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EX-32.2 - EXHIBIT 32.2 - Phillips Edison & Company, Inc.pentr_20170630-ex322.htm
EX-32.1 - EXHIBIT 32.1 - Phillips Edison & Company, Inc.pentr_20170630-ex321.htm
EX-31.2 - EXHIBIT 31.2 - Phillips Edison & Company, Inc.pentr_20170630-ex312.htm
EX-31.1 - EXHIBIT 31.1 - Phillips Edison & Company, Inc.pentr_20170630-ex311.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, 2017
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  þ    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  þ    No  ¨  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
¨
Accelerated Filer
¨
 
 
 
 
Non-Accelerated Filer
þ (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
 
Emerging growth company
¨
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
As of July 31, 2017, there were 183.4 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, 2017 AND DECEMBER 31, 2016
(Unaudited)
(In thousands, except per share amounts)
  
June 30, 2017
 
December 31, 2016
ASSETS
  
 
  
Investment in real estate:
  
 
  
Land and improvements
$
824,718

 
$
796,192

Building and improvements
1,614,465

 
1,532,888

Acquired in-place lease assets
222,527

 
212,916

Acquired above-market lease assets
42,860

 
42,009

Total investment in real estate assets
2,704,570

 
2,584,005

Accumulated depreciation and amortization
(390,662
)
 
(334,348
)
Total investment in real estate assets, net
2,313,908

 
2,249,657

Cash and cash equivalents
5,367

 
8,224

Restricted cash
5,499

 
41,722

Other assets, net
86,480

 
80,585

Total assets
$
2,411,254

 
$
2,380,188

 
 
 
 
LIABILITIES AND EQUITY
  

 
  

Liabilities:
  

 
  

Mortgages and loans payable, net
$
1,167,847

 
$
1,056,156

Acquired below-market lease liabilities, net of accumulated amortization of $23,363 and $20,255, respectively
42,546

 
43,032

Accounts payable – affiliates
5,155

 
4,571

Accounts payable and other liabilities
54,125

 
51,642

Total liabilities
1,269,673

 
1,155,401

Commitments and contingencies (Note 7)

 

Equity:
  

 
  

Preferred stock, $0.01 par value per share, 10,000 shares authorized, zero shares issued and outstanding at June 30, 2017
  
 
  
and December 31, 2016, respectively

 

Common stock, $0.01 par value per share, 1,000,000 shares authorized, 183,059 and 185,062 shares issued and
  
 
  
outstanding at June 30, 2017 and December 31, 2016, respectively
1,831

 
1,851

Additional paid-in capital
1,606,688

 
1,627,098

Accumulated other comprehensive income
9,787

 
10,587

Accumulated deficit
(499,198
)
 
(438,155
)
Total stockholders’ equity
1,119,108

 
1,201,381

Noncontrolling interests
22,473

 
23,406

Total equity
1,141,581

 
1,224,787

Total liabilities and equity
$
2,411,254

 
$
2,380,188


See notes to consolidated financial statements.

2



PHILLIPS EDISON GROCERY CENTER REIT I, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2017 AND 2016
(Unaudited)
(In thousands, except per share amounts)
  
Three Months Ended June 30,
 
Six Months Ended June 30,
  
2017
 
2016
 
2017
 
2016
Revenues:
  
 
  
 
 
 
 
Rental income
$
53,167

 
$
47,256

 
$
104,260

 
$
94,195

Tenant recovery income
16,454

 
15,509

 
33,390

 
31,453

Other property income
230

 
288

 
504

 
487

Total revenues
69,851

 
63,053


138,154


126,135

Expenses:
  

 
  

 
 
 
 
Property operating
10,297

 
9,657

 
21,729

 
19,948

Real estate taxes
10,155

 
9,230

 
20,413

 
18,641

General and administrative
8,896


8,461

 
16,726

 
16,014

Acquisition expenses
313


1,502

 
264

 
1,522

Depreciation and amortization
28,207


25,977

 
55,831

 
51,683

Total expenses
57,868


54,827


114,963


107,808

Other:
  

 
  

 
 
 
 
Interest expense, net
(9,501
)

(7,601
)
 
(17,891
)
 
(15,333
)
Transaction expenses
(4,383
)
 

 
(6,023
)
 

Other income (expense), net
680


(42
)
 
636

 
(158
)
Net (loss) income
(1,221
)

583


(87
)

2,836

Net loss (income) attributable to noncontrolling interests
28

 
(23
)
 

 
(57
)
Net (loss) income attributable to stockholders
$
(1,193
)

$
560

 
$
(87
)
 
$
2,779

Earnings per common share:
  

 
  

 
 
 
 
Net (loss) income per share attributable to stockholders - basic
$
(0.01
)

$
0.00


$
(0.00
)

$
0.02

Net (loss) income per share attributable to stockholders - diluted
$
(0.01
)
 
$
0.00

 
$
(0.00
)
 
$
0.01

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
183,126

 
183,514

 
183,178

 
182,880

Diluted
183,126

 
186,299

 
183,178

 
185,665

 
 
 
 
 
 
 
 
Comprehensive loss:
  

 
  

 
 
 
 
Net (loss) income
$
(1,221
)
 
$
583

 
$
(87
)
 
$
2,836

Other comprehensive loss:
  

 
  

 
 
 
 
Unrealized loss on derivatives
(2,994
)
 
(3,240
)
 
(1,775
)
 
(11,547
)
Reclassification of derivative loss to interest expense
378

 
928

 
975

 
1,874

Comprehensive loss
(3,837
)
 
(1,729
)
 
(887
)
 
(6,837
)
Comprehensive loss (income) attributable to noncontrolling interests
28

 
(23
)
 

 
(57
)
Comprehensive loss attributable to stockholders
$
(3,809
)
 
$
(1,752
)
 
$
(887
)
 
$
(6,894
)

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, 2017 AND 2016
(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, 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
)
Dividend reinvestment plan (“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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
185,062

 
$
1,851

 
$
1,627,098

 
$
10,587

 
$
(438,155
)
 
$
1,201,381

 
$
23,406

 
$
1,224,787

Share repurchases
(4,246
)
 
(42
)
 
(43,265
)
 

 

 
(43,307
)
 

 
(43,307
)
DRIP
2,240

 
22

 
22,828

 

 

 
22,850

 

