Market Overview

Phillips Edison Grocery Center REIT II Reports First Quarter 2018 Results; Increases Estimated Value per Share to $22.80

Share:

Executes Record Number of New Leases and Delivers Strong Same-Center
NOI Growth

Phillips
Edison Grocery Center REIT II, Inc.
, a real estate investment
trust (REIT) focused on the acquisition and management of well-occupied
grocery-anchored shopping centers, reported its results for the first
quarter ended March 31, 2018 and increased its estimated value per share
to $22.80 as of March 31, 2018.

First Quarter 2018 Highlights (vs. First Quarter 2017)

  • Acquired one grocery-anchored shopping center for a total cost of
    $18.5 million
  • Net loss totaled $1.3 million
  • Funds from operations (FFO) increased 4.6% to $18.2 million, or $0.39
    per diluted share
  • Modified funds from operations (MFFO) increased 7.7% to $16.7 million,
    or $0.36 per diluted share
  • Same-center net operating income (NOI) increased 4.8% to $25.2 million
  • Net Debt to Total Enterprise Value was 42.9% at quarter-end
  • Outstanding debt had a weighted-average interest rate of 3.5% and
    89.7% was fixed-rate debt

Estimated Value per Share Update

  • On May 9, 2018, the company's board of directors increased the
    estimated value per share of its common stock to $22.80 as of March
    31, 2018, based on the range of $21.27 to $24.17 provided by Duff &
    Phelps, an independent third-party valuation firm.

Management Commentary

"Our portfolio of well-occupied grocery-anchored shopping centers
produced strong results during the first quarter of 2018, as illustrated
by our 7.7% increase in MFFO and 4.8% increase in same-center NOI," said
Jeff Edison, Chairman and Chief Executive Officer of Phillips Edison
Grocery Center REIT II. "Our strategy of owning centers in strong
demographic markets that provide necessity-based goods and services
continues to yield strong results."

"We increased the estimated value per share to $22.80 because of the
continued successful execution of our business strategy, which is
producing increases in both revenue and cash flow – in spite of recent
adverse retail headlines. We believe the current disconnect in the
private and public market valuations of retail real estate to be
unfounded considering the positive operating fundamentals we are seeing
at our centers."

First Quarter Ended March 31, 2018 Financial Results

Net Loss

For the three months ended March 31, 2018, net loss totaled $1.3 million
compared to net loss of $0.1 million during the three months ended
March 31, 2017. The results were primarily driven by a $1.9 million
increase in depreciation and amortization related to owning an
additional eight properties when compared to March 31, 2017.

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

For the first quarter of 2018, FFO totaled $18.2 million, or $0.39 per
share, compared to $17.4 million, or $0.37 per share, during the first
quarter of 2017. The improvement in FFO was driven by an increase in net
operating income generated by additional properties owned and the 4.8%
increase in same-center NOI.

Modified Funds from Operations (MFFO)

For the first quarter of 2018, MFFO increased 7.7% to $16.7 million, or
$0.36 per diluted share, compared to $15.5 million, or $0.33 per diluted
share, for the three months ended March 31, 2017. The increase in MFFO
was directly correlated to the increase in FFO.

Same-Center Results

For the first quarter of 2018, same-center NOI increased 4.8% to $25.2
million, compared to $24.1 million during the first quarter of 2017. The
improvement was driven by a 0.9% increase in same-center occupancy to
95.0% as well as a $0.05 increase in minimum rent per square foot versus
the comparable period.

Contributing to same-center NOI were 74 properties that were owned and
operational for the entire portion of both comparable reporting periods.

First Quarter Ended March 31, 2018 Portfolio Results

Portfolio Statistics

At quarter-end, the portfolio consisted of 86 properties, totaling
approximately 10.3 million square feet located in 24 states. This
compares to 78 properties, totaling approximately 9.6 million square
feet located in 24 states as of March 31, 2017.

Leased portfolio occupancy totaled 95.1%, an improvement from 94.5% as
of March 31, 2017.

Leasing Activity

During the first quarter of 2018, 68 leases (new, renewal and options)
were executed totaling approximately 305,000 square feet. This compares
to 52 leases (new, renewal and options) executed totaling 159,000 square
feet during the first quarter of 2017.

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 9.9% for new
leases and 9.8% for renewal leases.

Acquisition Activity

One grocery-anchored shopping center was acquired for a total cost of
$18.5 million during the first quarter of 2018. The property, located in
Arlington, Texas, is anchored by Walmart Neighborhood Market and totals
113,742 square feet.

