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EX-31.1 - EXHIBIT 31.1 - Phillips Edison & Company, Inc.pentr_20160630-ex311.htm
EX-32.2 - EXHIBIT 32.2 - Phillips Edison & Company, Inc.pentr_20160331-ex322.htm
EX-32.1 - EXHIBIT 32.1 - Phillips Edison & Company, Inc.pentr_20160331-ex321.htm
EX-31.2 - EXHIBIT 31.2 - Phillips Edison & Company, Inc.pentr_20160630-ex312.htm


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
OR
¨     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to              
Commission file number 000-54691
 
PHILLIPS EDISON GROCERY CENTER REIT I, INC.  
 
(Exact Name of Registrant as Specified in Its Charter)
 
Maryland
27-1106076
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
 
11501 Northlake Drive
 Cincinnati, Ohio
45249
(Address of Principal Executive Offices)
(Zip Code)
(513) 554-1110
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ¨ 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
¨
Accelerated Filer
¨
 
 
 
 
Non-Accelerated Filer
x (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of July 31, 2016, there were 184.1 million outstanding shares of common stock of Phillips Edison Grocery Center REIT I, Inc.





INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1



PART I.        FINANCIAL INFORMATION
 
Item 1.          Financial Statements

PHILLIPS EDISON GROCERY CENTER REIT I, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2016 AND DECEMBER 31, 2015
(Unaudited)
(In thousands, except per share amounts)
  
June 30, 2016
 
December 31, 2015
ASSETS
  
 
  
Investment in real estate:
  
 
  
Land and improvements
$
761,125

 
$
719,430

Building and improvements
1,453,060

 
1,397,050

Acquired in-place lease assets
203,092

 
194,242

Acquired above-market lease assets
41,036

 
39,311

Total investment in real estate assets
2,458,313

 
2,350,033

Accumulated depreciation and amortization
(284,998
)
 
(232,102
)
Total investment in real estate assets, net
2,173,315

 
2,117,931

Cash and cash equivalents
6,456

 
40,680

Restricted cash
7,132

 
6,833

Other assets, net
60,387

 
60,804

Total assets
$
2,247,290

 
$
2,226,248

 
 
 
 
LIABILITIES AND EQUITY
  

 
  

Liabilities:
  

 
  

Mortgages and loans payable, net
$
894,889

 
$
845,515

Acquired below-market lease intangibles, net of accumulated amortization of $17,495 and $14,259, respectively
42,274

 
39,782

Accounts payable – affiliates
3,843

 
5,278

Accounts payable and other liabilities
56,909

 
43,881

Total liabilities
997,915

 
934,456

Commitments and contingencies (Note 6)

 

Equity:
  

 
  

Preferred stock, $0.01 par value per share, 10,000 shares authorized, zero shares issued and outstanding at June 30, 2016
  
 
  
and December 31, 2015, respectively

 

Common stock, $0.01 par value per share, 1,000,000 shares authorized, 183,873 and 181,308 shares issued and
  
 
  
outstanding at June 30, 2016 and December 31, 2015, respectively
1,839

 
1,813

Additional paid-in capital
1,614,816

 
1,588,541

Accumulated other comprehensive (loss) income
(9,651
)
 
22

Accumulated deficit
(381,928
)
 
(323,761
)
Total stockholders’ equity
1,225,076

 
1,266,615

Noncontrolling interests
24,299

 
25,177

Total equity
1,249,375

 
1,291,792

Total liabilities and equity
$
2,247,290

 
$
2,226,248


See notes to consolidated financial statements.

2



PHILLIPS EDISON GROCERY CENTER REIT I, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016 AND 2015
(Unaudited)
(In thousands, except per share amounts)
  
Three Months Ended June 30,
 
Six Months Ended June 30,
  
2016
 
2015
 
2016
 
2015
Revenues:
  
 
  
 
 
 
 
Rental income
$
47,256

 
$
45,539

 
$
94,195

 
$
90,039

Tenant recovery income
15,509

 
13,289

 
31,453

 
27,393

Other property income
288

 
366

 
487

 
709

Total revenues
63,053

 
59,194

 
126,135

 
118,141

Expenses:
  

 
  

 
 
 
 
Property operating
9,657

 
8,372

 
19,948

 
18,358

Real estate taxes
9,230

 
8,548

 
18,641

 
16,727

General and administrative
8,461


2,509

 
16,014

 
4,871

Acquisition expenses
1,502


1,487

 
1,522

 
3,222

Depreciation and amortization
25,977


25,271

 
51,683

 
50,001

Total expenses
54,827


46,187

 
107,808

 
93,179

Other expenses:
  

 
  

 
 
 
 
Interest expense, net
(7,601
)

(7,543
)
 
(15,333
)
 
(14,337
)
Other expense, net
(42
)

(3
)
 
(158
)
 
(125
)
Net income
583


5,461

 
2,836

 
10,500

Net income attributable to noncontrolling interests
(23
)
 
(91
)
 
(57
)
 
(159
)
Net income attributable to stockholders
$
560


$
5,370

 
$
2,779

 
$
10,341

Earnings per common share:
  

 
  

 
 
 
 
Net income per share - basic
$
0.00


$
0.03

 
$
0.02

 
$
0.06

Net income per share - diluted
$
0.00

 
$
0.03

 
$
0.01

 
$
0.06

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
183,514

 
184,342

 
182,880

 
183,669

Diluted
186,299

 
187,127

 
185,665

 
186,316

 
 
 
 
 
 
 
 
Comprehensive (loss) income:
  

 
  

 
 
 
 
Net income
$
583

 
$
5,461

 
$
2,836

 
$
10,500

Other comprehensive (loss) income:
  

 
  

 
 
 
 
Unrealized (loss) gain on derivatives
(3,240
)
 
1,391

 
(11,547
)
 
1,391

Reclassification of derivative loss to interest expense
928

 
793

 
1,874

 
793

Comprehensive (loss) income
(1,729
)
 
7,645

 
(6,837
)
 
12,684

Comprehensive income attributable to noncontrolling interests
(23
)
 
(91
)
 
(57
)
 
(159
)
Comprehensive (loss) income attributable to stockholders
$
(1,752
)
 
$
7,554

 
$
(6,894
)
 
$
12,525


See notes to consolidated financial statements.

3



PHILLIPS EDISON GROCERY CENTER REIT I, INC.
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015
(Unaudited)
(In thousands, except per share amounts)
  
Common Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Accumulated Deficit
 
Total Stockholders’ Equity
 
Noncontrolling Interest
 
Total Equity
  
Shares
 
Amount
 
 
 
 
 
 
Balance at January 1, 2015
182,131

 
$
1,820

 
$
1,567,653

 
$

 
$
(213,975
)
 
$
1,355,498

 
$
22,764

 
$
1,378,262

Share repurchases
(645
)
 
(9
)
 
(8,344
)
 

 

 
(8,353
)
 

 
(8,353
)
Change in redeemable common stock

 

 
(22,115
)
 

 

 
(22,115
)
 

 
(22,115
)
Dividend reinvestment plan (“DRIP”)
3,363

 
34

 
31,924

 

 

 
31,958

 

 
31,958

Change in unrealized gain on interest rate swaps

 

 

 
2,184

 

 
2,184

 

 
2,184

Common distributions declared, $0.34 per share

 

 

 

 
(61,035
)
 
(61,035
)
 

 
(61,035
)
Issuance of partnership units

 

 

 

 

 

 
4,047

 
4,047

Distributions to noncontrolling interests

 

 

 

 

 

 
(898
)
 
(898
)
Net income

 

 

 

 
10,341

 
10,341

 
159

 
10,500

Balance at June 30, 2015
184,849

 
$
1,845

 
$
1,569,118

 
$
2,184

 
$
(264,669
)
 
$
1,308,478

 
$
26,072

 
$
1,334,550

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2016
181,308

 
$
1,813

 
$
1,588,541

 
$
22

 
$
(323,761
)
 
$
1,266,615

 
$
25,177

 
$
1,291,792

Share repurchases
(396
)
 
(4
)
 
(3,885
)
 

 

 
(3,889
)
 

 
(3,889
)
DRIP
2,961

 
30

 
30,160

 

 

 
30,190

 

 
30,190

Change in unrealized loss on interest rate swaps

 

 

 
(9,673
)
 

 
(9,673
)
 

 
(9,673
)
Common distributions declared, $0.34 per share

 

 

 

 
(60,946
)
 
(60,946
)
 

 
(60,946
)
Distributions to noncontrolling interests

 

 

 

 

 

 
(935
)
 
(935
)
Net income

 

 

 

 
2,779

 
2,779

 
57

 
2,836

Balance at June 30, 2016
183,873

 
$
1,839

 
$
1,614,816

 
$
(9,651
)
 
$
(381,928
)
 
$
1,225,076

 
$
24,299

 
$
1,249,375


See notes to consolidated financial statements.

