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EX-32.2 - EXHIBIT 32.2 - PHILLIPS EDISON GROCERY CENTER REIT II, INC.pe-ntr2q22017exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - PHILLIPS EDISON GROCERY CENTER REIT II, INC.pe-ntr2q22017exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - PHILLIPS EDISON GROCERY CENTER REIT II, INC.pe-ntr2q22017exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - PHILLIPS EDISON GROCERY CENTER REIT II, INC.pe-ntr2q22017exhibit311.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
o  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 000-55438
 
PHILLIPS EDISON GROCERY CENTER REIT II, INC.  
 
(Exact Name of Registrant as Specified in Its Charter)
 
Maryland
61-1714451
(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   o
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  o 
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:
Large Accelerated Filer
o
Accelerated Filer
o
 
 
 
 
Non-Accelerated Filer
þ  (Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
 
 
Emerging growth company
þ  
 
 
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.   þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  þ
As of July 31, 2017, there were 46.3 million outstanding shares of common stock of Phillips Edison Grocery Center REIT II, Inc.





INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1



PART I.     FINANCIAL INFORMATION
 
Item 1.        Financial Statements

PHILLIPS EDISON GROCERY CENTER REIT II, 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
$
487,294

 
$
452,515

Building and improvements
989,830

 
905,705

Acquired in-place lease assets
151,128

 
138,916

Acquired above-market lease assets
14,439

 
13,024

Total investment in property
1,642,691

 
1,510,160

Accumulated depreciation and amortization
(120,248
)
 
(85,255
)
Net investment in property
1,522,443

 
1,424,905

Investment in unconsolidated joint venture
15,104

 
14,287

Total investment in real estate assets, net
1,537,547

 
1,439,192

Cash and cash equivalents
3,720

 
8,259

Restricted cash
4,569

 
2,829

Other assets, net
44,554

 
36,247

Total assets
$
1,590,390

 
$
1,486,527

LIABILITIES AND EQUITY
  

 
  

Liabilities:
  

 
  

Mortgages and loans payable, net
$
672,590

 
$
533,215

Acquired below-market lease liabilities, net of accumulated amortization of $8,690 and $6,362, respectively
54,425

 
53,196

Accounts payable – affiliates
3,329

 
3,499

Accounts payable and other liabilities
34,002

 
34,383

Total liabilities
764,346

 
624,293

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, 46,485 and 46,372 shares
  
 
  
issued and outstanding at June 30, 2017 and December 31, 2016, respectively
467

 
463

Additional paid-in capital
1,029,430

 
1,026,887

Accumulated other comprehensive income
4,570

 
4,390

Accumulated deficit
(208,423
)
 
(169,506
)
Total equity
826,044

 
862,234

Total liabilities and equity
$
1,590,390

 
$
1,486,527


See notes to consolidated financial statements.

2



PHILLIPS EDISON GROCERY CENTER REIT II, 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
$
29,553

 
$
23,476

 
$
58,029

 
$
44,174

Tenant recovery income
10,130

 
7,707

 
20,339

 
15,187

Other property income
275

 
195

 
391

 
318

Total revenues
39,958

 
31,378

 
78,759

 
59,679

Expenses:
  

 
 
 
 
 
  

Property operating
6,192

 
4,793

 
12,795

 
9,893

Real estate taxes
6,489

 
4,911

 
12,610

 
9,428

General and administrative
5,167

 
4,812

 
9,821

 
8,852

Acquisition expenses
300

 
5,219

 
259

 
7,991

Depreciation and amortization
17,514

 
13,823

 
34,536

 
26,112

Total expenses
35,662

 
33,558

 
70,021

 
62,276

Other:
  

 
 
 
 
 
  

Interest expense, net
(5,452
)
 
(2,250
)
 
(9,926
)
 
(3,703
)
Gain on contribution of properties to unconsolidated joint venture

 

 

 
3,341

Other expense, net
(96
)
 
(122
)
 
(151
)
 
(242
)
Net loss
$
(1,252
)
 
$
(4,552
)
 
$
(1,339
)
 
$
(3,201
)
Earnings per common share:
  

 
 
 
 
 
  

Net loss per share - basic and diluted
$
(0.03
)
 
$
(0.10
)
 
$
(0.03
)
 
$
(0.07
)
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic and diluted
46,529

 
46,261

 
46,520

 
46,143

 
 
 
 
 
 
 
  

Comprehensive loss:
  

 
 
 
 
 
 
Net loss
$
(1,252
)
 
$
(4,552
)
 
$
(1,339
)
 
$
(3,201
)
Other comprehensive loss:
 
 
 
 
 
 
 
Unrealized loss on derivatives
(749
)
 

 
(58
)
 

Reclassification of derivative loss to interest expense
16

 

 
238

 

Comprehensive loss attributable to stockholders
$
(1,985
)
 
$
(4,552
)
 
$
(1,159
)
 
$
(3,201
)

See notes to consolidated financial statements.

3



PHILLIPS EDISON GROCERY CENTER REIT II, 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
 
Accumulated Deficit
 
Total Equity
  
Shares
 
Amount
 
 
 
 
Balance at January 1, 2016
45,723

 
$
458

 
$
1,011,635

 
$

 
$
(88,808
)
 
$
923,285

Share repurchases
(400
)
 
(2
)
 
(9,067
)
 

 

 
(9,069
)
Distribution reinvestment plan (“DRIP”)
828

 
7

 
19,331

 

 

 
19,338

Common distributions declared, $0.81 per share

 

 

 

 
(37,317
)
 
(37,317
)
Net loss

 

 

 

 
(3,201
)
 
(3,201
)
Balance at June 30, 2016
46,151

 
$
463

 
$
1,021,899

 
$

 
$
(129,326
)
 
$
893,036

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
46,372

 
$
463

 
$
1,026,887

 
$
4,390

 
$
(169,506
)
 
$
862,234

Share repurchases
(708
)
 
(6
)
 
(15,956
)
 

 

 
(15,962
)
DRIP
820

 
10


18,472

 

 

 
18,482

Change in unrealized gain on interest rate swaps


 

 

 
180

 

 
180

Common distributions declared, $0.81 per share

 

 

 

 
(37,578
)
 
(37,578
)
Share-based compensation
1

 

 
27

 

 

 
27

Net loss

 

 

 

 
(1,339
)
 
(1,339
)
Balance at June 30, 2017
46,485

 
$
467

 
$
1,029,430

 
$
4,570

 
$
(208,423
)
 
$
826,044


See notes to consolidated financial statements.

4



PHILLIPS EDISON GROCERY CENTER REIT II, 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
$
(1,339
)
 
$
(3,201
)
Adjustments to reconcile net loss to net cash provided by operating activities:
  

 
  

Depreciation and amortization
33,834

 
25,761

Net amortization of above- and below-market leases
(1,213
)
 
(958
)
Amortization of deferred financing expense
1,359

 
679

Gain on contribution of properties

 
(3,341
)
Change in fair value of derivatives
(235
)
 
(100
)
Straight-line rental income
(1,492
)
 
(1,747
)
Other
152

 
75

Changes in operating assets and liabilities:
  

 
  

Accounts receivable and accounts payable – affiliates
(170
)
 
1,452

Other assets
(6,562
)
 
(3,688
)
Accounts payable and other liabilities
230

 
5,165

Net cash provided by operating activities
24,564

 
20,097

CASH FLOWS FROM INVESTING ACTIVITIES:
  

 
  

Real estate acquisitions
(110,879
)
 
(326,290
)
Capital expenditures
(3,832
)
 
(7,368
)
Change in restricted cash
(1,740
)
 
(929
)
Investment in unconsolidated joint venture
(1,291
)
 

Principal disbursement on notes receivable - affiliate
(1,272
)
 

Return of investment in unconsolidated joint venture
400

 

Proceeds after contribution to unconsolidated joint venture

 
87,386

Net cash used in investing activities
(118,614
)
 
(247,201
)
CASH FLOWS FROM FINANCING ACTIVITIES:
  

 
  

Net change in credit facility
138,000

 
8,500

Proceeds from mortgages and loans payable

 
243,000

Payments on mortgages and loans payable
(13,070
)
 
(777
)
Payments of deferred financing expenses
(181
)
 
(5,518
)
Distributions paid, net of DRIP
(19,276
)
 
(18,131
)
Repurchases of common stock
(15,962
)
 
(10,950
)
Net cash provided by financing activities
89,511

 
216,124

NET DECREASE IN CASH AND CASH EQUIVALENTS
(4,539
)
 
(10,980
)
CASH AND CASH EQUIVALENTS:
  

 
  

Beginning of period
8,259

 
17,359

End of period
$
3,720

 
$
6,379

 
 
 
 
SUPPLEMENTAL CASH FLOW DISCLOSURE, INCLUDING NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
  
Cash paid for interest
$
8,995

 
$
3,029

Fair value of debt assumed
14,394

 
58,047

Initial investment in unconsolidated joint venture

 
6,888

Accrued capital expenditures
2,738

 
2,370

Change in distributions payable
(180
)
 
(152
)
Change in accrued share repurchase obligation

 
(1,881
)
Distributions reinvested
18,482

 
19,338


See notes to consolidated financial statements.

