8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

_______________________

FORM 8-K

_______________________

CURRENT REPORT

Pursuant to Section 13 or 15(d) of

The Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): August 4, 2016

PHILLIPS EDISON GROCERY CENTER REIT II, INC.

(Exact name of registrant specified in its charter)

Maryland	000-55438	61-1714451
(State or other jurisdiction of incorporation or organization)	(Commission File Number)	IRS Employer Identification No.

11501 Northlake Drive

Cincinnati, Ohio 45249

(Address of principal executive offices)

Registrant’s telephone number, including area code: (513) 554-1110

Not Applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨      Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨      Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨      Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨      Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02.   Results of Operations and Financial Condition.

On August 4, 2016, Phillips Edison Grocery Center REIT II, Inc. issued a press release announcing its results for the three months ended June 30, 2016.

Item  9.01.   Financial Statements and Exhibits.

(d) Exhibits.

Exhibit Number	Description of Exhibit
99.1	Press Release dated August 4, 2016

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	PHILLIPS EDISON GROCERY CENTER REIT II, INC.
Dated: August 4, 2016	By:	/s/ R. Mark Addy
		R. Mark Addy
		President and Chief Operating Officer

EXHIBIT INDEX

Exhibit Number	Description of Exhibit
99.1	Press Release dated August 4, 2016

EX-99.1

Exhibit 99.1

Phillips Edison Grocery Center REIT II, Inc. Reports Second Quarter 2016 Results

Acquired Twelve Grocery-anchored Shopping Centers in Eight States

Reported Portfolio Occupancy of 94.8%

Year-to-date Same Center NOI Growth of 10.7%

CINCINNATI, OH, August 4, 2016 - Phillips Edison Grocery Center REIT II, Inc. (the “Company,” “we,” “our,” or “us”), a publicly registered, non-traded real estate investment trust (“REIT”) focused on the acquisition and management of well-occupied grocery-anchored neighborhood and community shopping centers, today announced its operating results for the quarter ended June 30, 2016.

“Our second quarter operating results continue to demonstrate the strength and stability of our portfolio, with increases in total revenues, modified funds from operations and occupancy gains in our growing portfolio of high-quality grocery-anchored shopping centers. This quarter, we also successfully executed a $370 million unsecured term loan facility. This execution, with its advantageous terms, reflects the strength of our management team and the quality of our company. We highly value the continued support from our banking partners,” said Jeff Edison, Chairman of the Board and Chief Executive Officer.


Operating Results

• For the three and six months ended June 30, 2016, the Company generated revenues of $31.4 million and $59.7 million, respectively, compared to revenues of $11.6 million and $21.1 million, respectively, for the 2015 comparable periods. Growth in our revenue primarily relates to acquisitions made throughout 2015 and 2016.

• For the three and six months ended June 30, 2016, the Company generated net losses of $4.6 million and $3.2 million, respectively, compared to net losses of $1.2 million and $1.3 million for the comparable 2015 periods. The increase in net loss for the three and six months is related to $2.5 million and $4.6 million in cash asset management fees paid to the Company’s advisor as a result of a change to the Company’s advisory fee structure in January 1, 2016, and a $2.7 million and $4.3 million increase, respectively, in acquisition expenses as a result of higher acquisition volume.

• For the three and six months ended June 30, 2016, the Company generated funds from operations (“FFO”) of $9.5 million and $19.8 million, respectively, compared to FFO of $4.0 million and $8.1 million for the comparable 2015 periods. The growth in FFO was primarily the result of additional property acquisitions.

• During the same time periods, the Company generated modified funds from operations (“MFFO”) of $12.9 million and $24.7 million, respectively, compared to MFFO of $5.7 million and $10.4 million for the comparable 2015 periods. The growth in MFFO was also primarily related to the additional property acquisitions.

Portfolio Results

• For the quarter ended June 30, 2016, the Company acquired twelve grocery-anchored shopping centers, totaling approximately 1.7 million square feet. The newly acquired centers have an average leased occupancy of 95.9%, annualized effective rent (“AER”) per leased square foot of $11.77, and are anchored by grocers such as Publix, Walmart, Kroger, and Trader Joe’s.

• As of June 30, 2016, the Company’s portfolio consisted of 69 grocery-anchored properties in 21 states, totaling 8.5 million square feet, with AER per leased square foot of $11.95. Portfolio AER for non-anchor tenants was $47.3 million, or $19.11 per leased square foot.

• As of June 30, 2016, the Company reported leased portfolio occupancy of 94.8%, compared to 93.2% as of June 30, 2015.