4




PHILLIPS EDISON GROCERY CENTER REIT I, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015
(Unaudited)
(In thousands)
  
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
  
 
  
Net income
$
2,836

 
$
10,500

Adjustments to reconcile net income to net cash provided by operating activities:
  

 
  

Depreciation and amortization
50,315

 
48,515

Net amortization of above- and below-market leases
(582
)
 
(354
)
Amortization of deferred financing expense
2,093

 
2,491

Loss on disposal of real estate assets
122

 
106

Straight-line rental income
(1,725
)
 
(2,605
)
Other
43

 
156

Changes in operating assets and liabilities:
  

 
  

Other assets
1,592

 
1,829

Accounts payable and other liabilities
3,849

 
1,670

Accounts payable – affiliates
(1,588
)
 
1,093

Net cash provided by operating activities
56,955


63,401

CASH FLOWS FROM INVESTING ACTIVITIES:
  

 
  

Real estate acquisitions
(94,385
)
 
(88,474
)
Capital expenditures
(10,325
)
 
(9,297
)
Change in restricted cash
(299
)
 
(1,025
)
Net cash used in investing activities
(105,009
)
 
(98,796
)
CASH FLOWS FROM FINANCING ACTIVITIES:
  

 
  

Net change in credit facility
106,500

 
134,800

Payments on mortgages and loans payable
(57,159
)
 
(45,480
)
Payments of deferred financing expenses

 
(557
)
Distributions paid, net of DRIP
(30,973
)
 
(29,262
)
Distributions to noncontrolling interests
(790
)
 
(753
)
Repurchases of common stock
(3,748
)
 
(6,183
)
Net cash provided by financing activities
13,830

 
52,565

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(34,224
)
 
17,170

CASH AND CASH EQUIVALENTS:
  

 
  

Beginning of period
40,680

 
15,649

End of period
$
6,456

 
$
32,819

 
 
 
 
SUPPLEMENTAL CASH FLOW DISCLOSURE, INCLUDING NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Cash paid for interest
$
14,843

 
$
12,818

Fair value of assumed debt

 
24,982

Accrued capital expenditures
1,920

 
2,012

Change in distributions payable
(217
)
 
(185
)
Change in distributions payable - noncontrolling interests
145

 
145

Change in accrued share repurchase obligation
141

 
2,170

Distributions reinvested
30,190

 
31,958


See notes to consolidated financial statements.

5



 Phillips Edison Grocery Center REIT I, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
 
1. ORGANIZATION
Phillips Edison Grocery Center REIT I, Inc., (“we,” the “Company,” “our,” or “us”) was formed as a Maryland corporation in October 2009. Substantially all of our business is conducted through Phillips Edison Grocery Center Operating Partnership I, L.P., (the “Operating Partnership”), a Delaware limited partnership formed in December 2009. We are a limited partner of the Operating Partnership, and our wholly owned subsidiary, Phillips Edison Grocery Center OP GP I LLC, is the sole general partner of the Operating Partnership.
Our advisor is Phillips Edison NTR LLC (“PE-NTR”), which is directly or indirectly owned by Phillips Edison Limited Partnership (the “Phillips Edison sponsor”). Under the terms of the advisory agreement between PE-NTR and us (the “PE-NTR Agreement”), PE-NTR is responsible for the management of our day-to-day activities and the implementation of our investment strategy.
We invest primarily in well-occupied, grocery-anchored neighborhood and community shopping centers having a mix of creditworthy national and regional retailers selling necessity-based goods and services in strong demographic markets throughout the United States. As of June 30, 2016, we owned fee simple interests in 149 real estate properties acquired from third parties unrelated to us or PE-NTR.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Set forth below is a summary of the significant accounting estimates and policies that management believes are important to the preparation of our consolidated interim financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by management. As a result, these estimates are subject to a degree of uncertainty. There have been no changes to our significant accounting policies during the six months ended June 30, 2016. For a full summary of our accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 3, 2016.
Basis of Presentation and Principles of Consolidation—The accompanying consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Readers of this Quarterly Report on Form 10-Q should refer to the audited consolidated financial statements of Phillips Edison Grocery Center REIT I, Inc. for the year ended December 31, 2015, which are included in our 2015 Annual Report on Form 10-K. In the opinion of management, all normal and recurring adjustments necessary for the fair presentation of the unaudited consolidated financial statements for the periods presented have been included in this Quarterly Report. Our results of operations for the three and six months ended June 30, 2016, are not necessarily indicative of the operating results expected for the full year.
The accompanying consolidated financial statements include our accounts and those of our majority-owned subsidiaries. All intercompany balances and transactions are eliminated upon consolidation.
Reclassifications—The following line item on our consolidated balance sheets as of December 31, 2015, was reclassified to conform to the current year presentation:
Acquired Intangible Lease Assets was separated into Acquired Above-Market Lease Assets and Acquired In-Place Lease Assets.
The following line item on our consolidated statement of cash flows for the six months ended June 30, 2015 was reclassified to conform to the current year presentation:
Change in Fair Value of Derivative was reclassified to Other.


6



Newly Adopted and Recently Issued Accounting Pronouncements—In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Interest - Imputation of Interest (Topic 835): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). This update amends existing guidance to require the presentation of certain debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. In August 2015, the FASB issued ASU 2015-15: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (“ASU 2015-15”). This update provides guidance regarding the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. We adopted ASU 2015-03 and ASU 2015-15 on January 1, 2016, and retrospectively applied the guidance for all periods presented. Unamortized debt issuance costs of $7.2 million and $8.6 million are included in Mortgages and Loans Payable, Net as of June 30, 2016 and December 31, 2015, respectively, which were previously included in Deferred Financing Expense, Net on our consolidated balance sheets. The remaining amounts included in Other Assets, Net on our consolidated balance sheets were related to our revolving credit facility. The adoption did not have an impact on our results of operations (see Note 5).
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis to ASC Topic 810 Consolidation. ASU 2015-02 includes all reporting entities within the scope of Subtopic 810-10 Consolidation - Overall, including limited partnerships and similar legal entities, unless a scope exception applies. Overall the amendments in this update are to simplify the codification and reduce the number of consolidation models and place more emphasis on risk of loss when determining controlling financial interests. This ASU was effective beginning in the first quarter of our year ending December 31, 2016. We have evaluated the impact of the adoption of ASU 2015-02 on our consolidated financial statements and have determined under ASU 2015-02 the Operating Partnership is considered a variable interest entity (“VIE”). We are the primary beneficiary of the VIE and our partnership interest is considered a majority voting interest. As such, this standard did not have a material impact on our consolidated financial statements.
The following table provides a brief description of recent accounting pronouncements that could have a material effect on our financial statements:
Standard
 
Description
 
Date of Adoption
 
Effect on the Financial Statements or Other Significant Matters
ASU 2014-09, Revenue from Contracts with Customers
 
This update outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU 2014-09 states that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” While ASU 2014-09 specifically references contracts with customers, it may apply to certain other transactions such as the sale of real estate or equipment. In 2015, the FASB provided for a one-year deferral of the effective date for ASU 2014-09, making it effective for annual reporting periods beginning after December 15, 2017.
 
