Market Overview

Phillips Edison Grocery Center REIT I Reports Second Quarter 2017 Results

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Phillips
Edison Grocery Center REIT I, Inc.
, a publicly registered,
non-traded real estate investment trust (REIT) focused on the
acquisition and management of well-occupied grocery-anchored shopping
centers, reported its results for the three and six months ended
June 30, 2017.

Second Quarter 2017 Highlights (vs. Second Quarter 2016)

  • Entered into a definitive contribution agreement to acquire 76 real
    estate assets and the third party asset management business of its
    sponsor, Phillips Edison Limited Partnership (PELP), for total
    consideration of approximately $1 billion
  • Net loss attributable to stockholders totaled $1.2 million
  • Excluding one-time transaction expenses, net income attributable to
    stockholders would have totaled $3.2 million compared to $0.6 million
    in the second quarter of 2016
  • Funds from operations (FFO) increased 1.7% to $26.6 million
  • Modified funds from operations (MFFO) increased 12.1% to $29.0 million
  • Same-center net operating income (NOI) increased 1.4% to $39.4 million

Six Months Ended June 30, 2017 Highlights (vs. Six Months Ended June
30, 2016)

  • Net loss attributable to stockholders totaled $0.1 million
  • Excluding one-time transaction expenses, net income attributable to
    stockholders would have totaled $5.9 million compared to $2.8 million
    in the first six months of 2016
  • FFO increased 2.3% to $54.9 million
  • MFFO increased 10.8% to $57.3 million
  • Same-center NOI increased 2.2% to $78.7 million

Management Commentary

"During the quarter, we announced the acquisition of certain real estate
assets and the third party asset management business from our sponsor,
PELP, for total consideration of approximately $1 billion," said Jeff
Edison, Chair and Chief Executive Officer of Phillips Edison Grocery
Center REIT I. "The transaction will result in the largest
internally-managed non-traded REIT and further aligns management with
shareholders, as management is expected to own approximately 10% of the
combined company."

"During the quarter, the continued expansion of our real estate
portfolio drove an increase in total rent. This, coupled with the
careful management of our operating expenses, drove a 12.1% increase in
MFFO."

"As grocers continue to evolve to meet changes in consumer behavior, our
focus remains on acquiring and owning well-occupied real estate anchored
by leading grocers in strong markets. We maintain that these high
quality assets provide a necessity-based shopping experience that will
continue to make grocery-anchored shopping centers the most attractive
and stable retail real estate asset class over the foreseeable future."

Acquisition of PELP

On May 18, 2017, the company entered into a definitive contribution
agreement with PELP to acquire certain real estate assets and its third
party asset management business in a stock and cash transaction valued
at approximately $1 billion, subject to closing adjustments.

Upon closing, the acquisition will create an internally-managed,
non-traded grocery-anchored shopping center REIT with an expected total
enterprise value of approximately $4 billion. The resulting enterprise
is expected to own a high-quality, nationally-diversified portfolio of
approximately 230 shopping centers in 32 states that is well positioned
to drive sustained growth and enhance shareholder value. On a pro forma
basis, the Company estimates that FFO would have increased 8-10% per
share and would have fully covered distributions for the three months
ended March 31, 2017, relative to actual results.

More information on the transaction can be found in the company's May
19, 2017 press release and the subsequent SEC filings, including the
definitive proxy statement filed with the SEC on July 5, 2017. Both the
press release and SEC filings can be found on the company's website at www.grocerycenterreit1.com.

Three and Six Months Ended June 30, 2017 Financial Results

Net Income (Loss) Attributable to Stockholders

For the three months ended June 30, 2017, net loss attributable to
stockholders totaled $1.2 million compared to net income of $0.6 million
during the three months ended June 30, 2016. The net loss was driven by
$4.4 million of transaction expenses related to the acquisition of PELP.
Excluding these expenses, net income attributable to stockholders would
have been $3.2 million versus $0.6 million for the comparable period.

For the six months ended June 30, 2017, net loss attributable to
stockholders totaled $0.1 million compared to net income of $2.8 million
during the six months ended June 30, 2016. The net loss was driven by
$6.0 million of transaction expenses related to the acquisition of PELP.
Excluding these expenses, net income attributable to stockholders would
have been $5.9 million versus $2.8 million for the comparable period.

