownership in excess of the 9.8%
ownership limit would result in the termination of our qualification as a REIT.
These restrictions on transferability and ownership will not apply, however, if
our board of directors determines that it is no longer in our best interest to
continue to qualify as a REIT.  These ownership limits could delay or prevent a
transaction or a change in control that might involve a premium price for our
common stock or otherwise be in the best interest of the stockholders.  Potential characterization of distributions or gain on
sale may be treated as unrelated business taxable income to tax-exempt
investors.  If (a) we are a “pension-held REIT,” (b) a
tax-exempt stockholder has incurred debt to purchase or hold our common stock,
or (c) a holder of common stock is a certain type of tax-exempt
stockholder, dividends on, and gains recognized on the sale of, common stock by
such tax-exempt stockholder may be subject to U.S. federal income tax as
unrelated business taxable income under the Internal Revenue Code.  Distributions to foreign investors
may be treated as an ordinary income distribution to the extent that it is made
out of current or accumulated earnings and profits.  In general, foreign investors will be subject to
regular U.S. federal income tax with respect to their investment in our stock
if the income derived therefrom is “effectively connected” with the foreign
investor’s conduct of a trade or business in the United States. A distribution
to a foreign investor that is not attributable to gain realized by us from the
sale or exchange of a “U.S. real property interest” within the meaning of the
Foreign Investment in Real Property Tax Act of 1980, as amended (“FIRPTA”), and
that we do not designate as a capital gain distribution, will be treated as an
ordinary income distribution to the extent that it is made out of current or
accumulated earnings and profits. Generally, any ordinary income distribution
will be subject to a U.S. federal income tax equal to 30% of the gross amount
of the distribution, unless this tax is reduced by the provisions of an
applicable treaty.  Foreign investors may be subject to
FIRPTA tax upon the sale of their shares of our stock.  A foreign investor disposing of a U.S. real
property interest, including shares of stock of a U.S. corporation whose
assets consist principally of U.S. real property interests, is generally
subject to FIRPTA on the gain recognized on the disposition. Such FIRPTA tax
does not apply, however, to the disposition of stock in a REIT if the REIT is
“domestically controlled.” A REIT is “domestically controlled” if less than
50.0% of the REIT’s stock, by value, has been owned directly or indirectly by
persons who are not qualifying U.S. persons during a continuous five-year
period ending on the date of disposition or, if shorter, during the entire
period of the REIT’s existence. While we intend to qualify as a “domestically
controlled” REIT, we cannot assure you that we will. If we were to fail to so
qualify, gain realized by foreign investors on a sale of shares of our stock
would be subject to FIRPTA tax unless the shares of our stock were traded on an
established securities market and the foreign investor did not at any time
during a specified testing period directly or indirectly own more than 5.0% of
the value of our outstanding common stock. 33


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Foreign investors may be subject to
FIRPTA tax upon the payment of a capital gains dividend.  A capital gains dividend paid to foreign investors, if
attributable to gain from sales or exchanges of U.S. real property
interests, would not be exempt from FIRPTA and would be subject to FIRPTA tax.  Retirement Plan Risks  If the fiduciary of an employee pension benefit plan
subject to ERISA (such as profit-sharing, Section 401(k) or pension plan)
or any other retirement plan or account fails to meet the fiduciary and other
standards under ERISA or the Internal Revenue Code as a result of an investment
in our stock, the fiduciary could be subject to criminal and civil penalties.  There are special considerations that
apply to employee benefit plans subject to ERISA (such as profit-sharing,
Section 401(k) or pension plans) and other retirement plans or accounts
subject to Section 4975 of the Internal Revenue Code (such as an IRA) that
are investing in our shares. Fiduciaries investing the assets of such a plan or
account in our common stock should satisfy themselves that: •      the investment is consistent with their
fiduciary obligations under ERISA and the Internal Revenue Code; •      the investment is made in accordance with the
documents and instruments governing the plan or IRA, including the plan’s or
account’s investment policy; •      the investment satisfies the prudence and
diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of
ERISA and other applicable provisions of ERISA and the Internal Revenue Code; •      the investment will not impair the liquidity of
the plan or IRA; •      the investment will not produce an unacceptable
amount of “unrelated business taxable income” for the plan or IRA; •      the value of the assets of the plan can be
established annually in accordance with ERISA requirements and applicable
provisions of the plan or IRA; and •      the investment will not constitute a non-exempt
prohibited transaction under Section 406 of ERISA or Section 4975 of
the Internal Revenue Code.  With respect to the annual valuation requirements
described above, we expect to provide an estimated value for our shares
annually. From the commencement of our offering until 18 months have passed
without a sale in a “public equity offering” of our common stock, we expect to
use the gross offering price of a share of common stock in our most recent
offering as the per share estimated value. For purposes of this definition, we
will not consider “public equity offerings” to include offerings on behalf of
selling stockholders or offerings related to any dividend reinvestment plan,
employee benefit plan or the redemption of interests in the Operating Partnership.  This estimated value is not likely to reflect the
proceeds you would receive upon our liquidation or upon the sale of your
shares. Accordingly, we can make no assurances that such estimated value will
satisfy the applicable annual valuation requirements under ERISA and the
Internal Revenue Code. The Department of Labor or the IRS may determine that a
plan fiduciary or an IRA custodian is required to take further steps to
determine the value of our common shares. In the absence of an appropriate
determination of value, a plan fiduciary or an IRA custodian may be subject to
damages, penalties or other sanctions.  Failure to satisfy the
fiduciary standards of conduct and other applicable requirements of ERISA and
the Internal Revenue Code may result in the imposition of civil and criminal
penalties and could subject the fiduciary to equitable remedies. In addition,
if an investment in our shares constitutes a non-exempt prohibited transaction
under ERISA or the Internal Revenue Code, the fiduciary or IRA owner who
authorized or directed the investment may be subject to the imposition of
excise taxes with respect to the amount invested. In the case of a non-exempt
prohibited transaction involving an IRA owner, the IRA may be disqualified and
all of the assets of the IRA may be deemed distributed and subject to tax.  34


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If you invest in our shares through an IRA or other
retirement plan, you may be limited in your ability to withdraw required
minimum distributions.  If
you establish an IRA or other retirement plan through which you invest in our
shares, federal law may require you to withdraw required minimum distributions
("RMDs") from such plan in the future. Our share repurchase program
limits the amount of repurchases (other than those repurchases as a result of a
stockholder’s death or disability) that can be made in a given year.
Additionally, you will not be eligible to have your shares repurchased until
you have held your shares for at least one year. As a result, you may not be
able to have your shares repurchased at a time in which you need liquidity to
satisfy the RMD requirements under your IRA or other retirement plan. Even if
you are able to have your shares repurchased, such repurchase may be at a price
less than the price at which the shares were initially purchased, depending on
how long you have held your shares. If you fail to withdraw RMDs from your IRA
or other retirement plan, you may be subject to certain tax penalties. 35


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ITEM 1B.   
UNRESOLVED STAFF COMMENTS  We have no unresolved staff
comments.  ITEM 2.      PROPERTIES  Real Estate Investments  As of December 31, 2012, we
owned fee simple interests in 26 properties in 15 states across the United
States that collectively total 2,490,177 square feet with a combined purchase
price of $307.0 million.  Included in these totals are 20 properties owned
through the Joint Venture that total 1,878,177 square feet with a combined
purchase price of $211.1 million.  Our portfolio was purchased at an 8.1%
weighted average capitalization rate, calculated by dividing the annualized net
operating income of each property as of the date of acquisition by the purchase
price of such property.  As of December 31, 2012, our portfolio was 95.0%
leased with approximately 80.0% of rents coming from grocery, national, and
regional tenants), including 11 market-leading grocers.  For additional
portfolio information, refer to “Real Estate and Accumulated Depreciation
(Schedule III)” herein.  Contract
 
 
 
 AveragePurchase
 
 Rentable
 
 RemainingOwnership
 
 
 
 Date
 
 Price(1)
 
 Square
 
 Lease Term
 
 %Property Name
 
 Location
 
 Interest
 
 Anchor
 
 Acquired
 
 (in thousands)
 
 Footage
 
 in Years
 
 LeasedLakeside Plaza
 
 Salem, VA
 
 54%
 
 Kroger
 
 12/10/2010
 
 $
 8,750
 
 82,798
 
 4.1
 years
 
 100.0%Snow View Plaza
 
 Parma, OH
 
 54%
 
 Giant Eagle
 
 12/15/2010
 
 
 12,300
 
 100,460
 
 6.5
 years
 
 97.0%St. Charles Plaza
 
 Haines City, FL
 
 54%
 
 Publix
 
 6/10/2011
 
 
 10,100
 
 65,000
 
 9.4
 years
 
 96.3%Centerpoint
 
 Easley, SC
 
 54%
 
 Publix
 
 10/14/2011
 
 
 6,850
 
 72,287
 
 9.5
 years
 
 84.7%Southampton Village
 
 Tyrone, GA
 
 54%
 
 Publix
 
 10/14/2011
 
 
 8,350
 
 77,956
 
 8.6
 years
 
 91.9%Burwood Village Center
 
 Glen Burnie, MD
 
 54%
 
 Food Lion
 
 11/9/2011
 
 
 16,600
 
 105,834
 
 5.6
 years
 
 100.0%Cureton Town Center
 
 Waxhaw, NC
 
 54%
 
 Harris Teeter
 
 12/29/2011
 
 
 13,950
 
 84,357
 
 9.3
 years
 
 100.0%Tramway Crossing
 
 Sanford, NC
 
 54%
 
 Food Lion
 
 2/23/2012
 
 
 5,500
 
 62,382
 
 3.4
 years
 
 95.9%Westin Centre
 
 Fayetteville, NC
 
 54%
 
 Food Lion
 
 2/23/2012
 
 
 6,050
 
 66,890
 
 3.0
 years
 
 97.9%The Village at Glynn Place
 
 Brunswick, GA
 
 54%
 
 Publix
 
 4/27/2012
 
 
 11,350
 
 111,924
 
 7.4
 years
 
 96.2%Meadowthorpe Shopping Center
 
 Lexington, KY
 
 54%
 
 Kroger
 
 5/9/2012
 
 
 8,550
 
 87,384
 
 3.6
 years
 
 97.4%New Windsor Marketplace
 
 Windsor, CO
 
 54%
 
 King Soopers(2)
 
 5/9/2012
 
 
 5,550
 
 95,877
 
 6.6
 years
 
 90.3%Vine Street Square
 
 Kissimmee, FL
 
 54%
 
 Walmart(3)
 
 6/4/2012
 
 
 13,650
 
 120,699
 
 6.0
 years
 
 100.0%Northtowne Square
 
 Gibsonia, PA
 
 54%
 
 Giant Eagle
 
 6/19/2012
 
 
 10,575
 
 113,372
 
 7.9
 years
 
 100.0%Brentwood Commons
 
 Bensenville, IL
 
 54%
 
 Dominick's(4)
 
 7/5/2012
 
 
 14,850
 
 125,550
 
 6.5
 years
 
 98.1%Sidney Towne Center
 
 Sidney, OH
 
 54%
 
 Kroger
 
 8/2/2012
 
 
 4,300
 
 118,360
 
 6.3
 years
 
 98.5%Broadway Plaza
 
 Tucson, AZ
 
 54%
 
 Sprouts
 
 8/13/2012
 
 
 12,675
 
 83,612
 
 5.2
 years
 
 95.9%Richmond Plaza
 
 Augusta, GA
 
 54%
 
 Kroger
 
 8/30/2012
 
 
 19,500
 
 178,167
 
 5.2
 years
 
 86.5%Publix at Northridge
 
 Sarasota, FL
 
 54%
 
 Publix
 
 8/30/2012
 
 
 11,500
 
 65,320
 
 9.4
 years
 
 86.2%Baker Hill Center
 
 Glen Ellyn, IL
 
 100%
 
 Dominick's(4)
 
 9/6/2012
 
 
 21,600
 
 135,355
 
 4.7
 years
 
 96.7%New Prague Commons
 
 New Prague, MN
 
 54%
 
 Coborn's
 
 10/12/2012
 
 
 10,150
 
 59,948
 
 8.4
 years
 
 98.2%Brook Park Plaza
 
 Brook Park, OH
 
 100%
 
 Giant Eagle
 
 10/23/2012
 
 
 10,140
 
 157,459
 
 5.3
 years
 
 87.8%Heron Creek Towne Center
 
 North Port, FL
 
 100%
 
 Publix
 
 12/17/2012
 
 
 8,650
 
 64,664
 
 6.4
 years
 
 90.4%Quartz Hill Towne Centre
 
 Lancaster, CA
 
 100%
 
 Vons(4)
 
 12/26/2012
 
 
 20,970
 
 110,306
 
 4.1
 years
 
 98.1%Hilfiker Square
 
 Salem, OR
 
 100%
 
 Trader Joe's
 
 12/28/2012
 
 
 8,000
 
 38,558
 
 9.2
 years
 
 100.0%Village One Plaza
 
 Modesto, CA
 
 100%
 
 Raley's
 
 12/28/2012
 
 
 26,500
 
 105,658
 
 13.8
 years
 
 91.6%(1)
 The contract purchase price excludes closing costs and
  acquisition costs.(2)
 King Soopers is an affiliate of Kroger.(3)
 The anchor tenant of Vine Street Square is a Walmart
  Neighborhood Market.(4)
 Dominick's and Vons are affiliates of Safeway, Inc.
 36


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Lease Expirations and
Significant Tenants  The following table lists, on
an aggregate basis, all of the scheduled lease expirations after December 31,
2012 over each of the years ending December 31, 2013 and thereafter for our 26
shopping centers.  The table shows the approximate rentable square feet and annualized
effective rent represented by the applicable lease expirations (dollars in
thousands):  Number of
 
 
 
 
 % of Total PortfolioExpiring
 
 
 Annualized
 
 Annualized
 
 Leased Rentable
 
 % of RentableYear
 
 Leases
 
 
 Effective Rent(1)
 
 Effective Rent
 
 Square Feet Expiring(2)
 
 Square Feet Expiring2013
 
 52
 
 $
 1,721
 
 6.5%
 
 125,300
 
 5.3%2014
 
 63
 
 
 2,803
 
 10.5%
 
 225,152
 
 9.6%2015
 
 55
 
 
 2,589
 
 9.7%
 
 188,111
 
 8.0%2016
 
 47
 
 
 1,945
 
 7.3%
 
 179,262
 
 7.7%2017
 
 54
 
 
 2,393
 
 9.0%
 
 177,840
 
 7.6%2018
 
 20
 
 
 1,772
 
 6.7%
 
 132,484
 
 5.7%2019
 
 17
 
 
 2,563
 
 9.6%
 
 260,441
 
 11.1%2020
 
 8
 
 
 1,062
 
 4.0%
 
 86,076
 
 3.7%2021
 
 12
 
 
 1,482
 
 5.6%
 
 188,512
 
 8.0%2022
 
 5
 
 
 1,876
 
 7.0%
 
 168,694
 
 7.2%Thereafter
 
 20
 
 
 6,433
 
 24.1%
 
 610,493
 
 26.1%(1)
 We calculate annualized effective rent as monthly contractual
  rent as of December 31, 2012 multiplied by 12 months, less any tenant
  concessions.(2)
 Does not include leases that had not begun to pay rent as
  the commencement dates for such leases had not been determined as of December
  31,2012.
  The following table sets forth
information regarding the tenants comprising ten percent or more of the
aggregate annualized effective rent or occupying ten percent or more of the
aggregate rentable square footage at our 26 shopping centers as of December 31,
2012 (dollars in thousands):  % of TotalPortfolio
 
 
 
 % of TotalAnnualized
 
 Annualized
 
 
 
 PortfolioNumber of
 
 Effective
 
 Effective
 
 Leased
 
 SquareTenant Name/Property
 
 Tenant Industry
 
 Locations
 
 Rent(1)
 
 Rent
 
 Square Feet
 
 FootagePublix Super Markets(2)
 
 Retail - Grocery Store
 
 8
 
 $
 3,183
 
 11.9%
 
 289,501
 
 11.6%Kroger(2)
 
 Retail - Grocery Store
 
 7
 
 
 1,352
 
 5.1%
 
 300,737
 
 12.1%(1)
 We calculate annualized effective rent as monthly
  contractual rent as of December 31, 2012 multiplied by 12 months, less any
  tenant concessions.(2)
 Includes non-grocery leases such as fuel stations and
  liquor stores.
  Portfolio Tenancy  Prior to the acquisition of a property, we assess the
suitability of the grocery-anchor tenant and other tenants in light of our
investment objectives, namely, preserving capital and providing stable cash
flows for distributions. Generally, we assess the strength of the tenant by
consideration of company factors, such as its financial strength and market
share in the geographic area of the shopping center, as well as
location-specific factors, such as the store’s sales, local competition and
demographics. When assessing the tenancy of the non-anchor space at the
shopping center, we consider the tenant mix at each shopping center in light of
our portfolio, the proportion of national and national franchise tenants, and
the creditworthiness of specific tenants. When evaluating non-national tenancy,
we attempt to obtain credit enhancements to leases, which typically come in the
form of deposits and/or guarantees from one or more individuals.  37


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The following table presents the composition of our
  portfolio by tenant type as of December 31, 2012 (dollars in thousands):Annualized
 
 % ofLeased
 
 % of Leased
 
 Effective
 
 AnnualizedTenant Type
 Square Feet
 
 Square Feet
 
 Rent(1)
 
 Effective RentGrocery
  anchor
 1,329,139
 
 56.2%
 
 $
 12,265
 
 46.0%National
  & regional
 664,974
 
 28.1%
 
 
 9,081
 
 34.1%Local
 370,941
 
 15.7%
 
 
 5,294
 
 19.9%2,365,054
 
 100.0%
 
 $
 26,640
 
 100.0%(1)
 We calculate annualized effective rent as monthly
  contractual rent as of December 31, 2012 multiplied by 12 months, less any
  tenant concessions.
  The
  following table presents the composition of our portfolio by tenant industry
  as of December 31, 2012 (dollars in thousands):Annualized
 
 % ofLeased
 
 % of Leased
 
 Effective
 
 AnnualizedTenant Industry
 Square Feet
 
 Square Feet
 
 Rent(1)
 
 Effective RentGrocery
 1,329,139
 
 56.2%
 
 $
 12,265
 
 46.0%Retail
  Stores
 434,656
 
 18.5%
 
 
 5,064
 
 19.1%Services
 398,230
 
 16.8%
 
 
 5,791
 
 21.7%Restaurant
 197,169
 
 8.3%
 
 
 3,434
 
 12.9%Government
 5,860
 
 0.2%
 
 
 86
 
 0.3%2,365,054
 
 100.0%
 
 $
 26,640
 
 100.0%(1)
 We calculate annualized effective rent as monthly
  contractual rent as of December 31, 2012 multiplied by 12 months, less any
  tenant concessions.
  The
  following table presents our grocery-anchor tenants by the amount of square
  footage leased by each tenant as of December 31,2012
  (dollars in thousands):% ofLeased
 
 Leased
 
 
 Annualized
 
 % ofTenant
 
 Square
 
 Square
 
 
 Effective
 
 AnnualizedTenant
 
 Industry
 
 Feet
 
 Feet
 
 
 Rent(1)
 
 Effective RentKroger(2)
 
 Retail
  - Grocery Store
 
 299,537
 
 12.6%
 
 $
 1,318
 
 4.9%Publix
 
 Retail
  - Grocery Store
 
 286,401
 
 12.1%
 
 
 3,110
 
 11.7%Giant
  Eagle
 
 Retail
  - Grocery Store
 
 226,648
 
 9.6%
 
 
 1,972
 
 7.4%Safeway(3)
 
 Retail
  - Grocery Store
 
 187,019
 
 7.9%
 
 
 2,127
 
 8.0%Food
  Lion
 
 Retail
  - Grocery Store
 
 95,665
 
 4.0%
 
 
 881
 
 3.3%Raley's
 
 Retail
  - Grocery Store
 
 65,703
 
 2.8%
 
 
 1,165
 
 4.4%Harris
  Teeter
 
 Retail
  - Grocery Store
 
 48,756
 
 2.1%
 
 
 400
 
 1.5%Coborn's
 
 Retail
  - Grocery Store
 
 45,708
 
 1.9%
 
 
 593
 
 2.2%Walmart(4)
 
 Retail
  - Grocery Store
 
 31,979
 
 1.4%
 
 
 225
 
 0.8%Sprouts
  Farmers Market
 
 Retail
  - Grocery Store
 
 28,217
 
 1.2%
 
 
 272
 
 1.0%Trader
  Joe's
 
 Retail
  - Grocery Store
 
 13,506
 
 0.6%
 
 
 203
 
 0.8%All
  other tenants
 
 Retail/
  Restaurant/Services
 
 1,035,915
 
 43.8%
 
 
 14,374
 
 54.0%2,365,054
 
 100.0%
 
 
 26,640
 
 100.0%(1)
 We calculate annualized effective rent as monthly
  contractual rent as of December 31, 2012 multiplied by 12 months, less any
  tenantconcessions.(2)
 King Soopers is an affiliate of Kroger.(3)
 Dominick's and Vons are affiliates of Safeway, Inc.(4)
 The Walmart store at Vine Street Square is a Walmart
  Neighborhood Market.
  ITEM 3.      LEGAL PROCEEDINGS  From time to time, we are
party to legal proceedings, which arise in the ordinary course of our business.
We are not currently involved in any legal proceedings of which the outcome is
reasonably likely to have a material impact on our results of operations or
financial condition, nor are we aware of any such legal proceedings
contemplated by governmental authorities.  ITEM  4.       MINE SAFETY
DISCLOSURES  38


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Not applicable. 39


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PART II  ITEM 5.       MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES  Stockholder Information  As of February 28, 2013, we had 5,153 stockholders of
record.  Market Information  We are currently offering shares of our common stock
pursuant to an effective registration statement at an offering price of $10.00
per share in our “best efforts” offering. As of February 28, 2013, we had
approximately 18.5 million shares of common stock outstanding, held by a
total of 5,153 stockholders of record. The number of stockholders is based on
the records of DST Systems, Inc., who serves as our registrar and transfer
agent.  There is no established trading market for our common
stock. Therefore, there is a risk that a stockholder may not be able to sell
our stock at a time or price acceptable to the stockholder, or at all. Pursuant
to our offering, we are selling shares of our common stock to the public at a
price of $10.00 per share and at a price of $9.50 per share pursuant to the
DRP. Additionally, we provide discounts in our offering for certain categories
of purchasers, including volume discounts. Pursuant to the terms of our
charter, certain restrictions are imposed on the ownership and transfer of
shares.  Until the later of 18 months after the
termination of our offering or the termination of any subsequent offering of
our shares, we intend to use the offering price of shares in our most recent
offering as the per share net asset value. The estimated value of a share of
our common stock is $10.00 per share as of December 31, 2012. This estimated
value may be higher than the price at which you could resell your shares
because (1) our offering involves the payment of underwriting compensation
and other directed selling efforts, which payments and efforts are likely to
produce a higher sales price than could otherwise be obtained, and (2) there
is no public market for our shares. Moreover, this estimated value may be
higher than the amount you would receive per share if we were to liquidate at
this time because of the up-front fees that we pay in connection with the
issuance of our shares. Beginning 18 months after the last offering of
shares, the value of the properties and other assets will be based on
valuations of either our properties or our company as a whole, whichever
valuation method our board of directors determines to be appropriate, which may
include independent valuations of our properties or of our enterprise as a
whole.  Dividend Reinvestment Plan  We have adopted the DRP, through which
stockholders may elect to reinvest an amount equal to the dividends declared on
their shares of common stock into shares of our common stock in lieu of
receiving cash dividends. Shares may be purchased under the DRP for a price
equal to $9.50 per share during our primary offering period. Until we establish
an estimated value per share that is not based on the price to acquire a share
in the primary offering or a follow-on public offering, shares issued pursuant
to the DRP will be priced at the estimated value per share of our common stock,
as determined by the Advisor or another firm chosen for that purpose. We expect
to establish an estimated value per share not based on the price to acquire a
share in the primary offering or a follow-on public offering upon the
completion of our offering stage. We will consider our offering stage complete
when we are no longer offering equity securities—whether through our current
offering or follow-on public offerings—and have not done so for 18 months.
Participants in the DRP may purchase fractional shares so that 100% of the
dividends may be used to acquire additional shares of our common stock. For the
year ended December 31, 2012, approximately 139,293 shares or $1,324,000, were
reinvested through the DRP. For the year ended December 31, 2011, approximately
16,647 shares or $158,000, were reinvested through the DRP.  Distribution Information  We pay distributions based on daily record dates,
payable monthly in arrears. The common distributions that we paid during the
years ended December 31, 2011 and 2012 were equal to a daily amount of
$0.00178082 per share of common stock, which if paid each day for a 365-day
period, would equal a 6.5% annualized rate based on a purchase price of $10.00
per share. During the year ended December 31, 2011, we paid monthly
distributions to stockholders that totaled $873,000.  During the year ended
December 31, 2012, we paid monthly distributions to stockholders that totaled
$3,673,000. On January 2, 2013, we paid distributions to stockholders for
the period from December 1, 2012 to December 31, 2012 in the amount
of $717,000. On February 1, 2013, we paid distributions to stockholders
for the period from January 1, 2013 to January 31, 2013 in the amount
of $817,000. On March 1, 2013, we paid distributions to stockholders for
the period from February 1, 2013 to February 28, 2013 in the amount
of $882,000.  Distributions paid to stockholders of record from February 1,
2013 to February 28, 2013 were equal to a daily amount of $0.00183562 share of
common stock, which if paid each day for a 365-day period, would equal an
approximate 6.7% annualized rate based on a purchase price of $10.00 per
share.  All distributions paid to date have been funded by a combination of
cash generated through operations, advances from our sub-advisor, and
borrowings. 40


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The tax composition of our distributions declared for the
years ended December 31, 2012 and 2011 was as follows: 2012
 