5



 Phillips Edison Grocery Center REIT II, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
 
1. ORGANIZATION
Phillips Edison Grocery Center REIT II, Inc. (“we,” the “Company,” “our,” or “us”) was formed as a Maryland corporation in June 2013. Substantially all of our business is conducted through Phillips Edison Grocery Center Operating Partnership II, L.P., (the “Operating Partnership”), a Delaware limited partnership formed in June 2013. We are a limited partner of the Operating Partnership, and our wholly owned subsidiary, PE Grocery Center OP GP II 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. In addition, we may invest in other retail properties including power and lifestyle shopping centers, multi-tenant shopping centers, free-standing single-tenant retail properties, and other real estate or real estate-related assets.
Our advisor is Phillips Edison NTR II LLC (“PE-NTR II”), which is directly or indirectly owned by Phillips Edison Limited Partnership (“Phillips Edison sponsor”). Under the terms of the advisory agreement between PE-NTR II and us (the “PE-NTR II Agreement”), PE-NTR II is responsible for the management of our day-to-day activities and the implementation of our investment strategy.
As of June 30, 2017, we wholly-owned fee simple interests in 80 real estate properties acquired from third parties unaffiliated with us or PE-NTR II. In addition, we own a 20% equity interest in a joint venture that owned 13 real estate properties as of June 30, 2017 (see Note 4).

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 II, 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 item on our consolidated balance sheet as of December 31, 2016, was reclassified to conform to the current year presentation:
Restricted Cash was separately disclosed due to significance in the current period. In the previous period these amounts were included in Other Assets, Net.
The following line item on our consolidated statement of cash flows for the six months ended June 30, 2016, was reclassified to conform to the current year presentation:
Loss on Write-off of Unamortized Leasing Commission and Equity in Net Loss of Unconsolidated Joint Venture were reclassified to Other due to limited activity in the current period.
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 three would be applicable to our business as it stands currently: debt prepayment or debt extinguishment costs, proceeds from settlement of insurance claims, and distributions received from equity method investees. 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. 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
 
$
673,695

 
$
527,167

Recorded value(1)
 
676,491

 
537,736

(1) 
Recorded value does not include deferred financing costs of $3.9 million and $4.5 million as of June 30, 2017 and December 31, 2016, respectively.
Derivative Instruments—As of June 30, 2017, we had four interest rate swaps that fixed LIBOR on $370 million of our unsecured term loan facility (“Term Loans”), and as of December 31, 2016, we had two interest rate swaps that fixed LIBOR on $243 million of the 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 two interest rate swaps that fixed the variable interest rate on $15.6 million and $15.8 million, respectively, of two of our variable-rate mortgage notes. The change in fair value of these instruments 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 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
$
5,105

 
$
5,369

Derivative liability:
 
 
 
Interest rate swaps designated as hedging instruments - Term Loans
$
97

 
$
463

Interest rate swaps not designated as hedging instruments - mortgage notes
537

 
850

Total
$
634

 
$
1,313



8



4. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
On March 22, 2016, we entered into a joint venture (the “Joint Venture”) through our indirect wholly-owned subsidiary, PE OP II Value Added Grocery, LLC (“REIT Member”), with a limited partnership (“Investor Member”) affiliated with TPG Real Estate, the real estate platform of the global private investment firm TPG, and with PECO Value Added Grocery Manager, LLC (“PECO Member”), a wholly-owned subsidiary of our Phillips Edison sponsor and an affiliate of our advisor and property manager, Phillips Edison & Company Ltd. (“Property Manager”). REIT Member owns a 20% initial equity interest and Investor Member owns an 80% initial equity interest in the Joint Venture. REIT Member and Investor Member may contribute up to $50 million and $200 million of equity, respectively, to the Joint Venture. As of June 30, 2017, the REIT Member has contributed $15.9 million of its $50 million commitment. Additionally, as of June 30, 2017, we had placed $1.6 million in escrow, which was recorded in Restricted Cash on the consolidated balance sheet, that was subsequently contributed to the Joint Venture.
PECO Member manages and conducts the day-to-day operations and affairs of the Joint Venture. REIT Member has customary approval rights with respect to major decisions, but does not have the right to cause or prohibit various material transactions. The Joint Venture’s income, losses, and distributions are generally allocated based on the members’ respective ownership interests. Therefore, we account for the Joint Venture under the equity method. Distributions of net cash are anticipated to be made on a monthly basis, as appropriate. During the six months ended June 30, 2017, we received a $0.4 million cash distribution from the Joint Venture. Additional capital contributions in proportion to the members’ respective capital interests in the Joint Venture may be required.
On March 7, 2017, our board of directors approved certain short-term loans (the “Joint Venture Loans”) that we may provide to the Joint Venture for its acquisitions, as needed. The Joint Venture Loans have terms of up to 60 days, and are to be funded 80% by the Investor Member and 20% by us. Our portion of the outstanding principal should not exceed $15 million at any given time. The Joint Venture Loans will incur interest at a rate equal to the greater of a) LIBOR plus 1.70%, or b) the borrowing rate on our revolving credit facility. As of June 30, 2017, $1.3 million of outstanding Joint Venture Loans, which mature on July 31, 2017, was recorded in Other Assets, Net on the consolidated balance sheet.
Subsequent to June 30, 2017, the Joint Venture acquired one additional shopping center, bringing their property total to 14.

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 and comprehensive income as Acquisition Expense 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 six grocery-anchored shopping centers. During the six months ended June 30, 2016, we acquired 18 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 to the fair value of the assets acquired and liabilities assumed as follows (in thousands):
 
 
2017
 
2016
Land and improvements
 
$
33,795

 
$
125,645

Building and improvements
 
81,052

 
237,469

Acquired in-place leases
 
12,212

 
37,462

Acquired above-market leases
 
1,415

 
1,258

Acquired below-market leases
 
(3,556
)
 
(14,899
)
Total assets and lease liabilities acquired
 
124,918


386,935

Less: Fair value of assumed debt at acquisition
 
14,394

 
58,047

Net assets acquired
 
$
110,524

 
$
328,888


9



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
 
10
 
13
Acquired above-market leases
 
8
 
8
Acquired below-market leases
 
17
 
17

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 due 2018(2)(3)
2.47%
 
$
166,000

 
$
28,000

Term loan due 2019(3)
1.99%-2.79%
 
185,000

 
185,000

Term loan due 2020(3)
2.06%-2.99%
 
185,000

 
185,000

Mortgages payable(4)
4.13%-6.64%
 
136,121

 
134,941

Assumed market debt adjustments, net(5) 
 
 
4,370

 
4,795

Deferred financing costs, net(6)
 
 
(3,901
)
 
(4,521
)
Total  
 
 
$
672,590

 
$
533,215

(1) 
Includes the effects of derivative financial instruments (see Notes 3 and 8) as of June 30, 2017.
(2) 
The gross borrowings under our revolving credit facility were $214 million during the six months ended June 30, 2017. The gross payments on our revolving credit facility were $76 million during the six months ended June 30, 2017. The revolving credit facility had a maximum capacity of $350 million as of June 30, 2017 and December 31, 2016.
(3) 
The revolving credit facility and term loans have options to extend their maturities to 2019 and 2021, respectively. 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 $1.4 million and $1.3 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 $1.8 million and $1.2 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 $1.2 million and $1.8 million as of June 30, 2017 and December 31, 2016, respectively, and are net of accumulated amortization of $2.8 million and $2.2 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 3.0%.
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
$
506,121

 
$
377,941

Variable-rate debt
166,000

 
155,000

Total
$
672,121

 
$
532,941

As to collateralization:
 
 
 
Unsecured debt
$
536,000

 
$
398,000

Secured debt
136,121

 
134,941

Total  
$
672,121

 
$
532,941

(1) 
Includes the effects of derivative financial instruments (see Notes 3 and 8).

