10-Q 1 pentr_20180630-10q.htm 10-Q Document


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
þ    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
¨     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to              
Commission file number 000-54691
 
pecohorizontallogoblue.jpg
PHILLIPS EDISON & COMPANY, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
 
Maryland
27-1106076
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
11501 Northlake Drive
 Cincinnati, Ohio
45249
(Address of Principal Executive Offices)
(Zip Code)
(513) 554-1110
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨ 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).   Yes  þ    No  ¨  
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). (Check one):    
Large Accelerated Filer
¨
Accelerated Filer
¨
 
 
 
 
Non-Accelerated Filer
þ (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
 
Emerging growth company
¨
 
 
 
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
As of July 31, 2018, there were 183.7 million outstanding shares of common stock of the Registrant.




INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1



w PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2018 AND DECEMBER 31, 2017
(Unaudited)
(In thousands, except per share amounts)
  
June 30, 2018
 
December 31, 2017
ASSETS
  
 
  
Investment in real estate:
  
 
  
Land and improvements
$
1,118,536

 
$
1,121,590

Building and improvements
2,265,554

 
2,263,381

Acquired in-place lease assets
311,829

 
313,432

Acquired above-market lease assets
53,432

 
53,524

Total investment in real estate assets
3,749,351

 
3,751,927

Accumulated depreciation and amortization
(544,034
)
 
(462,025
)
Total investment in real estate assets, net
3,205,317

 
3,289,902

Cash and cash equivalents
8,310

 
5,716

Restricted cash
16,728

 
21,729

Account receivable – affiliates
5,596

 
6,102

Corporate intangible assets, net
49,300

 
55,100

Goodwill
29,066

 
29,085

Other assets, net
137,806

 
118,448

Total assets
$
3,452,123

 
$
3,526,082

 
 
 
 
LIABILITIES AND EQUITY
  

 
  

Liabilities:
  

 
  

Debt obligations, net
$
1,838,472

 
$
1,806,998

Acquired below-market lease liabilities, net of accumulated amortization
 
 
 
of $32,327 and $27,388, respectively
84,974

 
90,624

Accounts payable – affiliates
948

 
1,359

Accounts payable and other liabilities
142,457

 
148,419

Total liabilities
2,066,851

 
2,047,400

Commitments and contingencies (Note 9)

 

Equity:
  

 
  

Preferred stock, $0.01 par value per share, 10,000 shares authorized, zero shares issued
  
 
  
and outstanding at June 30, 2018 and December 31, 2017, respectively

 

Common stock, $0.01 par value per share, 1,000,000 shares authorized, 183,304 and 185,233
  
 
  
shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively
1,833

 
1,852

Additional paid-in capital
1,608,590

 
1,629,130

Accumulated other comprehensive income (“AOCI”)
31,293

 
16,496

Accumulated deficit
(676,673
)
 
(601,238
)
Total stockholders’ equity
965,043

 
1,046,240

Noncontrolling interests
420,229

 
432,442

Total equity
1,385,272

 
1,478,682

Total liabilities and equity
$
3,452,123

 
$
3,526,082


See notes to consolidated financial statements.

2



PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017
(Unaudited)
(In thousands, except per share amounts)
  
Three Months Ended June 30,
 
Six Months Ended June 30,
  
2018
 
2017
 
2018
 
2017
Revenues:
  
 
  
 
 
 
 
Rental income
$
72,853

 
$
53,167

 
$
144,302

 
$
104,260

Tenant recovery income
21,557

 
16,454

 
43,994

 
33,390

Fees and management income
9,137

 

 
17,849

 

Other property income
626

 
230

 
1,227

 
504

Total revenues
104,173

 
69,851

 
207,372

 
138,154

Expenses:
  

 
  

 
 
 
 
Property operating
16,901

 
10,297

 
35,016

 
21,729

Real estate taxes
13,326

 
10,155

 
26,473

 
20,413

General and administrative
13,450

 
9,209

 
23,911

 
16,990

Depreciation and amortization
46,385

 
28,207

 
92,812

 
55,831

Impairment of real estate assets
10,939




10,939



Total expenses
101,001

 
57,868

 
189,151

 
114,963

Other:
  

 
  

 
 
 
 
Interest expense, net
(17,051
)
 
(9,501
)
 
(33,830
)
 
(17,891
)
Transaction expenses

 
(4,383
)
 

 
(6,023
)
Other (expense) income, net
(197
)
 
680

 
(304
)
 
636

Net loss
(14,076
)
 
(1,221
)
 
(15,913
)
 
(87
)
Net loss attributable to noncontrolling interests
2,725

 
28

 
2,962

 

Net loss attributable to stockholders
$
(11,351
)
 
$
(1,193
)
 
$
(12,951
)
 
$
(87
)
Earnings per common share:
  

 
  

 
 
 
 
Net loss per share - basic and diluted
$
(0.06
)
 
$
(0.01
)
 
$
(0.07
)
 
$
(0.00
)
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
184,450

 
183,126

 
185,171

 
183,178

Diluted
228,903

 
185,911

 
229,624

 
185,963

 
 
 
 
 
 
 
 
Comprehensive (loss) income:
  

 
  

 
 
 
 
Net loss
$
(14,076
)
 
$
(1,221
)
 
$
(15,913
)
 
$
(87
)
Other comprehensive (loss) income:
  

 
  

 
 
 
 
Change in unrealized gain (loss) on interest rate swaps
4,855

 
(2,616
)
 
18,343

 
(800
)
Comprehensive (loss) income
(9,221
)
 
(3,837
)
 
2,430

 
(887
)
Net loss attributable to noncontrolling interests
2,725

 
28

 
2,962

 

Other comprehensive loss (income) attributable to noncontrolling interests
1,782

 

 
(584
)
 

Comprehensive (loss) income attributable to stockholders
$
(4,714
)
 
$
(3,809
)
 
$
4,808

 
$
(887
)

See notes to consolidated financial statements.

3



PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
(Unaudited)
(In thousands, except per share amounts)
  
Common Stock
 
Additional Paid-In Capital
 
AOCI
 
Accumulated Deficit
 
Total Stockholders’ Equity
 
Noncontrolling Interest
 
Total Equity
  
Shares
 
Amount
 
 
 
 
 
 
Balance at January 1, 2017
185,062

 
$
1,851

 
$
1,627,098

 
$
11,916

 
$
(439,484
)
 
$
1,201,381

 
$
23,406

 
$
1,224,787

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

 

 
(43,307
)
 

 
(43,307
)
Dividend reinvestment plan (“DRIP”)
2,240

 
22

 
22,828

 

 

 
22,850

 

 
22,850

Change in unrealized loss on interest
   rate swaps

 

 

 
(800
)
 

 
(800
)
 

 
(800
)
Common distributions declared, $0.34
   per share

 

 

 

 
(60,956
)
 
(60,956
)
 

 
(60,956
)
Distributions to noncontrolling interests

 

 

 

 

 

 
(933
)
 
(933
)
Share-based compensation
3

 

 
27

 

 

 
27

 

 
27

Net loss

 

 

 

 
(87
)
 
(87
)
 

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

 
$
1,831

 
$
1,606,688

 
$
11,116

 
$
(500,527
)
 
$
1,119,108

 
$
22,473

 
$
1,141,581

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
185,233

 
$
1,852

 
$
1,629,130

 
$
16,496

 
$
(601,238
)
 
$
1,046,240

 
$
432,442

 
$
1,478,682

Share repurchases
(4,196
)
 
(42
)
 
(46,110
)
 

 

 
(46,152
)
 

 
(46,152
)
DRIP
2,262

 
23

 
24,876

 

 

 
24,899

 

 
24,899

Change in unrealized gain on interest
rate swaps

 

 

 
14,797

 

 
14,797

 
3,546

 
18,343

Common distributions declared, $0.34
   per share

 

 

 

 
(62,484
)
 
(62,484
)
 

 
(62,484
)
Distributions to noncontrolling interests

 

 

 

 

 

 
(14,097
)
 
(14,097
)
Share-based compensation
5

 

 
719

 

 

 
719

 
1,300

 
2,019

Other

 

 
(25
)
 

 

 
(25
)
 

 
(25
)
Net loss

 

 

 

 
(12,951
)
 
(12,951
)
 
(2,962
)
 
(15,913
)
Balance at June 30, 2018
183,304

 
$
1,833

 
$
1,608,590

 
$
31,293

 
$
(676,673
)
 
$
965,043

 
$
420,229

 
$
1,385,272


See notes to consolidated financial statements.

