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Phillips Edison Grocery Center REIT II Reports Second Quarter 2018 ResultsPhillips Edison Grocery Center REIT II, Inc. ("REIT II" or the "Company"), a real estate investment trust ("REIT") focused on the acquisition and management of well-occupied grocery-anchored shopping centers, reported its results for the quarter and six months ended June 30, 2018. Merger with Phillips Edison & Company
More information on the merger is available in the Form 8-K filed on July 18, 2018, which can be found on our website at www.grocerycenterreit2.com/investors. Second Quarter 2018 Highlights (vs. Second Quarter 2017)
Six Months Ended June 30, 2018 Highlights (vs. Six Months Ended June 30, 2017)
Management Commentary "During the second quarter, continued demand for retail space in our well-located shopping centers drove another period of strong leasing activity, as we tripled the new leases executed coupled with new comparable leasing spreads of 13.9% when compared to the second quarter of last year," commented Jeff Edison, Chairman and Chief Executive Officer of Phillips Edison Grocery Center REIT II. "Subsequent to the end of the quarter, we entered into an agreement to merge with our sponsor and manager, Phillips Edison & Company. As a result of the merger, REIT II's shareholders will benefit from owning an internally-managed, more diversified portfolio exclusively focused on grocery-anchored real estate. REIT II will no longer pay any acquisition, asset management, or disposition fees, and the combined company would have fully covered its distributions for Q1 2018 on an FFO basis. "The merger will enhance the long-term value of the combined company and is an important step towards a full-cycle liquidity event for our shareholders." Three and Six Months Ended June 30, 2018 Financial Results Net Loss For the second quarter 2018, net loss totaled $1.6 million compared to net loss of $1.3 million during the second quarter of 2017. For the six months ended June 30, 2018, net loss totaled $2.9 million compared to net loss of $1.3 million during the six months ended June 30, 2017. The increase in net loss for both periods was primarily driven by increased depreciation and amortization as a result of owning an additional six properties when compared to June 30, 2017. Funds from Operations (FFO) as Defined by the National Association of Real Estate Investment Trusts (NAREIT) For the second quarter of 2018, FFO totaled $18.0 million, or $0.38 per share, compared to $16.7 million, or $0.36 per share, during the second quarter of 2017. For the six months ended June 30, 2018, FFO totaled $36.1 million, or $0.77 per share, compared to $34.1 million, or $0.73 per share, during the six months ended June 30, 2017. The improvements in FFO were driven by an increase in net operating income generated by additional properties owned, coupled with a 1.1% and 2.9% increase in same-center NOI for the three and six months ended June 30, 2018, respectively, when compared to the three and six months ended June 30, 2017. Modified Funds from Operations (MFFO) For the second quarter of 2018, MFFO increased 8.6% to $16.7 million, or $0.36 per diluted share, compared to $15.4 million, or $0.33 per diluted share, for the three months ended June 30, 2017. For the six months ended June 30, 2018, MFFO increased 8.3% to $33.4 million, or $0.72 per diluted share, compared to $30.9 million, or $0.66 per diluted share, for the six months ended June 30, 2017. The increase in MFFO was directly correlated to the increase in FFO. Same-Center Results For the second quarter of 2018, same-center NOI increased 1.1% to $24.9 million compared to $24.6 million during the second quarter of 2017. The improvement was driven by a $0.22 increase in minimum rent per square foot partially offset by a 1.8% increase in operating expenses versus the comparable period. For the six months ended June 30, 2018, same-center NOI increased 2.9% to $50.1 million compared to $48.7 million during the six months ended June 30, 2017. The improvement was driven by the aforementioned increase in minimum rent per square foot, partially offset by a 1.8% increase in same-center operating expenses versus the comparable six-month period. Contributing to same-center NOI were 74 properties that were owned and operational for the entire portion of both comparable reporting periods. Second Quarter Ended June 30, 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 80 properties, totaling approximately 9.8 million square feet located in 24 states as of June 30, 2017. Leased portfolio occupancy totaled 94.9%, an improvement from 94.8% as of June 30, 2017. Leasing Activity During the second quarter of 2018, 85 leases (new, renewal and options) were executed totaling approximately 444,000 square feet. This compares to 62 leases executed totaling approximately 165,000 square feet during the second quarter of 2017. Comparable rent spreads during the quarter, which compare the percentage increase of new or renewal leases to the expiring lease of a unit that was occupied within the past 12 months, were 13.9% for new leases, 9.2% for renewal leases (excluding options), and 9.5% combined (new and renewal leases). During the six months ended June 30, 2018, 153 leases (new, renewal and options) were executed totaling approximately 749,000 square feet. This compares to 114 leases executed totaling approximately 324,000 square feet during the six months ended June 30, 2017. Acquisition Activity During the second quarter of 2018, one undeveloped outparcel adjacent to a REIT II-owned shopping center was purchased for a total cost of $800,000. During the six months ended June 30, 2018, one shopping center was acquired for a total cost of $18.5 million. Balance Sheet Highlights at June 30, 2018 At quarter-end, the Company had $264.4 million of borrowing capacity available on its $350 million revolving credit facility. Net debt to total enterprise value was 42.8% at June 30, 2018. Please see the Net Debt to Total Enterprise Value table for additional disclosure. At quarter-end, the Company's outstanding debt had a weighted-average interest rate of 3.5%, a weighted-average maturity of 3.0 years, and 89.4% of its total debt was fixed-rate debt at June 30, 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. Distributions Gross distributions of $19.0 million were paid during the second quarter of 2018, including $8.5 million reinvested through the distribution reinvestment plan ("DRIP"), for net cash distributions of approximately $10.5 million. During the quarter, FFO totaled $18.0 million, which was 94.6% of total distributions made, up from 87.3% in Q2 2017. Gross distributions of $38.1 million were paid during the six months ended of June 30, 2018, including $17.3 million reinvested through the DRIP, for net cash distributions of