Capital Markets

• In June 2016, the Company entered into a first amendment to the existing credit agreement, providing additional term loan borrowing capacity of $370 million. The term loan facility (the “Term Loans”) is comprised of two tranches, which have a maximum term of four years, or five years with extension options. Proceeds from the Term Loans were used to fund our acquisition activities. The Company’s objective in entering into the Term Loans was to restore liquidity on its corporate revolvers, which was used to fund acquisitions, and ladder its debt maturity profile.

• As of June 30, 2016, $127.0 million was available to borrow under the Term Loans and $341.5 million was available under the Company’s $350 million revolving credit facility.

• On July 7, 2016, the Company entered into two interest rate swap agreements to fix the interest rate on $243 million of the Term Loans. The swaps convert the LIBOR rate on the first and second tranches to a fixed rate of interest of 2.24% through July 2019 and 2.31% through June 2020, respectively.

• As of June 30, 2016, our debt to total enterprise value was 11.6%. Debt to total enterprise value is calculated as net debt (total debt, excluding below-market debt adjustments and deferred financing costs, less cash and cash equivalents) as a percentage of enterprise value (equity value, calculated as total common shares outstanding multiplied by the estimated value per share of $22.50, plus net debt).

• The Company’s debt had a weighted-average interest rate of 2.98% and a weighted-average maturity of 4.3 years.

Share Repurchase Program

• The Board of Directors established an estimated net asset value (“NAV”) as of March 31, 2016 of $22.50, and effective thereafter, the repurchase price for shares under the Share Repurchase Program (“SRP”) for all stockholders became $22.50, subject to the terms and limitations contained in the SRP.

• Effective in May 2016, the SRP was amended, and the Company is allowed to repurchase shares on the last business day of each month, rather than on a quarterly basis. The maximum amount of common stock that may be repurchased during any calendar year is limited, among other things, to 5% of the weighted-average number of shares outstanding during the prior calendar year. The maximum amount is reduced each reporting period by the current year share repurchases to date. In addition, the cash available for repurchases on any particular date is generally limited to the proceeds from the distribution reinvestment plan during the preceding four fiscal quarters, less amounts already used for repurchases since the beginning of that period. For a stockholder’s shares to be eligible for repurchase, a written repurchase request in good order must be received at least five business days before the repurchase date.

Distribution Reinvestment Plan

• In connection with the establishment of the estimated NAV, participants in the distribution reinvestment plan acquire shares of common stock at a price equal to the estimated NAV per share of $22.50, beginning with the purchases in May 2016.

Distributions

• For the six months ended June 30, 2016, the Company paid gross distributions of approximately $37.5 million, including $19.3 million of distributions reinvested through the distribution reinvestment plan, for net cash distributions of $18.2 million.

• Operating cash flow for the six months ended June 30, 2016, was $20.1 million, compared to $7.7 million for the comparable 2015 period, representing more than a 150% increase.

Stockholder Update Presentation

• The Company will provide a stockholder update presentation on August 15, 2016, on its website at www.grocerycenterreit2.com. An additional press release with further details will follow.

Reconciliation of Non-GAAP Measures

Same-Center Net Operating Income

We present Same-Center Net Operating Income (“Same-Center NOI”) as a supplemental measure of our performance. We define Net Operating Income (“NOI”) as total operating revenues less property operating expenses, real estate taxes, and non-cash revenue items. Same-Center NOI represents the NOI for the 20 properties that were operational for the entire portion of both comparable reporting periods and that were not acquired during or subsequent to the comparable reporting periods. The six properties that were contributed to the unconsolidated joint venture were not included in the Same-Center presentation. We believe that NOI and Same-Center NOI provide useful information to our investors about our financial and operating performance because each provides a performance measure of the revenues and expenses directly involved in owning and operating real estate assets and provides a perspective not immediately apparent from net income. Because Same-Center NOI excludes the change in NOI from properties acquired after December 31, 2014, it highlights operating trends such as occupancy levels, rental rates, and operating costs on properties that were operational for both comparable periods. Other REITs may use different methodologies for calculating Same-Center NOI, and accordingly, our Same-Center NOI may not be comparable to other REITs.

Same-Center NOI should not be viewed as an alternative measure of our financial performance since it does not reflect the operations of our entire portfolio, nor does it reflect the impact of general and administrative expenses, acquisition expenses, interest expense, depreciation and amortization, other income, or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties that could materially impact our results from operations.