 2011Ordinary Income
 
 0%
 
 
 0%Return of Capital
 
 100%
 
 
 100%Total
 
 100%
 
 
 100%
  Use of Initial Public Offering
Proceeds  On August 12, 2010, our registration statement on
Form S-11 (File No. 333-164313), covering a public offering of up to
180,000,000 shares of common stock, was declared effective under the Securities
Act of 1933. We commenced our initial public offering on September 17,
2010 upon retaining the Dealer Manager of our offering. We are offering
150,000,000 shares of common stock in our primary offering at an aggregate
offering price of up to $1.5 billion, or $10.00 per share with discounts
available to certain categories of purchasers. The 30,000,000 shares offered
under the DRP are initially being offered at an aggregate offering price of
$285 million, or $9.50 per share. We are selling the shares registered in our
primary offering over a three-year period, which ends August 12, 2013. Under
rules promulgated by the SEC, in some instances we may extend the primary
offering beyond that date. We may sell shares under the DRP beyond the
termination of the primary offering until we have sold all the shares under the
plan.  As of December 31, 2012, we have issued 13,801,251
shares of common stock, including 155,940 shares sold through the DRP,
generating gross cash proceeds of $136.1 million. As of December 31, 2012, we
had incurred $8.9 million in selling commissions, all of which was reallowed to
participating broker-dealers, $2.9 million in dealer manager fees, $0.8 million
of which was reallowed to participating broker-dealers, and $7.2 million
of organization and offering costs.  From the commencement of our public offering through
December 31, 2012, the net offering proceeds to us, after deducting the total
expenses incurred as described above, were approximately $117.1 million. As of
December 31, 2012, we have used the net proceeds from our offering, combined
with debt financing, to purchase $307.0 million in real estate and to pay $6.2
million of acquisition and origination fees and expenses.  Unregistered Sales of Equity
Securities  During 2012, we did not issue any securities that were
not registered under the Securities Act.  Share Repurchase Program  Our share repurchase program may provide a limited
opportunity for stockholders to have shares of common stock repurchased,
subject to certain restrictions and limitations, at a price equal to or at a
discount from the purchase price paid for the shares being repurchased.  Only those stockholders who purchased their shares
from us or received their shares from us (directly or indirectly) through one
or more non-cash transactions may be able to participate in the share
repurchase program. In other words, once our shares are transferred for value
by a stockholder, the transferee and all subsequent holders of the shares are
not eligible to participate in the share repurchase program.  The repurchase price varies based upon
the length of time that the shares of our common stock subject to repurchase
have been held. Unless the shares are being repurchased in connection with a
stockholder’s death, “determination of incompetence” or “qualifying
disability,” the prices at which we will repurchase shares are as follows: •      the lower of $9.25 and 92.5% of the price paid
to acquire the shares for stockholders who have held their shares for at least
one year; •      the lower of $9.50 and 95.0% of the price paid
to acquire the shares for stockholders who have held their shares for at least
two years; •      the lower of $9.75 and 97.5% of the price paid
to acquire the shares for stockholders who have held their shares for at least
three years; and •      the lower of $10.00 and 100% of the price paid
to acquire the shares for stockholders who have held their shares for at least
four years.  The cash available for redemption on any particular
date will generally be limited to the proceeds from the DRP during the period
consisting of the preceding four fiscal quarters for which financial statements
are available, less any cash already used for redemptions 41


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during
the same period; however, subject to the limitations described above, we may
use other sources of cash at the discretion of the board of directors. The
limitations described above do not apply to shares repurchased due to a
stockholder’s death, “qualifying disability,” or “determination of
incompetence.”  Notwithstanding the above, once we establish an
estimated fair value per share of our common stock that is not based on the
price to acquire a share in the primary offering or a follow-on public or
private offering, the repurchase price per share for all stockholders would be
equal to the estimated fair value per share, as determined by the Advisor or another
firm chosen for that purpose.  In some respects, we would treat
repurchases sought upon a stockholder’s death, “qualifying disability” or
“determination of incompetence” differently from other repurchases: •      there is no one-year holding requirement; and •      until we establish an estimated value per
share, which we expect to be upon the completion of our offering stage
(described above), the repurchase price is the amount paid to acquire the
shares from us.  Repurchases of shares of common stock will be made
monthly upon written notice received by us at least five days prior to the end
of the applicable month. Stockholders may withdraw their repurchase request at
any time up to five business days prior to the repurchase date.  The board of directors may, in its sole discretion,
amend, suspend or terminate the share repurchase program at any time. If the
board of directors decides to amend, suspend or terminate the share repurchase
program, stockholders will be provided with no less than 30 days’ written
notice.  For the year ended December
31, 2011, we repurchased 5,630 shares under the share repurchase program for a
total of $56,244 or $9.99 per share. For the year ended December 31, 2012, we
repurchased 3,749 shares under the share repurchase program for a total of
$35,089 or $9.36 per share.  For the years ended December 31, 2012 and 2011,
there were no additional shares eligible for repurchase that were tendered for
repurchase. All of the shares that we repurchased pursuant to our share
repurchase program during the quarter ended December 31, 2012 are provided
below:  Approximate DollarTotal Number of Shares
 
 Value of Shares AvailablePurchased as Part of a
 
 That May Yet BeTotal Number of
 
 Average Price Paid
 
 Publicly Announced
 
 Redeemed Under thePeriod
 
 Shares Redeemed(1)
 
 per Share
 
 Plan or Program(2)
 
 Program(3)October
  2012
 
 1,249
 
 $
 8.38
 
 1,249
 
 (3)November
  2012
 
 -
 
 $
 -
 
 -
 
 (3)December
  2012
 
 -
 
 $
 -
 
 -
 
 (3)(1)
 All purchases of our equity securities by us in the three
  months ended December 31, 2012 were made pursuant to the share repurchase
  program.(2)
 We announced the commencement of the share repurchase
  program on August 12, 2010, and it was subsequently amended on September
  29,2011.(3)
 We currently limit the dollar value and number of shares
  that may yet be repurchased under the share repurchase program as described
  above.
 42


---



Securities Authorized for Issuance
under Equity Compensation Plans  The following table provides
information regarding our 2010 Long-Term Incentive Plan and our Amended and
Restated 2010 Independent Director Stock Plan as of December 31, 2012 (in
thousands):  Number of securities
 
 Weighted-average
 
 Number of securitiesto be issued upon
 
 exercise price of
 
 remaining availableexercise of
 
 outstanding
 
 for future issuanceoutstanding options,
 
 options, warrants
 
 under equityPlan Category
 
 warrants and rights
 
 and rights
 
 compensation plans (*)Equity
  compensation plans approved by security holders
 
 -
 
 -
 
 9,200Equity
  compensation plans not approved by security holders
 
 -
 
 -
 
 -Total
 
 -
 
 -
 
 9,200*
 To date, no awards have been granted under the 2010
  Long-Term Incentive Plan or the Amended and Restated 2010 Independent
  Director StockPlan.
  43


---



ITEM  6.
 SELECTED
  FINANCIAL DATAPHILLIPS EDISON-ARC SHOPPING CENTER REIT
  INC.For the years ended December 31, 2012,
  2011, and 2010 and the period from December 3, 2009(formation) to December 31, 2009(In thousands, except per share amounts)2012
 
 2011
 
 2010
 
 2009Balance
  Sheet Data:Investment
  in real estate assets, net
 $
 283,858
 
 $
 69,492
 
 $
 19,061
 
 $
 -Acquired
  intangible lease assets, net
 
 20,957
 
 
 6,799
 
 
 2,341
 
 
 -Cash
  and cash equivalents
 
 7,654
 
 
 6,969
 
 
 707
 
 
 200Other
  assets
 
 12,941
 
 
 1,932
 
 
 604
 
 
 943Total
  assets
 $
 325,410
 
 $
 85,192
 
 $
 22,713
 
 $
 1,143Mortgage
  loans payable
 $
 159,007
 
 $
 46,788
 
 $
 14,695
 
 $
 -Notes
  payable—affiliates
 
 -
 
 
 -
 
 
 600
 
 
 -Accounts
  payable—affiliates
 
 3,634
 
 
 8,395
 
 
 5,542
 
 
 943Other
  liabilities
 
 10,498
 
 
 2,824
 
 
 719
 
 
 -Total
  liabilities
 $
 173,139
 
 $
 58,007
 
 $
 21,556
 
 $
 943Equity
 
 152,271
 
 
 27,185
 
 
 1,157
 
 
 200Total
  liabilities and equity
 $
 325,410
 
 $
 85,192
 
 $
 22,713
 
 $
 1,143Operating
  Data:Total
  revenues
 $
 17,550
 
 $
 3,529
 
 $
 98
 
 $
 -Property
  operating expenses
 
 (2,957)
 
 
 (631)
 
 
 (14)
 
 
 -Real
  estate tax expenses
 
 (2,055)
 
 
 (507)
 
 
 (18)
 
 
 -General
  and administrative expenses
 
 (1,717)
 
 
 (845)
 
 
 (228)
 
 
 -Acquisition
  expenses
 
 (3,981)
 
 
 (1,751)
 
 
 (467)
 
 
 -Depreciation
  and amortization
 
 (8,094)
 
 
 (1,500)
 
 
 (81)
 
 
 -Operating
  loss
 
 (1,254)
 
 
 (1,705)
 
 
 (710)
 
 
 -Interest
  expense
 
 (3,020)
 
 
 (811)
 
 
 (38)
 
 
 -Other
  income
 
 1
 
 
 -
 
 
 1
 
 
 -Net
  loss
 
 (4,273)
 
 
 (2,516)
 
 
 (747)
 
 
 -Net
  loss attributable to noncontrolling interests
 
 927
 
 
 152
 
 
 -
 
 
 -Net
  loss attributable to Company stockholders
 $
 (3,346)
 
 $
 (2,364)
 
 $
 (747)
 
 $
 -Cash
  Flow Data:Cash
  flows provided by operating activities
 $
 4,033
 
 $
 593
 
 $
 201
 
 $
 -Cash
  flows used in investing activities
 $
 (198,478)
 
 $
 (56,149)
 
 $
 (21,249)
 
 $
 -Cash
  flows provided by financing activities
 $
 195,130
 
 $
 61,818
 
 $
 21,555
 
 $
 200Per
  Share Data:Net
  loss per share—basic and diluted
 $
 (0.51)
 
 $
 (1.57)
 
 $
 (4.44)
 
 
 N/AWeighted
  average distributions per share declared
 $
 0.65
 
 $
 0.65
 
 $
 0.22
 
 $
 -Weighted
  average shares outstanding—basic and diluted
 
 6,509,470
 
 
 1,503,477
 
 
 168,419
 
 
 20,000The
  selected financial data should be read in conjunction with the consolidated
  financial statements and notes appearing in this annualreport.
 44


---



ITEM 7.    
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS  The following discussion and analysis should be read
in conjunction with the Selected Financial Data in Item 6 above and our
accompanying consolidated financial statements and notes thereto. See also
“Cautionary Note Regarding Forward-Looking Statements” preceding Part I.  Overview  Phillips Edison—ARC Shopping Center REIT Inc. was
formed as a Maryland corporation on October 13, 2009 and has elected to be
taxed as a real estate investment trust (“REIT”) commencing with the taxable
year ended December 31, 2010.  We are offering pursuant to a registration
statement $1.785 billion in shares of common stock in our initial public
offering on a “best efforts” basis. Our offering consists of a primary offering
of $1.5 billion in shares offered to investors at a price of $10.00 per share,
with discounts available for certain categories of purchasers, and $285 million
in shares offered to stockholders pursuant to a dividend reinvestment plan (the
“DRP”) at a price of $9.50 per share. We have the right to reallocate the
shares of common stock offered between the primary offering and the DRP.  During the year ended December 31, 2012, we issued
11,143,092 shares of common stock, net of 3,749 shares repurchased and
including 139,293 shares through the DRP, generating gross cash proceeds of
$110.8 million.  As of December 31, 2012, we had issued 13,801,251 shares of
common stock, including 155,940 shares issued through the DRP, generating gross
cash proceeds of $136.1 million since the commencement of our initial public
offering.  During the year ended December 31, 2012, we acquired
19 properties, including 13 properties acquired through the Joint Venture, for
a combined purchase price of $230.1 million.  The weighted average capitalization
rate for our 2012 acquisitions was 8.0%.   The capitalization rate is
calculated by dividing the annualized net operating income of a property as of
the date of acquisition by the purchase price of the property. As of December
31, 2012, we owned fee simple interests in 26 properties in 15 states across
the United States that collectively total 2,490,177 square feet with a combined
purchase price of $307.0 million.  Included in these totals are 20 properties
owned through the Joint Venture that total 1,878,177 square feet with a
combined purchase price of $211.1 million.  Our portfolio was purchased at a
weighted average capitalization rate of 8.1% and was 95.0% leased as of
December 31, 2012.  Market Outlook—Real Estate and Real
Estate Finance Markets  Management reviews a number of economic forecasts and
market commentaries in order to evaluate general economic conditions and to
formulate a view of the current environment’s effect on the real estate markets
in which we operate.  As measured by the U.S. real
gross domestic product (“GDP”), the U.S. economy’s growth increased 2.2% in
2012 as compared to 2011, according to preliminary estimates. For 2011, real
GDP increased 1.8% compared with an increase of 3.0% for 2010. According to the
Commerce Department, the real GDP acceleration in 2012 primarily reflected
a deceleration in imports, upturns in residential fixed investment and
smaller decreases in state, local and  federal spending. The increase in real
GDP in 2012 reflected positive contributions from personal consumption
expenditures, nonresidential fixed investment, exports,residential fixed investment, and private inventory investment that were
partly offset by negative contributions from federal government spending and
from state and local government spending.  Although the U.S. GDP has increased
for twelve consecutive quarters, and the increases have been far below the
historical average annual growth rate.  U.S. GDP is
expected to grow 2.5% in 2013.  In general, the economic outlook is mixed as
there has been significant growth in the creation of jobs over the past three
years, yet the number of people who are unemployed remains high.  There is also
much uncertainty with the direction of U.S. economic policy as the President
and Congress have dramatically different approaches to the stabilization of the
economy.  This uncertainty and the ongoing weakness of the U.S. economy has led
the Federal Reserve to commit to maintain an ultra-low interest rate policy
until mid-2015.  The lending
environment for commercial real estate continued to improve during 2012, and
that improvement appears likely to continue in 2013.  According to the latest
information available, the retail real estate industry showed the largest
increase in new mortgages with an increase of 56% in the second quarter of
2012, as compared to the second quarter of 2011.  The U.S. retail real estate market continued to display
mixed signals in its ongoing rebounding effort during 2012, with vacancy rates continuing
to drop but with average per square foot leasing rates also continuing to
decline. Vacancy rates dropped to 6.9% at December 31, 2012, as compared
to 7.1% at the end of 2011. Net absorption, defined as the “net change in
occupied space over a given period of time,” also continued to increase in
2012.  It appears the positive absorption and decreased vacancy rate are
continuing to come at the expense of rents. Average rents, on a per square foot
basis, continued their four-year trend of decreasing by dropping to $14.99 at
the end of 2012, from $15.12 at the end of 2011.  45


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The dollar sales total of
retail real estate transactions increased slightly in 2012, as compared to
2011. As the volume of transactions increased, sales prices increased and price
per square foot of transactions increased which resulted in a decrease in
capitalization rates in 2012.  Overall, retail real estate
displayed improving fundamentals in 2012. The improving fundamentals, along
with the improving job creation and personal consumption expenditure data suggest
an increasingly positive market situation in 2013; however, this optimism is
tempered with the ongoing uncertainty related to the political environment.  The Joint Venture  On September 20, 2011, we entered into the Joint
Venture with a group of institutional international investors advised by CBRE
Global Multi Manager (each a “CBRE Investor”). We, through an indirectly wholly
owned subsidiary, serve as the general partner of and own a 54% interest in the
Joint Venture. Each CBRE Investor is a limited partner and they collectively
own a 46% interest in the Joint Venture. Below is a summary of the major terms
of the Joint Venture.  Investment Strategy.The Joint Venture has invested in necessity-based
neighborhood and community shopping centers with acquisition costs of no more
than $20 million per property. Each acquired property has an occupancy rate of
at least 80%, with no vacant primary anchor tenant at the time of acquisition.
The aggregate level of debt financing is generally not to exceed 50% of the
gross asset value of the properties owned by the Joint Venture.  Capital Contributions. We have contributed approximately $59 million to the
Joint Venture and the CBRE Investors have contributed $50 million in cash. We
funded our capital commitment through the contribution of six properties (with
a purchase price of approximately $63.0 million to acquire those properties)
and cash.  Management.
As general partner, we control the management of the Joint Venture. We have
engaged the Advisor to advise the Joint Venture. The Advisor has delegated its
duties with respect to the Joint Venture to the Sub-advisor. We have also
engaged the Property Manager to provide property management services to the
Joint Venture. The agreements generally mirror the similar agreements in place
among and between us and the Advisor, the Sub-advisor and the Property Manager.  Certain major decisions require the
approval of an executive committee, which consists of four members: two
appointed by us and two appointed by the CBRE Investors. The major decisions
that require executive committee approval include, but are not limited to: •      certain related-party transactions; •      acquisitions not consistent with the Joint
Venture’s investment strategy; •      the incurrence of debt or guarantees not
consistent with the Joint Venture’s investment strategy; •      litigation with a primary anchor tenant; •      the decision to rebuild a property that has
suffered a casualty (except as required by any lease or loan document); •      disposing of substantially all of the assets of
the Joint Venture before August 13, 2013; •      the dissolution or liquidation of the Joint
Venture or any subsidiary; and •      any amendment to the limited partnership
agreement of the Joint Venture.  Distributions.
The Joint Venture makes periodic distributions of net cash flow to us and the CBRE
Investors pro rata based on our respective percentage interests. The CBRE
Investors’ pro rata share of distributions are first distributed to the CBRE Investors
until they have received an inflation-adjusted real rate of return of 5%. The
remaining net cash flow allocated to the CBRE Investors is then distributed 85%
to the CBRE Investors and 15% to the Sub-advisor, which is also a limited
partner for purposes of earning the promote but which is not investing any
capital in the Joint Venture. No carried interest is paid to the Sub-advisor
with respect to the distributions allocated to us because we pay an incentive
fee to the Advisor and Sub-advisor pursuant to our existing advisory agreement.  Transfer Restrictions. The limited partnership agreement contains
restrictions on each partner’s ability to transfer their interests in the Joint
Venture, including certain indirect transfers. Notwithstanding those restrictions,
none of the following transfers would constitute a breach of the limited
partnership agreement: •      transfers of a CBRE Investor’s interest in the
Joint Venture provided that we are first given an opportunity to purchase the
interest at the proposed transfer price; •      transfers of our interest in the Joint Venture
to a “qualified property manager” for cash after the expiration of the
“lock-out period,” which is defined as the earlier of (i) August 31,
2013 or (ii) the first date on which we have raised aggregate equity of
$1.5 billion, subject to the CBRE Investors’ tag-along rights described below; 46


---



•      indirect transfers
of our interests, such as through changes in the ownership of us or the Operating
Partnership, if no single person would directly or indirectly own 20% of our
subsidiary that acts as the general partner to the Joint Venture; •     any transfer of our shares issued in our current
public offering or other public offerings; and •     certain transfers to affiliates.  Tag-Along Rights. If we sell our interests to a qualified property manager, we must use
commercially reasonable efforts to cause the purchaser to also purchase all of
the interests of those individual CBRE Investors who desire to sell. If the
purchaser does not agree to purchase all of these interests, then each CBRE
Investor who desires to sell will sell a proportionate part of the interest it
desires to sell and we will sell a proportionate part of our interest.  If we conduct a registered offering of shares listed
on a national securities exchange, each CBRE Investor has the right to convert
its interest in the Joint Venture into privately issued shares in our company.
The number of shares to be received will be based on the appraised value of the
assets of the Joint Venture divided by the price paid in the offering.  Go-Along Obligation. After the expiration of the lock-out period, if we enter into an
agreement to sell all of our interests in the Joint Venture for a cash purchase
price, the CBRE Investors must also sell all of their interests to the
purchaser on the same terms.  Buy/Sell Procedures. We or the CBRE Investors (acting as a group) may
initiate buy/sell procedures with respect to our respective ownership interests
in the event that a majority of the executive committee members are not able to
reach an agreement on certain major decisions. Under the buy/sell procedures,
one partner must deliver to the other partner notice of its intention to
exercise the buy/sell option. Such notice shall state the value of the real and
tangible personal property owned by the Joint Venture. The partner receiving
such notice must either (i) sell its interests based on the value provided
in the notice, or (ii) buy the other partner’s interests based upon that
value. The buy/sell rights are not applicable at any time in which our interest
in the Joint Venture is worth more than half of our total assets.  Results of Operations  Overview  Prior to September 17, 2010, our
operations had not yet commenced.  The accompanying discussion of the results
of operations for the period ended December 31, 2010, pertain only to the
period that our operations commenced, September 17, 2010, and the
property-level information covers only the brief period beginning with our first
acquisition, Lakeside Plaza, on December 10, 2010.  We acquired five properties
during 2011, bringing total properties owned as of December 31, 2011 to seven,
and we acquired 19 properties during 2012, bringing total properties owned as
of December 31, 2012 to 26.  As such, year-to-year comparative differences for
the years ended December 31, 2010, 2011, and 2012 are almost entirely
attributable to the number of properties owned, the length of ownership of
these properties, and the abbreviated period of operations during 2010. As a
result, the following discussion of our results of operation is not necessarily
indicative of those expected in future periods.  Summary of Operating Activities for
the Years Ended December 31, 2012, 2011, and 2010  Total revenues for the year ended
December 31, 2012 were $17,550,000 with rental income of $13,828,000. Other
revenues, largely comprised of tenant reimbursements, were $3,722,000. Total
revenues for the year ended December 31, 2011 were $3,529,000 with rental
income of $2,762,000 and other revenues, largely comprised of tenant
reimbursements, of $767,000.  Total revenues for year ended December 31, 2010 were
$98,000, with rental income of $85,000. Other revenue, largely comprised of
tenant reimbursements, was $13,000.  During the year ended December 31, 2012, we entered
into 18 new leases comprising a total of 32,584 square feet. These leases will
generate first year base rental revenues of $358,000, representing average rent
per square foot of $10.99.  In addition, we executed renewals on 38 leases
comprising a total of 82,724 square feet.  These leases will generate first
year base rental revenues of $1,338,000, representing average rent per square
foot of $16.18.  The cost of executing the leases and renewals, including
leasing commissions, tenant improvement costs, and tenant concessions, was $4.32
per square foot.  During the year ended December 31, 2011, we entered into two new
leases comprising a total of 3,050 square feet. These leases generated first
year base rental revenues of $51,000, representing average rent per square foot
of $16.72.  In addition, we executed renewals on two leases comprising a total
of 2,900 square feet.  These leases generated first year base rental revenues
of $47,000, representing average rent per square foot of $16.23.  The cost of
executing the leases and renewals, including leasing commissions, tenant
improvement costs, and tenant concessions, was $17.47 per square foot.  There
was no leasing activity during the year ended December 31, 2010, as we did not
acquire our first property until December 2010.  Property operating costs were
$2,957,000 for the year ended December 31, 2012. The significant items
comprising this expense were common area maintenance expense of $1,653,000, property
management fees paid to an affiliate of the Sub-advisor of $756,000, and 47


---



insurance expense of $368,000. Property operating costs
were $631,000 for the year ended December 31, 2011. The significant items
attributable to this total were common area maintenance expense of $305,000,
property management fees related to services provided by affiliates of the
Sub-advisor of $157,000, and insurance expense of $64,000.  Property operating
expenses for year ended December 31, 2010 were approximately $14,000. The items
comprising this expense included common area maintenance expense and insurance.  Real estate taxes were $2,055,000, $507,000, and $18,000,
respectively, for the years ended December 31, 2012, 2011, and 2010.  General and administrative expenses were $1,717,000, $845,000,
and $228,000, respectively, for the years ended December 31, 2012, 2011, and
2010. These amounts were comprised largely of audit and tax fees, asset
management fees (2011 and 2012 only), legal fees, board-related expenses and
insurance expense.  In addition to the acquisition of 19 properties since
December 31, 2011, the primary reason for the increase in general and
administrative expenses is a $634,000 increase in asset management fees, which
were paid solely by the CBRE Investors.  Our sponsors also provided $88,000 and
$140,000 for certain of our general and administrative expenses as capital
contributions during the years ended December 31, 2011 and 2010, respectively.
Our sponsors have not received, and will not receive, any reimbursement for these
contributions.  Our sponsors do not intend to contribute monies to fund future
expenses.  There was no such capital contribution for the year ended December
31, 2012.  For the years ended December 31, 2012, 2011, and 2010, the Advisor,
Sub-advisor and their affiliates did not allocate any portion of their
employees’ salaries to general and administrative expenses.  Under the terms of our advisory agreement, a waiver of
all or a portion of the asset management fee occurred for any applicable period
through September 30, 2012 to the extent that, as of the date of the payment,
our modified funds from operations, (as defined in accordance with the
then-current practice guidelines issued by the Investment Program Association
with an additional adjustment to add back capital contribution amounts received
from the Sub-advisor or an affiliate thereof without any corresponding issuance
of equity to the Sub-advisor or affiliate), during the quarter were not at
least equal to our declared distributions during the quarter, provided that the
distribution rate during such quarter was no more than $0.65 per share on an
annualized basis.  Asset management fees were $1,243,000 for the year
ended December 31, 2012, but $546,000 of these fees were waived by the Advisor
and Sub-advisor pursuant to the advisory agreement provision detailed in the
previous paragraph. For the year ended December 31, 2012, the net asset
management fees of $697,000 were paid solely by the CBRE Investors, as the
amount of asset management fees for which we were responsible was waived or
reimbursed to us by the Advisor and Sub-advisor pursuant to the advisory
agreement between the Joint Venture and the Advisor.  Asset management fees
were $347,000 for the year ended December 31, 2011, but $284,000 of these fees
were waived by the Advisor and Sub-advisor pursuant to the advisory agreement
provision detailed in the previous paragraph.  For the year ended December 31,
2011, the net asset management fees of $63,000 were paid solely by the CBRE
Investors.  Asset management fees were $18,000 for year ended December 31,
2010, but were waived by the Advisor and Sub-advisor.  On February 4, 2013, we and the Operating
Partnership entered into an Amended and Restated Advisory Agreement (the
“A&R Advisory Agreement”) with the Advisor.  The A&R Advisory Agreement
provides that the asset management compensation structure contemplated in the
previous advisory agreement between us and the Advisor (as discussed above) is
eliminated effective October 1, 2012.  Instead, we expect to issue to the
Advisor on a quarterly basis performance-based restricted partnership units of the
Operating Partnership designated as “Class B units.”  The Class B units will
vest, and will no longer be subject to forfeiture, at such time as all of the
following events occur: (x) the value of the Operating Partnership’s assets
plus all distributions made equals or exceeds the total amount of capital
contributed by investors plus a 6% cumulative, pre-tax, non-compounded annual
return thereon (the “economic hurdle”); (y) any one of the following occurs:
(1) the termination of the A&R Advisory Agreement by an affirmative vote of
a majority of our independent directors without cause; (2) a listing event; or
(3) another liquidity event; and (z) the Advisor is still providing advisory services
to us (the “service condition”). Such Class B units will be forfeited
immediately if: (a) the A&R Advisory Agreement is terminated for cause; or
(b) the A&R Advisory Agreement is terminated by an affirmative vote of a
majority of our independent directors without cause before the economic hurdle
has been met.  The Class B units are participating securities that will receive
distributions at the same rates and dates as the distributions paid to our
common stockholders.  These distributions will be calculated by the product of
the number of unvested units issued to date and the stated distribution rate at
the time the applicable distributions are authorized.  On February 13, 2013, the Operating Partnership issued
59,245 Class B units to the Advisor under the A&R Advisory Agreement for
the asset management services performed by the Advisor during the period from
October 1, 2012 to December 31, 2012.  These Class B units will not vest until
the conditions referenced above have been met.  Acquisition expenses were
$3,981,000 for the year ended December 31, 2012. Included in these acquisition
fees and expenses were $1,705,000 of acquisition fees due to the Advisor and
Sub-advisor and $390,000 of expense incurred for acquisitions that did not
close during the period. Acquisition expenses were $1,751,000 for the year
ended December 31, 2011.  Included in these acquisition expenses were
acquisition fees due to the Advisor and Sub-advisor of $356,000 for the five
acquisitions that closed during 2011, $288,000 for the completion of the Joint
Venture agreement and $68,000 of expense was incurred for prospective
acquisitions that did 48


