Recently, retail REIT Phillips Edison & Company, Inc. and Northwestern Mutual reported they formed two joint ventures valued at $414.5 million that will invest in 20 grocery-anchored shopping centers currently owned by PECO.

CINCINNATI—Locally-based Phillips Edison & Company, Inc., an internally-managed real estate investment trust and one of the nation's largest owners and operators of grocery-anchored shopping centers, has completed its merger with Phillips Edison Grocery Center REIT II, Inc., a public non-traded REIT that was advised and managed by PECO.

The 100% stock-for-stock transaction has created a combined company with a total enterprise value of approximately $6.0 billion. PECO's merger with REIT II creates a national portfolio with ownership interests in 334 grocery-anchored shopping centers encompassing approximately 37.7 million square feet located across 32 states.

“This merger creates meaningful benefits for both PECO and REIT II stockholders,” says Jeff Edison, chairman and CEO of PECO. “It creates an internally-managed REIT that owns a high-quality portfolio of grocery-anchored shopping centers with even greater geographic, grocery-anchor, and tenant diversification. The combined entity will have increased access to the capital markets due to its enhanced size, scale and prominence, which we believe improves our position for a liquidity event.

He adds, “Having successfully managed grocery-anchored retail centers for over 27 years through numerous market cycles we remain bullish on the fundamentals supporting this asset class and will continue to focus on strategically advancing our growth objectives.”

The merger increases the percentage of PECO's earnings from real estate from approximately 92% to approximately 97%. 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, Phillips Edison states in its press announcement.

Company officials explain that the combined company is expected to realize the synergies of operating a combined enterprise focused on driving stockholder value and they expect to have a seamless integration process, as PECO's management team has managed REIT II since its inception.

In exchange for each share of REIT II common stock, REIT II stockholders received 2.04 shares of PECO common stock, which is equivalent to $22.54 per share based on PECO's most recent estimated net asset value per share of $11.05. The exchange ratio was based on a thorough review of the relative valuation of each entity, including factoring in PECO's growing investment management business as well as each company's transaction costs. Original PECO stockholders own approximately 71% and former REIT II stockholders own approximately 29% of the combined company.

PECO's most recent estimated net asset value per share of $11.05 was established on May 9, 2018 by its board of directors based on property valuations performed by an independent valuation firm. The combined company expects to perform its next valuation during the spring of 2019.

At the Nov. 14, PECO annual meeting of stockholders, the proposals to amend PECO's charter and consummate the merger with REIT II were each approved by at least 92.5% of the votes cast. Of the total shares outstanding, only 1.35% voted unfavorably.

At the Nov. 14, 2018 REIT II annual meeting of stockholders, the proposal to approve the merger with PECO was approved by approximately 93.0% of the votes cast. Of the total shares outstanding, only 1.34% voted unfavorably.

Prior to the merger with PECO, Phillips Edison Grocery Center REIT II, Inc. owned an institutional quality retail portfolio consisting of 86 grocery-anchored shopping centers totaling approximately 10.3 million square feet.

BofA Merrill Lynch acted as lead financial advisor to PECO. Citigroup Global Markets Inc. and Goldman Sachs & Co. LLC also acted as financial advisors for PECO. Latham & Watkins LLP acted as exclusive legal advisor to the board of directors of PECO. Morgan Stanley & Co. LLC acted as exclusive financial advisor and Hogan Lovells US LLP acted as exclusive legal advisor to the special committee of the board of directors of REIT II.

At the closing of the merger, John A. Strong and David W. Garrison were appointed to the combined company's board of directors as independent directors. Following the appointment, the PECO board of directors was increased in size to seven directors, six of whom are independent. Immediately prior to the merger, Strong and Garrison both served as independent directors of the REIT II board of directors.

Instant Insights /

Phillips Edison Completes Merger Deal Creating $6B Retail REIT

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