 
22,850

Change in unrealized loss on interest rate swaps

 

 

 
(800
)
 

 
(800
)
 

 
(800
)
Common distributions declared, $0.34 per share

 

 

 

 
(60,956
)
 
(60,956
)
 

 
(60,956
)
Distributions to noncontrolling interests

 

 

 

 

 

 
(933
)
 
(933
)
Share-based compensation
3

 

 
27

 

 

 
27

 

 
27

Net loss

 

 

 

 
(87
)
 
(87
)
 

 
(87
)
Balance at June 30, 2017
183,059

 
$
1,831

 
$
1,606,688

 
$
9,787

 
$
(499,198
)
 
$
1,119,108

 
$
22,473

 
$
1,141,581


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, 2017 AND 2016
(Unaudited)
(In thousands)
  
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
  
 
  
Net (loss) income
$
(87
)
 
$
2,836

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
  

 
  

Depreciation and amortization
55,051

 
50,315

Net amortization of above- and below-market leases
(686
)
 
(582
)
Amortization of deferred financing expense
2,389

 
2,093

Net loss on write-off of unamortized capitalized leasing commissions, market debt adjustments,
 
 
 
and deferred financing expense
(411
)
 
(7
)
Straight-line rental income
(1,943
)
 
(1,725
)
Other
(673
)
 
172

Changes in operating assets and liabilities:
  

 
  

Other assets
(8,327
)
 
1,592

Accounts payable – affiliates
584

 
(1,588
)
Accounts payable and other liabilities
3,060

 
3,849

Net cash provided by operating activities
48,957


56,955

CASH FLOWS FROM INVESTING ACTIVITIES:
  

 
  

Real estate acquisitions
(75,824
)
 
(94,385
)
Capital expenditures
(11,483
)
 
(10,325
)
Proceeds from sale of real estate
37,037

 

Change in restricted cash
323

 
(299
)
Net cash used in investing activities
(49,947
)
 
(105,009
)
CASH FLOWS FROM FINANCING ACTIVITIES:
  

 
  

Net change in credit facility
120,000

 
106,500

Payments on mortgages and loans payable
(38,934
)
 
(57,159
)
Distributions paid, net of DRIP
(38,520
)
 
(30,973
)
Distributions to noncontrolling interests
(782
)
 
(790
)
Repurchases of common stock
(43,307
)
 
(3,748
)
Payments of deferred financing expenses
(324
)
 

Net cash (used in) provided by financing activities
(1,867
)
 
13,830

NET DECREASE IN CASH AND CASH EQUIVALENTS
(2,857
)
 
(34,224
)
CASH AND CASH EQUIVALENTS:
  

 
  

Beginning of period
8,224

 
40,680

End of period
$
5,367

 
$
6,456

 
 
 
 
SUPPLEMENTAL CASH FLOW DISCLOSURE, INCLUDING NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
Cash paid for interest
$
16,846

 
$
14,843

Fair value of assumed debt
30,832

 

Accrued capital expenditures
3,055

 
1,920

Change in distributions payable
(414
)
 
(217
)
Change in distributions payable - noncontrolling interests
151

 
145

Change in accrued share repurchase obligation

 
141

Distributions reinvested
22,850

 
30,190

Like-kind exchange of real estate:
 
 
 
   Utilization of restricted cash held for acquisitions
(35,900
)
 


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.
We invest primarily in well-occupied, grocery-anchored, neighborhood and community shopping centers that have a mix of creditworthy national and regional retailers that sell necessity-based goods and services in strong demographic markets throughout the United States. 
Our advisor is Phillips Edison NTR LLC (“PE-NTR”), which is directly or indirectly owned by Phillips Edison Limited Partnership (“Phillips Edison sponsor” or “PELP”). Under the terms of the advisory agreement between PE-NTR and us (“PE-NTR Agreement”), PE-NTR is responsible for the management of our day-to-day activities and the implementation of our investment strategy.
As of June 30, 2017, we owned fee simple interests in 158 real estate properties acquired from third parties unaffiliated with us or PE-NTR.
On May 18, 2017, we entered into a definitive contribution agreement to acquire certain real estate assets and the third party asset management business of our Phillips Edison sponsor in a stock and cash transaction valued at approximately $1.0 billion (“PELP transaction”), subject to closing adjustments. For a more detailed discussion, see Note 3.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 2017. For a full summary of our accounting policies, refer to our 2016 Annual Report on Form 10-K filed with the SEC on March 9, 2017.
Basis of Presentation and Principles of Consolidation—The accompanying consolidated 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, 2016, which are included in our 2016 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, 2017, 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 items on our consolidated statement of cash flows for the six months ended June 30, 2016, were reclassified:
Loss on Disposal of Real Estate Assets was reclassified to Other due to limited activity in the current period.
Net Loss on Write-off of Unamortized Capitalized Leasing Commissions, Market Debt Adjustments, and Deferred Financing Expense was separately disclosed due to significance in the current period. In the previous period these amounts were included in Other.
Newly Adopted and Recently Issued Accounting Pronouncements—We adopted Accounting Standards Update (“ASU”) 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, on January 1, 2017, and applied it prospectively. For a more detailed discussion of this adoption, see Note 5.

6



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 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20)
 
This update amends existing guidance in order to provide consistency in accounting for the derecognition of a business or nonprofit activity. It is effective for annual reporting periods beginning after December 15, 2017, but early adoption is permitted.
 
January 1, 2018
 
We will adopt this standard concurrently with ASU 2014-09, listed above. We expect the adoption will impact our transactions that are subject to the amendments, which, although expected to be infrequent, would include a partial sale of real estate or contribution of a nonfinancial asset to form a joint venture.
ASU 2016-18, Statement of Cash Flows (Topic 230)
 
This update amends existing guidance in order to clarify the classification and presentation of restricted cash on the statement of cash flows. It is effective for annual reporting periods beginning after December 15, 2017, but early adoption is permitted.
 
January 1, 2018
 
Upon adoption, we will include amounts generally described as restricted cash within the beginning-of-period and end-of-period total amounts on the statement of cash flows rather than within an activity on the statement of cash flows.
ASU 2016-15, Statement of Cash Flows (Topic 230)
 
This update addresses the presentation of eight specific cash receipts and cash payments on the statement of cash flows. It is effective for annual reporting periods beginning after December 15, 2017, but early adoption is permitted.
 
