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Feature Article, May 2006
New Fund Means More Growth For Phillips Edison
Company plans to buy up to $785 million in community centers over the next 3 years.
Randall Shearin
Phillips Edison likes to find a deal. The company buys centers in secondary markets that need a little help through innovative leasing strategies and redevelopments. With the recent launch of its third acquisition fund, the company is on a quest to buy upwards of $785 million worth of shopping centers over the next 3 years.
Shopping Center Business recently spoke to Jeff Edison and Michael Phillips, principals of the company, to find out what the size and scope of the new fund will mean for their acquisition program.
Brief History
Phillips Edison purchased its first center in 1992 and launched its first fund in 2000, backed by private equity. The $20 million of equity the company raised allowed it to purchase 14 centers. The company quickly figured its sweet spot was strip shopping centers in secondary and tertiary markets that needed some revitalization. The company has generally focused on purchasing centers both individually and in portfolios. The average Phillips Edison center is 135,000 square feet.
In 2002, the company launched its second fund, raising $60 million in equity — again, from private sources — to acquire more centers. Fund II, along with several acquisitions the company made on its own account, including the acquisition of Aegis Property Trust in 2003, boosted the company into a national player within a relatively short time span. The Aegis portfolio contained 27 properties, 17 that were west of the Mississippi River. At that time, it was the farthest west the company had been. The acquisition spawned the opening of the company’s Salt Lake City office, and has since spurred further activities in the west.
In 2004, the company consolidated both funds and other partnerships into one entity. This benefited the company by simplifying its operations.
In January, the company closed funding for its Fund III, which raised $275 million in equity from institutional investors. Leveraged at 65 percent, the company anticipates it can acquire up to $785 million in centers with Fund III.
Phillips Edison operates its company by looking at the country on a national basis. The company has acquisitions officers in six regions, and offices in Baltimore, Cincinnati and Salt Lake City.
Already Acquiring
Phillips Edison has been incredibly active with the proceeds from Fund III so far in 2006. In the first 6 months of the fund’s existence, Phillips Edison had purchased 12 properties valued at $88 million, including a seven-property portfolio it purchased in January from Ramco Gershenson Properties Trust. By the end of the second quarter of 2006, the company predicted it would have made $150 million in acquisitions.
“We estimate having about 80 properties in Fund III,” says Phillips. “We estimate that most of the properties will be located in the Midwest and Southeast, and a number of them will spread farther west. We have had really good success in the Carolinas in the last 2 years, as well as in the west. That said, we have the platform to go wherever the opportunities are.”
Acquisitions to date in 2006 bring the company to 103 centers, containing 12.5 million square feet. Approximately 74 percent of the centers are grocery anchors, and Kroger is the company’s biggest tenant, with 10 percent of its revenue.
With some REITs and private owners looking to sell properties in recent months, Phillips Edison has not had as difficult time in the past finding new properties.
“We’re seeing more product come into the market that is more typical of what we do,” says Edison. “A lot of companies want to sell non-core assets in secondary markets because they are focusing on primary markets and trimming their portfolios.”
Recent Acquisitions, Future Success
Two centers that the company recently acquired for Fund III point out the upside potential that the company must have to create added value. The first is Southbrook, a 135,077-square-foot center that Phillips Edison purchased in Alabaster, Alabama. The center, anchored by Bruno’s, was 15 percent vacant and needed a facelift. The company is remodeling the center, as well as leasing the vacant space.
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Edgewood Square in North Augusta, South Carolina, is anchored by Bi-Lo.
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In North Augusta, South Carolina, the company purchased Edgewood Square, a 228,209-square-foot center anchored by Bi-Lo and a vacant Wal-Mart, which is still paying rent. While the company still has income from the vacant store, it is taking the time to plan the center’s redevelopment. Phillips Edison is presently working with several national tenants on potential redevelopment plans for the center.
“That project may be a home run for us,” says Phillips. “It is more of a redevelopment project for us than Southbrook, but the returns will also be a lot larger.”
Out of the 12 properties the company has purchased for Fund III, three of them need major redevelopment. Seven of them require leasing to fill large vacancies, and a few of the properties are stable, but require good operations, leasing and management to create more returns.
Phillips Edison instituted a person-to-person acquisition program a few years ago. This requires a face-to-face meeting with one of the company’s acquisition officers to present an offering. Owners and brokers like the program, says Edison, because it instills in them a serious interest in a property. The program has allowed repeat deals by both brokers and owners, who present properties to the company over and over.
“It also builds relationships,” says Edison. “It reassures them that we have the resources to buy a center and that we can close quickly. Once they know us, and hear our story and track record, their confidence in the deal is increased.”
Other Activities
In addition to acquiring centers for Fund III, the company has also served as a merchant developer for retailers like Safeway in the East and Walgreens in the east and west. Through its Salt Lake City office, the company has developed locations for the drug retailer in Idaho, Utah, Washington and Oregon. Phillips Edison is also constantly updating its existing portfolio.
“The retail business is constantly changing, so there is always a need to change our merchandising mix and upgrade our tenants,” says Edison.
The market value of Phillips Edison’s portfolio is in excess of $900 million, with the value of the overall company greater than $1 billion in assets.
“Our goal is to continue to grow at a rapid pace,” says Edison. “We have the ability now to buy portfolios that require significant redevelopment and portfolios in secondary markets. Most buyers in the market are not focused on this niche.”
Along with Mark Addy, the company’s chief operating officer, Edison and Phillips are involved in the company’s day-to-day operations. Edison is based in Baltimore, Phillips in Salt Lake City, while Addy is in Cincinnati. The three meet, on average, every other week in one of the cities, one of the company’s centers, or at a prospective center. Phillips Edison uses an extensive teleconferencing system throughout its three offices to keep its employees connected. The company has 65 employees based in Cincinnati, 12 in Baltimore and 16 in Salt Lake City.
©2006 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.
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