January 1, 2018
 
We are currently evaluating the impact the adoption of this standard will have on our consolidated financial statements.
ASU 2016-02, Leases (Topic 842)
 
This update amends existing guidance by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. It is effective for annual reporting periods beginning after December 15, 2018, but early adoption is permitted.
 
January 1, 2019
 
We are currently evaluating the impact the adoption of this standard will have on our consolidated financial statements.


7



3. FAIR VALUE MEASUREMENTS
ASC 820, Fair Value Measurement (“ASC 820”) defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. ASC 820 emphasizes that fair value is intended to be a market-based measurement, as opposed to a transaction-specific measurement. Fair value is defined by ASC 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate the fair value. Assets and liabilities are measured using inputs from three levels of the fair value hierarchy, as follows:
Level 1—Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).
Level 3—Unobservable inputs, only used to the extent that observable inputs are not available, reflect our assumptions about the pricing of an asset or liability. 
Considerable judgment is necessary to develop estimated fair values of financial and non-financial assets and liabilities. Accordingly, the estimates presented herein are not necessarily indicative of the amounts we did or could actually realize upon disposition of the financial assets and liabilities previously sold or currently held.
The following describes the methods we use to estimate the fair value of our financial and non-financial assets and liabilities: 
Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, and Accounts Payable and Other Liabilities—We consider the carrying values of these financial instruments to approximate fair value because of the short period of time between origination of the instruments and their expected realization.
Real Estate Investments—The purchase prices of the investment properties, including related lease intangible assets and liabilities, were allocated at estimated fair value based on Level 3 inputs, such as discount rates, capitalization rates, comparable sales, replacement costs, income and expense growth rates, and current market rents and allowances as determined by management.
Real estate assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the individual property may not be recoverable, or at least annually. In such an event, a comparison will be made of the projected operating cash flows of each property on an undiscounted basis to the carrying amount of such property. Such carrying amount would be adjusted, if necessary, to estimated fair values to reflect impairment in the value of the asset.
Mortgages and Loans Payable—We estimate the fair value of our debt by discounting the future cash flows of each instrument at rates currently offered for similar debt instruments of comparable maturities by our lenders using Level 3 inputs.  The discount rate used approximates current lending rates for loans or groups of loans with similar maturities and credit quality, assuming the debt is outstanding through maturity and considering the debt’s collateral (if applicable). We have utilized market information, as available, or present value techniques to estimate the amounts required to be disclosed.
The following is a summary of discount rates and borrowings as of June 30, 2016 and December 31, 2015 (dollars in thousands):
 
 
June 30, 2016
 
December 31, 2015
Discount rates:
 
 
 
 
Unsecured variable-rate debt
 
1.95
%
 
1.66
%
Secured fixed-rate debt
 
2.87
%
 
2.75
%
Secured variable-rate debt
 
2.70
%
 
2.36
%
Borrowings:
 
 
 
 
Fair value
 
$
919,303

 
$
880,854

Recorded value(1)
 
902,074

 
854,079

(1) 
Recorded value does not include deferred financing cost of $7.2 million and $8.6 million as of June 30, 2016 and December 31, 2015, respectively.

8



Derivative InstrumentsIn April 2015, we entered into three interest rate swap agreements with a notional amount of $387 million that are measured at fair value on a recurring basis. These interest rate swap agreements effectively fix the LIBOR portion of the interest rate on $387 million of outstanding debt under our existing unsecured term loan facility. These swaps qualify and have been designated as cash flow hedges.
As of June 30, 2016 and December 31, 2015, we were party to an interest rate swap agreement with a notional amount of $11.2 million and $11.3 million, respectively. The interest rate swap was assumed as part of an acquisition and is measured at fair value on a recurring basis. The interest rate swap agreement, in effect, fixes the variable interest rate of one of our secured variable-rate mortgage notes at an annual interest rate of 5.22% through June 2018.
The fair values of the interest rate swap agreements as of June 30, 2016 and December 31, 2015, were based on the estimated amount we would receive or pay to terminate the contract at the reporting date and were determined using interest rate pricing models and interest rate-related observable inputs. Although we determined that the significant inputs used to value our derivatives fell within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our counterparties and our own credit risk utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, as of June 30, 2016 and December 31, 2015, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative position and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
We record derivative liabilities in Accounts Payable and Other Liabilities and derivative assets in Other Assets, Net on our consolidated balance sheets. The fair value measurements of our financial liability and asset as of June 30, 2016 and December 31, 2015, are as follows (in thousands):
  
June 30, 2016
 
December 31, 2015
Derivative liability (asset) designated as hedging instruments:
 
 
 
Interest rate swaps - unsecured term loan facility
$
9,651

 
$
(22
)
Derivative liability not designated as hedging instrument:
 
 
 
Interest rate swap - mortgage note
473

 
442


4. REAL ESTATE ACQUISITIONS
During the six months ended June 30, 2016, we acquired two grocery-anchored shopping centers and one strip center adjacent to a previously acquired grocery-anchored shopping center for an aggregate purchase price of approximately $93.9 million, with no assumed debt. During the six months ended June 30, 2015, we acquired nine grocery-anchored shopping centers for an aggregate purchase price of approximately $109.2 million, including $24.0 million of assumed debt with a fair value of $25.0 million. The following tables present certain additional information regarding our acquisitions of properties during the six months ended June 30, 2016 and 2015
For the six months ended June 30, 2016 and 2015, we allocated the purchase price of acquisitions to the fair value of the assets acquired and liabilities assumed as follows (in thousands):
 
2016
 
2015
Land and improvements
$
40,088

 
$
33,911

Building and improvements
48,999

 
67,647

Acquired in-place leases
8,849

 
10,165

Acquired above-market leases
1,725

 
1,241

Acquired below-market leases
(5,728
)
 
(3,782
)
Total assets and lease liabilities acquired
93,933

 
109,182

Less: Fair value of assumed debt at acquisition (1)

 
24,982

Net assets acquired
$
93,933

 
$
84,200

(1) 
Debt assumed for the six months ended June 30, 2015 relates to five properties as well as a strip center adjacent to a previously acquired grocery-anchored shopping center.  

9



The weighted-average amortization periods for acquired in-place lease, above-market lease, and below-market lease intangibles acquired during the six months ended June 30, 2016 and 2015, are as follows (in years):
 
2016
 
2015
Acquired in-place leases
14
 
14
Acquired above-market leases
6
 
9
Acquired below-market leases
23
 
19
The amounts recognized for revenues, acquisition expenses, and net loss from each respective acquisition date to June 30, 2016 and 2015, related to the operating activities of our acquisitions are as follows (in thousands):
 
2016
 
2015
Revenues
$
433

 
$
3,043

Acquisition expenses
1,361

 
1,849

Net loss
1,420

 
1,493

The following unaudited pro forma information summarizes selected financial information from our combined results of operations as if all of our acquisitions for 2016 and 2015 had been acquired on January 1, 2015. Acquisition expenses related to each respective acquisition are not expected to have a continuing impact and, therefore, have been excluded from these pro forma results. This pro forma information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transactions occurred at the beginning of the period, nor does it purport to represent the results of future operations.
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(in thousands)
2016
 
2015
 
2016
 
2015
Pro forma revenues
$
64,841

 
$
59,756

 
$
130,143

 
$
125,168

Pro forma net income attributable to stockholders
2,519

 
6,697

 
5,276

 
14,580


5. MORTGAGES AND LOANS PAYABLE
Our credit agreement provides access to an unsecured revolving credit facility and an unsecured term loan facility (the “Term Loans”). The revolving credit facility has a capacity of $500 million with a current interest rate of LIBOR plus 1.3%. The revolving credit facility matures in December 2017 with additional options to extend the maturity to December 2018. The Term Loans include three tranches with an interest rate of LIBOR plus 1.25%. The first tranche has a principal amount of $100 million and matures in February 2019, with two 12-month options to extend the maturity to February 2021. The second tranche has a principal amount of $175 million and matures in February 2020, with one option to extend the maturity to February 2021. The third tranche has a principal amount of $125 million and matures in February 2021. A maturity date extension for the first or second tranche requires the payment of an extension fee of 0.15% of the outstanding principal amount of the corresponding tranche.
As of June 30, 2016 and December 31, 2015, the weighted-average interest rate for all of our mortgages and loans payable was 3.2% and 3.5%, respectively.