---



not close or had not yet closed.For year endedDecember 31, 2010, acquisition expenses in the amount of $467,000 were
incurred. Included in these acquisition expenses were acquisition fees due to
the Advisor and Sub-advisor of $215,000 and $34,000 of expense that was
incurred for prospective acquisitions that did not closeor had not yet
closed.The remainder of the expense
largely related to various professional services provided in connection with
the acquisitions, including accounting, legal, environmental and due diligence.  Depreciation and amortization expense for the years
ended December 31, 2012, 2011, and 2010, respectively, was $8,094,000, $1,500,000,
and $81,000.  Interest expense was $3,020,000, $811,000, and $38,000,
for the years ended December 31, 2012, 2011, and 2010, respectively.  Of the
2010 interest expense, approximately $2,000 was related to a loan provided to
us by the Sub-advisor.  As a result of the contribution of properties and cash
to the Joint Venture beginning in November 2011, 46% of all net income or net
loss, subject to certain adjustments, recorded by the Joint Venture is
allocable to the CBRE Investors. For years ended December 31, 2012 and 2011, $927,000
and $152,000, respectively, of the net loss of the Joint Venture was allocated
to the CBRE Investors.  As the operations of the Joint Venture did not begin
until November 2011, there was no corresponding allocation of the net loss for the
year ended December 31, 2010 to the CBRE Investors.  The net loss attributable to our stockholders was
$3,346,000, $2,364,000, and $747,000, for the years ended December 31, 2012, 2011,
and 2010, respectively.  Same Center Net Operating
Income  We present Same Center Net
Operating Income as a supplemental measure of our performance. We define Net
Operating Income ("NOI") as total operating revenues less property
operating expenses. Same Center NOI represents the NOI for Lakeside Plaza and
Snow View Plaza, the properties that were operational for the entire portion of
both comparable reporting periods and which were not acquired or disposed of during
the comparable reporting periods. We believe that NOI and Same Center NOI
provide useful information to our investors about our financial and operating
performance because it provides a performance measure of the revenues and
expenses directly involved in owning and operating real estate assets and
provides a perspective not immediately apparent from net income. Because Same
Center NOI excludes the change in NOI from properties acquired and disposed of,
it highlights operating trends such as occupancy levels, rental rates and operating
costs on properties that were operational for both comparable periods. Other
REITs may use different methodologies for calculating Same Center NOI, and
accordingly, our Same Center NOI may not be comparable to other REITs.  Same Center NOI should not be
viewed as an alternative measure of our financial performance since it does not
reflect the operations of our entire portfolio, nor does it reflect the impact
of general and administrative expenses, acquisition expenses, interest expense,
depreciation and amortization, other income, and the level of capital
expenditures and leasing costs necessary to maintain the operating performance
of our properties that could materially impact our results from operations.  49


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Below
is a reconciliation of net loss to Same Center NOI for the years ended December
31, 2012 and 2011 (in thousands):  2012
 
 2011
 
 Change
 
 % ChangeNet loss
 $
 (4,273)
 
 $
 (2,516)Interest expense
 
 3,020
 
 
 811Other income
 
 (1)
 
 
 -Operating loss
 
 (1,254)
 
 
 (1,705)Adjusted to exclude:General and administrative
 
 1,717
 
 
 845Acquisition expenses
 
 3,981
 
 
 1,751Depreciation and amortization
 
 8,094
 
 
 1,500Net amortization of above- and below-market leases
 
 395
 
 
 312Straight-line rental income
 
 (440)
 
 
 (79)Property net operating income
 
 12,493
 
 
 2,624Less: non-same center NOI
 
 (10,632)
 
 
 (913)Total same center NOI
 $
 1,861
 
 $
 1,711
 
 $
 150
 
 
 8.8%
  Liquidity and Capital Resources  General  Our principal demands for funds are for real estate
and real estate-related investments and the payment of acquisition expenses,
operating expenses, distributions to stockholders and principal and interest on
our outstanding indebtedness. Generally, we expect cash needed for items other
than acquisitions and acquisition expenses to be generated from operations and
our current investments. The sources of our operating cash flows are primarily
driven by the rental income received from leased properties. We expect to
continue to raise capital through our offering of common stock and to utilize
such funds and proceeds from secured or unsecured financing to complete future
property acquisitions. As of December 31, 2012, we had raised approximately
$136.1 million in gross proceeds from our offering, including $1.5 million
through the DRP.  As of December 31, 2012, we had cash and cash
equivalents of approximately $7.7 million. During the year ended December 31,
2012, we had a net cash increase of approximately $0.7 million.  This cash increase was the result of: •      $4.0 million provided by operating activities,
largely the result of income generated from operations, a portion of which was
offset by the reimbursement of general and administrative expenses to the
Sub-advisor.  Also included in this total was approximately $4.0 million of
real estate acquisition expenses incurred during the period and expensed in
accordance with Accounting Standards Codification (“ASC”) 805,Business
Combinations(“ASC 805”) and $409,000 of capitalized leasing costs; •      $198.5 million used in investing activities, which
was primarily the result of the 19 property acquisitions along with tenant
improvement costs of $130,000 and capital improvement costs of $575,000; and •      $195.1 million provided by financing activities
with approximately $209.7 million from the proceeds from mortgage loans, $94.8
million from the net proceeds of the issuance of common stock and $35.6 million
provided by the CBRE Investors.  Partially offsetting these amounts was $140.2
million of payments on the mortgage loans payable, distributions paid to the CBRE
Investors of $2.4 million and distributions paid to our stockholders of $2.3
million, net of DRP proceeds.  Short-term Liquidity and Capital
Resources  We expect to meet our short-term liquidity
requirements through net cash provided by property operations, proceeds from
our offering, and proceeds from secured and unsecured debt financings, along
with any deferral or waiver of fees by the Advisor or Sub-advisor. Operating
cash flows are expected to increase as additional properties are added to our portfolio.
Other than the commissions paid to the Dealer Manager, the organization and
offering costs associated with our offering are initially paid by our
sponsors.  Our sponsors will be reimbursed for such costs up to 1.5% of the
gross capital raised in our offering. As of December 31, 2012, we owe the
Advisor, Sub-advisor and their affiliates a total of $3.6 million of organization
and offering costs incurred on our behalf and fees charged to us for asset
management, property management, and other services.  In addition,
approximately $6.9 million of offering costs incurred by the Sub-advisor on our
behalf has not been charged to us or recorded in our consolidated financial
statements. Whether these costs will be billed to us in the future will depend
on the success of our offering and the discretion of the Sub-advisor.  Our
sponsors provided $88,000 during the year ended December 31, 2011 and $140,000
for the year ended December 31, 2010 for certain of our general and
administrative expenses as capital contributions. Our sponsors have not
received, and will not receive, any 50


---



reimbursement or
additional equity for these contributions. The sponsors provided no such
capital contributions for the year ended December 31, 2012.  Our sponsors do
not intend to make further capital contributions to continue to fund certain of
our general and administrative expenses.  We have $157.1 million of contractual debt
obligations, representing variable-rate and fixed-rate credit facilities and
mortgage loans secured by our real estate assets.  Of the amount outstanding at
December 31, 2012, $17.3 million is for loans which mature in 2013, and we have
a one-year extension option on each loan maturing in 2013, subject to extension
fees and compliance with loan covenants.  We intend to extend (if possible) or
refinance these loans as they mature.  We
have access to an unsecured credit facility with $10.0 million of available
funds, on which we had not drawn any funds as of December 31, 2012.  We also
have access to a secured credit facility with up to $120.0 million of available
funds, on which we had drawn $36.7 million as of December 31, 2012.  For the year ended December 31, 2012, gross
distributions of approximately $3,673,000 were paid to stockholders, including
$1,324,000 of distributions reinvested through the DRP, for net cash
distributions of $2,349,000. Our cash generated from operating activities for
the year ended December 31, 2012 was
$4,033,000.  On January 2, 2013, gross
distributions of approximately $717,000 were paid, including $298,000 of
distributions reinvested through the DRP, for net cash distributions of
$419,000. These distributions were funded by cash generated from operating
activities.  On November 7, 2012, our board of directors authorized
distributions to the stockholders of record at the close of business each day
in the period commencing January 1, 2013 through and including January 31, 2013.
The authorized distributions equal an
amount of $0.00178082 per share of common stock, par value $0.01 per share.
This equates to a 6.50% annualized yield when calculated on a $10.00 per share
purchase price. A portion of each distribution is expected to constitute a
return of capital for tax purposes.  Distributions
for the month of January were paid on February 1, 2013.  Our policy is not
to fund distributions with proceeds from our offering.  Our leverage ratios were 48.5% and 51.7% (calculated
as total debt, less cash and cash equivalents, as a percentage of total real
estate investments, including acquired intangible lease assets, at cost) as of
December 31, 2012 and 2011, respectively.  Long-term Liquidity and Capital
Resources  On a long-term basis, our principal demands for funds
will be for real estate and real estate-related investments and the payment of acquisition
expenses, operating expenses, distributions and redemptions to stockholders, interest
and principal on indebtedness, and payments on amounts due to our sponsors for
organization and offering costs incurred on our behalf.  Generally, we expect to
meet cash needs for items other than acquisitions and acquisition expenses from
our cash flow from operations, and we expect to meet cash needs for
acquisitions and acquisition expenses from the net proceeds of our offering and
from debt financings.  As they mature, we intend to refinance our long-term
debt obligations if possible.  On December 24, 2012, we also entered into a $40.0
million secured revolving credit facility with the potential to increase the
borrowing capacity under such facility to $250.0 million from which we may draw
funds to pay certain long-term debt obligations as they mature.  We expect that
substantially all net cash generated from operations will be used to pay
distributions to our stockholders after certain capital expenditures, including
tenant improvements and leasing commissions, are funded; however, we may use
other sources to fund distributions as necessary, including contributions or
advances made to us by the Advisor, Sub-advisor and their respective affiliates
and borrowings under future debt agreements.  Our charter limits our borrowings to 300% of our net
assets (as defined in our charter); however, we may exceed that limit if a
majority of our conflicts committee approves each borrowing in excess of our
charter limitation and if we disclose such borrowing to our stockholders in our
next quarterly report with an explanation from the conflicts committee of the
justification for the excess borrowing. In all events, we expect that our
secured and unsecured borrowings will be reasonable in relation to the net
value of our assets and will be reviewed by our board of directors at least
quarterly.  Careful use of debt will help us to achieve our
diversification goals because we will have more funds available for investment.
However, high levels of debt could cause us to incur higher interest charges
and higher debt service payments, which would decrease the amount of cash
available for distribution to our investors.  51


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The table below summarizes our consolidated indebtedness
  at December 31, 2012 (dollars in thousands).Principal
 
 Weighted
 
 WeightedAmount at
 
 Average
 
 Average YearsDebt(1)
 December 31, 2012
 
 Interest Rate
 
 to MaturityFixed
  rate mortgages payable(2)
 $
 43,934
 
 6.3%
 
 4.1Variable
  rate mortgages payable
 
 76,424
 
 2.6%
 
 3.5Secured
  line of credit
 
 36,709
 
 2.5%
 
 3.0Total
 $
 157,067
 
 3.6%
 
 3.5(1)
 The debt maturity table does not include any below-market
  debt adjustment, of which $1,940, net of accumulated amortization, wasoutstanding as of December 31, 2012.(2)
 A portion of the fixed rate debt represents loans assumed
  as part of certain acquisitions.  These loans typically have higher interest
  rates thaninterest rates associated with new debt.
  Contractual
  Commitments and ContingenciesOur
  contractual obligations as of December 31, 2012, were as follows (in
  thousands):Payments due by periodTotal
 
 2013
 
 2014
 
 2015
 
 2016
 
 2017
 
 ThereafterLong-term
  debt obligations - principal payments
 $
 157,067
 
 $
 18,897
 
 $
 18,436
 
 $
 38,861
 
 $
 26,389
 
 $
 40,539
 
 $
 13,945Long-term
  debt obligations - interest payments(1)
 
 18,440
 
 
 5,422
 
 
 4,554
 
 
 3,650
 
 
 2,088
 
 
 1,228
 
 
 1,498Operating
  lease obligations
 
 97
 
 
 20
 
 
 20
 
 
 20
 
 
 20
 
 
 17
 
 
 -Total
 $
 175,604
 
 $
 24,339
 
 $
 23,010
 
 $
 42,531
 
 $
 28,497
 
 $
 41,784
 
 $
 15,443(1)
 Interest payments related to variable rate debt were
  calculated using the respective interest rates of each variable rate debt
  instrument as ofDecember 31, 2012.
  Certain of our debt obligations contain
certain restrictive covenants.  As of December 31, 2012, we are in compliance
with all restrictive covenants of our outstanding debt obligations.  Distributions  During the year ended December 31, 2012, gross
distributions paid were $3,673,000 with $1,324,000 being reinvested through the
DRP for net cash distributions of $2,349,000. Our cash provided by operating
activities for the year ended December 31, 2012 was $4,033,000.  During the
year ended December 31, 2011, gross distributions paid were $873,000 with
$158,000 being reinvested through the DRP for net cash distributions of $715,000. 
Our cash generated by operations for the year ended December 31, 2011 was $593,000. 
To the extent that distributions paid were greater than our cash provided by
operating activities for the year ended December 31, 2011, we funded such
excess distributions with advances from the Sub-advisor.  There were gross
distributions of $717,000 accrued and payable as of December 31, 2012.  Distributions for the years ended December 31, 2012
and 2011 accrued at a daily rate of $0.00178082 per share of common stock.  Our
net loss attributable to stockholders for the year ended December 31, 2012 was
$3,346,000, and net cash provided by operating activities was $4,033,000.  Our
cumulative gross distributions and net loss attributable to stockholders from
inception through December 31, 2012 are $4,546,000 and $6,457,000,
respectively.  We have funded our cumulative distributions, which includes net
cash distributions and distributions reinvested by stockholders, with cash
provided by operating activities, advances from the Sub-Advisor, and borrowings.  We expect to pay distributions monthly and continue
paying distributions monthly unless our results of operations, our general
financial condition, general economic conditions or other factors make it
imprudent to do so. The timing and amount of distributions will be determined
by our board and will be influenced in part by our intention to comply with
REIT requirements of the Internal Revenue Code of 1986, as amended.  We may receive income from interest or rents at various
times during our fiscal year, and because we may need funds from operations
during a particular period to fund capital expenditures and other expenses, we
expect that at least during the early stages of our development and from time
to time during our operational stage, we will declare distributions in
anticipation of funds that we expect 52


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to receive during
a later period.  We will pay these distributions in advance of our actual
receipt of these funds. In these instances, we expect to look to borrowings to
fund our distributions. We may also fund such distributions from advances from
our sponsors or from any deferral or waiver of fees by the Advisor or
Sub-advisor.  To the extent that we pay distributions from sources other than
our cash provided by operating activities, we will have fewer funds available
for investment in properties.  The overall return to our stockholders may be
reduced, and subsequent investors may experience dilution.  Our distribution policy is not to use the proceeds of
our offering to pay distributions. However, our board has the authority under
our organizational documents, to the extent permitted by Maryland law, to pay
distributions from any source without limit, including proceeds from our
offering or the proceeds from the issuance of securities in the future.  To maintain our qualification as a REIT, we must make
aggregate annual distributions to our stockholders of at least 90.0% of our
REIT taxable income (which is computed without regard to the dividends paid
deduction or net capital gain and which does not necessarily equal net income
as calculated in accordance with GAAP). If we meet the REIT qualification
requirements, we generally will not be subject to U.S. federal income tax on
the income that we distribute to our stockholders each year.  We have not established a minimum
distribution level, and our charter does not require that we make distributions
to our stockholders.  Funds from Operations and Modified
Funds from Operations  Funds from operations, or FFO, is a non-GAAP
performance financial measure that is widely recognized as a measure of REIT
operating performance. We use FFO as defined by the National Association of
Real Estate Investment Trusts to be net income (loss), computed in accordance
with GAAP excluding extraordinary items, as defined by GAAP, and gains (or
losses) from sales of property (including deemed sales and settlements of
pre-existing relationships), plus depreciation and amortization on real estate
assets and impairment charges, and after related adjustments for unconsolidated
partnerships, joint ventures and subsidiaries and noncontrolling interests. We
believe that FFO is helpful to our investors and our management as a measure of
operating performance because it excludes real estate-related depreciation and
amortization, gains and losses from property dispositions, impairment charges,
and extraordinary items, and as a result, when compared year to year, reflects
the impact on operations from trends in occupancy rates, rental rates, operating
costs, development activities, general and administrative expenses, and
interest costs, which are not immediately apparent from net income. Historical
cost accounting for real estate assets in accordance with GAAP implicitly
assumes that the value of real estate and intangibles diminishes predictably
over time. Since real estate values have historically risen or fallen with
market conditions, many industry investors and analysts have considered the
presentation of operating results for real estate companies that use historical
cost accounting alone to be insufficient. As a result, our management believes
that the use of FFO, together with the required GAAP presentations, is helpful
for our investors in understanding our performance. In particular, because GAAP
impairment charges are not allowed to be reversed if the underlying fair values
improve or because the timing of impairment charges may lag the onset of
certain operating consequences, we believe FFO provides useful supplemental
information related to current consequences, benefits and sustainability
related to rental rate, occupancy and other core operating fundamentals.
Factors that impact FFO include start-up costs, fixed costs, delay in buying
assets, lower yields on cash held in accounts, income from portfolio properties
and other portfolio assets, interest rates on acquisition financing and
operating expenses. In addition, FFO will be affected by the types of
investments in our targeted portfolio which will consist of, but is not limited
to, necessity-based neighborhood and community shopping centers, first- and
second-priority mortgage loans, mezzanine loans, bridge and other loans,
mortgage-backed securities, collateralized debt obligations, and debt
securities of real estate companies. Investors should note, however, that
determinations of whether impairment charges have been incurred are based
partly on anticipated operating performance, because estimated undiscounted
cash flows from a property, including estimated future net rental and lease revenues,
net proceeds on the sale of the property, and certain other ancillary cash
flows, are taken into account in determining whether an impairment charge has
been incurred. While impairment charges are excluded from the calculation of
FFO as described above, as impairments are based on estimated future
undiscounted cash flows, investors are cautioned that we may not recover any
impairment charges. FFO is not a useful measure in evaluating net asset value
because impairments are taken into account in determining net asset value but
not in determining FFO.  Since FFO was promulgated, GAAP has
expanded to include several new accounting pronouncements, such that management
and many investors and analysts have considered the presentation of FFO alone
to be insufficient. Accordingly, in addition to FFO, we use modified funds from
operations, or MFFO, as defined by the Investment Program Association (“IPA”).
MFFO excludes from FFO the following items: (1)     acquisition fees and expenses; (2)     straight-line rent amounts, both income and
expense; (3)     amortization of above- or below-market
intangible lease assets and liabilities; (4)     amortization of discounts and premiums on debt
investments; (5)     gains or losses from the early extinguishment
of debt; 53


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(6)     gains or losses on
the extinguishment or sales of hedges, foreign exchange, securities and other
derivatives holdings except where the trading of such instruments is a
fundamental attribute of our operations; (7)     gains or losses related to fair value
adjustments for derivatives not qualifying for hedge accounting, including
interest rate and foreign exchange derivatives; (8)     gains or losses related to consolidation from,
or deconsolidation to, equity accounting; (9)     gains or losses related to contingent purchase
price adjustments; and (10)   adjustments related to the above items for
unconsolidated entities in the application of equity accounting.  We believe that MFFO is helpful in assisting
management and investors with the assessment of the sustainability of operating
performance in future periods and, in particular, after our offering and
acquisition stages are complete, primarily because it excludes acquisition
expenses that affect property operations only in the period in which the
property is acquired. Thus, MFFO provides helpful information relevant to
evaluating our operating performance in periods in which there is no
acquisition activity.  As explained below, management’s evaluation of our
operating performance excludes the items considered in the calculation based on
the following economic considerations. Many of the adjustments in arriving at
MFFO are not applicable to us. Nevertheless, we explain below the reasons for
each of the adjustments made in arriving at our MFFO definition. •Acquisition fees and expenses.In
evaluating investments in real estate, including both business combinations and
investments accounted for under the equity method of accounting, management’s
investment models and analyses differentiate costs to acquire the investment
from the operations derived from the investment. Prior to 2009, acquisition
costs for both of these types of investments were capitalized under GAAP;
however, beginning in 2009, acquisition costs related to business combinations
are expensed. Both of these acquisition-related costs have been and will
continue to be funded from the proceeds of our offering and generally not from
operations. We believe by excluding expensed acquisition costs, MFFO
provides useful supplemental information that is comparable for each type of
real estate investment and is consistent with management’s analysis of the
investing and operating performance of our properties. Acquisition fees
and expenses include those paid to the Advisor, the Sub-advisor or third
parties. •Adjustments for straight-line rents and
amortization of discounts and premiums on debt investments.In the proper
application of GAAP, rental receipts and discounts and premiums on debt
investments are allocated to periods using various systematic methodologies.
This application may result in income recognition that could be significantly
different than underlying contract terms. By adjusting for these items, MFFO
provides useful supplemental information on the realized economic impact of
lease terms and debt investments and aligns results with management’s analysis
of operating performance. •Adjustments for amortization of above- or
below-market intangible lease assets.Similar to depreciation and
amortization of other real estate related assets that are excluded from FFO,
GAAP implicitly assumes that the value of intangibles diminishes ratably over
time and that these charges be recognized currently in revenue. Since real
estate values and market lease rates in the aggregate have historically risen
or fallen with market conditions, management believes that by excluding these
charges, MFFO provides useful supplemental information on the performance of
the real estate. •Gains or losses related to fair-value adjustments
for derivatives not qualifying for hedge accounting and gains or losses related
to contingent purchase price adjustments.Each of these items relates to a
fair value adjustment, which is based on the impact of current market
fluctuations and underlying assessments of general market conditions and
specific performance of the holding, which may not be directly attributable to
current operating performance. As these gains or losses relate to underlying
long-term assets and liabilities, management believes MFFO provides useful
supplemental information by focusing on the changes in core operating
fundamentals rather than changes that may reflect anticipated gains or losses. •Adjustment for gains or losses related to
early extinguishment of hedges, debt, consolidation or deconsolidation and
contingent purchase price.Similar to extraordinary items excluded from
FFO, these adjustments are not related to continuing operations. By excluding
these items, management believes that MFFO provides supplemental information
related to sustainable operations that will be more comparable between other
reporting periods and to other real estate operators.  By providing MFFO, we believe we are presenting useful
information that also assists investors and analysts to better assess the
sustainability of our operating performance after our offering and acquisition
stages are completed. We also believe that MFFO is a recognized measure of
sustainable operating performance by the non-listed REIT industry. MFFO is
useful in comparing the sustainability of our operating performance after our
offering and acquisition stages are completed with the sustainability of the
operating performance of other real estate companies that are not as involved
in acquisition activities. However, investors are cautioned that MFFO should
only be used to assess the sustainability of our operating performance after
our offering and acquisition 54


