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Phillips Edison Grocery Center REIT I Shareholders to Vote on Internalization

July 7, 2017

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Phillips Edison Grocery Center REIT I Shareholders to Vote on Internalization

July 7, 2017 | by James Sprow | Blue Vault

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At a shareholder meeting set for September 20, Phillips Edison Grocery Center REIT I (“PECO I”) shareholders will vote on a transaction which will make the REIT an internally-managed, non-traded grocery-anchored shopping center REIT with an expected enterprise value of $4 billion. Originally organized in 2009 as Phillips Edison – ARC Shopping Center REIT, the REIT terminated its advisory agreement with AR Capital in December, 2014, and entered into an advisory agreement with PE-NTR whose principals are Michael Phillips and Jeffrey Edison.

The REIT is proposing to acquire certain real estate assets, the third-party asset management business and certain other assets of the sponsor and the parent company of the external advisor and property manager, Phillips Edison Limited Partnership. Lazard Freres & Company rendered an opinion to the Special Committee of the Board of Directors on May 18, 2017, that subject to assumptions, limitations and qualifications set forth in its opinion, the aggregate consideration to be paid by PECO I in the internalization transaction was fair, from a financial point of view, to PECO I.

According to the letter to stockholders, “If approved, the resulting enterprise will own a high-quality, nationally-diversified portfolio of 230 grocery-anchored shopping centers in 32 states that is well-positioned to drive sustained growth and create enhanced value for stockholders.”

The REIT listed the following benefits which it expects to see with the internalization transaction:

  • Maintains Grocery Focus. The combined real estate portfolio will be focused on grocery-anchored shopping centers with an emphasis on necessity-based retailers, which are likely to be more internet and recession resilient.
  • Improved Earnings. The PELP Transaction is expected to be accretive to funds from operations, as defined by the National Association of Real Estate Investment Trusts.
  • Dividends and Dividend Coverage: Future monthly distributions for PECO I are expected to remain unchanged following the transaction. PECO I estimates that pro forma FFO would have fully covered distributions for the three months ended March 31, 2017.
  • Strengthened Balance Sheet. The post-closing combined enterprise is expected to have an improved capital position on a total debt/EBITDA basis, which positions the company well for attractive future financing opportunities.
  • Better Alignment of Management. An internalized management structure creates better alignment with stockholders. Management will be PECO I’s largest equity owner, owning over 19 million operating partnership units and shares of common stock, with a long-term view of stockholder value and will be subject to traditional and customary lock-ups.
  • Increased Potential for Future Growth and Dividend Coverage. PELP’s real estate portfolio has the opportunity for higher net operating income growth. Additionally, potential future fee income from PELP’s asset management business is expected to further support PECO I’s dividend as well as other capital allocation strategies.
  • Improved Geographic and Tenant Diversity. The post-closing combined enterprise will own a high-quality portfolio of 230 grocery-anchored shopping centers comprising approximately 25.5 million square feet in established trade areas located in 32 states and will benefit from greater geographic, grocery anchor and tenant diversification.
  • Superior Financial Strength and Flexibility. With enhanced size and scale, the combined enterprise will have additional access to capital, which can be used to support strategic investments to drive future growth opportunities.
  • Liquidity Opportunities. Given its enhanced size, scale, improved financials and internalized management structure, the combined enterprise is better positioned to capitalize on capital market opportunities, including certain potential liquidity alternatives.

The Board of Directors, based on the recommendation of a Special Committee, recommended unanimously the internalization transaction be approved by shareholders.

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Blue Vault Nontraded REIT and Nontraded BDC Reviews
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