4



PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
(Unaudited)
(In thousands)
  
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
  
 
  
Net loss
$
(15,913
)
 
$
(87
)
Adjustments to reconcile net loss to net cash provided by operating activities:
  

 
  

Depreciation and amortization
84,216

 
55,051

Impairment of real estate assets
10,939

 

Depreciation and amortization of corporate assets
7,672

 

Amortization of deferred financing expense
2,401

 
2,389

Net amortization of above- and below-market leases
(1,990
)
 
(686
)
Gain on disposal of real estate assets
(877
)
 

Net loss (gain) on write-off of unamortized capitalized leasing commissions,
 
 
 
market debt adjustments, and deferred financing expense
153

 
(411
)
Change in fair value of contingent liability
1,500

 

Straight-line rent
(2,471
)
 
(1,943
)
Share-based compensation
1,994

 

Other
76

 
(673
)
Changes in operating assets and liabilities:
  

 
  

Accounts receivable – affiliates
506

 

Other assets
(1,208
)
 
(8,327
)
Accounts payable – affiliates
(411
)
 
584

Accounts payable and other liabilities
(8,775
)
 
3,060

Net cash provided by operating activities
77,812


48,957

CASH FLOWS FROM INVESTING ACTIVITIES:
  

 
  

Real estate acquisitions
(9,222
)
 
(75,824
)
Capital expenditures
(17,346
)
 
(11,483
)
Proceeds from sale of real estate
13,300

 
1,137

Net cash used in investing activities
(13,268
)
 
(86,170
)
CASH FLOWS FROM FINANCING ACTIVITIES:
  

 
  

Net change in credit facility
(15,000
)
 
120,000

Proceeds from mortgages and loans payable
65,000

 

Payments on mortgages and loans payable
(20,542
)
 
(38,934
)
Payments of deferred financing expenses

 
(324
)
Distributions paid, net of DRIP
(37,819
)
 
(38,520
)
Distributions to noncontrolling interests
(14,096
)
 
(782
)
Repurchases of common stock
(44,494
)
 
(43,307
)
Net cash used in financing activities
(66,951
)
 
(1,867
)
NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
(2,407
)
 
(39,080
)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH:
  

 
  

Beginning of period
27,445

 
49,946

End of period
$
25,038

 
$
10,866

 
 
 
 
RECONCILIATION TO CONSOLIDATED BALANCE SHEETS
 
 
 
Cash and cash equivalents
$
8,310

 
$
5,367

Restricted cash
16,728

 
5,499

Cash, cash equivalents, and restricted cash at end of period
$
25,038

 
$
10,866


5



  
2018
 
2017
SUPPLEMENTAL CASH FLOW DISCLOSURE, INCLUDING NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
Cash paid for interest
$
32,422

 
$
16,846

Fair value of assumed debt

 
30,832

Cash paid for income taxes
282

 

Capital leases
739

 

Accrued capital expenditures
2,428

 
3,055

Change in distributions payable
(235
)
 
(414
)
Change in distributions payable - noncontrolling interests
2

 
151

Change in accrued share repurchase obligation
1,658

 

Distributions reinvested
24,899

 
22,850


See notes to consolidated financial statements.

6



Phillips Edison & Company, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

1. ORGANIZATION
Phillips Edison & Company, Inc. (“we,” the “Company,” “our,” or “us”) was formed as a Maryland corporation in October 2009. Substantially all of our business is conducted through Phillips Edison Grocery Center Operating Partnership I, L.P., (the “Operating Partnership”), a Delaware limited partnership formed in December 2009. We are a limited partner of the Operating Partnership, and our wholly owned subsidiary, Phillips Edison Grocery Center OP GP I LLC, is the sole general partner of the Operating Partnership.
We invest primarily in well-occupied, grocery-anchored, neighborhood and community shopping centers that have a mix of creditworthy national and regional retailers that sell necessity-based goods and services in strong demographic markets throughout the United States. In addition to managing our own shopping centers, our third-party investment management business provides comprehensive real estate and asset management services to certain non-traded, publicly registered real estate investment trusts (“REITs”) and private funds (“Managed Funds”). The Managed Funds include Phillips Edison Grocery Center REIT II, Inc. (“REIT II”), Phillips Edison Grocery Center REIT III, Inc. (“REIT III”), Phillips Edison Limited Partnership (“PELP”), and Necessity Retail Partners (“NRP”).
As of June 30, 2018, we owned fee simple interests in 235 real estate properties.
In July 2018 we entered into an Agreement and Plan of Merger ("Merger Agreement") pursuant to which, subject to the satisfaction or waiver of certain conditions, we will merge with REIT II, and we will continue as the surviving corporation (“Merger”). To complete the proposed Merger, we will issue 2.04 shares of our common stock in exchange for each issued and outstanding share of REIT II common stock, subject to closing adjustments. For a more detailed discussion, see Note 3.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by management. For example, significant estimates and assumptions have been made with respect to the useful lives of assets, recoverable amounts of receivables, and other fair value measurement assessments required for the preparation of the consolidated financial statements. As a result, these estimates are subject to a degree of uncertainty.
Other than those noted below, there have been no changes to our significant accounting policies during the six months ended June 30, 2018. For a full summary of our accounting policies, refer to our 2017 Annual Report on Form 10-K filed with the SEC on March 30, 2018.
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 & Company, Inc. for the year ended December 31, 2017, which are included in our 2017 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, 2018, 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.
Income Taxes—Our consolidated financial statements include the operations of one wholly owned subsidiary that has jointly elected to be treated as a Taxable REIT Subsidiary (“TRS”) and is subject to U.S. federal, state, and local income taxes at regular corporate tax rates. As of June 30, 2018 and December 31, 2017, a full valuation allowance was recorded for the entire amount of the net deferred tax asset. During the three and six months ended June 30, 2018, there was no tax expense recorded due to the full valuation allowance and our having a net operating loss. We are continuing to evaluate the impact of the 2017 Tax Cuts and Jobs Act (“2017 Tax Act”) on the organization as a whole, but we do not expect there to be a material impact on our consolidated financial statements.

7



Newly Adopted and Recently Issued Accounting Pronouncements—The following table provides a brief description of newly adopted accounting pronouncements and their effect on our consolidated financial statements:
Standard
 
Description
 
Date of Adoption
 
Effect on the Financial Statements or Other Significant Matters
ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
 
This update clarifies guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting.
 
January 1, 2018
 
The adoption of this standard did not have a material impact on our consolidated financial statements. We will apply the guidance to any future modifications of share-based compensation awards.
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 nonfinancial asset.
 
January 1, 2018
 
We did not record any cumulative adjustment in connection with the adoption of the new pronouncement. We determined that these changes did not have any impact on our consolidated financial statements.
ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment (Topic 350)
 
This update amends existing guidance in order to simplify impairment testing for goodwill. It is effective for annual reporting periods beginning after January 1, 2021, but early adoption is permitted.
 
January 1, 2018
 
We elected to adopt this standard as of January 1, 2018. The adoption of this standard did not have any impact on our consolidated financial statements.
ASU 2016-15, Statement of Cash Flows (Topic 230);
ASU 2016-18, Statement of Cash Flows (Topic 230)
 
These updates address the presentation of eight specific cash receipts and cash payments on the statement of cash flows, as well as clarify the classification and presentation of restricted cash on the statement of cash flows.
 
January 1, 2018
 
We adopted these ASUs by applying a retrospective transition method which requires a restatement of our consolidated statement of cash flows for all periods presented.
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.
 
January 1, 2018
 
Our revenue-producing contracts are primarily leases that are not within the scope of this standard. As a result, the adoption of this standard did not have a material impact on our rental or reimbursement revenue. However, the standard does apply to a majority of our fees and management income. We have evaluated the impact of this standard on our fees and management income; it did not have a material impact on our revenue recognition, but we have provided additional disclosures around fees and management revenue. We adopted this guidance on a modified retrospective basis.
The following table provides a brief description of recent accounting pronouncements that could have a material effect on our consolidated financial statements:
Standard
 
Description
 
Date of Adoption
 
Effect on the Financial Statements or Other Significant Matters
ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting
 
The amendments in this update expand the scope of Topic 718: Compensation—Stock Compensation to include share-based payment transactions for acquiring goods and services from non-employees, except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). This update is effective for public business entities for fiscal years beginning after December 15, 2018. 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.


