Phillips Edison & Company Reports Third Quarter 2019 Results

Executed a record 246 leases totaling 1.4 million square feet, driving portfolio occupancy to 95.0%

Repriced $200 million term loan, lowering cost of capital

CINCINNATI–(BUSINESS WIRE)–Phillips Edison & Company, Inc. (“PECO” or the “Company”), an internally-managed real estate investment trust (“REIT”) and one of the nation’s largest owners and operators of grocery-anchored shopping centers, reported a net loss of $29.7 million and $77.7 million for the three- and nine-month periods ended September 30, 2019, respectively, primarily driven by non-cash impairments related to property dispositions to improve the quality of the portfolio, consistent with the Company’s planned strategy to recycle capital into higher-growth opportunities.

Third Quarter 2019 Highlights (vs. Third Quarter 2018)

• Pro forma same-center net operating income (“NOI”)* increased 2.9% to $89.3 million
• Leased portfolio occupancy totaled 95.0%, an improvement from 93.2% at December 31, 2018, the first comparable period after the November 2018 merger with Phillips Edison Grocery Center REIT II, Inc. (“REIT II”)
• Executed a record 246 leases (new, renewal, and options) totaling 1.4 million square feet with comparable new lease spreads of 12.6% and comparable renewal lease spreads of 2.7%
• Funds from operations (“FFO”) increased 48.4% to $56.4 million as a result of the merger with REIT II; FFO per diluted share was unchanged at $0.17
• Modified funds from operations (“MFFO”) increased 44.4% to $56.9 million as a result of the merger with REIT II; MFFO per diluted share was unchanged at $0.17
• FFO and MFFO totaled 102.9% and 103.9%, respectively, of total distributions made during the quarter
• Repriced a $200 million term loan in September and a $175 million term loan in October, reducing the interest spreads on each by 50 basis points to 125 basis points over LIBOR
• Net debt to total enterprise value (“TEV”) improved to 40.4% from 41.1% at December 31, 2018
• Outstanding debt had a weighted-average interest rate of 3.5%, and 78.8% was fixed-rate debt
• Subsequent to the quarter’s end, PECO acquired three grocery-anchored properties and an interest in a joint venture from Phillips Edison Grocery Center REIT III, Inc. (“PECO III”) in a merger transaction
• Subsequent to the quarter’s end, the PECO Board of Directors declared a monthly distribution for each of the next three months, maintaining the annualized rate of $0.67 per share

Nine Months Ended September 30, 2019 Highlights (vs. Nine Months Ended September 30, 2018)

• Pro forma same-center NOI* increased 2.4% to $261.8 million
• Executed a record 775 leases (new, renewal, and options) totaling 3.5 million square feet with comparable new lease spreads of 13.9% and comparable renewal lease spreads of 8.4%
• Realized $90.3 million in gross proceeds from the sale of ten properties and one outparcel
• Acquired one property and one outparcel for a total cost of $49.9 million
• FFO increased 37.2% to $160.6 million as a result of the merger with REIT II; FFO per diluted share totaled $0.49 compared to $0.51
• MFFO increased 34.9% to $165.4 million as a result of the merger with REIT II; MFFO per diluted share totaled $0.51 compared to $0.53

* Pro forma same-center NOI includes properties acquired in PECO’s merger with REIT II in November 2018. Please see ‘Pro Forma Same-Center Results’ under Portfolio Results for additional disclosure.

Management Commentary

“Record leasing activity during the quarter drove our leased portfolio occupancy to 95%, marking the highest level since 2017, which contributed to pro forma same-center NOI growth of 2.9%,” commented Jeff Edison, Chairman and Chief Executive Officer of PECO. “This robust activity and healthy demand for retail space in our well-located grocery-anchored centers was illustrated by a record 246 leases executed, totaling 1.4 million square feet which was a 22.0% increase over the third quarter of 2018.”

“We also executed on our strategic initiatives during the quarter as we disposed of four centers that no longer met our investment objectives. Our goal is to use disposition proceeds to invest, by means of tax efficient 1031 exchanges, into higher-quality grocery-anchored centers with better growth opportunities and outparcel development projects across our portfolio. We are also using disposition proceeds to reduce our debt, of which we paid down approximately $21.3 million for the first nine months of 2019.