Additionally contributing to the results for the three and six month
periods ended June 30, 2017 was the adoption of new accounting guidance.
Under this guidance, certain property acquisitions are now classified as
asset acquisitions, and as a result, the majority of acquisition-related
expenses are capitalized and amortized over the life of the related
assets.

FFO as Defined by the National Association of Real Estate Investment
Trusts (NAREIT)

FFO increased 1.7% to $26.6 million for the second quarter of 2017
compared to $26.2 million during the same year-ago quarter. The
improvement was driven by a 10.8% increase in total revenue, which
resulted from owning nine more properties than the comparable period,
partially offset by the related 6.6% increase in property-related
operating expenses and $4.4 million of transaction expenses.

FFO increased 2.3% to $54.9 million for the six months ended June 30,
2017 compared to $53.7 million during the same year-ago period. The
improvement was driven by a 9.5% increase in total revenue, which
resulted from owning nine more properties than the comparable period,
partially offset by the related 8.9% increase in property-related
operating expenses and $6.0 million of transaction expenses.

MFFO

For the first quarter of 2017, MFFO increased 12.1% to $29.0 million
compared to $25.9 million during the three months ended June 30, 2016.

For the first six months of 2017, MFFO increased 10.8% to $57.3 million
compared to $51.7 million during the six months ended June 30, 2016.

Three and Six Months Ended June 30, 2017 Portfolio Results

Same-Center Results

For the second quarter of 2017, same-center NOI increased 1.4% to $39.4
million compared to $38.8 million during the second quarter of 2016. The
improvement was driven by a $0.26 increase in minimum rent per square
foot and a 1.5% decrease in same-center operating expenses versus the
comparable period.

For the six months ended June 30, 2017, same-center NOI increased 2.2%
to $78.7 million compared to $77.1 million during the first six months
of 2016. The improvement was driven by the aforementioned increase in
minimum rent per square foot and a 1.3% decrease in same-center
operating expenses versus the comparable period.

Contributing to same-center NOI were 137 properties that were owned and
operational for the entire portion of both comparable reporting periods,
excluding nine properties identified as redevelopment.

Same-center occupancy totaled 96.7%, an increase of 0.3% from June 30,
2016.

Portfolio Statistics

At quarter-end, the portfolio consisted of 158 properties, totaling
approximately 17.2 million square feet located in 28 states.

Leased portfolio occupancy totaled 95.9% compared to 96.1% as of
June 30, 2016.

Leasing Activity

During the second quarter of 2017, 130 new and renewal leases were
executed totaling 488,000 square feet. Comparable rent spreads during
the quarter, which compare the percentage increase (or decrease) of new
or renewal leases to the expiring lease of a unit that was occupied
within the past 12 months, were 23.6% for new leases and 15.6% for
renewal leases.

During the first six months of 2017, 262 new and renewal leases were
executed totaling approximately 1.0 million square feet. Comparable rent
spreads during the first six months of 2017 were 24.8% for new leases
and 14.1% for renewal leases.

Acquisition Activity

Four grocery-anchored shopping centers were acquired for a total cost of
$92.5 million during the second quarter of 2017. The properties, located
in California, Florida, and Wisconsin, total approximately 404,000
square feet.

During the six months ended June 30, 2017, five shopping centers were
acquired for a total cost of $107.6 million.

Balance Sheet Highlights at June 30, 2017

The company has $297 million outstanding on its $500 million revolving
credit facility, and its net debt to total enterprise value was 38.1%.

The company defines net debt as total debt, excluding below-market debt
adjustments and deferred financing costs, less cash and cash
equivalents; and defines total enterprise value as equity value,
calculated as total diluted shares outstanding multiplied by the
estimated net asset value per share of $10.20, plus net debt.

The weighted-average interest rate of outstanding debt was 3.1% with a
weighted-average maturity of 3.4 years. 51.8% of the total debt was
fixed-rate debt. On July 1, 2017, an additional $255 million of
variable-rate debt was fixed through a forward starting interest rate
swap agreement. Including the debt subject to the interest rate swap,
73.5% of the total debt was fixed-rate debt.