Balance Sheet Highlights at March 31, 2018

At quarter-end, the company had $267.4 million of borrowing capacity
available on its $350.0 million revolving credit facility.

Net debt to total enterprise value was 42.9% at March 31, 2018. Please
see the Net Debt to Total Enterprise Value table for additional
disclosure.

The company's outstanding debt had a weighted-average interest rate of
3.5%, a weighted-average maturity of 3.2 years, and 89.7% of its total
debt was fixed-rate debt at March 31, 2018. This compared to a
weighted-average interest rate of 3.5%, a weighted average maturity of
3.5 years, and 92.6% fixed-rate debt at December 31, 2017.

Estimated Value Per Share

Effective May 9, 2018, the company's board of directors increased the
estimated value per share of its common stock to $22.80 as of March 31,
2018.

Duff & Phelps was engaged to provide a calculation of the range in
estimated value per share of the company's common stock as of March 31,
2018. Duff & Phelps prepared a valuation report based substantially on
its estimate of the "as is" market values of the company's portfolio,
adjusted to reflect balance sheet assets and liabilities provided by
company management as of March 31, 2018, before calculating a range of
estimated per share values based on the number of outstanding shares of
common stock as of quarter end. These calculations produced an estimated
value per share in the range of $21.27 to $24.17.

For a full description of the assumptions and methodologies used to
determine the estimated value per share, see the Form 10-Q for the
quarter ended March 31, 2018 to be filed with the SEC, which will be
accessible on the SEC's website at www.sec.gov.

First Quarter 2018 Distributions

Gross distributions of $19.1 million were paid during the first quarter
of 2018, including $8.8 million reinvested through the distribution
reinvestment plan, for net cash distributions of approximately $10.3
million.

During the quarter, FFO was $18.2 million, which was 95% of the
company's gross distributions, marking an improvement from 89% during
the previous quarter.

Subsequent to quarter-end, the company's board of directors authorized
distributions for June 2018, July 2018, and August 2018 in the amount of
$0.13541652 per share to the shareholders of record at the close of
business on June 15, 2018, July 16, 2018, and August 15, 2018,
respectively.

Share Repurchase Program (SRP)

During the first quarter of 2018, approximately 259,000 shares of common
stock, totaling $5.9 million, were repurchased at $22.75 per share under
the SRP during the quarter.

Subsequent to the quarter end, in April 2018, approximately 293,000
shares of common stock, totaling $6.7 million, were repurchased at
$22.75 per share under the SRP. Standard repurchase requests surpassed
the funding limits under the SRP resulting in the company processing
standard repurchase requests on a pro rata basis.

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.

Due to the program's funding limits, repurchases during the remainder of
2018 are expected to be limited. Cash available for standard repurchases
on any particular date under the SRP is generally limited to the
proceeds from the dividend reinvestment plan during the preceding four
quarters, less amounts already used for repurchases during the same time
period.

Stockholder Update Call

President and Chief Operating Officer Mark Addy will host a presentation
addressing the company's results on Thursday, May 10, 2018, at 2:00 p.m.
Eastern Time.

Interested parties will be able to access the listen-only presentation
online or by telephone. If dialing in, please call the conference
telephone number five minutes prior to the start time as an operator
will register your name and organization. Participants should ask to
join the Phillips Edison Grocery Center REIT II call.

   

Date: Thursday, May 10, 2018

Time: 2:00 p.m. Eastern Time

Webcast link: https://services.choruscall.com/links/peco180510reit2.html

U.S. listen-only: (888) 346-2646

International listen-only: (412) 317-5249

 

A webcast replay will be available approximately one hour after the
conclusion of the presentation in the Events & Presentations section of
the Phillips Edison Grocery Center REIT II website at http://investors.grocerycenterreit2.com/event.

For investor-related updates on Phillips Edison Grocery Center REIT II,
please visit www.grocerycenterreit2.com/investors.

For more information on the company's quarterly results, please refer to
the company's Form 10-Q for the quarter ended March 31, 2018, which will
be filed with the SEC and available on the SEC's website at www.sec.gov.

Non-GAAP Disclosures

Same-Center Net Operating Income

Same-Center NOI is presented as a supplemental measure of the company's
performance. NOI is defined as total operating revenues less property
operating expenses, real estate taxes, and non-cash revenue items.
Same-Center NOI represents the NOI for the 74 properties that were
wholly-owned and operational for the entire portion of both comparable
reporting periods. The company believes that NOI and Same-Center NOI
provide useful information to its investors about its 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, 2016, 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, the company's 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 its 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 its properties that could materially impact results from
operations.