8



Standard
 
Description
 
Date of Adoption
 
Effect on the Financial Statements or Other Significant Matters
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
 
The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This update is effective for public entities in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted after December 15, 2018.
 
January 1, 2020
 
We are currently evaluating the impact the adoption of this standard will have on our consolidated financial statements.
ASU 2016-02, Leases (Topic 842);

ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842;

ASU 2018-10, Codification Improvements to Topic 842, Leases; and

ASU 2018-11, Leases (Topic 842): Targeted Improvements
 
These updates amend existing guidance by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Early adoption is permitted as of the original effective date.
 
January 1, 2019
 
We are currently evaluating the impact the adoption of these standards will have on our consolidated financial statements. We have identified areas within our accounting policies we believe could be impacted by the new standard. This standard impacts the lessor’s ability to capitalize certain costs related to leasing, which will result in a reduction in the amount of execution costs currently being capitalized in connection with leasing activities and an increase to our Property Operating expenses. The standard will also require new disclosures within the accompanying notes to the consolidated financial statements.

We expect to adopt the practical expedients available for implementation under the standard. By adopting these practical expedients, we will not be required to reassess (i) whether an expired or existing contract meets the definition of a lease; (ii) the lease classification at the adoption date for existing leases; and (iii) whether the costs previously capitalized as initial direct costs would continue to be amortized. This allows us to continue to account for our leases where we are the lessee as operating leases, however, any new or renewed leases may be classified as financing leases. We currently have fewer than 50 leases of this type.
We also expect to recognize right of use assets and lease liability on our consolidated balance sheets related to certain leases where we are the lessee.

In July 2018, the FASB issued an ASU related to ASC 842. The update allows lessors to use a practical expedient to account for non-lease components and related lease components as a single lease component instead of accounting for them separately, if certain conditions are met. We expect to utilize this practical expedient

We will continue to evaluate the effect the adoption of these ASUs will have on our consolidated financial statements. However, we currently believe that the adoption will not have a material impact for operating leases where we are a lessor and will continue to record revenues from rental properties for our operating leases on a straight-line basis. We are still evaluating the impact for leases where we are the lessee.
Reclassifications—The following line items on our consolidated statement of operations and comprehensive income for the three and six months ended June 30, 2017, were reclassified:
Unrealized Gain (Loss) on Derivatives and Reclassification of Derivative Loss to Interest Expense were combined to Change in Unrealized Gain on Interest Rate Swaps.
Acquisition Expenses were combined to General and Administrative.

3. REIT II MERGER
In July 2018, we entered into the Merger Agreement, pursuant to which we will merge with REIT II in a 100% stock transaction valued at approximately $1.9 billion. This proposed transaction will create a portfolio of 321 grocery-anchored shopping centers encompassing approximately 36.6 million square feet in established trade areas across 33 states.
To complete the proposed Merger, we will issue 2.04 shares of our common stock in exchange for each issued and outstanding share of REIT II common stock, which is equivalent to $22.54 based on our most recent estimated net asset value per share

9



(“EVPS”) of $11.05. The exchange ratio is based on a thorough review of the relative valuation of each entity, including factoring in our growing investment management business as well as each company’s transaction costs. REIT II’s outstanding debt of approximately $800 million is expected to be refinanced or assumed by us at closing under the terms of the Merger Agreement.
The Merger Agreement provides REIT II with a 30-day go-shop period pursuant to which they may solicit, receive, evaluate, and enter into negotiations with respect to alternative proposals from third-parties. The Merger Agreement also provides certain termination rights for REIT II and us. In connection with the termination of the Merger Agreement, under certain specified circumstances, (i) REIT II may be required to pay us a termination fee of $15.9 million in connection with the go-shop provision or $31.7 million in connection with termination for reasons other than the go-shop provision, and (ii) we may be required to pay REIT II a termination fee of $75.6 million.
On a pro forma basis, upon completion of the mergers, we estimate that continuing PECO stockholders will own approximately 71% of the issued and outstanding shares of the Combined Company on a fully diluted basis (determined as if each PECO OP unit were exchanged for one share of PECO common stock), and former REIT II stockholders will own approximately 29% of the issued and outstanding shares of the Combined Company on a fully diluted basis (determined as if each PECO OP unit were exchanged for one share of PECO common stock).
After consideration of all applicable factors pursuant to the business combination accounting rules under ASC 805, Business Combinations, including the application of a screen test to evaluate if substantially all the fair value of the acquired properties is concentrated in a single asset or group of similar assets, we have concluded that the Merger will be treated as an asset acquisition under GAAP. As of June 30, 2018, we have capitalized $0.8 million in costs related to the merger.

4. PELP ACQUISITION
On October 4, 2017, we completed a transaction to acquire certain real estate assets, the third-party investment management business, and the captive insurance company of PELP in a stock and cash transaction (“PELP transaction”). Under the terms of this transaction, the following consideration was given in exchange for the contribution of PELP’s ownership interests in 76 shopping centers, its third-party investment management business, and its captive insurance company (in thousands):
 
Amount
Fair value of Operating Partnership units (“OP units”) issued
$
401,630

Debt assumed:
 
Corporate debt
432,091

Mortgages and notes payable
72,649

Cash payments
30,420

Fair value of earn-out
38,000

Total consideration
974,790

PELP debt repaid by the Company on the transaction date
(432,091
)
Net consideration
$
542,699

We issued 39.4 million OP units with an estimated fair value per unit of $10.20 at the time of the transaction. Certain of our executive officers who received OP units as part of the PELP transaction entered into an agreement which provides that they will not transfer their OP units for either two or three years following the closing. The remaining holders of the OP units are subject to the terms of exchange for shares of common stock outlined in the Third Amended and Restated Agreement of Limited Partnership (“Partnership Agreement”) (see Note 10). The terms of the PELP transaction include an earn-out structure with an opportunity for up to an additional 12.5 million OP units to be issued. For more detail regarding this earn-out, see Note 14.
Immediately following the closing of the PELP transaction, our shareholders owned approximately 80.6% and former PELP shareholders owned approximately 19.4% of the combined company.

10



Assets Acquired and Liabilities Assumed—The PELP transaction was accounted for using the acquisition method of accounting under ASC 805, Business Combinations, which requires, among other things, the assets acquired and liabilities assumed to be recognized at their fair values as of the acquisition date. The preliminary fair market value of the assets acquired and liabilities assumed was based on a valuation report prepared by a third-party valuation specialist that was subject to management’s review and approval. The following table summarizes the purchase price allocation based on that report (in thousands):
 
Amount
Assets:
 
Land and improvements
$
269,140

Building and improvements
574,173

Intangible lease assets
93,506

Cash
5,930

Accounts receivable and other assets
42,426

Management contracts
58,000

Goodwill
29,066

Total assets acquired
1,072,241

Liabilities:
 
Accounts payable and other liabilities
48,342

Acquired below-market leases
49,109

Total liabilities acquired
97,451

Net assets acquired
$
974,790

The allocation of the purchase price was based on management’s assessment, which may change in the future as more information becomes available and could have an impact on the unaudited pro forma financial information presented below. Subsequent adjustments made to the purchase price allocation upon the completion of our fair value assessment process will not exceed one year from the acquisition date. The allocation of the purchase price above required a significant amount of judgment and represented management’s best estimate of the fair value as of the acquisition date.
Intangible Assets and Liabilities—The fair value and weighted-average amortization periods for the intangible assets and liabilities acquired in the PELP transaction as of the transaction date were as follows (dollars in thousands, useful life in years):
 
Fair Value
Weighted-Average Useful Life
Management contracts
$
58,000

5
Acquired in-place leases
83,305

9
Acquired above-market leases
10,201

7
Acquired below-market leases
(49,109
)
13
Goodwill—In connection with the PELP transaction, we recorded goodwill of $29.1 million as a result of the consideration exceeding the fair value of the net assets acquired. Goodwill represents the estimated future benefits arising from other assets acquired that could not be individually identified and separately recognized. We do not expect that the goodwill will be deductible for tax purposes. The goodwill recorded represents our management structure and its ability to generate additional opportunities for revenue and raise additional funds, and therefore the full amount of goodwill was allocated to the Investment Management segment, which comprises one reporting unit. For more information about each of our reporting segments, see Note 15.
Results of Operations—The consolidated net assets and results of operations of PELP’s contributions were included in the consolidated financial statements from the transaction date going forward and resulted in the following impact to Total Revenues and Net Loss for the three and six months ended June 30, 2018 (in thousands):
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Revenues
$
21,482

 
$
42,952

Net loss
(9,837
)
 
(8,536
)
Acquisition Costs—We incurred approximately $17.0 million of costs related to the PELP transaction, $6.0 million of which was incurred during the six months ended June 30, 2017, and was recorded as Transaction Expenses on the consolidated statements of operations. No costs related to the PELP transaction were recorded in 2018.