10



The following is a summary of our debt obligations as of June 30, 2016 and December 31, 2015 (in thousands):
  
June 30, 2016
 
December 31, 2015
Unsecured Term Loans - fixed-rate(1)
$
387,000

 
$
387,000

Unsecured Term Loans - variable-rate
13,000

 
13,000

Unsecured revolving credit facility - variable-rate(2)
247,500

 
141,000

Fixed-rate mortgages payable(3)(4)
249,277

 
306,435

Assumed below-market debt adjustment, net(5)
5,298

 
6,644

Deferred financing costs, net(6)
(7,186
)
 
(8,564
)
Total
$
894,889

 
$
845,515

(1) 
As of June 30, 2016 and December 31, 2015, the interest rate on $387 million outstanding under our Term Loans was, effectively, fixed at various interest rates by three interest rate swap agreements with maturities ranging from February 2019 to February 2021 (see Notes 3 and 7).
(2) 
The gross borrowings under our revolving credit facility were $370 million during the six months ended June 30, 2016. The gross payments on our credit facility were $263.5 million during the six months ended June 30, 2016.
(3) 
Due to the non-recourse nature of our fixed-rate mortgages, the assets and liabilities of the related properties are neither available to pay the debts of the consolidated property-holding limited liability companies nor constitute obligations of such consolidated limited liability companies as of June 30, 2016 and December 31, 2015.
(4) 
As of June 30, 2016 and December 31, 2015, the interest rate on one of our variable-rate mortgage notes payable was, in effect, fixed at 5.22% by an interest rate swap agreement (see Notes 3 and 7).
(5) 
Net of accumulated amortization of $6.2 million and $6.5 million as of June 30, 2016 and December 31, 2015, respectively.
(6) 
Net of accumulated amortization of $3.7 million and $2.8 million as of June 30, 2016 and December 31, 2015, respectively. Accumulated amortization of deferred financing costs included in Other Assets, Net was $5.1 million and $4.8 million as of June 30, 2016 and December 31, 2015, respectively.

6. COMMITMENTS AND CONTINGENCIES 
Litigation 
In the ordinary course of business, we may become subject to litigation or claims. There are no material legal proceedings pending, or known to be contemplated, against us. 
Environmental Matters 
In connection with the ownership and operation of real estate, we may be potentially liable for costs and damages related to environmental matters. We record liabilities as they arise related to environmental obligations. We have not been notified by any governmental authority of any material non-compliance, liability or other claim, nor are we aware of any other environmental condition that we believe will have a material impact on our consolidated financial statements.

7. DERIVATIVES AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives
We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposure to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of our debt funding and the use of derivative financial instruments. Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash receipts and our known or expected cash payments principally related to our investments and borrowings.
Cash Flow Hedges of Interest Rate Risk
Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for our making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

11



The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive (Loss) Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the six months ended June 30, 2016, such derivatives were used to hedge the variable cash flows associated with certain variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. 
As of June 30, 2016, we had three interest rate swaps with a notional amount of $387.0 million that were designated as cash flow hedges of interest rate risk. Amounts reported in Accumulated Other Comprehensive (Loss) Income (“AOCI”) related to these derivatives will be reclassified to Interest Expense, Net as interest payments are made on the variable-rate debt. During the next 12 months, we estimate that an additional $3.3 million will be reclassified from Other Comprehensive Loss as an increase to Interest Expense, Net.
Derivatives Not Designated as Hedging Instruments
Derivatives not designated as hedges are not speculative and are used to manage our exposure to interest rate movements and other identified risks, but do not meet the strict hedge accounting requirements to be classified as hedging instruments. Changes in the fair value of these derivative instruments, as well as any payments, are recorded directly in Other Expense, Net and resulted in a gain of $43,000 and a loss of $6,000 for the three months ended June 30, 2016 and 2015, respectively. Changes in the fair value of these derivative instruments resulted in a gain of $162,000 and a loss of $127,000 for the six months ended June 30, 2016 and 2015, respectively.
Tabular Disclosure of the Effect of Derivative Instruments on AOCI and the Consolidated Statements of Operations and Comprehensive (Loss) Income
The table below presents the changes in AOCI and the effect of our derivative financial instruments on the consolidated statements of operations and comprehensive (loss) income for the six months ended June 30, 2016 and 2015 (in thousands):
Balance in AOCI as of January 1, 2015
 
 
$

Amount of gain recognized in other comprehensive income on derivative
$
1,391

 
 
Amount of loss reclassified from AOCI into interest expense
793

 
 
Current-period other comprehensive income
 
 
2,184

Balance in AOCI as of June 30, 2015
 
 
$
2,184

 
 
 
 
Balance in AOCI as of January 1, 2016
 
 
$
22

Amount of loss recognized in other comprehensive income on derivative
$
(11,547
)
 
 
Amount of loss reclassified from AOCI into interest expense
1,874

 
 
Current-period other comprehensive loss
 
 
(9,673
)
Balance in AOCI as of June 30, 2016
 
 
$
(9,651
)
Credit-risk-related Contingent Features
We have an agreement with our derivative counterparties that contains a provision where, if we either default or are capable of being declared in default on any of our indebtedness, we could also be declared to be in default on our derivative obligations. As of June 30, 2016 and December 31, 2015, the fair value of our derivatives excluded any adjustment for nonperformance risk related to this agreement. As of June 30, 2016 and December 31, 2015, we had not posted any collateral related to this agreement.

8. EQUITY
On April 14, 2016, our board of directors reaffirmed its estimated value per share of our common stock of $10.20 based substantially on the estimated market value of our portfolio of real estate properties as of March 31, 2016. We engaged a third party valuation firm, Duff & Phelps, LLC, to provide a calculation of the range in estimated value per share of our common stock as of March 31, 2016, which reflected certain balance sheet assets and liabilities as of that date.
Tender OfferOn April 25, 2016, in order to deter an unsolicited tender offer by a third party and to deter other potential future bidders that may try to exploit the illiquidity of shares of our common stock and acquire them from stockholders at prices substantially below their value, we launched a self-tender offer to purchase up to 9.3 million shares of our common stock. The tender offer expired on June 7, 2016, and in connection therewith, we repurchased 69,271 shares of common stock at a price of $6.00 per share, for an aggregate purchase price of approximately $416,000.

