Phillips Edison Grocery Center REIT II Reports Second Quarter 2018 Results
CINCINNATI--(BUSINESS WIRE)--Aug 8, 2018-- (“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 & CompanyOn July 17, 2018, REIT II entered into a definitive merger agreement with Phillips Edison & Company, Inc. (“PECO”), an internally-managed REIT and one of the nation’s largest owners and operators of grocery-anchored shopping centers. REIT II’s merger with PECO will create a national portfolio of 321 grocery-anchored shopping centers encompassing approximately 36.6 million square feet located across 33 states and a total enterprise value (“TEV”) of approximately $6.3 billion. The merger is an important step towards a full-cycle liquidity event for both REIT II and PECO shareholders.
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)Net loss totaled $1.6 million Funds from operations (FFO) increased 7.7% to $18.0 million, or $0.38 per diluted share Modified funds from operations (MFFO) increased 8.6% to $16.7 million, or $0.36 per diluted share Same-center net operating income (NOI) increased 1.1% to $24.9 million Net Debt to Total Enterprise Value was 42.8% at quarter-end Outstanding debt had a weighted-average interest rate of 3.5% and 89.4% was fixed-rate debt
Six Months Ended June 30, 2018 Highlights (vs. Six Months Ended June 30, 2017)Net loss totaled $2.9 million FFO increased 6.1% to $36.1 million, or $0.77 per diluted share MFFO increased 8.3% to $33.4 million, or $0.72 per diluted share Same-center NOI increased 2.9% to $50.1 million
“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
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.
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
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.
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.
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.
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 Time: 4:30 p.m. Eastern Time Webcast link:https://services.choruscall.com/links/peco180808reit2.htmlU.S. listen-only: (888) 346-2646 International listen-only: (412) 317-5249 Submit Questions:InvestorRelations@phillipsedison.comWebcast Replay: A replay will be available at http://investors.grocerycenterreit2.com/event
Investors are encouraged to submit questions in advance of the presentation by emailing them to InvestorRelations@phillipsedison.com. 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.
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 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 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.
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