---



stages are completed, as
it excludes acquisition costs that have a negative effect on our operating performance
during the periods in which properties are acquired. Acquisition costs also
adversely affect our book value and equity.  FFO or MFFO should not be considered as an alternative
to net income (loss), nor as an indication of our liquidity, nor is either
indicative of funds available to fund our cash needs, including our ability to
fund distributions. In particular, as we are currently in the acquisition phase
of our life cycle, acquisition-related costs, and other adjustments that are
increases to MFFO are, and may continue to be, a significant use of cash. MFFO
has limitations as a performance measure in an offering such as ours where the
price of a share of common stock is a stated value and there is no net asset
value determination during the offering stage and for a period thereafter.
Accordingly, both FFO and MFFO should be reviewed in connection with other GAAP
measurements. Our FFO and MFFO as presented may not be comparable to amounts
calculated by other REITs.  The following section presents our calculation of FFO
and MFFO and provides additional information related to our operations (in
thousands, except per share amounts). As a result of the timing of the
commencement of our offering and our active real estate operations, FFO and
MFFO are not relevant to a discussion comparing operations for the two periods
presented. We expect revenues and expenses to increase in future periods as we
raise additional offering proceeds and use them to acquire additional
investments.  FUNDS FROM OPERATIONS AND MODIFIED FUNDS FROM OPERATIONSFOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011(Unaudited)(Amounts in thousands, except share and per share amounts)Three Months Ended
  December 31,
 
 Year Ended December 31,
 
 Cumulative Since2012
 
 2011
 
 2012
 
 2011
 
 InceptionCalculation of Funds from OperationsNet loss attributable to Company stockholders
 $
 (1,247)
 
 $
 (1,071)
 
 $
 (3,346)
 
 $
 (2,364)
 
 $
 (6,457)Add:Depreciation and amortization of real estate assets
 
 3,015
 
 
 647
 
 
 8,094
 
 
 1,500
 
 
 9,675Less:Noncontrolling interest
 
 (1,242)
 
 
 (117)
 
 
 (3,539)
 
 
 (117)
 
 
 (3,656)Funds from operations (FFO)
 $
 526
 
 $
 (541)
 
 $
 1,209
 
 $
 (981)
 
 $
 (438)Calculation of Modified Funds from
  OperationsFunds from operations
 $
 526
 
 $
 (541)
 
 $
 1,209
 
 $
 (981)
 
 $
 (438)Add:Acquisition expenses
 
 1,565
 
 
 1,011
 
 
 3,981
 
 
 1,751
 
 
 6,199Net amortization of above- and below-market leases
 
 58
 
 
 98
 
 
 395
 
 
 312
 
 
 724Less:Straight-line rental income
 
 (154)
 
 
 (45)
 
 
 (440)
 
 
 (79)
 
 
 (519)Amortization of market debt adjustment
 
 (153)
 
 
 -
 
 
 (235)
 
 
 -
 
 
 (235)Noncontrolling interest
 
 18
 
 
 (124)
 
 
 (615)
 
 
 (124)
 
 
 (739)Modified funds from operations (MFFO)
 $
 1,860
 
 $
 399
 
 $
 4,295
 
 $
 879
 
 $
 4,992Weighted-average common shares outstanding - basic and
  diluted
 
 11,200,440
 
 
 2,318,047
 
 
 6,509,470
 
 
 1,503,477
 
 
 2,663,204Net loss per share - basic and diluted
 $
 (0.11)
 
 $
 (0.46)
 
 $
 (0.51)
 
 $
 (1.57)
 
 $
 (2.42)FFO per share - basic and diluted
 $
 0.05
 
 $
 (0.23)
 
 $
 0.19
 
 $
 (0.65)
 
 $
 (0.16)MFFO per share - basic and diluted
 $
 0.17
 
 $
 0.17
 
 $
 0.66
 
 $
 0.58
 
 $
 1.87
  Critical Accounting Policies  Below is a discussion of our critical accounting
policies. Our accounting policies have been established to conform with GAAP.
We consider these policies critical because they involve significant management
judgments and assumptions, require estimates about matters that are inherently
uncertain and because they are important for understanding and evaluating our
reported financial results. These judgments affect the reported amounts of
assets and liabilities and our disclosure of contingent assets and liabilities
at the dates of the financial statements and the reported amounts of revenue
and expenses during the reporting periods. With different estimates or
assumptions, materially different amounts could be reported in our financial
statements. Additionally, other companies may utilize different estimates that
may impact the comparability of our results of operations to those of companies
in similar businesses.  Real Estate Assets  Depreciation and Amortization. Investments in real estate are carried at cost and
depreciated using the straight-line method over the estimated useful lives.
Third-party acquisition costs are expensed as incurred. Repair and maintenance
costs are charged to expense as 55


---



incurred, and
significant replacements and betterments will be capitalized. Repair and maintenance
costs include all costs that do not extend the useful life of the real estate
asset. We consider the period of future benefit of an asset to determine its
appropriate useful life. Costs directly associated with the development of land
and those incurred during construction will be capitalized as part of the
investment basis. We anticipate the estimated useful lives of our assets by
class to be generally as follows:  Buildings
 30 yearsBuilding improvements
 30 yearsLand improvements
 15 yearsTenant improvements
 Shorter of lease term or expected useful lifeTenant origination and absorption costs
 Remaining term of related leaseFurniture, fixtures and equipment
 5 – 7 years
  Real Estate Acquisition Accounting.In accordance with ASC 805, we record real estate,
consisting of land, buildings and improvements, at fair value. We allocate the
cost of an acquisition to the acquired tangible assets, identifiable
intangibles and assumed liabilities based on their estimated acquisition-date
fair values. In addition, ASC 805 requires that acquisition costs be expensed
as incurred and restructuring costs generally be expensed in periods subsequent
to the acquisition date.  We assess the acquisition-date fair values of all
tangible assets, identifiable intangibles and assumed liabilities using methods
similar to those used by independent appraisers (e.g., discounted cash flow
analysis and replacement cost) and that utilize appropriate discount and/or
capitalization rates and available market information. Estimates of future cash
flows are based on a number of factors including historical operating results,
known and anticipated trends, and market and economic conditions. The fair
value of tangible assets of an acquired property considers the value of the property
as if it was vacant.  We record above-market and below-market in-place lease
values for acquired properties based on the present value (using an interest
rate that reflects the risks associated with the leases acquired) of the
difference between (i) the contractual amounts to be paid pursuant to the
in-place leases and (ii) management’s estimate of market lease rates for
the corresponding in-place leases, measured over a period equal to the
remaining non-cancelable term of the lease. We amortize any recorded
above-market or below-market lease values as a reduction or increase,
respectively, to rental income over the remaining non-cancelable terms of the
respective lease.  We also include fixed rate renewal options in our
calculation of the fair value of both above- and below-market leases and the
periods over which such leases are amortized.  If a tenant has a unilateral
option to renew a below-market lease, we include such an option in the
calculation of the fair value of such lease and the period over which the lease
is amortized if we determines that the tenant has a financial incentive to
exercise such option.  Intangible assets include the value of in-place
leases, which represents the estimated value of the net cash flows of the
in-place leases to be realized, as compared to the net cash flows that would
have occurred had the property been vacant at the time of acquisition and
subject to lease-up.  Acquired in-place lease value is amortized to depreciation
and amortization expense over the average remaining non-cancelable terms of the
respective in-place leases.  We will estimate the value of tenant origination and
absorption costs by considering the estimated carrying costs during
hypothetical expected lease-up periods, considering current market conditions.
In estimating carrying costs, management will include real estate taxes,
insurance and other operating expenses and estimates of lost rentals at market
rates during the expected lease-up periods.  Estimates of the fair values of the tangible assets,
identifiable intangibles and assumed liabilities will require us to estimate
market lease rates, property-operating expenses, carrying costs during lease-up
periods, discount rates, market absorption periods, and the number of years the
property will be held for investment. The use of inappropriate estimates would
result in an incorrect valuation of our acquired tangible assets, identifiable
intangibles and assumed liabilities, which would impact the amount of our net
income.  Impairment of Real Estate and Related Intangible
Assets.We will monitor events and
changes in circumstances that could indicate that the carrying amounts of our
real estate and related intangible assets may be impaired. When indicators of
potential impairment suggest that the carrying value of real estate and related
intangible assets may be greater than fair value, we will assess the
recoverability, considering recent operating results, expected net operating
cash flow, and plans for future operations. If, based on this analysis of
undiscounted cash flows, we do not believe that we will be able to recover the
carrying value of the real estate and related intangible assets, we would
record an impairment loss to the extent that the carrying value exceeds the
estimated fair value of the real estate and related intangible assets as
defined by ASC 360,Property, Plant, and Equipment. Particular examples
of events and changes in circumstances that could indicate potential
impairments are: significant decreases in occupancy, rental income, operating
income and market values.  Revenue Recognition  We will recognize minimum rent, including rental
abatements and contractual fixed increases attributable to operating leases, on
a straight-line basis over the term of the related lease, and we will include
amounts expected to be received in later years in deferred 56


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rents.
Our policy for percentage rental income is to defer recognition of contingent
rental income until the specified target (i.e., breakpoint) that triggers the
contingent rental income is achieved. We will record property operating expense
reimbursements due from tenants for common area maintenance, real estate taxes
and other recoverable costs in the period the related expenses are incurred. We
will make certain assumptions and judgments in estimating the reimbursements at
the end of each reporting period. We do not expect the actual results to differ
from the estimated reimbursement.  We will make estimates of the collectability of our
tenant receivables related to base rents, expense reimbursements and other
revenue or income. We will specifically analyze accounts receivable and
historical bad debts, customer creditworthiness, current economic trends and
changes in customer payment terms when evaluating the adequacy of the allowance
for doubtful accounts. In addition, with respect to tenants in bankruptcy, we
will make estimates of the expected recovery of pre-petition and post-petition
claims in assessing the estimated collectability of the related receivable. In
some cases, the ultimate resolution of these claims can exceed one year. These
estimates have a direct impact on our net income because a higher bad debt
reserve results in less net income.  Reimbursements from tenants for recoverable real
estate tax and operating expenses are accrued as revenue in the period in which
the applicable expenses are incurred. We make certain assumptions and judgments
in estimating the reimbursements at the end of each reporting period. We do not
expect the actual results to materially differ from the estimated
reimbursements.  We record lease termination income if there is a
signed termination letter agreement, all of the conditions of the agreement
have been met, collectability is reasonably assured and the tenant is no longer
occupying the property. Upon early lease termination, we provide for losses
related to unrecovered intangibles and other assets.  We will recognize gains on sales of real estate
pursuant to the provisions of ASC 605-976,Accounting for Sales of Real
Estate(“ASC 605-976”). The specific timing of a sale will be measured
against various criteria in ASC 605-976 related to the terms of the transaction
and any continuing involvement associated with the property. If the criteria
for profit recognition under the full-accrual method are not met, we will defer
gain recognition and account for the continued operations of the property by
applying the percentage-of-completion, reduced profit, deposit, installment or
cost recovery methods, as appropriate, until the appropriate criteria are met.  Class B Units  Effective October 1, 2012, the Advisor and Sub-advisor
are no longer entitled to the payment of asset management fees in cash under
the A&R Advisory Agreement.  Instead, we will issue to the Advisor and
Sub-advisor units of the Operating Partnership designated as “Class B units” in
connection with the asset management services provided by the Advisor and
Sub-advisor.  The Class B units will vest, and will no longer be
subject to forfeiture, at such time as all of the following events occur: (x)
the value of the Operating Partnership’s assets plus all distributions made
equals or exceeds the total amount of capital contributed by investors plus a
6% cumulative, pre-tax, non-compounded annual return thereon (the “economic
hurdle”); (y) any one of the following occurs: (1) the termination of the
A&R Advisory Agreement by an affirmative vote of a majority of our
independent directors without cause; (2) a listing event; or (3) another
liquidity event; and (z) the Advisor is still providing advisory services to us
(the “service condition”). Such Class B units will be forfeited immediately if:
(a) the A&R Advisory Agreement is terminated for cause; or (b) the A&R
Advisory Agreement is terminated by an affirmative vote of a majority of our independent
directors without cause before the economic hurdle has been met.  We have concluded that the Advisor and Sub-advisor’s
performance under the A&R Advisory Agreement and the Fourth Amended and
Restated Sub-Advisory Agreement is not complete until they have served as the
Advisor and Sub-advisor through the date of a Liquidity Event because, prior to
such date, the Class B units are subject to forfeiture by the Advisor and
Sub-advisor.  Additionally, the Advisor and Sub-advisor have no disincentive for
nonperformance other than the forfeiture of Class B units, which is not a
sufficiently large disincentive for nonperformance and, accordingly, no
performance commitment exists. As a result, we have concluded the measurement
date occurs when a Liquidity Event has occurred and at such time the Advisor
and Sub-advisor have continued providing advisory services, and that the Class
B units are not considered issued until such a Liquidity Event.  The Class B units have both a market condition and a
service condition up to and through a Liquidity Event. We intend to recognize
costs during periods prior to the final measurement date in accordance with
GAAP. As a result, the vesting of Class B units occurs only upon completion of
both a market condition and service condition.  The satisfaction of the market
or service condition is not probable and thus no compensation will be
recognized unless the market condition or service condition becomes probable.  Because the Advisor and Sub-advisor can be terminated
without cause before a Liquidity Event occurs and at such time the market
condition and service condition may not be met, the Class B units may be
forfeited.  Additionally, if the market condition and service condition had
been met and a Liquidity Event had not occurred, the Advisor and Sub-advisor
could not control the Liquidity Event because each of the aforementioned events
that represent a Liquidity Event must be approved unanimously by our
independent directors. As a result, we have concluded that the service
condition is not probable. 57


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Based on our conclusion of the market condition and
service condition not being probable, the Class B Units will be treated as
unissued for accounting purposes until the market condition, service condition
and Liquidity Event have been achieved.  However, as the Class B Units are
deemed to be participating securities, the distributions paid to the Advisor
and Sub-advisor will be treated as compensation expense. This expense will be
calculated as the product of the number of unvested units issued to date and
the stated distribution rate at the time such distribution is authorized.  Impact of Recently Issued Accounting Pronouncements—In May 2011, the Financial Accounting Standards Board
(the “FASB”) issued Accounting Standards Update (“ASU”) 2011-04,Fair Value
Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement
and Disclosure Requirements in U.S. GAAP and IFRS. ASU 2011-04 clarifies
some existing concepts, eliminates wording differences between U.S. GAAP and
International Financial Reporting Standards (“IFRS”), and in some limited
cases, changes some principles to achieve convergence between U.S. GAAP and
IFRS. ASU 2011-04 results in a consistent definition of fair value and common
requirements for measurement of and disclosure about fair value between U.S.
GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value
measurements that are estimated using significant unobservable (Level 3)
inputs. ASU 2011-04 was effective for us as of January 1, 2012. The adoption of
this pronouncement did not materially impact our consolidated financial
statements.  In June 2011, the FASB issued ASU 2011-05,Presentation
of Comprehensive Income, which requires an entity to present the total of
comprehensive income, the components of net income, and the components of other
comprehensive income either in a single continuous statement of comprehensive
income, or in two separate but consecutive statements. ASU 2011-05 eliminates
the option to present components of other comprehensive income as part of the
statement of equity. ASU 2011-05 was effective for us as of January 1, 2012.
The adoption of this pronouncement did not materially impact our consolidated
financial statements.  In August 2012, the FASB issued ASU 2012-03,Technical
Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs
Pursuant to SEC Staff Accounting Bulletin (SAB) No. 114, Technical Amendments
Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting
Standards Update 2010-22 (SEC Update). This updateamends a number of SEC sections in the
FASB Accounting Standards Codification as a result of (1) the issuance of SAB
114, (2) the issuance of SEC Final Rule 33-9250, and (3) corrections related to
ASU 2010-22.  ASU 2012-03 was effective
upon issuance.  The adoption of this pronouncement did not have a material
impact on our consolidated financial statements.  In October 2012, the FASB issued ASU 2012-04,Technical
Corrections and Improvements. The amendments in this update cover a wide
range of topics in the Accounting Standards Codification. These amendments
include technical corrections and improvements to the Accounting Standards
Codification and conforming amendments related to fair value measurements. ASU
2012-04 will be effective for us as of January 1, 2013. The adoption of this
pronouncement is not expected to have a material impact on our consolidated
financial statements.  Subsequent Events  Distributions  On January 2, 2013, we paid a distribution equal to a
daily amount of $0.00178082 per share of common stock outstanding for
stockholders of record for the period from December 1, 2012 through December 31,
2012. The total gross amount of the distribution was approximately $717,000,
with $298,000 being reinvested in the DRP, for a net cash distribution of
$419,000.  On January 23, 2013, our board of directors authorized
distributions to the stockholders of record at the close of business each day
in the period commencing March 1, 2013 through and including March 31, 2013.
The authorized distributions equal an amount of $0.00183562 per share of common
stock, par value $0.01 per share. This equates to a 6.70% annualized yield when
calculated on a $10.00 per share purchase price. A portion of each distribution
is expected to constitute a return of capital for tax purposes.  We expect to
pay these distributions on April 1, 2013.  Our policy is not to fund
distributions with proceeds from our offering.  On February 1, 2013, we paid a distribution equal to a
daily amount of $0.00178082 per share of common stock outstanding for
stockholders of record for the period from January 1, 2013 through January 31, 2013.
The total gross amount of the distribution was approximately $817,000, with
$344,000 being reinvested in the DRP, for a net cash distribution of $473,000.  On March 1, 2013, we paid a distribution equal to a
daily amount of $0.00183562 per share of common stock outstanding for
stockholders of record for the period from February 1, 2013 through February 28,
2013. The total gross amount of the distribution was approximately $882,000,
with $374,000 being reinvested in the DRP, for a net cash distribution of
$508,000.  Acquisition of Atlanta Portfolio  58


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Between January 15, 2013 and February 13, 2013, we
acquired a 100% interest in a portfolio consisting of seven shopping centers in
the Atlanta, Georgia area (the “Atlanta Portfolio”) for approximately $69.6
million, exclusive of closing costs. The individual properties in the Atlanta
Portfolio are located in: Acworth, Georgia; Ellenwood, Georgia; Alpharetta,
Georgia; Buford, Georgia; Mableton, Georgia; Marietta, Georgia; and McDonough,
Georgia. The acquisition of the Atlanta Portfolio was partially financed with
proceeds from a syndicated revolving credit facility led by KeyBank National
Association and proceeds from our ongoing public offering. The portfolio is
approximately 587,367 square feet and is 90.8% leased.  Acquisition of Fairlawn Town Centre  On
January 30, 2013, we acquired a 100% interest in a Giant Eagle-anchored
shopping center, Fairlawn Town Centre, located in Fairlawn, Ohio, for a
purchase price of approximately $42.2 million. The acquisition was partially
financed with proceeds from a syndicated revolving credit facility led by
KeyBank National Association and proceeds from our ongoing public offering. The
347,255 square foot property is 95.0% leased.  Sale of Shares of Common Stock  From January 1, 2013 through February 28, 2013, we
raised approximately $46.7 million through the issuance of 4,697,487 shares of
common stock under our offering. As of February 28, 2013, approximately 131.4 million
shares remained available for sale to the public under our offering, exclusive
of shares available under the DRP.  Amendment
of our Advisory Agreement  On
February 4, 2013, we and the Operating Partnership entered into the A&R
Advisory Agreement with the Advisor.  The A&R Advisory Agreement provides
that the asset management compensation structure contemplated in the previous
advisory agreement between the us and the Advisor  is eliminated effective
October 1, 2012.  Instead, we expect to issue to the Advisor on a quarterly
basis performance-based restricted partnership units of the Operating Partnership
designated as “Class B units.”  The Class B units will vest, and will no longer
be subject to forfeiture, at such time as all of the following events occur:
(x) the value of the Operating Partnership’s assets plus all distributions made
equals or exceeds the total amount of capital contributed by investors plus a 6%
cumulative, pre-tax, non-compounded annual return thereon (the “economic
hurdle”); (y) any one of the following occurs: (1) the termination of the
A&R Advisory Agreement by an affirmative vote of a majority of our
independent directors without cause; (2) a listing event; or (3) another
liquidity event; and (z) the Advisor is still providing advisory services to us
(the “service condition”). Such Class B units will be forfeited immediately if:
(a) the A&R Advisory Agreement is terminated for cause; or (b) the A&R
Advisory Agreement is terminated by an affirmative vote of a majority of our
independent directors without cause before the economic hurdle has been met.  Additionally,
the A&R Advisory Agreement eliminates the subordinated share of cash flows
and the subordinated incentive fee contemplated under the previous advisory
agreement between us and the Advisor.  Instead, similar concepts are now set
forth in the Amended and Restated Agreement of Limited Partnership for the Operating
Partnership as follows: ·The Operating Partnership will pay
a subordinated participation in the net sales proceeds of the sale of real
estate assets equal to 15.0% of remaining net sale proceeds after return of
capital contributions to investors plus payment to investors of a 7.0%
cumulative, pre-tax, non-compounded return on the capital contributed by
investors. ·The Operating Partnership will pay
a subordinated incentive listing distribution of 15.0% of the amount by which
the market value of all of our issued and outstanding common stock plus
distributions exceeds the aggregate capital contributed by investors plus an
amount equal to a 7.0% cumulative, pre-tax non-compounded annual return to
investors. ·Neither the Advisor nor any of its
affiliates can earn both the subordination participation in the net sales
proceeds and the subordinated incentive listing distribution. ·Upon termination or non-renewal of
the A&R Advisory Agreement, an affiliate of the Advisor shall be entitled
to a subordinated termination fee in the form of a non-interest bearing
promissory note equal to 15.0% of the amount by which the cost of our assets
plus distributions exceeds the aggregate capital contributed by investors plus
an amount equal to a 7.0% cumulative, pre-tax non-compounded annual return to
investors.  In addition, the affiliate of the Advisor may elect to defer its
right to receive a subordinated distribution upon termination until either a
listing on a national securities exchange or other liquidity event occurs.  The Class B units are participating securities that
will receive distributions at the same rates and dates as the distributions
paid to our common stockholders.  These distributions will be calculated by the
product of the number of unvested units issued to date and the stated distribution
rate at the time the applicable distributions are authorized.  Lines
of Credit  59


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On January 18, 2013, weincreased
the borrowing capacity of our syndicated senior secured revolving credit
facility led by KeyBank National Association from $40 million to $88 million. 
On January 30, 2013, we again increased the borrowing capacity under this
facility to $120 million. This facility has an accordion feature that allows us
to further increase the capacity up to $250 million, subject to the terms and conditions
of the facility.  Subsequent to December 31, 2012, we drew $63.9 million from
this facility.  As of March 7, 2013, the balance under this facility was $100.6
million.  We have an unsecured credit facility with KeyBank National
Association with a capacity of $10.0 million.  Subsequent to December 31, 2012,
we drew $8.4 million from this facility.  As of March 7, 2013, the balance under
this facility was $8.4 million. 60


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ITEM 7A. 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  As of December 31, 2012, we had approximately
$113.1 million of variable rate debt outstanding. In the future, we may
hedge our exposure to interest rate fluctuations through the utilization of
derivative financial instruments, such as interest rate swaps, in order to
mitigate the risk of this exposure. We do not intend to enter into derivative
or interest rate transactions for speculative purposes. Our hedging decisions
will be determined based upon the facts and circumstances existing at the time
of the hedge and may differ from our currently anticipated hedging strategy. If
we use derivative financial instruments to hedge against interest rate
fluctuations, we will be exposed to both credit risk and market risk. Credit
risk is the failure of the counterparty to perform under the terms of the
derivative contract. If the fair value of a derivative contract is positive,
the counterparty will owe us, which creates credit risk for us. If the fair
value of a derivative contract is negative, we will owe the counterparty and,
therefore, do not have credit risk. We will seek to minimize the credit risk in
derivative instruments by entering into transactions with high-quality
counterparties. Market risk is the adverse effect on the value of a financial
instrument that results from a change in interest rates. The market risk
associated with interest-rate contracts is managed by establishing and
monitoring parameters that limit the types and degree of market risk that may
be undertaken.  As of December 31, 2012, we have not fixed the
interest rates for our debt through derivative financial instruments, and as a
result, we are subject to the potential impact of rising interest rates, which
could negatively impact our profitability and cash flows.  Below is a listing of the mortgage loans payable with
their respective principal payment obligations (in thousands) and weighted-average
interest rates:  2013
 
 2014
 
 2015
 
 2016
 
 2017
 
 Thereafter
 
 TotalMaturing
  debt:(1)Fixed
  rate mortgages payable
 $
 1,216
 
 $
 17,331
 
 $
 1,047
 
 $
 10,296
 
 $
 6,899
 
 $
 7,145
 
 $
 43,934Variable
  rate mortgages payable
 
 17,681
 
 
 1,105
 
 
 1,105
 
 
 16,093
 
 
 33,640
 
 
 6,800
 
 
 76,424Secured
  line of credit
 
 -
 
 
 -
 
 
 36,709
 
 
 -
 
 
 -
 
 
 -
 
 
 36,709Total
  maturing debt
 $
 18,897
 
 $
 18,436
 
 $
 38,861
 
 $
 26,389
 
 $
 40,539
 
 $
 13,945
 
 $
 157,067Weighted-average
  interest rate on debt:Fixed
  rate mortgages payable(2)
 
 7.0%
 
 
 7.5%
 
 
 6.5%
 
 
 6.0%
 
 
 3.7%
 
 
 6.1%
 
 
 6.3%Variable
  rate mortgages payable
 
 2.8%
 
 
 2.5%
 
 
 2.5%
 
 
 2.7%
 
 
 2.4%
 
 
 2.3%
 
 
 2.6%Secured
  line of credit
 
 0.0%
 
 
 0.0%
 
 
 2.5%
 
 
 0.0%
 
 
 0.0%
 
 
 0.0%
 
 
 2.5%Total
 
 3.1%
 
 
 7.2%
 
 
 2.6%
 
 
 4.0%
 
 
 2.6%
 
 
 4.2%
 
 
 3.6%(1)
 The debt maturity table does not include any below-market
  debt adjustment, of which $1,940, net of accumulated amortization, wasoutstanding as of December 31, 2012.(2)
 A portion of the fixed rate debt represents loans assumed
  as part of certain acquisitions.  These loans typically have higher interest
  rates thaninterest rates associated with new debt.
  The analysis below presents the sensitivity of the
fair market value of our financial instruments to selected changes in market
interest rates.  The impact on our annual results of operations of a
one-percentage-point change in interest rates on the outstanding balance of
variable-rate debt at December 31, 2012 would result in approximately $1.1
million of additional interest expense. We had no other outstanding interest
rate contracts as of December 31, 2012.  The above amounts were determined based on the impact
of hypothetical interest rates on our borrowing cost and assume no changes in
our capital structure. As the information presented above includes only those
exposures that exist as of December 31, 2012, it does not consider those
exposures or positions that could arise after that date. Hence, the information
represented herein has limited predictive value. As a result, the ultimate
realized gain or loss with respect to interest rate fluctuations will depend on
the exposures that arise during the period, the hedging strategies at the time,
and the related interest rates.  We do not have any foreign operations, and thus we are
not exposed to foreign currency fluctuations.  ITEM  8.     FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA  See the Index to Financial
Statements at page F-1 of this report.  61