12



Dividend Reinvestment Plan—We have adopted a dividend reinvestment plan (the “DRIP”) that allows stockholders to invest distributions in additional shares of our common stock. For the three and six months ended June 30, 2016, shares were issued under the DRIP at a price of $10.20 per share.
Share Repurchase Program—Our share repurchase program provides an opportunity for stockholders to have shares of common stock repurchased, subject to certain restrictions and limitations. Our share repurchase program was temporarily suspended during the tender offer as required by SEC rules. No repurchases were made under the share repurchase program during the tender offer and for ten business days thereafter. Redemption requests that were submitted through the share repurchase program during the tender offer were not accepted for consideration. The share repurchase program was reinstated on June 22, 2016.
During the first and second quarters of 2016, repurchase requests continued to surpass the funding limits under the share repurchase program. Due to the program’s funding limits, no funds will be available for repurchases during the third quarter of 2016, and we believe the funds available for repurchases during the fourth quarter of 2016 will be insufficient to meet all requests. If we are unable to fulfill all repurchase requests in any month, we will attempt to honor requests on a pro rata basis. We continue to fulfill repurchases sought upon a stockholder’s death, determination of incompetence or qualifying disability in accordance with the terms of the share repurchase program.
On April 14, 2016, our board of directors amended and restated the share repurchase program. The amendment provides that the board of directors reserves the right, in its sole discretion, at any time and from time to time, to reject any request for repurchase, and clarifies that the cash available for repurchases on any particular date will generally be limited to the proceeds from the DRIP during the preceding four fiscal quarters, less amounts already used for repurchases since the beginning of that period. The amendment was effective as of May 15, 2016. As a result of this amendment, we no longer record amounts that are redeemable under the share repurchase program as redeemable common stock on our consolidated balance sheets. Since the program’s funding limits were surpassed as of the effective date of the amendment, there was no impact to redeemable stock on the consolidated balance sheets at the date of the amendment.
Class B and Operating Partnership Units—The Operating Partnership issues limited partnership units that are designated as Class B units and Operating Partnership units (“OP units”) for asset management services provided by PE-NTR. The vesting of the Class B units is contingent upon a market condition and service condition. OP units may be exchanged at the election of the holder for cash or, at the option of the Operating Partnership, for shares of our common stock, under the terms of exchange rights agreements to be prepared at a future date, provided, however, that the OP units have been outstanding for at least one year. PE-NTR has agreed under the PE-NTR Agreement not to exchange any OP units it may hold until the listing of our common stock or the liquidation of our portfolio occurs. As the form of the redemptions for the OP units is within our control, the OP units issued as of June 30, 2016 are classified as Noncontrolling Interests within permanent equity on our consolidated balance sheets. Additionally, the cumulative distributions that have been paid on these OP units are included in Distributions to Noncontrolling Interests on the consolidated statements of equity.
Below is a summary of our outstanding OP units and unvested Class B units as of June 30, 2016 and December 31, 2015 (in thousands):
 
 
June 30, 2016
 
December 31, 2015
OP units
 
2,785

 
2,785

Class B units
 
2,340

 
2,083


9. EARNINGS PER SHARE
We use the two-class method of computing earnings per share (“EPS”), which is an earnings allocation formula that determines EPS for common stock and any participating securities according to dividends declared (whether paid or unpaid). Under the two-class method, basic EPS is computed by dividing the sum of distributed earnings to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from share equivalent activity.
Class B units and OP units held by limited partners other than us are considered to be participating securities because they contain non-forfeitable rights to dividends or dividend equivalents and they have the potential to be exchanged for shares of our common stock in accordance with the terms of the Operating Partnership’s Second Amended and Restated Agreement of Limited Partnership, as amended (the “Partnership Agreement”). The impact of these Class B units and OP units on basic and diluted EPS has been calculated using the two-class method whereby earnings are allocated to the Class B units and OP units based on dividends declared and the units’ participation rights in undistributed earnings. The effects of the two-class method on basic and diluted EPS were immaterial to the consolidated financial statements as of June 30, 2016 and 2015.

13



Since the OP units are fully vested, they were included in the diluted net income per share computations for the three and six months ended June 30, 2016 and 2015. However, as vesting of the Class B units is contingent upon a market condition and service condition, unvested Class B units were not included in the diluted net income per share computations since the satisfaction of the market or service condition was not probable as of June 30, 2016 and 2015. There were 2.3 million and 0.8 million unvested Class B units outstanding as of June 30, 2016 and 2015, respectively, which had no effect on EPS.
The following table provides a reconciliation of the numerator and denominator of the earnings per unit calculations for the three and six months ended June 30, 2016 and 2015 (in thousands, except per share amounts):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Numerator for basic and diluted earnings per share:
 
 
 
 
 
 
 
Net income attributable to stockholders
$
560

 
$
5,370

 
$
2,779

 
$
10,341

Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share - weighted-average shares
183,514

 
184,342

 
182,880

 
183,669

Effect of dilutive OP units/Class B units
2,785

 
2,785

 
2,785

 
2,647

Denominator for diluted earnings per share - adjusted weighted-average shares
186,299


187,127

 
185,665

 
186,316

Basic earnings per share:
 
 
 
 
 
 
 
Net income attributable to stockholders
$
0.00

 
$
0.03

 
$
0.02

 
$
0.06

Diluted earnings per share:
 
 
 
 
 
 
 
Net income attributable to stockholders
$
0.00

 
$
0.03

 
$
0.01

 
$
0.06


10. RELATED PARTY TRANSACTIONS
Economic Dependency—We are dependent on PE-NTR, Phillips Edison & Company Ltd. (the “Property Manager”), and their respective affiliates for certain services that are essential to us, including asset acquisition and disposition decisions, asset management, operating and leasing of our properties, and other general and administrative responsibilities. In the event that PE-NTR, and/or the Property Manager, and their respective affiliates are unable to provide such services, we would be required to find alternative service providers, which could result in higher costs and expenses.
As of June 30, 2016 and December 31, 2015, PE-NTR owned 176,509 shares of our common stock, or approximately 0.1% of our outstanding common stock issued during our initial public offering period, which closed in February 2014. PE-NTR may not sell any of these shares while serving as our advisor. 
Advisory Agreement—Pursuant to the PE-NTR Agreement effective as of December 3, 2014, PE-NTR is entitled to specified fees for certain services, including managing our day-to-day activities and implementing our investment strategy. PE-NTR manages our day-to-day affairs and our portfolio of real estate investments subject to the board’s supervision. Expenses are to be reimbursed to PE-NTR based on amounts incurred on our behalf.
In October 2015, we entered into amended agreements to revise certain fees that are paid to PE-NTR in consideration for the advisory services that PE-NTR provides to us. Beginning October 1, 2015, we no longer pay a 0.75% financing fee to PE-NTR. The asset management fee remains at 1% of the cost of our assets but is paid 80% in cash and 20% in Class B units of the Operating Partnership. The cash portion is paid on a monthly basis in arrears, in the amount of 0.06667% multiplied by the cost of our assets as of the last day of the preceding monthly period.
Acquisition Fee—We pay PE-NTR an acquisition fee related to services provided in connection with the selection and purchase or origination of real estate and real estate-related investments. The acquisition fee is equal to 1% of the cost of investments we acquire or originate, including any debt attributable to such investments.
Acquisition Expenses—We reimburse PE-NTR for direct expenses incurred related to selecting, evaluating, and acquiring assets on our behalf, including certain personnel costs.
Asset Management Subordinated Participation—Within 60 days after the end of each calendar quarter (subject to the approval of our board of directors), we will pay an asset management subordinated participation partially by issuing a number of restricted operating partnership units designated as Class B Units to PE-NTR and American Realty Capital II Advisors, LLC (“ARC”), equal to: (i) the product of (x) the cost of our assets multiplied by (y) 0.05% (0.25% prior to October 1, 2015); divided by (ii) the most recent primary offering price for a share of our common stock as of the last day of such calendar quarter less any selling commissions and dealer manager fees that would have been payable in connection with that offering.

14



PE-NTR and ARC are entitled to receive distributions on the Class B units (and OP units converted from previously issued and vested Class B units) they receive in connection with their asset management subordinated participation at the same rate as distributions are paid to common stockholders. Such distributions are in addition to the incentive fees that PE-NTR, ARC, and their affiliates may receive from us. 
We continue to issue Class B units to PE-NTR and ARC in connection with the asset management services provided by PE-NTR under our current advisory agreement. Such Class B units will not vest until the economic hurdle is met in conjunction with (i) a termination of the PE-NTR Agreement by our independent directors without cause, (ii) a listing event, or (iii) a liquidity event; provided that PE-NTR serves as our advisor at the time of any of the foregoing events. During the six months ended June 30, 2016 and 2015, the Operating Partnership issued 0.3 million and 0.8 million Class B units, respectively, to PE-NTR and ARC under the PE-NTR Agreement for asset management services performed by PE-NTR.
Disposition Fee—We pay PE-NTR for substantial assistance by PE-NTR or any of its affiliates in connection with the sale of properties or other investments 2% of the contract sales price of each property or other investment sold. The conflicts committee of our board of directors determines whether PE-NTR or its affiliates have provided substantial assistance to us in connection with the sale of an asset. Substantial assistance in connection with the sale of a property includes PE-NTR or its affiliates’ preparation of an investment package for the property (including an investment analysis, rent rolls, tenant information regarding credit, a property title report, an environmental report, a structural report and exhibits) or such other substantial services performed by PE-NTR or its affiliates in connection with a sale. However, if we sold an asset to an affiliate, our organizational documents would prohibit us from paying a disposition fee to PE-NTR or its affiliates. 
General and Administrative Expenses—As of June 30, 2016 and December 31, 2015, we owed PE-NTR $85,000 and $124,000, respectively, for general and administrative expenses paid on our behalf.
Summarized below are the fees earned by and the expenses reimbursable to PE-NTR and ARC, except for unpaid general and administrative expenses, which we disclose above, for the three and six months ended June 30, 2016 and 2015, and any related amounts unpaid as of June 30, 2016 and December 31, 2015 (in thousands):
  