Second Quarter 2017 Distributions

Gross distributions of $31.0 million were paid during the second quarter
of 2017, including $9.1 million reinvested through the dividend
reinvestment plan, for net cash distributions of $21.9 million.

Share Repurchase Program (SRP)

During the second quarter of 2017, repurchase requests surpassed the
funding limits under the SRP. Funds available for repurchases during the
remainder of 2017, if any, are expected to be limited. The company will
continue to fulfill repurchases sought upon a stockholder's death,
"qualifying disability," or "determination of incompetence" in
accordance with the terms of the SRP.

In connection with the PELP acquisition, the SRP was temporarily
suspended during the month of June. As expected, the SRP resumed in July
after the preliminary proxy statement was filed. As a result,
repurchases for May, which are typically processed in June, and
repurchases for June were both processed in July.

Other Events

During the second quarter of 2017, an unrelated third party commenced an
unsolicited mini-tender offer to purchase shares of Phillips Edison
Grocery Center REIT I common stock at $6.39 per share. At the close of
the tender, approximately 165,000 shares were purchased which
represented 0.1% of shares outstanding.

Stockholder Update Call

Company management will host a stockholder update webinar on Wednesday,
August 9, 2017 at 11:00 a.m. Eastern time to provide a portfolio update
and to discuss these results. Interested parties can listen to the
presentation by clicking the link available in the Events &
Presentations section of the Investor Relations website at http://investors.grocerycenterreit1.com/event.

For more information on the company's quarterly results, please refer to
the company's Form 10-Q which will be filed with the SEC and available
on the SEC's website at www.sec.gov.

Reconciliation of Non-GAAP Measures

Same-Center Net Operating Income

Same-center net operating income ("same-center NOI") is presented as a
supplemental measure of the company's performance. Net Operating Income
("NOI") is defined as total operating revenues, adjusted to exclude
lease buy-out income and non-cash revenue items, less property operating
expenses and real estate taxes. Same-center NOI represents the NOI for
the 137 properties that were owned and operational for the entire
portion of both comparable reporting periods, except for those
properties classified as redevelopment during either of the periods
presented. A property is removed from the same-center pool and
classified as redevelopment when it is being repositioned in the market
and such repositioning is expected to have a significant impact on
property operating income. While there is judgment surrounding changes
in designations, once a redevelopment property has stabilized, it is
typically moved to the same-center pool the following year. Currently
the company has identified nine properties that are classified as
redevelopment properties.

The company believes NOI and same-center NOI provide useful information
to investors about the company's financial and operating performance
because each 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
after December 31, 2015 and those considered redevelopment properties,
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, same-center NOI may not be
comparable to other REITs.

Same-center NOI should not be viewed as an alternative measure of the
company's financial performance since it does not reflect the operations
of their entire portfolio, nor does it reflect the impact of general and
administrative expenses, acquisition expenses, depreciation and
amortization, interest expense, other income, or the level of capital
expenditures and leasing costs necessary to maintain the operating
performance of the company's properties that could materially impact
results from operations.

Below is a reconciliation of net (loss) income to NOI and Same-Center
NOI for the three and six months ended June 30, 2017 and 2016 (in
thousands):

  Three Months Ended June 30,   Six Months Ended June 30,
2017   2016(1) 2017   2016(1)
Net (loss) income $ (1,221 ) $ 583 $ (87 ) $ 2,836
Adjusted to exclude:
Straight-line rental income (1,451 ) (826 ) (1,943 ) (1,725 )
Net amortization of above- and below-market leases (357 ) (310 ) (686 ) (582 )
Lease buyout income (1,085 ) (169 ) (1,112 ) (534 )
General and administrative expenses 8,896 8,461 16,726 16,014
Acquisition expenses 313 1,502 264 1,522
Depreciation and amortization 28,207 25,977 55,831 51,683
Interest expense, net 9,501 7,601 17,891 15,333
Transaction expenses 4,383 6,023
Other (680 ) 42   (636 ) 158  
NOI 46,506 42,861 92,271 84,705
Less: NOI from centers excluded from Same-Center (7,128 ) (4,032 ) (13,530 ) (7,633 )
Total Same-Center NOI $ 39,378   $ 38,829   $ 78,741   $ 77,072  
(1)   Certain prior period amounts have been restated to conform with
current year presentation.

