Phillips Edison Grocery Center REIT II Reports Second Quarter 2017 Results
CINCINNATI–(BUSINESS WIRE)– Phillips Edison Grocery Center REIT II, Inc., a publicly registered, non-traded real estate investment trust (REIT) focused on the acquisition and management of well-occupied grocery-anchored shopping centers, reported its results for the three and six months ended June 30, 2017.
Second Quarter 2017 Highlights (vs. Second Quarter 2016)
- Net loss attributable to stockholders totaled $1.3 million, an improvement of $3.3 million
- Funds from operations (FFO) increased 75.8% to $16.7 million
- Modified funds from operations (MFFO) increased 19.2% to $15.4 million
- Same-center net operating income (NOI) increased 3.2% to $16.3 million
- Acquired two grocery-anchored shopping centers for a total cost of $36.4 million
Six Months Ended June 30, 2017 Highlights (vs. Six Months Ended June 30, 2016)
- Net loss attributable to stockholders totaled $1.3 million, an improvement of $1.9 million
- FFO increased 72.0% to $34.1 million
- MFFO increased 25.1% to $30.9 million
- Same-center NOI increased 3.7% to $32.5 million
- Acquired six grocery-anchored shopping centers for a total cost of $124.9 million
Management Commentary
“In a time of retail uncertainty, shopping centers anchored by leading grocers continue to perform well, as illustrated by the 3.2% increase in our same-center NOI for the quarter,” said Jeff Edison, Chair and Chief Executive Officer of Phillips Edison Grocery Center REIT II. “These grocery-anchored centers provide a necessity-based shopping experience that has proven to be more resistant to recession and e-commerce than malls and power centers.”
“We continue to add properties to our portfolio that fit our strict underwriting standards and own 80 assets at quarter’s end. Looking forward, our focus remains on the acquisition of high quality real estate and driving NOI increases through the lease-up of properties, expanding rent spreads and maximizing the value of our real estate.”
Three and Six Months Ended June 30, 2017 Financial Results
Net Loss
For the three months ended June 30, 2017, net loss totaled $1.3 million, an improvement of $3.3 million when compared to a net loss of $4.6 million during the three months ended June 30, 2016. The results were driven by an $8.6 million increase in revenues due to the acquisition of 23 properties since the beginning of April 1, 2016, offset by an increase in related operating costs, real estate taxes and interest expenses.
For the six months ended June 30, 2017, net loss totaled $1.3 million, an improvement of $1.9 million when compared to a net loss of $3.2 million during the six months ended June 30, 2016. The results were driven by a $19.1 million increase in revenues due to the acquisition of 29 properties since the beginning of 2016, offset by an increase in related operating costs, real estate taxes and interest expenses.
Additionally contributing to the improvement for both the three and six month periods ended June 30, 2017 was the adoption of new accounting guidance. Under this guidance, certain property acquisitions are now classified as asset acquisitions, and as a result, the majority of acquisition-related expenses are capitalized and amortized over the life of the related assets.
FFO as Defined by the National Association of Real Estate Investment Trusts (NAREIT)
FFO increased 75.8% to $16.7 million for the second quarter of 2017 compared to $9.5 million during the same year-ago quarter.
FFO for the six months ended June 30, 2017 increased 72.0% to $34.1 million compared to $19.8 million during the six months ended June 30, 2016, as a result of additional properties owned.
MFFO
For the three months ended June 30, 2017, MFFO increased 19.2% to $15.4 million compared to $12.9 million for the three months ended June 30, 2016.
For the six months ended June 30, 2017, MFFO increased 25.1% to $30.9 million compared to $24.7 million for the six months ended June 30, 2016, as a result of additional properties owned.
Three and Six Months Ended June 30, 2017 Portfolio Results
Same-Center Results
For the second quarter of 2017, same-center NOI increased 3.2% to $16.3 million compared to $15.8 million during the second quarter of 2016. The improvement was driven by a 2.2% increase in minimum rent per square foot, partially offset by an 8.1% increase in real estate taxes resulting from property reassessments, versus the comparable period.
For the six months ended June 30, 2017, same-center NOI increased 3.7% to $32.5 million compared to $31.3 million during the first six months of 2016. The improvement was driven by the aforementioned increase in minimum rent per square foot, partially offset by a 3.4% increase in real estate taxes resulting from property reassessments, versus the comparable period.
Contributing to same-center NOI were 51 properties that were owned and operational for the entire portion of both comparable reporting periods.