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ITEM 9.      
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE  None.  ITEM  9A.        CONTROLS AND
PROCEDURES  Management’s Conclusions Regarding the
Effectiveness of Disclosure Controls and Procedures  We carried out an evaluation, under the supervision
and with the participation of management, including the Principal Executive
Officer and Principal Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rule 13a-15(e)
under the Exchange Act as of the end of the period covered by this report.
Based upon that evaluation, the Principal Executive Officer and Principal
Financial Officer concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this annual report in
providing a reasonable level of assurance that information we are required to
disclose in reports that we file or submit under the Exchange Act is recorded,
processed, summarized, and reported within the time periods in SEC rules and
forms, including providing a reasonable level of assurance that information
required to be disclosed by us in such reports is accumulated and communicated
to our management, including our Principal Executive Officer and our Principal
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.  Internal Control Over Financial
Reporting  Our management is responsible for
establishing and maintaining adequate internal control over financial
reporting, as defined in Rules 13a-15(f) and 15-15(f) under the Exchange Act,
as a process designed by, or under the supervision of, the Principal Executive
Officer and Principal Financial Officer and effected by our management and
other personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP and includes those policies and procedures
that: •      pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
disposition of our assets; •      provide reasonable assurance that the
transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that our receipts and expenditures are
being made only in accordance with authorizations of management and/or members
of the board of directors; and •      provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on the financial statements.  Because of the inherent limitations of internal
control over financial reporting, including the possibility of human error and
the circumvention or overriding of controls, material misstatements may not be
prevented or detected on a timely basis. In addition, projections of any
evaluation of effectiveness to future periods are subject to the risks that
controls may become inadequate because of changes and conditions or that the
degree of compliance with policies may deteriorate. Accordingly, even internal
controls determined to be effective can provide only reasonable assurance that
the information required to be disclosed in reports filed under the Exchange
Act is recorded, processed, summarized and represented within the time periods
required.  Our management has assessed the effectiveness of our
internal control over financial reporting at December 31, 2012. To make this
assessment, we used the criteria for effective internal control over financial
reporting described in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, our management believes that our system of internal control over
financial reporting met those criteria, and therefore our management has
concluded that we maintained effective internal control over financial
reporting as of December 31, 2012.  There have been no changes in our internal control
over financial reporting during the quarter ended December 31, 2012 that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.  ITEM 9B.      OTHER INFORMATION  For the quarter ended December
31, 2012, all items required to be disclosed under Form 8-K were reported under
Form 8-K.  On December 31, 2012, we filed
a Current Report on Form 8-K to disclose our acquisition of Village One Plaza. 
We included in that Form 8-K an undertaking to provide financial statements for
Village One Plaza in an amendment to the Form 8-K on or before March 62


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12,
2013.  Subsequent to the filing of this Form 8-K, we determined that we are not
required to provide such financial statements for Village One Plaza.  As a
result, we will not provide such financial statements for Village One Plaza in
an amendment to the Form 8-K. 63


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PART III  ITEM  10.     DIRECTORS,
EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE  We have adopted a Code of Ethics that applies to all
of our executive officers and directors, including but not limited to, our
principal executive officer and principal financial officer. Our Code of Ethics
may be found at http://www.phillipsedison-arc.com.  The other information required
by this Item is incorporated by reference from our 2013 Proxy Statement.  ITEM 11.      EXECUTIVE COMPENSATION  The information required by
this Item is incorporated by reference from our 2013 Proxy Statement.  ITEM 12.        SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER
MATTERS  The information required by
this Item is incorporated by reference from our 2013 Proxy Statement.  ITEM 13.       CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE  The information required by
this Item is incorporated by reference from our 2013 Proxy Statement.  ITEM 14.       PRINCIPAL
ACCOUNTING FEES AND SERVICES  The information required by
this Item is incorporated by reference from our 2013 Proxy Statement. 64


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PART IV  ITEM 15.        EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES  (a)Financial Statement
Schedules  See the Index to Financial Statements at
page F-1 of this report.  (b)Exhibits  Ex.
 Description3.1
 Third Articles of Amendment
  and Restatement (incorporated by
  reference to Exhibit 3.1 to Post-Effective Amendment No. 1 to the Company’s
  Registration Statement on Form S-11 (No. 333-164313) filed September 17,
  2010)3.2
 Amended and
  Restated Bylaws (incorporated by reference to Exhibit 3.2 to Pre-Effective
  Amendment No. 3 to the Company’s Registration Statement on Form S-11 (No.
  333-164313) filed July 2, 2010)4.1
 Form of Subscription Agreement
  (incorporated by reference to Appendix B to the prospectus dated October 26,
  2012 included in Post-Effective Amendment No. 12 to the Company’s
  Registration Statement on Form S-11 (No. 333-164313) filed January 28, 2013)4.2
 Statement regarding restrictions on
  transferability of shares of common stock (to appear on stock certificate or
  to be sent upon request and without charge to stockholders issued shares
  without certificates) (incorporated by reference to Exhibit 4.2 to
  Pre-Effective Amendment No. 1 to the Company’s Registration Statement on Form
  S-11 (No. 333-164313) filed March 1, 2010)4.3
 Dividend Reinvestment Plan (incorporated
  by reference to Appendix C to the prospectus dated October 26, 2012 included
  in Post-Effective Amendment No. 12 to the Company’s Registration Statement on
  Form S-11 (No. 333-164313) filed January 28, 2013)4.4
 Subscription Escrow
  Agreement by and between the Company and Wells Fargo Bank, N.A. dated July
  28, 2010 (incorporated by reference to Exhibit 4.5 to Post-Effective
  Amendment No. 1 to the Company’s Registration Statement on Form S-11 (No.
  333-164313) filed September 17, 2010)4.5
 First Amendment to
  Subscription Escrow Agreement by and between the Company and Wells Fargo
  Bank, N.A. dated September 17, 2010 (incorporated by reference to Exhibit 4.6
  to the Company’s Quarterly Report on Form 10-Q filed September 24, 2010)4.6
 Amended and Restated Agreement of
  Limited Partnership of Phillips Edison – ARC Shopping Center Operating
  Partnership, L.P. dated February 4, 201310.1
 Advisory Agreement by and between the
  Company and American Realty Capital II Advisors, LLC dated July 1, 2011
  (incorporated by reference to Exhibit 10.1 to Post-Effective Amendment No. 5
  to the Company’s Registration Statement on Form S-11 (No. 333-164313) filed
  July 29, 2011)10.2
 First Amendment to Advisory Agreement by
  and between the Company and American Realty Capital II Advisors, LLC dated
  September 20, 2011 (incorporated by reference to Exhibit 10.21 to
  Post-Effective Amendment No. 6 to the Company’s Registration Statement on
  Form S-11 (No. 333-164313) filed October 31, 2011)10.3
 Second Amendment to Advisory Agreement by and
  between the Company and American Realty Capital II Advisors, LLC dated
  October 27, 2011 (incorporated by reference to Exhibit 10.22 to
  Post-Effective Amendment No. 6 to the Company’s Registration Statement on
  Form S-11 (No. 333-164313) filed October 31, 2011)10.4
 Amended and Restated
  Advisory Agreement by and between the Company, Phillips Edison – ARC Shopping
  Center Operating Partnership, L.P. and American Realty Capital II Advisors,
  LLC dated February 4, 201310.5
 Master Property Management, Leasing and
  Construction Management Agreement (incorporated by
  reference to Exhibit 10.2 to Pre-Effective Amendment No. 4 to the Company’s
  Registration Statement on Form S-11 (No. 333-164313) filed July 28, 2010)10.6
 Amended and Restated 2010 Independent
  Director Stock Plan (incorporated by reference to Exhibit
  10.3 to Pre-Effective Amendment No. 5 to the Company’s Registration Statement
  on Form S-11 (No. 333-164313) filed August 11, 2010)
 65


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10.7
 Second Amended and Restated Sub-Advisory
  Agreement by and between American Realty Capital II Advisors, LLC and
  Phillips Edison NTR LLC dated September 17, 2010 (incorporated by reference
  to Exhibit 10.4 to Post-Effective Amendment No. 1 to the Company’s
  Registration Statement on Form S-11 (No. 333-164313) filed September 17,
  2010)10.8
 Fourth Amended and Restated
  Sub-Advisory Agreement by and between American Realty Capital II Advisors,
  LLC and Phillips Edison NTR LLC dated February 4, 201310.9
 2010 Long-Term
  Incentive Plan (incorporated by reference to Exhibit 10.5 to Pre-Effective
  Amendment No. 5 to the Company’s Registration Statement on Form S-11 (No.
  333-164313) filed August 11, 2010)10.10
 Shopping Center Purchase Agreement by
  and between Tramway Crossing, LLC and Phillips Edison Group LLC dated January
  27, 2012(incorporated by reference to
  Exhibit 10.44 to Post-Effective Amendment No. 9 to the Company’s Registration
  Statement on Form S-11 (No. 333-164313) filed April 17, 2012)10.11
 Shopping Center Purchase Agreement by
  and between Westin Centre, LLC and Phillips Edison Group LLC dated January
  27, 2012(incorporated by reference to
  Exhibit 10.45 to Post-Effective Amendment No. 9 to the Company’s Registration
  Statement on Form S-11 (No. 333-164313) filed April 17, 2012)10.12
 Assignment and Assumption of Rights
  Under Shopping Center Purchase Agreement by and between Phillips Edison Group
  LLC and Tramway Station LLC dated February 21, 2012(incorporated
  by reference to Exhibit 10.46 to Post-Effective Amendment No. 9 to the
  Company’s Registration Statement on Form S-11 (No. 333-164313) filed April
  17, 2012)10.13
 Assignment and Assumption of Rights
  Under Shopping Center Purchase Agreement by and between Phillips Edison Group
  LLC and Westin Station LLC dated February 21, 2012(incorporated
  by reference to Exhibit 10.47 to Post-Effective Amendment No. 9 to the
  Company’s Registration Statement on Form S-11 (No. 333-164313) filed April
  17, 2012)10.14
 Shopping Center Purchase and Sale
  Agreement by and between Phillips Edison Group LLC and
  CRP II – Glynn Place, LLC dated
  March 26, 2012(incorporated by reference to
  Exhibit 10.48 to Post-Effective Amendment No. 10 to the Company’s
  Registration Statement on Form S-11 (No. 333-164313) filed July 17, 2012)10.15
 First Amendment to Shopping Center
  Purchase and Sale Agreement by and between Phillips Edison Group LLC and CRP
  II – Glynn Place, LLC dated April 27, 2012(incorporated
  by reference to Exhibit 10.49 to Post-Effective Amendment No. 10 to the
  Company’s Registration Statement on Form S-11 (No. 333-164313) filed July 17,
  2012)10.16
 Assignment and Assumption of Rights
  Under Shopping Center Purchase Agreement by and between Phillips Edison Group
  LLC and Glynn Place Station LLC dated April 27, 2012(incorporated
  by reference to Exhibit 10.50 to Post-Effective Amendment No. 10 to the
  Company’s Registration Statement on Form S-11 (No. 333-164313) filed July 17,
  2012)10.17
 Agreement of Sale between Kimco
  Kissimmee 613, Inc. and Phillips Edison Group LLC dated April 24, 2012(incorporated by reference to Exhibit 10.51 to
  Post-Effective Amendment No. 10 to the Company’s Registration Statement on
  Form S-11 (No. 333-164313) filed July 17, 2012)10.18
 Second Amendment to Agreement of Sale
  between Kimco Kissimmee 613, Inc. and Phillips Edison Group LLC dated May 29,
  2012(incorporated by reference to Exhibit
  10.52 to Post-Effective Amendment No. 10 to the Company’s Registration Statement
  on Form S-11 (No. 333-164313) filed July 17, 2012)10.19
 Assignment and Assumption of Rights
  Under Shopping Center Purchase Agreement by and between Phillips Edison Group
  LLC and Vine Street Station LLC dated June 4, 2012(incorporated
  by reference to Exhibit 10.53 to Post-Effective Amendment No. 10 to the
  Company’s Registration Statement on Form S-11 (No. 333-164313) filed July 17,
  2012)10.20
 Agreement for Sale and Purchase of
  Property by and between Richmond Plaza Investors, L.P. and Phillips Edison
  Group LLC dated June 28, 2012(incorporated
  by reference to Exhibit 10.54 to Post-Effective Amendment No. 11 to the
  Company’s Registration Statement on Form S-11 (No. 333-164313) filed October
  17, 2012)
  66


---



10.21
 Fourth Amendment to, and Reinstatement of,
  Agreement for Sale and Purchase of Property by and between Richmond Plaza
  Investors, L.P. and Phillips Edison Group LLC dated August 24, 2012(incorporated by reference to Exhibit 10.55 to
  Post-Effective Amendment No. 11 to the Company’s Registration Statement on
  Form S-11 (No. 333-164313) filed October 17, 2012)10.22
 Assignment and Assumption of Rights
  Under Shopping Center Purchase Agreement by and between Phillips Edison Group
  LLC and Richmond Station LLC dated August 30, 2012(incorporated
  by reference to Exhibit 10.56 to Post-Effective Amendment No. 11 to the
  Company’s Registration Statement on Form S-11 (No. 333-164313) filed October
  17, 2012)10.23
 Revolving Loan Agreement among Phillips Edison – ARC
  Shopping Center Operating Partnership, L.P., KeyBank National Association,
  and KeyBank Capital Markets dated December 24, 201210.24
 Guaranty of Payment and Performance by Phillips
  Edison Shopping Center OP GP LLC and Heron Creek Station LLC in favor of
  KeyBank National Association dated December 21, 201210.25
 First Amendment to Revolving Loan Agreement and
  Other Loan Documents by and among Phillips Edison – ARC Shopping Center
  Operating Partnership, L.P., Phillips Edison – ARC Shopping Center REIT Inc.,
  Phillips Edison Shopping Center OP GP LLC, and KeyBank National Association
  dated January 15, 201310.26
 Shopping Centers Purchase and Sale Agreement by and
  among Equity One, Inc., Equity One (Southeast Portfolio) Inc., Equity One
  (Florida Portfolio), Inc. and Phillips Edison Group LLC dated November 30,
  201210.27
 Reinstatement and First Amendment to Shopping
  Centers Purchase and Sale Agreement by and among Equity One, Inc., Equity One
  (Southeast Portfolio) Inc., Equity One (Florida Portfolio), Inc. and Phillips
  Edison Group LLC dated December 27, 201210.28
 Second Amendment to Shopping Centers Purchase and
  Sale Agreement by and among Equity One, Inc., Equity One (Southeast
  Portfolio) Inc., Equity One (Florida Portfolio), Inc. and Phillips Edison
  Group LLC dated January 11, 201310.29
 Reinstatement and Third Amendment to Shopping
  Centers Purchase and Sale Agreement by and among Equity One, Inc., Equity One
  (Southeast Portfolio) Inc., Equity One (Florida Portfolio), Inc. and Phillips
  Edison Group LLC dated February 13, 201310.30
 Assignment and Assumption of Rights under Shopping
  Center Purchase Agreement by and between Phillips Edison Group LLC and Butler
  Creek Station LLC dated January 15, 2013 with schedule disclosing other
  substantially identical Assignment and Assumption of Rights under Shopping
  Center Purchase Agreements omitted10.31
 Sale-Purchase Agreement between AG/WP Fairlawn
  Owner, LLC and Phillips Edison Group LLC dated December 13, 201210.32
 Reinstatement and Second Amendment to Sale-Purchase
  Agreement between AG/WP Fairlawn Owner, LLC and Phillips Edison Group LLC
  dated December 21, 201210.33
 Assignment and Assumption of Rights under Shopping
  Center Purchase Agreement by and between Phillips Edison Group LLC and
  Fairlawn Station LLC dated January 30, 201321.1
 Subsidiaries of the Company31.1
 Certification of Chief Executive Officer pursuant to
  Section 302 of the Sarbanes-Oxley Act of 200231.2
 Certification of Chief Financial Officer pursuant to
  Section 302 of the Sarbanes-Oxley Act of 200232.1
 Certification of Chief Executive Officer pursuant to
  18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 200232.2
 Certification of Chief Financial Officer pursuant to
  18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 200299.1
 Amended Share Repurchase Program (incorporated by
  reference to Exhibit 9.1 to the Company’s Current Report on Form 8-K filed
  October 5, 2011)101.1
 The following information from the Company’s annual
  report on Form 10-K for the year ended December 31, 2012, formatted in XBRL
  (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets;
  (ii) Consolidated Statements of Operations and Comprehensive Loss; (iii)
  Consolidated Statements of Equity; and (iv) Consolidated Statements of Cash
  Flows
 67


---



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS  Financial Statements
 PageReport of Independent Registered Public
  Accounting Firm
 F-2Consolidated Balance Sheets as of December
  31, 2012 and 2011
 F-3Consolidated Statements of Operations and Comprehensive
  Loss for the years ended December 31, 2012, 2011 and 2010
 F-4Consolidated Statements of Equity for the years
  ended December 31, 2012, 2011 and 2010
 F-5Consolidated Statements of Cash Flows for the December
  31, 2012, 2011 and 2010
 F-6Notes to Consolidated Financial Statements
 F-7Real Estate Assets and Accumulated Depreciation
  (Schedule III) *
 F-23
  *    All schedules other than
the one listed in the index have been omitted as the required information is
either not applicable or the information is already presented in the
consolidated financial statements or the related notes. F-1


---



REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM  To the Board of Directors and Stockholders of Phillips Edison—ARC Shopping Center REIT Inc.  We have audited the accompanying consolidated balance
sheets of Phillips Edison—ARC Shopping Center REIT Inc. and subsidiaries (the
“Company”) as of December 31, 2012 and 2011, and the related consolidated
statements of operations and comprehensive loss, equity, and cash flows for each
of the three years in the period ended December 31, 2012. Our audits also
included the financial statement schedule listed in the Index. These financial
statements and financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.  We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.  In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial position of Phillips
Edison – ARC Shopping Center REIT Inc. and subsidiaries as of December 31, 2012
and 2011, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2012, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.   /s/ Deloitte & Touche LLP  Cincinnati, Ohio March 7, 2013 F-2


---



PHILLIPS EDISON – ARC SHOPPING CENTER
  REIT INC.CONSOLIDATED BALANCE SHEETSAS OF DECEMBER 31, 2012 AND DECEMBER 31, 2011(In thousands, except share and per share amounts)December 31, 2012
 
 December 31, 2011ASSETSInvestment in real estate:Land
 $
 82,127
 
 $
 21,338Building and improvements
 
 209,048
 
 
 49,415Total investment in real estate assets
 
 291,175
 
 
 70,753Accumulated depreciation and amortization
 
 (7,317)
 
 
 (1,261)Total investment in real estate assets, net
 
 283,858
 
 
 69,492Acquired intangible lease assets, net of accumulated
  amortization of $3,844 and $807, respectively
 
 20,957
 
 
 6,799Cash and cash equivalents
 
 7,654
 
 
 6,969Restricted cash
 
 1,053
 
 
 214Accounts receivable, net of bad debt reserve of $69 and
  $35, respectively
 
 2,707
 
 
 786Deferred financing expense, net of accumulated
  amortization of $596 and $203, respectively
 
 2,827
 
 
 599Prepaid expenses and other
 
 6,354
 
 
 333Total assets
 $
 325,410
 
 $
 85,192LIABILITIES AND EQUITYLiabilities:Mortgage loans payable
 $
 159,007
 
 $
 46,788Acquired below market lease intangibles, net of
  accumulated amortization of $811 and $161, respectively
 
 4,892
 
 
 1,203Accounts payable
 
 533
 
 
 47Accounts payable – affiliates
 
 3,634
 
 
 8,395Accrued and other liabilities
 
 5,073
 
 
 1,574Total liabilities
 
 173,139
 
 
 58,007Commitments and contingencies (Note 9)
 
 -
 
 
 -Equity:Preferred stock, $0.01 par value per share, 10,000,000
  shares authorized, zero shares issued and outstanding at December 31,2012 and 2011
 $
 -
 
 $
 -Common stock, $0.01 par value per share, 180,000,000
  shares authorized, 13,801,251 and 2,658,159 shares issued andoutstanding at December 31, 2012 and 2011, respectively
 
 138
 
 
 27Additional paid-in capital
 
 118,238
 
 
 17,980Accumulated deficit
 
 (11,720)
 
 
 (4,126)Total stockholders’ equity
 
 106,656
 
 
 13,881Noncontrolling interests
 
 45,615
 
 
 13,304Total equity
 
 152,271
 
 
 27,185Total liabilities and equity
 $
 325,410
 
 $
 85,192See notes to consolidated financial statements.
 F-3


---



PHILLIPS EDISON – ARC SHOPPING CENTER
  REIT INC.CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
  LOSSFOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010(In thousands, except share and per share amounts)2012
 
 
 2011
 
 
 2010Revenues:Rental income
 $
 13,828
 
 $
 2,762
 
 $
 85Tenant recovery income
 
 3,635
 
 
 750
 
 
 13Other property income
 
 87
 
 
 17
 
 
 -Total revenues
 
 17,550
 
 
 3,529
 
 
 98Expenses:Property operating
 
 2,957
 
 
 631
 
 
 14Real estate taxes
 
 2,055
 
 
 507
 
 
 18General and administrative
 
 1,717
 
 
 845
 
 
 228Acquisition expenses
 
 3,981
 
 
 1,751
 
 
 467Depreciation and amortization
 
 8,094
 
 
 1,500
 
 
 81Total expenses
 
 18,804
 
 
 5,234
 
 
 808Operating loss
 
 (1,254)
 
 
 (1,705)
 
 
 (710)Other expense:Interest expense, net
 
 (3,020)
 
 
 (811)
 
 
 (38)Other income
 
 1
 
 
 -
 
 
 1Net loss
 
 (4,273)
 
 
 (2,516)
 
 
 (747)Net loss attributable to noncontrolling interests
 
 927
 
 
 152
 
 
 -Net loss attributable to Company stockholders
 $
 (3,346)
 
 $
 (2,364)
 
 $
 (747)Per share information - basic and diluted:Loss per share - basic and diluted
 $
 (0.51)
 
 $
 (1.57)
 
 $
 (4.44)Weighted-average common shares outstanding - basic and
  diluted
 
 6,509,470
 
 
 1,503,477
 
 
 168,419Comprehensive loss
 $
 (4,273)
 
 $
 (2,516)
 
 $
 (747)Comprehensive loss attributable to noncontrolling
  interests
 
 927
 
 
 152
 
 
 -Comprehensive loss attributable to Company stockholders
 $
 (3,346)
 
 $
 (2,364)
 
 $
 (747)See notes to consolidated financial statements.
 F-4


---



PHILLIPS EDISON-ARC SHOPPING CENTER REIT
  INC.CONSOLIDATED STATEMENTS OF EQUITYFOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010(In thousands, except share and per share amounts)TotalCommon Stock
 
 Additional
 
 Accumulated
 
 Stockholders'
 
 NoncontrollingShares
 
 Amount
 
 Paid-In Capital
 
 Deficit
 
 Equity
 
 Interest
 
 TotalBalance at December 31, 2009
 20,000
 
 $
 -
 
 $
 200
 
 $
 -
 
 $
 200
 
 $
 -
 
 $
 200Issuance of common stock
 710,570
 
 
 7
 
 
 6,384
 
 
 -
 
 
 6,391
 
 
 -
 
 
 6,391Contributions from Sponsors
 -
 
 
 -
 
 
 140
 
 
 -
 
 
 140
 
 
 -
 
 
 140Common distributions declared, $0.22 per share
 -
 
 
 -
 
 
 -
 
 
 (37)
 
 
 (37)
 
 
 -
 
 
 (37)Offering costs
 -
 
 
 -
 
 
 (4,790)
 
 
 -
 
 
 (4,790)
 
 
 -
 
 
 (4,790)Net loss
 -
 
 
 -
 
 
 -
 
 
 (747)
 
 
 (747)
 
 
 -
 
 
 (747)Balance at December 31, 2010
 730,570
 
 $
 7
 
 $
 1,934
 
 $
 (784)
 
 $
 1,157
 
 $
 -
 
 $
 1,157Issuance of common stock
 1,916,572
 
 
 20
 
 
 18,596
 
 
 -
 
 
 18,616
 
 
 -
 
 
 18,616Issuance of preferred stock
 -
 
 
 -
 
 
 -
 
 
 -
 
 
 -
 
 
 125
 
 
 125Share repurchases
 (5,630)
 
 
 -
 
 
 (56)
 
 
 -
 
 
 (56)
 
 
 -
 
 
 (56)Contributions from Sponsors
 -
 
 
 -
 
 
 88
 
 
 -
 
 
 88
 
 
 -
 
 
 88Dividend reinvestment plan (DRP)
 16,647
 
 
 -
 
 
 158
 
 
 -
 
 
 158
 
 
 -
 
 
 158Contributions from noncontrolling interests
 -
 
 
 -
 
 
 -
 
 
 -
 
 
 -
 
 
 14,441
 
 
 14,441Reallocation of equity from contribution ofproperties to Joint Venture
 -
 
 
 -
 
 
 1,003
 
 
 -
 
 
 1,003
 
 
 (1,003)
 