10



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 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, 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, we estimate that an additional $1.3 million will be reclassified from Other Comprehensive Income as a decrease to Interest Expense, Net.

11



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 (notional amount in thousands). We had no such interest rate swaps outstanding as of June 30, 2016.
Count
 
Notional Amount
 
Fixed LIBOR
 
Maturity Date
4
 
$370,000
 
0.7% - 1.7%
 
2019-2020
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.

9. EQUITY
On May 9, 2017, our board of directors increased its estimated value per share of our common stock to $22.75 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.
Distribution Reinvestment Plan—We have adopted a DRIP that allows stockholders to invest distributions in additional shares of our common stock. Before our board of directors approved an increased estimated value per share on May 9, 2017, shares were issued under the DRIP at a price of $22.50 per share. Subsequent to that date, participants acquired and continue to acquire shares of common stock through the DRIP at a price of $22.75 per share.
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. Effective April 14, 2016, the repurchase price per share for all stockholders was equal to the estimated value per share of $22.50, which was subsequently increased to $22.75 on May 9, 2017.
During the six months ended June 30, 2017, repurchase requests surpassed the funding limits under the SRP. Approximately $16.0 million of shares of common stock were repurchased under our SRP during the six months ended June 30, 2017. Repurchase requests in connection with a stockholder’s death, “qualifying disability,” or “determination of incompetence” were completed in full. The remaining repurchase requests that were in good order were fulfilled on a pro rata basis. As of June 30, 2017, we had approximately 81,000 shares of unfulfilled repurchase requests, which were fully redeemed as of July 31, 2017.
Due to the program’s funding limits, the funds available for repurchases during the third quarter of 2017 are expected to be insufficient to meet all requests. When we are unable to fulfill all repurchase requests in a given month, we will honor requests on a pro rata basis to the extent funds are available. We will 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 Units—The Operating Partnership issues limited partnership units that are designated as Class B units for asset management services provided by PE-NTR II. The vesting of the Class B units is contingent upon a market condition and service condition. We had outstanding unvested Class B units of 460,547 shares and 414,415 shares as of June 30, 2017 and December 31, 2016, respectively.

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.
In the third quarter of 2016, approximately 4,400 shares of restricted stock were granted under our 2013 Independent Director Stock Plan and are potentially dilutive. As of June 30, 2017, approximately 3,300 restricted stock awards were outstanding. For the three and six months ended June 30, 2017, these awards were anti-dilutive and, as a result, were excluded from the

12



weighted-average common shares used to calculate diluted EPS. The impact of these grants on basic and diluted EPS has been calculated using the two-class method whereby earnings are allocated to the restricted stock 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.
Class B units are potentially dilutive securities as they contain non-forfeitable rights to dividends or dividend equivalents. There were 460,547 and 368,283 Class B units of the Operating Partnership outstanding as of June 30, 2017 and 2016, respectively. The vesting of the Class B units is contingent upon satisfaction of 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 per share computations.

11. RELATED PARTY TRANSACTIONS
Economic Dependency—We are dependent on PE-NTR II, 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 II, 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.
Advisory Agreement—Pursuant to the PE-NTR II Agreement, PE-NTR II is entitled to specified fees for certain services, including managing our day-to-day activities and implementing our investment strategy. PE-NTR II 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 II based on amounts incurred on our behalf.
Acquisition Fee—We pay PE-NTR II under the PE-NTR II 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 contract purchase price of each property we acquire, including acquisition or origination expenses and any debt attributable to such investments.
Due Diligence Fee—We reimburse PE-NTR II for expenses incurred related to selecting, evaluating, and acquiring assets on our behalf.
Asset Management Fee and Subordinated Participation—Under the PE-NTR II Agreement, the asset management fee 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. Under the first amendment to the Operating Partnership’s amended and restated agreement of limited partnership, 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 II and pay American Realty Capital PECO II Advisors, LLC (“ARC”), equal to 0.05% multiplied by the lower of the cost of assets and the applicable quarterly NAV, divided by the per share NAV. Our board of directors established an estimated NAV per share of $22.50 on April 14, 2016, and approved an increased estimated NAV per share of $22.75 on May 9, 2017. The Class B units are subject to forfeiture provisions.
PE-NTR II and ARC are entitled to receive distributions on the Class B units at the same rate as distributions are paid to common stockholders. Such distributions are in addition to the incentive compensation that PE-NTR II, ARC, and their affiliates may receive from us. During the six months ended June 30, 2017 and 2016, the Operating Partnership issued 46,131 and 136,474 Class B units, respectively, to PE-NTR II and ARC under the PE-NTR II Agreement for asset management services performed by PE-NTR II. PE-NTR II or one of its affiliates must continue to provide advisory services through the date that such economic hurdle is met. The economic hurdle will be met when (a) the value of the Operating Partnership’s assets, plus all distributions made equal or exceeds (b) the total amount of capital contributed by investors, plus a 6% cumulative, pre-tax, non-compounded annual return on the capital contributed.
Disposition Fee—We pay PE-NTR II for substantial assistance by PE-NTR II or its affiliates up to the lesser of: (i) 2% of the contract sales price of each property or other investment sold; or (ii) one-half of the total brokerage commissions paid if a non-affiliated broker is also involved in the sale, provided that total real estate commissions paid (to PE-NTR II and others) in connection with the sale may not exceed the lesser of a competitive real estate commission or 6% of the contract sales price. The conflicts committee of our board of directors determines whether PE-NTR II 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 II or its affiliates in connection with a sale.

13



General and Administrative Expenses—As of June 30, 2017 and December 31, 2016, we owed PE-NTR II and its affiliates $100,362 and $43,021, respectively, for general and administrative expenses paid on our behalf.
Summarized below are the fees earned by and the expenses reimbursable to PE-NTR II 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)
$
356

 
$
2,834

 
$
1,222

 
$
3,843

 
$

 
$
179

Due diligence fees(1)
71

 
546

 
244

 
754

 

 

Asset management fees(2)
3,118

 
2,497

 
6,136

 
4,613

 
1,091

 
1,007

Class B units distribution(3)
182

 
145

 
351

 
362

 
62

 
57

Total
$
3,727

 
$
6,022

 
$
7,953

 
$
9,572

 
$
1,153

 
$
1,243

(1) 
Prior to January 1, 2017, acquisition and due diligence fees were presented as Acquisition Expenses 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) 
Represents the distributions paid to PE-NTR II and ARC as holders of Class B units of the Operating Partnership and is 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.
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 II 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)
$
1,492

 
$
1,178

 
$
2,892

 
$
2,170

 
$
491

 
$
423

Leasing commissions(2)
985

 
741

 
1,621

 
1,565

 
240

 
386

Construction management fees(2)
143

 
157

 
221

 
306

 
62

 
185

Other fees and reimbursements(3)
961

 
837

 
1,755

 
1,704

 
532

 
367

Total
$
3,581

 
$
2,913

 
$
6,489

 
$
5,745

 
$
1,325

 
$
1,361

(1) 
The property management fees are included in Property Operating on the consolidated statements of operations.

14



(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.
Transfer Agent—Prior to February 2016, we utilized transfer agent services provided by an affiliate of Realty Capital Securities, LLC, our former dealer manager. Fees incurred from this transfer agent represented amounts paid by PE-NTR II to the affiliate of the Dealer Manager for such services. We reimbursed PE-NTR II for these fees through the payment of organization and offering costs. The transfer agent ceased services and the agreement was terminated in connection with the bankruptcy of the transfer agent and its parent company.
The following table details fees paid to the transfer agent for the three and six months ended June 30, 2017 and 2016, and any related amounts unpaid, which are included as a component of total unpaid organization and offering costs, 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
Transfer agent fees incurred related to offering costs
$

 
$

 
$

 
$

 
$
140

 
$
140

Other fees incurred from transfer agent

 

 

 
140

 
560

 
560

Unconsolidated Joint Venture—As of June 30, 2017 and December 31, 2016, we owed the Joint Venture $51,065 and $152,104, respectively, for real estate tax, property operating, and other general and administrative expenses paid on our behalf.