Same-center occupancy totaled 94.8%, a decrease of 0.1% from June 30, 2016.
Portfolio Statistics
At quarter-end, the portfolio consisted of 80 properties, totaling approximately 9.8 million square feet located in 24 states.
Leased portfolio occupancy totaled 94.8%, unchanged from June 30, 2016.
Leasing Activity
During the second quarter of 2017, 62 new and renewal leases were executed totaling 165,000 square feet. 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 1.1% for new leases and 13.3% for renewal leases.
During the first six months of 2017, 114 new and renewal leases were executed totaling 324,000 square feet. Comparable rent spreads during the first six months of 2017, were 8.2% for new leases and 13.8% for renewal leases.
Acquisition Activity
Two grocery-anchored shopping centers were acquired for a total cost of $36.4 million during the second quarter of 2017. The properties, located in California and Georgia, total approximately 167,000 square feet.
During the six months ended June 30, 2017, six shopping centers were acquired for a total cost of $124.9 million.
During the three and six months ended June 30, 2017, Necessity Retail Partners, the company’s joint venture with TPG Real Estate, acquired one and two grocery-anchored shopping centers, respectively, bringing its total property count to thirteen.
Balance Sheet Highlights at June 30, 2017
The company has $166 million outstanding on its $350 million revolving credit facility and its net debt to total enterprise value was 38.7% at June 30, 2017.
The company defines net debt as total debt, excluding below-market debt adjustments and deferred financing costs, less cash and cash equivalents; and defines total enterprise value as equity value, calculated as total diluted shares outstanding multiplied by the per share of $22.75, plus net debt.
The weighted-average interest rate of outstanding debt was 3.0% with a weighted-average maturity of 2.5 years. 75.3% of the total debt was fixed-rate debt.
Second Quarter 2017 Distributions
Gross distributions of $19.1 million were paid during the second quarter of 2017, including $9.3 million reinvested through the dividend reinvestment plan, for net cash distributions of $9.9 million.
Share Repurchase Program (SRP)
During the three months ended June 30, 2017, the company repurchased approximately 344,000 shares. The cash available for repurchases on any particular date under the SRP is generally limited to the proceeds from the dividend reinvestment plan during the preceding four fiscal quarters, less amounts already used for repurchases during the same time period.
Stockholder Update Call
Company management will host a stockholder update webinar on Wednesday, August 9, 2017 at 11:30 a.m. Eastern time to provide a portfolio update and to discuss these results. Interested parties can listen to the presentation by clicking the link available in the Events & Presentations section of the Investor Relations website at http://investors.grocerycenterreit2.com/event.
For more information on the company’s quarterly results, please refer to the company’s Form 10-Q which will be filed with the SEC and available on the SEC’s website at www.sec.gov.
Reconciliation of Non-GAAP Measures
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 51 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 the investors about 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, 2015, 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, same-center NOI may not be comparable to other REITs.
Same-center NOI should not be viewed as an alternative measure of financial performance since it does not reflect the operations of the entire portfolio, nor does it reflect the impact of general and administrative expenses, acquisition expenses, interest expense, depreciation and amortization, other income, or the level of capital expenditures and leasing costs necessary to maintain the operating performance of properties that could materially impact the results from operations.