January 1, 2018
 
We are currently evaluating the impact the adoption of this standard will have on our consolidated financial statements. Of the eight specific cash receipts and cash payments listed within this guidance, we believe only two would be applicable to our business as it stands currently: debt prepayment or debt extinguishment costs and proceeds from settlement of insurance claims. We will continue to evaluate the impact that adoption of the standard will have on our presentation of these and any other applicable cash receipts and cash payments.
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. This update 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. We have identified areas within our accounting policies we believe could be impacted by the new standard. We expect to have a change in presentation on our consolidated statement of operations with regards to Tenant Recovery Income, which includes reimbursement amounts we receive from tenants for operating expenses such as real estate taxes, insurance, and other common area maintenance. Additionally, this standard impacts the lessor’s ability to capitalize certain costs related to the leasing of vacant space, which will result in a reduction in the amount of execution costs currently being capitalized in connection with leasing activities.
ASU 2014-09, Revenue from Contracts with Customers (Topic 606)
 
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 also applies to certain other transactions such as the sale of real estate or equipment. Expanded quantitative and qualitative disclosures are also required for contracts subject to ASU 2014-09. In 2015, the Financial Accounting Standard Board (“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
 
Our revenue-producing contracts are primarily leases that are not within the scope of this standard. As a result, we do not expect the adoption of this standard to have a material impact on our rental or reimbursement revenue. We currently plan to adopt this guidance on a modified retrospective basis.


7



3. PELP ACQUISITION
On May 18, 2017, we entered into the PELP transaction valued at approximately $1.0 billion, subject to closing adjustments. Under the terms of the PELP transaction, PELP will receive approximately 45.2 million Operating Partnership units (“OP units”), inclusive of 4.8 million OP units and Class B units already outstanding, in the Operating Partnership, and approximately $50.0 million in cash in exchange for the contribution of PELP’s ownership interests in 76 shopping centers and its third party asset management business. On a pro forma basis, immediately following the closing of the transaction, our shareholders are expected to own approximately 80.2%, and former PELP shareholders are expected to own approximately 19.8% of the combined company.
PELP’s outstanding debt of approximately $501 million is expected to be refinanced or assumed by us at closing under the terms of the agreement. The agreement also includes an earn-out structure with an opportunity for PELP to receive up to an additional 12.49 million OP units if certain milestones are achieved related to a liquidity event for our shareholders and fundraising targets in PELP’s third non-traded REIT, Phillips Edison Grocery Center REIT III.
The transaction was approved by the independent special committee of our board of directors, which had retained independent financial and legal advisors. The completion of this transaction is subject to the satisfaction of customary conditions, and is expected to close during the fourth quarter of 2017. Although not required by law or under our governing documents, we have conditioned the closing of the transaction on the receipt of the approval of our shareholders. PELP will also seek the approval of its partners. For additional information, please see the Definitive Proxy Statement filed with the SEC on July 5, 2017 (the “Proxy Statement”).
The PELP transaction will be accounted for as a business combination in accordance with ASC 805, Business Combinations. As a result, costs incurred in connection with the PELP transaction are expensed and have been recorded as Transaction Expenses on our consolidated statements of operations.

4. FAIR VALUE MEASUREMENTS
The following describes the methods we use to estimate the fair value of our financial and nonfinancial 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.
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 rates used approximate 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 borrowings as of June 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
June 30, 2017
 
December 31, 2016
Fair value
 
$
1,171,842

 
$
1,056,990

Recorded value(1)
 
1,175,945

 
1,065,180

(1) 
Recorded value does not include deferred financing costs of $8.1 million and $9.0 million as of June 30, 2017 and December 31, 2016, respectively.
Derivative InstrumentsAs of June 30, 2017 and December 31, 2016, we had three interest rate swaps that fixed LIBOR on $387 million of our unsecured term loan facility (“Term Loans”), as well as a forward starting interest rate swap, which became effective July 1, 2017, that fixes LIBOR on $255 million of our Term Loans. For a more detailed discussion of our cash flow hedges, see Note 8. As of June 30, 2017 and December 31, 2016, we were also party to an interest rate swap that fixed the variable interest rate on $10.9 million and $11.0 million, respectively, of one of our mortgage notes. The change in fair value of this instrument is recorded in Other Expense, Net on the consolidated statements of operations and was not material for the three and six months ended June 30, 2017 and 2016.
All interest rate swap agreements are measured at fair value on a recurring basis. The fair values of the interest rate swap agreements as of June 30, 2017 and December 31, 2016, were based on the estimated amounts we would receive or pay to

8



terminate the contracts 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, 2017 and December 31, 2016, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions 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 assets in Other Assets, Net and derivative liabilities in Accounts Payable and Other Liabilities on our consolidated balance sheets. The fair value measurements of our derivative assets and liabilities as of June 30, 2017 and December 31, 2016, were as follows (in thousands):
  
June 30, 2017
 
December 31, 2016
Derivative asset:
 
 
 
Interest rate swaps designated as hedging instruments - Term Loans
$
11,126

 
$
11,916

Derivative liability:
 
 
 
Interest rate swap not designated as hedging instrument - mortgage note
149

 
262


5. REAL ESTATE ACQUISITIONS
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This update amends existing guidance in order to clarify when an integrated set of assets and activities is considered a business. We adopted ASU 2017-01 on January 1, 2017, and applied it prospectively. Under this new guidance, most of our real estate acquisition activity will no longer be considered a business combination and will instead be classified as an asset acquisition. As a result, most acquisition-related costs that would have been recorded on our consolidated statements of operations have been capitalized and will be amortized over the life of the related assets. Costs incurred related to properties that were not ultimately acquired were recorded as Acquisition Expenses on our consolidated statements of operations. As of June 30, 2017, none of our real estate acquisitions in 2017 met the definition of a business; therefore, we accounted for all as asset acquisitions.
During the six months ended June 30, 2017, we acquired five grocery-anchored shopping centers. Our first quarter acquisition closed out the reverse Section 1031 like-kind exchange outstanding as of December 31, 2016. During the six months ended June 30, 2016, we acquired two grocery-anchored shopping centers and additional real estate adjacent to a previously acquired shopping center.
For the six months ended June 30, 2017 and 2016, we allocated the purchase price of our acquisitions, including acquisition costs for 2017, to the fair value of the assets acquired and liabilities assumed as follows (in thousands):
 