11



Pro Forma Results (Unaudited)—The following unaudited pro forma information summarizes selected financial information from our combined results of operations, as if the PELP transaction had occurred on January 1, 2016. These results contain certain nonrecurring adjustments, such as the elimination of transaction expenses incurred related to the PELP transaction and the elimination of intercompany activity related to creating an internalized management structure. This pro forma information is presented for informational purposes only, and may not be indicative of what actual results of operations would have been had the PELP transaction occurred at the beginning of the period, nor does it purport to represent the results of future operations.
(in thousands)
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
Pro forma revenues
$
102,775

 
$
201,454

Pro forma net income attributable to stockholders
465

 
1,264


5. REAL ESTATE ACTIVITY
Acquisitions—During the six months ended June 30, 2018, we acquired one grocery-anchored shopping center. That acquisition closed out the Internal Revenue Code (“IRC”) Section 1031 like-kind exchange outstanding at December 31, 2017. During the six months ended June 30, 2017, we acquired five grocery-anchored shopping centers. All of the 2017 and 2018 acquisitions were classified as asset acquisitions. As such, most acquisition-related costs were capitalized and are included in the total purchase prices shown below. Our real estate asset acquired during the six months ended June 30, 2018, was as follows (dollars in thousands):
Property Name
 
Location
 
Anchor Tenant
 
Acquisition Date
 
Purchase Price
 
Square Footage
 
Leased % of Rentable Square Feet at Acquisition
Shoppes of Lake Village
 
Leesburg, FL
 
Publix
 
2/26/2018
 
$
8,423

 
135.437

 
71.3
%
During the six months ended June 30, 2017, we acquired the following real estate assets (dollars in thousands):
Property Name
 
Location
 
Anchor Tenant
 
Acquisition Date
 
Purchase Price
 
Square Footage
 
Leased % of Rentable Square Feet at Acquisition
Atwater Marketplace
 
Atwater, CA
 
Save Mart
 
2/10/2017
 
$
15,041

 
96,224

 
94.6
%
Rocky Ridge Station(1)
 
Roseville, CA
 
Sprouts
 
4/18/2017
 
37,271

 
93,337

 
96.3
%
Greentree Station
 
Racine, WI
 
Pick ‘n Save
 
5/5/2017
 
12,309

 
82,659

 
90.3
%
Titusville Station
 
Titusville, FL
 
Publix
 
6/15/2017
 
13,817

 
117,507

 
71.7
%
Sierra Station(1)
 
Corona, CA
 
Ralph’s
 
6/20/2017
 
29,137

 
110,904

 
94.0
%
(1) 
The purchase price includes debt assumed as part of the acquisition.
The fair value at acquisition and weighted-average amortization periods for in-place, above-market, and below-market lease intangibles acquired as part of the above transactions during the six months ended June 30, 2018 and 2017, are as follows (dollars in thousands, weighted-average useful life in years):
 
2018
 
2017
 
Fair Value
 
Weighted-Average Useful Life
 
Fair Value
 
Weighted-Average Useful Life
Acquired in-place leases
$
946

 
6
 
$
9,611

 
13
Acquired above-market leases
74

 
3
 
850

 
7
Acquired below-market leases
(457
)
 
16
 
(2,622
)
 
20
Dispositions—During the six months ended June 30, 2018, we sold two grocery-anchored shopping centers. We had no dispositions during the six months ended June 30, 2017. Our real estate assets disposed of during the six months ended June 30, 2018, were as follows (dollars in thousands):
Property Name
 
Location
 
Anchor Tenant
 
Disposition Date
 
Sale Price
 
Gain
 
Square Footage
Lakeshore Crossing
 
Gainesville, GA
 
Lowe’s
 
5/15/2018
 
$
9,270

 
$
208

 
123,948

Lake Wales Station
 
Lake Wales, FL
 
CVS
 
5/30/2018
 
4,100

 
777

 
11,220

The gain on these dispositions is included as Other Expense (Income), Net on the consolidated statements of operations.
Impairment of Real Estate Assets—During the three months ended June 30, 2018, we recognized an impairment charge totaling $10.9 million associated with the anticipated disposition of a certain property with a net book value in excess of its estimated fair value. Our estimated fair value was based upon the contracted price to sell. We have applied reasonable estimates and judgments in determining the level of impairments recognized.

12




6. OTHER ASSETS, NET
The following is a summary of Other Assets, Net outstanding as of June 30, 2018 and December 31, 2017 (in thousands):
 
June 30, 2018
 
December 31, 2017
Other assets, net:
 
 
 
Deferred leasing commissions and costs
$
32,120

 
$
29,055

Deferred financing costs
13,971

 
13,971

Office equipment, including capital lease assets, and other
12,070

 
10,308

Total depreciable and amortizable assets
58,161

 
53,334

Accumulated depreciation and amortization
(21,637
)
 
(17,121
)
Net depreciable and amortizable assets
36,524

 
36,213

Accounts receivable, net
36,488

 
41,211

Deferred rent receivable, net
20,687

 
18,201

Derivative asset
34,839

 
16,496

Prepaid expenses
5,531

 
4,232

Investment in affiliates
903

 
902

Other
2,834

 
1,193

Total other assets, net
$
137,806

 
$
118,448


7. DEBT OBLIGATIONS
The following is a summary of the outstanding principal balances and interest rates, which include the effect of derivative financial instruments, on our debt obligations as of June 30, 2018 and December 31, 2017 (in thousands):
   
Interest Rate
 
June 30, 2018
 
December 31, 2017
Revolving credit facility(1)
LIBOR + 1.40%
 
$
46,568

 
$
61,569

Term loans(2)
2.51% - 3.93%
 
1,205,000

 
1,140,000

Secured loan facility due 2026
3.55%
 
175,000

 
175,000

Secured loan facility due 2027
3.52%
 
195,000

 
195,000

Mortgages and other(3) 
3.75% - 7.91%
 
226,415

 
246,217

Assumed market debt adjustments, net(4) 
 
 
4,517

 
5,254

Deferred financing costs(5)
 
 
(14,028
)
 
(16,042
)
Total  
 
 
$
1,838,472

 
$
1,806,998

(1) 
The gross borrowings and payments under our revolving credit facility were $151.0 million and $166.0 million, respectively, during the six months ended June 30, 2018. The revolving credit facility has a capacity of $500 million and matures in October 2021, with additional options to extend the maturity to October 2022.
(2) 
We have six term loans with maturities ranging from 2019 to 2024. The $100 million term loan due in 2019 has options to extend the maturity to 2021. We will consider options for refinancing the loan or exercising the option upon maturity. As of June 30, 2018, the availability on our revolving credit facility exceeded the balance on the loan. The $175 million term loan due in 2020 has options to extend its maturity to 2021. We executed a $65 million delayed draw in January 2018 on one of our term loans entered into in October 2017.
(3) 
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, 2018 and December 31, 2017.
(4) 
Net of accumulated amortization of $4.2 million and $3.7 million as of June 30, 2018 and December 31, 2017, respectively.
(5) 
Net of accumulated amortization of $7.0 million and $5.4 million as of June 30, 2018 and December 31, 2017, respectively.
As of June 30, 2018 and December 31, 2017, the weighted-average interest rate, including the effect of derivative financial instruments, for all of our debt obligations was 3.5% and 3.4%, respectively.

13



The allocation of total debt between fixed- and variable-rate as well as between secured and unsecured, excluding market debt adjustments and deferred financing costs, as of June 30, 2018 and December 31, 2017, is summarized below (in thousands):
   
June 30, 2018
 
December 31, 2017
As to interest rate:(1)
 
 
 
Fixed-rate debt
$
1,588,415

 
$
1,608,217

Variable-rate debt
259,568

 
209,569

Total
$
1,847,983

 
$
1,817,786

As to collateralization:
 
 
 
Unsecured debt
$
1,252,258

 
$
1,202,476

Secured debt
595,725

 
615,310

Total  
$
1,847,983

 
$
1,817,786

(1) 
Includes the effects of derivative financial instruments (see Notes 8 and 14).