The table below is a comparison of Same-Center NOI for the three and six
months ended June 30, 2017, to the three and six months ended June 30,
2016 (in thousands):

  Three Months Ended June 30,   Six Months Ended June 30,
2017   2016  

$ Change

  % Change 2017   2016  

$ Change

  % Change
Revenues:
Rental income(1) $ 42,304 $ 41,507 $ 797 $ 84,967 $ 82,867 $ 2,100
Tenant recovery income 13,665 14,095 (430 ) 27,716 28,563 (847 )
Other property income 137   216   (79 ) 341   367   (26 )
Total revenues 56,106 55,818 288 0.5 % 113,024 111,797 1,227 1.1

 

%

Operating expenses:
Property operating expenses 8,437 8,680 (243 ) 17,732 17,860 (128 )
Real estate taxes 8,291   8,309   (18 ) 16,551   16,865   (314 )
Total operating expenses 16,728   16,989   (261 ) (1.5 )% 34,283   34,725   (442 ) (1.3

)

%

Total Same-Center NOI $ 39,378   $ 38,829   $ 549   1.4 % $ 78,741   $ 77,072   $ 1,669   2.2

 

%

(1)

  Excludes straight-line rental income, net amortization of above- and
below-market leases, and lease buyout income.

Funds from Operations and Modified Funds from Operations

FFO is a non-GAAP performance financial measure that is widely
recognized as a measure of REIT operating performance. The company uses
FFO as defined by the NAREIT to be net income (loss), computed in
accordance with GAAP, and gains (or losses) from sales of depreciable
real estate 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 noncontrolling
interests. The company believes that FFO is helpful to investors and its
management as a measure of operating performance because, when compared
year to year, it 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.

Since the definition of FFO was promulgated by NAREIT, 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, the company
uses MFFO, which excludes from FFO the following items:

  • acquisition and transaction expenses;
  • straight-line rent amounts, both income and expense;
  • amortization of above- or below-market intangible lease assets and
    liabilities;
  • amortization of discounts and premiums on debt investments;
  • gains or losses from the early extinguishment of debt;
  • gains or losses on the extinguishment of derivatives, except where the
    trading of such instruments is a fundamental attribute of company
    operations;
  • gains or losses related to fair value adjustments for derivatives not
    qualifying for hedge accounting;
  • adjustments related to the above items for joint ventures and
    noncontrolling interests and unconsolidated entities in the
    application of equity accounting.

The company believes MFFO is helpful in assisting management and
investors with the assessment of the sustainability of operating
performance in future periods and, in particular, after the acquisition
stage is complete, because MFFO excludes acquisition expenses that
affect operations only in the period in which the property is acquired.
Thus, MFFO provides helpful information relevant to evaluating the
company's operating performance in periods in which there is no
acquisition activity.

Many of the adjustments in arriving at MFFO are not applicable to the
company. Nevertheless, as explained below, management's evaluation of
the company's operating performance may also exclude items considered in
the calculation of MFFO based on the following economic considerations.

  • Adjustments for straight-line rents and amortization of discounts
    and premiums on debt investments
    —GAAP requires rental receipts and
    discounts and premiums on debt investments to be recognized using
    various systematic methodologies. This 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. The adjustment to MFFO for
    straight-line rents, in particular, is made to reflect rent and lease
    payments from a GAAP accrual basis to a cash basis.
  • 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 the
    lease term and should be recognized in revenue. Since real estate
    values and market lease rates in the aggregate have historically risen
    or fallen with market conditions, and the intangible value is not
    adjusted to reflect these changes, 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
    —This item 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, but unknown, gains or losses.
  • Adjustment for gains or losses related to early extinguishment of
    derivatives and debt instruments
    —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.

Neither FFO nor MFFO should be considered as an alternative to net
income (loss) or income (loss) from continuing operations under GAAP,
nor as an indication of liquidity, nor is either of these measures
indicative of funds available to fund the company's cash needs,
including its ability to fund distributions. MFFO may not be a useful
measure of the impact of long-term operating performance on value if the
company does not continue to operate their business plan in the manner
currently contemplated.