2017
 
2016
Land and improvements
$
27,139

 
$
40,088

Building and improvements
72,597

 
48,999

Acquired in-place leases
9,611

 
8,849

Acquired above-market leases
850

 
1,725

Acquired below-market leases
(2,622
)
 
(5,728
)
Total assets and lease liabilities acquired
107,575

 
93,933

Less: Fair value of assumed debt at acquisition
30,832

 

Net assets acquired
$
76,743

 
$
93,933

The weighted-average amortization periods for in-place, above-market, and below-market lease intangibles acquired during the six months ended June 30, 2017 and 2016, are as follows (in years):
 
2017
 
2016
Acquired in-place leases
13
 
14
Acquired above-market leases
7
 
6
Acquired below-market leases
20
 
23


9



6. MORTGAGES AND LOANS PAYABLE
The following is a summary of the outstanding principal balances of our debt obligations as of June 30, 2017 and December 31, 2016 (in thousands):
   
Interest Rate(1)
 
June 30, 2017
 
December 31, 2016
Revolving credit facility(2)(3)
2.47%
 
$
296,969

 
$
176,969

Term loan due 2019(3)
2.46%
 
100,000

 
100,000

Term loan due 2020(3)
2.65%
 
175,000

 
175,000

Term loan due 2021
2.42%-2.80%
 
125,000

 
125,000

Term loan due 2023
2.87%
 
255,000

 
255,000

Mortgages payable(4)
3.67%-7.91%
 
219,833

 
228,721

Assumed market debt adjustments, net(5) 
 
 
4,143

 
4,490

Deferred financing costs, net(6)
 
 
(8,098
)
 
(9,024
)
Total  
 
 
$
1,167,847

 
$
1,056,156

(1) 
Includes the effects of derivative financial instruments (see Notes 4 and 8) as of June 30, 2017.
(2) 
The gross borrowings under our revolving credit facility were $191 million during the six months ended June 30, 2017. The gross payments on our revolving credit facility were $71 million during the six months ended June 30, 2017. The revolving credit facility had a capacity of $500 million as of June 30, 2017 and December 31, 2016.
(3) 
The revolving credit facility matures in December 2017. Prior to maturity and in connection with the PELP transaction, we anticipate refinancing this facility. If we do not refinance, we will exercise our option to extend the maturity to 2018. The term loans have options to extend their maturities to 2021. A maturity date extension for the first or second tranche on the term loans requires the payment of an extension fee of 0.15% of the outstanding principal amount of the corresponding tranche.
(4) 
Due to the non-recourse nature of our fixed-rate mortgages, the assets and liabilities of the properties securing such mortgages are neither available to pay the debts of the consolidated property-holding limited liability companies, nor do they constitute obligations of such consolidated limited liability companies as of June 30, 2017 and December 31, 2016.
(5) 
Net of accumulated amortization of $4.4 million and $6.1 million as of June 30, 2017 and December 31, 2016, respectively.
(6) 
Deferred financing costs shown are related to our Term Loans and mortgages payable and are net of accumulated amortization of $4.7 million and $3.9 million as of June 30, 2017 and December 31, 2016, respectively. Deferred financing costs related to the revolving credit facility, which are included in Other Assets, Net, were $1.0 million and $2.2 million as of June 30, 2017 and December 31, 2016, respectively, and are net of accumulated amortization of $7.9 million and $6.7 million, respectively.
As of June 30, 2017 and December 31, 2016, the weighted-average interest rate for all of our mortgages and loans payable was 3.1% and 3.0%, respectively.
The allocation of total debt between fixed and variable-rate and between secured and unsecured, excluding market debt adjustments and deferred financing costs, as of June 30, 2017 and December 31, 2016, is summarized below (in thousands):
   
June 30, 2017
 
December 31, 2016
As to interest rate:(1)
 
 
 
Fixed-rate debt
$
606,833

 
$
615,721

Variable-rate debt
564,969

 
444,969

Total
$
1,171,802

 
$
1,060,690

As to collateralization:
 
 
 
Unsecured debt
$
951,968

 
$
831,969

Secured debt
219,834

 
228,721

Total  
$
1,171,802

 
$
1,060,690

(1) 
Includes the effects of derivative financial instruments (see Notes 4 and 8).

7. COMMITMENTS AND CONTINGENCIES 
Litigation 
We are involved in various claims and litigation matters arising in the ordinary course of business, some of which involve claims for damages. Many of these matters are covered by insurance, although they may nevertheless be subject to deductibles

10



or retentions. Although the ultimate liability for these matters cannot be determined, based upon information currently available, we believe the ultimate resolution of such claims and litigation will not have a material adverse effect on our consolidated financial statements.
Environmental Matters
In connection with the ownership and operation of real estate, we may potentially be liable for costs and damages related to environmental matters. In addition, we may own or acquire certain properties that are subject to environmental remediation. Generally, the seller of the property, the tenant of the property, and/or another third party is responsible for environmental remediation costs related to a property. Additionally, in connection with the purchase of certain properties, the respective sellers and/or tenants may agree to indemnify us against future remediation costs. We also carry environmental liability insurance on our properties that provides limited coverage for any remediation liability and/or pollution liability for third-party bodily injury and/or property damage claims for which we may be liable. We are not aware of any environmental matters which we believe are reasonably likely to have a material effect on our consolidated financial statements.

8. 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.
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 Income (“AOCI”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the six months ended June 30, 2017 and 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. For the three and six months ended June 30, 2017, the ineffective portion of the change in fair value of the derivatives recognized directly in earnings was not material. A floor feature on the interest rate of our hedged debt that was not included on the associated interest rate swap caused this ineffectiveness.
Amounts reported in 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 twelve months, the estimated additional amount that will be reclassified from Other Comprehensive Loss to Interest Expense, Net is not material.
The following is a summary of our interest rate swaps that were designated as cash flow hedges of interest rate risk as of June 30, 2017 and December 31, 2016, and includes an interest rate swap that we entered into in October 2016 with a notional amount of $255 million that became effective July 1, 2017 (notional amount in thousands):
Count
 
Notional Amount
 
Fixed LIBOR
 
Maturity Date
4
 
$642,000
 
1.2% - 1.5%
 
2019 - 2023
Credit-risk-related Contingent Features
We have agreements with our derivative counterparties that contain provisions 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, 2017 and December 31, 2016, the fair value of our derivatives excluded any adjustment for nonperformance risk related to these agreements. As of June 30, 2017 and December 31, 2016, we had not posted any collateral related to these agreements.