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 National Association of Real Estate Investment
Trusts ("NAREIT") to be net income (loss) attributable to common
stockholders computed in accordance with GAAP, excluding gains (or
losses) from sales of property, plus depreciation and amortization, and
after adjustments for unconsolidated partnerships and joint ventures.
Adjustments for unconsolidated partnerships and joint ventures are
calculated to reflect funds from operations on the same basis.

MFFO is an additional performance financial measure used by us as FFO
includes certain non-comparable items that affect the company's
performance over time. MFFO excludes the following items:

  • acquisition fees and 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 our
    operations;
  • gains or losses related to fair-value adjustments for derivatives not
    qualifying for hedge accounting;
  • gains or losses related to consolidation from, or deconsolidation to,
    equity accounting; and
  • adjustments related to the above items for unconsolidated entities in
    the application of equity accounting.

The company believes that MFFO is helpful in assisting management and
investors with the assessment of the sustainability of operating
performance in future periods. 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 the company's 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 its
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.

 

PHILLIPS EDISON GROCERY CENTER REIT II, INC.

CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2018 AND DECEMBER 31, 2017

(Unaudited)

 

(In thousands, except per share amounts)

 

March 31, 2018 December 31, 2017
ASSETS
Investment in real estate:
Land and improvements $ 525,500 $ 520,526
Building and improvements 1,062,353 1,047,758
Acquired in-place lease assets 160,261 158,510
Acquired above-market lease assets 15,017   14,742  
Total investment in property 1,763,131 1,741,536
Accumulated depreciation and amortization (176,411 ) (157,290 )
Net investment in property 1,586,720 1,584,246
Investment in unconsolidated joint venture 15,463   16,076  
Total investment in real estate assets, net 1,602,183 1,600,322
Cash and cash equivalents 2,998 1,435
Restricted cash 4,748 4,382
Other assets, net 54,244   46,178  
Total assets $ 1,664,173   $ 1,652,317  
LIABILITIES AND EQUITY
Liabilities:
Debt obligations, net $ 799,651 $ 775,275
Acquired below-market lease liabilities, net of accumulated
amortization of $12,123
and $10,959, respectively 54,394 54,994
Accounts payable – affiliates 1,772 1,808
Accounts payable and other liabilities 35,504   36,961  
Total liabilities 891,321 869,038
Commitments and contingencies (Note 7)
Equity:
Preferred stock, $0.01 par value per share, 10,000 shares
authorized, zero shares issued and outstanding
at March 31, 2018 and December 31, 2017, respectively
Common stock, $0.01 par value per share, 1,000,000 shares
authorized, 46,713 and 46,584 shares
issued and outstanding at March 31, 2018 and December 31, 2017,
respectively
470 468
Additional paid-in capital 1,034,636 1,031,685
Accumulated other comprehensive income ("AOCI") 12,472 6,459
Accumulated deficit (274,726 ) (255,333 )
Total equity 772,852   783,279  
Total liabilities and equity $ 1,664,173   $ 1,652,317  
 
 

PHILLIPS EDISON GROCERY CENTER REIT II, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

(Unaudited)

(In thousands, except per share amounts)

 
Three Months Ended March 31,
2018   2017
Revenues:
Rental income $ 31,979 $ 28,476
Tenant recovery income 11,885 10,209
Other property income 296   116  
Total revenues 44,160 38,801
Expenses:
Property operating 7,326 6,603
Real estate taxes 7,023 6,121
General and administrative 4,337 4,613
Depreciation and amortization 18,888   17,022  
Total expenses 37,574 34,359
Other:
Interest expense, net (7,468 ) (4,474 )
Other expense, net (372 ) (55 )
Net loss $ (1,254 ) $ (87 )
Earnings per common share:
Net loss per share - basic and diluted $ (0.03 ) $ (0.00 )
Weighted-average common shares outstanding:
Basic and diluted 46,693 46,512
 
Comprehensive loss:
Net loss $ (1,254 ) $ (87 )
Other comprehensive income:
Change in unrealized gain on interest rate swaps 6,013   913  
Comprehensive income $ 4,759   $ 826  
 

The table below is a comparison of the Same-Center NOI for the three
months ended March 31, 2018 and 2017 (in thousands):

  Three Months Ended March 31,
2018   2017   $ Change   % Change
Revenues:
Rental income(1) $ 27,060 $ 26,323 $ 737
Tenant recovery income 10,562 10,071 491
Other property income 240   91   149  
Total revenues 37,862 36,485 1,377 3.8 %
Operating expenses:
Property operating expenses 6,534 6,395 139
Real estate taxes 6,101   6,017   84  
Total operating expenses 12,635   12,412   223   1.8 %
Total Same-Center NOI $ 25,227   $ 24,073   $ 1,154   4.8 %
(1)   Excludes straight-line rental income, net amortization of
above- and below-market leases, and lease buyout income.
 

