The Grocery REITPhillips Edison-ARC
Grocery Center REIT II
1
Phillips Edison Grocery Center REIT II, Inc.
Year End 2016 Results
www.grocerycenterREIT2.com
DST: 888.518.8073
Griffin Capital Securities: 866.788.8614
The Grocery REITPhillips Edison-ARC
Grocery Center REIT II
2
Agenda
Portfolio & Results
Financials
Other Updates
R. Mark Addy - President and COO
The Grocery REITPhillips Edison-ARC
Grocery Center REIT II
3
Forward-Looking Statement Disclosure
This presentation and the corresponding call 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 quality of the Company’s portfolio of grocery anchored shopping centers 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, such as the risks that retail conditions may adversely affect our base rent and, subsequently, our income, and that our
properties consist primarily of retail properties and our performance, therefore, is linked to the market for retail space generally, as
well as other risks described under the section entitled “Risk Factors” in the Company's Annual Report on Form 10-K for the year
ended December 31, 2016, as such factors may be updated from time to time in the Company’s 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 presentation, the
corresponding call, 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.
The Grocery REITPhillips Edison-ARC
Grocery Center REIT II
4
Year End 2016 Portfolio Highlights
• 74 properties
• 22 states
• 23 leading grocery anchors
• 9.3 million square feet
• 94.6% leased occupancy
• 78.4% of rents from grocery, national
and regional tenants
Information as of 12/31/2016.
The Grocery REITPhillips Edison-ARC
Grocery Center REIT II
5
Year End 2016 Portfolio Highlights
Grocer % of ABR # ofLocations
Publix 6.2% 15
Albertsons-Safeway 5.5% 10
Walmart 5.1% 6
Ahold Delhaize 4.6% 5
Kroger 3.4% 9
Top 5 Grocers by % of Annualized Base Rent
Annualized Base Rent by Tenant Type Annualized Base Rent by Tenant Industry
We calculate annualized base rent as monthly contractual rent as of December 31, 2016, multiplied by 12 months.
Grocery
38.5%
National and
Regional
39.9%
Local
21.6%
Grocery
38.5%
Retail
Stores
24.3%
Services
23.0%
Restaurant
14.2%
The Grocery REITPhillips Edison-ARC
Grocery Center REIT II
6
Name Location Grocer GLA
Alameda Crossing Avondale, AZ Sprouts 132,338
Shorewood Crossing Shorewood, IL Mariano's 173,981
Franklin Centre Franklin, WI Pick 'n Save 120,608
Palmer Town Centre Easton, PA Giant 153,085
Q4 2016 Acquisition Highlights
Alameda Crossing Shorewood Crossing Franklin Centre Palmer Towne Centre
The Grocery REITPhillips Edison-ARC
Grocery Center REIT II
7
2016 Financials
Growth in Performance Consistent with Portfolio Growth
• Year Ended
December 31,
(in 000s) 2016 2015
Net Loss $ (5,497) $ (6,698)
Funds from Operations (FFO) 48,419 19,080
Modified Funds from Operations (MFFO) 52,431 28,522
The Grocery REITPhillips Edison-ARC
Grocery Center REIT II
8
2016 Same-Center(1) Net Operating Income (NOI)
Year Ended December 31,
(in 000s) 2016 2015 $ Change % Change
Revenues:
Rental income(2) $ 25,449 $ 23,944 $ 1,505
Tenant recovery income 9,845 8,959 886
Other property income 181 274 (93)
Total revenues 35,475 33,177 2,298 6.9%
Operating expenses:
Property operating expenses 6,237 5,958 279
Real estate taxes 5,216 5,001 215
Total operating expenses 11,453 10,959 494 4.5%
Total Same-Center NOI $ 24,022 $ 22,218 $ 1,804 8.1%
(1) Represents 20 properties that we owned and operated prior to January 1, 2015
(2) Excludes straight-line rental income, net amortization of above- and below-market leases, and lease buyout income
The Grocery REITPhillips Edison-ARC
Grocery Center REIT II
9
• Debt to Total Enterprise Value: 33.5%1
• Weighted-Average Interest Rate: 3.0%
• Weighted-Average Years to Maturity: 3.3
• Fixed-Rate Debt: 94.7% 2
• Variable-Rate Debt: 5.3%
• Includes a $127 million variable-rate term loan subject to a forward starting interest rate swap
effective January 2017. Excluding this swap, 70.9% of the Company's debt was fixed-rate.