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 interest rate swaps 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—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 change in the fair value of derivatives designated, and that qualify, as cash flow hedges is recorded in AOCI and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the six months ended June 30, 2018 and 2017, such derivatives were used to hedge the variable cash flows associated with certain variable-rate debt. The ineffectiveness previously reported in earnings for the periods ended June 30, 2017, was adjusted to reflect application of the provisions of ASU 2017-12, Derivatives and Hedging (Topic 815), as of the beginning of 2017. This adjustment was not material.
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 $7.1 million will be reclassified from Other Comprehensive Income (“OCI”) as a decrease to Interest Expense, Net. 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, 2018 and December 31, 2017 (notional amount in thousands):
Count
Fixed LIBOR
Maturity Date
Notional Amount
6
1.2% - 2.2%
2019-2024
$
992,000

The table below details the location of the gain or loss recognized on interest rate derivatives designated as cash flow hedges in the consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2018 and 2017 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
  
2018
 
2017
 
2018
 
2017
Amount of gain (loss) recognized in OCI on derivative
$
5,608

 
$
(2,914
)
 
$
19,047

 
$
(1,765
)
Amount of (gain) loss reclassified from AOCI into interest
   expense
(753
)
 
378

 
(704
)
 
975

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, 2018, none of our derivatives were in a liability position, and therefore the fair value includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements. As of June 30, 2018, we had not posted any collateral related to these agreements and were not in breach of any agreement provisions.


14



9. 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 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.

10. EQUITY
On May 9, 2018, our board of directors (“Board”) increased the EVPS of our common stock to $11.05 based substantially on the estimated market value of our portfolio of real estate properties and our third-party investment management business as of March 31, 2018. We engaged a third-party valuation firm to provide a calculation of the range in EVPS of our common stock as of March 31, 2018, which reflected certain balance sheet assets and liabilities as of that date. Previously, on November 8, 2017, our Board increased the EVPS of our common stock to $11.00 from $10.20 based substantially on the estimated market value of our portfolio of real estate properties and our third-party investment management business as of October 5, 2017, the first full business day after the closing of the PELP transaction.
Shares of our common stock are issued under the DRIP and redeemed under the Share Repurchase Program (“SRP”), as discussed below, at the same price as the EVPS in effect at the time of issuance or redemption.
Dividend Reinvestment Plan—The DRIP allows stockholders to invest distributions in additional shares of our common stock. Stockholders who elect to participate in the DRIP, and who are subject to U.S. federal income taxation laws, will incur a tax liability on an amount equal to the fair value on the relevant distribution date of the shares of our common stock purchased with reinvested distributions, even though such stockholders have elected not to receive the distributions in cash. In connection with the proposed Merger (see Note 3), the DRIP was temporarily suspended for the month of July 2018; therefore, all DRIP participants received their July 2018 distribution in cash rather than in stock. The DRIP plan resumed in August 2018.
Share Repurchase Program—Our SRP provides an opportunity for stockholders to have shares of common stock repurchased, subject to certain restrictions and limitations. The Board reserves the right, in its sole discretion, at any time and from time to time, to reject any request for repurchase. Further, 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. In connection with the Merger, the SRP was also temporarily suspended for the month of July 2018 and resumed in August 2018.
During the six months ended June 30, 2018, repurchase requests surpassed the funding limits under the SRP. Approximately 4.2 million shares of our common stock were repurchased under the SRP during the six months ended June 30, 2018. 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, 2018, we had 13.4 million shares of unfulfilled repurchase requests, which will be treated as requests for repurchase during future months until satisfied or withdrawn. Due to the program's funding limits, no funds will be available for the remainder of 2018. However, 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.
Convertible Noncontrolling Interests—As part of the PELP transaction, we issued 39.4 million OP units that are classified as Noncontrolling Interests. Prior to the PELP transaction, the Operating Partnership also issued limited partnership units that were designated as Class B units for asset management services provided by our former advisor. Upon closing of the PELP transaction, all outstanding Class B units vested and were converted to OP units.
Under the terms of the Third Amended and Restated Agreement of Limited Partnership, OP unit holders may elect to exchange OP units. The Operating Partnership controls the form of the redemption, and may elect to exchange OP units for shares of our common stock, provided that the OP units have been outstanding for at least one year. As the form of redemption for OP units is within our control, the OP units outstanding as of June 30, 2018 and December 31, 2017, are classified as Noncontrolling Interests within permanent equity on our consolidated balance sheets. The cumulative distributions that have been paid on OP units are included in Distributions to Noncontrolling Interests on the consolidated statements of equity. There were 44.5 million OP units outstanding as of June 30, 2018 and December 31, 2017.
Nonconvertible Noncontrolling Interests—In addition to partnership units of the Operating Partnership, Noncontrolling Interests also includes a 25% ownership share of one of our subsidiaries who provides advisory services, which was not significant to our results.


15



11. 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 Net Loss Attributable to 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.

OP units held by limited partners other than us are considered to be participating securities because they contain non-forfeitable rights to dividends or dividend equivalents, and have the potential to be exchanged for an equal number of shares of our common stock in accordance with the terms of the Partnership Agreement.
The impact of OP units on basic and diluted EPS has been calculated using the two-class method whereby earnings are allocated to the OP units based on dividends declared and the units’ participation rights in undistributed earnings. The effects of the two-class method on basic and diluted EPS were immaterial to the consolidated financial statements as of June 30, 2018 and 2017.
The following table provides a reconciliation of the numerator and denominator of the earnings per share calculations for the three and six months ended June 30, 2018 and 2017 (in thousands, except per share amounts):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net loss attributable to stockholders - basic
$
(11,351
)
 
$
(1,193
)
 
$
(12,951
)
 
$
(87
)
Net loss attributable to convertible OP units(1)
(2,756
)
 
(28
)
 
(3,090
)
 

Net loss attributable to stockholders and convertible noncontrolling interests - diluted
$
(14,107
)
 
$
(1,221
)
 
$
(16,041
)
 
$
(87
)
Denominator:
 
 
 
 
 
 
 
Weighted-average shares - basic
184,450

 
183,126

 
185,171

 
183,178

OP units(1)
44,453


2,785

 
44,453

 
2,785

Adjusted weighted-average shares - diluted
228,903

 
185,911

 
229,624

 
185,963

Earnings per common share:
 
 
 
 
 
 
 
Net loss attributable to stockholders -
   basic and diluted
$
(0.06
)
 
$
(0.01
)
 
$
(0.07
)
 
$
(0.00
)
(1) OP units include units previously issued for asset management services provided under our former advisory agreement (see Note 13), as well as units issued as part of the PELP transaction (Note 4), all of which are convertible into common shares. The Operating Partnership loss attributable to these OP units, which is included as a component of Net Income Attributable to Noncontrolling Interests on the consolidated statements of operations, has been added back in the numerator as these OP units were included in the denominator for all years presented.
As of June 30, 2018, approximately 1.0 million unvested restricted stock awards granted to employees and directors were outstanding. These securities were anti-dilutive and, as a result, were excluded from the weighted-average common shares used to calculate diluted EPS. The unvested restricted stock awards outstanding at June 30, 2017, were immaterial. There were 2.9 million unvested Class B units outstanding as of June 30, 2017. As these units were unvested, they were not included in the diluted earnings per share calculation. We had no unvested Class B units outstanding as of June 30, 2018.

12. REVENUE RECOGNITION AND RELATED PARTY REVENUE
Effective January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers, using the modified retrospective approach. The majority of our revenue is lease revenue derived from our Owned Real Estate segment (see Note 15). We record these amounts as Rental Income and Tenant Recovery Income on the consolidated statements of operations. These revenue amounts are excluded from the scope of ASU 2014-09, as they are accounted for under Topic 840, Leases.
Fee revenues from our Investment Management segment are earned by providing services to the Managed Funds. These fees are within the scope of ASU 2014-09 and are recorded as Fees and Management Income on the consolidated statements of operations. Additional immaterial revenue is recorded as Other Property Income on the consolidated statements of operations. The adoption of ASU 2014-09 did not result in any retrospective adjustments to prior periods as our previous revenue recognition policies aligned with the updated guidance.
The Investment Management segment provides services to Managed Funds that are considered related parties. These services primarily include asset acquisition and disposition services, asset management, operating and leasing of properties, construction management, and other general and administrative responsibilities. These services are currently provided under two types of contracts: advisory agreements and property management agreements. Advisory agreements have a duration of one year and are renewed annually at the discretion of the respective boards, but can be terminated upon notice by either party. Property management agreements include both property management agreements and master services agreements, which we have determined should be evaluated as a single agreement for revenue recognition under GAAP. Property management agreements have no defined term, but can be canceled by either party upon 30 days’ notice.

