UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

SCHEDULE 14A

 

(RULE 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

 

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

 

Filed by the Registrant ☑

Filed by a Party other than the Registrant ☐

 

Check the appropriate box:

 

Preliminary Proxy Statement

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

Definitive Proxy Statement

Definitive Additional Materials

Soliciting Material Pursuant to § 240.14a-12

 

PHILLIPS EDISON GROCERY CENTER REIT I, INC.

(Name of Registrant as Specified in its Charter)

 

Payment of Filing Fee (Check the appropriate box):

 

No fee required.

Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

(1)Title of each class of securities to which transaction applies:

Limited partnership units of Phillips Edison Grocery Center Operating Partnership I, L.P.

 

(2)Aggregate number of securities to which transaction applies:

52,850,700 limited partnership units of Phillips Edison Grocery Center Operating Partnership I, L.P.

 

(3)Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

The filing fee is determined based on the aggregate transaction consideration, which is the sum of the product of 52,850,700 limited partnership units of Phillips Edison Grocery Center Operating Partnership I, L.P. multiplied by the assumed value of $10.20 per unit (equal to $539,077,140), determined by the Board of Directors of PECO I based on a financial analysis performed by an independent valuation expert. In accordance with Exchange Act Rule 0-11(c), the filing fee of $62,479.04 was determined by multiplying the aggregate transaction consideration of $539,077,140 by 0.0001159.

 

(4)Proposed maximum aggregate value of transaction:

$539,077,140

 

(5)Total fee paid:

$62,479.04

 

Fee paid previously with preliminary materials.

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

(1)Amount Previously Paid:

(2)Form, Schedule or Registration Statement No.:

(3)Filing Party:

(4)Date Filed:

 

 

 

 

 

PRELIMINARY COPIES

 

 (PHILLIPS EDISON LOGO)

 

Dear Stockholder,

 

You are cordially invited to attend the annual meeting of stockholders of Phillips Edison Grocery Center REIT I, Inc., a Maryland corporation (“PECO I”), that will be held at 11501 Northlake Drive, Cincinnati, Ohio 45249 on ___________, 2017 at ____ Eastern Time.

 

At the annual meeting, you will be asked to consider and vote on the three items below. No matter the size of your investment, your vote is very important.

 

(i) The election of five directors to serve until the next annual meeting of stockholders and until their respective successors are duly elected and qualify;

 

(ii) A proposal to approve the recently proposed transaction (the “PELP Transaction”) where PECO I will acquire certain real estate assets, the third-party asset management business and certain other assets of our sponsor and the parent company of our external advisor and property manager, Phillips Edison Limited Partnership (“PELP”); and

 

(iii) The adjournment of the annual meeting, if necessary, as determined by the Chair of the annual meeting, to solicit additional proxies in favor of the foregoing proposals if there are not sufficient votes for the proposals.

 

The PELP Transaction will create an internally-managed, non-traded grocery-anchored shopping center REIT with an expected total enterprise value of approximately $4.0 billion. The resulting enterprise will own a high-quality, nationally-diversified portfolio of 230 grocery-anchored shopping centers in 32 states that is well positioned to drive sustained growth and create enhanced value for all stockholders.

 

Operational and financial benefits of the PELP Transaction include:

 

Maintains Grocery Focus. The combined real estate portfolio will be focused on grocery-anchored shopping centers with an emphasis on necessity-based retailers, which are likely to be more internet and recession resilient.

 

Improved Earnings. The PELP Transaction is expected to be accretive to funds from operations, as defined by the National Association of Real Estate Investment Trusts.

 

Dividends and Dividend Coverage: Future monthly distributions for PECO I are expected to remain unchanged following the transaction. PECO I estimates that pro forma FFO would have fully covered distributions for the three months ended March 31, 2017.

 

Strengthened Balance Sheet. The post-closing combined enterprise is expected to have an improved capital position on a total debt/EBITDA basis, which positions the company well for attractive future financing opportunities.

 

Better Alignment of Management. An internalized management structure creates better alignment with stockholders. Management will be PECO I’s largest equity owner, owning over 19 million operating partnership units and shares of common stock, with a long-term view of stockholder value and will be subject to traditional and customary lock-ups.

 

Increased Potential for Future Growth and Dividend Coverage. PELP’s real estate portfolio has the opportunity for higher net operating income growth. Additionally, potential future fee income from PELP’s asset management business is expected to further support PECO I’s dividend as well as other capital allocation strategies.

 

 

 

 

Improved Geographic and Tenant Diversity. The post-closing combined enterprise will own a high-quality portfolio of 230 grocery-anchored shopping centers comprising approximately 25.5 million square feet in established trade areas located in 32 states and will benefit from greater geographic, grocery anchor and tenant diversification.

 

Superior Financial Strength and Flexibility. With enhanced size and scale, the combined enterprise will have additional access to capital, which can be used to support strategic investments to drive future growth opportunities.

 

Liquidity Opportunities. Given its enhanced size, scale, improved financials and internalized management structure, the combined enterprise is better positioned to capitalize on capital market opportunities, including certain potential liquidity alternatives.

   

After careful consideration, the Special Committee of the Board of Directors recommended the PELP Transaction for approval and adoption and that it be submitted to our Board of Directors for consideration.

 

Based on the recommendation of the Special Committee, all of the uninterested directors present at a meeting of the Board of Directors unanimously approved the terms and conditions of the PELP Transaction and believe it is advisable and in the best interests of PECO I. Therefore, our Board of Directors recommends that you vote “FOR” all of the foregoing proposals.

 

Whether or not you expect to attend the annual meeting in person, please authorize a proxy to vote on your behalf as promptly as possible by completing, signing, dating and mailing your proxy card in the pre-addressed postage-paid envelope provided or authorizing your proxy by one of the other methods specified in this proxy statement. This saves the company time and money as we will no longer have to solicit your vote. 

 

We encourage you to read the enclosed proxy statement accompanying this letter in its entirety before voting, including the annexes included in the enclosed proxy statement and the section entitled “Risk Factors” beginning on page 19.

 

On behalf of PECO I’s management team and the Board of Directors, I thank you for your support and urge you to vote “FOR” approval of each of the matters presented.

 

Sincerely,

 

-s- Jeffrey S. Edison 

 

Jeffrey S. Edison

Chair of the Board of Directors and 

Chief Executive Officer

 

 

 

 

PHILLIPS EDISON GROCERY CENTER REIT I, INC.

11501 Northlake Drive
Cincinnati, Ohio 45249

 

NOTICE OF 2017 ANNUAL MEETING OF STOCKHOLDERS
AND INTERNET AVAILABILITY OF PROXY MATERIALS

 

Dear Stockholder:

 

You are cordially invited to attend the 2017 annual meeting of stockholders (the “Annual Meeting”) of Phillips Edison Grocery Center REIT I, Inc., a Maryland corporation (“PECO I”), that will be held at 11501 Northlake Drive, Cincinnati, Ohio 45249, at ____ Eastern Time on ___________, 2017.

 

The purpose of the Annual Meeting is to consider and vote upon the following proposals:

 

1.Elect five directors to serve until the next annual meeting of stockholders and until their respective successors are duly elected and qualify.

The Board of Directors (the “Board of Directors”) recommends a vote FOR each nominee.

 

2.

Approve the transactions contemplated by that certain Contribution Agreement, dated May 18, 2017 (the “Contribution Agreement”), by and among PECO I, Phillips Edison Grocery Center Operating Partnership I, L.P. (“PECO I OP”), Phillips Edison Limited Partnership (“PELP”) and the other contributors listed on Exhibit A thereto (collectively, the “Contributors”), whereby the Contributors agreed to contribute certain of their real estate assets, their third-party asset management business and certain other assets to PECO I OP, in exchange for the Aggregate Consideration (as defined and described in further detail in this proxy statement) (the “PELP Proposal”). 

The Board of Directors recommends a vote FOR this proposal.

 

3.Adjourn the Annual Meeting, if necessary, as determined by the Chair of the Annual Meeting, to solicit additional proxies in favor of the foregoing proposals if there are not sufficient votes for the proposals.

The Board of Directors recommends a vote FOR this proposal.

 

4.Attend to such other business as may properly come before the meeting and any adjournment or postponement thereof.

 

The Board of Directors has fixed _______, 2017 as the record date for the Annual Meeting. Only the holders (the “Stockholders”) of record of shares of common stock of PECO I (the “Common Shares”) as of the close of business on _______, 2017 are entitled to notice of and to vote at the Annual Meeting and any adjournment or postponement thereof.

 

This proxy statement and proxy card is dated as of ________, 2017 and is first being mailed to you on or about ________, 2017, along with a copy of our 2016 annual report.

 

 

 

 

YOUR VOTE IS IMPORTANT

 

Whether or not you plan to attend the Annual Meeting in person, please authorize a proxy to vote your shares as promptly as possible. To authorize a proxy, complete, sign, date and mail your proxy card in the pre-addressed postage-paid envelope provided or, if the option is available to you, call the toll-free telephone number listed on your proxy card or use the internet as described in the instructions on the enclosed proxy card to authorize your proxy. Authorizing a proxy will assure that your vote is counted at the Annual Meeting if you do not attend in person. If your Common Shares are held in “street name” by your broker or other nominee, only your broker or other nominee can vote your Common Shares and the vote cannot be cast unless you provide instructions to your broker or other nominee on how to vote or obtain a legal proxy from your broker or other nominee. You should follow the directions provided by your broker or other nominee regarding how to instruct your broker or other nominee to vote your Common Shares. You may revoke your proxy at any time before it is voted. Please review the proxy statement accompanying this notice for more complete information regarding the transactions contemplated by the PELP Proposal (the “PELP Transaction”) and the Annual Meeting.

 

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON _________, 2017: 

Our proxy statement, form of proxy card and 2016 annual report to Stockholders are also available at http://www.grocerycenterreit1.com/investor-relations/proxy-materials and https://proxyvote.com
with use of the control number on your proxy card.

 

By Order of the Board of Directors

 

-s- Devin I. Murphy 

 

Devin I. Murphy

Secretary

 

Cincinnati, Ohio

________, 2017

 

 

 

 

Table of Contents

 

      Page
QUESTIONS AND ANSWERS ABOUT THE PROXY MATERIALS AND THE ANNUAL  MEETING   1
SUMMARY OF PELP PROPOSAL   10
  The Parties   10
  The PELP Transaction   11
  Recommendation of the Board of Directors   11
  Opinion of Financial Advisor to the Special Committee   11
  Summary Risk Factors   11
  Conditions to Closing   13
  Termination of the Contribution Agreement   13
  Accounting Treatment of the PELP Transaction   14
  Interests of Certain Persons in the PELP Transaction   14
  Selected Financial Data of PELP   15
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS   17
RISK FACTORS   19
  Risk Factors Related to the PELP Transaction   19
  Risk Factors Following the PELP Transaction   22
  Risks Relating to an Investment in Common Shares Following the PELP Transaction   24
  Legal Risks Related to the PELP Transaction   25
  Tax Risks Relating to the PELP Transaction   25
THE ANNUAL MEETING   27
  Date, Time and Place of Annual Meeting   27
  Purpose of the Annual Meeting   27
  Recommendation of the Board of Directors   27
  Record Date; Who Can Vote at the Annual Meeting   27
  Quorum   27
  Voting Requirements   28
  Broker Non-Votes   28
  Manner of Authorizing Proxy   28
  Revocation of Proxies or Voting Instructions   29
  Solicitation of Proxies   29
PROPOSALS SUBMITTED TO HOLDERS OF COMMON SHARES   30
  Proposal 1: Election of Directors   30

 

 i

 

 

  Proposal 2: The PELP Proposal   47
  Proposal 3: Adjournment of the Annual Meeting   48
THE PELP TRANSACTION   49
  The Parties   49
  The PELP Transaction   50
  Background of the PELP Transaction   50
  Rationale for Recommending the Approval of the PELP Transaction   68
  Opinion of Financial Advisor to the Special Committee   72
  Certain Unaudited Prospective Financial Information Reviewed by PECO I   82
  Regulatory Approvals Required for the PELP Transaction   87
  Accounting Treatment of the PELP Transaction   87
  Material U.S. Federal Income Tax Consequences of the PELP Transaction   87
  Interests of Certain Persons in the PELP Transaction   90
THE PELP TRANSACTION DOCUMENTS   97
  The Contribution Agreement   97
  The Escrow Agreement   115
  The Tax Protection Agreement   115
  The Equityholder Agreement   116
  The Executive Severance Plan   117
  The Services Agreement   118
  The Third Amended and Restated Agreement of Limited Partnership of PECO I OP   120
  The Third Amended and Restated Bylaws of PECO I   123
  The License Agreement   123
INFORMATION ABOUT THE CONTRIBUTED PROPERTIES AND ASSET  MANAGEMENT BUSINESS   125
  General Structure of the Combined Businesses after Closing   125
  The Portfolio of Contributed Properties   126
  The Asset Management Business   128
  PECO II   129
  PECO III   131
  Legacy PELP   132
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  RESULTS OF OPERATIONS OF PELP   133
PER SHARE DATA OF PECO I   137

 

 ii

 

 

  UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF PECO I   138
  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT   149
  STOCKHOLDER PROPOSALS   150
  STOCKHOLDERS SHARING AN ADDRESS   150
  OTHER MATTERS   150
  WHERE YOU CAN FIND MORE INFORMATION   151
       
  Annexes:    
       
  Annex A Contribution Agreement   A-1
  Annex B Form of Equityholder Agreement   B-1
  Annex C Form of Services Agreement   C-1
  Annex D Form of Third Amended and Restated Agreement of Limited Partnership of Phillips Edison Grocery Center Operating Partnership I, L.P.   D-1
  Annex E Form of Third Amended and Restated Bylaws of Phillips Edison Grocery Center REIT I Inc.   E-1
  Annex F Form of License Agreement   F-1
  Annex G Form of Escrow Agreement   G-1
  Annex H Form of Tax Protection Agreement   H-1
  Annex I Lazard Opinion   I-1
  Annex J Historical Combined Financials of PELP   J-1

 

 iii

 

  

QUESTIONS AND ANSWERS ABOUT THE PROXY MATERIALS AND THE ANNUAL MEETING

 

We are providing you with this proxy statement and other proxy materials, which contain information about the items to be voted on at our Annual Meeting. To make this information easier to understand, we have presented some of the information in a question-and-answer format. Unless the context otherwise indicates, we refer to Phillips Edison Grocery Center REIT I, Inc. as “PECO I,” “we,” “us” or “our.”

 

 

 

Q:Why am I receiving these proxy materials?

 

A:We sent you this proxy statement and the enclosed proxy card because our Board of Directors is soliciting your proxy to vote your Common Shares at the Annual Meeting. This proxy statement includes information that we are required to provide to you under the rules of the Securities and Exchange Commission (the “SEC”) and is designed to assist you in voting.

 

 

 

Q:What is a proxy?

 

A:

A proxy is a person who votes the Common Shares of another person who could not attend a meeting. The term “proxy” also refers to the proxy card or other method of appointing a proxy. When you submit your proxy, you are appointing R. Mark Addy, the President and Chief Operating Officer of PECO I and an employee of PELP and Devin I. Murphy, the Chief Financial Officer, Treasurer and Secretary of PECO I and the Chief Financial Officer of PELP, each of whom is an officer, as your proxies, and you are giving them permission to vote your Common Shares at the Annual Meeting. The appointed proxies will vote your Common Shares as you instruct unless you submit your proxy without instructions. If you submit your proxy without instructions, the appointed proxies will vote FOR all of the director nominees, FOR the PELP Proposal, and FOR the proposal to adjourn the Annual Meeting to solicit additional proxies if necessary. With respect to any other proposals to be voted upon, they will vote in accordance with the recommendation of the Board of Directors or, in the absence of such a recommendation, in their discretion. If you do not submit your proxy, they will not vote your Common Shares.

 

 

 

Q:When is the Annual Meeting and where will it be held?

 

A:The Annual Meeting will be held on _________, 2017 at ____ Eastern Time at 11501 Northlake Drive, Cincinnati, Ohio 45249. If you need directions to the location of the Annual Meeting, please contact us at (513) 554-1110.

 

 

 

Q:Who is entitled to vote?

 

A:Anyone who is a Stockholder of record at the close of business on ________, 2017, the record date, or holds a valid proxy for the Annual Meeting, is entitled to vote at the Annual Meeting. Every Stockholder is entitled to one vote for each Common Share held.

 

 

 

Q:How many Common Shares are outstanding?

 

A:As of _______, 2017, there were [•] Common Shares issued and outstanding.

 

 1

 

 

 

 

Q:What is a “quorum”?

 

A:A quorum consists of the presence in person or by proxy of Stockholders entitled to cast 50% of all the votes entitled to be cast at the Annual Meeting. There must be a quorum present in order for the Annual Meeting to be a duly held meeting at which business can be conducted. Generally, if you submit your proxy, then you will be considered part of the quorum.

 

 

 

Q:What may I vote on?

 

A:You may vote on the election of nominees to serve on the Board of Directors, the PELP Proposal, the adjournment of our Annual Meeting to solicit additional proxies if necessary, and on any other proposal that may properly come before the Annual Meeting.

 

 

 

Q:How does the Board of Directors recommend I vote on the proposals?

 

A:The Board of Directors recommends a vote FOR each of the nominees for election as a director who are named as such in this proxy statement, a vote FOR the PELP Proposal, and a vote FOR the proposal to adjourn the Annual Meeting to solicit additional proxies if necessary. Mr. Jeffrey S. Edison, Chair and Chief Executive Officer of PECO I and the Co-Chair and Chief Executive Officer of Phillips Edison & Company, Inc., the general partner of PELP, who has a material financial interest in the PELP Transaction, has abstained from voting on our Board of Directors’ recommendation with respect to the PELP Proposal.

 

 

 

Q:How do I vote?

 

A:Stockholders can vote in person at the meeting or by authorizing a proxy. Stockholders have the following three options for authorizing a proxy to vote their Common Shares:

 

via the internet at https://proxyvote.com with use of the control number on your proxy card;

by telephone, by calling 1-800-690-6903; or

by mail, by completing, signing, dating and returning the enclosed postage pre-paid proxy card.

 

For those Stockholders with internet access, we encourage you to authorize a proxy via the internet, since it is quick, convenient and provides a cost savings to us. When you vote via the internet or by telephone prior to the meeting date, your vote is recorded immediately and there is no risk that postal delays will cause your vote to arrive late and, therefore, not be counted. For further instructions on voting, see the enclosed proxy card.

 

If you elect to attend the Annual Meeting, you can submit your vote in person, and any previous votes that you submitted, whether by internet, telephone or mail, will be superseded. If you return your signed proxy, your shares will be voted as you instruct, unless you give no instructions with respect to one or more of the proposals. In this case, unless you later instruct otherwise, your Common Shares will be voted FOR the nominees for director, FOR the PELP Proposal, and FOR the proposal to adjourn the Annual Meeting to solicit additional proxies, if necessary. With respect to any other proposals to be voted on that properly come before the Annual Meeting, your Common Shares will be voted in accordance with the recommendation of the Board of Directors or, in the absence of such a recommendation, in the discretion of Messrs. Addy and Murphy.

 

 2

 

 

 

 

Q:Why has the PELP Transaction been proposed?

 

A:After carefully evaluating the PELP Transaction, the Special Committee of our Board of Directors (the “Special Committee”) believes the PELP Transaction is reasonably likely to create significant operational and financial benefits, including:

 

Maintains Grocery Focus. The combined real estate portfolio will be focused on grocery-anchored shopping centers with an emphasis on necessity-based retailers, which are likely to be more internet and recession resilient.

  

Improved Earnings. The PELP Transaction is expected to be accretive to funds from operations (“FFO”), as defined by the National Association of Real Estate Investment Trusts (“NAREIT”).

 

Dividends and Dividend Coverage. Future monthly distributions for PECO I are expected to remain unchanged following the PELP Transaction. PECO I estimates that pro forma FFO would have fully covered distributions for the three months ended March 31, 2017.

  

Strengthened Balance Sheet. The post-closing combined enterprise is expected to have an improved capital position on a total debt to estimated earnings before interest, taxes, depreciation and amortization (“EBITDA”) basis, which positions the company well for attractive future financing opportunities.

  

Better Alignment of Management. An internalized management structure creates better alignment with Stockholders. Through its investment in limited partnership units of PECO I OP (“OP Units”), management will be PECO I’s largest equity owner, owning over 19 million OP Units and Common Shares, with a long-term view of Stockholder value and will be subject to traditional and customary lock-ups.

  

Increased Potential for Future Growth and Dividend Coverage. PELP’s real estate portfolio has the opportunity for higher net operating income growth. Additionally, potential future fee income from PELP’s third-party asset management business is expected to further support PECO I’s dividend as well as other capital allocation strategies.

 

Improved Geographic and Tenant Diversity. The post-closing combined enterprise will own a high-quality portfolio of 230 grocery-anchored shopping centers comprising approximately 25.5 million square feet in established trade areas located in 32 states and will benefit from greater geographic, grocery anchor and tenant diversification.

 

Superior Financial Strength and Flexibility. With enhanced size and scale, the combined enterprise will have additional access to capital, which can be used to support strategic investments to drive future growth opportunities.

 

Liquidity Opportunities. Given its enhanced size, scale, improved financials and internalized management structure, the post-closing combined enterprise is better positioned to capitalize on capital market opportunities, including certain potential liquidity alternatives.

  

 3

 

 

 

 

Q:What is the effect of the PELP Transaction?

 

A:

If the conditions to consummation of the Contribution Agreement are satisfied or (to the extent permissible) waived, in exchange for the Contributors’ equity interests in all of the issued and outstanding equity interests of certain of the Contributors’ subsidiaries identified on Exhibit B to the Contribution Agreement (each, a “Contributed Company,” and collectively, the “Contributed Companies”): (i) at the closing of the PELP Transaction (the “Closing”), PECO I OP will issue to the Contributors 40,360,504 OP Units (the “Base OP Unit Consideration”), subject to certain adjustments set forth in the Contribution Agreement, and PECO I OP will pay the Contributors $50.0 million in cash (the “Cash Consideration” together with the Base OP Unit Consideration, the “Closing Consideration”), subject to certain adjustments set forth in the Contribution Agreement; an\d (iii) after the Closing, the Contributors will have the right to receive up to 12,490,196 OP Units (the “Earn-out Consideration”) if certain milestones are achieved as set forth in the Contribution Agreement, with the greatest aggregate consideration contingent on achieving a liquidity event for Stockholders by December 31, 2019 at a value per Common Share of $10.20 (the “Implied Valuation”) or greater and the successful raising of $1.5 billion of equity capital by December 31, 2019 for Phillips Edison Grocery Center REIT III, Inc. (“PECO III”). Upon completion of the PELP Transaction, the Contributed Companies will become subsidiaries of PECO I OP, and we will become self-managed and self-advised. After that time, we no longer will bear the cost of the advisory and property management fees and expense reimbursements currently payable to our external advisor and property manager, Phillips Edison & Company, Ltd. (“Property Manager”), under our current advisory and property management agreements. Upon completion of the PELP Transaction, we will acquire the Contributed Companies, which collectively own a portfolio of 76 shopping centers totaling approximately 8.7 million square feet (the “Contributed Properties”), PELP’s third-party asset management business, captive insurance business and certain other assets (the “Contributed Businesses”) held by PELP and the other Contributors. See “The PELP Transaction” on page 49.