Year End Debt Profile
1Debt 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).
2Effective January 2017, an additional $127 million of variable-rate debt was fixed through interest rate swap agreements. Excluding this debt that is subject to the forward interest rate swaps,
70.9% of the Company's debt was fixed-rate debt.
The Grocery REITPhillips Edison-ARC
Grocery Center REIT II
10
Thank You
www.grocerycenterREIT2.com
DST: 888.518.8073
Griffin Capital Securities: 866.788.8614
The Grocery REITPhillips Edison-ARC
Grocery Center REIT II
11
Appendix
The Grocery REITPhillips Edison-ARC
Grocery Center REIT II
12
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. 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.
The table below is a comparison of the Same-Center NOI for the year ended December 31, 2016, to the year ended December 31, 2015 (in thousands):
(in 000s) 2016 2015 $ Change % Change
Revenues:
Rental income(1) $ 25,449 $ 23,944 $ 1,505
Tenant recovery income 9,845 8,959 886
Other property income 181 274 (93)
35,475 33,177 2,298 6.9%
Operating expenses:
Property operating expenses 6,237 5,958 279
Real estate taxes 5,216 5,001 215
11,453 10,959 494 4.5%
Total Same-Center NOI $ 24,022 $ 22,218 $ 1,804 8.1%
(1)Excludes straight-line rental income, the net amortization of above- and below-market leases, and lease buyout income
Reconciliation of Non-GAAP Financials
The Grocery REITPhillips Edison-ARC
Grocery Center REIT II
13
2016 2015(1)
Net loss $ (5,497) $ (6,698)
Adjusted to exclude:
General and administrative expenses 18,139 3,744
Acquisition expenses 10,754 13,661
Depreciation and amortization 56,541 25,778
Interest expense, net 10,970 3,990
Gain on contribution of properties to unconsolidated joint venture (3,341) —
Other income, net (153) (410)
Net amortization of above- and below-market leases (2,142) (1,151)
Lease buyout income (707) (9)
Straight-line rental income (2,767) (2,056)
NOI 81,797 36,849
Less: NOI from centers excluded from Same-Center 57,775 14,631
Total Same-Center NOI $ 24,022 $ 22,218
Below is a reconciliation of net loss to NOI and Same-Center NOI for the years ended December 31, 2016 and 2015 (in thousands):
Reconciliation of Non-GAAP Financials
(1) Certain prior period amounts have been restated to conform with current year presentation.
The Grocery REITPhillips Edison-ARC
Grocery Center REIT II
14
Reconciliation of Non-GAAP Financials
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.
The Grocery REITPhillips Edison-ARC
Grocery Center REIT II
15
Reconciliation of Non-GAAP Financials
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.
The Grocery REITPhillips Edison-ARC
Grocery Center REIT II
16
Reconciliation of Non-GAAP Financials
Years Ended December 31,
(in thousands, except per share amounts) 2016 2015(1) 2014
Calculation of FFO
Net loss $ (5,497) $ (6,698) $ (5,833)
Adjustments:
Depreciation and amortization of real estate assets 56,541 25,778 3,516
Gain on contribution of properties to unconsolidated JV (3,341) — —
Depreciation and amortization related to unconsolidated JV 716 — —
FFO $ 48,419 $ 19,080 $ (2,317)
Calculation of MFFO
FFO $ 48,419 $ 19,080 $ (2,317)
Adjustments:
Acquisition expenses 10,754 13,661 5,449
Net amortization of above- and below-market leases (2,142) (1,151) (152)
Gain on extinguishment of debt, net (80) (60) —
Straight-line rental income (2,767) (2,056) (256)
Amortization of market debt adjustment (866) (845) (40)
Change in fair value of derivative (1,076) (107) —
Adjustments related to unconsolidated joint venture 189 — —
MFFO $ 52,431 $ 28,522 $ 2,684
Weighted-average common shares outstanding - basic 46,228 36,538 10,302
Weighted-average common shares outstanding - diluted 46,230 36,538 10,302
Net loss per share - basic and diluted $ (0.12) $ (0.18) $ (0.57)
FFO per share - basic and diluted $ 1.05 $ 0.52 $ (0.22)
MFFO per share - basic and diluted $ 1.13 $ 0.78 $ 0.26
(1) Certain prior period amounts have been restated to conform with current year presentation.