“With our solid operating performance and the record leasing momentum, we believe we are well on track for a strong fourth quarter and 2020.”

Three and Nine Months Ended September 30, 2019 Financial Results

Net Loss

For the third quarter of 2019, net loss totaled $29.7 million, compared to a net loss of $16.3 million for the third quarter of 2018. Excluding impairment charges, net income would have been $6.0 million for the third quarter of 2019 compared to $0.5 million for the third quarter of 2018.

For the nine months ended September 30, 2019, net loss totaled $77.7 million compared to a net loss of $32.2 million for the same period in 2018. Excluding impairment charges, net income would have been $6.6 million for the first nine months of 2019 compared to a net loss of $4.5 million for the first nine months of 2018.

Net loss increased primarily as a result of $35.7 million and $74.6 million of real estate non-cash impairment charges for the three- and nine-month periods ended September 30, 2019. Excluding impairment charges, the increase in net income was driven by NOI growth, gains from the sale of properties in the Necessity Retail Partners joint venture with TPG Real Estate, gains on wholly-owned property sales, and lower general and administrative expenses. This improvement was partially offset by increased depreciation and amortization, real estate taxes, and interest expense resulting from additional properties owned and debt assumed in the November 2018 merger with REIT II.

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

For the third quarter ended September 30, 2019, total FFO attributable to stockholders and convertible noncontrolling interests increased 48.4% to $56.4 million, or $0.17 per diluted share, from $38.0 million, or $0.17 per diluted share, during the third quarter of 2018.

For the nine months ended September 30, 2019, total FFO attributable to stockholders and convertible noncontrolling interests increased 37.2% to $160.6 million, or $0.49 per diluted share, from $117.1 million, or $0.51 per diluted share, during the nine months ended September 30, 2018.

The improvements in FFO for both periods were driven by the assets acquired from the merger with REIT II, year-over-year NOI growth, and expense management. FFO per diluted share for both periods was impacted by net disposition activity of wholly-owned properties, as debt to TEV decreased to 40.4% from 42.3% at September 30, 2018, partially offset by portfolio NOI growth.

MFFO

For the third quarter of 2019, MFFO increased 44.4% to $56.9 million, or $0.17 per diluted share, compared to $39.4 million, or $0.17 per diluted share, during the same year-ago period.

For the first nine months of 2019, MFFO increased 34.9% to $165.4 million, or $0.51 per diluted share, compared to $122.6 million, or $0.53 per diluted share, during the same year-ago period.

MFFO performance for both periods was driven by higher earnings from the larger portfolio resulting from the merger with REIT II, partially offset by the decrease in leverage through net disposition activity. MFFO per share for the nine months ended September 30, 2019, declined due to lower FFO per share.

Pro Forma Same-Center Results*

For the third quarter of 2019, pro forma same-center NOI increased 2.9% to $89.3 million compared to $86.8 million during the third quarter of 2018. The improvement was driven by a $0.24, or 2.0%, increase in average minimum rent per square foot, lower operating expenses and higher recovery of expenses when compared to the third quarter of 2018.

For the nine months ended September 30, 2019, pro forma same-center NOI increased 2.4% to $261.8 million compared to $255.6 million during the same period in 2018. The improvement was driven by a $0.23, or 1.9%, increase in average minimum rent per square foot, lower operating expenses and higher recovery of expenses when compared to the first nine months of 2018.

The adoption of ASC 842 affects the presentation of the Company’s consolidated financial statements and decreased both revenue and operating expenses for the three- and nine-month periods ending September 30, 2019. The Company no longer recognizes real estate taxes paid directly by tenants to third parties as recoverable revenues, and therefore recognized no such revenue or offsetting expenses for the three- and nine- month periods ending September 30, 2019. Additionally, with the implementation of the new lease accounting standards, the Company assesses lease collectability and now presents this as an adjustment to rental income rather than as an increase to expenses. The impact to NOI for both changes is neutral.