 

Further, as a result of the PELP Transaction, our executive officers and one of our directors will benefit in the Closing Consideration and Earn-out Consideration (together, the “Aggregate Consideration”) through their interests in PELP. See “The PELP Transaction—Interests of Certain Persons in the PELP Transaction” beginning on page 90 for a summary of the interests of our executive officers and directors in the PELP Transaction.

 

 

 

Q:What was the process used to evaluate the PELP Transaction?

 

A:The Special Committee recommended that the Board of Directors approve the PELP Transaction based upon a variety of factors. In evaluating the PELP Transaction, the independent directors held dozens of telephonic and in-person meetings over a multi-year period during which they considered various proposals from PELP and consulted with their legal, financial and other advisors as described in greater detail in the section entitled “The PELP Transaction—Background of the PELP Transaction” beginning on page 50.

 

 

 

Q:When do you expect the PELP Transaction to be consummated?

 

A:Assuming all conditions to the PELP Transaction under the Contribution Agreement are satisfied or waived, we expect to consummate the PELP Transaction on the second business day after the date on which each of the conditions of the parties to consummate the PELP Transaction is satisfied or, to the extent permitted by law, waived by the party entitled to waive such condition or at such other time or date as agreed to in writing by the parties.

 

 4

 

 

Pursuant to the Contribution Agreement, the Contribution Agreement may be terminated if the PELP Transaction has not been completed by February 14, 2018.

 

 

 

Q:What will be the impact of the PELP Transaction on the current Stockholders?

 

A:The PELP Transaction will dilute the ownership percentage of current Stockholders. Consequently, current Stockholders, as a general matter, may have less influence over the management and policies of PECO I after the PELP Transaction than they currently exercise over the management and policies of PECO I.

 

Moreover, pursuant to the Contribution Agreement, the Contributors have an opportunity to earn additional OP Units if certain milestones are achieved, including a liquidity event for the Stockholders no later than December 31, 2021 or the successful raising of equity capital for PECO III, with the greatest Aggregate Consideration contingent on achieving a liquidity event for the Stockholders no later than December 31, 2019 at a value per Common Share of $10.20 or greater and the successful raising of $1.5 billion of equity capital by December 31, 2019 for PECO III. Achievement of any part of the Earn-out Consideration would further dilute current Stockholders’ fully diluted ownership interests in PECO I.

 

 

 

Q:What are the U.S. federal income tax consequences to PECO I as a result of the proposed PELP Transaction?

 

A:The PELP Transaction involves the contribution of interests in a number of entities that own real property, a management business, an insurance business and certain other assets to PECO I OP in exchange for OP Units. Assuming PECO I OP is treated as a partnership for U.S. federal income tax purposes, the PELP Transaction is intended to constitute a tax-deferred contribution by the Contributors to PECO I OP for such purposes. As a result, none of the Contributors, PECO I OP or PECO I is expected to recognize any material gain or loss for U.S. federal income tax purposes solely as a result of the PELP Transaction. In addition, the PELP Transaction is not expected to adversely affect our ability to continue to qualify as a real estate investment trust (“REIT”). For more information regarding the tax consequences to PECO I as a result of the PELP Transaction, please see “The PELP Transaction─Material U.S. Federal Income Tax Consequences of the PELP Transaction” on page 87.

 

 

 

Q:Do any of our executive officers and directors or any other persons have any interest in the PELP Transaction that is different than that of our Stockholders?

 

A:Yes. In considering the recommendation of the Board of Directors to vote for the proposal described in this proxy statement, you should be aware that certain of our current directors and executive officers, including Mr. Edison, who is one of the five directors being nominated for reelection in this proxy statement and the Chair of the Board of Directors, have interests in the PELP Transaction that may be different from, or in addition to, the interests of the Stockholders generally and that may create potential conflicts of interest. These interests include:

 

Mr. Edison and members of the PECO I management team are investors in, and form the management team of, PELP;

 

the payment of consideration in connection with the PELP Transaction to certain of these individuals, including Messrs. Edison, Murphy and Addy;

 

the grant or anticipated grant of OP Units to certain of these individuals, including Messrs. Edison, Murphy and Addy;

 

  5 

 

 

the adoption or anticipated adoption of an executive severance plan in which certain of these individuals, including Messrs. Edison, Murphy and Addy, will become participants effective as of the Closing;

 

the grant or anticipated grant of PECO I OP phantom units to certain of these individuals that hold restricted units pursuant to the PELP Restricted Unit Award Plan (each such restricted unit, a “RMU”), including Messrs. Edison, Murphy, and Addy and Ms. Jennifer Robison, the Chief Accounting Officer of PECO I and PELP;

 

the entry or anticipated entry into the Equityholder Agreement and Tax Protection Agreement with certain of these individuals, including Messrs. Edison, Murphy, and Addy, that will become effective as of the Closing;

 

the provision of certain indemnification rights to certain of these individuals, including Messrs. Edison, Murphy and Addy, to receive coverage under directors’ and officers’ liability insurance for a period of six years following the Closing, as provided under the organizational documents of PELP; and

 

the adoption or anticipated adoption of an equity incentive plan, which would provide for equity grants to certain of these individuals, including Messrs. Edison, Murphy and Addy.

  

The Special Committee was aware of each of these interests in reviewing, considering and negotiating the terms of the PELP Transaction and in recommending to the Board of Directors to pursue the PELP Transaction. The Board of Directors was also aware of these interests in approving the Contribution Agreement and the other transaction documents contemplated thereby and in recommending the approval of the Contribution Agreement, the other transaction documents contemplated thereby and the PELP Transaction to the Stockholders.

 

 

 

Q:Why is the PELP Transaction being submitted to our Stockholders?

 

A:

There is no legal requirement to submit the PELP Transaction to our Stockholders for approval. Because we believe it is desirable to obtain your approval of the PELP Transaction, we have made your approval of the PELP Transaction a condition to the Closing. If the PELP Proposal is not approved by the Stockholders, we will continue to operate under our current management structure, paying fees and cost reimbursements to our advisor and our Property Manager under our current agreements. 

 

 

 

Q:What rights will I have if I vote against the PELP Transaction?

 

A:You can vote against the PELP Transaction by indicating a vote against the PELP Proposal on your proxy card and by signing and mailing your proxy card, by authorizing your proxy over the internet (pursuant to the instructions on the proxy card), by telephone, or by voting against the PELP Proposal in person at the Annual Meeting.

 

Stockholders will not have appraisal rights with respect to the PELP Proposal.

 

 

 

  6 

 

 

Q:What if I submit my proxy and then change my mind?

 

A:You have the right to revoke your proxy at any time before the meeting by:

 

(1)notifying our Secretary at our corporate office address listed below;

(2)attending the Annual Meeting and voting in person;

(3)contacting us for another proxy card, and then returning it to us, if we receive it before the Annual Meeting date; or

(4)recasting your proxy vote via the internet or by telephone.

 

Only the most recent proxy vote will be counted and all others will be discarded regardless of the method of voting.

 

 

 

Q:Will my vote make a difference?

 

A:Yes. Your vote is needed to ensure that the proposals can be acted upon. Because we are a widely held REIT (with more than 40,000 Stockholders and, unlike most other public companies, no large brokerage house is the record holder of a substantial amount of Common Shares), YOUR VOTE IS VERY IMPORTANT! Your immediate response will help avoid potential delays and may save us significant additional expenses associated with soliciting Stockholder votes. We encourage you to participate in the governance of PECO I.

 

 

 

Q:What are the voting requirements to elect the Board of Directors?

 

A:With regard to the election of directors, you may vote “FOR ALL” of the nominees, you may withhold your vote for all of the nominees by voting “WITHHOLD ALL,” or you may vote for all of the nominees except for certain nominees by voting “FOR ALL EXCEPT” and listing the corresponding number of the nominee(s) for whom you want your vote withheld in the space provided on the proxy card. Under our bylaws, a majority of the Common Shares present in person or by proxy at an annual meeting at which a quorum is present is required for the election of the directors. This means that, of the Common Shares present in person or by proxy at an annual meeting, a director nominee needs to receive affirmative votes from a majority of such Common Shares in order to be elected to the Board of Directors. Because of this majority of the votes present requirement, “withhold” votes and broker non-votes (discussed below) will have the effect of a vote against each nominee for director. If an incumbent director nominee fails to receive the required number of votes for reelection, then under Maryland law, he will continue to serve as a “holdover” director until his successor is duly elected and qualified. If you submit a proxy card with no further instructions, your Common Shares will be voted in accordance with the recommendation of the Board of Directors at the Annual Meeting.

 

 

 

Q:What are the voting requirements to approve the PELP Proposal?

 

A:Approval of the PELP Proposal requires the affirmative vote of a majority of the votes cast at the Annual Meeting, assuming a quorum is present. Abstentions and broker non-votes will not be counted as votes cast and will have no effect on the PELP Proposal. Proxies received will be voted FOR the PELP Proposal unless Stockholders designate otherwise.

 

  7 

 

 

 

 

Q:What are the voting requirements to approve the proposal to adjourn the Annual Meeting to solicit additional proxies, if necessary?

 

A:Approval of the proposal to adjourn the Annual Meeting to solicit additional proxies, if necessary, requires the affirmative vote of a majority of the votes cast thereon at the Annual Meeting. You may vote for or against or abstain on the proposal. Abstentions and broker non-votes will not have an effect on the proposal to adjourn the Annual Meeting to solicit additional proxies, if necessary. Proxies received will be voted FOR the proposal to adjourn the Annual Meeting to solicit additional proxies, if necessary, unless Stockholders designate otherwise.

 

 

 

Q:What is a “broker non-vote”?

 

A:A “broker non-vote” occurs when a broker holding stock on behalf of a beneficial owner submits a proxy but does not vote on a non-routine proposal because the broker does not have discretionary power with respect to that item and has not received instructions from the beneficial owner. Brokers may not exercise discretionary voting in uncontested director elections at stockholder meetings and are prohibited from giving a proxy to vote with respect to an election of directors without receiving voting instructions from a beneficial owner. Brokers also may not exercise discretionary voting with respect to the PELP Proposal. Beneficial owners of Common Shares held in broker accounts are advised that, if they do not timely provide instructions to their broker, their Common Shares will not be voted in connection with the election of directors or the PELP Proposal. However, even without such instructions, the Common Shares of beneficial owners will be treated as present for the purposes of establishing a quorum if the broker votes such Common Shares on the proposal regarding the adjournment of the Annual Meeting, which proposal is a routine matter with respect to which brokers have discretionary authority to vote.

 

 

 

Q:How will voting on any other business be conducted?

 

A:Although we do not know of any business to be considered at the Annual Meeting other than the election of directors, the PELP Proposal and the proposal to adjourn the Annual Meeting to solicit additional proxies, if necessary, if any other business is properly presented at the Annual Meeting, a submitted proxy gives authority to Messrs. Addy and Murphy, and each of them, to vote on such matters in accordance with the recommendation of the Board of Directors or, in the absence of such a recommendation, in the discretion of Messrs. Addy and Murphy.

 

 

 

Q:When are the Stockholder proposals for the next annual meeting of Stockholders due?

 

A:Stockholders interested in nominating a person as a director or presenting any other business for consideration at our annual meeting of Stockholders in 2018 may do so by following the procedures prescribed in Section 2.12 of our bylaws and in Rule 14a-8 under the Securities Exchange Act of 1934 (the “Exchange Act”). To be eligible for presentation to and action by the Stockholders at the 2018 annual meeting and to also be eligible for inclusion in our proxy statement for the 2018 annual meeting, director nominations and other Stockholder proposals must be received by our secretary no earlier than [•], 2018 and no later than 5:00 p.m. Eastern Time on [•], 2018. See “Stockholder Proposals” on page 149.

 

 

 

  8 

 

 

Q:Who pays the cost of this proxy solicitation?

 

A:We will pay all of the costs of soliciting these proxies. We have contracted with Broadridge Financial Solutions, Inc. (“BFS”) to assist us in the distribution of proxy materials and the solicitation of proxies. We expect to pay BFS fees of approximately $[•] to solicit proxies plus other fees and expenses for other services related to this proxy solicitation, including the review of proxy materials, dissemination of brokers’ search cards, distribution of proxy materials, operating online and telephone voting systems and receipt of executed proxies. We will also reimburse brokerage houses and other custodians, nominees and fiduciaries for their reasonable out-of-pocket expenses for forwarding proxy and solicitation materials to our Stockholders.

 

 

 

Q:Is this proxy statement the only way that proxies are being solicited?

 

A:No. In addition to mailing proxy solicitation material, employees of BFS and employees of our advisor or its affiliates may also solicit proxies in person, via the internet, by telephone or by any other electronic means of communication we deem appropriate.

 

 

 

Q:If I plan to attend the Annual Meeting in person, should I notify anyone?

 

A:While you are not required to notify anyone in order to attend the Annual Meeting, if you do plan to attend the Annual Meeting, we would appreciate it if you would mark the appropriate box on the enclosed proxy card to let us know how many Stockholders will be attending the meeting so that we will be able to prepare a suitable meeting room for the attendees.

 

 

 

Q:Where can I find more information?

 

A:You may access, read and print copies of the proxy materials for this year’s Annual Meeting, including our proxy statement, form of proxy card, and annual report to Stockholders, at the following web address: http:// www.grocerycenterreit1.com/investor-relations/proxy-materials and https://proxyvote.com with use of the control number on your proxy card.

 

We also file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any reports, statements or other information we file with the SEC on the website maintained by the SEC at www.sec.gov. Our SEC filings also are available to the public at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, DC 20549. You also may obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information regarding the public reference facilities.

 

  9 

 

 

SUMMARY OF PELP PROPOSAL

 

The Parties

 

PECO I and PECO I OP

 

PECO I is a public non-traded REIT that was formed as a Maryland corporation in October 2009 and qualified as a REIT for the year ended December 31, 2010 and each year thereafter.

 

PECO I focuses its investment strategy primarily on well-occupied, grocery-anchored neighborhood and community shopping centers having a mix of creditworthy national and regional retailers selling necessity-based goods and services in diversified markets with growth potential throughout the United States, including Florida, Georgia, Ohio, California, Illinois and North Carolina. PECO I owns its interests in all of its properties and conducts substantially all of its business through PECO I OP, a Delaware limited partnership formed in December 2009. The principal executive office of PECO I and PECO I OP is located at 11501 Northlake Drive, Cincinnati, Ohio 45249, and its telephone number is (513) 554-1110.

 

PELP

 

PELP is a Delaware limited partnership that acquires and operates grocery-anchored neighborhood and community shopping centers throughout the United States. PELP was formed in 2004, pursuant to a business combination of predecessor entities that have existed since 1991. As of March 31, 2017, PELP owned fee simple interests in 82 properties, located in 25 states, totaling approximately 9.4 million square feet. PELP focuses its investment strategy on grocery-anchored shopping centers in areas with attractive growth opportunities and benefits from in-line tenants and rental revenue driven by convenience and service-based businesses. PELP’s real estate properties are located in diversified markets, including Florida, Georgia, Ohio, Texas, California, Virginia and North Carolina.

 

PELP also operates a fully integrated, in-house, third-party asset management business led by senior executives with more than two decades of real estate experience and more than ten years together. This platform manages multiple aspects of shopping center operations, including acquisitions, leasing, construction management, property management, finance, marketing and dispositions. Designed to optimize property value and consistently deliver a great shopping experience, PELP currently manages approximately $4.9 billion of third-party real estate, which includes properties owned by PECO I, Phillips Edison Grocery Center REIT II, Inc. (“PECO II”), PECO III, Phillips Edison Value Added Grocery Venture, LLC, a value-added joint venture between PECO II and TPG Real Estate, and other third parties.

 

PELP has operated with financial partners through property-specific joint ventures, multi-asset discretionary private equity funds, and publicly registered, non-traded REITs, and since its inception, has owned, operated, and/or managed over 60 million square feet of real estate. As of March 31, 2017, PELP and its affiliates own, operate, and/or manage a portfolio consisting of approximately 39.8 million square feet, located in 33 states, totaling over 5,300 tenants.

 

PELP has corporate offices in Cincinnati, Salt Lake City, New York and Atlanta. The principal executive office of PELP is located at 11501 Northlake Drive, Cincinnati, Ohio 45249, and its telephone number is (513) 554-1110.

 

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The PELP Transaction

 

PECO I OP will acquire from the Contributors, including PELP, the Contributed Companies, which collectively own the Contributed Properties and the Contributed Businesses, pursuant to the terms and conditions of the Contribution Agreement, as further described in this proxy statement. A copy of the Contribution Agreement is attached as Annex A to this proxy statement and incorporated herein by reference. PECO I encourages you to read the Contribution Agreement in its entirety because it is the principal document governing the PELP Transaction. See “Transaction Documents—The Contribution Agreement” for a summary of the principal terms of the Contribution Agreement.

 

Recommendation of the Board of Directors

 

After careful consideration of the PELP Proposal and the recommendation of the Special Committee that the PELP Transaction is advisable and in the best interests of PECO I, the Board of Directors recommends that you vote FOR the PELP Proposal.

 

Opinion of Financial Advisor to the Special Committee

 

At a meeting of the Special Committee held to evaluate the PELP Transaction on May 18, 2017, Lazard Frères & Co. LLC (“Lazard”) rendered an opinion to the Special Committee to the effect that, as of such date, and subject to the assumptions, limitations and qualifications set forth in the opinion, the Aggregate Consideration, if any, to be paid by PECO I OP in the PELP Transaction was fair, from a financial point of view, to PECO I.

 

The full text of Lazard’s opinion, dated May 18, 2017, which sets forth the assumptions made, factors considered and limitations and qualifications on the review undertaken by Lazard in connection with its opinion, is attached as Annex I. Lazard’s opinion was not intended to and does not constitute a recommendation to any holder of securities as to how such holder should vote or act with respect to the PELP Transaction or any matter relating thereto. Pursuant to an engagement letter between the Special Committee and Lazard, the Special Committee has agreed to pay Lazard an aggregate fee of approximately $4.0 million, of which $1.75 million has been paid to date and $2.25 million is payable upon the Closing. In addition, the Special Committee may pay Lazard a discretionary fee up to a maximum amount of $1.0 million, determined by the Special Committee in its sole discretion, upon the Closing.

 

Summary Risk Factors

 

You should consider carefully all of the risk factors and other information included or otherwise incorporated by reference in this proxy statement before deciding how to vote. Certain of the risks related to the PELP Transaction are described under “Risk Factors” on page 19. The principal risks relating to the PELP Transaction include the following:

 

The ownership percentage of Stockholders will be diluted by the PELP Transaction.

 

The PELP Transaction may not be accretive to Stockholders.

 

The Closing is subject to various conditions and if these conditions are not satisfied or waived, the PELP Transaction will not be completed. Failure to complete the PELP Transaction could have material adverse effects on PECO I.

 

There may be unexpected delays in the Closing, which could impact the ability to timely achieve the benefits associated with the PELP Transaction.

 

  11 

 

 

The number of OP Units constituting the Aggregate Consideration will not be adjusted in the event of any change in PECO I’s estimated net asset value per Common Share.

 

Members of PECO I’s management team and the Chair of the Board of Directors have interests in the PELP Transaction that are different from, or in addition to, those of Stockholders more generally.

 

The pendency of the PELP Transaction could adversely affect the business and operations of PECO I and the Contributed Companies.

 

The unaudited pro forma combined financial information in this proxy statement is presented for illustrative purposes only and the operating results and financial condition of PECO I following the Closing may differ and such differences may be material.

  

The unaudited prospective financial information in this proxy statement is presented for illustrative purposes only and actual results of PECO I following the Closing may differ materially.

  

Mr. Edison, or his designee, will be nominated to the Board of Directors for each of the next ten succeeding annual meetings following the Closing, subject to certain terminating events.

  

Mr. Edison shall continue to serve as Chair of the Board of Directors until the third anniversary of the Closing, subject to certain terminating events.

  

Upon the Closing, the Second Amended and Restated Agreement of Limited Partnership of PECO I OP (the “PECO I OP Partnership Agreement”) shall be amended to, among other things, grant certain rights and protections to the limited partners, which may prevent or delay a change of control transaction that might involve a premium price for Common Shares. This risk is especially true if Mr. Edison does not favor a proposed change of control transaction because Mr. Edison will have voting control over a significant number of OP Units.

  

PECO I expects to incur substantial expenses related to the PELP Transaction.

  

The future results of PECO I will suffer if PECO I does not effectively manage its expanded portfolio and operations.

  

PECO I may be unable to retain key employees.

 

PECO I may be exposed to risks to which PECO I has not historically been exposed.

 

PECO I allows other parties to use the “Phillips Edison” and “PECO” names and marks following the Closing, which may cause monetary and reputational costs.

 

Following the Closing, PECO I has agreed to honor and fulfill the rights to certain indemnification claims for acts or omissions occurring at or prior to the Closing in favor of managers, directors, officers, trustees, agents or fiduciaries of any Contributed Company or subsidiary thereof.

 

  12 

 

 

The estimated net asset value of Common Shares may decline as a result of the PELP Transaction.

 

PECO I cannot assure you that PECO I will be able to continue paying distributions at the rate currently paid.

 

Counterparties to certain significant agreements with PELP, the Contributed Companies and their subsidiaries may have consent rights in connection with the PELP Transaction.

 

PECO I may have failed to uncover all liabilities of the Contributed Companies through the due diligence process prior to the PELP Transaction, exposing PECO I to potentially large, unanticipated costs.

 

The Tax Protection Agreement, during its term, could limit PECO I OP’s ability to sell or otherwise dispose of certain properties and may require PECO I OP to maintain certain debt levels that otherwise would not be required to operate our business.

 

If PECO OP I fails to qualify as a partnership for U.S. federal income tax purposes, we would fail to qualify as a REIT and suffer other adverse consequences.

  

PECO I OP will have a carryover tax basis on certain of its assets as a result of the PELP Transaction, and the amount that we have to distribute to Stockholders therefore may be higher.

 

Conditions to Closing

 

The Closing is subject to the satisfaction of a number of conditions, as described more fully in this proxy statement. For example, the Closing is conditioned upon, among other things, the following approvals: 

 

Approvals. The expiration of all applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), shall have been terminated or expired. All required governmental filings shall have been made and consents from governmental authorities shall have been obtained. On June 16, 2017, the Federal Trade Commission (the “FTC”) granted early termination of the waiting period under the HSR Act.

  

Consents. Consents required for the consummation of the contributions shall have been obtained.

 

No Injunctions or Restraints. No law, judgment or other legal restraint of or from any governmental entity or court prohibiting the PELP Transaction shall be in effect.

  

Stockholder Approval. PECO I OP shall have received the approval of the PELP Proposal by the affirmative vote of a majority of the votes cast at a meeting of the Stockholders at which a quorum is present, subject to PECO I’s right to make postponements or adjournments of such Stockholders’ meeting under certain circumstances specified in the Contribution Agreement.

  

Termination of the Contribution Agreement

 

The Contribution Agreement may be terminated and the PELP Transaction may be abandoned prior to the Closing for a number of reasons, as described more fully in this proxy statement.

 

  13 

 

 

Accounting Treatment of the PELP Transaction

 

The PELP Transaction will be accounted for as a business combination under Accounting Standards Codification (“ASC”) 805, Business Combinations, with PECO I treated as the accounting acquirer. The assets (including identifiable intangible assets) and liabilities of PELP will be recorded at their respective fair values at the date of acquisition. Any excess purchase price over the net amount of the fair values of the tangible and intangible identified assets and liabilities will be recorded as goodwill. Consolidated financial statements after the acquisition will reflect the fair value adjustments and the combined results of operations from the date of the acquisition. PECO I, with the assistance of independent valuation professionals, has calculated preliminary fair values; however the allocation is based upon a valuation that has not yet been finalized and will not be finalized until the PELP Transaction has closed.