11



9. EQUITY
On May 9, 2017, 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, 2017. We engaged a third party valuation firm to provide a calculation of the range in estimated value per share of our common stock as of March 31, 2017, which reflected certain balance sheet assets and liabilities as of that date.
Dividend Reinvestment Plan—We have adopted a DRIP that allows stockholders to invest distributions in additional shares of our common stock. For the six months ended June 30, 2017 and 2016, shares were issued under the DRIP at a price of $10.20 per share. In connection with the PELP transaction (see Note 3), the DRIP was suspended during May 2017; therefore, all DRIP participants received their May distribution, which was payable in June, in cash rather than in stock. The DRIP plan resumed in June 2017, with distributions payable in July 2017.
Share Repurchase Program—Our share repurchase program (“SRP”) provides an opportunity for stockholders to have shares of common stock repurchased, subject to certain restrictions and limitations. 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 board of directors reserves the right, in its sole discretion, at any time and from time to time, to reject any request for repurchase. In connection with the PELP transaction, the SRP was suspended during May 2017 and resumed in June 2017.
During the six months ended June 30, 2017, repurchase requests surpassed the funding limits under the SRP. Due to the program’s funding limits, no funds will be available for the remainder of 2017. When we are unable to fulfill all repurchase requests in any month, we will honor requests on a pro rata basis to the extent possible. As of June 30, 2017, we had 9.5 million shares of unfulfilled repurchase requests, which will be treated as requests for repurchase during future months until satisfied or withdrawn. We continue to fulfill repurchases sought upon a stockholder’s death, “qualifying disability,” or “determination of incompetence” in accordance with the terms of the SRP.
Class B and Operating Partnership Units—The Operating Partnership issues limited partnership units that are designated as Class B 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. Once vested, Class B units may be converted into OP units in accordance with the terms of the Operating Partnership’s Second Amended and Restated Agreement of Limited Partnership, as amended (the “Partnership Agreement”). 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. As the form of the redemptions for the OP units is within our control, the OP units outstanding as of June 30, 2017 and December 31, 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 number of outstanding OP units and unvested Class B units as of June 30, 2017 and December 31, 2016 (in thousands):
 
 
June 30, 2017
 
December 31, 2016
OP units
 
2,785

 
2,785

Class B units
 
2,892

 
2,610


10. 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 income available to common stockholders by the weighted-average
number of shares of common stock 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 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 for the three and six months ended June 30, 2017 and 2016.

12



Since the OP units are fully vested, they were treated as potentially dilutive in the diluted net (loss) income per share computations for the three and six months ended June 30, 2017 and 2016. The vesting of the Class B units is contingent upon a market condition and service condition. Since the satisfaction of both conditions was not probable as of June 30, 2017 and 2016, the Class B units remained unvested and thus were not included in the diluted net (loss) income per share computations. There were 2.9 million and 2.3 million unvested Class B units outstanding as of June 30, 2017 and 2016, 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, 2017 and 2016 (in thousands, except per share amounts):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Numerator for basic and diluted earnings per share:
 
 
 
 
 
 
 
Net (loss) income attributable to stockholders
$
(1,193
)
 
$
560

 
$
(87
)
 
$
2,779

Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share - weighted-average shares
183,126

 
183,514

 
183,178

 
182,880

Effect of dilutive OP units


2,785

 

 
2,785

Denominator for diluted earnings per share - adjusted weighted-average shares
183,126


186,299

 
183,178

 
185,665

Basic earnings per common share:
 
 
 
 
 
 
 
Net (loss) income attributable to stockholders
$
(0.01
)
 
$
0.00

 
$
(0.00
)
 
$
0.02

Diluted earnings per common share:
 
 
 
 
 
 
 
Net (loss) income attributable to stockholders
$
(0.01
)
 
$
0.00

 
$
(0.00
)
 
$
0.01

As of June 30, 2017, approximately 2.8 million OP units and 7,400 restricted stock awards were outstanding. For the three and six months ended June 30, 2017, these securities were anti-dilutive and, as a result, were excluded from the weighted average common shares used to calculate diluted EPS.

11. 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, the Property Manager, and/or 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, 2017 and December 31, 2016, 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, 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. Expenditures are reimbursed to PE-NTR based on amounts incurred on our behalf.
Acquisition Fee—We pay PE-NTR under the PE-NTR Agreement 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.
Due Diligence Fee—We reimburse PE-NTR for expenses incurred related to selecting, evaluating, and acquiring assets on our behalf, including certain personnel costs.
Asset Management Fee and Subordinated Participation—The asset management compensation is equal to 1% of the cost of our assets, and 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 at the rate of 0.06667% multiplied by the cost of our assets as of the last day of the preceding monthly period.
Within 60 days after the end of each calendar quarter (subject to the approval of our board of directors), we pay an asset management subordinated participation 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

13



multiplied by (y) 0.05% 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.
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) at the same rate as distributions are paid to common stockholders. These 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, 2017 and 2016, the Operating Partnership issued 0.3 million Class B units 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 its affiliates, 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 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, 2017 and December 31, 2016, we owed PE-NTR and their affiliates approximately $154,000 and $43,000, 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, 2017 and 2016, and any related amounts unpaid as of June 30, 2017 and December 31, 2016 (in thousands):
  
Three Months Ended
 
Six Months Ended
 
Unpaid Amount as of
  
June 30,
 
June 30,
 
June 30,
 
December 31,
  
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Acquisition fees(1)
$
902

 
$
940

 
$
1,050

 
$
940

 
$

 
$

Due diligence fees(1)
183

 
155

 
213

 
155

 
78

 
29

Asset management fees(2)
5,228

 
4,711

 
10,317

 
9,330

 
1,766

 
1,687

OP units distribution(3)
465

 
464

 
925

 
928

 
158

 
158

Class B units distribution(4)
473

 
382

 
911

 
736

 
155

 
148

Disposition fees
19

 

 
19

 

 

 

Total
$
7,270

 
$
6,652

 
$
13,435

 
$
12,089

 
$
2,157

 
$
2,022

(1) 
Prior to January 1, 2017, acquisition and due diligence fees were recorded on our consolidated statements of operations. The majority of these costs are now capitalized and allocated to the related investment in real estate assets on the consolidated balance sheet based on the acquisition-date fair values of the respective assets and liability acquired.
(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.
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 owned 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.