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
$
57,800

2018
109,404

2019
97,363

2020
84,777

2021
69,979

2022 and thereafter
262,287

Total
$
681,610

No single tenant comprised 10% or more of our aggregate annualized base rent (“ABR”) as of June 30, 2017. As of June 30, 2017, our real estate investments in Florida represented 15.0% of our ABR. As a result, the geographic concentration of our portfolio makes it particularly susceptible to adverse economic developments in the Florida real estate market.


15



13. SUBSEQUENT EVENTS
Distributions to Stockholders
Distributions equal to a daily amount of $0.00445205 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
 
$
6,216

 
$
3,002

 
$
3,214

July 1, 2017 through July 31, 2017
 
8/1/2017
 
6,431

 
3,082

 
3,349

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 $0.00445205 per share of common stock.
Acquisitions
Subsequent to June 30, 2017, we acquired the following property (dollars in thousands):
Property Name
 
Location
 
Anchor Tenant
 
Acquisition Date
 
Contractual Purchase Price
 
Square Footage
 
Leased % of Rentable Square Feet at Acquisition
Ormond Beach Station
 
Ormond Beach, FL
 
Publix
 
7/12/2017
 
$
12,600

 
94,275
 
85.2
%
Share Repurchase Program
Subsequent to June 30, 2017, we repurchased 273,506 shares of common stock in the amount of $6.2 million.


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 II, 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, and Item 1A. Risk Factors, in Part I of our 2016 Annual Report on Form 10-K, filed with the SEC on March 9, 2017, 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, and Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Form 10-Q.

Overview
Organization
Phillips Edison Grocery Center REIT II, 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.
As of June 30, 2017, we wholly-owned 80 real estate properties acquired from third parties unaffiliated with us or Phillips Edison NTR II LLC (“PE-NTR II”). In addition, we own a 20% equity interest in a joint venture (the “Joint Venture”) that owned 13 real estate properties as of June 30, 2017.
Portfolio
Below are statistical highlights of our wholly-owned portfolio:
 
 
 
 
Property Acquisitions
 
 
 
 
During the  
 
 
Total Portfolio as of
 
Six Months Ended
 
 
June 30, 2017
 
June 30, 2017
Number of properties
 
80

 
6

Number of states
 
24

 
4

Total square feet (in thousands)
 
9,775

 
523

Leased % of rentable square feet
 
94.8
%
 
94.6
%
Average remaining lease term (in years)(1)
 
5.8

 
5.9

(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 80 wholly-owned 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
 
ABR(1)
 
% of Total Portfolio ABR
 
Leased Square Feet Expiring
 
% of Leased Square Feet Expiring
Remaining 2017(2)
 
92

 
$
3,532

 
3.1
%
 
206

 
2.2
%
2018
 
215

 
11,206

 
9.7
%
 
802

 
8.7
%
2019
 
222

 
13,081

 
11.3
%
 
1,005

 
10.8
%
2020
 
229

 
14,788

 
12.8
%
 
1,287

 
13.9
%
2021
 
190

 
15,283

 
13.2
%
 
1,196

 
12.9
%
2022
 
146

 
9,309

 
8.0
%
 
708

 
7.6
%
2023
 
55

 
7,469

 
6.5
%
 
733

 
7.9
%
2024
 
48

 
4,896

 
4.2
%
 
361

 
3.9
%
2025
 
64

 
10,160

 
8.8
%
 
733

 
7.9
%
2026
 
63

 
7,518

 
6.5
%
 
575

 
6.2
%
Thereafter
 
96

 
18,467

 
15.9
%
 
1,657

 
18.0
%
 
 
1,420

 
$
115,709

 
100.0
%
 
9,263

 
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 14 leases, which accounts for 30,185 total square feet and total ABR of $0.6 million.
Portfolio Tenancy 
Prior to the acquisition of a property, we assess the suitability of the grocery anchor tenant and other tenants in light of our investment objectives, namely, preserving capital and providing stable cash flows for distributions. Generally, we assess the strength of the tenant by consideration of company factors, such as its financial strength and market share in the geographic area of the shopping center, as well as location-specific factors, such as the store’s sales, local competition, and demographics. When assessing the tenancy of the non-anchor space at the shopping center, we consider the tenant mix at each shopping center in light of our portfolio, the proportion of national and national franchise tenants, the creditworthiness of specific tenants, and the timing of lease expirations. When evaluating non-national tenancy, we attempt to obtain credit enhancements to leases, which typically come in the form of deposits and/or guarantees from one or more individuals.
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
National and regional(1)
 
$
45,740

 
39.6
%
 
3,028

 
32.7
%
Grocery anchor
 
44,479

 
38.4
%
 
4,883

 
52.7
%
Local
 
25,490

 
22.0
%
 
1,352

 
14.6
%
 
 
$
115,709

 
100.0
%
 
9,263

 
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
 
$
44,479

 
38.4
%
 
4,883

 
52.7
%
Retail
 
27,348

 
23.7
%
 
2,220

 
24.0
%
Service
 
26,610

 
23.0
%
 
1,371

 
14.8
%
Restaurant
 
17,272

 
14.9
%
 
789

 
8.5
%
 
 
$
115,709

 
100.0
%
 
9,263

 
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)
Publix Super Markets
 
$
6,955

 
6.0
%
 
742

 
8.0
%
 
16

Albertsons Companies
 
6,574

 
5.7
%
 
651

 
7.0
%
 
11

 Ahold Delhaize
 
6,374

 
5.5
%
 
389

 
4.2
%
 
6

Walmart
 
5,410

 
4.8
%
 
845

 
9.1
%
 
6

 Kroger
 
4,843

 
4.2
%
 
729

 
7.9
%
 
11

 Giant Eagle
 
2,776

 
2.4
%
 
273

 
3.0
%
 
4

 Save Mart Supermarkets
 
1,750

 
1.5
%
 
208

 
2.2
%
 
4

 Sprouts Farmers Market
 
1,347

 
1.2
%
 
82

 
0.9
%
 
3

 SuperValu
 
1,089

 
0.9
%
 
136

 
1.5
%
 
2

 Schnuck Markets
 
1,054

 
0.9
%
 
127

 
1.4
%
 
2

 PAQ
 
995

 
0.9
%
 
60

 
0.6
%
 
1

 Marc's
 
788

 
0.7
%
 
84

 
0.9
%
 
2

 Big Y Foods
 
621

 
0.5
%
 
39

 
0.4
%
 
1

 Balls Food Stores
 
595

 
0.5
%
 
66

 
0.7
%
 
1

 Skogens Foodliners
 
566

 
0.5
%
 
71

 
0.8
%
 
1

 Trader Joe's
 
512

 
0.4
%
 
25

 
0.3
%
 
2

 McKeever Enterprises
 
500

 
0.4
%
 
70

 
0.8
%
 
1

 BJ's Wholesale Club
 
494

 
0.4
%
 
68

 
0.7
%
 
1

 Southeastern Grocers
 
305

 
0.3
%
 
47

 
0.5
%
 
1

 Tops Markets
 
280

 
0.2
%
 
55

 
0.6
%
 
1

 The Fresh Market
 
259

 
0.2
%
 
18

 
0.2
%
 
1

 Raley's Supermarkets
 
240

 
0.2
%
 
60

 
0.6
%
 
1

 Lund Food Holdings
 
153

 
0.1
%
 
38

 
0.4
%
 
1

 
 
$
44,480

 
38.4
%
 
4,883

 
52.7
%
 
80

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



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
 
Change
 
Non-Same-Center
 
Same-Center
Operating Data:
  
 
  
 
 
 
 
 
 
Total revenues
$
39,958

 
$
31,378

 
$
8,580

 
$
8,091

 
$
489

Property operating expenses
(6,192
)
 
(4,793
)
 