The table below is a comparison of the same-center NOI for the three and six months ended June 30, 2017, to the three and six months ended June 30, 2016 (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||
| 2017 | 2016 | $ Change | % Change | 2017 | 2016 | $ Change | % Change | |||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||||
| Rental income(1) | $ | 17,764 | $ | 17,223 | $ | 541 | $ | 35,344 | $ | 34,411 | $ | 933 | ||||||||||||||||
| Tenant recovery income | 6,805 | 6,408 | 397 | 13,684 | 13,005 | 679 | ||||||||||||||||||||||
| Other property income | 143 | 142 | 1 | 218 | 228 | (10 | ) | |||||||||||||||||||||
| Total revenues | 24,712 | 23,773 | 939 | 3.9% | 49,246 | 47,644 | 1,602 | 3.4% | ||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||
| Property operating expenses | 4,028 | 3,930 | 98 | 8,458 | 8,294 | 164 | ||||||||||||||||||||||
| Real estate taxes | 4,370 | 4,041 | 329 | 8,327 | 8,052 | 275 | ||||||||||||||||||||||
| Total operating expenses | 8,398 | 7,971 | 427 | 5.4% | 16,785 | 16,346 | 439 | 2.7% | ||||||||||||||||||||
| Total Same-Center NOI | $ | 16,314 | $ | 15,802 | $ | 512 | 3.2% | $ | 32,461 | $ | 31,298 | $ | 1,163 | 3.7% | ||||||||||||||
| (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) income to NOI and same-center NOI for the three and six months ended June 30, 2017 and 2016 (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2017 | 2016(1) | 2017 | 2016(1) | |||||||||||||
| Net (loss) income | $ | (1,252 | ) | $ | (4,552 | ) | $ | (1,339 | ) | $ | (3,201 | ) | ||||
| Adjusted to exclude: | ||||||||||||||||
| Straight-line rental income | (656 | ) | (938 | ) | (1,492 | ) | (1,747 | ) | ||||||||
| Net amortization of above- and below-market leases | (606 | ) | (546 | ) | (1,213 | ) | (958 | ) | ||||||||
| Lease buyout income | — | (149 | ) | (125 | ) | (149 | ) | |||||||||
| General and administrative expenses | 5,167 | 4,812 | 9,821 | 8,852 | ||||||||||||
| Acquisition expenses | 300 | 5,219 | 259 | 7,991 | ||||||||||||
| Depreciation and amortization | 17,514 | 13,823 | 34,536 | 26,112 | ||||||||||||
| Interest expense, net | 5,452 | 2,250 | 9,926 | 3,703 | ||||||||||||
| Other | 96 | 122 | 151 | 242 | ||||||||||||
| Gain on contribution of properties to unconsolidated joint venture | — | — | — | (3,341 | ) | |||||||||||
| NOI | 26,015 | 20,041 | 50,524 | 37,504 | ||||||||||||
| Less: NOI from centers excluded from Same-Center | (9,701 | ) | (4,239 | ) | (18,063 | ) | (6,206 | ) | ||||||||
| Total Same-Center NOI | $ | 16,314 | $ | 15,802 | $ | 32,461 | $ | 31,298 | ||||||||
| (1) | Certain prior period amounts have been restated to conform with current year presentation. | |
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. FFO is used as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) to be net income (loss), computed in accordance with GAAP and gains (or losses) from sales of depreciable real estate property (including deemed sales and settlements of pre-existing relationships), plus depreciation and amortization on real estate assets and impairment charges, and after related adjustments for unconsolidated partnerships, joint ventures and noncontrolling interests. FFO is believed to be helpful to investors and management as a measure of operating performance because, when compared year to year, it reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which are not immediately apparent from net income.
Since the definition of FFO was promulgated by NAREIT, GAAP has expanded to include several new accounting pronouncements, such that management and many investors and analysts have considered the presentation of FFO alone to be insufficient. Accordingly, in addition to FFO, the company uses MFFO, which excludes from FFO 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 company 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;
- adjustments related to the above items for unconsolidated entities in the application of equity accounting.
MFFO is believed to be helpful in assisting management and investors with the assessment of the sustainability of operating performance in future periods and, in particular, after the acquisition stage is complete, because MFFO excludes acquisition expenses that affect operations only in the period in which the property is acquired. Thus, MFFO provides helpful information relevant to evaluating operating performance in periods in which there is no acquisition activity.
Many of the adjustments in arriving at MFFO are not applicable to the company. Nevertheless, as explained below, management’s evaluation of operating performance may also exclude items considered in the calculation of MFFO based on the following economic considerations.
- Adjustments for straight-line rents and amortization of discounts and premiums on debt investments—GAAP requires rental receipts and discounts and premiums on debt investments to be recognized using various systematic methodologies. This may result in income recognition that could be significantly different than underlying contract terms. By adjusting for these items, MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments and aligns results with management’s analysis of operating performance. The adjustment to MFFO for straight-line rents, in particular, is made to reflect rent and lease payments from a GAAP accrual basis to a cash basis.
- Adjustments for amortization of above- or below-market intangible lease assets—Similar to depreciation and amortization of other real estate-related assets that are excluded from FFO, GAAP implicitly assumes that the value of intangibles diminishes ratably over the lease term and should be recognized in revenue. Since real estate values and market lease rates in the aggregate have historically risen or fallen with market conditions, and the intangible value is not adjusted to reflect these changes, management believes that by excluding these charges, MFFO provides useful supplemental information on the performance of the real estate.
- Gains or losses related to fair-value adjustments for derivatives not qualifying for hedge accounting—This item relates to a fair value adjustment, which is based on the impact of current market fluctuations and underlying assessments of general market conditions and specific performance of the holding, which may not be directly attributable to current operating performance. As these gains or losses relate to underlying long-term assets and liabilities, management believes MFFO provides useful supplemental information by focusing on the changes in core operating fundamentals rather than changes that may reflect anticipated, but unknown, gains or losses.