16



Summarized below is all fee and management revenue for the Investment Management segment. The revenue includes the fees and reimbursements earned by us from the Managed Funds for the three and six months ended June 30, 2018, and other revenues that are not in the scope of ASC 606, Revenue from Contracts with Customers, but are included in this table for the purpose of disclosing all related party revenues (in thousands):
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
REIT II
 
Other Parties
 
Total
 
REIT II
 
Other Parties
 
Total
Advisory revenue:
 
 
 
 
 
 
 
 
 
 
 
Acquisition fees
$
7

 
$

 
$
7

 
$
162

 
$
256

 
$
418

Asset management fees
3,064

 
294

 
3,358

 
6,129

 
575

 
6,704

Other advisory fees and reimbursements
578

 
132

 
710

 
653

 
160

 
813

Total advisory revenue
3,649

 
426

 
4,075

 
6,944

 
991

 
7,935

 
 
 
 
 
 
 
 
 
 
 
 
Property Management and Services revenue:
 
 
 
 
 
 
 
 
 
 
 
Property management fees
2,125

 
364

 
2,489

 
4,204

 
716

 
4,920

Leasing commissions
1,340

 
162

 
1,502

 
2,512

 
413

 
2,925

Construction management fees
127

 
110

 
237

 
202

 
132

 
334

Other property management fees and
   reimbursements
188

 
100

 
288

 
422

 
243

 
665

Total property management and services revenue
3,780

 
736

 
4,516

 
7,340

 
1,504

 
8,844

 
 
 
 
 
 
 
 
 
 
 
 
Other revenue:
 
 
 
 
 
 
 
 
 
 
 
Insurance premiums(1)
109

 
437

 
546

 
189

 
881

 
1,070

Non-operating property revenue

 
137

 
137

 

 
270

 
270

Total fees and management income
$
7,538

 
$
1,736

 
$
9,274

 
$
14,473

 
$
3,646

 
$
18,119

(1) 
Insurance premium income from other parties was from third parties not affiliated with us.
Because the PELP transaction occurred in October 2017, no fee and management income was earned during the six months ended June 30, 2017.
Advisory Agreements—Under our advisory agreements, we earn revenue for managing day-to-day activities and implementing the investment strategy for the Managed Funds. The wide variety of duties as the advisor within these contracts makes determining the performance obligations within the contracts a matter of judgment. We have concluded that each of the separately disclosed fee types in the below table represents a separate performance obligation within the contract.
Due to the nature of the services being provided under the Advisory Agreements, each performance obligation within the contract has a variable component. Therefore when we determine the transaction price for the contract we are required to constrain our estimate to an amount that is not probable of significant revenue reversal. For the acquisition and disposition services, compensation only occurs if the transaction takes place, and the amount of compensation is dependent upon the contract price for the transaction. Property acquisition and disposition fees are recognized when we satisfy a performance obligation by acquiring a property or transferring control of a property. These fees are billed subsequent to the acquisition or sale of the property and payment is due thereafter.
The following table summarizes the fee structure for our advisory agreements:
Fee Type
 
Performance Obligation Satisfied
 
Timing of Payment
 
Revenue Recognition
Acquisition Fee
 
Point in time (upon close of transaction)
 
In cash upon close of transaction
 
Revenue is recognized based on a percentage of the contract purchase price, including acquisition expenses and any debt.
Disposition Fee
 
Point in time (upon close of transaction)
 
In cash upon completion
 
Revenue is recognized based on a percentage of the contract sales price.
Asset Management Fee and Subordinated Participation
 
Over time
 
Monthly, in cash and/or ownership units
 
Because each increment of service is distinct, although substantially the same, revenue is recognized at the end of each reporting period based on a percentage of the cost of assets under management or the applicable NAV.
In addition to the fees listed above, our management company contracts include the potential for additional revenues if certain market conditions are in place or certain events take place. We have not recognized revenue related to these fees, nor will we until it is no longer highly probable that there would be a material reversal of revenue.
Property Management Agreements—Under our property management agreements, we earn revenue for managing day-to-day activities at the properties of the Managed Funds, for which we receive a distinct fee based on a set percentage of gross cash receipts each month. Under the property management agreements, we also serve as a leasing agent to the Managed Funds. For each new lease, lease renewal, and expansion we receive a distinct fee in the form of a leasing commission. Leasing commissions are recognized at lease execution and are dependent on the terms of the lease. Additionally, we assist in

17



overseeing the construction of various improvements for Managed Funds, for which we receive a distinct fee based on a set percentage of total project cost calculated upon completion of construction. Because both parties in these contracts can cancel upon 30 days’ notice without penalties, their term is considered month-to-month.
The wide variety of duties as the property manager within these contracts makes determining the performance obligations within the contracts a matter of judgment. We have concluded that each of the separately disclosed fee types in the contracts, property management, leasing, and construction management, represents a separate performance obligation within the contract.
Due to the nature of the services being provided under the property management agreements, each performance obligation within the contract has a variable consideration component. However, due to the month-to-month term of these contracts, any uncertainty regarding the amounts to be earned over the contract term is resolved by the end of that month. As a result, we can reliably calculate the amount of the consideration to be recognized with regards to each performance obligation each month.
All property management agreements have terms as follows:
Fee
 
Performance Obligation Satisfied
 
Timing of Payment
 
Revenue Recognition
Property Management
 
Over time
 
In cash, monthly
 
Revenue is recognized based on a percentage of monthly cash receipts at each property.
Leasing Commissions
 
Point in time
 
In cash upon completion
 
Revenue is recognized based on a percentage of the contractual payments to be received per the terms of the lease and occurs when the lease is executed.
Construction Management
 
Point in time
 
In cash upon completion
 
Revenue is recognized based on a percentage of the cost of the construction project. Revenue recognition occurs upon completion of the contract (in the case of a normal capital improvement) or upon the tenant taking possession (in the case of a tenant improvement).
Both the advisory agreements and property management agreements have an original duration of one year or less, and we utilize the practical expedient applicable to such contracts and have not disclosed the transaction price for the remaining performance obligations as of the end of each reporting period nor when we expect to recognize this revenue. Due to the duration of the contracts, we have also utilized the practical expedient and made no adjustment to contract consideration for the effects of financing components.
Related Party Receivables—Summarized below is the detail of our outstanding receivable balance from related parties as of June 30, 2018 and December 31, 2017, respectively (in thousands):
 
June 30, 2018
 
December 31, 2017
 
REIT II
 
Other Parties
 
REIT II
 
Other Parties
Contract receivables:
 
 
 
 
 
 
 
Advisory
$
365

 
$
5

 
$
256

 
$
51

Property management and services
1,142

 
197

 
1,264

 
128

Total contract receivables
1,507

 
202

 
1,520

 
179

Other
129

 
4,036

 
72

 
4,331

Total
$
1,636

 
$
4,238

 
$
1,592

 
$
4,510

Organizational and Offering Costs—Under the terms of the advisory agreement, we have incurred organizational and offering costs related to REIT III, all of which are recorded in Accounts Receivable - Affiliates on the consolidated balance sheets. We have charged REIT III organizational and offering costs related to both its private placement and public offering, which were approximately $3.9 million and $2.0 million as of June 30, 2018 and December 31, 2017, respectively.
During the public offering period for REIT III we will receive an additional contingent advisor payment of 2.15% of the contract purchase price of each property or other real estate investment they acquire. This reimbursement is intended to allow us to recoup a portion of the dealer manager fees and organizational and offering expenses advanced by the REIT III Advisor, which we have a 75% interest. Therefore, this reimbursement shall not exceed the amount of organizational and offering expenses and dealer manager fees outstanding at the time of closing for the acquired property.
The initial $4.5 million we may incur to fund the dealer manager fee and other organizational and offering expenses related to the REIT III public offering, shall be retained by REIT III until the termination of their public offering, at which time such amount shall be paid.