 
 -Common distributions declared, $0.65 per share
 -
 
 
 -
 
 
 -
 
 
 (978)
 
 
 (978)
 
 
 -
 
 
 (978)Distributions to noncontrolling interests
 -
 
 
 -
 
 
 -
 
 
 -
 
 
 -
 
 
 (92)
 
 
 (92)Offering costs
 -
 
 
 -
 
 
 (3,726)
 
 
 -
 
 
 (3,726)
 
 
 -
 
 
 (3,726)Offering costs - issuance of stock fornoncontrolling interest
 -
 
 
 -
 
 
 (17)
 
 
 -
 
 
 (17)
 
 
 (15)
 
 
 (32)Net loss
 -
 
 
 -
 
 
 -
 
 
 (2,364)
 
 
 (2,364)
 
 
 (152)
 
 
 (2,516)Balance at December 31, 2011
 2,658,159
 
 $
 27
 
 $
 17,980
 
 $
 (4,126)
 
 $
 13,881
 
 $
 13,304
 
 $
 27,185Issuance of common stock
 11,007,548
 
 
 110
 
 
 109,372
 
 
 -
 
 
 109,482
 
 
 -
 
 
 109,482Share repurchases
 (3,749)
 
 
 -
 
 
 (35)
 
 
 -
 
 
 (35)
 
 
 -
 
 
 (35)Dividend reinvestment plan (DRP)
 139,293
 
 
 1
 
 
 1,323
 
 
 -
 
 
 1,324
 
 
 -
 
 
 1,324Contributions from noncontrolling interests
 -
 
 
 -
 
 
 -
 
 
 -
 
 
 -
 
 
 35,560
 
 
 35,560Common distributions declared, $0.65 per share
 -
 
 
 -
 
 
 -
 
 
 (4,248)
 
 
 (4,248)
 
 
 -
 
 
 (4,248)Distributions to noncontrolling interests
 -
 
 
 -
 
 
 -
 
 
 -
 
 
 -
 
 
 (2,322)
 
 
 (2,322)Offering costs
 -
 
 
 -
 
 
 (10,402)
 
 
 -
 
 
 (10,402)
 
 
 -
 
 
 (10,402)Net loss
 -
 
 
 -
 
 
 -
 
 
 (3,346)
 
 
 (3,346)
 
 
 (927)
 
 
 (4,273)Balance at December 31, 2012
 13,801,251
 
 $
 138
 
 $
 118,238
 
 $
 (11,720)
 
 $
 106,656
 
 $
 45,615
 
 $
 152,271See notes to consolidated financial statements.
 F-5


---



PHILLIPS EDISON-ARC SHOPPING CENTER REIT
  INC.CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010(In thousands, except share and per share amounts)2012
 
 
 2011
 
 
 2010CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
 $
 (4,273)
 
 $
 (2,516)
 
 $
 (747)Adjustments to reconcile net loss to net cash provided by
  operating activities:Depreciation and amortization
 
 7,850
 
 
 1,500
 
 
 81Net amortization of above- and below-market leases
 
 395
 
 
 312
 
 
 17Amortization of deferred financing costs
 
 648
 
 
 193
 
 
 10Straight-line rental income
 
 (440)
 
 
 (79)
 
 
 -Changes in operating assets and liabilities:Accounts receivable
 
 (1,481)
 
 
 (518)
 
 
 -Prepaid expenses and other
 
 (1,258)
 
 
 (163)
 
 
 (173)Accounts payable
 
 355
 
 
 (66)
 
 
 113Accounts payable – affiliates
 
 (539)
 
 
 708
 
 
 782Accrued and other liabilities
 
 2,776
 
 
 1,222
 
 
 118Net cash provided by operating activities
 
 4,033
 
 
 593
 
 
 201CASH FLOWS FROM INVESTING ACTIVITIES:Real estate acquisitions
 
 (196,934)
 
 
 (55,851)
 
 
 (21,238)Capital expenditures
 
 (705)
 
 
 (95)
 
 
 -Change in restricted cash
 
 (839)
 
 
 (203)
 
 
 (11)Net cash used in investing activities
 
 (198,478)
 
 
 (56,149)
 
 
 (21,249)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of common stock
 
 109,482
 
 
 18,616
 
 
 6,391Proceeds from issuance of noncontrolling stock, net
 
 -
 
 
 93
 
 
 -Redemptions of common stock
 
 (35)
 
 
 (56)
 
 
 -Payment of offering costs
 
 (14,643)
 
 
 (1,364)
 
 
 -Payments on mortgage loans payable
 
 (140,150)
 
 
 (25,430)
 
 
 -Proceeds from mortgage loans payable
 
 212,503
 
 
 57,523
 
 
 14,695Payments for notes payable – affiliates
 
 -
 
 
 (600)
 
 
 (900)Proceeds from notes payable – affiliates
 
 -
 
 
 -
 
 
 1,500Distributions paid, net of DRP
 
 (2,349)
 
 
 (715)
 
 
 -Contributions from noncontrolling interests
 
 35,560
 
 
 14,441
 
 
 -Distributions to noncontrolling interests
 
 (2,406)
 
 
 -
 
 
 -Payments of loan financing costs
 
 (2,832)
 
 
 (690)
 
 
 (131)Net cash provided by financing activities
 
 195,130
 
 
 61,818
 
 
 21,555NET INCREASE IN CASH AND CASH EQUIVALENTS
 
 685
 
 
 6,262
 
 
 507CASH AND CASH EQUIVALENTS:Beginning of period
 
 6,969
 
 
 707
 
 
 200End of period
 $
 7,654
 
 $
 6,969
 
 $
 707SUPPLEMENTAL CASHFLOW DISCLOSURE, INCLUDING NON-CASH
  INVESTING AND FINANCING ACTIVITIES:Change in offering costs payable to sub-advisor
 $
 (4,241)
 
 $
 2,362
 
 $
 3,847Distributions payable
 
 575
 
 
 142
 
 
 37Distributions payable – noncontrolling interests
 
 (84)
 
 
 92
 
 
 -Assumed debt
 
 40,101
 
 
 -
 
 
 -Accrued capital expenditures and deferred financing costs
 
 363
 
 
 -
 
 
 -Cash paid for interest
 
 2,346
 
 
 557
 
 
 140Distributions reinvested
 
 1,324
 
 
 158
 
 
 -Reclassification of deferred offering costs to additional
  paid-in capital
 
 -
 
 
 -
 
 
 4,790Financing costs payable to advisor and sub-advisor, net
 
 19
 
 
 (19)
 
 
 110Contributions from sponsors
 
 -
 
 
 88
 
 
 140See notes to consolidated financial statements.
 F-6


---



Phillips Edison—ARC Shopping Center REIT Inc. Notes
to Consolidated Financial Statements  1. ORGANIZATION  Phillips Edison—ARC Shopping Center REIT Inc. was
formed as a Maryland corporation on October 13, 2009 and has elected to be
taxed as a real estate investment trust (“REIT”) commencing with the taxable
year ended December 31, 2010. Substantially all of our business is expected to
be conducted through Phillips Edison—ARC Shopping Center Operating Partnership,
L.P. (the “Operating Partnership”), a Delaware limited partnership formed on
December 3, 2009. We are the sole limited partner of the Operating
Partnership, and our wholly owned subsidiary, Phillips Edison Shopping Center
OP GP LLC, is the sole general partner of the Operating Partnership.  We are offering to the public, pursuant to a
registration statement, $1.785 billion in shares of common stock on a “best
efforts” basis in our initial public offering (“our offering”). Our offering
consists of a primary offering of $1.5 billion in shares offered to investors
at a price of $10.00 per share, with discounts available for certain categories
of purchasers, and $285 million in shares offered to stockholders pursuant to a
dividend reinvestment plan (the “DRP”) at a price of $9.50 per share. We have
the right to reallocate the shares of common stock offered between the primary
offering and the DRP.  We are selling the
shares registered in our primary offering over a three-year period, which ends
August 12, 2013. Under rules promulgated by the SEC, in some instances we may
extend the primary offering beyond that date. We may sell shares under the DRP
beyond the termination of the primary offering until we have sold all the
shares under the plan.  As of December 31, 2012, we had issued 13,801,251
shares of common stock since inception, including 155,940 shares issued through
the DRP, generating gross cash proceeds of $136.1 million.  Our advisor is American Realty Capital II Advisors,
LLC (the “Advisor”), a limited liability company that was organized in the
State of Delaware on December 28, 2009 and that is indirectly wholly owned
by AR Capital, LLC (formerly American Realty Capital II, LLC) (the “AR Capital
sponsor”). Under the terms of the advisory agreement between the Advisor and us,
the Advisor is responsible for the management of our day-to-day activities and
the implementation of our investment strategy. The Advisor has delegated most
of its duties under the advisory agreement, including the management of our
day-to-day operations and our portfolio of real estate assets, to Phillips
Edison NTR LLC (the “Sub-advisor”), which is indirectly wholly owned by
Phillips Edison Limited Partnership (the “Phillips Edison sponsor”).
Notwithstanding such delegation to the Sub-advisor, the Advisor retains
ultimate responsibility for the performance of all the matters entrusted to it
under the advisory agreement.  We invest primarily in well-occupied grocery-anchored
neighborhood and community shopping centers having a mix of creditworthy national
and regional retailers selling necessity-based goods and services in strong
demographic markets throughout the United States. In addition, we may invest in
other retail properties including power and lifestyle shopping centers,
multi-tenant shopping centers, free-standing single-tenant retail properties,
and other real estate and real estate-related loans and securities depending on
real estate market conditions and investment opportunities that we determine
are in the best interests of our stockholders. We expect that retail properties
primarily would underlie or secure the real estate-related loans and securities
in which we may invest.  We owned fee simple interests in 26 real estate
properties, 20 of which we owned through the Joint Venture (as defined below),
acquired from third parties unaffiliated with us, the Advisor, or the
Sub-advisor as of December 31, 2012.  On September 20, 2011, we entered into a joint
venture with a group of institutional international investors advised by CBRE
Investors Global Multi Manager (each a “CBRE Investor”). The joint venture is
in the form of PECO-ARC Institutional Joint Venture I., L.P., a Delaware limited partnership (the “Joint Venture”). We, through an indirectly wholly owned
subsidiary, hold an approximate 54% interest in the Joint Venture.  We serve as
the general partner and manage the operations of the Joint Venture. The CBRE
Investors hold the remaining approximate 46% interest.  We contributed
approximately $58.7 million, in the form of equity interests in six wholly
owned real estate properties and cash, to the Joint Venture, and the CBRE
Investors contributed $50 million in cash.  As of December 31, 2012, the Joint
Venture holds 20 grocery-anchored neighborhood and community shopping centers.  2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES  Principles of Consolidation—The accompanying consolidated financial statements
include our accounts and the accounts of the Operating Partnership (over which we
exercise financial and operating control). The financial statements of the
Operating Partnership are prepared using accounting policies consistent with our
accounting policies. All significant intercompany balances and transactions are
eliminated upon consolidation.  Partially Owned Entities—If we determine that we are an owner in a
variable-interest entity (“VIE”), and we hold a controlling financial interest,
then we will consolidate the entity as the primary beneficiary. For
partially-owned entities determined not to be a VIE, we analyze rights held by
each partner to determine which would be the consolidating party. We will
generally consolidate entities (in the absence of other factors when
determining control) when we have over a 50% ownership interest in the entity. We
will F-7


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assess our interests in VIEs on an ongoing basis
to determine whether or not we are the primary beneficiary. However, we will
also evaluate who controls the entity even in circumstances in which we have
greater than a 50% ownership interest. If we do not control the entity due to
the lack of decision-making abilities, we will not consolidate the entity.  We performed an analysis of the assets held through
the Joint Venture in accordance with Accounts Standards Codification (“ASC”)
810 –Consolidation. Based upon this analysis, we have determined the
Joint Venture should be consolidated into our consolidated financial
statements. As a result of the contribution of the assets to the Joint Venture,
there was a difference of $1.0 million in the net book value of the contributed
assets and the agreed upon contribution value of the assets. In accordance with
accounting principles generally accepted in the United States of America (“GAAP”),
the difference arising from the contribution to the Joint Venture was not
recognized as a gain on sale in the consolidated statements of operations,
rather it was treated as a reallocation of equity to our stockholders from the CBRE
Investors.  Use of Estimates—The preparation of the consolidated financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting periods. For
example, significant estimates and assumptions have been made with respect to
the useful lives of assets; recoverable amounts of receivables; and initial
valuations of tangible and intangible assets and liabilities and related
amortization periods of deferred costs and intangibles, particularly with
respect to property acquisitions. Actual results could differ from those
estimates.  Cash and Cash Equivalents—We consider all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents. Cash
equivalents may include cash and short-term investments. Short term investments
are stated at cost, which approximates fair value and may consist of
investments in money market accounts.  Organizational and Offering Costs—The Sub-advisor has paid offering expenses on our
behalf. We will reimburse on a monthly basis the Sub-advisor for these costs
and future offering costs it, the Advisor, or any of their respective
affiliates may incur on our behalf but only to the extent that the
reimbursement would not exceed 1.5% of gross offering proceeds over the life of
the offering or cause the selling commissions, the dealer manager fee and the
other organization and offering expenses borne by us to exceed 15.0% of gross
offering proceeds as of the date of the reimbursement. These offering expenses
include all expenses (other than selling commissions and the dealer manager
fee) to be paid by us in connection with the offering, including legal,
accounting, printing, mailing and filing fees, charges of the escrow holder and
transfer agent, reimbursement to the Advisor and Sub-advisor for our portion of
the salaries and related employment costs of the Advisor’s and Sub-advisor’s
employees who provide services to us (excluding costs related to employees who
provide services for which the Advisor or Sub-advisor, as applicable, receive
acquisition or disposition fees), reimbursement to Realty Capital Securities,
LLC, the dealer manager (“the Dealer Manager”), for amounts it may pay to
reimburse the bona fide due diligence expenses of broker-dealers, costs in
connection with preparing supplemental sales materials, our costs of conducting
bona fide training and education meetings (primarily the travel, meal and lodging
costs of our non-registered officers and the non-registered officers of the
Advisor and Sub-advisor to attend such meetings), and cost reimbursement for
non-registered employees of our affiliates to attend retail seminars conducted
by broker-dealers. These offering costs include travel services provided to the
Advisor or Sub-advisor by a related party of one or more of the sponsors. Costs
associated with the offering are charged against the gross proceeds of the
offering.  Organizational costs are expensed as incurred.  Investment Property and Lease Intangibles—Real estate assets we have acquired are stated at
cost less accumulated depreciation. Depreciation is computed using the
straight-line method. The estimated useful lives for computing depreciation are
generally 5-7 years for furniture, fixtures and equipment, 15 years for land
improvements and 30 years for buildings and building improvements. Tenant
improvements are amortized over the shorter of the respective lease term or the
expected useful life of the asset. Major replacements that extend the useful
lives of the assets are capitalized, and maintenance and repair costs are
expensed as incurred.  Real estate assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of the individual property may not be recoverable. In such an event, a
comparison will be made of the projected operating cash flows of each property
on an undiscounted basis to the carrying amount of such property. Such carrying
amount would be adjusted, if necessary, to estimated fair values to reflect
impairment in the value of the asset. We recorded no impairments for the years
ended December 31, 2012, 2011, and 2010.  The results of operations of acquired properties are
included in our results of operations from their respective dates of
acquisition. Estimates of future cash flows, estimates of replacement cost, and
other valuation techniques that we believe are similar to those used by
independent appraisers are used to allocate the purchase price of each
identifiable asset acquired and liabilities assumed such as land, buildings and
improvements, equipment and identifiable intangible assets and liabilities,
such as amounts related to in-place leases, acquired above- and below-market
leases, tenant relationships, asset retirement obligations, mortgage notes
payable and any goodwill or gain on purchase. Acquisition-related costs are
expensed as incurred.  The fair value of buildings and improvements is
determined on an as-if-vacant basis.  The estimated fair value of acquired
in-place leases is the costs we would have incurred to lease the properties to
the occupancy level of the properties at the date of acquisition. F-8


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Such estimates include leasing commissions, legal costs
and other direct costs that would be incurred to lease the properties to such
occupancy levels. Additionally, we evaluate the time period over which such
occupancy levels would be achieved. Such evaluation includes an estimate of the
net market-based rental revenues and net operating costs (primarily consisting
of real estate taxes, insurance and utilities) that would be incurred during
the lease-up period. Acquired in-place leases as of the date of acquisition are
amortized over the remaining lease terms.  Acquired above- and below-market lease values are
recorded based on the present value (using interest rates that reflect the
risks associated with the leases acquired) of the difference between the
contractual amounts to be paid pursuant to the in-place leases and management’s
estimate of the market lease rates for the corresponding in-place leases. The
capitalized above- and below-market lease values are amortized as adjustments
to rental income over the remaining terms of the respective leases.  We also
include fixed rate renewal options in our calculation of the fair value of both
above- and below-market leases and the periods over which such leases are
amortized.  If a tenant has a unilateral option to renew a below-market lease,
we include such an option in the calculation of the fair value of such lease
and the period over which the lease is amortized if we determines that the
tenant has a financial incentive to exercise such option.  Management estimates the fair value of assumed
mortgage notes payable based upon indications of then-current market pricing
for similar types of debt with similar maturities. Assumed mortgage notes
payable are initially recorded at their estimated fair value as of the
assumption date, and the difference between such estimated fair value and the
note’s outstanding principal balance is amortized over the life of the mortgage
note payable as an adjustment to interest expense.  Deferred Financing Costs—Deferred financing costs are capitalized and
amortized on a straight-line basis over the term of the related financing
arrangement, which approximates the effective interest method. Deferred
financing costs incurred during the years ended December 31, 2012, 2011, and
2010, respectively, were approximately $2,875,000, $561,000, and $241,000. Of
this amount, for the years ended December 31, 2012, 2011, and 2010,
respectively, $816,000, $180,000, and $110,000 was incurred as a result of the
financing fee due to the Advisor, Sub-advisor and their affiliates.
Amortization of deferred financing costs for the years ended December 31, 2012,
2011, and 2010, respectively, was $648,000, $193,000, and $10,000 and was
recorded in interest expense in the consolidated statements of operations and
comprehensive loss.  Revenue Recognition—We commence revenue recognition on our leases based on a number of
factors. In most cases, revenue recognition under a lease begins when the
lessee takes possession of or controls the physical use of the leased asset.
Generally, this occurs on the lease commencement date. The determination of who
is the owner, for accounting purposes, of the tenant improvements determines
the nature of the leased asset and when revenue recognition under a lease
begins. If we are the owner, for accounting purposes, of the tenant improvements,
then the leased asset is the finished space, and revenue recognition begins
when the lessee takes possession of the finished space, typically when the
improvements are substantially complete.  If we conclude that we are not the owner,
for accounting purposes, of the tenant improvements (the lessee is the owner),
then the leased asset is the unimproved space and any tenant improvement
allowances funded under the lease are treated as lease incentives, which reduce
revenue recognized over the term of the lease. In these circumstances, we begin
revenue recognition when the lessee takes possession of the unimproved space to
construct their own improvements. We consider a number of different factors in
evaluating whether we or the lessee is the owner of the tenant improvements for
accounting purposes. These factors include: •     whether the lease stipulates how and on what a
tenant improvement allowance may be spent; •     whether the tenant or landlord retains legal
title to the improvements; •     the uniqueness of the improvements; •     the expected economic life of the tenant
improvements relative to the length of the lease; and •     who constructs or directs the construction of
the improvements.  We recognize rental income on a straight-line basis
over the term of each lease. The difference between rental income earned on a
straight-line basis and the cash rent due under the provisions of the lease
agreements is recorded as deferred rent receivable and is included as a
component of accounts receivable. Due to the impact of the straight-line basis,
rental income generally will be greater than the cash collected in the early
years and will be lesser than the cash collected in the later years of a lease.
Our policy for percentage rental income is to defer recognition of contingent
rental income until the specified target (i.e. breakpoint) that triggers the
contingent rental income is achieved. We periodically review the collectability
of outstanding receivables. Allowances will be taken for those balances that we
deem to be uncollectible, including any amounts relating to straight-line rent
receivables.  Reimbursements from tenants for recoverable real
estate tax and operating expenses are accrued as revenue in the period in which
the applicable expenses are incurred. We make certain assumptions and judgments
in estimating the reimbursements at the end of each reporting period. We do not
expect the actual results to materially differ from the estimated
reimbursements.  F-9


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We record lease
termination income if there is a signed termination letter agreement, all of
the conditions of the agreement have been met, collectability is reasonably
assured and the tenant is no longer occupying the property. Upon early lease
termination, we provide for losses related to unrecovered intangibles and other
assets.  Income Taxes—We
have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as
amended (the “Code”). Our qualification and taxation as a REIT depends on our
ability, on a continuing basis, to meet certain organizational and operational
qualification requirements imposed upon REITs by the Code. If we fail to
qualify as a REIT for any reason in a taxable year, we will be subject to tax
on our taxable income at regular corporate rates. We would not be able to
deduct distributions paid to stockholders in any year in which we fail to
qualify as a REIT. We will also be disqualified for the four taxable years
following the year during which qualification was lost unless we are entitled
to relief under specific statutory provisions.  Additionally, GAAP prescribes a
recognition threshold and measurement attribute for the financial statement
recognition of a tax position taken, or expected to be taken, in a tax return.
A tax position may only be recognized in the consolidated financial statements
if it is more likely than not that the tax position will be sustained upon
examination. We believe it is more likely than not that our tax positions will
be sustained in any tax examinations.  Repurchase of Common Stock—We offer a share repurchase program which may allow
certain stockholders to have their shares repurchased subject to approval and
certain limitations and restrictions (see Note 3). We account for those
financial instruments that represent our mandatory obligation to repurchase
shares as liabilities to be reported at settlement value. At such time, we will
reclassify such obligations from equity to a liability based upon their
respective settlement values. As of December 31, 2012 and 2011, no such obligations
existed.  Restricted Cash—Restricted
cash primarily consisted of escrowed insurance premiums, real estate taxes and
investor proceeds for which shares of common stock had not been issued of $1,053,000
and $214,000 as of December 31, 2012 and 2011, respectively.  Class B Units—Effective
October 1, 2012, the Advisor and Sub-advisor are no longer entitled to the
payment of asset management fees in cash under the A&R Advisory Agreement. 
Instead, we will issue to the Advisor and Sub-advisor units of the Operating
Partnership designated as “Class B units” in connection with the asset
management services provided by the Advisor and Sub-advisor.  The Class B units will vest, and will no longer be
subject to forfeiture, at such time as all of the following events occur: (x)
the value of the Operating Partnership’s assets plus all distributions made
equals or exceeds the total amount of capital contributed by investors plus a
6% cumulative, pre-tax, non-compounded annual return thereon (the “economic
hurdle”); (y) any one of the following occurs: (1) the termination of the
A&R Advisory Agreement by an affirmative vote of a majority of our
independent directors without cause; (2) a listing event; or (3) another
liquidity event; and (z) the Advisor is still providing advisory services to us
(the “service condition”). Such Class B units will be forfeited immediately if:
(a) the A&R Advisory Agreement is terminated for cause; or (b) the A&R
Advisory Agreement is terminated by an affirmative vote of a majority of our
independent directors without cause before the economic hurdle has been met.  We have concluded that the Advisor and Sub-advisor’s
performance under the A&R Advisory Agreement and the Fourth Amended and
Restated Sub-Advisory Agreement is not complete until they have served as the
Advisor and Sub-advisor through the date of a Liquidity Event because, prior to
such date, the Class B units are subject to forfeiture by the Advisor and
Sub-advisor.  Additionally, the Advisor and Sub-advisor have no disincentive
for nonperformance other than the forfeiture of Class B units, which is not a
sufficiently large disincentive for nonperformance and, accordingly, no
performance commitment exists. As a result, we have concluded the measurement
date occurs when a Liquidity Event has occurred and at such time the Advisor
and Sub-advisor have continued providing advisory services, and that the Class
B units are not considered issued until such a Liquidity Event.  The Class B units have both a market condition and a
service condition up to and through a Liquidity Event. We intend to recognize
costs during periods prior to the final measurement date in accordance with
GAAP. As a result, the vesting of Class B units occurs only upon completion of
both a market condition and service condition.  The satisfaction of the market
or service condition is not probable and thus no compensation will be
recognized unless the market condition or service condition becomes probable.  Because the Advisor and Sub-advisor can be terminated
without cause before a Liquidity Event occurs and at such time the market
condition and service condition may not be met, the Class B units may be
forfeited.  Additionally, if the market condition and service condition had
been met and a Liquidity Event had not occurred, the Advisor and Sub-advisor
could not control the Liquidity Event because each of the aforementioned events
that represent a Liquidity Event must be approved unanimously by our
independent directors. As a result, we have concluded that the service
condition is not probable.  Based on our conclusion of the market condition and
service condition not being probable, the Class B Units will be treated as
unissued for accounting purposes until the market condition, service condition
and Liquidity Event have been achieved.  However, as the Class B Units are
deemed to be participating securities, the distributions paid to the Advisor
and Sub-advisor will be treated as compensation expense. This expense will be
calculated as the product of the number of unvested units issued to date and
the stated distribution rate at the time such distribution is authorized. F-10