*For purposes of evaluating same-center NOI on a comparative basis, and in light of the merger with REIT II, the Company is presenting pro forma same-center NOI, which is same-center NOI on a pro forma basis as if the merger had occurred on January 1, 2018. As such, contributing to pro forma same-center NOI were 287 properties that were owned and operational for the entire portion of both comparable reporting periods.

Three and Nine Months Ended September 30, 2019 Portfolio Overview

Portfolio Statistics

At quarter-end, PECO’s portfolio consisted of 294 properties, totaling approximately 33.2 million square feet located in 32 states. This compares to 233 properties, totaling approximately 25.9 million square feet located in 32 states as of September 30, 2018, which was prior to the merger with REIT II.

Leased portfolio occupancy totaled 95.0%, which compared to 93.2% at December 31, 2018 (the first comparable period after the merger with REIT II). Anchor occupancy increased to 98.1% compared to 97.5% at year-end, and in-line occupancy increased to 89.2% from 85.0% at year-end due to the strong demand in well-located neighborhood shopping centers and strategic initiatives focused on leasing dormant spaces.

Leasing Activity

During the third quarter 2019, 246 leases (new, renewal and options) were executed totaling approximately 1.4 million square feet. This compared to 165 leases executed totaling approximately 0.9 million square feet during the third quarter of 2018, which was prior to the merger with REIT II.

Comparable rent spreads during the quarter, which compares 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 12.6% for new leases, 2.7% for renewal leases (excluding options), and 5.0% combined (new and renewal leases).

During the first nine months of 2019, there were 775 leases (new, renewal and options) executed totaling approximately 3.5 million square feet. This compared to 534 leases executed totaling approximately 2.5 million square feet during the same year-ago period, which was prior to the merger with REIT II.

Comparable rent spreads during the first nine months of 2019 were 13.9% for new leases, 8.4% for renewal leases (excluding options), and 9.6% combined (new and renewal leases).

Acquisition & Disposition Activity

During the quarter, the Company did not acquire any properties and sold four properties, generating $40.2 million in gross proceeds.

During the nine months ended September 30, 2019, the Company acquired one property and one outparcel for a total cost of $49.9 million and sold ten properties and one outparcel, generating $90.3 million in gross proceeds.

Sale proceeds are expected to be used to fund tax-efficient acquisitions, fund redevelopment opportunities in owned centers, and delever the balance sheet.

As real estate companies recycle assets, both the recognition of impairment charges and asset sale gains are common occurrences. The Company anticipates continuing to sell non-core assets and potentially recognizing non-cash impairments during the coming quarters with an expected completion of this program in the first half of 2020.

Investment Management Business

During the three and nine months ended September 30, 2019, the Company generated $2.8 million and $9.1 million of fee income, respectively, for asset management and property management services rendered to third parties. Fee income declined from 2018 due to the decrease in third-party assets under management resulting from the acquisition of REIT II.

Looking forward, the Company is committed to expanding its investment management business, which has the potential to generate income and cash flow without requiring additional capital or increasing leverage.

At quarter-end, the Company had approximately $690 million of third-party assets under management. Those assets included properties owned by Phillips Edison Grocery Center REIT III, Inc., Grocery Retail Partners I LLC and Grocery Retail Partners II LLC (joint ventures with The Northwestern Mutual Life Insurance Company), Necessity Retail Partners, and a private fund.

Balance Sheet Highlights at September 30, 2019

At quarter-end, the Company had $491.4 million of borrowing capacity available on its $500 million revolving credit facility.

Net debt to TEV was 40.4% at September 30, 2019, compared to 41.1% at December 31, 2018.

The Company repriced a $200 million term loan, lowering the interest rate spread from 1.75% over LIBOR to 1.25% over LIBOR, while maintaining the current maturity of September 2024. Subsequent to the quarter end, in October 2019, the Company repriced a $175 million term loan, lowering the interest rate spread from 1.75% over LIBOR to 1.25% over LIBOR, while maintaining the current maturity of October 2024.

