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Phillips Edison & Company Reports Significant Growth in Same-Store NOI and FFO Following Merger

Phillips Edison & Company Inc. (PECO), an internally-managed real estate investment trust that invests in grocery-anchored shopping centers, reported its results for the quarter and six months ended June 30, 2018.

Phillips Edison & Company Inc. (PECO), an internally-managed real estate investment trust that invests in grocery-anchored shopping centers, reported its results for the quarter and six months ended June 30, 2018.

“Our portfolio of grocery-anchored shopping centers continues to produce strong results, as illustrated by our same-center NOI increase of 6.5 percent during the quarter,” commented Jeff Edison, chairman and chief executive officer of Phillips Edison & Company. “This growth in property NOI, coupled with $9.1 million of fee income generated by our investment management business, drove a 13.3 percent increase in FFO per diluted share. Our FFO totaled 100.3 percent of our total distributions for the quarter compared to 85.7 percent a year ago.”

Merger with Phillips Edison Grocery Center REIT II

  • On July 17, 2018, PECO entered into a definitive merger agreement with Phillips Edison Grocery Center REIT II Inc., a publicly registered non-traded REIT it currently advises and manages.
  • PECO’s merger with REIT II’s 86 properties will create a national portfolio of 321 grocery-anchored shopping centers totaling approximately 36.6 million square feet located across 33 states with a total enterprise value of approximately $6.3 billion.

Financial Results for the Three and Six Months Ended June 30, 2018

Net Loss

For the second quarter of 2018, net loss totaled $14.1 million compared to net loss of $1.2 million for the second quarter of 2017.

For the six months ended June 30, 2018, net loss totaled $15.9 million compared to a net loss of $0.1 million for the same period in 2017.

The company noted that the increase in net loss for both periods was primarily driven by the increased depreciation and amortization of owning an additional 77 properties when compared to June 30, 2017.

Funds from Operations (FFO)

For the second quarter of 2018, funds from operations attributable to stockholders and convertible noncontrolling interests increased 43.4 percent to $38.7 million, or $0.17 per diluted share, from $27.0 million, or $0.15 per diluted share, during the second quarter of 2017. FFO per diluted share increased 13.3 percent.

For the six months ended June 30, 2018, FFO attributable to stockholders and convertible noncontrolling interests increased 41.8 percent to $79.1 million compared to $55.7 million during the same year-ago period. FFO per diluted share increased 13.3 percent.

The company noted that the improvement in FFO for both periods was driven by an increase in net operating income generated by additional properties owned, a 6.5 percent and 5.4 percent increase in pro forma same-center NOI, and $9.1 million and $17.8 million of fee income generated by PECO’s investment management business for the three and six months ended June 30, 2018, respectively. The company did not generate fee income prior to the acquisition of the investment management business from Phillips Edison Limited Partnership in October 2017.

Modified Funds from Operations (MFFO)

For the second quarter of 2018, modified funds from operations increased 39.0 percent to $40.9 million, or $0.18 per diluted share, compared to $29.5 million, or $0.16 per diluted share, during the same year-ago quarter.

For the first six months of 2018, MFFO increased 42.9 percent to $83.1 million, or $0.36 per diluted share, compared to $58.2 million, or $0.32 per diluted share, during the same year-ago period.

The increase in MFFO for both periods was directly correlated to the increase in FFO.

Pro Forma Same-Center Results

For the second quarter of 2018, pro forma same-center NOI increased 6.5 percent to $62.4 million compared to $58.6 million during the second quarter of 2017. The increase was driven by a $0.22 increase in minimum rent per square foot, or 1.9 percent, as well as a 3.2 percent decrease in operating expenses versus the comparable period.

For the six months ended June 30, 2018, pro forma same-center NOI increased 5.4 percent to $123.5 million compared to $117.1 million during the same period in 2017. The company said that the increase was driven by the aforementioned increase in minimum rent, as well as a 4.2 percent decrease in operating expenses versus the comparable period.