 

Interests of Certain Persons in the PELP Transaction

 

In considering the recommendation of the Board of Directors to vote for the proposal described in this proxy statement, you should be aware that certain of our current directors and executive officers, including Mr. Edison, who is one of the five directors being nominated for reelection in this proxy statement, have interests in the PELP Transaction that may be different from, or in addition to, the interests of the Stockholders generally and that may create potential conflicts of interest. These interests include:

 

Mr. Edison and members of the PECO I management team are investors in, and form the management team of, PELP;

 

the payment of consideration in connection with the PELP Transaction to certain of these individuals, including Messrs. Edison, Murphy and Addy;

 

the grant or anticipated grant of OP Units to certain of these individuals, including Messrs. Edison, Murphy and Addy;

 

the adoption or anticipated adoption of an executive severance plan in which certain of these individuals, including Messrs. Edison, Murphy and Addy, will become participants effective as of Closing;

 

the grant or anticipated grant of PECO I OP phantom units to certain of these individuals that hold RMUs, including Messrs. Edison, Murphy, and Addy and Ms. Robison;

 

the entry or anticipated entry into the Equityholder Agreement and Tax Protection Agreement with certain of these individuals, including Messrs. Edison, Murphy, and Addy, that will become effective as of Closing;

 

the provision of certain indemnification rights to certain of these individuals, including Messrs. Edison, Murphy and Addy, to receive coverage under directors’ and officers’ liability insurance for a period of six years following the Closing, as provided under the organizational documents of PELP; and

 

the adoption or anticipated adoption of an equity incentive plan, which are expected to provide for equity grants to certain of these individuals, including Messrs. Edison, Murphy and Addy.

 

The Special Committee was aware of each of these interests in reviewing, considering and negotiating the terms of the PELP Transaction and in recommending to the Board of Directors to pursue the PELP Transaction. The Board of Directors was also aware of these interests in approving the Contribution Agreement and the other transaction documents contemplated thereby and in recommending the approval of the Contribution Agreement, the other transaction documents contemplated thereby and the PELP Transaction to the Stockholders.

 

  14 

 

 

Selected Financial Data of PELP

 

The following table sets forth selected financial data related to PELP. Please read the following selected financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations of PELP” on page 132.

 

   For the three months ended   For the years ended December 31, 
(in thousands)  March 31, 2017   2016   2015   2014   2013   2012 
Balance Sheet Data:(1)                              
Investment in real estate assets at cost  $636,819   $609,075   $639,129   $643,485   $632,111   $640,752 
Cash and cash equivalents   8,272    13,520    10,912    16,428    20,237    9,674 
Total assets   508,012    491,134    492,000    510,407    521,392    534,564 
Mortgages and loans payable, net   521,817    493,724    518,327    525,415    554,404    579,459 
Operating Data:(2)                              
Rental income  $16,585   $68,768   $68,635   $66,997   $67,953   $66,678 
Fees and management income   18,710    75,190    51,297    73,569    40,386    24,302 
Total revenues   40,363    164,357    140,770    160,528    126,619    111,954 
Property operating expenses   9,101    36,781    33,992    28,041    25,614    22,123 
General and administrative expenses   10,157    37,837    52,618    34,131    25,504    18,656 
Interest expense, net   4,760    19,558    22,796    25,658    27,334    30,216 
Net income (loss) attributable to partners   6,365    41,224    (2,653)   32,371    20,384    6,591 
Cash Flow Data:(2)                              
Cash flows provided by operating activities  $6,673   $59,603   $35,347   $63,314   $47,310   $26,138 
Cash flows used in investing activities   (26,483)   (20,870)   (21,005)   (4,965)   (9,836)   (5,150)
Cash flows provided by (used in) financing activities   14,562    (36,125)   (19,858)   (62,158)   (26,911)   (20,121)

 

(1)The selected balance sheet data as of March 31, 2017, as well as December 31, 2013, and 2012 were derived from the unaudited financial statements of PELP. The selected balance sheet data as of December 31, 2016, 2015 and 2014 were derived from the audited combined financial statements of PELP.

 

(2)The selected operating data and cash flow data for the three months ended March 31, 2017, as well as December 31, 2013 and 2012, were derived from the unaudited financial statements of PELP. The selected operating data for the years ended December 31, 2016, 2015, and 2014 were derived from the audited combined financial statements of PELP.

 

The information above includes certain PELP assets, investments in certain entities, and working capital that are not being acquired by PECO I in the PELP Transaction. See “Unaudited Pro Forma Consolidated Financial Information of PECO I” on page 138 for adjustments made to PELP’s historical financial information to exclude such assets, investments in certain entities, and working capital, and their associated impact to operations for these items not being acquired by PECO I in the PELP Transaction.

 

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Selected Unaudited Pro Forma Consolidated Financial Information of PECO I

 

The tables below set forth selected unaudited pro forma consolidated financial information related to the financial condition of PECO I upon completion of the PELP Transaction. This unaudited pro forma financial information was prepared for informational purposes only and was based on assumptions and estimates considered appropriate by our management. For more detail regarding the presentation of unaudited pro forma condensed consolidated financial information, see page 137.

 

(in thousands)  As of March 31, 2017 
Unaudited consolidated balance sheet data:     
Investment in real estate assets, net  $3,148,297 
Cash and cash equivalents   14,166 
Total assets   3,441,900 
Mortgages and loans payable, net   1,648,744 
Total equity   1,549,021 

 

(in thousands)  For the three months
ended March 31, 2017
   For the year ended
December 31, 2016
 
Unaudited consolidated operating data:          
Rental income  $67,750   $270,654 
Fee and management income   7,306    30,998 
Total revenues   97,652    389,089 
Property operating expenses   16,728    65,655 
General and administrative expenses   11,390    45,565 
Interest expense, net   14,193    65,805 
Net loss attributable to stockholders   (442)   (8,970)
Net loss per share - basic and diluted   (0.00)   (0.05)

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

 

Certain statements contained in this proxy statement other than historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act, including, but not limited to, statements regarding our near-term objectives and long-term strategies, the anticipated benefits of the PELP Transaction, expectations of short-term and long-term liquidity requirements and needs, the declaration or payment of distributions, and other statements that are not historical facts, statements containing words such as “anticipate(s),” “expect(s),” “intend(s),” “plan(s),” “target(s),” “project(s),” “will,” “believe(s),” “may,” “would,” “seek(s),” “estimate(s)” and similar expressions. These statements are based on management’s current expectations, beliefs and assumptions and are subject to a number of known and unknown risks, uncertainties and other factors that could lead to actual results materially different from those described in the forward-looking statements. We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in the Securities Act and the Exchange Act. We can give no assurance that our expectations will be attained. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the SEC. We make no representations or warranties (expressed or implied) about the accuracy of any such forward-looking statements contained in this proxy statement, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Factors that could adversely affect our operations and prospects or which could cause actual results to differ materially from our expectations include, but are not limited to:

 

changes in local and national real estate market conditions and general economic conditions;

 

availability of capital from short-term borrowings, availability of proceeds from future equity offerings, or our ability to obtain additional long-term financing on satisfactory terms;

 

our ability to continue to identify suitable investments;

 

our ability to consummate the transactions contemplated under existing and future agreements;

 

failure of closing conditions to be satisfied and/or to secure certain third-party consents in connection with certain transactions;

 

changes in the structure of pending transactions;

 

whether the PELP Proposal is approved and whether the PELP Transaction is consummated;

 

the inability to acquire properties that meet our investment objectives;

 

our ability to continue to qualify as a REIT and to make payments which are necessary, including distributions, to maintain such qualification;

 

changes in interest rates and financial and capital markets;

 

legislative or regulatory changes, including changes to laws governing the taxation of REITs;

 

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changes in generally accepted accounting principles, policies and guidelines and/or their application to us;

 

changes in our business or strategic objectives;

 

Stockholders that elect to participate in our dividend reinvestment plan;

 

requirements relating to the offering of equity securities; and

 

such other risk factors as may be discussed herein and in other reports on file or subsequently filed with the SEC, including “Item 1A. Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2016.

 

Such forward-looking statements speak only as of the date of this proxy statement. We expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.

 

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RISK FACTORS

 

In addition to the other information included in this proxy statement, including the matters addressed under “Cautionary Statement Concerning Forward-Looking Statements,” you should carefully consider the following risks before deciding how to vote your Common Shares. In addition, you should read and consider the risks associated with the business of PECO I in PECO I’s Annual Report on Form 10-K for the year ended December 31, 2016 and other reports filed by PECO I with the SEC. See “Where You Can Find More Information” on page 150. You should also read and consider the other information in this proxy statement and the other documents.

 

Risk Factors Related to the PELP Transaction

 

The ownership percentage of Stockholders will be diluted by the PELP Transaction.

 

The PELP Transaction will dilute the ownership percentage of Stockholders. Upon the closing of the PELP Transaction, existing Stockholders will own approximately 80.2% of PECO I and the Contributors will own approximately 19.8% of PECO I, in each case, on a fully diluted basis (based on shares outstanding as of May 18, 2017 and assuming (1) the issuance and redemption for Common Shares of the 40,360,504 OP Units to be received by the Contributors in the PELP Transaction and (2) that pursuant to the terms of the PECO I OP Partnership Agreement, all Class B Units of PECO I OP will convert to OP Units. Consequently, current Stockholders, as a general matter, may have less influence over the management and policies of PECO I after the PELP Transaction than they currently exercise over the management and policies of PECO I.

 

Moreover, pursuant to the Contribution Agreement, the Contributors have an opportunity to earn up to 12,490,196 additional OP Units if certain milestones are achieved. Even if the maximum Earn-Out Consideration is not earned, the Contributors would still be entitled to substantial Earn-Out Consideration if a liquidity event for the Stockholders occurs at any price by December 31, 2021. See “The PELP Transaction Documents—The Contribution Agreement—Earn-out Consideration.” Achievement of any part of this earn-out opportunity would further dilute current Stockholders’ fully diluted ownership interests in PECO I.

 

The PELP Transaction may not be accretive to Stockholders.

 

Because OP Units will be issued in the PELP Transaction, it is possible that, although PECO I currently expects the PELP Transaction to be accretive to PECO I’s FFO per Common Share, the PELP Transaction is expected to be dilutive to PECO I’s earnings per Common Share and also may be dilutive to PECO I’s FFO per Common Share, if, among other things, PECO I incurs higher depreciation and amortization expenses, higher than expected expenses in connection with the PELP Transaction or fails to realize anticipated benefits of the PELP Transaction in a timely manner or at all. The failure of the PELP Transaction to be accretive to Stockholders could have a material adverse effect on PECO I’s business, financial condition and results of operations.

 

The Closing is subject to various conditions, and if these conditions are not satisfied or waived, the PELP Transaction will not be completed. Failure to complete the PELP Transaction could have material adverse effects on PECO I.

 

The Closing is subject to a number of conditions, including the approval by Stockholders of the PELP Proposal, the receipt of certain title insurance policies and the receipt of certain consents related to certain loan documents, which make the Closing and the timing of the Closing uncertain. See “Summary of the PELP Proposal—Conditions to Closing.” The Contribution Agreement may be terminated if the PELP Transaction has not been completed by February 14, 2018.

 

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There can be no assurance that the conditions to the Closing will be satisfied or waived or that the PELP Transaction will be completed. Failure to complete the PELP Transaction may adversely affect PECO I’s results of operations and business prospects for the following reasons, among others:

 

    the PELP Transaction, whether or not it closes, will divert the attention of PECO I’s management team from ongoing business activities, including the pursuit of other opportunities that could be beneficial to PECO I; and

 

    PECO I will incur certain transaction costs, regardless of whether the PELP Transaction closes.

 

There may be unexpected delays in the Closing, which could impact the ability to timely achieve the benefits associated with the PELP Transaction.

 

Certain events may delay the Closing, such as failure to timely receive Stockholder approval or failure to satisfy the other closing conditions to which the PELP Transaction is subject. PECO I cannot assure you that the conditions to the Closing will be satisfied or waived, if permitted, or that any adverse effect, event, development or change will not occur, or provide any assurances as to whether or when the PELP Transaction will be completed. The Contribution Agreement may be terminated if the PELP Transaction has not been completed by February 14, 2018. Any delay in the Closing could materially reduce or, if the Contribution Agreement is terminated, eliminate the benefits expected to be obtained by PECO I in the PELP Transaction.

 

The number of OP Units constituting the OP Unit Consideration will not be adjusted in the event of any change in PECO I’s estimated net asset value per Common Share.

 

Upon the Closing, PECO I will issue to the Contributors 40,360,504 OP Units, subject to certain adjustments, and will grant to the Contributors an opportunity to earn up to 12,490,196 additional OP Units if certain milestones are met after the Closing. The Common Shares are not listed for trading on any national securities exchange. The estimated net asset value of $10.20 per Common Share was determined as of March 31, 2017 by the Board of Directors based on the financial analysis of a third-party valuation expert. The number of OP Units to be issued as consideration in connection with the PELP Transaction will not be adjusted for any changes in the estimated net asset value per Common Share. While we do not anticipate making any further determinations of the estimated net asset value per Common Share prior to the Closing, any such changes (upward or downward) would affect the assumed value of the OP Units issued as consideration that the Contributors will receive in connection with the PELP Transaction. 

 

Members of PECO I’s management team and the Chair of the Board of Directors have interests in the PELP Transaction that are different from, or in addition to, those of Stockholders more generally.

 

When considering the recommendation of the Board of Directors with respect to the PELP Proposal, you should be aware that members of PECO I’s management team (including Mr. Edison, who is both an officer and a director of PECO I) may have interests in the PELP Transaction that are different from, or in addition to, those of Stockholders more generally. See “The PELP Transaction—Interests of Certain Persons in the PELP Transaction” on page 90. These interests present these members of PECO I’s management team with conflicts of interest. The Special Committee was formed in response to these conflicts and was aware of such conflicts, and Mr. Edison recused himself from the vote of the Board of Directors in recommending that Stockholders approve the PELP Proposal.

 

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The pendency of the PELP Transaction could adversely affect the business and operations of PECO I and the Contributed Companies.

 

In connection with the pending PELP Transaction, some tenants, operators, lenders, borrowers, managers or vendors may delay or defer decisions related to their business dealings with PECO I or the Contributed Companies and their subsidiaries, which could negatively impact the revenues, earnings, cash flows or expenses of PECO I or the Contributed Companies and their subsidiaries, as the case may be, regardless of whether the PELP Transaction is completed. Similarly, employees of the Contributed Companies and their subsidiaries may experience uncertainty about their future roles with PECO I following the PELP Transaction, which may have a material adverse effect on the ability of the Contributed Companies and their subsidiaries to attract and retain key personnel during the pendency of and after the Closing.

 

The unaudited pro forma combined financial information in this proxy statement is presented for illustrative purposes only, and the operating results and financial condition of PECO I following the Closing may differ and such differences may be material.

 

The unaudited pro forma combined financial information in this proxy statement is presented for illustrative purposes only and is not necessarily indicative of what PECO I’s actual financial position or results of operations would have been had the PELP Transaction been completed on the date indicated. Further, PECO I’s actual results and financial position following the Closing may differ materially and adversely from the unaudited pro forma combined financial data that are included in this proxy statement. The unaudited pro forma combined financial information does not reflect future events that may occur after the Closing, including the costs related to the planned integration of PECO I and the Contributed Companies and any future nonrecurring charges resulting from the PELP Transaction, and does not consider potential impacts of current market conditions on revenues or expense efficiencies. The unaudited pro forma combined financial information presented elsewhere in this proxy statement is based in part on certain assumptions regarding the PELP Transaction that PECO I believes are reasonable under the circumstances. PECO I cannot assure you that the assumptions will prove to be accurate over time. See “Unaudited Pro Forma Consolidated Financial Information of PECO I” on page 137.

 

The unaudited prospective financial information in this proxy statement is presented for illustrative purposes only and actual results of PECO I following the Closing may differ materially.  

 

The unaudited prospective financial information in this proxy statement is presented for illustrative purposes only, and PECO I’s actual results and financial position following the Closing may differ materially from such projections. Such information is not intended to be used, and should not be used, for purposes of guidance or forecasting. Moreover, this unaudited prospective financial information was based on estimates and assumptions made by PECO I and PELP, as applicable, at the time of their preparation and speak only as of such time. The unaudited prospective financial information does not take into account any circumstances or events occurring after the date on which it was prepared. The assumptions made in preparing the above unaudited prospective financial information may not necessarily reflect actual future conditions. The estimates and assumptions underlying the unaudited prospective financial information involve judgments with respect to, among other things, future economic, competitive, regulatory and financial market conditions and future business decisions which may not be realized and which are inherently subject to significant business, economic, competitive and regulatory uncertainties and contingencies. See “Certain Unaudited Prospective Financial Information Reviewed by PECO I” on page 82. 

 

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Risk Factors Following the PELP Transaction

 

Mr. Edison, or his designee, will be nominated to the Board of Directors for each of the next ten succeeding annual meetings following the Closing, subject to certain terminating events.

 

The form of Equityholder Agreement contemplates that Mr. Edison, or his designee, will be nominated to the Board of Directors for each of the ten succeeding annual meetings following the Closing, subject to certain terminating events, including the sale or transfer of more than 35% of the OP Units that he beneficially owns immediately following the Closing. As a result, it is possible that Mr. Edison may continue to be nominated as a director in circumstances when the independent directors would not otherwise have done so.

 

Mr. Edison shall continue to serve as Chair of the Board of Directors until the third anniversary of the Closing, subject to certain terminating events.

 

The Contribution Agreement contemplates amending and restating the bylaws of PECO I in connection with the Closing to incorporate a provision providing that Mr. Edison shall continue to serve as Chair of the Board of Directors until the third anniversary of the Closing, subject to certain terminating events, including the listing of the Common Shares on a national securities exchange. As a result, Mr. Edison may continue to serve as Chair of the Board of Directors in circumstances when the independent directors would not otherwise have selected him.

 

Upon the Closing, the PECO I OP Partnership Agreement shall be amended to, among other things, grant certain rights and protections to the limited partners, which may prevent or delay a change of control transaction that might involve a premium price for Common Shares.

 

The Contribution Agreement contemplates amending and restating the PECO I OP Partnership Agreement, which, among other things, grants certain rights and protections to the limited partners, including granting limited partners the right to consent to a change of control transaction. Furthermore, Mr. Edison is expected to have voting control over approximately 9.7% of the OP Units (inclusive of those owned by PECO I) after the PELP Transaction and therefore could have a significant influence over votes on change of control transactions. Although the Tax Protection Agreement should reduce the possibility that Mr. Edison or other Protected Partners (as defined below) would have an economic incentive to oppose a change of control transaction that would otherwise be in our best interest, we cannot be certain that such limited partners would view a change of control transaction as favorably as our stockholders. We also note that the Tax Protection Agreement expires after ten years.

 

PECO I expects to incur substantial expenses related to the PELP Transaction.

 

PECO I will incur substantial expenses in connection with completing the PELP Transaction. While PECO I expects to incur a certain level of transaction and integration expenses, factors beyond PECO I’s control could affect the total amount or the timing of its integration expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. As a result, the transaction and integration expenses associated with the PELP Transaction could, particularly in the near term, exceed the savings that PECO I expects to achieve from the acquisition of the Contributed Companies following the Closing. If the expenses PECO I incurs as a result of the PELP Transaction are higher than anticipated, PECO I’s net income per Common Share and its FFO per Common Share would be adversely affected.

 

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The future results of PECO I will suffer if PECO I does not effectively manage its expanded portfolio and operations.

 

The PELP Transaction is expected to result in certain benefits to PECO I, including, among others, those described in “The PELP Transaction—Rationale for Recommending the Approval of the PELP Transaction.” There can be no assurance, however, regarding when or to what extent PECO I will be able to realize these benefits, which may be difficult, unpredictable and subject to delays. PECO I will be required to devote significant management attention and resources to integrating the business practices and operations of PECO I and the Contributed Companies. It is possible that the integration process could result in the distraction of PECO I’s management, the disruption of PECO I’s ongoing business or inconsistencies in PECO I’s operations, services, standards, controls, procedures and policies, any of which could adversely affect the ability of PECO I to maintain relationships with operators, vendors and employees or to fully achieve the anticipated benefits of the PELP Transaction. There may also be potential unknown or unforeseen liabilities, increased expenses, delays or regulatory conditions associated with integrating the Contributed Companies into PECO I.

 

Following the PELP Transaction, PECO I will have an expanded portfolio and operations and likely will continue to expand its operations through additional acquisitions and other strategic transactions, some of which may involve complex challenges. The future success of PECO I will depend, in part, upon its ability to manage its expansion opportunities, integrate new operations into its existing business in an efficient and timely manner, successfully monitor its operations, costs, regulatory compliance and service quality and maintain other necessary internal controls. There can be no assurance that PECO I’s expansion or acquisition opportunities will be successful, or that it will realize its expected operating efficiencies, cost savings, revenue enhancements, synergies or other benefits.

 

PECO I may be unable to retain key employees.

 

The success of PECO I after the PELP Transaction will depend in part upon its ability to retain key employees. Key employees of the Contributed Companies and subsidiaries thereof may depart either before or after the Closing because of issues relating to the uncertainty and difficulty of integration or a desire not to join PECO I following the PELP Transaction. Accordingly, no assurance can be given that the Contributed Companies and their subsidiaries and, following the PELP Transaction, PECO I will be able to retain key employees.

 

The Contribution Agreement provides that the Contributors shall, and shall cause the Contributed Companies and their subsidiaries, to use all reasonable efforts to keep available the services of its employees and preserve their relationships with customers, suppliers, landlords, tenants, creditors, employees and others with whom they deal. If PECO I needs to recruit and hire additional personnel, there may be delays in doing so, the compensation to such employees may be higher and there could be disruptions to PECO I’s business.

 

PECO I may be exposed to risks to which PECO I has not historically been exposed.

 

PECO I currently has no employees of its own. PECO I will have employees following the consummation of the PELP Transaction. As their employer, PECO I will be subject to those potential liabilities that are commonly faced by employers, such as workers disability and compensation claims, potential labor disputes and other employee-related liabilities and grievances. Further, PECO I will bear the costs of the establishment and maintenance of health, retirement and similar benefit plans for its employees.

 

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PECO I allows other parties to use the “Phillips Edison” and “PECO” names and marks following the Closing, which may cause monetary and reputational costs.

 

Pursuant to certain provisions of the Contribution Agreement, the form of Services Agreement and the form of License Agreement, after the Contributors, on behalf of their affiliates and subsidiaries, assign and transfer to PECO I OP all their rights in and to the names “PHILLIPS EDISON” and “PECO” (together, the “Trade Names”), PECO I OP agreed to grant licenses to certain Contributors and their affiliates to use the Trade Names in connection with the continued operation of their respective businesses. By allowing other parties to use the Trade Names, PECO I may incur monetary and reputational costs, including the loss of goodwill or brand recognition associated with the Trade Names, which could have an adverse effect on PECO I’s business.

 

Following the Closing, PECO I has agreed to honor and fulfill the rights to certain indemnification claims for acts or omissions occurring at or prior to the Closing in favor of managers, directors, officers, trustees, agents or fiduciaries of any Contributed Company or subsidiary thereof.