14



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, 2017 and 2016, and any related amounts unpaid as of June 30, 2017 and December 31, 2016 (in thousands):
  
Three Months Ended
 
Six Months Ended
 
Unpaid Amount as of
  
June 30,
 
June 30,
 
June 30,
 
December 31,
  
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Property management fees(1)
$
2,683

 
$
2,572

 
$
5,269

 
$
4,999

 
$
857

 
$
840

Leasing commissions(2)
2,077

 
1,547

 
4,400

 
3,742

 
809

 
705

Construction management fees(2)
380

 
254

 
684

 
413

 
163

 
165

Other fees and reimbursements(3)
1,912

 
1,406

 
3,621

 
2,576

 
1,015

 
796

Total
$
7,052

 
$
5,779

 
$
13,974

 
$
11,730

 
$
2,844

 
$
2,506

(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, General and Administrative, and Transaction Expenses on the consolidated statements of operations based on the nature of the expense.

12. 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 rental income to be received under non-cancelable operating leases in effect as of June 30, 2017, assuming no new or renegotiated leases or option extensions on lease agreements, was as follows (in thousands):
Year
Amount
Remaining 2017
$
103,281

2018
195,464

2019
171,809

2020
149,559

2021
124,903

2022 and thereafter
412,963

Total
$
1,157,979

No single tenant comprised 10% or more of our aggregate annualized base rent as of June 30, 2017.


15



13. SUBSEQUENT EVENTS
Distributions to Stockholders
Distributions equal to a daily amount of $0.00183562 per share of common stock outstanding were paid subsequent to June 30, 2017, to the stockholders of record from June 1, 2017, through July 31, 2017, as follows (in thousands):
Distribution Period
 
Date Distribution Paid
 
Gross Amount of Distribution Paid
 
Distribution Reinvested through the DRIP
 
Net Cash Distribution
June 1, 2017, through June 30, 2017
 
7/3/2017
 
$
10,091

 
$
4,383

 
$
5,708

July 1, 2017, through July 31, 2017
 
8/1/2017
 
10,385

 
4,468

 
5,917

In August 2017 our board of directors authorized distributions to the stockholders of record at the close of business each day in the period commencing September 1, 2017, through November 30, 2017, equal to a daily amount of $0.00183562 per share of common stock.

16



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 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. Risk Factors, in Part II of this Form 10-Q, Item 1A. Risk Factors, in Part I of our 2016 Annual Report on Form 10-K, filed with the SEC on March 9, 2017, and in the Proxy Statement, 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. Except as required by law, we do not undertake any obligation to update or revise any forward-looking statements contained in this Form 10-Q. Important factors that could cause actual results to differ materially from the forward-looking statements are disclosed in Item 1A. Risk Factors, in Part II, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Form 10-Q, and in the Proxy Statement.

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 grocery-anchored neighborhood and community shopping centers that meet the day-to-day needs of residents in the surrounding trade areas.
On May 18, 2017, we entered into the PELP transaction. For a more detailed discussion, see Note 3 to the consolidated financial statements.
Portfolio
Below are statistical highlights of our portfolio:
  
 

 
Property Acquisitions During the
  
 
Total Portfolio as of
 
Six Months Ended
  
 
June 30, 2017
 
June 30, 2017
Number of properties
 
158

 
5

Number of states
 
28

 
3

Total square feet (in thousands)
 
17,249

 
501

Leased % of rentable square feet
 
95.9
%
 
89.0
%
Average remaining lease term (in years)(1)
 
5.4

 
7.1

(1) 
As of June 30, 2017. The average remaining lease term in years excludes future options to extend the term of the lease.

17



Lease Expirations
The following table lists, on an aggregate basis, all of the scheduled lease expirations after June 30, 2017, for each of the next ten years and thereafter for our 158 shopping centers. The table shows the leased square feet and annualized base rent (“ABR”) represented by the applicable lease expirations (dollars and square feet in thousands):
Year
 
Number of Leases Expiring
 
Leased Square Feet Expiring
 
% of Leased Square Feet Expiring
 
ABR(1)
 
% of Total Portfolio ABR
Remaining 2017(2)
 
166

 
410

 
2.5
%
 
$
5,848

 
2.8
%
2018
 
352

 
1,546

 
9.3
%
 
20,596

 
9.9
%
2019
 
419

 
2,031

 
12.3
%
 
26,978

 
13.0
%
2020
 
329

 
1,791

 
10.8
%
 
23,147

 
11.1
%
2021
 
350

 
2,068

 
12.5
%
 
24,689

 
11.9
%
2022
 
256

 
1,962

 
11.9
%
 
21,260

 
10.2
%
2023
 
115

 
1,589

 
9.6
%
 
19,945

 
9.6
%
2024
 
141

 
1,258

 
7.6
%
 
13,304

 
6.4
%
2025
 
117

 
702

 
4.2
%
 
11,316

 
5.4
%
2026
 
120

 
979

 
5.9
%
 
14,431

 
6.9
%
Thereafter
 
192

 
2,201

 
13.4
%
 
26,417

 
12.8
%
 
 
2,557

 
16,537

 
100.0
%
 
$
207,931

 
100.0
%
(1) 
We calculate ABR as monthly contractual rent as of June 30, 2017, multiplied by 12 months.
(2) 
Subsequent to June 30, 2017, we renewed 35 leases, which accounts for 225,125 total square feet and total ABR of $2.4 million.
Portfolio Tenancy
The following table presents the composition of our portfolio by tenant type as of June 30, 2017 (dollars and square feet in thousands):
Tenant Type
 
ABR
 
% of ABR
 
Leased Square Feet
 
% of Leased Square Feet
Grocery anchor
 
$
83,582

 
40.2
%
 
$
8,750

 
52.9
%
National and regional(1)
 
79,147

 
38.1
%
 
5,385

 
32.6
%
Local
 
45,202

 
21.7
%
 
2,402

 
14.5
%
  
 
$
207,931

 
100.0
%
 
$
16,537

 
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, 2017 (dollars and square feet in thousands):
Tenant Industry
 