approximately $20.8 million. During the first six months of 2018, FFO totaled $36.1 million, which was 94.9% of total distributions made, up from 90.2% during the comparable six months. Subsequent to quarter-end, the Company's board of directors authorized distributions for September 2018, October 2018, and November 2018 in the amount of $0.13541652 per share to the shareholders of record at the close of business on September 17, 2018, October 15, 2018, and November 15, 2018, respectively. In connection with the proposed merger between PECO and REIT II, REIT II was required to temporarily suspend its DRIP during July 2018, and DRIP participants received their July 2018 distribution (payable on August 1, 2018) in cash. The DRIP will resume in August 2018 (with the distribution payable on September 1, 2018) as the filing of a joint preliminary proxy statement and registration statement on Form S-4 has been completed. Share Repurchase Program (SRP) During the second quarter of 2018, approximately 342,000 shares of common stock, totaling $7.8 million, were repurchased under the SRP. The Company fulfilled all repurchases sought upon a stockholder's death, "qualifying disability," or "determination of incompetence" in accordance with the terms of the SRP. Standard repurchase requests were processed on a pro rata basis due to requests surpassing the funding limits under the SRP. Cash available for standard repurchases on any particular date under the SRP is generally limited to the proceeds from the DRIP during the preceding four quarters, less amounts already used for repurchases during the same time period. In connection with the proposed merger between PECO and REIT II, REIT II was required to temporarily suspend the SRP during July 2018 and will resume the SRP in August 2018 as the filing of the joint preliminary proxy statement and registration statement on Form S-4 has been completed. The next repurchase for standard requests and death, disability, and incompetence ("DDI") is expected to take place on August 31, 2018. SRP paperwork must be on file and in good order by August 24, 2018 at 6:00pm Eastern Time. REIT II expects to make standard repurchases on a pro rata basis. Following the August repurchase, REIT II expects to make its next repurchase on a pro rata basis at the end of October 2018. Stockholder Update Call Chairman and Chief Executive Officer Jeff Edison, Chief Financial Officer Devin Murphy, and President and Chief Operating Officer Mark Addy will host a live presentation addressing the Company's results later today at 4:30 p.m. Eastern Time. Following management's prepared remarks, there will be a question and answer session.
Date: Today, Wednesday, August 8, 2018 Investors are encouraged to submit questions in advance of the presentation by emailing them to [email protected]. Additionally, questions may be submitted via the webcast interface during the live presentation. Interested parties will be able to access the 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. 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 June 30, 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:
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.
The table below is a comparison of the Same-Center NOI for the three and six months ended June 30, 2018 and 2017 (in thousands):
Below is a reconciliation of Net Loss to NOI and Same-Center NOI for the three and six months ended June 30, 2018 and 2017 (in thousands):
The following section presents the Company's calculation of FFO and MFFO and provides additional information related to the Company's operations for three and six months ended June 30, 2018 and 2017 (in thousands, except per share amounts):
Net Debt to Total Enterprise Value The following table presents the calculation of debt to total enterprise value as of June 30, 2018 and December 31, 2017 (dollars in thousands):
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 June 30, 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. Additional Information and Where You Can Find It This communication shall not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of the federal securities laws. PECO and REIT II have filed a joint proxy statement/registration statement on Form S-4 in connection with the merger. Investors are urged to read carefully the joint proxy statement/prospectus and other relevant materials because they contain important information about the merger. Investors may obtain free copies of these documents and other documents filed by PECO or REIT II with the SEC through the website maintained by the SEC at www.sec.gov. Investors may obtain free copies of the documents filed with the SEC by PECO by going to PECO's corporate website at www.phillipsedison.com or by directing a written request to: Phillips Edison & Company, Inc., 11501 Northlake Drive, Cincinnati, OH 45249, Attention: Investor Relations. Investors may obtain free copies of documents filed with the SEC by REIT II by going to REIT II's corporate website at www.grocerycenterREIT2.com or by directing a written request to: Phillips Edison Grocery Center REIT II, Inc., 11501 Northlake Drive, Cincinnati, OH 45249, Attention: Investor Relations. Investors are urged to read the joint proxy statement/prospectus and the other relevant materials before making any voting decision with respect to the merger. PECO and its directors and executive officers and REIT II and its directors and executive officers may be deemed to be participants in the solicitation of proxies from the stockholders of each of PECO and REIT II in connection with the merger. Information regarding the interests of these directors and executive officers in the merger has been included in the joint proxy statement/prospectus referred to above. Additional information regarding certain of these persons and their beneficial ownership of PECO common stock is also set forth in the Definitive Proxy Statement for PECO's 2017 Annual Meeting of Stockholders, which has been filed with the SEC. Additional information regarding certain of these persons and their beneficial ownership of REIT II's common stock is set forth in the Definitive Proxy Statement for REIT II's 2017 Annual Meeting of Stockholders, which has been filed with the SEC. 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 anticipated benefits of the business combination transaction involving PECO and REIT II, including future financial and operating results, and the combined Company's plans, objectives and expectations, 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, risk the proposed merger with PECO will not be consummated, 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, and the joint preliminary proxy statement/prospectus filed with the SEC on August 6, 2018, 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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