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Earnings Per Share—Earnings per share are calculated based on the weighted average number
of common shares outstanding during each period. Diluted income per share
considers the effect of any potentially dilutive share equivalents, of which we
had none for the years ended December 31, 2012, 2011, and 2010.  Segment Reporting—We assess and measure operating results of our properties based on net
property operations. We internally evaluate the operating performance of our
portfolio of properties and do not differentiate properties by geography, size
or type. Each of our investment properties is considered a separate operating
segment, and as each property earns revenue and incurs expenses, individual
operating results are reviewed and discrete financial information is available.
However, our properties are aggregated into one reportable segment as we evaluate
the aggregate performance of the properties.  Noncontrolling Interests—Noncontrolling interests in the consolidated balance
sheets represent the economic equity interests of the Joint Venture that are
not owned by us. Noncontrolling interests in the consolidated statements of
equity represent contributions, distributions and allocated earnings to the
CBRE Investors. Noncontrolling interests in earnings of the Joint Venture in
the consolidated statements of operations and comprehensive loss represents losses
allocated to noncontrolling interests based on the economic ownership
percentage of the consolidated Joint Venture held by these investors.  Impact of Recently Issued Accounting Pronouncements—In May 2011, the Financial Accounting Standards Board
(the “FASB”) issued Accounting Standards Update (“ASU”) 2011-04,Fair Value
Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement
and Disclosure Requirements in U.S. GAAP and IFRS. ASU 2011-04 clarifies
some existing concepts, eliminates wording differences between U.S. GAAP and
International Financial Reporting Standards (“IFRS”), and in some limited
cases, changes some principles to achieve convergence between GAAP and IFRS.
ASU 2011-04 results in a consistent definition of fair value and common
requirements for measurement of and disclosure about fair value between GAAP
and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements
that are estimated using significant unobservable (Level 3) inputs. ASU 2011-04
was effective for us as of January 1, 2012. The adoption of this pronouncement
did not materially impact our consolidated financial statements.  In June 2011, the FASB issued ASU 2011-05,Presentation
of Comprehensive Income, which requires an entity to present the total of
comprehensive income, the components of net income, and the components of other
comprehensive income either in a single continuous statement of comprehensive
income, or in two separate but consecutive statements. ASU 2011-05 eliminates
the option to present components of other comprehensive income as part of the
statement of equity. ASU 2011-05 was effective for us as of January 1, 2012.
The adoption of this pronouncement did not materially impact our consolidated
financial statements.  In August 2012, the FASB issued ASU 2012-03,Technical
Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs
Pursuant to SEC Staff Accounting Bulletin (SAB) No. 114, Technical Amendments
Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting
Standards Update 2010-22 (SEC Update). This updateamends
a number of SEC sections in the FASB Accounting Standards Codification as a
result of (1) the issuance of SAB 114, (2) the issuance of SEC Final Rule
33-9250, and (3) corrections related to ASU 2010-22.  ASU 2012-03 was
effective upon issuance.  The adoption of this pronouncement did not have a
material impact on our consolidated financial statements.  In October 2012, the FASB issued ASU 2012-04,Technical
Corrections and Improvements. The amendments in this update cover a wide
range of topics in the Accounting Standards Codification. These amendments
include technical corrections and improvements to the Accounting Standards
Codification and conforming amendments related to fair value measurements. ASU
2012-04 will be effective for us as of January 1, 2013. The adoption of this
pronouncement is not expected to have a material impact on our consolidated
financial statements.  3. EQUITY  General—We
have the authority to issue a total of 180,000,000 shares of common stock with
a par value of $0.01 per share and 10,000,000 shares of preferred stock, $0.01
par value per share. As of December 31, 2012, we had issued 13,801,251 shares
of common stock generating gross cash proceeds of $136.1 million, and we had
issued no shares of preferred stock. The holders of shares of the common stock
are entitled to one vote per share on all matters voted on by stockholders,
including election of the board of directors. Our charter does not provide for
cumulative voting in the election of directors.  Dividend Reinvestment Plan—We have adopted the DRP that allows stockholders to
have distributions invested in additional shares of our common stock at a price
equal to $9.50 per share. Stockholders who elect to participate in the DRP, and
who are subject to U.S. federal income taxation laws, will incur a tax
liability on an amount equal to the fair value on the relevant distribution
date of the shares of our common stock purchased with reinvested distributions,
even though such stockholders have elected not to receive the distributions
used to purchase those shares of common stock in cash.  Distributions
reinvested through the DRP for the years ended December 31, 2012 and 2011, were
$1,324,000 and $158,000, respectively.  There were no distributions reinvested through
the DRP during the year ended December 31, 2010. F-11


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Share Repurchase Program—Our share repurchase program may provide a limited
opportunity for stockholders to have shares of common stock repurchased,
subject to certain restrictions and limitations, at a price equal to or at a
discount from the purchase price paid for the shares being repurchased.  Repurchase
of shares of common stock will be made monthly upon written notice received by
us at least five days prior to the end of the applicable month. Stockholders
may withdraw their repurchase request at any time up to five business days
prior to the repurchase date.  The board of directors may, in its sole discretion,
amend, suspend, or terminate the share repurchase program at any time. If the
board of directors decides to amend, suspend or terminate the share repurchase
program, stockholders will be provided with no less than 30 days’ written
notice. During the year ended December 31, 2012, there were 3,749 shares
repurchased for $35,089 under the share repurchase program for an average
repurchase price of $9.36 per share.  During the year ended December 31, 2011,
there were 5,630 shares repurchased for $56,244 under the share repurchase
program for an average repurchase price of $9.99 per share.  There were no
shares repurchased during the year ended December 31, 2010.  2010 Long-Term Incentive Plan—We have adopted a 2010 Long-Term Incentive Plan which
may be used to attract and retain officers, advisors, and consultants. We have
not issued any shares under this plan as of December 31, 2012.  2010 Independent Director Stock Plan—We have also adopted an Amended and Restated 2010
Independent Director Stock Plan which may be used to offer independent
directors an opportunity to participate in our growth through awards of shares
of restricted common stock subject to time-based vesting. We have not issued
any shares under this plan as of December 31, 2012.  4. FAIR VALUE MEASUREMENTS  ASC 820,Fair Value Measurements and
Disclosures(“ASC 820”) defines fair value, establishes a framework for
measuring fair value in accordance with GAAP and expands disclosures about fair
value measurements. ASC 820 emphasizes that fair value is intended to be a
market-based measurement, as opposed to a transaction-specific measurement.
Fair value is defined by ASC 820 as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Depending on the nature of the asset or
liability, various techniques and assumptions can be used to estimate the fair
value. Assets and liabilities are measured using inputs from three levels of
the fair value hierarchy, as follows: Level
1—Inputs are quoted prices (unadjusted) in active markets for identical
assets or liabilities that we have the ability to access at the measurement
date. An active market is defined as a market in which transactions for the
assets or liabilities occur with sufficient frequency and volume to provide
pricing information on an ongoing basis. Level
2—Inputs include quoted prices for similar assets and liabilities in active
markets, quoted prices for identical or similar assets or liabilities in
markets that are not active (markets with few transactions), inputs other than
quoted prices that are observable for the asset or liability (i.e., interest
rates, yield curves, etc.), and inputs that are derived principally from or
corroborated by observable market data correlation or other means (market
corroborated inputs). Level
3—Unobservable inputs, only used to the extent that observable inputs are not
available, reflect our assumptions about the pricing of an asset or liability.  The following describes the methods we
use to estimate the fair value of our financial assets and liabilities:  Cash and cash equivalents, restricted cash, accounts
receivable, prepaid expenses, accounts payable, and accrued expenses—We consider the carrying values of these financial
instruments to approximate fair value because of the short period of time
between origination of the instruments and their expected realization.  Real estate investments—The purchase prices of the investment properties,
including related lease intangible assets and liabilities, were allocated at
estimated fair value based on Level 3 inputs, such as discount rates,
capitalization rates, comparable sales, replacement costs, income and expense
growth rates and current market rents and allowances as determined by
management.  Mortgage loans payable—We estimate the fair value of our debt by discounting
the future cash flows of each instrument at rates currently offered for similar
debt instruments of comparable maturities by our lenders using Level 3 inputs. 
The discount rates used approximate current lending rates for loans or groups
of loans with similar maturities and credit quality, approximately 2.70% for
variable rate debt and 4.25% for fixed rate debt, as of December 31, 2012,
assuming the debt is outstanding through maturity and considering the debt’s
collateral (if applicable).  We have utilized market information as available
or present value techniques to estimate the amounts required to be disclosed.  The
fair values and recorded values of our borrowings as of December 31, 2012, were
$158.7 million and $159.0 million, respectively.  The carrying amount of our
borrowings approximates their fair value as of December 31, 2011.  F-12


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Considerable judgment is
necessary to develop estimated fair values of financial assets and liabilities.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts we could realize on disposition of the financial assets and
liabilities.  5. REAL ESTATE ACQUISITIONS  For the year ended December 31,
2012, we acquired 19 grocery-anchored retail centers, including 13 through the
Joint Venture, for a combined purchase price of approximately
$232.2 million, including $37.9 million of assumed debt with a fair value
of $40.1 million.  We allocated the purchase price of these properties to the
fair value of the assets acquired and liabilities assumed as follows (in
thousands):  Category
 AllocationLand
 $
 60,600Building
  and improvements
 
 158,828Acquired
  in-place leases
 
 14,428Acquired
  above-market leases
 
 2,718Acquired
  below-market leases
 
 (4,339)Total
 $
 232,235
  The following information summarizes selected
financial information from our combined results of operations, as if all of our
acquisitions for 2011 and 2012 had been acquired on January 1, 2011.  We estimated that revenues, on
a pro forma basis, for the years ended December 31, 2012 and 2011, would have
been approximately $36.3 million and $35.0 million, respectively, and our net
loss attributable to our stockholders, on a pro forma basis excluding
acquisition expenses of $8.7 million, would have been approximately $0.7
million and $1.8 million, respectively. The pro forma net loss per share
excluding acquisition expenses would have been $0.05 and $0.14, respectively,
for the years ended December 31, 2012 and 2011.  This pro forma information is presented for
informational purposes only and may not be indicative of what actual results of
operations would have been had the transactions occurred at the beginning of
the period, nor does it purport to represent the results of future operations.  6.
  ACQUIRED INTANGIBLE ASSETSAcquired
  intangible lease assets consisted of the following (in thousands):2012
 
 2011Acquired
  in-place leases, net of accumulatedamortization
  of $2,310 and $318,respectively
 $
 15,655
 
 $
 3,169Acquired
  above-market leases, net of accumulatedamortization
  of $1,534 and $489,respectively
 
 5,302
 
 
 3,630Total
 $
 20,957
 
 $
 6,799
  Amortization expense recorded
on the intangible assets for the years ended December 31, 2012, 2011, and 2010
was $3,037,000, $764,000, and $43,000, respectively.  F-13


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Estimated
amortization expense of the respective acquired intangible lease assets as of
December 31, 2012 for each of the five succeeding calendar years and thereafter
is as follows (in thousands):  Year
 
 
 In-Place Leases
 
 Above-Market Leases2013
 
 
 $
 3,771
 
 $
 1,4482014
 
 
 
 3,632
 
 
 1,4182015
 
 
 
 2,795
 
 
 1,1982016
 
 
 
 2,125
 
 
 6622017
 
 
 
 1,230
 
 
 4042018
  and thereafter
 
 2,102
 
 
 172Total
 
 $
 15,655
 
 $
 5,302The
  weighted-average amortization periods for acquired in-place lease and
  above-market lease intangibles are six years and five years,respectively.
  7. MORTGAGE LOANS PAYABLE  As of December 31, 2012, we had approximately
$159.0 million of outstanding mortgage notes payable outstanding, inclusive
of a below-market assumed debt adjustment of $1.9 million. As of December 31,
2011, we had approximately $46.8 million of outstanding mortgage notes
payable outstanding.  Each of the mortgage notes payable is secured by the
respective property on which the debt was placed.  Certain of the mortgage
notes allow us to generally make additional principal payments on the loan and
draw those amounts back, not to exceed the initial loan amount, as needed.  As
of December 31, 2012 and 2011, the weighted-average interest rate for the loans
was 3.58% and 2.91%, respectively.  Excluding the below-market debt adjustment, we hold $104.6
million of our debt obligations through the Joint Venture, in which we have a
54% interest, and we hold $52.5 million of our debt obligations directly.  We
also have an unsecured credit facility with $10.0 million of available funds,
on which we have not drawn any funds as of December 31, 2012.  On December 24,
2012, we also entered into a $40.0 million secured revolving credit facility
with the potential to increase the borrowing capacity under such facility to
$250.0 million, from which we may draw funds to pay certain long-term debt
obligations as they mature.  Of the amount outstanding on our mortgage notes
payable at December 31, 2012, $17.3 million is for loans which mature in 2013.  We
have a one-year extension option on each loan maturing in 2013, subject to extension
fees and compliance with loan covenants. As of December 31, 2012 and 2011, our
leverage ratios, or the ratio of total debt, less cash and cash equivalents, to
total real estate investments, at cost, were approximately 48.5% and 51.7%,
respectively.  In conjunction with our acquisition of five real
estate properties, we assumed debt of $37.9 million with a fair value of $40.1
million. The assumed debt market adjustment will be amortized over the
remaining life of the loans. The amortization recorded on the assumed
below-market debt adjustment was $235,000 for the year ended December 31, 2012.  The
  following is a summary of our debt obligations as of December 31, 2012 and
  2011 (in thousands):December 31, 2012
 
 
 December 31, 2011Outstanding
 
 
 Maximum
 
 
 Outstanding
 
 
 MaximumPrincipal
 
 
 Loan
 
 
 Principal
 
 
 LoanBalance
 
 
 Capacity
 
 
 Balance
 
 
 CapacityFixed
  rate mortgages payable(1)
 $
 43,934
 
 $
 43,934
 
 $
 -
 
 $
 -Variable
  rate mortgages payable
 
 76,424
 
 
 89,475
 
 
 46,788
 
 
 53,400Secured
  credit facility
 
 36,709
 
 
 40,000
 
 
 -
 
 
 -Unsecured
  credit facility
 
 -
 
 
 10,000
 
 
 -
 
 
 -Assumed
  below-market debt adjustment
 
 1,940
 
 
 N/A
 
 
 -
 
 
 N/ATotal
 $
 159,007
 
 $
 183,409
 
 $
 46,788
 
 $
 53,400(1)
 The assets and liabilities of the following properties are
  neither available to pay the debts of the consolidated entity nor constitute
  obligations ofthe consolidated entity:  Baker Hill Center, Broadway
  Plaza, and Publix at Northridge.
 F-14


---



Below is a listing of the
mortgage loans payable with their respective principal payment obligations (in
thousands) and weighted-average interest rates:  2013
 
 2014
 
 2015
 
 2016
 
 2017
 
 Thereafter
 
 TotalMaturing
  debt:(1)Fixed
  rate mortgages payable
 $
 1,216
 
 $
 17,331
 
 $
 1,047
 
 $
 10,296
 
 $
 6,899
 
 $
 7,145
 
 $
 43,934Variable
  rate mortgages payable
 
 17,681
 
 
 1,105
 
 
 1,105
 
 
 16,093
 
 
 33,640
 
 
 6,800
 
 
 76,424Secured
  line of credit
 
 -
 
 
 -
 
 
 36,709
 
 
 -
 
 
 -
 
 
 -
 
 
 36,709Total
  maturing debt
 $
 18,897
 
 $
 18,436
 
 $
 38,861
 
 $
 26,389
 
 $
 40,539
 
 $
 13,945
 
 $
 157,067Weighted-average
  interest rate on debt:Fixed
  rate mortgages payable(2)
 
 7.0%
 
 
 7.5%
 
 
 6.5%
 
 
 6.0%
 
 
 3.7%
 
 
 6.1%
 
 
 6.3%Variable
  rate mortgages payable
 
 2.8%
 
 
 2.5%
 
 
 2.5%
 
 
 2.7%
 
 
 2.4%
 
 
 2.3%
 
 
 2.6%Secured
  line of credit
 
 0.0%
 
 
 0.0%
 
 
 2.5%
 
 
 0.0%
 
 
 0.0%
 
 
 0.0%
 
 
 2.5%Total
 
 3.1%
 
 
 7.2%
 
 
 2.6%
 
 
 4.0%
 
 
 2.6%
 
 
 4.2%
 
 
 3.6%(1)
 The debt maturity table does not include any below-market
  debt adjustment, of which $1,940, net of accumulated amortization, wasoutstanding as of December 31, 2012.(2)
 A portion of the fixed rate debt represents loans assumed
  as part of certain acquisitions.  These loans typically have higher interest
  rates thaninterest rates associated with new debt.As
  of December 31, 2012, we were in compliance with all debt covenants.
  8.
  ACQUIRED BELOW-MARKET LEASE INTANGIBLESAcquired
  below-market lease intangibles consisted of the following (in thousands):2012
 
 2011Acquired
  below-market leases, net of accumulatedamortization
  of $811 and $161,respectively
 $
 4,892
 
 $
 1,203
  Amortization recorded on the
intangible liabilities for the years ended December 31, 2012, 2011, and 2010
was $650,000, $151,000, and $10,000, respectively.  Estimated amortization income
of the intangible lease liabilities as of December 31, 2012 for each of the
five succeeding calendar years and thereafter is as follows (in thousands):  Year
 Below-Market Leases2013
 $
 1,0752014
 
 1,0112015
 
 7952016
 
 6642017
 
 5172018
  and thereafter
 
 830Total
 $
 4,892The
  weighted-average amortization period for below market lease intangibles is
  six years.
 F-15


---



9.
COMMITMENTS AND CONTINGENCIES  Sponsor Organization and Offering
Costs  In addition to the accounts payable to affiliates,
there are approximately $6.9 million of offering costs incurred by the
Sub-advisor on our behalf that have not been charged to us. Organization and
offering cost reimbursements may not exceed 1.5% of the gross proceeds raised
through our offering. Whether these costs incurred by the Sub-advisor will be
billed is dependent upon the success of our offering and the discretion of the
Sub-advisor.  Litigation  In the ordinary course of business, we may become
subject to litigation or claims. There are no material legal proceedings
pending or known to be contemplated against us.  Environmental Matters  In connection with the ownership and operation of real
estate, we may be potentially liable for costs and damages related to
environmental matters. We have not been notified by any governmental authority
of any non-compliance, liability or other claim, and we are not aware of any
other environmental condition that we believe will have a material impact on
our consolidated financial statements.  Operating Lease  We lease land under a long-term lease at one property,
which was acquired in 2011.  Total rental expense for the lease was $18,300 and
$4,500 for the years ended December 31, 2012 and 2011, respectively.  Minimum
rental commitments under the noncancelable term of the lease as of December 31,
2012 are as follows:  (i) 2013, $20,000; (ii) 2014, $20,000; (iii) 2015, $20,000;
(iv) 2016, $20,000; and (v) 2017, $17,000.  10. RELATED PARTY TRANSACTIONS  Advisory Agreement—Pursuant to our advisory agreement, the Advisor is entitled to
specified fees for certain services, including managing our day-to-day
activities and implementing our investment strategy. The Advisor has entered
into a sub-advisory agreement with the Sub-advisor, which manages our
day-to-day affairs and our portfolio of real estate investments, subject to the
board’s supervision and certain major decisions requiring the consent of both
the Advisor and Sub-advisor. The expenses to be reimbursed to the Advisor and
Sub-advisor will be reimbursed in proportion to the amount of expenses incurred
on our behalf by the Advisor and Sub-advisor, respectively.  Organization and Offering Costs—Under the terms of the advisory agreement, we are to
reimburse on a monthly basis the Advisor, the Sub-advisor or their respective
affiliates for cumulative organization and offering costs and future
organization and offering costs they may incur on our behalf but only to the
extent that the reimbursement would not exceed 1.5% of gross offering proceeds
over the life of our offering. As of December 31, 2012, the Advisor,
Sub-advisor and their affiliates have billed us for approximately $7.2 million
of organization and offering costs, and we have reimbursed $4.2 million of such
costs, resulting in a net payable of $3.0 million. In addition, approximately $6.9
million of offering costs incurred by the Sub-advisor on our behalf has not
been charged to us or been recorded in our consolidated financial statements.
Whether these costs incurred by the Sub-advisor will be billed is dependent
upon the success of our offering and the discretion of the Sub-advisor.  As of December
31, 2011, the Advisor, Sub-advisor or their affiliates had incurred $7.1 million
of organization and offering costs which we had yet to reimburse. Acquisition
Fee—We pay the Advisor an acquisition
fee related to services provided in connection with the selection and purchase
or origination of real estate and real estate-related investments. The
acquisition fee is equal to 1.0% of the cost of investments we acquire or
originate, including acquisition or origination expenses and any debt
attributable to such investments.  We incurred acquisition fees payable to the
Advisor, Sub-advisor and their affiliates of $1,705,000, $356,000, and $210,000,
respectively, for the years ended December 31, 2012, 2011, and 2010 in
connection with our property acquisitions.  The amount of these acquisition
fees outstanding and payable (receivable) by us as of December 31, 2012 and 2011
was $191,000 and ($44,000), respectively. The receivable at December 31, 2011
was due to an overpayment of acquisition fees related to the Cureton Town
Center acquisition.  Asset Management Fee—We paid the Advisor an asset management fee for the asset management
services it provides pursuant to the advisory agreement. The asset management
fee, payable monthly in arrears (based on assets we held during the previous
month) was equal to 0.08333% of the sum of the cost of all real estate and real
estate-related investments we owned and of our investments in joint ventures,
including certain expenses and any debt attributable to such investments.
However, the Advisor reimbursed all or a portion of the asset management fee
for any applicable period to the extent that as of the date of the payment, our
modified funds from operations (as defined in accordance with the then-current
practice guidelines issued by the Investment Program Association with an F-16


---



additional adjustment to add back capital contribution
amounts received from the Sub-advisor or an affiliate thereof, without any
corresponding issuance of equity to the Sub-advisor or its affiliate), during
the quarter were not at least equal to our declared distributions during the
quarter. We cannot avoid payment of an asset management fee by raising our distribution
rate beyond $0.65 per share on an annualized basis. Total asset management fees
incurred for the years ended December 31, 2012, 2011, and 2010 were $1,243,000,
$347,000, and $18,000, respectively, with $546,000, $284,000, and $18,000 of
these fees being waived or reimbursed by the Advisor and Sub-advisor. For the years
ended December 31, 2012 and 2011, the net asset management fees of $697,000 and
$63,000, respectively, were paid solely by the CBRE Investors to the Advisor
and Sub-advisor, as the amount of asset management fees for which we were
responsible were waived or reimbursed to us by the Advisor and Sub-advisor
pursuant to the advisory agreement between the Joint Venture and the Advisor. 
The amount of these asset management fees outstanding and payable by us as of
December 31, 2012 and 2011 was $248,000 and $63,000, respectively.  On February 4, 2013, we and the
Operating Partnership entered into an Amended and Restated Advisory Agreement
(the “A&R Advisory Agreement”) with the Advisor.  The A&R Advisory
Agreement provides that the asset management compensation structure
contemplated in the previous advisory agreement between us and the Advisor (as
discussed above) is eliminated effective October 1, 2012.  Instead, we expect
to issue to the Advisor on a quarterly basis performance-based restricted
partnership units of the Operating Partnership designated as “Class B units.” 
The Class B units will vest, and will no longer be subject to forfeiture, at
such time as all of the following events occur: (x) the value of the Operating Partnership’s
assets plus all distributions made equals or exceeds the total amount of
capital contributed by investors plus a 6% cumulative, pre-tax, non-compounded
annual return thereon (the “economic hurdle”); (y) any one of the following
occurs: (1) the termination of the A&R Advisory Agreement by an affirmative
vote of a majority of our independent directors without cause; (2) a listing
event; or (3) another liquidity event; and (z) the Advisor is still providing
advisory services to us (the “service condition”). Such Class B units will be
forfeited immediately if: (a) the A&R Advisory Agreement is terminated for
cause; or (b) the A&R Advisory Agreement is terminated by an affirmative
vote of a majority of our independent directors without cause before the
economic hurdle has been met.  The Class B units are participating securities
that will receive distributions at the same rates and dates as the
distributions paid to our common stockholders.  These distributions will be
calculated as the product of the number of unvested units issued to date and
the stated distribution rate at the time such distribution is authorized.  On February 13, 2013, the Operating Partnership issued
59,245 Class B units to the Advisor under the A&R Advisory Agreement for
the asset management services performed by the Advisor during the period from
October 1, 2012 to December 31, 2012.  These Class B units will not vest until
the conditions referenced above have been met.  Financing Fee—We
pay the Advisor or Sub-advisor a financing fee equal to 0.75% of all amounts
made available under any loan or line of credit. We incurred financing fees payable
to the Advisor, Sub-advisor and their affiliates of $816,000, $180,000, and
$110,000 for the years ended December 31, 2012, 2011, and 2010, respectively. 
The amount of these financing fees outstanding and receivable by us as of
December 31, 2011 was $19,000, which was due to an overpayment of financing
fees related to the Cureton Town Center acquisition.  Disposition Fee—For
substantial assistance by the Advisor, Sub-advisor or any of their affiliates
in connection with the sale of properties or other investments, we will pay the
Advisor or its assignee 2.0% of the contract sales price of each property or
other investment sold. The conflicts committee will determine whether the
Advisor, Sub-advisor or their respective affiliates have provided substantial
assistance to us in connection with the sale of an asset. Substantial
assistance in connection with the sale of a property includes the Advisor’s or
Sub-advisor’s preparation of an investment package for the property (including
an investment analysis, rent rolls, tenant information regarding credit, a
property title report, an environmental report, a structural report and
exhibits) or such other substantial services performed by the Advisor or
Sub-advisor in connection with a sale. However, if we sell an asset to an
affiliate, our organizational documents will prohibit us from paying the
Advisor a disposition fee. There were no disposition fees incurred during the years
ended December 31, 2012, 2011, and 2010.  General and Administrative Expenses—The sponsors
provided $0, $88,000, and $140,000, respectively, during the years ended December
31, 2012, 2011, and 2010, for certain of our general and administrative
expenses as capital contributions. The sponsors have not received, and will not
receive, any reimbursement for these contributions. The sponsors do not intend
to make further capital contributions to continue to fund our general and
administrative expenses. As of December 31, 2012, we owed the Advisor,
Sub-advisor and their affiliates $2,000 for general and administrative expenses
paid on our behalf. The amount payable to the Advisor, Sub-advisor and their
affiliates as of December 31, 2011, for general and administrative expenses was
$1,140,000.  As of December 31, 2012, the Advisor, Sub-advisor and their
affiliates have not allocated any portion of their employees’ salaries to
general and administrative expenses.  Subordinated Participation in
Net Sales Proceeds—The Operating Partnership will pay to PECO-ARC Special
Limited Partner, LLC (the “Special Limited Partner”) a subordinated
participation in the net sales proceeds of the sale of real estate assets equal
to 15.0% of remaining net sale proceeds after return of capital contributions
to stockholders plus payment to investors of a 7.0% cumulative, pre-tax,
non-compounded return on the capital contributed by stockholders.  Advisor has
a 15.0% interest and the Sub-advisor has an 85.0% interest in the Special
Limited Partner. F-17