ABR
 
% of ABR
 
Leased Square Feet
 
% of Leased Square Feet
Grocery
 
$
83,582

 
40.2
%
 
$
8,750

 
52.9
%
Service
 
48,154

 
23.2
%
 
2,508

 
15.2
%
Retail
 
46,052

 
22.1
%
 
3,870

 
23.4
%
Restaurants
 
30,143

 
14.5
%
 
1,409

 
8.5
%
  
 
$
207,931

 
100.0
%
 
$
16,537

 
100.0
%

18



The following table presents our grocery anchor tenants, grouped according to parent company, by leased square feet as of June 30, 2017 (dollars and square feet in thousands):
Tenant  
 
ABR
 
% of ABR
 
Leased Square Feet
 
% of Leased Square Feet
 
Number of Locations(1)
Kroger
 
$
18,270

 
8.8
%
 
2,298

 
13.9
%
 
40

Publix Super Markets
 
15,514

 
7.5
%
 
1,503

 
9.1
%
 
32

Ahold Delhaize
 
8,383

 
4.0
%
 
555

 
3.3
%
 
10

Albertsons Companies
 
7,744

 
3.7
%
 
756

 
4.6
%
 
13

Giant Eagle
 
5,435

 
2.6
%
 
560

 
3.4
%
 
7

Walmart
 
5,197

 
2.5
%
 
1,121

 
6.8
%
 
9

Raley's Supermarkets
 
3,422

 
1.6
%
 
193

 
1.2
%
 
3

SuperValu
 
2,382

 
1.1
%
 
273

 
1.7
%
 
4

Sprouts Farmers Market
 
2,281

 
1.1
%
 
195

 
1.2
%
 
6

Southeastern Grocers
 
1,545

 
0.7
%
 
147

 
0.9
%
 
3

Schnuck Markets
 
1,459

 
0.7
%
 
121

 
0.7
%
 
2

Coborn's
 
1,388

 
0.7
%
 
108

 
0.7
%
 
2

BJ’s Wholesale Club
 
1,223

 
0.6
%
 
115

 
0.7
%
 
1

H.E. Butt Grocery Company
 
1,210

 
0.6
%
 
81

 
0.5
%
 
1

Big Y Foods
 
1,091

 
0.5
%
 
65

 
0.4
%
 
1

PAQ
 
1,046

 
0.5
%
 
59

 
0.3
%
 
1

Trader Joe's
 
934

 
0.5
%
 
55

 
0.3
%
 
4

McKeever Enterprises
 
844

 
0.4
%
 
68

 
0.4
%
 
1

Save Mart Supermarkets
 
843

 
0.4
%
 
102

 
0.6
%
 
2

The Fresh Market
 
841

 
0.4
%
 
59

 
0.3
%
 
3

Pete's Fresh Market
 
579

 
0.3
%
 
72

 
0.4
%
 
1

U R M Stores
 
574

 
0.3
%
 
51

 
0.3
%
 
1

Hy-Vee Food Stores
 
527

 
0.3
%
 
127

 
0.8
%
 
2

Fresh Thyme Farmers Market
 
450

 
0.2
%
 
30

 
0.2
%
 
1

Marcs
 
400

 
0.2
%
 
36

 
0.2
%
 
1

 
 
$
83,582

 
40.2
%
 
8,750

 
52.9
%
 
151

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



19



Results of Operations
Summary of Operating Activities for the Three Months Ended June 30, 2017 and 2016
 
 
 
 
 
 
Favorable (Unfavorable) Change
(In thousands, except per share amounts)
 
2017
 
2016
 
$
 
%
Operating Data:
 
 
 
 
 
 
 
 
Total revenues
 
$
69,851

 
$
63,053

 
$
6,798

 
10.8
 %
Property operating expenses
 
(10,297
)
 
(9,657
)
 
(640
)
 
(6.6
)%
Real estate tax expenses
 
(10,155
)
 
(9,230
)
 
(925
)
 
(10.0
)%
General and administrative expenses
 
(8,896
)
 
(8,461
)
 
(435
)
 
(5.1
)%
Acquisition expenses
 
(313
)
 
(1,502
)
 
1,189

 
NM

Depreciation and amortization
 
(28,207
)
 
(25,977
)
 
(2,230
)
 
(8.6
)%
Interest expense, net
 
(9,501
)
 
(7,601
)
 
(1,900
)
 
(25.0
)%
Transaction expenses
 
(4,383
)
 

 
(4,383
)
 
NM

Other income (expense), net
 
680

 
(42
)
 
722

 
NM

Net (loss) income
 
(1,221
)
 
583

 
(1,804
)
 
NM

Net loss (income) attributable to noncontrolling interests
 
28

 
(23
)
 
51

 
NM

Net (loss) income attributable to stockholders
 
$
(1,193
)
 
$
560

 
$
(1,753
)
 
NM

 
 
 
 
 
 

 
 
Net (loss) income per share—basic and diluted
 
$
(0.01
)
 
$
0.00

 
$
(0.01
)
 


Below are explanations of the significant fluctuations in the results of operations for the three months ended June 30, 2017 and 2016:
Total revenues—Of the $6.8 million increase in total revenues, $6.7 million is attributed to owning nine more properties as of June 30, 2017, than the comparable 2016 period. The remaining increase was the result of a $0.1 million increase among same-center properties, which are the 137 properties that were owned and operational for the entire portion of both comparable reporting periods. There are nine properties being repositioned in the market and such repositioning is expected to have a significant impact on property operating income. As such, these properties have been classified as redevelopment and have been excluded from our same-center pool. The increase in same-center revenue was due to a $0.6 million increase in rental income, offset by a $0.4 million decrease in tenant recovery income. The increase in same-center rental income was driven by a $0.26 increase in minimum rent per square foot and a 0.3% increase in occupancy since June 30, 2016. The decrease in tenant recovery income primarily resulted from a decrease in property maintenance recoveries and metered utility recoveries, as our expenses were lower for the three months ended June 30, 2017, compared to the same period in 2016.
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. The $0.6 million increase in property operating expenses consisted of a $1.2 million increase related to owning nine more properties as of June 30, 2017, than the comparable 2016 period, offset by a $0.5 million decrease in property operating expenses among same-center properties. This decrease was attributed to a reduction in allowance for doubtful accounts that resulted from improved collections, as well as a decrease in insurance costs from obtaining more favorable rates.
Real estate tax expenses—The $0.9 million increase in real estate tax expenses was primarily due to having more properties in our portfolio as of June 30, 2017, than the comparable 2016 period.
General and administrative expenses—The $0.4 million increase in general and administrative expenses was primarily due to additional asset management fees related to the additional properties acquired after June 30, 2016.
Acquisition expenses—The $1.2 million decrease in acquisition expenses was attributed to the implementation of ASU 2017-01 on January 1, 2017, which requires us to capitalize most acquisition-related costs. For a more detailed discussion of this adoption, see Note 5 to the consolidated financial statements.
Depreciation and amortization—The $2.2 million increase in depreciation and amortization expenses included a $2.9 million increase related to owning more properties at June 30, 2017, than at June 30, 2016. This was offset by a $0.4 million decrease due to the disposition of a property in December 2016, and a $0.3 million decrease that was primarily attributed to certain intangible lease assets becoming fully amortized.