 

Pursuant to the Contribution Agreement, PECO I has agreed to honor and fulfill, following the Closing the rights to indemnification and exculpation from liabilities for acts or omissions occurring at or prior to the Closing now existing in favor of a manager, director, officer, trustee, agent or fiduciary of any Contributed Company or subsidiary contained in (i) the organizational documents of the Contributed Companies and their subsidiaries and (ii) all existing indemnification agreements of the Contributed Companies and their subsidiaries. For six years after the Closing, PECO I may not amend, modify or repeal the organizational documents of the Contributed Companies and their subsidiaries in any way that would adversely affect such rights. PECO I may incur substantial costs to address such claims and is limited in its ability to modify such indemnification obligations.

 

Risks Relating to an Investment in Common Shares Following the PELP Transaction

 

The estimated net asset value per Common Share may decline as a result of the PELP Transaction.

 

The estimated net asset value per Common Share may decline as a result of the PELP Transaction for a number of reasons, including if PECO I does not achieve the perceived benefits of the PELP Transaction as rapidly or to the extent that is anticipated. 

 

PECO I cannot assure you that PECO I will be able to continue paying distributions at the rate currently paid.

 

PECO I expects to continue PECO I’s current distribution practices following the PELP Transaction. However, Stockholders may not receive distributions following the PELP Transaction equivalent to those currently paid by PECO I for various reasons, including the following:

 

as a result of the PELP Transaction and the issuance of OP Units in connection with the PELP Transaction, the total amount of cash required for PECO I to pay distributions at its current rate will increase;

 

PECO I may not have enough cash to pay such distributions due to changes in PECO I’s cash requirements, indebtedness, capital spending plans, cash flows or financial position or as a result of unknown or unforeseen liabilities incurred in connection with the PELP Transaction;

 

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decisions on whether, when and in what amounts to make any future distributions will remain at all times entirely at the discretion of the Board of Directors, which reserves the right to change PECO I’s distribution practices at any time and for any reason; and

 

PECO I may desire to retain cash to maintain or improve its credit ratings and financial position.

                   

Existing and future Stockholders have no contractual or other legal right to distributions that have not been declared.

 

Legal Risks Related to the PELP Transaction

 

Counterparties to certain significant agreements with PELP, the Contributed Companies and their subsidiaries may have consent rights in connection with the PELP Transaction.

 

PELP, the Contributed Companies and their subsidiaries are parties to certain agreements that give the counterparty certain rights, including consent rights, in connection with “change in control” transactions or otherwise. Under certain of these agreements, the PELP Transaction may constitute a “change in control” or otherwise give rise to consent rights and, therefore, the counterparty may assert its rights in connection with the PELP Transaction. Any such counterparty may request modifications of its agreements as a condition to granting a waiver or consent under those agreements, and there can be no assurance that such counterparties will not exercise their rights under the agreements, including termination rights where available. In addition, the failure to obtain consent under one agreement may be a default under other agreements and, thereby, trigger rights of the counterparties to such other agreements, including termination rights where available.

 

PECO I may have failed to uncover all liabilities of the Contributed Companies through the due diligence process prior to the PELP Transaction, exposing PECO I to potentially large, unanticipated costs.

 

Prior to completing the PELP Transaction, PECO I performed certain due diligence reviews of the business of PELP. PECO I’s due diligence reviews may not have adequately uncovered all of the contingent or undisclosed liabilities PECO I may incur as a consequence of the PELP Transaction. Any such liabilities could cause PECO I to experience potentially significant losses, which could materially adversely affect PECO I’s business, results of operations and financial condition.

 

Tax Risks Relating to the PELP Transaction

 

The Tax Protection Agreement, during its term, could limit PECO I OP’s ability to sell or otherwise dispose of certain properties and may require PECO I OP to maintain certain debt levels that otherwise would not be required to operate our business.

 

Upon the Closing, PECO I and PECO I OP will enter into a Tax Protection Agreement, pursuant to which if PECO I OP (i) sells, exchanges, transfers, conveys or otherwise disposes of a Protected Property (as defined in the Tax Protection Agreement) in a taxable transaction for a period of ten years commencing on the Closing (the “Tax Protection Period”) or (ii) fails, prior to the expiration of the Tax Protection Period, to maintain minimum levels of indebtedness that would be allocable to each Protected Partner for tax purposes or, alternatively, fails to offer such Protected Partner the opportunity to guarantee specific types of PECO I OP’s indebtedness in order to enable such Protected Partner to continue to defer certain tax liabilities, PECO I OP will indemnify each affected Protected Partner against certain resulting tax liabilities. Therefore, although it may be in the Stockholders’ best interest for PECO I to cause PECO I OP to sell, exchange, transfer, convey or otherwise dispose of one of these properties, it may be economically prohibitive for PECO I to do so during the Tax Protection Period because of these indemnity obligations. Moreover, these obligations may require PECO I to cause PECO I OP to maintain more or different indebtedness than PECO I would otherwise require for PECO I’s business. As a result, the Tax Protection Agreement will, during its term, restrict PECO I’s ability to take actions or make decisions that otherwise would be in PECO I’s best interests.

 

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If PECO I OP fails to qualify as a partnership for U.S. federal income tax purposes, we would fail to qualify as a REIT and suffer other adverse consequences.

 

We believe that PECO I OP is organized and will be operated in a manner so as to be treated as a partnership, and not an association or publicly traded partnership taxable as a corporation for U.S. federal income tax purposes. As a partnership, PECO I OP will not be subject to U.S. federal income tax on its income. Instead, each of its partners, including PECO I, will be allocated that partner’s share of PECO I OP’s income. No assurance can be provided, however, that the Internal Revenue Service will not challenge PECO I OP’s status as a partnership for U.S. federal income tax purposes, or that a court would not sustain such a challenge. If the Internal Revenue Service were successful in treating PECO I OP as an association or publicly traded partnership taxable as a corporation for U.S. federal income tax purposes, PECO I would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, would cease to qualify as a REIT. Also, the failure of PECO I OP to qualify as a partnership would cause it to become subject to U.S. federal corporate income tax, which would reduce significantly the amount of its cash available for debt service and for distribution to its partners, including PECO I.

 

PECO I OP will have a carryover tax basis on certain of its assets as a result of the PELP Transaction, and the amount that we have to distribute to Stockholders therefore may be higher.

 

As a result of the PELP Transaction, certain of PECO I OP’s properties will have carryover tax bases that are lower than the fair market values of these properties at the time of the acquisition. As a result of this lower aggregate tax basis, PECO I OP will recognize higher taxable gain upon the sale of these assets, and PECO I OP will be entitled to lower depreciation deductions on these assets than if it had purchased these properties in taxable transactions at the time of the acquisition. Such lower depreciation deductions and increased gains on sales allocated to us generally will increase the amount of our required distribution under the REIT rules, and will decrease the portion of any distribution that otherwise would have been treated as a “return of capital” distribution.

 

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THE ANNUAL MEETING

 

Date, Time and Place of Annual Meeting

 

The Annual Meeting will be held on ______, 2017 at _____ Eastern Time at 11501 Northlake Drive, Cincinnati, Ohio 45249. If you need directions to the location of the Annual Meeting, please contact us at 513-554-1110.

 

Purpose of the Annual Meeting

 

The purpose of the Annual Meeting is to consider and vote upon the following proposals:

 

1.elect five directors to serve until the next annual meeting of Stockholders and until their respective successors are duly elected and qualify;

 

2.approve the PELP Proposal;

 

3.adjourn the Annual Meeting, if necessary, as determined by the Chair of the Annual Meeting, to solicit additional proxies in favor of the foregoing proposals if there are not sufficient votes for the proposals; and

 

4.attend to such other business as may properly come before the meeting and any adjournment or postponement thereof.

 

Recommendation of the Board of Directors

 

After careful consideration of the proposals and, in the case of the PELP Proposal, the recommendation of the Special Committee that the PELP Transaction is advisable and in the best interests of PECO I, the Board of Directors recommends that you vote (1) “FOR” each of the nominees for election as a director who are named as such in this proxy statement, (2) “FOR” the PELP Proposal and (3) “FOR” the proposal to adjourn the Annual Meeting to solicit additional proxies if necessary. Mr. Edison, who has a material financial interest in the PELP Transaction, has abstained from voting on our Board of Directors’ recommendation with respect to the PELP Proposal. The PELP Transaction cannot be completed without the approval by Stockholders of the PELP Proposal. See “Proposals Submitted to Holders of Common Shares” on page 29.

 

Record Date; Who Can Vote at the Annual Meeting

 

Anyone who is a Stockholder of record at the close of business on ______, 2017, the record date, or holds a valid proxy for the Annual Meeting is entitled to vote at the Annual Meeting. Every Stockholder is entitled to one vote for each Common Share held.

 

Quorum

 

A quorum consists of the presence in person or by proxy of Stockholders entitled to cast 50% of all the votes entitled to be cast at the Annual Meeting. There must be a quorum present in order for the Annual Meeting to be a duly held meeting at which business can be conducted. Generally, if you submit your proxy, then you will be considered part of the quorum.

 

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Voting Requirements

 

With regard to the election of directors, you may vote “FOR ALL” of the nominees, you may withhold your vote for all of the nominees by voting “WITHHOLD ALL,” or you may vote for all of the nominees except for certain nominees by voting “FOR ALL EXCEPT” and listing the corresponding number of the nominee(s) for whom you want your vote withheld in the space provided on the proxy card. Under our bylaws, a majority of the Common Shares present in person or by proxy at an annual meeting at which a quorum is present is required for the election of the directors. This means that, of the Common Shares present in person or by proxy at an annual meeting, a director nominee needs to receive affirmative votes from a majority of such Common Shares in order to be elected to the Board of Directors. Because of this majority of votes present requirement, “withhold” votes and broker non-votes (discussed below) will have the effect of a vote against each nominee for director. If an incumbent director nominee fails to receive the required number of votes for reelection, then under Maryland law, he will continue to serve as a “holdover” director until his successor is duly elected and qualified. If you submit a proxy card with no further instructions, your Common Shares will be voted in accordance with the recommendation of the Board of Directors at the Annual Meeting.

 

Approval of the PELP Proposal requires the affirmative vote of a majority of the votes cast at the Annual Meeting, assuming a quorum is present. Abstentions and broker non-votes will not be considered as votes cast and will have no effect on the PELP Proposal. Proxies received will be voted FOR the PELP Proposal unless Stockholders designate otherwise.

 

Approval of the proposal to adjourn the Annual Meeting to solicit additional proxies, if necessary, requires the affirmative vote of the holders of at least a majority of the votes cast thereon at the Annual Meeting, assuming a quorum is present. You may vote for or against or abstain on the proposal. Abstentions and broker non-votes will not have an effect on the proposal to adjourn the Annual Meeting to solicit additional proxies if necessary. Proxies received will be voted FOR the proposal to adjourn the Annual Meeting to solicit additional proxies, if necessary, unless Stockholders designate otherwise.

 

Broker Non-Votes

 

A “broker non-vote” occurs when a broker holding stock on behalf of a beneficial owner submits a proxy but does not vote on a non-routine proposal because the broker does not have discretionary power with respect to that item and has not received instructions from the beneficial owner. Brokers may not exercise discretionary voting in uncontested director elections at stockholder meetings and are prohibited from giving a proxy to vote with respect to an election of directors without receiving voting instructions from a beneficial owner. Brokers also may not exercise discretionary voting with respect to the PELP Proposal. Beneficial owners of Common Shares held in broker accounts are advised that, if they do not provide instructions to their broker in a timely manner, their Common Shares will not be voted in connection with the election of directors or the PELP Proposal. However, even without such instructions, the Common Shares of beneficial owners will be treated as present for the purposes of establishing a quorum if the broker votes such Common Shares on the proposal regarding the adjournment of the Annual Meeting, which proposal is a routine matter with respect to which brokers have discretionary authority to vote.

 

Manner of Authorizing Proxy

 

Stockholders can vote in person at the Annual Meeting or by authorizing a proxy. Stockholders have the following three options for authorizing a proxy to vote their Common Shares:

 

via the internet at https://proxyvote.com with use of the control number on your proxy card;

by telephone, by calling 1-800-690-6903; or

 

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by mail, by completing, signing, dating and returning the enclosed proxy card.

 

For those Stockholders with internet access, we encourage you to authorize a proxy via the internet, since it is quick, convenient and provides a cost savings to us. When you authorize a proxy via the internet or by telephone prior to the meeting date, your vote is recorded immediately and there is no risk that postal delays will cause your vote to arrive late and, therefore, not be counted. For further instructions on voting, see the enclosed proxy card.

 

If you elect to attend the Annual Meeting, you can submit your vote in person, and any previous votes that you submitted, whether by internet, telephone or mail, will be superseded. If you return your signed proxy, your shares will be voted as you instruct, unless you give no instructions with respect to one or more of the proposals. In this case, unless you later instruct otherwise, your Common Shares will be voted FOR the nominees for director, FOR the PELP Proposal, and FOR the proposal to adjourn the Annual Meeting to solicit additional proxies, if necessary. With respect to any other proposals to be voted on that properly come before the Annual Meeting, your Common Shares will be voted in accordance with the recommendation of the Board of Directors or, in the absence of such a recommendation, in the discretion of Messrs. Addy and Murphy.

 

Revocation of Proxies or Voting Instructions

 

You have the right to revoke your proxy at any time before the Annual Meeting by:

 

(1)notifying our secretary at our corporate office address listed below;

(2)attending the Annual Meeting and voting in person;

(3)contacting us for another proxy card, and then returning it to us, if we receive it before the Annual Meeting date; or

(4)recasting your proxy vote via the internet or by telephone.

 

Only the most recent proxy vote will be counted and all others will be discarded regardless of the method of voting.

 

Solicitation of Proxies

 

In addition to mailing proxy solicitation material, employees of BFS and employees of our advisor or its affiliates may also solicit proxies in person, via the internet, by telephone or by any other electronic means of communication we deem appropriate.

 

We will pay all of the costs of soliciting these proxies. We have contracted with BFS to assist us in the distribution of proxy materials and the solicitation of proxies. We expect to pay BFS fees of approximately $[•] to solicit proxies plus other fees and expenses for other services related to this proxy solicitation, including the review of proxy materials, dissemination of brokers’ search cards, distribution of proxy materials, operating online and telephone voting systems and receipt of executed proxies. We will also reimburse brokerage houses and other custodians, nominees and fiduciaries for their reasonable out-of-pocket expenses for forwarding proxy and solicitation materials to our Stockholders.

 

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PROPOSALS SUBMITTED TO HOLDERS OF COMMON SHARES

 

Proposal 1: Election of Directors

 

At the Annual Meeting, you and the other Stockholders will vote on the election of all five members of our Board of Directors. Those persons elected will serve as directors until the 2018 annual meeting and until their successors are duly elected and qualified. The Board of Directors has nominated the following persons for re-election as directors:

 

  Jeffrey S. Edison   Stephen R. Quazzo
  Leslie T. Chao   Gregory S. Wood
  Paul J. Massey, Jr.      

 

Each of the nominees for director is a current member of our Board of Directors. Detailed information on each nominee is provided on pages 39 through 41.

 

Vote Required

 

Under our bylaws, the affirmative vote of a majority of the Common Shares present in person or by proxy at an annual meeting at which a quorum is present is required for the election of the directors. This means that a director nominee needs to receive affirmative votes from a majority of such Common Shares in order to be elected to the Board of Directors. Because of this majority of votes present requirement, “withhold” votes and broker non-votes will have the effect of a vote against each nominee for director. If an incumbent director nominee fails to receive the required number of votes for reelection, then under Maryland law, he will continue to serve as a “holdover” director until his successor is duly elected and qualified.

 

The appointed proxies will vote your shares of common stock as you instruct. If you submit a proxy card with no further instructions, the appointed proxies will vote your shares FOR all of the director nominees listed above. If any nominee becomes unable or unwilling to stand for re-election, the Board of Directors may reduce its size or designate a substitute. If a substitute is designated, proxies voting on the original nominee will be cast for the substituted nominee.

 

Recommendation

 

Your Board of Directors unanimously recommends a vote “FOR” all nominees listed for re-election as directors.

 

The Board of Directors

 

Our Board of Directors has oversight responsibility for our operations and makes all major decisions concerning our business. We currently have five directors, all of whom have been nominated for reelection at the Annual Meeting. We currently have no vacant director positions. Our Board of Directors held six meetings during 2016. During 2016, each director attended at least 75% of the board meetings. Additionally, during 2016, each director attended at least 75% of the meetings for each committee on which he served. For biographical information regarding our directors, see “Executive Officers and Directors” on page 39.

 

Our Board of Directors has established an Audit Committee, a Conflicts Committee and a Special Committee consisting of all of our independent directors. Information regarding each of the committees is set forth below.

 

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Director Independence

 

Although our Common Shares are not listed for trading on any national securities exchange, a majority of our directors, and all of the members of the Audit Committee, Conflicts Committee, and the Special Committee, are “independent” as defined by the rules of the New York Stock Exchange (the “NYSE”). The NYSE independence standards provide that to qualify as an independent director, in addition to satisfying certain bright-line criteria, the Board of Directors must affirmatively determine that a director has no material relationship with us (either directly or as a partner, stockholder, or officer of an organization that has a relationship with us). The Board of Directors has determined that each of Leslie T. Chao, Paul J. Massey, Jr., Stephen R. Quazzo, and Gregory S. Wood is “independent” as defined by the NYSE.

 

The Audit Committee

 

General

 

The Audit Committee’s primary function is to assist our Board of Directors in fulfilling its responsibilities by overseeing our independent auditors and reviewing the financial information to be provided to our Stockholders and others, overseeing the system of internal control over financial reporting that our management has established, and overseeing our audit and financial reporting process. The Audit Committee also is responsible for overseeing our compliance with applicable laws and regulations and for establishing procedures for the ethical conduct of our business. The Audit Committee fulfills these responsibilities primarily by carrying out the activities enumerated in the Audit Committee Charter adopted by our Board of Directors in 2010. The Audit Committee Charter is available on our website at www.grocerycenterreit1.com/governance.aspx.

 

The members of the Audit Committee are Leslie T. Chao (Chair), Paul J. Massey, Jr., Stephen R. Quazzo, and Gregory S. Wood. The Board of Directors has determined that Mr. Chao qualifies as the Audit Committee “financial expert” within the meaning of SEC rules. During 2016, the Audit Committee held four meetings.

 

Independent Auditors

 

During the year ended December 31, 2016, Deloitte & Touche LLP served as our independent auditor and provided certain domestic tax and other services. Deloitte & Touche LLP has served as our independent auditor since our formation in 2009. The Audit Committee has engaged Deloitte & Touche LLP as our independent auditor to audit our consolidated financial statements for the year ending December 31, 2017. The Audit Committee may, however, select new auditors at any time in the future in its discretion if it deems such decision to be in our best interest. Any decision to select new auditors would be disclosed to our Stockholders in accordance with applicable securities laws.

 

Representatives from Deloitte & Touche LLP are expected to be present at the Annual Meeting, to have the opportunity to make a statement if they desire to do so and to be available to respond to appropriate questions posed by any Stockholders.

 

Preapproval Policies

 

The Audit Committee charter imposes a duty on the Audit Committee to preapprove all auditing services performed for us by our independent auditors, as well as all permitted nonaudit services (including the fees and terms thereof) in order to ensure that the provision of such services does not impair the auditors’ independence. Unless a type of service to be provided by the independent auditors has received “general” preapproval, it will require “specific” preapproval by the Audit Committee. Additionally, any proposed services exceeding “general” preapproved cost levels will require specific preapproval by the Audit Committee.

 

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All requests or applications for services to be provided by the independent auditor that do not require specific preapproval by the Audit Committee will be submitted to management and must include a detailed description of the services to be rendered. Management will determine whether such services are included within the list of services that have received the general preapproval of the Audit Committee. The Audit Committee will be informed on a timely basis of any such services rendered by the independent auditors.

 

Requests or applications to provide services that require specific preapproval by the Audit Committee will be submitted to the Audit Committee by both the independent auditors and the Chief Financial Officer, and must include a joint statement as to whether, in their view, the request or application is consistent with the SEC’s rules on auditor independence. The Chair of the Audit Committee has been delegated the authority to specifically preapprove all services not covered by the general preapproval guidelines. Amounts requiring preapproval in excess of the amount require specific preapproval by all members of the Audit Committee prior to engagement of our independent auditors. All amounts specifically preapproved by the Chair of the Audit Committee in accordance with this policy are to be disclosed to the full Audit Committee at the next regularly scheduled meeting. All services rendered by Deloitte & Touche LLP for the year ended December 31, 2016 were preapproved in accordance with the policies and procedures described above.

 

Principal Auditor Fees

 

The aggregate fees billed to us for professional accounting services, including the audit of our annual consolidated financial statements by our principal auditor for the years ended December 31, 2016 and 2015, are set forth in the table below.

 

   2016   2015 
Audit fees  $613,800   $603,800 
Audit-related fees   19,000    23,600 
Tax fees   3,895    245,560 
All other fees        
Total fees  $636,695   $872,960 

 

For purposes of the preceding table, the principal auditor’s professional fees are classified as follows:

 

Audit fees – These are fees for professional services performed for the audit of our annual consolidated financial statements and the required review of quarterly consolidated financial statements and other procedures performed by the principal auditor in order for them to be able to form an opinion on our consolidated financial statements. These fees also cover services that are normally provided by independent auditors in connection with statutory and regulatory filings or engagements, including reviews of our consolidated financial statements included in the registration statements, as amended, related to our public offerings of common stock. Audit fees are presented for the period to which the audit work relates, regardless of whether the fees are actually billed during the period.

 

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Audit-related fees – These are fees for assurance and related services that traditionally are performed by independent auditors that are reasonably related to the performance of the audit or review of the consolidated financial statements, such as due diligence related to acquisitions and dispositions, attestation services that are not required by statute or regulation, internal control reviews, and consultation concerning financial accounting and reporting standards.

 

Tax fees – These are fees for all professional services performed by professional staff in our independent auditor’s tax division, except those services related to the audit of our consolidated financial statements. These include fees for tax compliance, tax planning and tax advice, including federal, state, and local issues. Services also may include assistance with tax audits and appeals before the Internal Revenue Service and similar state and local agencies, as well as federal, state, and local tax issues related to due diligence. Tax fees are presented for the period in which the services were provided.

 

All other fees – These are fees for any services not included in the above-described categories.

 

Report of the Audit Committee

 

The Audit Committee reviews the financial reporting process on behalf of the Board of Directors. Our management has the primary responsibility for the financial statements and the reporting process, including the system of internal control over financial reporting. Membership on the Audit Committee does not call for the professional training and technical skills generally associated with career professionals in the field of accounting and auditing. In addition, the independent auditors devote more time and have access to more information than does the Audit Committee. Accordingly, the Audit Committee’s role does not provide any special assurance with regard to our financial statements, nor does it involve a professional evaluation of the quality of the audits performed by the independent auditors. In this context, the Audit Committee reviewed the 2016 audited consolidated financial statements with management, including a discussion of the quality and acceptability of our financial reporting, the reasonableness of significant judgments, and the clarity of disclosures in the consolidated financial statements.