13. RELATED PARTY EXPENSE
Economic Dependency—Prior to the completion of the PELP transaction, we were dependent on Phillips Edison NTR LLC (“PE-NTR”), Phillips Edison & Company Ltd. (the “Property Manager”), and their respective affiliates for certain services that were essential to us, including asset acquisition and disposition decisions, asset management, operating and leasing of our properties, and other general and administrative responsibilities. Upon closing of the transaction in October 2017, our management structure became internalized and our relationship with PE-NTR and the Property Manager was acquired. As a

18



result, we no longer pay the fees listed below and had no outstanding unpaid amounts related to those fees as of June 30, 2018 or December 31, 2017.
Advisory Agreement—PE-NTR and a previous advisor were entitled to specified fees and expenditure reimbursements for certain services, including managing our day-to-day activities and implementing our investment strategy under advisory agreements, as follows:
Asset management and subordinated participation fee paid out monthly in cash and/or Class B units;
Acquisition fee based on the cost of investments acquired/originated;
Acquisition expenses reimbursed related to selecting, evaluating, and acquiring assets; and
Disposition fee paid for substantial assistance in connection with the sale of a property.
Summarized below are the fees earned by and the expenses reimbursable for the three and six months ended June 30, 2017 (in thousands):
  
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
Acquisition fees(1)
$
902

 
$
1,050

Due diligence fees(1)
183

 
213

Asset management fees(2)
5,228

 
10,317

OP unit distributions(3)
465

 
925

Class B unit distributions(4)
473

 
911

Disposition fees
19

 
19

Total
$
7,270

 
$
13,435

(1) 
The majority of acquisition and due diligence fees are capitalized and allocated to the related investment in real estate assets on the consolidated balance sheets based on the acquisition-date fair values of the respective assets and liabilities acquired.
(2) 
Asset management fees are presented in General and Administrative on the consolidated statements of operations.
(3) 
Distributions are presented as Distributions to Noncontrolling Interests on the consolidated statements of equity.
(4) 
The distributions paid to holders of unvested Class B units are presented in General and Administrative on the consolidated statements of operations.
Property Management Agreement—Prior to the completion of the PELP transaction in October 2017, all of our real properties were managed and leased by the Property Manager, which was wholly-owned by PELP. The Property Manager was entitled to the following specified fees and expenditure reimbursements:
Property management fee based on monthly gross cash receipts from the properties managed;
Leasing commissions paid for leasing services rendered with respect to a particular property;
Construction management costs paid for construction management services rendered with respect to a particular property; and
Other expenses and reimbursement incurred by the Property Manager on our behalf.
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 (in thousands):
  
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
Property management fees(1)
$
2,683

 
$
5,269

Leasing commissions(2)
2,077

 
4,400

Construction management fees(2)
380

 
684

Other fees and reimbursements(3)
1,912

 
3,621

Total
$
7,052

 
$
13,974

(1) 
The property management fees are included in Property Operating on the consolidated statements of operations.
(2) 
Leasing commissions paid for leases with terms less than one year were 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, were 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.
Other Related Party Matters—Under the terms of the advisory agreement, we have incurred organizational and offering costs related to REIT III. A portion of those costs were incurred by Griffin Capital Corporation (“Griffin sponsor”), a co-sponsor of REIT III. The Griffin sponsor owns a 25% interest and we own a 75% interest in the REIT III Advisor. As such, $0.9 million of the receivable we have from REIT III is reimbursable to the Griffin sponsor and is recorded in Accounts Payable - Affiliates on the consolidated balance sheets.
Upon completion of the PELP transaction, we assumed PELP’s obligation as the limited guarantor for up to $200 million, capped at $50 million in most instances, of NRP’s debt. Our guarantee is limited to being the non-recourse carveout guarantor and the environmental indemnitor.


19



14. 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—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.
Debt Obligations—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, 2018 and December 31, 2017 (in thousands):
 
 
June 30, 2018
 
December 31, 2017
Fair value
 
$
1,820,280

 
$
1,765,151

Recorded value(1)
 
1,852,500

 
1,823,040

(1) 
Recorded value does not include deferred financing costs of $14.0 million and $16.0 million as of June 30, 2018 and December 31, 2017, respectively.
Recurring Fair Value Measurements—Our earn-out liability and interest rate swaps are measured and recognized at fair value on a recurring basis. The fair value measurements of those assets and liabilities as of June 30, 2018 and December 31, 2017, were as follows (in thousands):
 
June 30, 2018
 
December 31, 2017
 
Level 1
Level 2
Level 3
 
Level 1
Level 2
Level 3
Interest rate swaps-term loans(1)
$

$
34,839

$

 
$

$
16,496

$

Interest rate swap-mortgage note(1)



 

(61
)

Earn-out liability(2)


(39,500
)
 


(38,000
)
(1) 
We record derivative assets in Other Assets, Net and derivative liabilities in Accounts Payable and Other Liabilities on our consolidated balance sheets.
(2) 
The estimated fair value of the earn-out is presented in Accounts Payable and Other Liabilities on the consolidated balance sheets. We will continue to estimate the fair value of this earn-out liability at each reporting date during the contingency period and record any changes on our consolidated statements of operations.
Earn-out—The terms of the PELP transaction include an earn-out structure with an opportunity for up to an additional 12.5 million OP units to be issued to PELP as additional consideration if certain milestones are achieved. The milestones are related to a liquidity event for our shareholders and fundraising targets in REIT III, of which PELP was a co-sponsor.
We estimate the fair value of this liability using weighted-average probabilities of likely outcomes. These estimates require us to make various assumptions about future share prices, timing of liquidity events, equity raise projections, and other items that are unobservable and are considered Level 3 inputs in the fair value hierarchy. In calculating the fair value of this liability, we have determined that the most likely range of potential outcomes includes a possibility of no additional OP units issued as well as up to 9 million out of the maximum 12.5 million units being issued.
Derivative Instruments—As of June 30, 2018 and December 31, 2017, we had interest rate swaps that fixed LIBOR on portions of our unsecured term loan facilities. For a more detailed discussion of these cash flow hedges, see Note 8.
All interest rate swap agreements are measured at fair value on a recurring basis. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
To comply with the provisions of ASC 820, Fair Value Measurement, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
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, 2018 and December 31, 2017, we have assessed the significance of the impact of the credit valuation adjustments on the

20



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.
Nonrecurring Fair Value Measurements—Our real estate assets are measured and recognized at fair value on a nonrecurring basis dependent upon when we determine an impairment has occurred (see Note 5). We did not have any impaired real estate assets as of December 31, 2017. The fair value measurement of our impaired real estate asset as of June 30, 2018, was as follows (in thousands):
 
June 30, 2018
 
Level 1
Level 2
Level 3
Impaired real estate asset
$

$
5,300

$


15. SEGMENT INFORMATION
As of June 30, 2018, we operated through two business segments: Owned Real Estate and Investment Management. Prior to the completion of the PELP transaction in October 2017, we only operated through the Owned Real Estate segment. As a result, we did not report any segment disclosures for the three and six months ended June 30, 2017. We generate revenues and Segment Profit as follows:
Owned Real Estate: Our business objective is to own and operate well-occupied grocery-anchored shopping centers that generate cash flows to support distributions to our shareholders with the potential for capital appreciation. We typically invest in neighborhood shopping centers (generally containing less than 125,000 leasable square feet) located in attractive demographic markets throughout the United States where our management believes our fully integrated operating platform can add value. Through this segment, we own a diversified portfolio of shopping centers subject to long-term net leases with creditworthy tenants in the grocery, retail, restaurant, and service industries. As of June 30, 2018, we owned 235 properties.
Investment Management: Through this segment, we are responsible for managing the day-to-day affairs of the Managed Funds, identifying and making acquisitions and investments on their behalf, maintaining and operating their real properties, and recommending an approach for providing investors of the Managed Funds with liquidity. We generate revenues by providing asset management and property management services, such as revenues from leasing, acquisition, construction, and disposition services (see Note 12).
Our chief operating decision makers rely primarily on Segment Profit and similar measures to make decisions regarding allocating resources and assessing segment performance. We allocate certain operating expenses, such as employee-related costs and benefits, to our segments. Items not directly attributable to our Owned Real Estate or Investment Management segments are allocated to corporate general and administrative expenses, which is a reconciling item. The table below compares Segment Profit for each of our operating segments and reconciles total Segment Profit to Net Loss for the three and six months ended June 30, 2018 (in thousands):
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
Owned Real Estate
 
Investment Management
 
Total
 
Owned Real Estate
 
Investment Management
 
Total
Total revenues
$
94,899

 
$
9,274

 
$
104,173

 
$
189,253

 
$
18,119

 
$
207,372

Property operating expenses
(14,058
)
 