- Adjustment for gains or losses related to early extinguishment of derivatives and debt instruments—These adjustments are not related to continuing operations. By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods and to other real estate operators.
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 cash needs, including ability to fund distributions. MFFO may not be a useful measure of the impact of long-term operating performance on value if business plan is not continued to be operated 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 following section presents calculation of FFO and MFFO and provides additional information related to operations (in thousands). As a result of the timing of the commencement of active real estate operations, FFO and MFFO are not relevant to a discussion comparing operations for the periods presented. Revenues and expenses are expected to increase in future periods as additional investments are acquired.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| (In thousands, except per share amounts) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
|
Calculation of FFO |
||||||||||||||||
| Net loss | $ | (1,252 | ) | $ | (4,552 | ) | $ | (1,339 | ) | $ | (3,201 | ) | ||||
| Adjustments: | ||||||||||||||||
| Depreciation and amortization of real estate assets | 17,514 | 13,823 | 34,536 | 26,112 | ||||||||||||
| Gain on contribution of properties to unconsolidated joint venture | — | — | — | (3,341 | ) | |||||||||||
| Depreciation and amortization related to unconsolidated joint venture | 446 | 233 | 872 | 233 | ||||||||||||
| FFO | $ | 16,708 | $ | 9,504 | $ | 34,069 | $ | 19,803 | ||||||||
|
Calculation of MFFO |
||||||||||||||||
| FFO | $ | 16,708 | $ | 9,504 | $ | 34,069 | $ | 19,803 | ||||||||
| Adjustments: | ||||||||||||||||
| Acquisition expenses | 300 | 5,219 | 259 | 7,991 | ||||||||||||
| Net amortization of above- and below-market leases | (606 | ) | (546 | ) | (1,213 | ) | (958 | ) | ||||||||
| Straight-line rental income | (656 | ) | (938 | ) | (1,492 | ) | (1,747 | ) | ||||||||
| Amortization of market debt adjustment | (252 | ) | (230 | ) | (534 | ) | (340 | ) | ||||||||
| Change in fair value of derivatives | (119 | ) | (106 | ) | (235 | ) | (100 | ) | ||||||||
| Gain on extinguishment of debt | — | — | (11 | ) | — | |||||||||||
| Adjustments related to unconsolidated joint venture | 25 | 19 | 23 | 19 | ||||||||||||
| MFFO | $ | 15,400 | $ | 12,922 | $ | 30,866 | $ | 24,668 | ||||||||
| Weighted-average common shares outstanding – basic | 46,529 | 46,261 | 46,520 | 46,143 | ||||||||||||
| Weighted-average common shares outstanding – diluted(1) | 46,531 | 46,261 | 46,523 | 46,143 | ||||||||||||
| Net loss per share – basic and diluted | $ | (0.03 | ) | $ | (0.10 | ) | $ | (0.03 | ) | $ | (0.07 | ) | ||||
| FFO per share – basic and diluted | $ | 0.36 | $ | 0.21 | $ | 0.73 | $ | 0.43 | ||||||||
| MFFO per share – basic and diluted | $ | 0.33 | $ | 0.28 | $ | 0.66 | $ | 0.53 | ||||||||
| (1) | Restricted stock awards were dilutive to FFO/MFFO for the three and six months ended June 30, 2017, and, accordingly, were included in the weighted-average common shares used to calculate diluted FFO/MFFO per share. |
About Phillips Edison Grocery Center REIT II, Inc.
Phillips Edison Grocery Center REIT II, Inc. is a public non-traded REIT that seeks to acquire and manage well-occupied grocery-anchored neighborhood shopping centers having 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, 2017, the company owned and managed an institutional quality retail portfolio consisting of 80 grocery-anchored shopping centers totaling approximately 9.8 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 expectations regarding the performance of its business, its financial results, its liquidity and capital resources, the funding available under its share repurchase 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, including those described under the section entitled “Risk Factors” in Annual Report on Form 10-K for the year ended December 31, 2016, 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 release and in the filings with the SEC. No obligation is undertaken to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.
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Investors:
For Phillips Edison Grocery Center REIT II, Inc.
Michael Koehler, 513-338-2743
Director of Investor Relations
InvestorRelations@phillipsedison.com
Source: Phillips Edison Grocery Center REIT II, Inc.
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