 

The Audit Committee reviewed with Deloitte & Touche LLP, which is responsible for expressing an opinion on the conformity of those audited consolidated financial statements with U.S. generally accepted accounting principles, their judgments as to the quality and the acceptability of the consolidated financial statements and such other matters as are required to be discussed with the Audit Committee under Statement on Auditing Standards No. 16 (Communication with Audit Committees). The Audit Committee received from and discussed with Deloitte & Touche LLP the written disclosures and the letter required by the applicable requirements of the Public Company Accounting Oversight Board regarding that firm’s independence from us. In addition, the Audit Committee considered whether Deloitte & Touche LLP’s provision of nonaudit services is compatible with maintaining its independence from us.

 

The Audit Committee discussed with Deloitte & Touche LLP the overall scope and plans for the audit. The Audit Committee meets periodically, and at least quarterly, with Deloitte & Touche LLP, with and without management present, to discuss the results of their examinations, their evaluations of our internal controls, and the overall quality of our financial reporting.

 

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In reliance on these reviews and discussions, the Audit Committee recommended to the Board of Directors, and the Board of Directors approved, the inclusion of the 2016 audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2016 for filing with the SEC.

 

________, 2017 The Audit Committee of the Board of Directors:
Leslie T. Chao (Chair), Paul J. Massey, Jr.,
Stephen R. Quazzo, and Gregory S. Wood

  

The Conflicts Committee

 

The Conflicts Committee’s primary functions are to approve transactions with affiliates and to supervise and evaluate the performance of our external advisor. The Conflicts Committee fulfills these responsibilities primarily by carrying out the activities enumerated in the Corporate Governance Guidelines adopted by our Board of Directors in 2014. The Corporate Governance Guidelines are available on our website at www.grocerycenterreit1.com/governance.aspx.

 

The members of our Conflicts Committee are Paul J. Massey, Jr. (Chair), Leslie T. Chao, Stephen R. Quazzo, and Gregory S. Wood, all of whom are independent directors. The Conflicts Committee held seven meetings during 2016.

 

The Special Committee

 

In connection with the evaluation of the PELP Proposal, a special committee of the Board of Directors was established. The members of our Special Committee are Stephen R. Quazzo (Chair), Leslie T. Chao, Paul J. Massey, Jr., and Gregory S. Wood, all of whom are independent directors. The Special Committee held eight meetings during 2016.

 

Transactions with Related Persons

 

Our Corporate Governance Guidelines require our Conflicts Committee to review and approve all transactions involving our affiliates and us. Prior to entering into a transaction with an affiliate that is not covered by our advisory agreement, a majority of the Conflicts Committee must conclude that the transaction is fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties. In addition, our Code of Ethics lists examples of types of transactions with affiliates that would create prohibited conflicts of interest. Under the Code of Ethics, our officers and directors are required to bring potential conflicts of interest to the attention of the Chair of our Audit Committee promptly. The Conflicts Committee has reviewed the material transactions between our affiliates and us since the beginning of 2016. There are no currently proposed material transactions with related persons other than the PELP Transaction and those covered by the terms of the agreements described below.

 

We entered into an advisory agreement (the “PE-NTR Agreement”) with PECO I OP and Phillips Edison NTR LLC (“PE-NTR”), which is wholly owned by our sponsor, PELP, on December 3, 2014. Certain of our officers, Messrs. Edison, Addy, and Murphy, serve as the executive officers of PE-NTR. The Property Manager is wholly owned by our sponsor, PELP, and Messrs. Edison and Murphy hold key positions at our Property Manager.

 

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Our Relationship with PE-NTR

 

Pursuant to the PE-NTR Agreement, PE-NTR is entitled to specified fees for certain services, including managing our day-to-day activities and implementing our investment strategy. Reimbursable expenses under the PE-NTR Agreement are also reimbursed to PE-NTR.

 

We pay PE-NTR under the PE-NTR Agreement an acquisition fee related to services provided in connection with the selection and purchase or origination of real estate and real estate-related investments. The acquisition fee is equal to 1% of the cost of investments acquired or originated by us, including acquisition or origination expenses and any debt attributable to such investments. We incurred acquisition fees payable to PE-NTR and its affiliates of approximately $2.3 million for the year ended December 31, 2016 and $148,000 for the quarter ended March 31, 2017, all of which had been paid as of March 31, 2017. We intend to terminate the PE-NTR Agreement prior to the Closing and thus will not pay any acquisition fees to PE-NTR pursuant to the PE-NTR Agreement in connection with the Closing.

 

In addition to acquisition fees, we reimburse PE-NTR under the PE-NTR Agreement for customary acquisition expenses, whether or not we ultimately acquire an asset. For the year ended December 31, 2016, we incurred acquisition expenses reimbursable to PE-NTR of approximately $464,000, and for the quarter ended March 31, 2017, we incurred acquisition expenses reimbursable to PE-NTR of approximately $30,000.

 

Pursuant to the PECO I OP Partnership Agreement, PECO I OP issues performance-based restricted operating partnership units designated as “Class B Units” to PE-NTR as partial compensation for asset management services under the PE-NTR Agreement. PECO I OP issued 539,071 Class B Units to PE-NTR for the asset management services performed during 2016 and 141,705 Class B Units to PE-NTR for the asset management services performed during the first quarter of 2017. The Class B Units issued to PE-NTR under the PECO I OP Partnership Agreement will vest and will no longer be subject to forfeiture at such time as all of the following events have occurred: (1) the value of PECO I OP’s assets plus all distributions made equaled or exceeded the total amount of capital contributed by investors plus a 6% cumulative, pre-tax, non-compounded annual return thereon (the “economic hurdle”); (2) any one of the following has occurred: (a) the termination of the PE-NTR Agreement by an affirmative vote of a majority of our independent directors without cause; (b) a listing event; or (c) another liquidity event; and (3) PE-NTR is still providing advisory services to us at the time of such event. Such Class B Units will be forfeited immediately if: (x) the PE-NTR Agreement is terminated for cause; or (y) the PE-NTR Agreement is terminated by an affirmative vote of a majority of our independent directors without cause before the economic hurdle has been met. It is expected that, as a result of the PELP Transaction, all outstanding Class B Units will vest at Closing, pursuant to the terms of the PECO I OP Partnership Agreement. See “The PELP Transaction Documents—Contribution Agreement—Treatment of Class B Units in PECO I OP” on page 99.

 

Beginning October 1, 2015, the PE-NTR Agreement was amended so that the asset management fee payable to PE-NTR would be paid 80% in cash and 20% in Class B Units. We incurred cash asset management fees payable to PE-NTR of approximately $19.2 million for the year ended December 31, 2016 and of approximately $5.1 million for the quarter ended March 31, 2017.

 

We pay PE-NTR under the PE-NTR Agreement for substantial assistance in connection with the sale of properties or other investments an amount equal to 2% of the contract sales price of each property or other investment sold. The Conflicts Committee must determine substantial assistance has been provided to us in connection with the sale of an asset. Substantial assistance in connection with the sale of a property includes the preparation of an investment package for the property (including an investment analysis, rent rolls, tenant information regarding credit, a property title report, an environmental report, a structural report and exhibits) or such other substantial services performed in connection with a sale. During the year ended December 31, 2016, we incurred disposition fees payable to PE-NTR of approximately $745,000. There were no disposition fees incurred during the quarter ended March 31, 2017.

 

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Additionally, PE-NTR incurred approximately $177,000 of general and administrative expenses on our behalf for which PE-NTR was entitled to reimbursement under the PE-NTR Agreement during the year ended December 31, 2016 and approximately $94,000 during the quarter ended March 31, 2017, of which approximately $94,000 remained due and payable to PE-NTR as of March 31, 2017.

 

Our Relationship with the Property Manager

 

All of our real properties are managed and leased by our Property Manager. Our Property Manager also manages real properties acquired by the affiliates of PELP or other third parties.

 

We pay our Property Manager monthly property management fees equal to 4% of the annualized gross revenues of the properties it manages. In addition to the property management fee, if our Property Manager provides leasing services with respect to a property, we pay our Property Manager leasing fees in an amount equal to the usual and customary leasing fees charged by unaffiliated persons rendering comparable services based on national market rates. We pay a leasing fee to our Property Manager in connection with a tenant’s exercise of an option to extend an existing lease, and the leasing fees payable to the Property Manager may be increased by up to 50% in the event that the Property Manager engages a co-broker to lease a particular vacancy. We reimburse the costs and expenses incurred by our Property Manager on our behalf, including legal, travel and other out-of-pocket expenses that are directly related to the management of specific properties, as well as fees and expenses of third-party accountants.

 

If we engage our Property Manager to provide construction management services with respect to a particular property, we pay a construction management fee in an amount that is usual and customary for comparable services rendered to similar projects in the geographic market of the property.

 

Our Property Manager hires, directs and establishes policies for employees who have direct responsibility for the operations of each real property it manages, which may include, but is not limited, to on-site managers and building and maintenance personnel. Certain employees of our Property Manager may be employed on a part-time basis and may also be employed by PE-NTR or certain of its affiliates. Our Property Manager also directs the purchase of equipment and supplies and supervises all maintenance activity.

 

For the year ended December 31, 2016, we incurred property management fees of approximately $9.9 million, leasing fees of approximately $7.7 million, and construction management fees of approximately $1.1 million due to our Property Manager. For the quarter ended March 31, 2017, we incurred property management fees of approximately $2.6 million, leasing fees of approximately $2.3 million, and construction management fees of approximately $304,000. As of March 31, 2017, approximately $878,000 of property management fees, approximately $815,000 of leasing commissions and approximately $59,000 of construction management fees remained due and payable to our Property Manager. Additionally, our Property Manager incurred approximately $5.6 million of costs and expenses on our behalf for which our Property Manager was entitled to reimbursement during the year ended December 31, 2016 and approximately $1.7 million during the quarter ended March 31, 2017, of which approximately $945,000 remained due and payable as of March 31, 2017. Of these costs and expenses, during 2016 approximately $237,000, and during the first quarter of 2017 approximately $86,000, were attributable to travel-related expenses for business purposes on aircraft owned by a company in which Mr. Edison has a 50% ownership interest. The aircraft were utilized to provide timely and cost-effective travel alternatives in connection with company-related business activities at market rates.

 

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Nomination of Directors

 

General

 

We do not have a standing nominating committee. However, our Conflicts Committee is responsible for identifying and nominating replacements for vacancies among our independent director positions. Our Board of Directors believes that the primary reason for creating a standing nominating committee is to ensure that candidates for independent director positions can be identified and their qualifications assessed under a process free from conflicts of interest with us. Because nominations for vacancies in independent director positions are handled exclusively by a committee composed only of independent directors, our Board of Directors has determined that the creation of a standing nominating committee is not necessary. Nominations for replacements for vacancies among non-independent director positions are considered and made by the full Board of Directors. We do not have a charter that governs the director nomination process.

 

Board Membership Criteria

 

The Board of Directors annually reviews the appropriate experience, skills, and characteristics required of directors in the context of the then-current membership of the Board of Directors. This assessment includes, in the context of the perceived needs of the Board of Directors at that time, issues of knowledge, experience, judgment, and skills such as an understanding of commercial real estate, capital markets, business leadership, accounting and financial management. No one person is likely to possess deep experience in all of these areas. Therefore, the Board of Directors has sought a diverse board of directors whose members collectively possess these skills and experiences. Other considerations include the candidate’s independence from us and our affiliates and the ability of the candidate to participate in board meetings regularly and to devote an appropriate amount of effort in preparation for those meetings. It also is expected that independent directors nominated by the Board of Directors shall be individuals who possess a reputation and hold (or have held) positions or affiliations befitting a director of a large publicly held company and are (or have been) actively engaged in their occupations or professions or are otherwise regularly involved in the business, professional, or academic community. As detailed in the director biographies below, the Board of Directors believes that the slate of directors recommended for election at the Annual Meeting possesses these diverse skills and experiences.

 

Selection of Directors

 

The Board of Directors is responsible for selecting its own nominees and recommending them for election by the Stockholders. Pursuant to our Corporate Governance Guidelines, however, the independent directors must nominate replacements for any vacancies among the independent director positions. All director nominees then stand for election by the Stockholders annually.

 

In order for Stockholder nominees to be considered for nomination by the Board of Directors, recommendations made by Stockholders must be submitted within the timeframe required to request a proposal to be included in the proxy materials. See “Stockholder Proposals” on page 149. In evaluating the persons recommended as potential directors, the Board of Directors will consider each candidate without regard to the source of the recommendation and take into account those factors that the Board of Directors determines are relevant. Stockholders may directly nominate potential directors (without the recommendation of the Board of Directors) by satisfying the procedural requirements for such nomination as provided in Section 2.12 of our bylaws.

 

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Stockholder Communications with the Board of Directors

 

We have established several means for Stockholders to communicate concerns to the Board of Directors. If the concern relates to our financial statements, accounting practices, or internal controls, Stockholders should submit the concern in writing to Leslie T. Chao, the Chair of our Audit Committee, in care of our Secretary at our headquarters address at 11501 Northlake Drive, Cincinnati, Ohio 45249. If the concern relates to our governance practices, business ethics, or corporate conduct, Stockholders should submit the concern in writing to Paul J. Massey, Jr., the Chair of our Conflicts Committee, in care of our Secretary at our headquarters address at 11501 Northlake Drive, Cincinnati, Ohio 45249. If uncertain as to which category a concern relates, a Stockholder may communicate the concern to any one of the independent directors in care of our Secretary.

 

Stockholders also may communicate concerns with our directors at our annual meetings. We expect all of our directors to be present at the Annual Meeting. All of our directors were present at our 2016 annual meeting.

 

Board of Directors Leadership Structure and Role in Risk Oversight

 

Chief Executive Officer and Chair of the Board of Directors Positions

 

Mr. Edison serves as both our Chief Executive Officer and as Chair of our Board of Directors. As Chief Executive Officer, Mr. Edison manages our business under the direction of the Board of Directors and implements our policies as determined by the Board of Directors. As Chair of the Board of Directors, Mr. Edison presides over Board of Directors and Stockholder meetings, represents PECO I at public events and oversees the setting of the agenda for those meetings and the dissemination of information about PECO I to the Board of Directors. Our Board of Directors believes that it is appropriate for PECO I that one person serve in both capacities. Mr. Edison, along with Michael C. Phillips, founded PECO I and devotes a substantial amount of his time to its management. With his greater knowledge of PECO I’s day-to-day operations, our Board of Directors believes that Mr. Edison is in the best position to oversee the setting of the agenda for the meetings of the Board of Directors and the dissemination of information about PECO I to the Board of Directors. Our Board of Directors believes that Mr. Edison is best suited to preside over Stockholder meetings and that his representation of PECO I at public events is good for PECO I’s growth.

 

Some commentators regarding board leadership advocate separating the role of Chair of the Board of Directors and Chief Executive Officer, maintaining that such separation creates a system of checks and balances to prevent one person from having too much power. Our Board of Directors believes that this issue is less of a concern for PECO I than many others. Our Board of Directors has four independent directors out of a five-member Board of Directors. Those four directors constitute the Conflicts Committee, Audit Committee and Special Committee. As an externally advised company, many matters raise conflicts of interest. As a result, our Conflicts Committee largely directs the management of PECO I. Given authority vested in the Conflicts Committee, our Board of Directors believes this structure mitigates concerns with Mr. Edison holding both positions, and further believes it is in our best interest that Mr. Edison serves as both Chief Executive Officer and Chair of the Board of Directors.

 

Risk Oversight

 

Our executive officers and PE-NTR are responsible for the day-to-day management of risks faced by PECO I, while our Board of Directors has an active role in the oversight of the management of such risks. The entire Board of Directors is actively involved in overseeing risk management for PECO I through (1) its approval of all property acquisitions and the incurrence and assumption of debt; (2) its oversight of our executive officers, PE-NTR and its affiliates; (3) its review and approval of all transactions with affiliated parties; (4) its review and discussion of regular periodic reports to the Board of Directors and its committees, including management reports on property operating data, compliance with debt covenants, actual and projected financial results, compliance with requirements set forth in our charter and Corporate Governance Guidelines, and various other matters relating to our business; and (5) regular periodic reports from our independent public accounting firm to the Audit Committee regarding various areas of potential risk, including, among others, those relating to our qualification as a REIT for tax purposes.

 

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Executive Officers and Directors

 

We have provided below certain information about our executive officers and directors. All of our directors have terms expiring on the date of the 2017 Annual Meeting, and all of our directors have been nominated to be re-elected to serve until the 2018 annual meeting and until their successors are elected and qualified.

 

Name

Position(s)

Age

Year First Became a Director

       
Jeffrey S. Edison Chair of the Board of Directors and Chief Executive Officer 56 2009
Leslie T. Chao Independent Director 60 2010
Paul J. Massey, Jr. Independent Director 57 2010
Stephen R. Quazzo Independent Director 57 2013
Gregory S. Wood Independent Director 58 2016
R. Mark Addy President and Chief Operating Officer 55 N/A
Devin I. Murphy Chief Financial Officer, Treasurer and Secretary 57 N/A
Jennifer L. Robison Chief Accounting Officer 40 N/A

 

Directors

 

Jeffrey S. Edison (Chair of our Board of Directors and Chief Executive Officer). Mr. Edison has served as Chair or Co-Chair of our Board of Directors and our Chief Executive Officer since December 2009. Mr. Edison has served as Chair of the Board of Directors and Chief Executive Officer of PECO II since August 2013 and as the Chair of the Board of Directors and the Chief Executive Officer of PECO III since April 2016. Mr. Edison co-founded PELP and has served as a principal of PELP since 1995. Before founding PELP, from 1991 to 1995, Mr. Edison was a Senior Vice President from 1993 until 1995 and was a Vice President from 1991 until 1993 at Nations Bank’s South Charles Realty Corporation. From 1987 until 1990, Mr. Edison was employed by Morgan Stanley Realty Incorporated and The Taubman Company from 1984 to 1987. Mr. Edison holds a master’s degree in business administration from Harvard Business School and a bachelor’s degree in mathematics and economics from Colgate University.

 

Among the most important factors that led to our Board of Directors’ recommendation that Mr. Edison serve as our director are Mr. Edison’s leadership skills, integrity, judgment, knowledge of PECO I and PELP, his experience as a director and Chief Executive Officer of PECO II and PECO III, and his commercial real estate expertise.

 

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Leslie T. Chao (Independent Director). Mr. Chao has been one of our directors since July 2010. Mr. Chao retired as Chief Executive Officer of Chelsea Property Group (“Chelsea”), a subsidiary of Simon Property Group, Inc. (“Simon”) (NYSE: SPG), in 2008. Previously he served in various senior capacities at Chelsea, including President and Chief Financial Officer, from 1987 through its initial public offering in 1993 (NYSE: CPG) and acquisition by Simon in 2004. Chelsea was the world’s largest developer, owner and manager of premium outlet centers, with operations in the United States, Japan, Korea and Mexico. Prior to Chelsea, Mr. Chao was a Vice President in the treasury group of Manufacturers Hanover Corporation, a New York bank holding company now part of JPMorgan Chase & Co., where he was employed from 1978 to 1987. Since January 2009, he has served as a non-executive director of Value Retail PLC, a leading developer of outlet centers in Europe, and from 2005 to October 2008 he served as an independent director of The Link REIT, the first and largest public REIT in Hong Kong. Mr. Chao co-founded and, since February 2012, has served as Chair and Chief Executive Officer of Value Retail (Suzhou) Co., Ltd., a developer of outlet centers in China. He received an AB from Dartmouth College in 1978 and an MBA from Columbia Business School in 1986.

 

Among the most important factors that led to the Board of Directors’ recommendation that Mr. Chao serve as our director are Mr. Chao’s integrity, judgment, leadership skills, extensive domestic and international commercial real estate expertise, accounting and financial management expertise, public company director experience, and independence from management and our sponsor and its affiliates.

 

Paul J. Massey, Jr. (Independent Director). Mr. Massey has been one of our directors since July 2010. Mr. Massey has also served as a director of PECO II since July 2014. Mr. Massey began his career in 1983 at Coldwell Banker Commercial Real Estate Services in Midtown Manhattan, first as the head of the market research department, and next as an investment sales broker. Together with partner Robert A. Knakal, whom he met at Coldwell Banker, he then founded Massey Knakal Realty Services, which became New York City’s largest investment property sales brokerage firm, of which Mr. Massey served as Chief Executive Officer. With 250 sales professionals serving more than 200,000 property owners, Massey Knakal Realty Services was ranked as New York City’s #1 property sales company in transaction volume by the CoStar Group, a national, independent real estate analytics provider. With more than $4.0 billion in annual sales, Massey Knakal was also ranked as one of the nation’s largest privately owned real estate brokerage firms. On December 31, 2014, Massey Knakal was sold to global commercial real estate firm Cushman & Wakefield, Inc., for which Mr. Massey now serves as President - New York Investment Sales. In 2007, Mr. Massey was the recipient of the Real Estate Board of New York’s (“REBNY”) prestigious Louis B. Smadbeck Broker Recognition Award. Mr. Massey also serves as Chair for REBNY’s Ethics and Business Practice Subcommittee, is a director on the Commercial Board of Directors of REBNY, is an active member of the Board of Trustees for the Lower East Side Tenement Museum and serves as a chair or member of numerous other committees. Mr. Massey graduated from Colgate University with a Bachelor of Arts degree in economics.

 

Among the most important factors that led to the Board of Directors’ recommendation that Mr. Massey serve as our director are Mr. Massey’s integrity, judgment, leadership skills, extensive commercial real estate expertise, and independence from management and our sponsor and its affiliates.

 

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Stephen R. Quazzo (Independent Director). Mr. Quazzo has been one of our directors since November 2013. Mr. Quazzo is co-founder and Chief Executive Officer of Pearlmark Real Estate, L.L.C. From 1991 to 1996, Mr. Quazzo served as President of Equity Institutional Investors, Inc., a subsidiary of investor Sam Zell’s private holding company, Equity Group Investments, Inc. Mr. Quazzo was responsible for raising equity capital and performing various portfolio management services in connection with the firm’s real estate investments, including institutional opportunity funds and public REITs. Prior to joining the Zell organization, Mr. Quazzo was in the Real Estate Department of Goldman, Sachs & Co., where he was a Vice President responsible for the firm’s real estate investment banking activities in the Midwest. Mr. Quazzo holds undergraduate and MBA degrees from Harvard University, where he serves as an HAA Director and a member of the Board of Dean’s Advisors for the business school. He is a Trustee of the Urban Land Institute (ULI), Chair of the ULI Foundation, a member of the Pension Real Estate Association, and is a licensed real estate broker in Illinois. In addition, Mr. Quazzo serves as a director of ILG, Inc. (NASDAQ: ILG), a Trustee of Rush University Medical Center, and an Investment Committee member of the Chicago Symphony Orchestra endowment and pension plans. Mr. Quazzo has served as a Trustee of The Latin School of Chicago since 2001 and since 1994 has been a Chicago Advisory Board member of City Year, a national service organization.

 

Among the most important factors that led to the Board of Directors’ recommendation that Mr. Quazzo serve as our director are Mr. Quazzo’s integrity, judgment, leadership skills, commercial real estate expertise, investment management expertise, public company director experience, and independence from management and our sponsor and its affiliates.