At September 30, 2019, the Company’s outstanding debt had a weighted-average interest rate of 3.5%, a weighted-average maturity of 4.3 years, and 78.8% of its total debt was fixed-rate debt. This compared to a weighted-average interest rate of 3.5%, a weighted-average maturity of 4.9 years, and 90.1% fixed-rate debt at December 31, 2018.

Distributions

For the third quarter ended September 30, 2019, total distributions of $54.8 million were paid to common stockholders and operating partnership (“OP unit”) holders, including $16.3 million reinvested through the distribution reinvestment plan (“DRIP”), for net cash distributions of $38.5 million.

During the quarter, FFO totaled 102.9% of total distributions, compared to 99.0% in the third quarter of 2018.

For the first nine months of 2019, total distributions of $164.4 million were paid to common stockholders and OP unit holders, including $51.3 million reinvested through the DRIP, for net cash distributions of $113.1 million.

During the first nine months of 2019, FFO totaled 97.6% of total distributions, compared to 101.6% during the first nine months of 2018.

Since the beginning of the third quarter, the Company made its July 2019, August 2019, September 2019, and October 2019 distributions of $0.05583344 per share ($0.67 annualized) and will make its November 2019 distribution, payable on December 2, 2019, at the same rate to stockholders of record at the close of business on November 15, 2019.

Subsequent to quarter-end, the Company’s board of directors authorized distributions for December 2019, January 2020, and February 2020 in the same amount ($0.05583344 per share; $0.67 annualized) to stockholders of record at the close of business on December 16, 2019, January 15, 2020, and February 17, 2020, respectively. OP unit holders will receive distributions at the same rate, subject to required tax withholding.

Share Repurchase Program (“SRP”)

During the third quarter of 2019, approximately 1.7 million shares of common stock, totaling $18.2 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 made available under the SRP.

Merger Transaction with PECO III

On October 31, 2019, PECO successfully acquired three grocery-anchored properties and an interest in a joint venture from PECO III in a merger transaction valued at approximately $71 million. Pursuant to the merger, former PECO III common stockholders have exchanged their ownership for shares of PECO common stock and cash. The proposal to approve the merger transaction was approved by the majority of the outstanding shares of PECO III common stock entitled to vote, and over 95.5% of the shares which voted on the matter did so favorably.

Stockholder Update Call

Chairman and Chief Executive Officer Jeff Edison, Chief Financial Officer John Caulfield, and Executive Vice President Mark Addy will host a live conference call on Thursday, November 7, 2019, at 10:00 a.m. Eastern Time addressing the Company’s third quarter 2019 results. Following management’s prepared remarks, there will be a question and answer session. The conference call will be broadcast via live webcast, and the webcast and accompanying slide presentation containing financial information can be accessed by visiting the Events and Presentations page on the Company’s website at investors.phillipsedison.com/event.

Date: Thursday, November 7, 2019

Time: 10:00 a.m. Eastern Time

Webcast link: https://services.choruscall.com/links/peco191107.html

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

Replay: A webcast replay will be available approximately one hour after the conclusion of the presentation at http://investors.phillipsedison.com/event-calendar.

Investors are able to submit questions in advance of the call 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 live conference call online or by telephone. If dialing in, please call the conference telephone number five minutes prior to the start time and an operator will register your name and organization. Participants should ask to join the Phillips Edison & Company call.

For more information on the Company’s third quarter 2019 results, please refer to the Company’s Form 10-Q for the quarter ended September 30, 2019, which will be filed with the SEC and available on the SEC’s website at www.sec.gov.

Non-GAAP Disclosures

Pro Forma Same-Center Net Operating Income

Same-center NOI represents the NOI for the properties that were owned and operational for the entire portion of both comparable reporting periods. For purposes of evaluating same-center NOI on a comparative basis, we are presenting pro forma same-center NOI, which is same-center NOI on a pro forma basis as if the merger between Phillips Edison & Company and Phillips Edison Grocery Center REIT II, Inc. had occurred on January 1, 2018.

Contacts

Investors:
Phillips Edison & Company, Inc.

Michael Koehler, Director of Investor Relations

(513) 338-2743

[email protected]

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