(1,399
)
 
(1,363
)
 
(36
)
Real estate tax expenses
(6,489
)
 
(4,911
)
 
(1,578
)
 
(1,250
)
 
(328
)
General and administrative expenses
(5,167
)
 
(4,812
)
 
(355
)
 
(502
)
 
147

Acquisition expenses
(300
)
 
(5,219
)
 
4,919

 
4,917

 
2

Depreciation and amortization
(17,514
)
 
(13,823
)
 
(3,691
)
 
(3,286
)
 
(405
)
Interest expense, net
(5,452
)
 
(2,250
)
 
(3,202
)
 
(3,528
)
 
326

Other expense, net
(96
)
 
(122
)
 
26

 
9

 
17

Net loss
$
(1,252
)
 
$
(4,552
)
 
$
3,300

 
$
3,088

 
$
212

 
 
 
 
 
 
 
 
 
 
Net loss per share - basic and diluted
$
(0.03
)
 
$
(0.10
)
 
$
0.07

 


 
 
We wholly-owned 80 properties as of June 30, 2017, and 69 properties as of June 30, 2016. The Same-Center column in the table above includes the 51 properties that were owned and operational prior to January 1, 2016. The Non-Same-Center column includes properties that were acquired after December 31, 2015, in addition to corporate-level income and expenses. In this section, we primarily explain fluctuations in activity shown in the Same-Center column as well as any notable fluctuations in the Non-Same-Center column related to corporate-level activity. Unless otherwise discussed below, year-over-year comparative differences for the three and six months ended June 30, 2017 and 2016, are almost entirely attributable to the number of properties owned and the length of ownership of these properties.
Total revenues— Of the $8.6 million increase in total revenues, $8.1 million was related to the acquisition of 29 properties in 2016 and 2017. The remaining variance was the result of an increase in revenue among same-center properties, primarily due to a $0.4 million increase in tenant recovery income as a result of higher recoverable expenses and an increase in our recovery rate. The increase in same-center revenue was also attributed to a $0.1 million increase in rental income, which was driven by a $0.26 increase in same-center minimum rent per leased square foot, partially offset by a 0.1% decrease in same-center occupancy since June 30, 2016.
General and administrative expenses—The $0.4 million increase in general and administrative expenses was primarily attributed to a $0.7 million increase in asset management fees as a result of portfolio growth, partially offset by a decrease of $0.2 million in third party professional costs.
Acquisition expenses—Acquisition expenses decreased $4.9 million as a result of adopting Accounting Standards Update (“ASU”) 2017-01, which now requires the majority of our acquisition-related expenses incurred in 2017 to be capitalized and amortized over the life of the related assets. For a more detailed discussion of this adoption, see Note 5 to our consolidated financial statements.
Interest expense, net— Of the $3.2 million increase in interest expense, $3.0 million is related to higher borrowings in 2017 on the revolving credit facility and the term loans, as well as the amortization of deferred financing costs related to new debt instruments. The remaining $0.2 million increase is related to new mortgage loans assumed in connection with certain acquisitions throughout 2016 and 2017, partially offset by mortgages that have matured.


20



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
 
Change
 
Non-Same-Center
 
Same-Center
Operating Data:
  
 
  
 
 
 
 
 
 
Total revenues
$
78,759

 
$
59,679

 
$
19,080

 
$
18,010

 
$
1,070

Property operating expenses
(12,795
)
 
(9,893
)
 
(2,902
)
 
(2,845
)
 
(57
)
Real estate tax expenses
(12,610
)
 
(9,428
)
 
(3,182
)
 
(2,907
)
 
(275
)
General and administrative expenses
(9,821
)
 
(8,852
)
 
(969
)
 
(1,121
)
 
152

Acquisition expenses
(259
)
 
(7,991
)
 
7,732

 
7,773

 
(41
)
Depreciation and amortization
(34,536
)
 
(26,112
)
 
(8,424
)
 
(7,625
)
 
(799
)
Interest expense, net
(9,926
)
 
(3,703
)
 
(6,223
)
 
(6,916
)
 
693

Gain on contribution of properties to unconsolidated joint venture

 
3,341

 
(3,341
)
 
(3,341
)
 

Other expense, net
(151
)
 
(242
)
 
91

 
(57
)
 
148

Net loss
$
(1,339
)
 
$
(3,201
)
 
$
1,862

 
$
971

 
$
891

 
 
 
 
 
 
 
 
 
 
Net loss per share—basic and diluted
$
(0.03
)
 
$
(0.07
)
 
$
0.04

 
 
 
 
Total revenues—Of the $19.1 million increase in total revenues, $18.0 million was related to the acquisition of 29 properties in 2016 and 2017. The remaining variance was the result of an increase in revenue among same-center properties, primarily due to a $0.7 million increase in tenant recovery income as a result of higher recoverable expenses and a 1.1% increase in our recovery rate. The increase in same-center revenue was also attributed to a $0.4 million increase in rental income, which was driven by a $0.26 increase in same-center minimum rent per square foot, partially offset by a 0.1% decrease in same-center occupancy since June 30, 2016.
General and administrative expenses—The $1.0 million increase in general and administrative expenses was primarily attributed to $1.5 million increase in asset management fees as a result of portfolio growth, partially offset by a decrease of $0.5 million in third party professional costs.
Acquisition expenses—Acquisition expenses decreased $7.7 million, as a result of adopting ASU 2017-01, which now requires the majority of our acquisition-related expenses incurred in 2017 to be capitalized and amortized over the life of the related assets. For a more detailed discussion of this adoption, see Note 5 to our consolidated financial statements.
Interest expense, net— Of the $6.2 million increase in interest expense, $5.6 million is related to higher borrowings in 2017 on the revolving credit facility and the term loans, including $0.7 million of amortization of deferred financing costs related to new debt instruments. The remaining $0.6 million increase is related to new mortgage loans assumed in connection with certain acquisitions throughout 2016 and 2017, partially offset by mortgages that have matured.
Gain on contribution of properties to unconsolidated joint venture—The $3.3 million decrease is a result of a gain on the contribution of six properties to the Joint Venture in March 2016.

Leasing Activity
The average rent per square foot and cost of executing leases fluctuate 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.

21



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
 
11

 
12

 
10

 
11

Square footage (in thousands)
 
38

 
50

 
23

 
35

First-year base rental revenue (in thousands)
 
$
571

 
$
651

 
$
422

 
$
531

    Average rent per square foot (“PSF”)
 
$
14.95

 
$
12.92

 
$
18.11

 
$
15.01

    Average cost PSF of executing new leases(2)(3)
 
$
38.75

 
$
27.03

 
$
31.62

 
$
35.08

 Weighted-average lease term (in years)
 
9.2

 
7.4

 
8.7

 
7.5

Renewals and options:
 
 
 
 
 
 
 
 
Number of leases
 
51

 
55

 
50

 
53

Square footage (in thousands)
 
127

 
161

 
101

 
107

First-year base rental revenue (in thousands)
 
$
2,554

 
$
2,536

 
$
2,309

 
$
2,153

    Average rent PSF
 
$
20.10

 
$
15.74

 
$
22.79

 
$
20.13

    Average rent PSF prior to renewals
 
$
17.77

 
$
14.47

 
$
20.10

 
$
18.34

    Percentage increase in average rent PSF
 
13.1
%
 
8.8
%
 
13.4
%
 
9.7
%
    Average cost PSF of executing renewals and options(2)(3)
 
$
4.02

 
$
3.23

 
$
4.68

 
$
3.95

 Weighted-average lease term (in years)
 
4.8

 
5.2

 
4.7

 
4.8

Portfolio retention rate(4)
 
94.7
%
 
80.8
%
 
87.8
%
 
80.8
%
(1) 
We consider an inline deal to be a lease for less than 10,000 square feet of gross leasable area (“GLA”).
(2) 
The cost of executing new leases, renewals, and options includes leasing commissions, tenant improvement costs, and tenant concessions.
(3) 
The costs associated with landlord improvements are excluded for repositioning and redevelopment projects.
(4) 
The portfolio retention rate is calculated by dividing (a) total square feet of retained tenants with current period lease expirations by (b) the square feet of leases expiring during the period.
Below is a summary of leasing activity for the six months ended June 30, 2017 and 2016:
 