 

Gregory S. Wood (Independent Director). Mr. Wood has been one of our directors since April 2016. Mr. Wood has been Executive Vice President & Chief Financial Officer of EnergySolutions, Inc., a leading services provider to the nuclear industry, since June 2012. Prior to that, Mr. Wood held the role of Chief Financial Officer at numerous public and private companies, including with Actian Corporation, Silicon Graphics (filed for Chapter 11 bankruptcy protection in 2009 in order to effect the sale of its business to Rackable Systems), Liberate Technologies and InterTrust Technologies. Mr. Wood was a director of Steinway Musical Instruments, Inc. from October 2011 to October 2013, where he also served as Chair of the Audit Committee. Mr. Wood, a certified public accountant (inactive), received his bachelor of business administration in accounting degree from the University of San Diego and his law degree from the University of San Francisco School of Law.

 

Among the most important factors that led to the Board of Directors’ recommendation that Mr. Wood serve as our director are Mr. Wood’s integrity, judgment, leadership skills, accounting and financial management expertise, public company director experience, and independence from management and our sponsor and its affiliates.

 

Executive Officers

 

R. Mark Addy. Mr. Addy has served as our President or Co-President since April 2013, and as our Chief Operating Officer since October 2010. Mr. Addy has served as the President or Co-President and Chief Operating Officer of PECO II since August 2013, and as the President and Chief Operating Officer of PECO III since April 2016. Mr. Addy has also served as the President or Co-President of PE-NTR since October 2010. Mr. Addy served as Chief Operating Officer for Phillips Edison & Company, Inc. from 2004 to October 2010. He also served Phillips Edison & Company, Inc. as Senior Vice President from 2002 until 2004, when he became Chief Operating Officer. From 1987 until 2002, Mr. Addy practiced law with Santen & Hughes in the areas of commercial real estate, financing, leasing, mergers and acquisitions and general corporate law. While at Santen & Hughes, he represented Phillips Edison & Company, Inc. from its inception in 1991 to 2002. Mr. Addy received his law degree from the University of Toledo, where he was a member of the Order of the Barristers, and his bachelor’s degree in environmental science and chemistry from Bowling Green State University, where he received the President’s Award for academic achievement and was a member of the Order of the Omega leadership honor society.

 

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Devin I. Murphy. Mr. Murphy has served as our Chief Financial Officer, Treasurer and Secretary since June 2013. Mr. Murphy has served as the Chief Financial Officer, Treasurer and Secretary of PECO II and PECO III since August 2013 and April 2016, respectively. From November 2009 to June 2013, he served as Vice Chair of Investment Banking at Morgan Stanley. He began his real estate career in 1986 when he joined the real estate group at Morgan Stanley as an associate. Prior to rejoining Morgan Stanley in June 2009, Mr. Murphy was a managing partner of Coventry Real Estate Advisors, a real estate private equity firm founded in 1998 which sponsors a series of institutional investment funds that acquire and develop retail properties. Since its inception, Coventry has invested over $2.5 billion in retail assets. Prior to joining Coventry in March 2008, from February 2004 until November 2007, Mr. Murphy served as global head of real estate investment banking for Deutsche Bank Securities, Inc. At Deutsche Bank, Mr. Murphy ran a team of over 100 professionals located in eight offices in the United States, Europe and Asia. Mr. Murphy’s Deutsche Bank team was recognized as an industry leader and under his management executed over 500 separate transactions on behalf of clients representing total transaction volume exceeding $400 billion. Prior to joining Deutsche Bank, Mr. Murphy was with Morgan Stanley for 15 years. He held a number of senior positions at Morgan Stanley including co-head of United States real estate investment banking and head of the private capital markets group, or PCM. PCM is the team at Morgan Stanley responsible for raising equity capital for Morgan Stanley’s real estate private equity funds as well as private equity capital on behalf of clients. During the time that Mr. Murphy ran PCM, the team raised in excess of $5 billion of equity capital. Mr. Murphy served on the investment committee of the Morgan Stanley Real Estate Funds from 1994 until his departure in 2004. During his tenure on the investment committee, the Morgan Stanley Real Estate Funds invested over $6.5 billion of equity capital globally in transactions with a total transaction value in excess of $35 billion. Mr. Murphy has served as an advisory director for Hawkeye Partners, a real estate private equity firm headquartered in Austin, Texas, since March 2005 and for Trigate Capital, a real estate private equity firm headquartered in Dallas, Texas, since September 2007. Mr. Murphy received a master’s of business administration from the University of Michigan and a bachelor of arts with honors from the College of William and Mary. He is a member of the Urban Land Institute, the Pension Real Estate Association and NAREIT.

 

Jennifer L. Robison. Ms. Robison has served as our Chief Accounting Officer since March 2015. Ms. Robison has also served as the Chief Accounting Officer of PECO II and PECO III since March 2015 and April 2016, respectively. Ms. Robison has served as the Senior Vice President and Chief Accounting Officer of Phillips Edison & Company, Inc. since July 2014. From February 2005 to July 2014, Ms. Robison served as Vice President, Financial Reporting at Ventas, Inc., an S&P 500 company and one of the 10 largest equity REITs in the country. Prior to her time at Ventas, Ms. Robison served as an audit manager at Mountjoy Chilton Medley LLP from September 2003 to February 2005. Ms. Robison began her career at Ernst & Young LLP, serving most recently as assurance manager, and was an employee there from February 1996 to September 2003. She received a bachelor of arts in accounting from Bellarmine University, where she graduated magna cum laude. Ms. Robison is a certified public accountant and a member of the American Institute of Certified Public Accountants, NAREIT and the SEC Professional Group. 

 

Compensation of Executive Officers

 

Messrs. Edison, Addy and Murphy, and Ms. Robison, are our executive officers. They are not our employees and do not receive compensation from us. Our executive officers are employees of PE-NTR, which has entered into the PE-NTR Agreement with us whereby it is responsible for providing our day-to-day management (subject to the authority of our Board of Directors) and it is responsible for compensating its employees, including the executive officers.

 

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Compensation of Directors

 

The following table sets forth information concerning the compensation of our independent directors for the year ended December 31, 2016:

                         
Name     Fees Earned or Paid in Cash       Stock Awards(1)       Total  
Leslie T. Chao   $ 91,751     $ 25,000     $ 116,751  
Paul J. Massey, Jr.   81,251     25,000     106,251  
Stephen R. Quazzo   94,251     25,000     119,251  
Gregory S. Wood   64,691     25,000     89,691  
Total   $ 331,944     $ 100,000     $ 431,944  

 

(1)Includes the value of 2,451 shares of restricted stock of PECO I granted to each of our independent directors on August 5, 2016, based on a per Common Share value equal to our estimated net asset value per Common Share of $10.20 as of August 5, 2016. On May 31, 2017, 613 of such shares vested for each of our independent directors. On each of May 31, 2018, and May 31, 2019, an additional 613 shares of such restricted stock of PECO I will vest. An additional 612 shares of restricted stock of PECO I will vest on May 31, 2020.

 

Cash Compensation

 

We pay each of our independent directors:

 

an annual retainer of $30,000;

 

$1,000 per each board meeting attended;

 

$1,000 per each committee meeting attended;

 

an annual retainer of $20,000 for the Chair of the Audit Committee;

 

an annual retainer of $3,000 for the Chair of the Conflicts Committee; and

 

a retainer of $55,000 for the Chair, and a retainer of $40,000 for the other members, of the Special Committee.

 

All directors receive reimbursement of reasonable out-of-pocket expenses incurred in connection with attendance at meetings of the Board of Directors.

 

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Equity Incentive Plans

 

2010 Long-Term Incentive Plan

 

We have adopted the 2010 Long-Term Incentive Plan (the “Incentive Plan”). The Incentive Plan is intended to attract and retain officers, advisors and consultants (including key employees thereof) considered essential to our long-range success by offering these individuals an opportunity to participate in our growth through awards in the form of, or based on, our Common Shares. Although we do not currently have any employees, any employees we may hire in the future would also be eligible to participate in the Incentive Plan. The Incentive Plan may be administered by a committee appointed by the Board of Directors, which we refer to as the plan committee, or by the Board of Directors itself if no committee is appointed. The Incentive Plan authorizes the granting of awards to participants in the following forms:

 

options to purchase Common Shares, which may be nonstatutory stock options or incentive stock options under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”);

 

stock appreciation rights (“SARs”) which give the holder the right to receive the difference between the fair market value per Common Share on the date of exercise over the SAR grant price;

 

performance awards, which are payable in cash or stock upon the attainment of specified performance goals;

 

restricted stock, which is subject to restrictions on transferability and other restrictions set by the plan committee;

 

restricted stock units, which give the holder the right to receive Common Shares, or the equivalent value in cash or other property, in the future, which right is subject to certain restrictions and to risk of forfeiture;

 

deferred stock units, which give the holder the right to receive Common Shares, or the equivalent value in cash or other property, at a future time;

 

distributions equivalents, which entitle the participant to payments equal to any distributions paid on the shares of stock underlying an award; and

 

other stock-based awards at the discretion of the plan committee, including unrestricted stock grants.

 

All awards must be evidenced by a written agreement with the participant, which will include the provisions specified by the plan committee. The plan committee will administer the Incentive Plan, with sole authority to select participants, determine the types of awards to be granted, and all of the terms and conditions of the awards, including whether the grant, vesting or settlement of awards may be subject to the attainment of one or more performance goals. Awards will not be granted under the Incentive Plan if the grant, vesting or exercise of the awards would jeopardize our status as a REIT under the Internal Revenue Code or otherwise violate the ownership and transfer restrictions imposed under our charter. Unless otherwise determined by the plan committee, no award granted under the Incentive Plan will be transferable except through the laws of descent and distribution or except, in the case of an incentive stock option, pursuant to a qualified domestic relations order.

 

We have reserved 9,000,000 Common Shares for issuance pursuant to awards granted under the Incentive Plan. In the event of a transaction between PECO I and our Stockholders that causes the per-share value of our Common Shares to change (including, without limitation, any stock distribution, stock split, spin-off, rights offering or large nonrecurring cash distribution), the share authorization limits under the Incentive Plan will be adjusted proportionately, and the plan committee must make such adjustments to the Incentive Plan and awards as it deems necessary, in its sole discretion, to prevent dilution or enlargement of rights immediately resulting from such transaction. In the event of a stock split, a stock distribution or a combination or consolidation of the outstanding Common Shares into a lesser number of Common Shares, the authorization limits under the Incentive Plan will automatically be adjusted proportionately, and the Common Shares then subject to each award will automatically be adjusted proportionately without any change in the aggregate purchase price.

 

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The Incentive Plan will automatically expire on August 11, 2020, unless extended or earlier terminated by the Board of Directors or the plan committee. The Board of Directors or the plan committee may terminate the Incentive Plan at any time, but termination will have no adverse impact on any award that is outstanding at the time of the termination. The Board of Directors or the plan committee may amend the Incentive Plan at any time, but no amendment to the Incentive Plan will be effective without the approval of our Stockholders if such approval is required by any law, regulation or rule applicable to the Incentive Plan. No termination or amendment of the Incentive Plan may, without the written consent of the participant, reduce or diminish the value of an outstanding award. The plan committee may amend or terminate outstanding awards, but such amendment or termination may require consent of the participant. Unless approved by our Stockholders, the original term of an option may not be extended. Unless permitted by the anti-dilution provisions of the Incentive Plan, the exercise price of an outstanding option may not be reduced, directly or indirectly, without approval by our Stockholders.

 

No awards have been issued under the Incentive Plan and we currently have no plans to issue any awards under the Incentive Plan.

 

Amended and Restated 2010 Independent Director Stock Plan

 

We have adopted a long-term incentive plan that we will use to attract and retain qualified independent directors. Our Amended and Restated 2010 Independent Director Stock Plan (the “Independent Director Plan”) offers independent directors an opportunity to participate in our growth through awards of shares of restricted common stock subject to time-based vesting.

 

Our Conflicts Committee administers the Independent Director Plan, with sole authority to determine all of the terms and conditions of the awards. No awards will be granted under the Independent Director Plan if the grant or vesting of the awards would jeopardize our status as a REIT under the Internal Revenue Code or otherwise violate the ownership and transfer restrictions imposed under our charter. Unless otherwise determined by our Board of Directors, no award granted under the Independent Director Plan will be transferable except through the laws of descent and distribution.

 

We have authorized and reserved 200,000 shares for issuance under the Independent Director Plan. In the event of a transaction between PECO I and our Stockholders that causes the per-share value of our Common Shares to change (including, without limitation, any stock distribution, stock split, spin-off, rights offering or large nonrecurring cash distribution), the share authorization limits under the Independent Director Plan will be adjusted proportionately and the Board of Directors will make such adjustments to the Independent Director Plan and awards as it deems necessary, in its sole discretion, to prevent dilution or enlargement of rights immediately resulting from such transaction. In the event of a stock split, a stock distribution or a combination or consolidation of the outstanding Common Shares into a lesser number of Common Shares, the authorization limits under the Independent Director Plan will automatically be adjusted proportionately and the Common Shares then subject to each award will automatically be adjusted proportionately without any change in the aggregate purchase price.

 

The Conflicts Committee may in its sole discretion at any time determine that all or a part of a director’s time-based vesting restrictions on all or a portion of a director’s outstanding shares of restricted stock will lapse, as of such date as the Conflicts Committee may, in its sole discretion, declare. The Conflicts Committee may discriminate among participants or among awards in exercising such discretion.

 

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The Independent Director Plan will automatically expire on August 11, 2020, unless extended or earlier terminated by the Board of Directors. The Board of Directors may terminate the Independent Director Plan at any time. The expiration or other termination of the Independent Director Plan will not, without the participants’ consent, have an adverse impact on any award that is outstanding at the time the Independent Director Plan expires or is terminated. The Board of Directors may amend the Independent Director Plan at any time, but no amendment will adversely affect any award without the participant’s consent and no amendment to the Independent Director Plan will be effective without the approval of our Stockholders if such approval is required by any law, regulation or rule applicable to the Independent Director Plan.

 

In August 2016, we awarded 2,451 shares of restricted stock to each of our independent directors under the Independent Director Plan. On May 31, 2017, 613 of such shares vested for each of our independent directors. On each of May 31, 2018 and May 31, 2019, an additional 613 shares of such restricted stock will vest. An additional 612 shares of restricted stock will vest on May 31, 2020.

 

The following table gives information regarding our equity incentive plans as of May 31, 2017.

  

    Equity Compensation Plans Information  
Plan Category     Number of Securities To Be Issued Upon Exercise of Outstanding Options, Warrants, and, Rights     Weighted-Average Exercise Price of Outstanding Options, Warrants, and, Rights       Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans(1)  
Equity compensation plans approved by security holders     9,804 (2)   $       8,992,196  
Equity compensation plans not approved by security holders                  
Total / Weighted Average     9,804     $       8,992,196  

 

(1)We have two equity incentive plans as described above.

(2)Amount represents the number of shares of restricted stock of PECO I that were granted to our independent directors in August 2016, of which 2,452 shares vested on May 31, 2017.

 

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Proposal 2: The PELP Proposal

 

At the Annual Meeting, you and the other Stockholders will also vote to approve the PELP Transaction pursuant to the Contribution Agreement. For a detailed discussion of the terms and conditions of the Contribution Agreement, as well as the agreements ancillary to the Contribution Agreement, including the Equityholder Agreement, the Services Agreement, the Third Amended and Restated Agreement of Limited Partnership of PECO I OP (the “PECO I OP Amended and Restated Partnership Agreement”), the Third Amended and Restated Bylaws of PECO I, the License Agreement, the Escrow Agreement and the Tax Protection Agreement (collectively, the “Ancillary Agreements”), see “The PELP Transaction Documents” on page 97. After careful consideration, the approval by the Board of Directors of the Contribution Agreement and the PELP Transaction was recommended by the Special Committee, consisting of the four disinterested, independent directors of PECO I who are also Stockholders and do not have a financial interest in PELP. The Special Committee, which was formed by the Board of Directors to evaluate and negotiate the PELP Transaction, retained its own legal, financial and other advisors. Upon recommendation by the Special Committee, the Board of Directors approved the Contribution Agreement, the Ancillary Agreements and the PELP Transaction. 

 

Vote Required

 

There is no legal requirement to submit the PELP Transaction to our Stockholders for approval. However, our Board of Directors believes it is desirable to obtain the approval of the PELP Transaction and accordingly, has made Stockholder approval of the PELP Transaction a condition to its closing. If the PELP Transaction is not approved by the affirmative vote of the holders of a majority of the votes cast at the Annual Meeting on the PELP Proposal, we will continue to operate under our current management structure, paying fees and cost reimbursements to PE-NTR and the Property Manager under our current agreements, and our Board of Directors will examine other strategic alternatives that may be available to PECO I. If you “Abstain” from voting, it will have no effect on the PELP Proposal under Maryland law. Failures to vote, including broker non-votes, also will have no effect on the PELP Proposal.

 

Pursuant to applicable Maryland law, contracts or other transactions in which directors have a material financial interest are not void or voidable solely because of such fact if, among other things, (i) a majority of a company’s disinterested directors approve or ratify such transaction, (ii) a majority of a company’s stockholders approve or ratify such transaction (excluding the votes of shares owned by interested directors or interested stockholders) or (iii) the contract or transaction is otherwise fair and reasonable to the corporation. The approval by the Board of Directors of the Contribution Agreement, the Ancillary Agreements and the PELP Transaction was recommended by the Special Committee, which retained its own legal, financial and other advisors. Upon recommendation by the Special Committee, the Board of Directors approved the Contribution Agreement, the Ancillary Agreements and the PELP Transaction. Because the PELP Transaction involves a transaction in which the PECO I management team (including Mr. Edison) has a material financial interest, the Board of Directors has determined that it wishes to solicit Stockholder approval of the PELP Transaction in addition to the approval of its disinterested directors. PECO I’s interested directors, officers and their affiliates own approximately 0.4% of the outstanding Common Shares as of June 1, 2017.

 

Recommendation

 

Based on the recommendation of the Special Committee, your Board of Directors recommends that you vote FOR the PELP Proposal.

 

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Proposal 3: Adjournment of the Annual Meeting

 

At the Annual Meeting, you and the other Stockholders will also vote to approve an adjournment of the Annual Meeting, including, if necessary, as determined by the Chair of the Annual Meeting, to solicit additional proxies in favor of the PELP Proposal if there are not sufficient votes for this proposal.

 

Vote Required

 

Approval of the proposal to adjourn the Annual Meeting requires the affirmative vote of a majority of the votes cast at the Annual Meeting by the holders who are present in person or by proxy and entitled to vote. Abstentions and broker non-votes will have no effect on the outcome of the vote. Proxies received will be voted FOR approval of this proposal to adjourn the Annual Meeting unless Stockholders designate otherwise.

 

Recommendation

 

Your Board of Directors unanimously recommends a vote FOR this proposal to adjourn the Annual Meeting, if necessary.

 

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THE PELP TRANSACTION

 

The following is a description of the material aspects of the PELP Transaction. While PECO I believes that the following description covers the material terms of the PELP Transaction, the description may not contain all of the information that may be important to you. You should read this proxy statement carefully and in its entirety, including the Contribution Agreement attached to this proxy statement as Annex A and incorporated herein by reference and the other transaction documents attached to this proxy statement as Annexes B through H, for a more complete understanding of the PELP Transaction.

 

The Parties

 

PECO I and PECO I OP

 

PECO I is a public non-traded REIT that was formed as a Maryland corporation in October 2009 and qualified as a REIT for the year ended December 31, 2010, and each year thereafter. As of March 31, 2017, PECO I owned fee simple interests in 154 real estate properties totaling approximately 16.8 million square feet acquired from third parties unrelated to PECO I or PE-NTR.

 

PECO I owns its interests in all of its properties and conducts substantially all of its business through PECO I OP, a Delaware limited partnership formed in December 2009. PECO I is a limited partner of PECO I OP, and PECO I’s wholly owned subsidiary, Phillips Edison Grocery Center OP GP I LLC, is the sole general partner of the PECO I OP. PECO I focuses its investment strategy primarily on well-occupied, grocery-anchored neighborhood and community shopping centers having a mix of creditworthy national and regional retailers selling necessity-based goods and services in diversified markets with growth potential throughout the United States. These markets include Florida, Georgia, Ohio, California, Illinois and North Carolina. The principal executive office of PECO I and PECO I OP is located at 11501 Northlake Drive, Cincinnati, Ohio 45249 and the telephone number is (513) 554-1110.

 

PELP

 

PELP is a Delaware limited partnership that acquires and operates grocery-anchored neighborhood and community shopping centers throughout the United States. PELP was formed in 2004, pursuant to a business combination of predecessor entities that have existed since 1991. As of March 31, 2017, PELP owned fee simple interests in 82 properties, located in 25 states, totaling approximately 9.4 million square feet. PELP focuses its investment strategy on grocery-anchored shopping centers in areas with attractive growth opportunities and benefits from in-line tenants and rental revenue driven by convenience and service-based businesses. PELP’s real estate properties are located in diversified markets, including Florida, Georgia, Ohio, Texas, California, Virginia and North Carolina.

 

PELP also operates a fully integrated, in-house, third-party asset management business led by senior executives with more than two decades of real estate experience and more than ten years together. This platform manages multiple aspects of shopping center operations, including acquisitions, leasing, construction management, property management, finance, marketing and dispositions. Designed to optimize property value and consistently deliver a great shopping experience, PELP currently manages approximately $4.9 billion of third-party real estate which include properties for PECO I, PECO II, PECO III, Phillips Edison Value Added Grocery Venture, LLC, a value-added joint venture between PECO II and TPG Real Estate, and other third parties.

 

PELP has operated with financial partners through property-specific joint ventures, multi-asset discretionary private equity funds, and publicly registered, non-traded REITs, and since its inception, has owned, operated, and/or managed over 60 million square feet of real estate. As of March 31, 2017, PELP and its affiliates own, operate and/or manage a portfolio consisting of approximately 39.8 million square feet, located in 33 states, totaling over 5,300 tenants.

 

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PELP has corporate offices in Cincinnati, Salt Lake City, New York and Atlanta. The principal executive office of PELP is located at 11501 Northlake Drive, Cincinnati, Ohio 45249, and its telephone number is (513) 554-1110.

 

The PELP Transaction

 

The Contribution Agreement generally provides for the contribution to PECO I OP of the Contributed Companies, which collectively own the Contributed Properties and the Contributed Businesses, pursuant to the terms and subject to the conditions set forth in the Contribution Agreement. Prior to the Closing and in connection with the PELP Transaction, the Contributors (including PELP) have agreed to consummate a series of transfers and reorganization transactions that are intended to facilitate the PELP Transaction, and PECO I OP has agreed to form a taxable REIT subsidiary (a “TRS”) to which the Property Manager, certain employees and certain third-party investment management agreements will be transferred.

 

Pursuant to the Contribution Agreement, in exchange for the Contributors’ equity interests in the Contributed Companies: (i) at the Closing, PECO I OP will issue to the Contributors the Base OP Unit Consideration (i.e., 40,360,504 OP Units of PECO I OP), subject to certain adjustments set forth in the Contribution Agreement; (ii) at the Closing, PECO I OP will pay the Contributors the Closing Consideration (the Cash Consideration and the Base OP Unit Consideration), subject to certain adjustments set forth in the Contribution Agreement; and (iii) after the Closing, the Contributors will have the right to receive the Earn-out Consideration, which consists of up to 12,490,196 OP Units if certain milestones are achieved, with the greatest Aggregate Consideration contingent on achieving a liquidity event for Stockholders by December 31, 2019 at the Implied Valuation (value per Common Share of $10.20) or greater and the successful raising of $1.5 billion of equity capital by December 31, 2019 for PECO III. The Contribution Agreement provides that OP Units comprising 7.5% of the Closing Consideration (the “Escrowed Consideration”) will be placed into escrow to satisfy the indemnification obligations of the Contributors under the Contribution Agreement. At the Closing, the parties anticipate that Class B Units of PECO I OP held by PELP and other persons will convert to OP Units in accordance with the terms and conditions of the PECO I OP Partnership Agreement.