Below is a reconciliation of Net Loss to NOI and Same-Center NOI for the
three months ended March 31, 2018 and 2017 (in thousands):

Three Months Ended March 31,
2018   2017
Net loss $ (1,254 ) $ (87 )
Adjusted to exclude:
Straight-line rental income (742 ) (836 )
Net amortization of above- and below-market leases (598 ) (607 )
Lease buyout income (125 )
General and administrative expenses 4,337 4,613
Depreciation and amortization 18,888 17,022
Interest expense, net 7,468 4,474
Other 372   55  
NOI 28,471 24,509
Less: NOI from centers excluded from Same-Center (3,244 ) (436 )
Total Same-Center NOI $ 25,227   $ 24,073  
 

Below is a breakdown of the company's property count:

        March 31, 2018
Same-center properties 74
Non-same-center properties 12
Total properties 86
 

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 months ended March 31, 2018 and 2017 (in thousands, except
per share amounts):

  Three Months Ended March 31,
2018   2017

Calculation of FFO

Net loss $ (1,254 ) $ (87 )
Adjustments:
Depreciation and amortization of real estate assets 18,888 17,022
Depreciation and amortization related to unconsolidated joint venture 519   425  
Funds from operations $ 18,153   $ 17,360  

Calculation of MFFO

Funds from operations $ 18,153 $ 17,360
Adjustments:
Net amortization of above- and below-market leases (598 ) (607 )
Straight-line rental income (742 ) (836 )
Amortization of market debt adjustment (270 ) (281 )
Gain on extinguishment of debt (11 )
Change in fair value of derivatives (131 ) (116 )
Adjustments related to unconsolidated joint venture (25 ) (2 )
Other 314    
Modified funds from operations $ 16,701   $ 15,507  
 
Earnings per common share:
Weighted-average common shares outstanding - basic 46,693 46,512
Weighted-average common shares outstanding - diluted(1) 46,696 46,515
FFO per share - basic and diluted $ 0.39 $ 0.37
MFFO per share - basic and diluted $ 0.36 $ 0.33
(1)   Restricted stock awards were dilutive to FFO/MFFO for the three
months ended March 31, 2018 and 2017, and accordingly, were included
in the weighted-average common shares used to calculate diluted
FFO/MFFO per share.
 

Net Debt to Total Enterprise Value

The following table presents the calculation of debt to total enterprise
value as of March 31, 2018 and December 31, 2017 (dollars in thousands):

  2018   2017
Net debt:
Total debt, excluding below-market adjustments and deferred
financing costs
$ 800,615 $ 776,438
Less: Cash and cash equivalents 2,998   5,716  
Total net debt 797,617   $ 770,722  
Enterprise Value:
Total net debt 797,617 $ 770,722
Total equity value(1) 1,062,789   1,059,854  
Total enterprise value $ 1,860,406   $ 1,830,576  
   
Net debt to total enterprise value 42.9 % 42.1 %
(1)   Total equity value is calculated as the product of the number
of diluted shares outstanding and the estimated value per share at
the end of the period. There were 46.7 million and 46.6 million
diluted shares outstanding as of March 31, 2018 and December 31,
2017, respectively.
 

About Phillips Edison Grocery Center REIT II, Inc.

Phillips Edison Grocery Center REIT II, Inc. is a public non-traded REIT
that owns well-occupied grocery-anchored neighborhood shopping centers
with a mix of national and regional retailers selling necessity-based
goods and services, in strong demographic markets throughout the United
States. As of March 31, 2018, the company owned an institutional quality
retail portfolio consisting of 86 grocery-anchored shopping centers
totaling approximately 10.3 million square feet. For more information,
please visit the company website at www.grocerycenterREIT2.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 quality of the Company's portfolio
of grocery-anchored shopping centers 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, such as the risks that retail conditions may adversely
affect our base rent and, subsequently, our income, and that our
properties consist primarily of retail properties and our performance,
therefore, is linked to the market for retail space generally, as well
as other risks that are described under the section entitled "Risk
Factors" in the Company's Annual Report on Form 10-K for the year ended
December 31, 2017, 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 press 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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