 
Total Deals
 
Inline Deals
 
 
2017
 
2016
 
2017
 
2016
New leases:
 
 
 
 
 
 
 
 
Number of leases
 
26

 
35

 
25

 
34

Square footage (in thousands)
 
68

 
96

 
53

 
81

First-year base rental revenue (in thousands)
 
$
1,148

 
$
1,511

 
$
1,000

 
$
1,391

    Average rent PSF
 
$
16.85

 
$
15.81

 
$
18.76

 
$
17.26

    Average cost PSF of executing new leases
 
$
34.39

 
$
31.17

 
$
30.06

 
$
35.47

 Weighted-average lease term (in years)
 
8.0

 
8.1

 
7.4

 
8.3

Renewals and options:
 
 
 
 
 
 
 
 
Number of leases
 
88

 
82

 
86

 
79

Square footage (in thousands)
 
256

 
239

 
181

 
151

First-year base rental revenue (in thousands)
 
$
4,611

 
$
3,659

 
$
3,842

 
$
3,138

    Average rent PSF
 
$
18.00

 
$
15.31

 
$
21.29

 
$
20.83

    Average rent PSF prior to renewals
 
$
16.03

 
$
13.96

 
$
18.78

 
$
18.86

    Percentage increase in average rent PSF
 
11.9
%
 
9.7
%
 
13.0
%
 
10.4
%
    Average cost PSF of executing renewals and options
 
$
3.59

 
$
4.25

 
$
4.45

 
$
4.50

 Weighted-average lease term (in years)
 
4.8

 
5.6

 
4.7

 
5.2

Portfolio retention rate
 
88.6
%
 
82.5
%
 
86.8
%
 
82.5
%



22



Non-GAAP Measures
Same-Center Net Operating Income
We present Same-Center Net Operating Income (“Same-Center NOI”) as a supplemental measure of our performance. We define Net Operating Income (“NOI”) as total operating revenues, adjusted to exclude lease buy-out income and non-cash revenue items, less property operating expenses and real estate taxes. Same-Center NOI represents the NOI for the 51 properties that were wholly-owned and operational for the entire portion of both comparable reporting periods.
We believe that NOI and Same-Center NOI provide useful information to our investors about our financial and operating performance because each provides a performance measure of the revenues and expenses directly involved in owning and operating real estate assets and provides a perspective not immediately apparent from net income. Because Same-Center NOI excludes the change in NOI from properties acquired after December 31, 2015, it highlights operating trends such as occupancy levels, rental rates, and operating costs on properties that were operational for both comparable periods. Other REITs may use different methodologies for calculating Same-Center NOI, and accordingly, our Same-Center NOI may not be comparable to other REITs.
Same-Center NOI should not be viewed as an alternative measure of our financial performance since it does not reflect the operations of our entire portfolio, nor does it reflect the impact of general and administrative expenses, acquisition expenses, depreciation and amortization, interest expense, other income, or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties that could materially impact our results from operations.
The table below is a comparison of the Same-Center NOI for the three and six months ended June 30, 2017, to the three and six months ended June 30, 2016 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
$ Change
 
% Change
 
2017
 
2016
 
$ Change
 
% Change
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental income(1)
$
17,764

 
$
17,223

 
$
541

 
 
 
$
35,344

 
$
34,411

 
$
933

 
 
Tenant recovery income
6,805

 
6,408

 
397

 
 
 
13,684

 
13,005

 
679

 
 
Other property income
143

 
142

 
1

 
 
 
218

 
228

 
(10
)
 
 
Total revenues
24,712

 
23,773

 
939

 
3.9
%
 
49,246

 
47,644

 
1,602

 
3.4
%
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property operating expenses
4,028

 
3,930

 
98

 
 
 
8,458

 
8,294

 
164

 
 
Real estate taxes
4,370

 
4,041

 
329

 
 
 
8,327

 
8,052

 
275

 
 
Total operating expenses
8,398

 
7,971

 
427

 
5.4
%
 
16,785

 
16,346

 
439

 
2.7
%
Total Same-Center NOI
$
16,314

 
$
15,802

 
$
512

 
3.2
%
 
$
32,461

 
$
31,298

 
$
1,163

 
3.7
%
(1) 
Excludes straight-line rental income, net amortization of above- and below-market leases, and lease buyout income.
Below is a reconciliation of net loss to NOI and Same-Center NOI for the three and six months ended June 30, 2017 and 2016 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016(1)
 
2017
 
2016(1)
Net loss
$
(1,252
)
 
$
(4,552
)
 
$
(1,339
)
 
$
(3,201
)
Adjusted to exclude:
 
 
 
 
 
 
 
Straight-line rental income
(656
)
 
(938
)
 
(1,492
)
 
(1,747
)
Net amortization of above- and below-market leases
(606
)
 
(546
)
 
(1,213
)
 
(958
)
Lease buyout income

 
(149
)
 
(125
)
 
(149
)
General and administrative expenses
5,167

 
4,812

 
9,821

 
8,852

Acquisition expenses
300

 
5,219

 
259

 
7,991

Depreciation and amortization
17,514

 
13,823

 
34,536

 
26,112

Interest expense, net
5,452

 
2,250

 
9,926

 
3,703

Other
96

 
122

 
151

 
242

Gain on contribution of properties to unconsolidated joint venture

 

 

 
(3,341
)
NOI
26,015

 
20,041

 
50,524

 
37,504

Less: NOI from centers excluded from Same-Center
(9,701
)
 
(4,239
)
 
(18,063
)
 
(6,206
)
Total Same-Center NOI
$
16,314

 
$
15,802

 
$
32,461

 
$
31,298

(1) 
Certain prior period amounts have been restated to conform with current year presentation.

23



Funds from Operations and Modified Funds from Operations
Funds from operations (“FFO”) is a non-GAAP financial measure that is widely recognized as a measure of REIT operating performance. We use FFO as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) to be net income (loss), computed in accordance with GAAP, adjusted for gains (or losses) from sales of depreciable real estate property (including deemed sales and settlements of pre-existing relationships), plus depreciation and amortization on real estate assets and impairment charges, and after related adjustments for unconsolidated partnerships, joint ventures, and noncontrolling interests. We believe that FFO is helpful to our investors and our management as a measure of operating performance because, when compared year over year, it reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which are not immediately apparent from net income.
Since the definition of FFO was promulgated by NAREIT, GAAP has expanded to include several new accounting pronouncements, such that management and many investors and analysts have considered the presentation of FFO alone to be insufficient. Accordingly, in addition to FFO, we use modified funds from operations (“MFFO”), which, as defined by us, excludes from FFO the following items:
acquisition expenses;
straight-line rent amounts, both income and expense;
amortization of above- or below-market intangible lease assets and liabilities;
amortization of discounts and premiums on debt investments;
gains or losses from the early extinguishment of debt;
gains or losses on the extinguishment of derivatives, except where the trading of such instruments is a fundamental attribute of our operations;
gains or losses related to fair-value adjustments for derivatives not qualifying for hedge accounting;
gains or losses related to consolidation from, or deconsolidation to, equity accounting; and
adjustments related to the above items for unconsolidated entities in the application of equity accounting.
We believe that MFFO is helpful in assisting management and investors with the assessment of the sustainability of operating performance in future periods because MFFO excludes acquisition expenses that affect operations only in the period in which the property is acquired. Thus, MFFO provides helpful information relevant to evaluating our operating performance in periods in which there is no acquisition activity.
Many of the adjustments in arriving at MFFO are not applicable to us. Nevertheless, as explained below, management’s evaluation of our operating performance may also exclude items considered in the calculation of MFFO based on the following economic considerations.
Adjustments for straight-line rents and amortization of discounts and premiums on debt investments—GAAP requires rental receipts and discounts and premiums on debt investments to be recognized using various systematic methodologies. This may result in income recognition that could be significantly different than underlying contract terms. By adjusting for these items, MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments and aligns results with management’s analysis of operating performance. The adjustment to MFFO for straight-line rents, in particular, is made to reflect rent and lease payments from a GAAP accrual basis to a cash basis.
Adjustments for amortization of above- or below-market intangible lease assets—Similar to depreciation and amortization of other real estate-related assets that are excluded from FFO, GAAP implicitly assumes that the value of intangibles diminishes ratably over the lease term and should be recognized in revenue. Since real estate values and market lease rates in the aggregate have historically risen or fallen with market conditions, and the intangible value is not adjusted to reflect these changes, management believes that by excluding these charges, MFFO provides useful supplemental information on the performance of the real estate.
Gains or losses related to fair-value adjustments for derivatives not qualifying for hedge accounting—This item relates to a fair value adjustment, which is based on the impact of current market fluctuations and underlying assessments of general market conditions and specific performance of the holding, which may not be directly attributable to current operating performance. As these gains or losses relate to underlying long-term assets and liabilities, management believes MFFO provides useful supplemental information by focusing on the changes in core operating fundamentals rather than changes that may reflect anticipated, but unknown, gains or losses.