Three Months Ended
 
Six Months Ended
 
Unpaid Amount as of
  
June 30,
 
June 30,
 
June 30,
 
December 31,
  
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Acquisition fees(1)
$
940

 
$
228

 
$
940

 
$
1,083

 
$

 
$

Acquisition expenses(1)
155

 
23

 
155

 
162

 

 

Asset management fees(2)
4,711

 

 
9,330

 

 
1,608

 
1,538

OP units distribution (3)
464

 
470

 
928

 
898

 
153

 
159

Class B units distribution(4)
382

 
99

 
736

 
111

 
128

 
119

Financing fees(5)

 

 

 
180

 

 

Total
$
6,652

 
$
820

 
$
12,089

 
$
2,434

 
$
1,889

 
$
1,816

(1) 
The acquisition fees and expenses are presented as Acquisition Expenses on the consolidated statements of operations.
(2) 
Asset management fees are presented in General and Administrative on the consolidated statements of operations.
(3) 
The distributions paid to holders of OP units are presented as Distributions to Noncontrolling Interests on the consolidated statements of equity.
(4) 
The distributions paid to holders of unvested Class B units are presented in General and Administrative on the consolidated statements of operations.
(5) 
Financing fees are presented in Other Assets, Net or Mortgages and Loans Payable, Net, on the consolidated balance sheets and amortized over the term of the related loan. As of October 1, 2015, we are no longer required to pay financing fees.
Property Manager—All of our real properties are managed and leased by the Property Manager. The Property Manager is wholly owned by our Phillips Edison sponsor. The Property Manager also manages real properties acquired by Phillips Edison affiliates and other third parties.
Property Management Fee—We pay to the Property Manager a monthly property management fee of 4% of the monthly gross cash receipts from the properties it manages.
Leasing Commissions—In addition to the property management fee, if the Property Manager provides leasing services with respect to a property, we pay the Property Manager leasing fees in an amount equal to the leasing fees charged by unaffiliated persons rendering comparable services based on national market rates. The Property Manager shall be paid a leasing fee in connection with a tenant’s exercise of an option to extend an existing lease, and the leasing fees payable to the Property Manager may be increased by up to 50% in the event that the Property Manager engages a co-broker to lease a particular vacancy.
Construction Management Fee—If we engage the Property Manager to provide construction management services with respect to a particular property, we pay a construction management fee in an amount that is usual and customary for comparable services rendered to similar projects in the geographic market of the property.

15



Expenses and Reimbursements—The Property Manager hires, directs, and establishes policies for employees who have direct responsibility for the operations of each real property it manages, which may include, but is not limited to, on-site managers and building and maintenance personnel. Certain employees of the Property Manager may be employed on a part-time basis and may also be employed by PE-NTR or certain of its affiliates. The Property Manager also directs the purchase of equipment and supplies and supervises all maintenance activity. We reimburse the costs and expenses incurred by the Property Manager on our behalf, including employee compensation, legal, travel, and other out-of-pocket expenses that are directly related to the management of specific properties and corporate matters, as well as fees and expenses of third-party accountants.
Summarized below are the fees earned by and the expenses reimbursable to the Property Manager for the three and six months ended June 30, 2016 and 2015, and any related amounts unpaid as of June 30, 2016 and December 31, 2015 (in thousands):
  
Three Months Ended
 
Six Months Ended
 
Unpaid Amount as of
  
June 30,
 
June 30,
 
June 30,
 
December 31,
  
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Property management fees(1)
$
2,572

 
$
2,407

 
$
4,999

 
$
4,592

 
$
771

 
$
755

Leasing commissions(2)
1,547

 
1,992

 
3,742

 
4,020

 
384

 
729

Construction management fees(2)
254

 
246

 
413

 
411

 
63

 
155

Other fees and reimbursements(3)
1,406

 
1,018

 
2,576

 
2,021

 
651

 
1,699

Total
$
5,779

 
$
5,663

 
$
11,730

 
$
11,044

 
$
1,869

 
$
3,338

(1) 
The property management fees are included in Property Operating on the consolidated statements of operations.
(2) 
Leasing commissions paid for leases with terms less than one year are expensed immediately and included in Depreciation and Amortization on the consolidated statements of operations. Leasing commissions paid for leases with terms greater than one year, and construction management fees are capitalized and amortized over the life of the related leases or assets.
(3) 
Other fees and reimbursements are included in Property Operating and General and Administrative on the consolidated statements of operations based on the nature of the expense.

11. OPERATING LEASES
The terms and expirations of our operating leases with our tenants vary. The lease agreements frequently contain options to extend the terms of leases and other terms and conditions as negotiated. We retain substantially all of the risks and benefits of ownership of the real estate assets leased to tenants.
Approximate future rentals to be received under non-cancelable operating leases in effect at June 30, 2016, assuming no new or renegotiated leases or option extensions on lease agreements, are as follows (in thousands):
Year
Amount
July 1 to December 31, 2016
$
94,260

2017
177,885

2018
160,311

2019
136,784

2020
114,238

2021 and thereafter
412,966

Total
$
1,096,444

No single tenant comprised 10% or more of our aggregate annualized base rent as of June 30, 2016.


16



12. SUBSEQUENT EVENTS
Distributions to Stockholders
Distributions equal to a daily amount of $0.00183060 per share of common stock outstanding were paid subsequent to June 30, 2016, to the stockholders of record from June 1, 2016 through July 31, 2016 as follows (in thousands):
Distribution Period
 
Date Distribution Paid
 
Gross Amount of Distribution Paid
 
Distribution Reinvested through the DRIP
 
Net Cash Distribution
June 1, 2016 through June 30, 2016
 
7/1/2016
 
$
10,102

 
$
4,773

 
$
5,329

July 1, 2016 through July 31, 2016
 
8/1/2016
 
10,460

 
4,898

 
5,562

On August 2, 2016 our board of directors authorized distributions to the stockholders of record at the close of business each day in the period commencing September 1, 2016 through and including November 30, 2016. The authorized distributions equal a daily amount of $0.00183060 per share of common stock.


17



Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Cautionary Note Regarding Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q of Phillips Edison Grocery Center REIT I, Inc. (“we,” the “Company,” “our,” or “us”) other than historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in those acts. Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, including known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the U.S. Securities and Exchange Commission (“SEC”). We make no representations or warranties (express or implied) about the accuracy of any such forward-looking statements contained in this Quarterly Report on Form 10-Q, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Any such forward-looking statements are subject to risks, uncertainties, and other factors and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual conditions, our ability to accurately anticipate results expressed in such forward-looking statements, including our ability to generate positive cash flow from operations, make distributions to stockholders, and maintain the value of our real estate properties, may be significantly hindered. See Item 1A in Part II of this Form 10-Q and Item 1A in Part I of our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 3, 2016, for a discussion of some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause actual results to differ materially from those presented in our forward-looking statements.
Overview
Organization
Phillips Edison Grocery Center REIT I, Inc. is a public non-traded real estate investment trust (REIT) that invests in retail real estate properties. Our primary focus is on necessity-anchored neighborhood and community shopping centers that meet the day-to-day needs of residents in the surrounding trade areas.
Portfolio
Below are statistical highlights of our portfolio’s activities from inception through June 30, 2016:
  
 
Cumulative
 
Property Acquisitions During the
  
 
Portfolio as of
 
Six Months Ended
  
 
June 30, 2016
 
June 30, 2016
Number of properties
 
149

 
2

Number of states
 
28

 
2

Total square feet (in thousands)
 
15,959

 
389

Leased % of rentable square feet
 
96.1
%
 
97.4
%
Average remaining lease term in years(1)
 
5.6

 
6.1

(1) 
As of June 30, 2016. The average remaining lease term in years excludes future options to extend the term of the lease.