 

The terms of the Contribution Agreement are discussed in greater detail in “The PELP Transaction Documents—The Contribution Agreement” below. Additionally, a copy of the Contribution Agreement is attached as Annex A to this proxy statement and incorporated herein by reference. PECO I encourages you to read the Contribution Agreement in its entirety because it is the principal document governing the PELP Transaction.

 

Background of the PELP Transaction

 

The Board of Directors and management of PECO I have regularly reviewed opportunities for PECO I to increase size and scale, obtain higher earnings potential and earnings growth potential, improve dividend coverage and enhance access to capital, in each case to enhance Stockholder value. The Board of Directors also has sought to achieve greater diversity in PECO I’s portfolio and improve its ability to pursue potential liquidity alternatives, such as a listing on a national securities exchange or a sale of PECO I. One way the Board of Directors has considered achieving these goals is by internally managing its enterprise. PECO I management had provided periodic updates to the Board of Directors regarding strategy initiatives and plans for PECO I.

 

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In May 2014, Mr. Edison indicated to the directors of PECO I an interest in exploring a transaction in which PECO I would acquire PELP’s owned real estate asset portfolio (the “Real Estate Portfolio”), third-party asset management business, including the external manager of PECO I (the “Asset Management Business”), and certain other related assets. In response, and in preparation for potential discussions with PELP, the Conflicts Committee of PECO I, consisting of Paul J. Massey, Jr., the Chair of the Conflicts Committee and an independent director of PECO I, Leslie T. Chao, an independent director of PECO I, and Stephen R. Quazzo, an independent director of PECO I (the “Conflicts Committee”), determined that they should engage independent legal and financial advisors to assist the independent directors in evaluating any proposal from PELP.

 

On June 4, 2014, the Conflicts Committee met and interviewed several law firms, including Sidley Austin LLP (“Sidley Austin”). Following such interviews, the independent directors discussed each firm’s presentation and qualifications and determined to engage Sidley Austin as legal counsel to the independent directors in connection with a possible transaction involving PELP.

 

The Conflicts Committee held a telephonic meeting with its legal counsel on June 18, 2014. During the meeting, the members of the Conflicts Committee discussed the possibility that PECO I may receive a proposal from PELP regarding the Real Estate Portfolio, the Asset Management Business and certain of PELP’s other related assets. The representatives of Sidley Austin discussed with the independent directors certain legal matters related to a possible transaction involving PELP, including the independence of members of the Conflicts Committee. Following such discussion, the Conflicts Committee determined that each member of the Conflicts Committee is independent for purposes of evaluating a possible transaction involving PELP. The representatives of Sidley Austin also reviewed with the directors their applicable duties under Maryland law. The Conflicts Committee determined, as a next step, to interview and engage independent financial advisors.

 

Starting in late June 2014 and continuing until February 2015, certain investment banking firms (other than Lazard) gave presentations to the Conflicts Committee and the Board of Directors regarding evaluations of strategic, financial and liquidity alternatives available to PECO I, including continuing as an externally managed non-listed REIT, listing the Common Shares (with or without an equity raise), merging with an existing publicly traded REIT, selling PECO I for cash or stock and a potential transaction with PELP.

 

On July 15, 2014, the Conflicts Committee, along with its legal counsel, met and interviewed four potential financial advisors, including Lazard.

 

On July 23, 2014, the Conflicts Committee held a telephonic meeting with its legal counsel. The Conflicts Committee reviewed and discussed the advisability of establishing a special committee comprised of independent members of the Board of Directors (the “Special Committee”) to evaluate any possible transaction involving PELP and strategic alternatives that may be available to PECO I. The Conflicts Committee also discussed the qualifications and independence of each of the investment banking firms that made presentations to the Conflicts Committee on July 15, 2014 and determined that it would engage Lazard to serve as financial advisor to the independent directors with respect to a possible transaction involving PELP, although no formal engagement letter was entered into at that time.

 

During the Fall of 2014, PELP worked with its financial and other advisers to prepare a proposed transaction with PECO I.

 

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On February 25, 2015, Goldman Sachs, PELP’s financial advisor, delivered a proposal to the independent directors of PECO I. The PELP proposal contemplated PECO I’s acquisition of the Real Estate Portfolio, which included 93 real estate assets, the Asset Management Business and certain of PELP’s other related assets in exchange for the issuance by PECO I of 83.6 million OP Units of PECO I OP (certain proposals made between the parties expressed the consideration in Common Shares, but the parties contemplated that the consideration may be issued in OP Units) and the assumption of outstanding PELP debt of approximately $529 million. The OP Units would have an assumed valuation of $10.00 per OP Unit, and under PELP’s proposal, the investors in PELP would have a 31% pro forma ownership of PECO I after the closing of the proposed transaction. PELP’s proposal also contemplated certain tax protection provisions for the benefit of the PELP investors for a period of 25 years.

 

The Conflicts Committee held a telephonic meeting with its financial and legal advisors on March 3, 2015. The representatives of Sidley Austin again reviewed with the directors their applicable duties. The Conflicts Committee reviewed and discussed establishing a Special Committee to evaluate the proposal from PELP, as well as strategic alternatives that may be available to PECO I. The representatives of Lazard reviewed with the directors a preliminary process timeline and work plan for evaluating PELP’s proposal and assessing strategic alternatives.

 

The Board of Directors met on March 4, 2015 and adopted resolutions establishing the Special Committee. The Board of Directors delegated to the Special Committee the full power and authority of the Board of Directors with respect to the evaluation of and actions with respect to a proposal from PELP, including the authority to negotiate and recommend to the full Board of Directors rejection or acceptance of any process, proposal, offer, inquiry or agreement relating to a proposal from PELP.

 

On March 20, 2015, representatives from Lazard reviewed with the Special Committee a preliminary work plan for evaluating PELP’s proposal and assessing strategic alternatives.

 

The Special Committee, consisting of Messrs. Quazzo, Chao and Massey, held a telephonic meeting with its financial and legal advisors on April 10, 2015. Mr. Quazzo was selected to be the Chair of the Special Committee and to take the lead in conducting the Special Committee’s work. The Special Committee also discussed the terms of the Lazard engagement letter. The representatives of Lazard then joined the meeting and discussed with the Special Committee their preliminary observations regarding PECO I’s business plan and portfolio. The Special Committee also approved the engagement of Venable LLP (“Venable”) to serve as Maryland counsel to the Special Committee.

 

On April 10, 2015, the Special Committee entered into an engagement letter with Lazard. At the direction of the Special Committee, Lazard began to evaluate strategic, financial and liquidity alternatives available to PECO I, including a potential acquisition of PELP.

 

The Special Committee held a telephonic meeting with its financial and legal advisors on April 20, 2015. The representatives of Lazard discussed with the Special Committee, among other things, preliminary observations on the composition of the Real Estate Portfolio and positioning relative to comparable publicly traded peers. After this discussion, representatives of PELP, including Messrs. Edison, Devin I. Murphy and Robert F. Myers, presented to the Special Committee an overview of the Real Estate Portfolio. The presentation covered, among other things, PELP’s view of the acquisition opportunity for PECO I and key financial and operational aspects of the Real Estate Portfolio. After the PELP presentation, in a private session, the members of the Special Committee reviewed with its financial and legal advisors the information provided by the representatives of PELP and the next steps in the Special Committee’s process.

 

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The Special Committee held a telephonic meeting with its financial and legal advisors on April 24, 2015. The representatives of Lazard discussed with the Special Committee, among other things, preliminary observations on the Asset Management Business and an evaluation of investment managers of select public REITs. After this discussion, representatives of PELP, including Messrs. Edison, Murphy and Myers, presented to the Special Committee and its financial and legal advisors an overview of the Asset Management Business. The presentation covered, among other things, PELP’s view of the acquisition opportunity for PECO I and key operational and financial aspects of the Asset Management Business. After the PELP presentation, in a private session, the members of the Special Committee reviewed with its financial and legal advisors the information provided by the representatives of PELP and the next steps in the Special Committee’s process.

 

The Special Committee held a telephonic meeting with its financial and legal advisors on May 1, 2015. The representatives of Lazard discussed with the Special Committee, among other things, preliminary pro forma observations on a potential combination with the Real Estate Portfolio and market observations on the shopping center and non-traded REIT sectors. After a discussion among the members of the Special Committee and the representatives of Sidley Austin and Lazard, the Special Committee discussed next steps in the process, including requesting that Lazard undertake a more complete financial analysis of PELP’s proposal and strategic alternatives that may be available to PECO I.

 

On May 6, 2015, representatives of Sidley Austin and Latham & Watkins LLP, counsel to PELP (“Latham”), discussed potential next steps, including the due diligence review of the Real Estate Portfolio, the Asset Management Business and certain of PELP’s other related assets.

 

The Special Committee held a meeting with its financial and legal advisors on May 8, 2015, with some in attendance in person at the offices of Lazard in New York, New York and others joining the meeting telephonically. The representatives of Lazard discussed with the Special Committee, among other things, a preliminary valuation analysis of PECO I, a preliminary valuation analysis of PELP and an analysis of PECO I’s strategic alternatives, including continuing to operate as an externally managed REIT, listing the Common Shares on a national securities exchange, acquiring the Real Estate Portfolio, the Asset Management Business and certain of PELP’s other related assets together, acquiring the Asset Management Business only, engaging in an all-stock strategic merger with unrelated third parties and selling PECO I for cash to unrelated third parties. The Special Committee and the representatives of Lazard discussed the preliminary valuation analyses, and the Special Committee directed the representatives of Lazard to assign no value to the internalization of the management services provided to PECO I by PELP. The Special Committee engaged in a discussion with its financial and legal advisors regarding both PELP’s proposal and other strategic alternatives that may be available to PECO I.

  

The Special Committee held a telephonic meeting with its financial and legal advisors on May 13, 2015. The Special Committee and its advisors continued their review and discussion of PELP’s proposal and strategic alternatives that may be available to PECO I. The Special Committee reviewed the range of possible benefits to PECO I and its Stockholders of the various strategic alternatives and the timing, costs, risks and likelihood of accomplishing the goals of these alternatives. The Special Committee assessed that none of the above-described strategic alternatives was reasonably likely to present superior opportunities for PECO I, or reasonably likely to create greater value for the Stockholders, than the PELP Transaction. Specifically, the Special Committee concluded that each of the other strategic alternatives would be more attractive after consummating the PELP Transaction, due to increased size and scale and an internalized management structure. The Special Committee also concluded that continuing to discuss a possible transaction involving PELP was in the best interests of PECO I. Following this discussion, the Special Committee determined to reject PELP’s proposal, principally due to valuation issues. The Special Committee and the representatives of Sidley Austin and Lazard then discussed and considered potential counterproposals to PELP’s proposal. Following this discussion, the Special Committee directed representatives of Lazard to contact representatives of Goldman Sachs to communicate the Special Committee’s decision to reject PELP’s proposal and discuss whether an alternative transaction structure could be mutually acceptable to PECO I and PELP.

 

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Following the Special Committee meeting on May 13, 2015, representatives of Lazard informed representatives of Goldman Sachs that the Special Committee had rejected PELP’s proposal. Thereafter, Mr. Quazzo and representatives of Lazard, PELP and Goldman Sachs engaged in further discussions concerning a possible transaction involving PELP. The parties discussed whether certain non-grocery-anchored properties should be excluded from the Real Estate Portfolio in order to align more with PECO I’s strategy and the status of certain re-development assets. The parties also discussed the parties’ different views on valuation and also discussed a possible earn-out.

 

The Special Committee held a telephonic meeting with its financial and legal advisors on May 21, 2015. The Special Committee reviewed the discussions among the representatives of Lazard, PELP and Goldman Sachs that had occurred since the meeting of the Special Committee held on May 13, 2015. The representatives of Lazard informed the Special Committee that PELP and Goldman Sachs had indicated that PELP would be making a revised proposal to the Special Committee within the next week.

 

The Special Committee held a meeting with its financial and legal advisors on May 29, 2015, with some in attendance in person at the offices of Lazard in New York, New York and others joining the meeting telephonically. At the meeting, Messrs. Edison and Murphy and other representatives of PELP, as well as representatives of Goldman Sachs, made a presentation to the Special Committee regarding a revised proposal, which, among other things, removed from the Real Estate Portfolio 16 of PELP’s owned real estate assets that were not strategic fits with PECO I’s existing grocery-focused portfolio or were no longer owned by PELP and identified four additional assets that were to be redeveloped and then sold. PELP’s revised proposal contemplated PELP receiving 61.9 million OP Units of PECO I OP. PELP’s presentation covered, among other things, PELP’s strategic plans for the Asset Management Business and the 77 owned real estate assets comprising the Real Estate Portfolio included in PELP’s revised proposal, a pro forma analysis showing the projected effects of the possible transaction contemplated by PELP’s revised proposal on PECO I’s projected performance and valuation and the methodologies that PELP used to prepare the revised proposal.

 

The Special Committee held a telephonic meeting with its financial and legal advisors on June 4, 2015. Representatives of Lazard discussed with the Special Committee their preliminary financial analysis regarding PELP’s revised proposal. The discussion covered, among other things, a comparison of the terms of PELP’s revised proposal with the original proposal discussed with the Special Committee on February 25, 2015 and an evaluation of PELP’s strategic plans for the Asset Management Business and the Real Estate Portfolio included in PELP’s revised proposal. At the direction of the Special Committee, Lazard’s preliminary financial analysis of PELP’s revised proposal assigned no value to the internalization of the management services provided to PECO I by PELP. A discussion among the Special Committee and the representatives of Sidley Austin and Lazard then ensued regarding the presentation and the next steps in the Special Committee’s process.

 

The Special Committee held a telephonic meeting with its financial and legal advisors on June 12, 2015. The Special Committee continued to review with representatives of Lazard the financial analysis of PELP’s revised proposal. The discussion covered, among other things, the assumptions behind (i) PECO I’s status quo business plan, (ii) PELP’s status quo business plan with respect to the PELP assets included in PELP’s revised proposal and (iii) PECO I’s business plan if it were to consummate the possible transaction contemplated by PELP’s revised proposal. Lazard’s financial analysis continued to assign no value to the internalization of the management services provided to PECO I by PELP.

 

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The Special Committee held a telephonic meeting with its financial and legal advisors on June 18, 2015. The representatives of Lazard discussed with the Special Committee additional analyses regarding PELP’s revised proposal. The discussion covered, among other things, a preliminary valuation analysis of the PELP assets that would be acquired by PECO I in the possible transaction contemplated by PELP’s revised proposal and a preliminary valuation analysis of PECO I assuming the consummation of such a transaction and also if no such transaction were consummated. Lazard’s financial analysis continued to assign no value to the internalization of the management services provided to PECO I by PELP. The Special Committee and the representatives of Sidley Austin and Lazard then discussed and considered possible counterproposals to PELP’s revised proposal.

 

The Special Committee held a telephonic meeting with its financial and legal advisors on June 19, 2015. The Special Committee and the representatives of Sidley Austin and Lazard continued their discussion regarding possible counterproposals to PELP’s revised proposal. Following this discussion, the Special Committee directed the representatives of Lazard to contact Goldman Sachs to deliver a term sheet reflecting the Special Committee’s counterproposal.

 

On June 21, 2015, representatives of Lazard delivered to PELP the Special Committee’s counterproposal to PELP’s revised proposal. The counterproposal contemplated PECO I acquiring the Real Estate Portfolio, the Asset Management Business and certain of PELP’s other related assets in exchange for the issuance of 41.2 million OP Units of PECO I OP and the assumption of approximately $480 million of PELP’s debt.

 

On July 1, 2015, representatives of Goldman Sachs delivered to the Special Committee PELP’s new proposal, which contemplated the issuance of 54.6 million OP Units of PECO I OP. PELP’s new proposal also sought an earn-out based on the revenues generated by the Asset Management Business. This new proposal reflected a decrease of 7.3 million OP Units compared to PELP’s proposal on May 29, 2015 and a decrease of 29.0 million OP Units compared to PELP’s original proposal on February 25, 2015.

 

On July 6, 2015, representatives of Goldman Sachs delivered to the representatives of the Special Committee PELP’s revised term sheet.

 

On July 10, 2015, the Special Committee held an in-person meeting at the offices of Lazard in New York, New York, with its financial advisors. At the meeting, Messrs. Edison and Murphy and other representatives of PELP, as well as representatives of Goldman Sachs, reviewed with the Special Committee PELP’s counterproposal delivered on July 1, 2015. A discussion among the members of the Special Committee and the representatives of Lazard, PELP and Goldman Sachs ensued. The Special Committee then held a private session with representatives of Sidley Austin and Lazard. The representatives of Lazard discussed with the Special Committee a financial analysis of PELP’s latest proposal and alternative earn-out structures to the structure proposed by PELP. Lazard’s financial analysis continued to assign no value to the internalization of the management services provided to PECO I by PELP. The Special Committee discussed with its financial and legal advisors possible responses to PELP’s latest proposal. Following this discussion, the Special Committee determined that it would make a revised offer to PELP that contemplated, among other things, an implied issuance of 39.9 million OP Units of PECO I OP. The revised offer also included an alternative earn-out structure, the details of which would be developed in further discussions between representatives of Lazard and Goldman Sachs. After the representatives of Sidley Austin left the meeting, the Special Committee reconvened its meeting with the representatives of Lazard, PELP and Goldman Sachs. The representatives of the Special Committee then presented to the representatives of PELP and Goldman Sachs the Special Committee’s response to PELP’s latest proposal delivered on July 1, 2015.

 

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The Special Committee held a telephonic meeting with its financial and legal advisors on July 16, 2015. In connection with the Special Committee’s proposal, the representatives of Lazard reviewed with the Special Committee a proposed earn-out structure and a related financial analysis reflecting the points discussed at the meeting of the Special Committee held on July 10, 2015. Following a discussion, the Special Committee decided upon the material terms of an earn-out structure and directed the representatives of Lazard to contact the representatives of Goldman Sachs to deliver a summary outlining the Special Committee’s proposed structure. Later that day, the representatives of Lazard sent to the representatives of Goldman Sachs the summary of the proposed earn-out structure.

 

Following the meeting on July 16, 2015, Mr. Quazzo, and the representatives of Lazard, PELP and Goldman Sachs engaged in a number of discussions regarding the Special Committee’s July 10, 2015 proposal.

 

On July 20, 2015, Mr. Quazzo had a meeting with Mr. Edison regarding the outstanding issues with PELP’s proposal and earn-out. Mr. Edison indicated that the parties were far apart on valuation and that he was inclined to terminate further discussions.

 

The Special Committee held a telephonic meeting with its financial and legal advisors on July 24, 2015. The Special Committee reviewed with its advisors the status of the negotiations with PELP and Goldman Sachs. Based on several conversations with representatives of PELP and Goldman Sachs, the Special Committee noted that the parties remained apart on valuation issues and that the negotiations regarding the possible transaction may terminate.

 

On July 28, 2015, following additional discussions with representatives of PELP, the parties determined to terminate any further discussions regarding a possible transaction. The Special Committee determined it was in the best interests of PECO I to terminate its discussions with PELP because of valuation issues and uncertainties regarding certain of PELP’s projections.

 

On November 3, 2015, in light of the parties’ inability to agree on a possible transaction, the Board of Directors resolved to dissolve the Special Committee.

 

On November 8, 2015, the engagement letter with Lazard was formally terminated.

 

From November 2015 through the Spring of 2016, the representatives of Lazard provided periodic updates to the independent directors regarding general market conditions and other general topics relevant to PECO I. 

 

In April 2016, Mr. Gregory S. Wood joined the Board of Directors as a fourth independent director. Mr. Wood also joined the Conflicts Committee.

 

Also in April 2016, Mr. Edison contacted Mr. Quazzo to discuss whether the independent directors would be willing to re-engage in discussions regarding a possible transaction involving PELP. In the Spring and Summer of 2016, the parties periodically continued such discussions. From these discussions, the independent directors noted that the conditions for discussing a possible transaction involving PELP had improved since the termination of discussions the previous summer. Among other factors: (i) PELP’s business had performed well since the termination of discussions and certain of its projected results had been achieved; (ii) PECO II had raised significant equity capital and had closed its public fundraising efforts in September 2015 with approximately $1.1 billion in proceeds; (iii) the Real Estate Portfolio performance had strengthened since the termination of discussions; (iv) PECO I and PECO II’s advisory agreements with PELP had been amended to provide for the payment of asset management fees 80% in cash and 20% in Class B Units; (v) PELP had continued to accrue Class B Units of both PECO I and PECO II in accordance with their respective advisory agreements; (vi) continued growth in the Asset Management Business, including the closing of a $250 million joint venture between PECO II and an affiliate of TPG Real Estate Partners; and (vii) PECO III had been organized with the intention of commencing fundraising in 2016.

 

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On April 14, 2016, the Board of Directors approved an estimated net asset value of $10.20 per Common Share, as of March 31, 2016, based on a financial analysis performed by an independent valuation expert. 

 

On May 10, 2016, the Conflicts Committee held an in-person meeting with representatives of Lazard at the offices of Lazard in New York, New York. The representatives of Lazard provided a general market update, as well as an update on operating performance of both PECO I and PELP.

 

On July 29, 2016, PELP delivered a proposal to the independent directors of PECO I. The new proposal contemplated the issuance of 54 million OP Units to PELP in exchange for all of the outstanding limited partnership interests of PELP, but the parties deferred a discussion of the transaction structure to a later stage subject to due diligence. The OP Units and Class B Units held by PELP would be retained and distributed to the PELP investors. PELP requested an earn-out of up to an additional 10.2 million OP Units based on a number of performance hurdles. The new proposal also contemplated tax protection to certain PELP limited partners.

 

On August 5, 2016, the Conflicts Committee held a telephonic meeting at which representatives of Sidley Austin and Lazard were present. The representatives of Lazard discussed with the Conflicts Committee their preliminary observations regarding PELP’s proposal delivered on July 29, 2016, including a comparison of the terms of PELP’s proposal to the Special Committee’s last proposal delivered on July 10, 2015. In addition, the representatives of Sidley Austin reviewed certain legal and procedural considerations in the event that the Board of Directors decided to re-constitute the Special Committee to evaluate PELP’s proposal. After a discussion among all the participants, the Conflicts Committee decided to seek clarification from PELP regarding certain terms in the proposal with a view toward determining whether it would be advisable for the Board of Directors to re-constitute the Special Committee to re-engage in negotiations with PELP. In that regard, the independent directors noted that the new proposal from PELP was based on a $10.20 per OP Unit value and reflected key changes in PELP’s operations since the previous summer.

 

Following the meeting, Mr. Quazzo had several conversations with representatives of PELP seeking clarification of the terms contained in PELP’s proposal delivered on July 29, 2016 and conveying the preliminary reactions of the independent directors to such proposed terms.