Below is a reconciliation of net loss to Same-Center NOI for the three and six months ended June 30, 2016 and 2015 (in thousands):

	Three months ended June 30,						Six months ended June 30,
	2016			2015			2016			2015
Net loss	$	(4,552	)	$	(1,229	)	$	(3,201	)	$	(1,344	)
Adjusted to exclude:
Interest expense, net	2,250			944			3,703			1,645
Gain on contribution of properties to unconsolidated joint venture	—			—			(3,341		)	—
Other income (expense), net	122			(84		)	242			(168		)
General and administrative expenses	4,812			556			8,852			1,183
Acquisition expenses	5,219			2,506			7,991			3,671
Depreciation and amortization	13,823			5,275			26,112			9,462
Net amortization of above- and below-market leases	(546		)	(245		)	(958		)	(475		)
Straight-line rental income	(938		)	(363		)	(1,747		)	(636		)
NOI	20,190			7,360			37,653			13,338
Less: NOI from centers excluded from Same-Center	(14,180		)	(2,009		)	(25,717		)	(2,555		)
Total Same-Center NOI	$	6,010		$	5,351		$	11,936		$	10,783

The table below is a comparison of the Same-Center NOI for the three and six months ended June 30, 2016, to the same periods ended June 30, 2015 (in thousands):

	Three months ended June 30,								Six months ended June 30,
	2016		2015		$ Change		% Change		2016		2015		$ Change			% Change
Revenues:
Rental income(1)	$	6,279	$	5,916	$	363			$	12,580	$	11,822	$	758
Tenant recovery income	2,515		1,849		666				5,012		3,882		1,130
Other property income	78		26		52				132		219		(87		)
Total	8,872		7,791		1,081		13.9	%	17,724		15,923		1,801			11.3	%
Operating expenses:
Property operating expenses	1,450		1,376		74				2,996		2,970		26
Real estate taxes	1,412		1,064		348				2,792		2,170		622
Total	2,862		2,440		422		17.3	%	5,788		5,140		648			12.6	%
Total Same-Center NOI	$	6,010	$	5,351	$	659	12.3	%	$	11,936	$	10,783	$	1,153		10.7	%

⁽¹⁾  Excludes straight-line rental income and net amortization of above- and below-market leases.

Funds from Operations and Modified Funds from Operations

Funds from operations (“FFO”) is a non-GAAP performance financial measure that is widely recognized as a measure of REIT operating performance. We use FFO as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) to be net income (loss), computed in accordance with GAAP excluding extraordinary items, as defined by GAAP, and gains (or losses) from sales of depreciable real estate property (including deemed sales and settlements of pre-existing relationships), plus depreciation and amortization on real estate assets and impairment charges, and after related adjustments for unconsolidated partnerships, joint ventures and noncontrolling interests. We believe that FFO is helpful to our investors and our management as a measure of operating performance because it, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which are not immediately apparent from net income.

Since the definition of FFO was promulgated by NAREIT, GAAP has expanded to include several new accounting pronouncements, such that management and many investors and analysts have considered the presentation of FFO alone to be insufficient. Accordingly, in addition to FFO, we use modified funds from operations (“MFFO”), which excludes from FFO the following items:

• acquisition fees and expenses;

• straight-line rent amounts, both income and expense;

• amortization of above- or below-market intangible lease assets and liabilities;

• amortization of discounts and premiums on debt investments;

• gains or losses from the early extinguishment of debt;

• gains or losses on the extinguishment of derivatives, except where the trading of such instruments is a fundamental attribute of our operations;

• gains or losses related to fair-value adjustments for derivatives not qualifying for hedge accounting;

• gains or losses related to consolidation from, or deconsolidation to, equity accounting;

• gains or losses related to contingent purchase price adjustments; and

• adjustments related to the above items for unconsolidated entities in the application of equity accounting.

We believe that MFFO is helpful in assisting management and investors with the assessment of the sustainability of operating performance in future periods and, in particular, after our acquisition stage is complete, because MFFO excludes acquisition expenses that affect operations only in the period in which the property is acquired. Thus, MFFO provides helpful information relevant to evaluating our operating performance in periods in which there is no acquisition activity.

Many of the adjustments in arriving at MFFO are not applicable to us. Nevertheless, as explained below, management’s evaluation of our operating performance may also exclude items considered in the calculation of MFFO based on the following economic considerations.

• Adjustments for straight-line rents and amortization of discounts and premiums on debt investments—GAAP requires rental receipts and discounts and premiums on debt investments to be recognized using various systematic methodologies. This may result in income recognition that could be significantly different than underlying contract terms. By adjusting for these items, MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments and aligns results with management’s analysis of operating performance. The adjustment to MFFO for straight-line rents, in particular, is made to reflect rent and lease payments from a GAAP accrual basis to a cash basis.