---



Subordinated Incentive Listing
Fee—The Operating Partnership will pay to the Special Limited Partner a
subordinated incentive listing distribution of 15.0% of the amount by which the
market value of all of our issued and outstanding common stock plus
distributions exceeds the aggregate capital contributed by stockholders plus an
amount equal to a 7.0% cumulative, pre-tax non-compounded annual return to
stockholders.  Neither the Special Limited
Partner nor any of its affiliates can earn both the subordination participation
in the net sales proceeds and the subordinated incentive listing distribution.  Subordinated Distribution Upon Termination of the
Advisor Agreement—Upon termination or
non-renewal of the A&R Advisory Agreement, the Special Limited Partner
shall be entitled to a subordinated termination fee in the form of a
non-interest bearing promissory note equal to 15.0% of the amount by which the
cost of our assets plus distributions exceeds the aggregate capital contributed
by stockholders plus an amount equal to a 7.0% cumulative, pre-tax
non-compounded annual return to stockholders.  In addition, the Special Limited
Partner may elect to defer its right to receive a subordinated distribution
upon termination until either a listing on a national securities exchange or
other liquidity event occurs.  Property Manager—All of our real properties are managed and leased by Phillips
Edison & Company Ltd. (the “Property Manager”), an affiliated property
manager. The Property Manager is wholly owned by our Phillips Edison sponsor
and was organized on September 15, 1999. The Property Manager also manages
real properties acquired by the Phillips Edison affiliates or other third parties.  We pay to the Property Manager monthly property
management fees equal to 4.5% of the gross cash receipts of the properties
managed by the Property Manager. In the event that we contract directly with a
non-affiliated third-party property manager with respect to a property, we will
pay the Property Manager a monthly oversight fee equal to 1.0% of the gross
revenues of the property managed. In addition to the property management fee or
oversight fee, if the Property Manager provides leasing services with respect
to a property, we will pay the Property Manager leasing fees in an amount equal
to the leasing fees charged by unaffiliated persons rendering comparable
services in the same geographic location of the applicable property. We will
reimburse the costs and expenses incurred by the Property Manager on our
behalf, including legal, travel and other out-of-pocket expenses that are
directly related to the management of specific properties, as well as fees and
expenses of third-party accountants.  If we engage the Property Manager to provide
construction management services with respect to a particular property, we will
pay a construction management fee in an amount that is usual and customary for
comparable services rendered to similar projects in the geographic market of
the property.  The Property Manager hires, directs and establishes
policies for employees who have direct responsibility for the operations of
each real property it manages, which may include, but is not limited to,
on-site managers and building and maintenance personnel. Certain employees of
the Property Manager may be employed on a part-time basis and may also be
employed by the Sub-advisor or certain of its affiliates. The Property Manager
also directs the purchase of equipment and supplies and will supervise all
maintenance activity.  Transactions involving the Property Manager consisted
of the following (in thousands):  Unpaid Amount as ofFor the Year Ended
  December 31,
 
 December 31,
 
 December 31,2012
 
 2011
 
 2010
 
 2012
 
 2011Property
  management fees
 $
 756
 
 $
 157
 
 $
 -
 
 $
 112
 
 $
 21Leasing
  commissions
 
 302
 
 
 34
 
 
 -
 
 
 96
 
 
 -Construction
  management fees
 
 41
 
 
 3
 
 
 -
 
 
 18
 
 
 2Other
  fees and reimbursements
 
 191
 
 
 46
 
 
 -
 
 
 (20)
 
 
 4Total
 $
 1,290
 
 $
 240
 
 $
 -
 
 $
 206
 
 $
 27
  Dealer Manager—Our
dealer manager is Realty Capital Securities, LLC (the “Dealer Manager”). The
Dealer Manager is a member firm of the Financial Industry Regulatory Authority,
Inc. (“FINRA”) and was organized on August 29, 2007. The Dealer Manager is
indirectly wholly owned by our AR Capital sponsor and provides certain sales,
promotional and marketing services in connection with the distribution of the
shares of common stock offered under our offering. Excluding shares sold
pursuant to the “friends and family” program, the Dealer Manager is generally
paid a sales commission equal to 7.0% of the gross proceeds from the sale of shares
of the common stock sold in the primary offering and a dealer manager fee equal
to 3.0% of the gross proceeds from the sale of shares of the common stock sold
in the primary offering.  The Dealer Manager typically reallows 100% of the
selling commissions and a portion of the dealer manager fee to participating
broker-dealers.  F-18


---



Selling commissions
incurred during the year ended December 31, 2012 were $7,880,000, all of which were
reallowed to participating broker-dealers.  Dealer manager fees incurred during
the year ended December 31, 2012 were $2,522,000, of which $767,000 was
reallowed to participating broker-dealers.  Selling commissions incurred during
the year ended December 31, 2011 were $1,014,000, all of which were reallowed
to participating broker-dealers.  Dealer manager fees incurred during the year
ended December 31, 2011, were $350,000, $76,000 of which was reallowed to
participating broker-dealers. There were no selling commissions or dealer
manager fees incurred or paid in the year ended December 31, 2010, as all
shares were sold in conjunction with our “friends and family” program under
which no fees or commissions are paid.  Share Purchases by Sub-advisor—The Sub-advisor has agreed to purchase on a monthly
basis sufficient shares sold in our public offering such that the total shares
owned by the Sub-advisor is equal to at least 0.10% of our outstanding shares (excluding
shares issued after the commencement of, and outside of, the initial public
offering) at the end of each immediately preceding month. The Sub-advisor will
purchase shares at a purchase price of $9.00 per share, reflecting no dealer
manager fee or selling commissions being paid on such shares. The Sub-advisor
may not sell any of these shares while serving as the Sub-advisor.  As of December 31, 2012, the Sub-advisor owned 23,061
shares of our common stock, or approximately 0.17% of our outstanding common
stock.  As of December 31, 2011, the Sub-advisor owned 21,412 shares of our
common stock, or approximately 0.81% of our outstanding common stock.  11. ECONOMIC DEPENDENCY  We are dependent on the Advisor, Sub-advisor, the
Property Manager, the Dealer Manager and their respective affiliates for
certain services that are essential to us, including the sale of our shares of
common stock, asset acquisition and disposition decisions, advances or
contributions for distributions, bridge financing, and other general and
administrative responsibilities. In the event that the Advisor, the
Sub-advisor, the Property Manager and/or the Dealer Manager are unable to
provide such services, we would be required to find alternative service
providers or sources of capital.  As of December 31, 2012 and 2011, we owed the Advisor,
the Sub-advisor and their respective affiliates approximately $3.6 million and
$8.4 million, respectively, for offering and organization expenses and asset
management, property management, and other fees payable as shown below (in
thousands):  2012
 
 2011Offering
  and organization expenses payable
 $
 2,987
 
 $
 7,149General
  and administrative expenses of the company paid by a Sponsor
 
 2
 
 
 1,149Asset
  management, property management, and other fees payable
 
 645
 
 
 97Total
  due
 $
 3,634
 
 $
 8,395
  In addition, as of December 31, 2012, approximately
$6.9 million of offering costs incurred by the Sub-advisor on our behalf has
not been charged to us or recorded in our consolidated financial statements. 
Whether these costs will be billed to us in the future will depend on the
success of our offering and the discretion of the Sub-advisor.  The sponsors
provided $88,000 during the year ended December 31, 2011 and $228,000 since
inception for certain of our general and administrative expenses as capital
contributions. The sponsors have not received, and will not receive, any
reimbursement for these contributions. There was no sponsor contribution for
the year ended December 31, 2012.  Our sponsors do not intend to make further
capital contributions to continue to fund certain of our general and
administrative expenses.  12. FUTURE MINIMUM RENTS  Our operating leases’ terms and expirations vary. The
leases frequently have provisions to extend the lease agreement and other terms
and conditions as negotiated. We retain substantially all of the risks and
benefits of ownership of the real estate assets leased to tenants.  F-19


---



Approximate future rentals to be
received under non-cancelable operating leases in effect at December 31, 2012,
assuming no new or renegotiated leases or option extensions on lease
agreements, are as follows (in thousands):  Year
 
 Amount2013
 
 $
 26,2962014
 
 
 24,4352015
 
 
 21,9702016
 
 
 19,7762017
 
 
 17,3682018
  and thereafter
 
 83,371Total
 
 $
 193,216
  One tenant, Publix, comprised
approximately 12% of the aggregate annualized effective rent of our 26 shopping
centers as of December 31, 2012.  No other tenant comprised 10% or more of our
aggregate annualized effective rent as of December 31, 2012.  13. QUARTERLY FINANCIAL DATA
(UNAUDITED)  The following is a summary of
the unaudited quarterly financial information for the years ended December 31, 2012
and 2011. We believe that all necessary adjustments, consisting only of normal
recurring adjustments, have been included in the amounts stated below to
present fairly, and in accordance with GAAP, the selected quarterly
information.  2012First
 
 
 Second
 
 
 Third
 
 
 Fourth(in thousands, except per share amounts)
 Quarter
 
 
 Quarter
 
 
 Quarter
 
 
 QuarterTotal
  revenue
 $
 2,215
 
 $
 3,105
 
 $
 5,148
 
 $
 7,082Operating
  loss
 
 (52)
 
 
 (725)
 
 
 (424)
 
 
 (53)Net
  loss attributable to Company stockholders
 
 (258)
 
 
 (805)
 
 
 (1,036)
 
 
 (1,247)Loss
  per share - basic and diluted
 
 (0.08)
 
 
 (0.17)
 
 
 (0.15)
 
 
 (0.11)2011First
 
 
 Second
 
 
 Third
 
 
 Fourth(in thousands, except per share amounts)
 Quarter
 
 
 Quarter
 
 
 Quarter
 
 
 QuarterTotal
  revenue
 $
 603
 
 $
 620
 
 $
 839
 
 $
 1,467Operating
  loss
 
 (99)
 
 
 (467)
 
 
 (241)
 
 
 (898)Net
  loss attributable to Company stockholders
 
 (248)
 
 
 (605)
 
 
 (440)
 
 
 (1,071)Loss
  per share - basic and diluted
 
 (0.28)
 
 
 (0.49)
 
 
 (0.29)
 
 
 (0.46)
  14. SUBSEQUENT EVENTS  Distributions  On January 2, 2013, we paid a distribution equal to a
daily amount of $0.00178082 per share of common stock outstanding for
stockholders of record for the period from December 1, 2012 through December
31, 2012. The total gross amount of the distribution was approximately
$717,000, with $298,000 being reinvested in the DRP, for a net cash
distribution of $419,000.  On January 23, 2013, our board of directors authorized
distributions to the stockholders of record at the close of business each day
in the period commencing March 1, 2013 through and including March 31, 2013.
The authorized distributions equal an amount of $0.00183562 per share of common
stock, par value $0.01 per share. This equates to an approximate 6.70%
annualized yield when calculated on a $10.00 per share purchase price. A
portion of each distribution is expected to constitute a return of capital for
tax purposes.  We expect to pay these distributions on April 1, 2013.  Our
policy is not to fund distributions with proceeds from our offering.  On February 1, 2013, we paid a distribution equal to a
daily amount of $0.00178082 per share of common stock outstanding for
stockholders of record for the period from January 1, 2013 through January 31,
2013. The total gross amount of the distribution was approximately $817,000,
with $344,000 being reinvested in the DRP, for a net cash distribution of
$473,000.  F-20


---



On March 1, 2013, we paid
a distribution equal to a daily amount of $0.00183562 per share of common stock
outstanding for stockholders of record for the period from February 1, 2013
through February 28, 2013. The total gross amount of the distribution was
approximately $882,000, with $374,000 being reinvested in the DRP, for a net
cash distribution of $508,000.  Acquisition of Atlanta Portfolio  Between
January 15, 2013 and February 13, 2013, we acquired a 100% interest in a
portfolio consisting of seven shopping centers in the Atlanta, Georgia area
(the “Atlanta Portfolio”) for approximately $69.6 million, exclusive of closing
costs. The individual properties in the Atlanta Portfolio are located in:
Acworth, Georgia; Ellenwood, Georgia; Alpharetta, Georgia; Buford, Georgia;
Mableton, Georgia; Marietta, Georgia; and McDonough, Georgia. The acquisition of
the Atlanta Portfolio was partially financed with proceeds from a syndicated revolving
credit facility led by KeyBank National Association and proceeds from our
ongoing public offering. The portfolio is approximately 587,367 square feet and
is 90.8% leased.  Acquisition of Fairlawn Town Centre  On
January 30, 2013, we acquired a 100% interest in a Giant Eagle-anchored
shopping center, Fairlawn Town Centre, located in Fairlawn, Ohio, for a
purchase price of approximately $42.2 million. The acquisition was partially
financed with proceeds from a syndicated revolving credit facility led by
KeyBank National Association and proceeds from our ongoing public offering. The
347,255 square foot property is 95.0% leased.  Sale of Shares of Common Stock  From January 1, 2013 through February 28, 2013, we
raised approximately $46.7 million through the issuance of 4,697,487 shares of
common stock under our offering. As of February 28, 2013, approximately 131.4 million
shares remained available for sale to the public under our offering, exclusive
of shares available under the DRP.  Amendment
of our Advisory Agreement  On
February 4, 2013, we and the Operating Partnership entered into the A&R
Advisory Agreement with the Advisor.  The A&R Advisory Agreement provides
that the asset management compensation structure contemplated in the previous
advisory agreement between us and the Advisor (as discussed above) is
eliminated effective October 1, 2012.  Instead, we expect to issue to the
Advisor on a quarterly basis performance-based restricted partnership units of
the Operating Partnership designated as “Class B units.”  The Class B units
will vest, and will no longer be subject to forfeiture, at such time as all of
the following events occur: (x) the value of the Operating Partnership’s assets
plus all distributions made equals or exceeds the total amount of capital
contributed by investors plus a 6% cumulative, pre-tax, non-compounded annual
return thereon (the “economic hurdle”); (y) any one of the following occurs:
(1) the termination of the A&R Advisory Agreement by an affirmative vote of
a majority of our independent directors without cause; (2) a listing event; or
(3) another liquidity event; and (z) the Advisor is still providing advisory
services to us (the “service condition”). Such Class B units will be forfeited
immediately if: (a) the A&R Advisory Agreement is terminated for cause; or
(b) the A&R Advisory Agreement is terminated by an affirmative vote of a
majority of our independent directors without cause before the economic hurdle
has been met.  Additionally,
the A&R Advisory Agreement eliminates the subordinated share of cash flows
and the subordinated incentive fee contemplated under the previous advisory
agreement between us and the Advisor.  Instead, similar concepts are now set
forth in the Amended and Restated Agreement of Limited Partnership for the
Operating Partnership as follows: ·The Operating Partnership will pay
to the Special Limited Partner a subordinated participation in the net sales
proceeds of the sale of real estate assets equal to 15.0% of remaining net sale
proceeds after return of capital contributions to investors plus payment to
investors of a 7.0% cumulative, pre-tax, non-compounded return on the capital
contributed by investors. ·The Operating Partnership will pay
to the Special Limited Partner a subordinated incentive listing distribution of
15.0% of the amount by which the market value of all of our issued and
outstanding common stock plus distributions exceeds the aggregate capital contributed
by investors plus an amount equal to a 7.0% cumulative, pre-tax non-compounded
annual return to investors. ·Neither the Special Limited
Partner nor any of its affiliates can earn both the subordination participation
in the net sales proceeds and the subordinated incentive listing distribution.  Upon termination or non-renewal of the A&R
Advisory Agreement, the Special Limited Partner shall be entitled to a
subordinated termination fee in the form of a non-interest bearing promissory
note equal to 15.0% of the amount by which the cost of our assets plus
distributions exceeds the aggregate capital contributed by investors plus an
amount equal to a 7.0% cumulative, pre-tax non-compounded annual return to
investors.  In addition, the Special Limited Partner may elect to defer its
right to receive a subordinated distribution upon termination until either a
listing on a national securities exchange or other liquidity event occurs. F-21


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The Class B units are participating securities that
will receive distributions at the same rates and dates as the distributions
paid to our common stockholders.  These distributions will be calculated by the
product of the number of unvested units issued to date and the stated
distribution rate at the time the applicable distributions are authorized.  Lines
of Credit  On
January 18, 2013, weincreased the borrowing capacity
of our syndicated senior secured revolving credit facility led by KeyBank
National Association from $40 million to $88 million.  On January 30, 2013, we
again increased the borrowing capacity under this facility to $120 million.
This facility has an accordion feature that allows us to further increase the
capacity up to $250 million, subject to the terms and conditions of the
facility.  Subsequent to December 31, 2012, we drew $63.9 million from this
facility.  As of March 7, 2013, the balance under this facility was $100.6
million.  We have an unsecured credit facility with KeyBank National
Association with a capacity of $10.0 million.  Subsequent to December 31, 2012,
we drew $8.4 million from this facility.  As of March 7, 2013, the balance
under this facility was $8.4 million. F-22


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SCHEDULE
  III—REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATIONDecember 31, 2012Gross amount carried at
  end of(in thousands)
 
 
 
 
 Initial Cost (A)
 
 periodBuildings and
 
 
 Accumulated
 DateBuildings and
 Adjustments
 
 
 Improvements
 Total
 Depreciation
 Constructed /
 DateProperty Name
 City
 State
 Mortgage
 Land
 Improvements
 to Basis (B)
 Land (C)
 (C)
 (D)
 (E)
 Renovated
 AcquiredLakeside Plaza
 Salem
 VA
 $
 -
 $
 2,614
 $
 5,977
 $
 159
 $
 2,614
 $
 6,084
 $
 8,698
 $
 (748)
 1988
 12/10/2010Snow View Plaza
 Parma
 OH
 
 -
 
 3,386
 
 7,150
 
 1,764
 
 3,386
 
 7,333
 
 10,719
 
 (959)
 1981/2008
 12/15/2010St. Charles Plaza
 Haines City
 FL
 
 6,008
 
 2,780
 
 5,709
 
 1,611
 
 2,780
 
 5,724
 
 8,504
 
 (549)
 2007
 6/10/2011Centerpoint
 Easley
 SC
 
 4,940
 
 2,132
 
 4,633
 
 85
 
 2,132
 
 4,663
 
 6,795
 
 (299)
 2002
 10/14/2011Southampton Village
 Tyrone
 GA
 
 6,020
 
 2,133
 
 5,713
 
 504
 
 2,133
 
 5,759
 
 7,892
 
 (387)
 2003
 10/14/2011Burwood Village Center
 Glen Burnie
 MD
 
 300
 
 3,828
 
 11,786
 
 986
 
 3,828
 
 11,829
 
 15,657
 
 (731)
 1971
 11/9/2011Cureton Town Center
 Waxhaw
 NC
 
 8,875
 
 4,653
 
 8,113
 
 1,184
 
 4,653
 
 8,132
 
 12,785
 
 (460)
 2006
 12/29/2011Tramway Crossing
 Sanford
 NC
 
 3,400
 
 1,230
 
 3,856
 
 414
 
 1,230
 
 3,883
 
 5,113
 
 (243)
 1996/2000
 2/23/2012Westin Centre
 Fayetteville
 NC
 
 3,738
 
 1,463
 
 4,226
 
 361
 
 1,463
 
 4,240
 
 5,703
 
 (300)
 1996/1999
 2/23/2012The Village at Glynn Place
 Brunswick
 GA
 
 6,500
 
 3,671
 
 7,626
 
 53
 
 3,671
 
 7,690
 
 11,361
 
 (364)
 1996
 4/27/2012Meadowthorpe Shopping Center
 Lexington
 KY
 
 4,891
 
 3,193
 
 5,085
 
 441
 
 3,193
 
 5,154
 
 8,347
 
 (272)
 1989/2008
 5/9/2012New Windsor Marketplace
 Windsor
 CO
 
 -
 
 3,044
 
 2,152
 
 354
 
 3,044
 
 2,176
 
 5,220
 
 (88)
 2003
 5/9/2012Vine Street Square
 Kissimmee
 FL
 
 7,931
 
 5,438
 
 7,229
 
 983
 
 5,438
 
 7,294
 
 12,732
 
 (286)
 1996/2011
 6/4/2012Northtowne Square
 Gibsonia
 PA
 
 6,370
 
 1,305
 
 8,749
 
 521
 
 1,305
 
 8,813
 
 10,118
 
 (302)
 1993
 6/19/2012Brentwood Commons
 Bensenville
 IL
 
 8,913
 
 5,141
 
 8,990
 
 719
 
 5,141
 
 9,012
 
 14,153
 
 (303)
 1981/2001
 7/5/2012Sidney Towne Center
 Sidney
 OH
 
 -
 
 850
 
 4,382
 
 (931)
 
 850
 
 4,499
 
 5,349
 
 (122)
 1981/2007
 8/2/2012Broadway Plaza
 Tucson
 AZ
 
 6,971
 
 3,704
 
 8,444
 
 926
 
 3,704
 
 8,542
 
 12,246
 
 (190)
 1982-1995
 8/13/2012Richmond Plaza
 Augusta
 GA
 
 13,000
 
 4,647
 
 13,754
 
 1,099
 
 4,647
 
 13,776
 
 18,423
 
 (238)
 1980/2009
 8/30/2012Publix at Northridge
 Sarasota
 FL
 
 9,985
 
 4,155
 
 7,148
 
 569
 
 4,155
 
 7,211
 
 11,366
 
 (103)
 2003
 8/30/2012Baker Hill Center
 Glen Ellyn
 IL
 
 11,969
 
 5,585
 
 15,220
 
 1,524
 
 5,585
 
 15,241
 
 20,826
 
 (236)
 1998
 9/6/2012New Prague Commons
 New Prague
 MN
 
 6,800
 
 2,027
 
 7,826
 
 297
 
 2,027
 
 7,826
 
 9,853
 
 (87)
 2008
 10/12/2012Brook Park Plaza
 Brook Park
 OH
 
 3,747
 
 1,702
 
 8,437
 
 506
 
 1,702
 
 8,463
 
 10,165
 
 (50)
 2001
 10/23/2012Heron Creek Towne Center
 North Port
 FL
 
 (F)
 
 2,848
 
 5,296
 
 506
 
 2,848
 
 5,296
 
 8,144
 
 -
 2001
 12/17/2012Quartz Hill Towne Centre
 Lancaster
 CA
 
 (F)
 
 4,977
 
 14,904
 
 1,089
 
 4,977
 
 14,904
 
 19,881
 
 -
 1991/2012
 12/26/2012Hilfiker Square
 Salem
 OR
 
 (F)
 
 2,063
 
 5,142
 
 795
 
 2,063
 
 5,142
 
 7,205
 
 -
 1984/2011
 12/28/2012Village One Plaza
 Modesto
 CA
 
 (F)
 
 3,558
 
 20,360
 
 2,582
 
 3,558
 
 20,362
 
 23,920
 
 -
 2007
 12/28/2012Totals
 
 
 $
 120,358
 $
 82,127
 $
 207,907
 $
 19,101
 $
 82,127
 $
 209,048
 $
 291,175
 $
 (7,317)(A)
 The initial cost to us represents the original purchase
  price of the property, including amounts incurred subsequent to acquisition
  which were contemplated at the time the property was acquired.(B)
 The amounts reflected in the column labeled “Adjustments
  to Basis” include above- and below-market leases and in-place values that are
  recorded at the time of acquisition. Such amounts are not included in ourdetermination of the total gross amount carried at the end
  of the period.(C)
 The aggregate cost of real estate owned at December 31,
  2012.(D)
 Reconciliation of real estate owned:2012
 
 2011Balance at January 1
 
 $
 70,753
 $
 19,126Real estate acquisitions
 
 
 219,377
 
 51,532Additions to/improvements of real estate
 
 
 1,045
 
 95Balance at December 31
 
 $
 291,175
 $
 70,753(E)
 Reconciliation of accumulated depreciation :2012
 
 2011Balance at January 1
 
 $
 1,261
 $
 65Depreciation expense
 
 
 6,056
 
 1,196Balance at December 31
 
 $
 7,317
 $
 1,261(F)
 The loan secured by these properties is a revolving credit
  facility on which we have borrowed $36,709 as of December 31, 2012.  The
  amount of loan is not allocated to the individual properties.* * * * *
 F-23


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SIGNATURES Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized this 8th day of
March 2013.  PHILLIPS EDISON-ARC SHOPPING CENTER
  REIT INC.By:
 /s/    JEFFREYS. EDISONJeffrey S. EdisonCo-Chairman of the Board and Chief Executive Officer
 Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed by the following persons in
the capacities and on the dates indicated.  Signature
 Title
 Date/s/    JEFFREYS. EDISON
  
  Michael C. Phillips
 Co-Chairman of the Board and Chief Executive Officer
  (Principal Executive Officer)
 March 7, 2013/s/    MICHAELC. PHILLIPS
  
  Jeffrey S. Edison
 Co-Chairman of the Board of Directors
 March 7, 2013/s/    RICHARDJ. SMITH
  
  Richard J. Smith
 Chief Financial Officer (Principal Financial Officer
  and Principal Accounting Officer)
 March 7, 2013/s/    WILLIAMM. KAHANE
  
  William M. Kahane
 Director
 March 7, 2013/s/    LESLIET. CHAO
  
  Leslie T. Chao
 Director
 March 7, 2013/s/    ETHANHERSHMAN
  
  Ethan Hershman
 Director
 March 7, 2013/s/    RONALDK. KIRK
  
  Ronald K. Kirk
 Director
 March 7, 2013/s/    PAULMASSEY
  
  Paul Massey
 Director
 March 7, 2013
  F-24


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