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Phillips Edison Grocery Center REIT I To Acquire its Sponsor in $1 Billion Transaction

Phillips Edison Grocery Center REIT I Inc., a publicly registered non-traded real estate investment trust, has agreed to acquire the real estate assets and third-party asset management business of its sponsor and external advisor, Phillips Edison Limited Partnership, in a stock and cash transaction valued at approximately $1 billion, subject to closing adjustments. The transaction is expected to close during the fourth quarter of 2017.

When the transaction is completed, it will create an internally-managed, non-traded grocery-anchored shopping center REIT with 230 properties and an expected enterprise value of approximately $4 billion.

“Shareholders of PECO I will benefit from a combined enterprise with internalized management, increased size and scale, higher earnings potential, greater earnings growth potential, improved dividend coverage and enhanced access to capital,” said Stephen Quazzo, the chair of the special committee of PECO I’s board of directors. “Importantly, we expect this strategic transaction to be immediately accretive to FFO per share, and it positions PECO I well for future capital market opportunities including potential liquidity alternatives.”

Under the terms of the agreement, the sponsor will receive approximately 45.2 million operating partnership units in the REIT’s operating partnership, Phillips Edison Grocery Center Operating Partnership I L.P., inclusive of 4.8 million Class B units in PECO I OP already outstanding, and approximately $50 million in cash in exchange for the sponsor’s ownership interests in 76 shopping centers and its third-party asset management business.

Each OP unit is exchangeable for Phillips Edison Grocery Center REIT I common shares, which have an estimated net asset value of $10.20 per share, as of March 31, 2017.

The cash portion of the consideration will be used to retire certain minority interests in Phillips Edison Limited Partnership so that the combined company maintains its qualification as a REIT.

Management will receive no cash consideration in this transaction and will be subject to traditional and customary lockup provisions. Additionally, the REIT will not pay any internalization fees in connection with the transaction, i.e., no consideration is being paid for the advisory services that Phillips Edison Limited Partnership provides to the REIT.

Outstanding debt of approximately $501 million is expected to be refinanced or assumed by the REIT at closing. The agreement also includes an earn-out structure where Phillips Edison Limited Partnership may receive up to an additional 12.49 million OP units if certain milestones are achieved related to a liquidity event for REIT shareholders and fundraising targets in the sponsor’s third non-traded REIT, Phillips Edison Grocery Center REIT III.

On a pro forma basis, immediately following the closing of the transaction, REIT shareholders are expected to own approximately 80.2 percent, and former Phillips Edison Limited Partnership shareholders are expected to own approximately 19.8 percent of the combined company.

The transaction was approved by the independent special committee of the REIT’s board, which had retained independent financial and legal advisors. Both companies are seeking the approval of their shareholders and partners – although not required by law or under the REIT’s governing documents.

Summary of Strategic Benefits

The companies maintain that the transaction could create significant operational and financial benefits, including:

• Maintains Grocery Focus: Combined portfolio and all assets under management are focused entirely on grocery-anchored shopping centers with an emphasis on necessity-based retailers, which are both internet and recession resilient.

• Improved Earnings: Expected to be accretive to funds from operations through meaningful cost synergies from an internalized management structure. Estimated pro forma FFO for the first quarter of 2017 would have increased by approximately 8-10 percent relative to the performance of stand-alone PECO I.

• Dividends and Dividend Coverage: Future monthly distributions for PECO I are expected to remain unchanged following the transaction. PECO I estimates that pro forma FFO would have fully covered distributions for the three months ended March 31, 2017, relative to actual coverage of 92 percent for PECO I standalone.

• Strengthened Balance Sheet: The combined company is expected to have an improved capital position on a total debt/EBITDA basis and a total debt to enterprise value of approximately 41.4 percent.

• Better Alignment of Management: Internalized management structure creates better alignment with its shareholders. Through its investment in OP units, management will be PECO I’s largest equity owner, owning over 18 million OP units and common shares, with a long-term view of shareholder value and will be subject to traditional and customary lock-ups.

• Increased Potential for Future Growth: Acquired real estate has the opportunity for higher net operating income growth, and the asset management business provides an additional avenue for future long-term earnings growth as assets under management increase.

• Improved Geographic and Tenant Diversity: The combined company will own a portfolio of 230 grocery-anchored shopping centers comprising approximately 25.5 million square feet in in 32 states, and will benefit from greater geographic, grocery anchor and tenant diversification.

• Financial Strength and Flexibility: With enhanced size and scale, the combined company will have additional access to capital, which can be used to support strategic investments to drive future growth opportunities.

• Liquidity Opportunities: Given its enhanced size, scale, improved financials and internalized management structure, the combined company is better positioned to capitalize on capital market opportunities, including potential liquidity alternatives.

Distribution Reinvestment Plan and Share Repurchase Program

In connection with the proposed acquisition, the REIT has modified its distribution reinvestment plan for the month of June, and DRP participants will receive their June distribution in cash. The DRP plan will resume in July after the expected filing of a preliminary proxy statement in June. The share repurchase program is suspended for the month of June and is also expected to resume in July.

Advisors

Lazard is acting as the exclusive financial advisor and Sidley Austin LLP is acting as legal advisor to the special committee of the board of directors of PECO I. Goldman, Sachs & Co., JP Morgan Securities LLC and KeyBanc Capital Markets Inc. are acting as financial advisors, and Latham Watkins LLP is acting as legal advisor to PELP.

A webinar will be published on May 22, 2017 to discuss the transaction, and interested parties can listen by visiting http://investors.grocerycenterreit1.com/event.

Phillips Edison Grocery Center REIT I launched in August 2010 and raised nearly $1.8 billion before closing the offering in the first quarter of 2014. Shares were originally sold for $10.00 each. The company’s portfolio consists of 154 properties with a combined purchase price of approximately $2.5 billion.

Phillips Edison Limited Partnership has focused on the grocery-anchored shopping center sector since 1991, and its operating platform provides retail services including acquisition, redevelopment, leasing and management of grocery-anchored retail centers.

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