• Adjustments for amortization of above- or below-market intangible lease assets—Similar to depreciation and amortization of other real estate-related assets that are excluded from FFO, GAAP implicitly assumes that the value of intangibles diminishes ratably over the lease term and should be recognized in revenue. Since real estate values and market lease rates in the aggregate have historically risen or fallen with market conditions, and the intangible value is not adjusted to reflect these changes, management believes that by excluding these charges, MFFO provides useful supplemental information on the performance of the real estate.

• Gains or losses related to fair-value adjustments for derivatives not qualifying for hedge accounting—This item relates to a fair value adjustment, which is based on the impact of current market fluctuations and underlying assessments of general market conditions and specific performance of the holding, which may not be directly attributable to current operating performance. As these gains or losses relate to underlying

long-term assets and liabilities, management believes MFFO provides useful supplemental information by focusing on the changes in core operating fundamentals rather than changes that may reflect anticipated, but unknown, gains or losses.

• Adjustment for gains or losses related to early extinguishment of derivatives and debt instruments—Similar to extraordinary items excluded from FFO, these adjustments are not related to continuing operations. By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods and to other real estate operators.

Neither FFO nor MFFO should be considered as an alternative to net income (loss) or income (loss) from continuing operations under GAAP, nor as an indication of our liquidity, nor is either of these measures indicative of funds available to fund our cash needs, including our ability to fund distributions. MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate our business plan in the manner currently contemplated.

Accordingly, FFO and MFFO should be reviewed in connection with other GAAP measurements. FFO and MFFO should not be viewed as more prominent measures of performance than our net income or cash flows from operations prepared in accordance with GAAP. Our FFO and MFFO as presented may not be comparable to amounts calculated by other REITs.

The following section presents our calculation of FFO and MFFO and provides additional information related to our operations. As a result of the timing of the commencement of our initial public offering and our active real estate operations, FFO and MFFO are not relevant to a discussion comparing operations for the periods presented. We expect revenues and expenses to increase in future periods as we continue to acquire additional investments.

FFO AND MFFO

FOR THE PERIODS ENDED JUNE 30, 2016 AND 2015

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Calculation of FFO
Net loss	$	(4,552	)	$	(1,229	)	$	(3,201	)	$	(1,344	)
Adjustments:
Depreciation and amortization of real estate assets	13,823			5,275			26,112			9,462
Gain on contribution of properties to unconsolidated joint venture	—			—			(3,341		)	—
Depreciation and amortization related to unconsolidated joint venture	233			—			233			—
FFO	$	9,504		$	4,046		$	19,803		$	8,118
Calculation of MFFO
FFO	$	9,504		$	4,046		$	19,803		$	8,118
Adjustments:
Acquisition expenses	5,219			2,506			7,991			3,671
Net amortization of above- and below-market leases	(546		)	(245		)	(958		)	(475		)
Straight-line rental income	(938		)	(363		)	(1,747		)	(636		)
Amortization of market debt adjustment	(230		)	(199		)	(340		)	(322		)
Change in fair value of derivatives	(106		)	—			(100		)	—
Adjustments related to unconsolidated joint venture	19			—			19			—
MFFO	$	12,922		$	5,745		$	24,668		$	10,356
Weighted-average common shares outstanding - basic and diluted	46,261			33,826			46,143			29,530
Net loss per share - basic and diluted	$	(0.10	)	$	(0.04	)	$	(0.07	)	$	(0.05	)
FFO per share - basic and diluted	$	0.21		$	0.12		$	0.43		$	0.27
MFFO per share - basic and diluted	$	0.28		$	0.17		$	0.53		$	0.35

About Phillips Edison Grocery Center REIT II, Inc.

Phillips Edison Grocery Center REIT II, Inc. is a public non-traded REIT that seeks to acquire and manage well-occupied grocery-anchored neighborhood shopping centers having a mix of national and regional retailers selling necessity-based goods

and services, in strong demographic markets throughout the United States. As of June 30, 2016, the Company owned and managed an institutional quality retail portfolio consisting of 69 grocery-anchored shopping centers totaling approximately 8.5 million square feet. For more information, please visit the Company’s website at www.grocerycenterREIT2.com.

Forward-Looking Statements

This press release may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include, but are not limited to, statements related to the Company’s expectations regarding the performance of its business, its financial results, its liquidity and capital resources, the funding available under its share repurchase and other non-historical statements. You can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties, including those described under the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, as such factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this release and in the Company’s filings with the SEC. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.

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