18



Lease Expirations
The following table lists, on an aggregate basis, all of the scheduled lease expirations after June 30, 2016, over each of the ten years ending December 31, 2016 and thereafter for our 149 shopping centers. The table shows the approximate rentable square feet and annualized base rent (“ABR”) represented by the applicable lease expirations (dollars and square feet in thousands):
Year
 
Number of Expiring Leases
 
Leased Square Feet Expiring
 
% of Leased Square Feet Expiring
 
ABR(1)
 
% of ABR
July 1 to December 31, 2016(2)
 
192

 
416

 
2.7
%
 
$
6,673

 
3.5
%
2017
 
329

 
1,318

 
8.6
%
 
16,761

 
8.8
%
2018
 
344

 
1,647

 
10.7
%
 
21,552

 
11.3
%
2019
 
356

 
1,941

 
12.7
%
 
26,262

 
13.8
%
2020
 
291

 
1,765

 
11.5
%
 
22,183

 
11.6
%
2021
 
235

 
1,722

 
11.2
%
 
18,472

 
9.7
%
2022
 
77

 
964

 
6.3
%
 
9,932

 
5.2
%
2023
 
87

 
1,449

 
9.5
%
 
17,783

 
9.3
%
2024
 
119

 
1,161

 
7.6
%
 
11,482

 
6.0
%
2025
 
101

 
696

 
4.5
%
 
10,815

 
5.7
%
Thereafter
 
199

 
2,253

 
14.7
%
 
28,574

 
15.1
%
 
 
2,330

 
15,332

 
100.0
%
 
$
190,489

 
100.0
%
(1) 
We calculate ABR as monthly contractual rent as of June 30, 2016, multiplied by 12 months, except for the period from July 1 to December 31, 2016, which was multiplied by six months.
(2) 
Subsequent to June 30, 2016, we renewed 24 of the 192 leases expiring in 2016, which accounts for 252 thousand total square feet and total ABR of $1.6 million.
Portfolio Tenancy
The following table presents the composition of our portfolio by tenant type as of June 30, 2016 (dollars and square feet in thousands):
Tenant Type
 
Leased Square Feet
 
% of Leased Square Feet
 
ABR
 
% of ABR
Grocery anchor
 
8,288

 
54.1
%
 
$
79,082

 
41.5
%
National and regional(1)
 
4,886

 
31.8
%
 
71,886

 
37.8
%
Local
 
2,158

 
14.1
%
 
39,521

 
20.7
%
  
 
15,332

 
100.0
%
 
$
190,489

 
100.0
%
(1) 
We define national tenants as those that operate in at least three states. Regional tenants are defined as those that have at least three locations.
The following table presents the composition of our portfolio by tenant industry as of June 30, 2016 (dollars and square feet in thousands):
Tenant Industry
 
Leased Square Feet
 
% of Leased Square Feet
 
ABR
 
% of ABR
Grocery
 
8,288

 
54.1
%
 
$
79,082

 
41.5
%
Retail
 
3,474

 
22.6
%
 
41,735

 
21.9
%
Services
 
2,294

 
15.0
%
 
43,011

 
22.6
%
Restaurant
 
1,276

 
8.3
%
 
26,661

 
14.0
%
  
 
15,332

 
100.0
%
 
$
190,489

 
100.0
%


19




The following table presents our grocery-anchor tenants by the amount of square footage leased by each tenant as of June 30, 2016 (in thousands, except number of locations):
Tenant  
 
Number of Locations(1)
 
Leased Square Feet
 
% of Leased Square Feet
 
ABR
 
% of ABR
Kroger
 
37

 
2,076

 
13.5
%
 
$
16,277

 
8.5
%
Publix
 
31

 
1,458

 
9.5
%
 
14,807

 
7.8
%
Walmart
 
9

 
1,121

 
7.3
%
 
5,198

 
2.7
%
Albertsons-Safeway
 
13

 
788

 
5.1
%
 
8,370

 
4.4
%
Giant Eagle
 
7

 
560

 
3.7
%
 
5,396

 
2.8
%
Ahold USA
 
6

 
411

 
2.7
%
 
6,449

 
3.4
%
SUPERVALU
 
4

 
273

 
1.8
%
 
2,382

 
1.3
%
Raley’s
 
3

 
188

 
1.2
%
 
3,229

 
1.7
%
Winn-Dixie
 
3

 
147

 
1.0
%
 
1,545

 
0.8
%
Delhaize America
 
4

 
142

 
0.9
%
 
1,855

 
1.0
%
Hy-Vee
 
2

 
127

 
0.8
%
 
527

 
0.3
%
Schnuck’s
 
2

 
121

 
0.8
%
 
1,459

 
0.8
%
Sprouts Farmers Market
 
4

 
120

 
0.8
%
 
1,482

 
0.8
%
BJ’s Wholesale Club
 
1

 
115

 
0.8
%
 
1,223

 
0.6
%
Coborn’s
 
2

 
108

 
0.7
%
 
1,388

 
0.7
%
H-E-B
 
1

 
81

 
0.5
%
 
1,210

 
0.6
%
Price Chopper
 
1

 
68

 
0.4
%
 
844

 
0.4
%
Big Y
 
1

 
65

 
0.4
%
 
1,091

 
0.6
%
PAQ, Inc.
 
1

 
59

 
0.4
%
 
1,046

 
0.5
%
Trader Joe’s
 
4

 
55

 
0.4
%
 
921

 
0.5
%
Rosauers Supermarkets, Inc.
 
1

 
51

 
0.4
%
 
537

 
0.3
%
Save Mart
 
1

 
50

 
0.3
%
 
399

 
0.2
%
The Fresh Market
 
2

 
38

 
0.2
%
 
597

 
0.3
%
Marc’s
 
1

 
36

 
0.2
%
 
400

 
0.2
%
Fresh Thyme
 
1

 
30

 
0.2
%
 
450

 
0.2
%
 
 
142

 
8,288

 
54.0
%
 
$
79,082

 
41.4
%
(1) 
Number of locations excludes (a) auxiliary leases with grocery anchors such as fuel stations, pharmacies, and liquor stores, (b) six locations where we do not own the portion of the shopping center that contains the grocery-anchor, and (c) two locations that have non-grocery anchors, but includes one location where two grocers operate.



20



Results of Operations
Summary of Operating Activities for the Three Months Ended June 30, 2016 and 2015
 
 
 
 
 
 
Favorable (Unfavorable) Change
(In thousands, except per share amounts)
 
2016

2015

$

%
Operating Data:
 
 
 
 
 
 
 
 
Total revenues
 
$
63,053

 
$
59,194

 
$
3,859

 
6.5
 %
Property operating expenses
 
(9,657
)
 
(8,372
)
 
(1,285
)
 
(15.3
)%
Real estate tax expenses
 
(9,230
)
 
(8,548
)
 
(682
)
 
(8.0
)%
General and administrative expenses
 
(8,461
)
 
(2,509
)
 
(5,952
)
 
(237.2
)%
Acquisition expenses
 
(1,502
)
 
(1,487
)
 
(15
)
 
(1.0
)%
Depreciation and amortization
 
(25,977
)
 
(25,271
)
 
(706
)
 
(2.8
)%
Interest expense, net
 
(7,601
)
 
(7,543
)
 
(58
)
 
(0.8
)%
Other expense, net
 
(42
)
 
(3
)
 
(39
)
 
n/m

Net income
 
583

 
5,461

 
(4,878
)
 
(89.3
)%
Net income attributable to noncontrolling interests
 
(23
)
 
(91
)
 