24



Adjustment for gains or losses related to early extinguishment of derivatives and debt instruments—These adjustments are not related to continuing operations. By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods and to other real estate operators.
Neither FFO nor MFFO should be considered as an alternative to net income (loss) or income (loss) from continuing operations under GAAP, nor as an indication of our liquidity, nor is either of these measures indicative of funds available to fund our cash needs, including our ability to fund distributions. MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate our business plan in the manner currently contemplated.
Accordingly, FFO and MFFO should be reviewed in connection with other GAAP measurements. FFO and MFFO should not be viewed as more prominent measures of performance than our net income or cash flows from operations prepared in accordance with GAAP. Our FFO and MFFO as presented may not be comparable to amounts calculated by other REITs.
The following section presents our calculation of FFO and MFFO and provides additional information related to our operations (in thousands). As a result of the timing of the commencement of our active real estate operations, FFO and MFFO are not relevant to a discussion comparing operations for the periods presented. We expect revenues and expenses to increase in future periods as we acquire additional investments.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
  
2017
 
2016
 
2017
 
2016
Calculation of FFO
  
 
  
 
 
 
 
Net loss
$
(1,252
)
 
$
(4,552
)
 
$
(1,339
)
 
$
(3,201
)
Adjustments:
  

 
  

  

 

Depreciation and amortization of real estate assets
17,514

 
13,823

 
34,536

 
26,112

Gain on contribution of properties to unconsolidated joint venture

 

 

 
(3,341
)
Depreciation and amortization related to unconsolidated joint venture
446

 
233

 
872

 
233

FFO
$
16,708


$
9,504


$
34,069

 
$
19,803

Calculation of MFFO
  

 
  

 
 
 
 
FFO
$
16,708

 
$
9,504

 
$
34,069

 
$
19,803

Adjustments:
  

 
  

 


 


Acquisition expenses
300

 
5,219

 
259

 
7,991

Net amortization of above- and below-market leases
(606
)
 
(546
)
 
(1,213
)
 
(958
)
Straight-line rental income
(656
)
 
(938
)
 
(1,492
)
 
(1,747
)
Amortization of market debt adjustment
(252
)
 
(230
)
 
(534
)
 
(340
)
Change in fair value of derivatives
(119
)
 
(106
)
 
(235
)
 
(100
)
Gain on extinguishment of debt

 

 
(11
)
 

Adjustments related to unconsolidated joint venture
25

 
19

 
23

 
19

MFFO
$
15,400


$
12,922

 
$
30,866

 
$
24,668

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Weighted-average common shares outstanding - basic
46,529

 
46,261

 
46,520

 
46,143

Weighted-average common shares outstanding - diluted(1)
46,531


46,261


46,523


46,143

FFO per share - basic and diluted
$
0.36

 
$
0.21

 
$
0.73

 
$
0.43

MFFO per share - basic and diluted
$
0.33

 
$
0.28

 
$
0.66

 
$
0.53

(1) 
Restricted stock awards were dilutive to FFO/MFFO for the three and six months ended June 30, 2017, and, accordingly, were included in the weighted-average common shares used to calculate diluted FFO/MFFO per share.
Liquidity and Capital Resources
General
Our principal cash demands, aside from standard operating expenses, are for investments in real estate, capital expenditures, repurchases of common stock, distributions to stockholders, and principal and interest on our outstanding indebtedness. We intend to use our cash on hand, operating cash flows, proceeds from our DRIP, and proceeds from debt financings, including borrowings under our unsecured credit facility, as our primary sources of immediate and long-term liquidity.

25



As of June 30, 2017, we had cash and cash equivalents of $3.7 million, a net cash decrease of $4.5 million during the six months ended June 30, 2017.
Operating Activities
Our net cash provided by operating activities consists primarily of cash inflows from tenant rental and recovery payments and cash outflows for property operating expenses, real estate taxes, general and administrative expenses, and interest payments.
Our cash flows from operating activities were $24.6 million as of June 30, 2017, compared to $20.1 million from the same period in 2016, primarily due to additional properties owned and the length of ownership of those properties. The increase was also attributed to a 3.7% increase in the Same-Center NOI. Operating cash flows are expected to continue to increase as additional properties are added to our portfolio.
Investing Activities
Net cash flows from investing activities are affected by the nature, timing, and extent of improvements to, as well as acquisitions and dispositions of, real estate and real estate-related assets as we continue to acquire additional investments to grow our portfolio.
During the six months ended June 30, 2017, we had a total cash outlay of $110.9 million related to the acquisition of six grocery-anchored shopping centers. During the same period in 2016, we acquired 18 grocery-anchored shopping centers and additional real estate adjacent to a previously acquired grocery-anchored shopping center for a total cash investment of $326.3 million.
In March 2016, we entered into the Joint Venture agreement under which we may contribute up to $50 million of equity. In the six months ended June 30, 2017, we contributed an additional $1.3 million in cash to the Joint Venture to acquire additional assets, bringing our total contributions to $15.9 million. In June 2017, we received a $0.4 million distribution from the Joint Venture. Subsequent to June 30, 2017, we contributed an additional $1.6 million to the Joint Venture, which was held in escrow and recorded in Restricted Cash as of June 30, 2017. During the six months ended June 30, 2016, we received a cash distribution of $87.4 million from the initial contribution of properties to the Joint Venture.
On March 7, 2017, our board of directors approved the issuance of certain short-term loans to the Joint Venture for its acquisitions, as needed. The loans have a term of up to 60 days, and the total outstanding principal balance funded by us should not exceed $15 million at any given time. The interest rate on such loans shall be the greater of a) LIBOR plus 1.70% or b) the borrowing rate on our revolving credit facility. As of June 30, 2017, there was $1.3 million in outstanding loans between the Joint Venture and us.
Financing Activities
Net cash flows from financing activities are affected by payments of distributions, principal and other payments associated with our outstanding debt, and borrowings during the period. As our debt obligations mature, we intend to refinance the remaining balance, if possible, or pay off the balances at maturity using proceeds from operations and/or corporate-level debt. During the six months ended June 30, 2017, we had an increase of $138 million in net borrowings from our credit facility compared to $8.5 million from the same period in 2016.
As of June 30, 2017, our debt to total enterprise value was 38.7%. Debt to total enterprise value is calculated as net debt (total debt, excluding below-market debt adjustments and deferred financing costs, less cash and cash equivalents) as a percentage of enterprise value (equity value, calculated as diluted shares outstanding multiplied by the estimated value per share of $22.75, plus net debt).
Our debt is subject to certain covenants, as disclosed in our 2016 Annual Report on Form 10-K filed with the SEC on March 9, 2017. As of June 30, 2017, we were in compliance with the restrictive covenants of our outstanding debt obligations. We expect to continue to meet the requirements of our debt covenants over the short- and long-term. Our debt to total enterprise value and debt covenant compliance as of June 30, 2017, allow us access to future borrowings as needed.
We have access to a revolving credit facility with a capacity of $350 million, and an interest rate of LIBOR plus 1.30%. As of June 30, 2017, $184 million was available for borrowing. The revolving credit facility matures in June 2018, with additional options to extend to June 2019. Our credit facility may be expanded up to $700 million, from which we may draw funds to pay certain long-term debt obligations as they mature, increase our investment in real estate, or pay operating costs and expenses.
We offer an SRP that provides a limited opportunity for stockholders to have shares of common stock repurchased, subject to certain restrictions and limitations. For a more detailed discussion of our SRP, see Note 9 to the consolidated financial statements. During the six months ended June 30, 2017, we paid cash for repurchases of common stock in the amount of $16.0 million.