The improvement in operating expenses during both periods was due to synergies resulting from PECO’s acquisition of PELP during 2017, the company said.

Pro-forma same-center leased occupancy totaled 94.0 percent which is unchanged from June 30, 2017.

Three and Six Months Ended June 30, 2018 Portfolio Results

Portfolio Statistics

At quarter-end, the portfolio consisted of 235 properties, totaling approximately 26.3 million square feet located in 32 states. This compares to 158 properties, totaling approximately 17.2 million square feet located in 28 states as of June 30, 2017.

Leased portfolio occupancy totaled 93.8 percent compared to 93.9 percent as of December 31, 2017 (the first comparable period after the PELP acquisition).

Leasing Activity

During the second quarter 2018, 178 leases (new, renewal and options) were executed totaling approximately 769,000 square feet. This compares to 130 leases executed totaling approximately 488,000 square feet during the second quarter of 2017.

During the first six months of 2018, there were 369 leases (new, renewal and options) executed totaling approximately 1.6 million square feet. This compares to 262 leases executed totaling approximately 1.0 million square feet during the same period of 2017.

Acquisition & Disposition Activity

During the quarter the company generated $13.4 million from the sale of two properties; and there was no acquisition activity.

During the six months ended June 30, 2018, one shopping center was acquired for a total cost of $8.4 million; and there was no disposition activity outside of what occurred during the second quarter of 2018.

Investment Management Business

During the second quarter of 2018, the company generated $9.1 million of fee income for asset management and property management services rendered to third parties.

At quarter-end, the company had approximately $2.1 billion of third-party assets under management, which included Phillips Edison Grocery Center REIT II, Phillips Edison Grocery Center REIT III, and Necessity Retail Partners (a joint venture between Phillips Edison Grocery Center REIT II and TPG Real Estate).

Phillips Edison Grocery Center REIT III

On May 8, 2018, the registration statement for Phillips Edison Grocery Center REIT III pertaining to an initial public offering was declared effective by the Securities and Exchange Commission. REIT III will offer up to an aggregate of $1.7 billion in common stock.

Balance Sheet Highlights at June 30, 2018

At quarter-end, the company had $453.0 million of borrowing capacity available on its $500 million revolving credit facility.

Net debt to TEV was 42.2 percent at June 30, 2018.

At quarter-end, the company’s outstanding debt had a weighted-average interest rate of 3.5 percent, a weighted-average maturity of 4.9 years, and 86.0 percent of its total debt was fixed-rate debt. This compared to a weighted-average interest rate of 3.4 percent, a weighted average maturity of 5.5 years, and 88.5 percent fixed-rate debt at December 31, 2017.

Distributions

For the quarter ended June 30, 2018, gross distributions of $38.5 million were paid to common shareholders and operating partnership unit holders, including $12.1 million reinvested through the distribution reinvestment plan, for net cash distributions of $26.4 million.

During the quarter, FFO totaled 100.3 percent of total distributions, up from 85.7 percent in Q2 2017.

For the first six months of 2018, gross distributions of $76.8 million were paid to common shareholders and OP unit holders, including $24.9 million reinvested through the DRIP, for net cash distributions of $51.9 million.

During the first six months of 2018, FFO totaled 102.8 percent of total distributions, up from 89.5 percent during the comparable six months in 2017.

Share Repurchase Program (SRP)

During the second quarter of 2018, approximately 3.8 million shares of common stock, totaling $42.1 million, were repurchased under the SRP.

Phillips Edison & Company, formerly Phillips Edison Grocery Center REIT I Inc., is one of the nation’s largest owners and operators of grocery-anchored shopping centers. The offering was declared effective by the SEC in August 2010 and raised approximately $1.8 billion in investor equity before closing in February 2014, according to Summit Investment Research. As of June 30, 2018, the company’s portfolio was comprised of 342 shopping centers – 235 of which it owns directly – totaling approximately 26.3 million square feet located in 32 states.

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