68

 
74.7
 %
Net income attributable to stockholders
 
$
560

 
$
5,370

 
$
(4,810
)
 
(89.6
)%
 
 
 
 
 
 

 
 
Net income per share—basic
 
$
0.00

 
$
0.03

 
$
(0.03
)
 
(100.0
)%
Net income per share—diluted
 
0.00

 
0.03

 
(0.03
)
 
(100.0
)%
Below are explanations of the fluctuations in the results of operations for the three months ended June 30, 2016 and 2015:
Total revenues—Of the $3.9 million increase in total revenues, $1.0 million was related to the acquisition of eleven properties since the beginning of 2015. Of the remaining $2.9 million increase, $2.8 million was related to same-center properties, which are the 133 properties that were owned and operational for the entire portion of both comparable reporting periods, except for those properties we classify as redevelopment during either of the periods presented. The increase in same-center revenue was due to a $0.8 million increase in rental income and a $2.0 million increase in tenant recovery income. The increase in same-center rental income was driven by a $0.46 increase in minimum rent per square foot and a 0.9% increase in occupancy since June 30, 2015. The increase in same-center tenant recovery income stemmed from an increase in recoverable expenses, as well as an increase in occupancy and recovery percentages.
Property operating expenses—These expenses include (i) operating and maintenance expense, which consists of property related costs including repairs and maintenance costs, landscaping, snow removal, utilities, property insurance costs, security and various other property-related expenses; (ii) bad debt expense; and (iii) property management fees and expenses. Of the $1.3 million increase in property operating expenses, $0.2 million was related to the acquisition of eleven properties in 2016 and 2015. The remaining $1.1 million was largely due to a $0.6 million increase in recoverable utilities and exterior maintenance expenses, a portion of which was a result of timing of center repairs. Additional variances in property operating expenses included a $0.4 million increase in bad debt expense due to collections in 2015 of previously reserved amounts, and a $0.1 million increase in management fees due to increasing cash receipts.
Real estate tax expenses—Of the $0.7 million increase in real estate tax expenses, $0.2 million was related to the acquisition of eleven properties in 2016 and 2015. The remaining $0.5 million was primarily the result of changes in assessed property values and increased property tax rates at certain properties following acquisition, in addition to general tax increases on properties owned for multiple years.
General and administrative expenses—General and administrative expenses include cash asset management fees, legal and professional fees, insurance for directors and officers, transfer agent fees, taxes and other corporate-level expenses. General and administrative expenses increased $6.0 million, which was primarily related to a $4.7 million increase in cash asset management fees as a result of the change to our advisory fee structure in October 2015. Previously, the asset management fee had been deferred via the issuance of Class B units of our operating partnership, which did not result in the recognition of expense under GAAP. The asset management fee remains at 1% of the cost of our assets; however, 80% is now paid in cash and therefore recognized on a current basis as expense under GAAP, with the remaining 20% paid in Class B units. The remaining $1.3 million increase was primarily due to a $0.8 million increase in professional fees over the comparable period in 2015. The professional fee increase was due in part to our annual share price valuation and higher costs for investor relations custodial fees. Additionally, a $0.3 million increase was related to distributions paid on unvested Class B units as a result of an increase in outstanding Class B units.


21



Summary of Operating Activities for the Six Months Ended June 30, 2016 and 2015
 
 
 
 
 
 
Favorable (Unfavorable) Change
(In thousands, except per share amounts)
 
2016

2015

$

%
Operating Data:
 
 
 
 
 
 
 
 
Total revenues
 
$
126,135

 
$
118,141

 
$
7,994

 
6.8
 %
Property operating expenses
 
(19,948
)
 
(18,358
)
 
(1,590
)
 
(8.7
)%
Real estate tax expenses
 
(18,641
)
 
(16,727
)
 
(1,914
)
 
(11.4
)%
General and administrative expenses
 
(16,014
)
 
(4,871
)
 
(11,143
)
 
(228.8
)%
Acquisition expenses
 
(1,522
)
 
(3,222
)
 
1,700

 
52.8
 %
Depreciation and amortization
 
(51,683
)
 
(50,001
)
 
(1,682
)
 
(3.4
)%
Interest expense, net
 
(15,333
)
 
(14,337
)
 
(996
)
 
(6.9
)%
Other expense, net
 
(158
)
 
(125
)
 
(33
)
 
(26.4
)%
Net income
 
2,836

 
10,500

 
(7,664
)
 
(73.0
)%
Net income attributable to noncontrolling interests
 
(57
)
 
(159
)
 
102

 
64.2
 %
Net income attributable to stockholders
 
$
2,779

 
$
10,341

 
$
(7,562
)
 
(73.1
)%
 
 
 
 
 
 
 
 
 
Net income per share—basic
 
$
0.02

 
$
0.06

 
$
(0.04
)
 
(66.7
)%
Net income per share—diluted
 
0.01

 
0.06

 
(0.05
)
 
(83.3
)%
Below are explanations of the fluctuations in the results of operations for the six months ended June 30, 2016 and 2015:
Total revenues—Of the $8.0 million increase in total revenues, $3.2 million was related to the acquisition of eleven properties since the beginning of 2015. Of the remaining $4.8 million increase, $5.1 million was related to same-center properties, which was offset by a $0.3 million decrease in total revenue from the properties classified as redevelopment. The increase in same-center revenue was due to a $1.9 million increase in rental income and a $3.4 million increase in tenant recovery income, offset by a $0.2 million decrease in other property income. The increase in same-center rental income was driven by a $0.46 increase in minimum rent per square foot and a 0.9% increase in occupancy since June 30, 2015. The increase in same-center tenant recovery income stemmed from an increase in recoverable expenses, as well as increases in occupancy and recovery percentages.
Property operating expenses—Of the $1.6 million increase in property operating expenses, $0.8 million was related to non-same center properties. The remaining $0.8 million was primarily a result of a $0.5 million increase in recoverable utilities and center maintenance expenses, a portion of which was a result of timing of center repairs, and a $0.3 million increase in management fees due to increasing cash receipts.
Real estate tax expenses—Of the $1.9 million increase in real estate tax expenses, $0.5 million was related to the acquisition of eleven properties since the beginning of 2015. The remaining $1.4 million was primarily the result of changes in assessed property values and increased property tax rates at certain properties following acquisition, in addition to general tax increases on properties owned for multiple years.
General and administrative expenses—General and administrative expenses increased $11.1 million, which was primarily related to a $9.3 million increase due to the change in advisory payment structure of the asset management fees as a result of the change to our advisory fee structure in October 2015 as discussed above. The remaining $1.8 million increase was primarily due to a $0.6 million increase in distributions paid on unvested Class B units as a result of an increase in outstanding Class B units, and a $1.0 million increase in professional fees expenses over the comparable period in 2015. The professional fee expense increase was due in part to the timing of our annual share price valuation and higher costs for investor relations custodial fees.
Acquisition expenses—Acquisition expenses decreased $1.7 million as two properties were acquired during the six months ended June 30, 2016, compared to nine property acquisitions during the six months ended June 30, 2015.
Interest expense, net—Interest expense increased $1.0 million primarily due to due to an increase in debt principal outstanding, offset by a decrease in average interest rates.

22



Leasing Activity
Below is a summary of leasing activity for the three months ended June 30, 2016 and 2015:
<
 
 
Total Deals
 
Inline Deals(1)
 
 
2016
 
2015
 
2016
 
2015
New leases:
 
 
 
 
 
 
 
 
Number of leases
 
40

 
56

 
40

 
54

Square footage (in thousands)
 
87

 
125

 
87

 
93

First-year base rental revenue (in thousands)
 
$
1,490

 
$
1,946

 
$
1,490

 
$
1,700

Average rent per square foot (“PSF”)
 
$
17.05

 
$
15.53

 
$
17.05

 
$
18.35

Average cost PSF of executing new leases(2)
 
$
34.49

 
$
30.66

 
$
34.49

 
$
34.94

Weighted average lease term (in years)
 
7.2

 
7.2

 
7.2