20



Interest expense, net—The $1.9 million increase in interest expense stemmed from additional borrowings subsequent to June 30, 2016, offset by a decrease that resulted from refinancing certain mortgages.
Transaction expenses—The $4.4 million increase in transaction expenses resulted from costs incurred in connection with the PELP transaction (see Note 3 to the consolidated financial statements).
Other income (expense), net—Other income increased $0.7 million primarily due to a gain on the sale of land at one of our properties.

Summary of Operating Activities for the Six Months Ended June 30, 2017 and 2016
 
 
 
 
 
 
Favorable (Unfavorable) Change
(In thousands, except per share amounts)
 
2017
 
2016
 
$
 
%
Operating Data:
 
 
 
 
 
 
 
 
Total revenues
 
$
138,154

 
$
126,135

 
$
12,019

 
9.5
 %
Property operating expenses
 
(21,729
)
 
(19,948
)
 
(1,781
)
 
(8.9
)%
Real estate tax expenses
 
(20,413
)
 
(18,641
)
 
(1,772
)
 
(9.5
)%
General and administrative expenses
 
(16,726
)
 
(16,014
)
 
(712
)
 
(4.4
)%
Acquisition expenses
 
(264
)
 
(1,522
)
 
1,258

 
NM

Depreciation and amortization
 
(55,831
)
 
(51,683
)
 
(4,148
)
 
(8.0
)%
Interest expense, net
 
(17,891
)
 
(15,333
)
 
(2,558
)
 
(16.7
)%
Transaction expenses
 
(6,023
)
 

 
(6,023
)
 
NM

Other income (expense), net
 
636

 
(158
)
 
794

 
NM

Net (loss) income
 
(87
)
 
2,836

 
(2,923
)
 
(103.1
)%
Net loss (income) attributable to noncontrolling interests
 

 
(57
)
 
57

 
100.0
 %
Net (loss) income attributable to stockholders
 
$
(87
)
 
$
2,779

 
$
(2,866
)
 
(103.1
)%
 
 
 
 
 
 
 
 
 
Net (loss) income per share—basic
 
$
(0.00
)
 
$
0.02

 
$
(0.02
)
 

Net (loss) income per share—diluted
 
(0.00
)
 
0.01

 
(0.01
)
 

Below are explanations of the significant fluctuations in the results of operations for the six months ended June 30, 2017 and 2016:
Total revenues—Of the $12.0 million increase in total revenues, $11.2 million was related to owning nine more properties as of June 30, 2017, than the comparable 2016 period, and the remaining $0.8 million increase was attributed to same-center properties. The increase in same-center revenue was due to a $1.7 million increase in rental income, offset by a $0.8 million decrease in tenant recovery income. The increase in same-center rental income was driven by a $0.26 increase in minimum rent per square foot and a 0.3% increase in occupancy since June 30, 2016. The decrease in tenant recovery income stemmed from a decrease in real estate tax, property maintenance, and metered utility recoveries, as our expenses were lower for the six months ended June 30, 2017, as compared to the same period in 2016.
Property operating expenses—The $1.8 million increase in property operating expenses was primarily related to owning nine more properties as of June 30, 2017, than the comparable 2016 period.
Real estate tax expenses—The $1.8 million increase in real estate tax expenses was comprised of a $2.1 million increase due to having more properties in our portfolio as of June 30, 2017, than the comparable 2016 period, offset by a $0.3 million decrease attributed to same-center properties.
Acquisition expenses—The $1.3 million decrease in acquisition expenses was attributed to the implementation of ASU 2017-01 on January 1, 2017, which requires us to capitalize most acquisition-related costs. For a more detailed discussion of this adoption, see Note 5 to the consolidated financial statements.
Depreciation and amortization—The $4.1 million increase in depreciation and amortization expenses included a $5.5 million increase related to owning more properties at June 30, 2017, than at June 30, 2016. This was offset by a $0.8 million decrease due to the disposition of a property in December 2016, as well as a $0.7 million decrease that was primarily attributed to certain intangible lease assets becoming fully amortized.
Interest expense, net—The $2.6 million increase in interest expense stemmed from additional borrowings subsequent to June 30, 2016, offset by a decrease that resulted from refinancing certain mortgages.

21



Transaction expenses—The $6.0 million increase in transaction expenses resulted from costs incurred in connection with the PELP transaction (see Note 3 to the consolidated financial statements).
Other income (expense), net—Other income increased $0.8 million primarily due to gains from the sale of land at two of our properties.

Leasing Activity
The average rent per square foot and cost of executing leases fluctuates based on the tenant mix, size of the space, and lease term. Leases with national and regional tenants generally require a higher cost per square foot than those with local tenants. However, such tenants will also execute leases for a longer term. As we continue to attract more of these national and regional tenants, our costs to lease may increase.
Below is a summary of leasing activity for the three months ended June 30, 2017 and 2016:
 
 
Total Deals
 
Inline Deals(1)
 
 
2017
 
2016
 
2017
 
2016
New leases:
 
 
 
 
 
 
 
 
Number of leases
 
45

 
40

 
44

 
40

Square footage (in thousands)
 
108

 
105

 
94

 
105

First-year base rental revenue (in thousands)
 
$
2,028

 
$
1,700

 
$
1,937

 
$
1,700

Average rent per square foot (“PSF”)
 
$
18.79

 
$
16.18

 
$
20.57

 
$
16.18

Average cost PSF of executing new leases(2)(3)