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Phillips Edison's $6.3B Merger With Its REIT to Expand Access to Capital Markets

Combined Business to Operate 323 Grocery-Anchored Shopping Centers, Expanding, Diversifying Its Portfolio
July 19, 2018
Crosscreek Village in St. Cloud, FL, acquired by Phillips Edison Grocery Center REIT II in 2016.

The proposed $6.3 billion merger of Phillips Edison & Co., one of the largest owners and operators of grocery-anchored shopping centers across the U.S., and Phillips Edison Grocery Center REIT II is designed to give the combined entity increased access to capital markets to take advantage of demand for their properties.

Phillips Edison & Co. agreed to a 100 percent stock-for-stock merger with REIT II. The combined company will operate 323 grocery-anchored shopping centers across 33 states, with a valuation of $6.3 billion. Phillips Edison launched REIT II in 2013.

Phillips Edison executives said in a conference call the merger increases the company’s percentage of earnings from real estate to 97 percent from 92 percent, noting that public equity markets value real estate earnings more than management-fee income because of its long-term, recurring nature. Executives also noted that larger REITs tend to financially outperform smaller ones.

"We believe grocery-anchored retail is the strongest asset class in retail real estate due to internet resistance and recession resilience," said Jeff Edison, chairman and chief executive officer of Cincinnati-based Phillips Edison.

Investment in grocery-anchored retail centers increased 5.3 percent last year, according to a Grocery Tracker report by Jones Lang LaSalle. A Retail Investor Sentiment Report from Real Capital Markets found that grocery-anchored centers remain the most attractive retail property segment, according to 48 percent of investors surveyed.

Phillips Edison Grocery Center REIT II operates 86 properties, valued at $1.9 billion. Phillips Edison & Co. executives noted that 38 percent of the combined properties are in the 25 largest metropolitan areas, where returns are generally higher. The REIT II properties are generally located in more affluent neighborhoods and command slightly higher rents.

"I don’t see grocery strip centers losing any value or their desirability," said Joe Latina, principal with Patterson-Woods Commercial Properties in Wilmington, DE.

The combined vacancy rate at the 323 properties is 6 percent.

The transaction is expected to be completed by December 2018, with a shareholder vote from both entities scheduled for November.

Rob Smith, National Retail Reporter  CoStar Group   
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