26



Activity related to distributions to our common stockholders for the six months ended June 30, 2017 and 2016 is as follows (in thousands):
 
2017
 
2016
Gross distributions paid
$
37,758

 
$
37,469

Distributions reinvested through DRIP
18,482

 
19,338

Net cash distributions
19,276

 
18,131

Net loss
(1,339
)
 
(3,201
)
Net cash provided by operating activities
24,564

 
20,097

FFO(1)
34,069

 
19,803

(1) See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Measures - Funds from Operations and Modified Funds from Operations” for the definition of FFO, information regarding why we present FFO, as well as for a reconciliation of this non-GAAP financial measure to net loss.
We paid distributions monthly and expect to continue paying distributions monthly unless our results of operations, our general financial condition, general economic conditions or other factors, as determined by our board of directors, make it imprudent to do so. The timing and amount of distributions is determined by our board of directors and is influenced in part by our intention to comply with REIT requirements of the Internal Revenue Code.
To maintain our qualification as a REIT, we must make aggregate annual distributions to our stockholders of at least 90% of our REIT taxable income (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). We generally will not be subject to U.S. federal income tax on the income that we distribute to our stockholders each year due to meeting the REIT qualification requirements. However, we may be subject to certain state and local taxes on our income, property, or net worth and to federal income and excise taxes on our undistributed income.
We have not established a minimum distribution level, and our charter does not require that we make distributions to our stockholders.

Critical Accounting Policies 
Real Estate Acquisition Accounting—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.
For a summary of all of our critical accounting policies, refer to our 2016 Annual Report on Form 10-K filed with the SEC on March 9, 2017.
Recently Issued Accounting Pronouncements—Refer to Note 2 of our consolidated financial statements in this report for discussion of the impact of recently issued accounting pronouncements.

Item 3.       Quantitative and Qualitative Disclosures About Market Risk
We hedge a portion of our exposure to interest rate fluctuations through the utilization of interest rate swaps in order to mitigate the risk of this exposure. We do not intend to enter into derivative or interest rate transactions for speculative purposes. Our hedging decisions are determined based upon the facts and circumstances existing at the time of the hedge and may differ from our currently anticipated hedging strategy. Because we use derivative financial instruments to hedge against interest rate fluctuations, we may be exposed to both credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty will owe us, which creates credit risk for us. If the fair value of a derivative contract is negative, we will owe the counterparty and, therefore, do not have credit risk. We seek to minimize the credit risk in derivative instruments by entering into transactions with high-quality counterparties. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. The market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. 
As of June 30, 2017, we had four interest rate swaps that fixed LIBOR on $370 million of our unsecured term loan facility, and we were party to two interest rate swaps that fixed the variable interest rate on $15.6 million of two of our mortgage notes.

27



As of June 30, 2017, we had not fixed the variable interest rate on $166.0 million of our unsecured debt through derivative financial instruments, and as a result, we are subject to the potential impact of rising interest rates, which could negatively impact our profitability and cash flows. The impact on our results of operations of a one-percentage point increase in interest rates on the outstanding balance of our variable-rate debt at June 30, 2017, would result in approximately $1.7 million of additional interest expense annually.
The additional interest expense was determined based on the impact of hypothetical interest rates on our borrowing cost and assumes no changes in our capital structure. As the information presented above includes only those exposures that exist as of June 30, 2017, it does not consider those exposures or positions that could arise after that date. Hence, the information represented herein has limited predictive value. As a result, the ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period, the hedging strategies at the time, and the related interest rates.
We do not have any foreign operations, and thus we are not exposed to foreign currency fluctuations. 

Item 4.        Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of June 30, 2017. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective as of June 30, 2017.
Internal Control Changes
During the quarter ended June 30, 2017, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


28



 PART II.     OTHER INFORMATION
 
Item 1.        Legal Proceedings
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 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, nor are we aware of any such legal proceedings contemplated by governmental authorities.

Item 1A. Risk Factors
For a listing of risk factors associated with investing in us, please see Item 1A. Risk Factors in Part I of our 2016 Annual Report on Form 10-K filed with the SEC on March 9, 2017.

Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds
a)
None.
b)
Not applicable.
c)During the quarter ended June 30, 2017, we repurchased shares as follows (shares in thousands):
Period
 
Total Number of Shares Repurchased
 
Average Price Paid per Share(1)
 
Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program(2)
 
Approximate Dollar Value of Shares Available That May Yet Be Repurchased Under the Program
April 2017
 
169

 
$
22.50

 
169

 
(3) 
May 2017
 
117

 
22.75

 
117

 
(3) 
June 2017
 
58

 
22.75

 
58

 
(3) 
(1) 
On April 14, 2016, our board of directors established an estimated value per share of our common stock of $22.50. On May 9, 2017, our board of directors established an estimated value per share of our common stock of $22.75. The repurchase price per share for all stockholders is equal to the estimated value per share.
(2) 
All purchases of our equity securities by us in the three months ended June 30, 2017, were made pursuant to the share repurchase program (“SRP”). We announced the commencement of the SRP on November 25, 2013, and it was subsequently amended effective May 15, 2016.
(3) 
We currently limit the dollar value and number of shares that may yet be repurchased under the SRP, as described below.
Our SRP may provide a limited opportunity for stockholders to have shares of common stock repurchased, subject to certain restrictions and limitations that are discussed below:
During any calendar year, we may repurchase no more than 5% of the weighted-average number of shares outstanding during the prior calendar year.
We have no obligation to repurchase shares if the repurchase would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.
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 any cash already used for repurchases since the beginning of the same period; however, subject to the limitations described above, we may use other sources of cash at the discretion of the board of directors. The limitations described above do not apply to shares repurchased due to a stockholder’s death, “qualifying disability,” or “determination of incompetence.”
Only those stockholders who purchased their shares from us or received their shares from us (directly or indirectly) through one or more non-cash transactions may be able to participate in the SRP. In other words, once our shares are transferred for value by a stockholder, the transferee and all subsequent holders of the shares are not eligible to participate in the SRP.
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.

29



Our board of directors may amend, suspend or terminate the program upon 30 days’ notice. We may provide notice by including such information (a) in a current report on Form 8-K or in our annual or quarterly reports, all publicly filed with the SEC, or (b) in a separate mailing to the stockholders.
During the six months ended June 30, 2017, repurchase requests surpassed the funding limits under the SRP. Approximately $16.0 million of shares of common stock were repurchased under our SRP during the six months ended June 30, 2017. Repurchase requests in connection with a stockholder’s death, “qualifying disability,” or “determination of incompetence” were satisfied in full. The remaining repurchase requests that were in good order were satisfied on a pro rata basis. As of June 30, 2017, we had approximately 81,000 shares of unfulfilled repurchase requests, which were fully redeemed as of July 31, 2017.
Due to the program’s funding limits, the funds available for repurchases during the third quarter of 2017 are expected to be insufficient to meet all requests. When we are unable to fulfill all repurchase requests in a given month, we will honor requests on a pro rata basis to the extent funds are available. We will continue to fulfill repurchases sought upon a stockholder’s death, “qualifying disability,” or “determination of incompetence” in accordance with the terms of the SRP.

Item 3.        Defaults Upon Senior Securities
None.

Item 4.        Mine Safety Disclosures
Not applicable.
 
Item 5.        Other Information
None.
 
Item 6.        Exhibits
Ex.
Description
 
 
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1
Certification of Principal Executive Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002*
32.2
Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002*
101.1
The following information from the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations and Comprehensive Loss; (iii) Consolidated Statements of Equity; and (iv) Consolidated Statements of Cash Flows*
*Filed herewith.


30



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
PHILLIPS EDISON GROCERY CENTER REIT II, INC.
 
 
 
Date: August 9, 2017
By:
/s/ Jeffrey S. Edison
 
 
Jeffrey S. Edison
 
 
Chair of the Board and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
Date: August 9, 2017
By:
/s/ Devin I. Murphy
 
 
Devin I. Murphy
 
 
Chief Financial Officer
 
 
(Principal Financial Officer)


31