Accordingly, FFO and MFFO should be reviewed in connection with other
GAAP measurements. FFO and MFFO should not be viewed as more prominent
measures of performance than net income or cash flows from operations
prepared in accordance with GAAP. FFO and MFFO, as presented, may not be
comparable to amounts calculated by other REITs.

The following section presents the company's calculation of FFO and MFFO
and provides additional information related to the company's operations
for the three and six months ended June 30, 2017 and 2016 (in thousands,
except per share amounts):

  Three Months Ended June 30,   Six Months Ended June 30,
2017   2016 2017   2016

Calculation of FFO

Net (loss) income attributable to stockholders $ (1,193 ) $ 560 $ (87 ) $ 2,779
Adjustments:
Depreciation and amortization of real estate assets 28,207 25,977 55,831 51,683
Noncontrolling interest (414 ) (387 ) (834 ) (774 )
FFO attributable to common stockholders $ 26,600   $ 26,150   $ 54,910   $ 53,688  

Calculation of MFFO

FFO attributable to common stockholders $ 26,600 $ 26,150 $ 54,910 $ 53,688
Adjustments:
Acquisition expenses 313 1,502 264 1,522
Net amortization of above- and below-market leases (357 ) (310 ) (686 ) (582 )
Loss (gain) on extinguishment of debt 56 (524 ) 105
Straight-line rental income (1,451 ) (826 ) (1,943 ) (1,725 )
Amortization of market debt adjustment (293 ) (673 ) (571 ) (1,346 )
Change in fair value of derivatives (126 ) (21 ) (124 ) 32
Transaction expenses 4,383 6,023
Noncontrolling interest (45 ) 17   (37 ) 43  
MFFO attributable to common stockholders $ 29,024   $ 25,895   $ 57,312   $ 51,737  
 

FFO/MFFO per share:

Weighted-average common shares outstanding - basic 183,126 183,514 183,178 182,880
Weighted-average common shares outstanding - diluted 185,916 186,299 185,969 185,665
FFO per share - basic $ 0.15 $ 0.14 $ 0.30 $ 0.29
FFO per share - diluted $ 0.14 $ 0.14 $ 0.30 $ 0.29
MFFO per share - basic and diluted $ 0.16 $ 0.14 $ 0.31 $ 0.28
(1)   OP units and restricted stock awards were dilutive to FFO/MFFO for
the three and six months ended June 30, 2017, and, accordingly, were
included in the weighted average common shares used to calculate
diluted FFO/MFFO per share.

About Phillips Edison Grocery Center REIT I, Inc.

Phillips Edison Grocery Center REIT I, Inc. is a public non-traded REIT
that seeks to acquire and manage well-occupied grocery-anchored
neighborhood shopping centers having a mix of national and regional
retailers selling necessity-based goods and services, in strong
demographic markets throughout the United States. As of June 30, 2017,
the company owned and managed an institutional quality retail portfolio
consisting of 158 grocery-anchored shopping centers totaling
approximately 17.2 million square feet. For more information, please
visit the company's website at www.grocerycenterREIT1.com.

Forward-Looking Statements

This press release may contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. These statements include, but are
not limited to, statements related to the company's expectations
regarding the performance of its business, its financial results, its
liquidity and capital resources, the funding available under its share
repurchase and other non-historical statements. You can identify these
forward-looking statements by the use of words such as "outlook,"
"believes," "expects," "potential," "continues," "may," "will,"
"should," "seeks," "approximately," "projects," "predicts," "intends,"
"plans," "estimates," "anticipates," or the negative version of these
words or other comparable words. Such forward-looking statements are
subject to various risks and uncertainties, including those described
under the section entitled "Risk Factors" in the company's Annual Report
on Form 10-K for the year ended December 31, 2016, as such factors may
be updated from time to time in the company's periodic filings with the
SEC, which are accessible on the SEC's website at www.sec.gov.
Accordingly, there are or will be important factors that could cause
actual outcomes or results to differ materially from those indicated in
these statements. These factors should not be construed as exhaustive
and should be read in conjunction with the other cautionary statements
that are included in this release and in the company's filings with the
SEC. The company undertakes no obligation to publicly update or revise
any forward-looking statement, whether as a result of new information,
future events, or otherwise.

###

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