(2,843
)
 
(16,901
)
 
(29,516
)
 
(5,500
)
 
(35,016
)
Real estate tax expenses
(13,076
)
 
(250
)
 
(13,326
)
 
(26,038
)
 
(435
)
 
(26,473
)
General and administrative expenses
(804
)
 
(3,420
)
 
(4,224
)
 
(1,229
)
 
(6,043
)
 
(7,272
)
Segment profit
$
66,961

 
$
2,761

 
69,722

 
$
132,470

 
$
6,141

 
138,611

Corporate general and administrative
   expenses
 
 
 
 
(9,226
)
 
 
 
 
 
(16,639
)
Depreciation and amortization
 
 
 
 
(46,385
)
 
 
 
 
 
(92,812
)
Impairment of real estate assets
 
 
 
 
(10,939
)
 
 
 
 
 
(10,939
)
Interest expense, net
 
 
 
 
(17,051
)
 
 
 
 
 
(33,830
)
Other expense, net
 
 
 
 
(197
)
 
 
 
 
 
(304
)
Net loss
 
 
 
 
$
(14,076
)
 
 
 
 
 
$
(15,913
)


21



16. SUBSEQUENT EVENTS
Distributions—Distributions paid to stockholders and OP unit holders of record subsequent to June 30, 2018, were as follows (in thousands):
Month
Date of Record
 
Distribution Rate
 
Date Distribution Paid
 
Gross Amount of Distribution Paid
 
Distribution Reinvested through the DRIP
 
Net Cash Distribution
June
6/15/2018
 
$0.05583344
 
7/2/2018
 
$
12,672

 
$
3,962

 
$
8,710

July
7/16/2018
 
$0.05583344
 
8/1/2018
 
12,439

 

 
12,439

In August 2018 our Board authorized distributions for September, October, and November 2018 to the stockholders of record at the close of business on September 17, 2018, October 15, 2018, and November 15 2018, respectively, equal to a monthly amount of $0.05583344 per share of common stock. OP unit holders will receive distributions at the same rate as common stockholders.

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 & Company, 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. These risks include, without limitation, (i) changes in national, regional, or local economic climates; (ii) local market conditions, including an oversupply of space in, or a reduction in demand for, properties similar to those in our portfolio; (iii) vacancies, changes in market rental rates, and the need to periodically repair, renovate, and re-let space; (iv) changes in interest rates and the availability of permanent mortgage financing; (v) competition from other available properties and the attractiveness of properties in our portfolio to our tenants; (vi) the financial stability of tenants, including the ability of tenants to pay rent; (vii) changes in tax, real estate, environmental, and zoning laws; (viii) the concentration of our portfolio in a limited number of industries, geographies, or investments; (ix) risks associated with our ability to consummate the Merger an the timing and closing of the Merger; and (x) any of the other risks included in this Quarterly Report on Form 10-Q. Therefore, such statements are not intended to be a guarantee of our performance in future periods.
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 flows from operations, make distributions to stockholders, and maintain the value of our real estate properties, may be significantly hindered.
See Part II, Item 1A. Risk Factors of this Form 10-Q and Part I, Item 1A. Risk Factors of our 2017 Annual Report on Form 10-K, filed with the SEC on March 30, 2018, 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 Part II, Item 1A. Risk Factors and Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-Q.
All references to “Notes” throughout this document refer to the footnotes to the consolidated financial statements in Part I, Item 1. Financial Statements.

Overview
We were formed as a Maryland corporation in 2009, and elected to be taxed as a REIT for U.S. federal income tax purposes commencing with the taxable year ended December 31, 2010. We are one of the nation’s largest owners and operators of market-leading, grocery-anchored shopping centers. The majority of our revenues are lease revenues derived from our owned real estate investments. Additionally, we operate a third-party investment management business that provides comprehensive real estate and asset management services to the Managed Funds.
Proposed REIT II Merger
In July 2018, we entered into a Merger Agreement, pursuant to which we will merge with REIT II, and we will continue as the surviving corporation, in a 100% stock transaction valued at approximately $1.9 billion. To complete the proposed Merger, we will issue 2.04 shares of our common stock in exchange for each issued and outstanding share of REIT II common stock, which is equivalent to $22.54 based on our most recent EVPS of $11.05. The exchange ratio is based on a thorough review of the relative valuation of each entity, including factoring in our growing investment management business as well as each

22



company’s transaction costs. REIT II’s outstanding debt of approximately $800.0 million is expected to be refinanced or assumed by us at closing under the terms of the Merger Agreement.
We expect the Merger to create meaningful operational and financial benefits, including:
Materially Improve Portfolio while Maintaining Exclusive Grocery Focus - The Merger will result in a portfolio comprising 321 grocery-anchored shopping centers with more than 36.6 million square feet located in 33 states with an emphasis on necessity-based retailers, which have proven to be internet resistant and recession resilient. This institutional-quality portfolio has higher occupancy rates, higher annualized base rent per square foot, and improved demographics on a pro forma basis.
Increase Size, Scale, and Market Prominence - Given our enhanced size, scale and portfolio demographics, the combined company will have improved access to the capital markets, which can be used to support strategic investments to drive future growth opportunities.
Actively Position Us for Liquidity - This Merger is an important step towards a full cycle liquidity event for shareholders.
Improve Earnings Quality and Maintain Distribution Coverage - We expect the Merger to increase the percentage of earnings from real estate. Real estate earnings are more highly valued in the public equity markets than management fee income, given the long-term, recurring nature of owning and operating real estate. We estimate that pro forma Funds from Operations (“FFO”) for the combined company will exceed pro forma distributions.
Maintain Healthy Leverage Ratio and Strong Balance Sheet - The combined company’s leverage ratio would have improved on a net debt/total enterprise value basis. Our fixed-rate percentage of debt remains stable on a pro forma basis compared to prior to the Merger.
Accelerate Strategy to Simplify Business Model - We expect to realize the synergies of operating a combined enterprise that remains focused on driving shareholder value and expect a seamless integration process as our management company has overseen REIT II since inception.
Below are statistical highlights of our portfolio:
  
Total Portfolio as of June 30, 2018
 
Property Acquisitions During the Six Months Ended June 30, 2018
Number of properties
235

 
1

Number of states
32

 
1

Total square feet (in thousands)
26,272

 
135

Leased % of rentable square feet
93.8
%
 
71.3
%
Average remaining lease term (in years)(1)
4.0

 
3.6

(1) 
The average remaining lease term in years excludes future options to extend the term of the lease.

23



Lease Expirations—The following chart shows, on an aggregate basis, all of the scheduled lease expirations after June 30, 2018, for each of the next ten years and thereafter for our 235 shopping centers. The chart shows the leased square feet and ABR represented by the applicable lease expiration year (dollars and square feet in thousands):
chart-15329573865755b3a8ba01.jpg
Subsequent to June 30, 2018, we renewed approximately 331,000 total square feet and $3.6 million of total ABR of the leases expiring.
Portfolio Tenancy—We define national tenants as those tenants that operate in at least three states. Regional tenants are defined as those tenants that have at least three locations. The following charts present the composition of our portfolio by tenant type as of June 30, 2018:
chart-ecb7a9d2c0aa5570a3ca01.jpgchart-5a818c46fa5c57f3ab2a01.jpg


24



The following charts present the composition of our portfolio by tenant industry as of June 30, 2018:
chart-106f25589b4b51279e2a01.jpgchart-40b7588d30ae52f09c5a01.jpg
The following table presents our top tenants, grouped according to parent company, by ABR as of June 30, 2018 (dollars and square feet in thousands):
Tenant  
 
ABR
 
% of ABR
 
Leased Square Feet
 
% of Leased Square Feet
 
Number of Locations(1)
Kroger
 
$
25,834

 
9.1
%
 
3,138

 
12.7
%
 
55

Publix Super Markets
 
17,258

 
6.1
%
 
1,715

 
7.0
%
 
37

Ahold Delhaize
 
10,233

 
3.6
%
 
854

 
3.5
%
 
19

Albertsons-Safeway
 
9,461

 
3.4
%
 
924

 
3.7
%
 
17

Giant Eagle
 
6,764

 
2.4
%
 
700

 
2.8
%
 
9

Walmart
 
5,562

 
2.0
%
 
1,213

 
4.9
%
 
11

Dollar Tree
 
3,591

 
1.3
%
 
409

 
1.7
%
 
41

Raley's
 
3,547

 
1.3
%
 
193