 

On August 18, 2016, representatives of PELP delivered a revised proposal to the independent directors of PECO I (the “PELP August 2016 Proposal”). The PELP August 2016 Proposal contemplated PECO I (i) acquiring all of the limited partnership interests of PELP, (ii) assuming approximately $500 million of PELP’s debt projected to be in-place as of December 31, 2016, (iii) providing PELP with ten years of tax protection, (iv) causing PECO I to issue to PELP 54.3 million OP Units of PECO I OP, at an assumed price of $10.20 per OP Unit, and (v) providing PELP with the opportunity to earn an additional 10.2 million OP Units if PELP achieved all of its earn-out hurdles in full. Additionally, the PELP August 2016 Proposal contemplates a mutually acceptable tax matters agreement and replicating PELP’s current incentive compensation plan. The parties continued to defer a discussion of the structure of the acquisition to a later stage subject to due diligence.

 

The independent directors concluded that the terms of the PELP August 2016 Proposal merited further evaluation. In August 2016, the Board of Directors adopted a resolution re-constituting the Special Committee, consisting of Messrs. Chao, Massey, Wood and Quazzo, each of whom is an independent member of the Board of Directors. Mr. Quazzo was again appointed the Chair of the Special Committee. The Board of Directors delegated to the Special Committee the same authority as was delegated to it by the resolutions adopted by Board of Directors on March 4, 2015.

 

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The Special Committee held a telephonic meeting with its legal advisors on September 14, 2016. The independent directors discussed the re-engagement of Lazard as the Special Committee’s financial advisor and the terms of such engagement. The Special Committee then approved the engagement of Lazard. Representatives of Sidley Austin reviewed with the Special Committee certain legal matters, including the independence of the directors, and the directors’ duties in transactions such as the one being considered with PELP. The Special Committee also approved the engagement of Venable to serve as Maryland counsel to the Special Committee.

 

On October 11, 2016, the Special Committee held an in-person meeting at the offices of Lazard in New York, New York, with its financial and legal advisors, with certain advisors joining the meeting telephonically. At the meeting, representatives of PELP, including Messrs. Edison, Murphy, Myers, Addy and John Caulfield, presented to the Special Committee an overview of the PELP August 2016 Proposal. After a discussion with the representatives of PELP, the Special Committee and its advisors then met privately to discuss the PELP August 2016 Proposal and the next steps in the Special Committee’s process.

 

The Special Committee held a telephonic meeting with its financial and legal advisors on November 4, 2016. The representatives of Lazard discussed with the Special Committee their preliminary financial analysis of the PELP August 2016 Proposal and provided an overview of the Asset Management Business. For purposes of Lazard’s preliminary financial analysis of the PELP August 2016 Proposal, the Special Committee directed Lazard to assign no value to the internalization of the management services provided to PECO I by PELP. The Special Committee and its advisors discussed the next steps in the process, including the financial due diligence work that Lazard would need to undertake.

 

The Special Committee held a telephonic meeting with its financial and legal advisors on November 9, 2016. The representatives of Lazard reviewed with the Special Committee additional financial analyses regarding the PELP August 2016 Proposal and Lazard’s ongoing financial due diligence of the Asset Management Business. For purposes of Lazard’s additional financial analyses of the PELP August 2016 Proposal, Lazard continued to assign no value to the internalization of the management services provided to PECO I by PELP.

 

The Special Committee held a telephonic meeting with its financial and legal advisors on November 21, 2016. The representatives of Lazard discussed, among other things, their analyses regarding the Real Estate Portfolio, including both the core properties, certain redevelopment properties and certain properties intended to be disposed of by PELP in the near term. The Special Committee and its advisors also reviewed the next steps in their evaluation of a possible transaction involving PELP.

 

On November 28, 2016, Mr. Quazzo and representatives of Sidley Austin and Lazard discussed an outline of a response to the PELP August 2016 Proposal and the potential timeline of a possible transaction involving PELP.

 

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The Special Committee held a telephonic meeting with its financial and legal advisors on December 6, 2016. The meeting was also attended by representatives of PELP, including Messrs. Edison, Murphy, Caulfield and Javon Bea, as well as representatives of J.P. Morgan and KeyBanc Capital Markets Inc. (“KeyBanc”). J.P. Morgan and KeyBanc were serving as financial advisors to PELP. The representatives of PELP presented to the Special Committee a valuation analysis of the Asset Management Business prepared by PELP, J.P. Morgan and KeyBanc. After a discussion among the Special Committee and the representatives of PELP, the Special Committee held a private meeting with its advisors. The representatives of Lazard then discussed with the Special Committee: (i) the results of Lazard’s preliminary valuation analysis of each of the Asset Management Business and the Real Estate Portfolio, including a discussion of the various assumptions underlying such preliminary valuations; (ii) a comparison of such preliminary valuations against the valuations of the Asset Management Business and the Real Estate Portfolio that were implied by the PELP August 2016 Proposal; and (iii) certain earn-out considerations and other adjustments affecting such preliminary valuations. Lazard’s preliminary valuation of the Asset Management Business continued to assign no value to the internalization of the management services provided to PECO I by PELP. A discussion among the Special Committee and the representatives of Lazard then ensued. The representatives of Sidley Austin then discussed with the Special Committee a draft term sheet summarizing the material terms of a possible counterproposal to the PELP August 2016 Proposal. The Special Committee and the representatives of Sidley Austin and Lazard then discussed and considered the terms of such a counterproposal and the next steps in the Special Committee’s process.

 

The Special Committee held a telephonic meeting with its financial and legal advisors on December 11, 2016. The Special Committee and the representatives of Sidley Austin and Lazard continued their discussion regarding the terms of a possible counterproposal to the PELP August 2016 Proposal. Following this discussion, the Special Committee approved the terms of a counterproposal and directed representatives of Lazard to contact PELP to communicate the terms of the counterproposal and deliver a term sheet reflecting such terms.

 

On December 12, 2016, the representatives of Lazard delivered a revised term sheet to PELP reflecting the Special Committee’s counterproposal. The term sheet contemplated the issuance of 47.9 million OP Units, plus the assumed vesting of the already issued Class B Units of PECO I OP. The Special Committee directed representatives of Lazard to assume that all Class B Units would vest concurrently with the closing of a potential transaction. The term sheet also contemplated an earn-out to acquire up to an additional 11 million OP Units and revisions to certain other terms from the PELP August 2016 Proposal.

 

On December 15, 2016, Mr. Quazzo had a telephonic meeting with Messrs. Edison and Murphy to discuss the term sheet.

 

On December 16, 2016, Mr. Quazzo had an additional telephonic meeting with Mr. Edison. On the call, Mr. Edison delivered to Mr. Quazzo PELP’s counterproposal to the Special Committee’s term sheet. PELP’s counterproposal contemplated the issuance of 51.9 million OP Units of PECO I OP to PELP, with an earn-out to acquire up to an additional 12 million OP Units, and revisions to certain other terms.

 

The Special Committee held a telephonic meeting with its financial and legal advisors on December 21, 2016. The Special Committee and the representatives of Sidley Austin and Lazard discussed PELP’s proposal delivered on December 16, 2016. The representatives of Lazard reviewed with the Special Committee a further analysis of, among other things, the value of the Real Estate Portfolio, the Asset Management Business and certain of PELP’s other related assets. Lazard’s further financial analysis continued to assign no value to the internalization of the management services provided to PECO I by PELP. The representatives of Sidley Austin and Lazard then discussed with the Special Committee the revisions to certain other terms in PELP’s proposal. After a discussion with the representatives of Sidley Austin and Lazard, the Special Committee approved the terms of a counterproposal to PELP’s proposal and the draft of a revised term sheet. The Special Committee directed the representatives of Lazard to contact PELP to communicate the terms of the new proposal and deliver the revised term sheet reflecting such terms.

 

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On December 24, 2016, the representatives of Lazard delivered a revised term sheet to PELP reflecting the Special Committee’s new proposal. The revised term sheet contemplated the issuance of 49.9 million OP Units to PELP, with an earn-out to acquire up to an additional 12 million OP Units, and revisions to certain other terms from PELP’s counterproposal delivered on December 16, 2016.

 

On December 30, 2016, Mr. Quazzo had a telephonic meeting with Messrs. Edison and Murphy to discuss the Special Committee’s new proposal. Specifically, the parties discussed an additional price increase of one million OP Units of PECO I OP (representing approximately $10.2 million in equity value), a liquidity provision not tied to the $10.20 OP Unit price and credit for incremental Class B Units of PECO I OP earned between January 1, 2017 and the closing date of the proposed transaction.

 

On December 31, 2016, PELP delivered to the Special Committee a revised term sheet reflecting its counterproposal. PELP’s proposal contemplated the issuance of 51 million OP Units to PELP, with an earn-out to acquire up to an additional 12 million OP Units. PELP’s proposal sought changes to other terms of the possible transaction.

 

On January 4, 2017, Mr. Quazzo and representatives of Sidley Austin and Lazard discussed PELP’s counterproposal delivered on December 31, 2016.

 

The Special Committee held a telephonic meeting with its financial and legal advisors on January 6, 2017. The Special Committee reviewed with the representatives of Sidley Austin and Lazard the status of the negotiations with PELP and PELP’s counterproposal delivered on December 31, 2016. The representatives of Lazard presented the Special Committee with a financial analysis of PELP’s businesses, including the Real Estate Portfolio, the Asset Management Business and certain of PELP’s other related assets, as well as the structure and mechanics of the proposed earn-out. Lazard’s financial analysis of PELP’s businesses continued to assign no value to the internalization of the management services provided to PECO I by PELP. The representatives of Sidley Austin and Lazard then discussed with the Special Committee certain other provisions of PELP’s proposal, including a request for a portion of the consideration to be in cash, the terms of the proposed tax protection agreement, certain lock-up arrangements with the principals of PELP, certain potential closing conditions and indemnification terms and the allocation of transaction costs. The Special Committee also reviewed the potential scope of the due diligence to be performed on the Real Estate Portfolio, the Asset Management Business and certain of PELP’s other related assets. A discussion among the Special Committee and the representatives of Sidley Austin and Lazard then ensued regarding the next steps in the Special Committee’s process.

 

The Special Committee held a telephonic meeting with its financial and legal advisors on January 10, 2017. The Special Committee and the representatives of Sidley Austin and Lazard continued their discussion regarding the terms of a possible counterproposal to PELP’s proposal delivered on December 31, 2016. Following this discussion, the Special Committee approved the terms of a further counterproposal and a revised term sheet. The Special Committee then directed the representatives of Lazard and Sidley Austin to contact PELP and Latham, respectively, to communicate the terms of the revised proposal and deliver the revised term sheet.

 

On January 13, 2017, the representatives of the Special Committee delivered to PELP a revised term sheet reflecting the Special Committee’s revised proposal. The revised term sheet contemplated the issuance of 50.2 million OP Units, an earn-out opportunity of up to 12 million OP Units and a ten-year tax protection period. The Special Committee proposal also sought a 7.5% escrow to cover potential indemnification claims.

 

On January 16, 2017, Mr. Quazzo had a telephonic meeting with Messrs. Edison and Murphy to discuss the revised term sheet.

 

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On January 17, 2017, PELP delivered to the Special Committee a further revised term sheet reflecting a counterproposal. PELP’s counterproposal contemplated consideration of 50.2 million OP Units (plus the assumed vesting of approximately 4.7 million Class B Units of PECO I OP already held by PELP) and a 12 million OP Unit earn-out opportunity. The counterproposal also accepted the 7.5% escrow, but PELP sought additional changes to the tax protection provisions.

  

The Special Committee held a telephonic meeting with its financial and legal advisors on January 19, 2017. The representatives of Sidley Austin and Lazard discussed with the Special Committee revisions to certain terms contemplated by PELP’s counterproposal delivered on January 17, 2017, including: (i) the structure and mechanics of the proposed earn-out; (ii) the parties’ respective responsibilities for certain transaction costs; (iii) proposed tax protection terms, including the duration and scope of merger and acquisition protections for PELP and requirements relating to PECO I’s level of indebtedness; and (iv) PELP’s request for representation on the Board of Directors. Following this discussion, the Special Committee approved the terms of a revised proposal to PELP’s proposal and a revised term sheet reflecting such revised proposal. The Special Committee then directed the representatives of Lazard and Sidley Austin to contact PELP and Latham, respectively, to communicate the terms of the revised proposal.

 

On January 20, 2017, the representatives of the Special Committee delivered to PELP a revised term sheet reflecting the Special Committee’s counterproposal. The revised term sheet contemplated revisions to, among other things, the structure of the earn-out and certain aspects of the tax protection arrangements.

 

On January 22, 2017, Mr. Quazzo had a telephonic meeting with Messrs. Edison and Murphy to discuss the revised term sheet. The parties specifically discussed the thresholds related to the earn-out, the lock-up provisions and board nomination rights. Also on that same day, representatives of Sidley Austin and Latham discussed the Special Committee’s revised term sheet, including, among other things, the lock-up provisions, voting power and the duration of the tax protection provisions.

 

Between January 22 and January 24, 2017, representatives of Sidley Austin and Latham continued to discuss the revised term sheet.

 

On January 25, 2017, PELP delivered to the Special Committee a revised term sheet reflecting further changes to, among other things, the earn-out structure, tax protection arrangements and lock-up provisions.

 

On January 26, 2017, Mr. Quazzo and representatives of Sidley Austin and Lazard discussed PELP’s counterproposal.

 

On January 27, 2017, the representatives of the Special Committee delivered to representatives of PELP a revised term sheet reflecting changes to, among other things, the earn-out structure, tax protection arrangements and board nomination rights.

 

Between January 28 and 29, 2017, Mr. Quazzo, had a telephonic meeting with Messrs. Edison and Murphy, as well as representatives of Lazard, to discuss the Special Committee’s revised term sheet delivered on January 27, 2017.

 

The Special Committee held a telephonic meeting with its financial and legal advisors on January 30, 2017. Mr. Quazzo and the representatives of Lazard reported to the Special Committee their discussions with the representatives of PELP. Following this discussion, the Special Committee reviewed and approved the terms of a revised proposal and directed the representatives of Lazard to contact PELP to communicate the terms of the revised proposal and deliver a revised term sheet.

 

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On February 7, 2017, representatives of Sidley Austin delivered a further revised term sheet to PELP. The latest term sheet clarified certain aspects of the earn-out, tax protection arrangements and board nomination rights. Later that day, representatives of Latham responded with a revised draft of the term sheet.

 

On February 9, 2017, Mr. Quazzo and representatives of Sidley Austin and Lazard discussed the next steps in the legal process, including conducting due diligence, determining whether any third-party consents or approvals were necessary in connection with the possible transaction, the compensation package that PECO I might offer to key employees, terms of asset management services to be provided to properties retained by PELP and preparing transaction documentation. The parties also discussed the submission of a formal due diligence request list, a roll-forward status quo business plan update for PELP and PECO I, the delivery of a fairness opinion, the selection of vendors to initiate due diligence, timing to execute an agreement and the potential desire for a special vote of Stockholders.

 

Between February 9 and February 13, 2017, representatives of Sidley Austin and Latham continued to negotiate and exchange drafts of the term sheet, with discussions particularly focused on tax protection provisions.

 

On February 13, 2017, the Special Committee and PELP agreed to the terms of the revised term sheet (the “Term Sheet”) and agreed to move forward with due diligence and the drafting and negotiation of definitive agreements. The representatives of Sidley Austin delivered to representatives of Latham drafts of legal due diligence request lists.

 

On February 16, 2017, Mr. Quazzo and representatives of Sidley Austin and Lazard discussed the next steps in the process, including the due diligence of the Real Estate Portfolio, the Asset Management Business and certain of PELP’s other related assets and the engagement of various third-party consultants and service providers to assist the Special Committee.

 

Commencing at the end of February 2017 and continuing through the first few weeks of May 2017, representatives of Sidley Austin engaged in a legal due diligence review of PELP. The due diligence included a review of PELP’s material contracts, organizational documents, employee benefit plans and certain debt agreements (including property level debt documents). In addition, as part of the property level due diligence, representatives of Sidley Austin reviewed: (i) certain material real property leases; (ii) updated title commitments, as well as certain material underlying recorded documents; (iii) existing and, in some instances, new surveys; (iv) updated zoning reports; and (v) certain tenant estoppels provided by PELP. The Special Committee also engaged an environmental consulting firm to perform an initial desktop environmental review with further reports or analysis commissioned where identified as necessary of each of the properties in the Real Estate Portfolio as well as a property condition assessment on certain of the properties. Representatives of Sidley Austin reviewed the environmental consulting firm’s work product with respect to the environmental findings and representatives of Lazard reviewed the property condition assessment reports produced by such environmental consulting firm. The Special Committee engaged a title insurance company to provide the title documents and commitments, and a survey firm to coordinate and provide the surveys and zoning reports.

 

On March 2, 2017, Mr. Quazzo and representatives of Sidley Austin and Lazard discussed the status of the due diligence review and related outstanding items.

 

On March 15, 2017, the Special Committee engaged a third-party compensation consultant to provide executive compensation advice to the Special Committee in connection with the management compensation arrangements to be established following the closing of the possible transaction involving PELP.

 

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On March 16, 2017, Mr. Quazzo and representatives of Sidley Austin and Lazard discussed the status of the due diligence review and related outstanding items.

 

On March 17, 2017, representatives of Latham delivered to representatives of Sidley Austin a document setting forth the series of transaction steps that comprise the possible transaction involving PELP (the “Transaction Steps Memo”).

 

On March 23, 2017, representatives of Latham delivered to representatives of Sidley Austin a revised Transaction Steps Memo. The representatives of Sidley Austin, Lazard and Latham discussed the Transaction Steps Memo and which real property assets were to be included in the Real Estate Portfolio.

 

On March 30, 2017, Mr. Quazzo and representatives of Sidley Austin and Lazard discussed a net asset value analysis of the possible transaction involving PELP, as well as the status of the due diligence review and related outstanding items.

 

The Special Committee held a telephonic meeting with its financial and legal advisors on April 3, 2017. The Special Committee and representatives of Sidley Austin and Lazard discussed the preliminary findings of the due diligence efforts and the overall status and timing of the possible transaction involving PELP. The representatives of Sidley Austin provided the Special Committee with a summary of Sidley Austin’s legal due diligence findings with respect to the Real Estate Portfolio, including the scope of Sidley Austin’s review of the Real Estate Portfolio with respect to environmental reports, title policies, surveys, zoning reports, property condition reports and tenant leases and the timing and number of lender consents and tenant estoppels that would be required in connection with the possible transaction. The representatives of Lazard provided the Special Committee with market updates on the performance of the shopping center REIT sector and fundraising activity of non-traded REITs. The representatives of Lazard then provided the Special Committee with a summary of Lazard’s financial due diligence findings with respect to the Real Estate Portfolio, the Asset Management Business and certain of PELP’s other related assets, including: (i) the amount of net operating income reported by each of PECO I and PELP in 2016; (ii) revisions to the net operating income forecasts for each of PECO I and PELP in 2017; (iii) projected increases to PELP’s general and administrative expenses related to incentive compensation; (iv) PELP’s revised fundraising strategy with respect to PECO III and (v) changes to PELP’s balance sheet since the date of the Term Sheet, including the status of the ten assets targeted for disposition in the Term Sheet. The Special Committee and the representatives of Sidley Austin and Lazard then discussed what impact, if any, Lazard’s financial due diligence findings would have on the amount of consideration to be paid to PELP in connection with the possible transaction. A discussion among the Special Committee and the representatives of Sidley Austin and Lazard then ensued regarding the next steps in the due diligence process and what properties the Special Committee should target for site visits. Finally, the representatives of Sidley Austin discussed the preliminary draft of the Contribution Agreement that Sidley Austin had prepared in connection with the Term Sheet.

 

On April 7, 2017, representatives of Sidley Austin delivered a draft of the Contribution Agreement to representatives of Latham.

 

On April 14, 2017, representatives of Latham delivered to representatives of Sidley Austin a draft of the form of Tax Protection Agreement. Commencing in the following days and continuing through May 18, 2017, the Special Committee and representatives of PELP, Sidley Austin and Latham negotiated the terms of the form of Tax Protection Agreement.

 

On April 20, 2017, representatives of Latham delivered a revised draft of the Contribution Agreement to Sidley Austin.

 

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On April 21, 2017, representatives of Sidley Austin and Latham discussed the revised draft Contribution Agreement. In addition, Mr. Quazzo and representatives of Sidley Austin and Lazard discussed the status of the negotiations regarding the Contribution Agreement, including key outstanding issues.

 

On April 25, 2017, at the direction of the Special Committee representatives, of the Special Committee’s third-party compensation consultant delivered to representatives of PELP a draft of the Severance Plan Term Sheet (which is referred to as the “Employment Agreement Term Sheet” in the Contribution Agreement). Commencing in the following days and continuing through May 17, 2017, the Special Committee and representatives of PELP, Latham and the Special Committee’s third-party compensation consultant negotiated the terms of the Severance Plan Term Sheet.

 

On April 26, 2017, representatives of Sidley Austin delivered a revised draft Contribution Agreement to representatives of Latham.

 

On April 27, 2017, representatives of Sidley Austin and PELP discussed legal due diligence matters and outstanding document requests. In addition, Mr. Quazzo and representatives of Sidley Austin and Lazard discussed the status of the negotiations with Latham, including key outstanding issues.

 

On May 2, 2017, representatives of Sidley Austin delivered to representatives of Latham a draft of the form of Equityholder Agreement. Commencing later that day and continuing through May 14, 2017, the Special Committee and representatives of PELP, Sidley Austin and Latham negotiated the terms of the form of Equityholder Agreement.

 

On May 3, 2017, representatives of Latham delivered to representatives of Sidley Austin a draft of the disclosure schedules to the Contribution Agreement. Commencing in the days that followed and continuing through May 17, 2017, representatives of PELP, Sidley Austin and Latham discussed and negotiated various disclosures included in the disclosure schedules to the Contribution Agreement.

 

On May 4, 2017, representatives of Latham delivered a revised draft Contribution Agreement to representatives of Sidley Austin, which revised, among other things, provisions relating to the earn-out, indemnification and several representations and warranties relating to real property, environmental, indebtedness and insurance matters.

 

On May 5, 2017, the Special Committee engaged (and subsequently on May 9, 2017 entered into an engagement letter with) a nationally recognized accounting firm (the “Accounting Firm”) to perform a specified review of accounting and tax matters of PELP as part of PECO I’s overall due diligence process.

  

On May 6, 2017, representatives of Latham delivered a revised Transaction Steps Memo to representatives of Sidley Austin.

 

On May 7, 2017, representatives of Latham delivered to representatives of Sidley Austin a draft of the PECO I OP Amended and Restated Partnership Agreement. Commencing the following day and continuing through May 18, 2017, representatives of Sidley Austin and Latham negotiated the terms of the draft PECO I OP Amended and Restated Partnership Agreement.

 

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The Special Committee held a telephonic meeting with its financial and legal advisors on May 8, 2017. The Special Committee and representatives of Sidley Austin and Lazard discussed the additional findings of the Special Committee’s advisors’ due diligence efforts, the overall status and timing of the possible transaction involving PELP and the status of the draft Contribution Agreement. The representatives of Sidley Austin discussed with the Special Committee the status of Sidley Austin’s legal due diligence and then presented the material issues remaining in the negotiations of the draft Contribution Agreement, including, among other things the transfer of certain of PELP’s intellectual property rights, provisions relating to certain environmental matters, costs associated with debt consents, title insurance and directors and officers liability insurance, proposed registration rights for certain of PELP’s equity holders and certain provisions relating to the earn-out. The representatives of Lazard then provided the Special Committee with an updated summary of Lazard’s financial due diligence findings with respect to the Real Estate Portfolio, Asset Management Business and certain of PELP’s other related assets, which included the amount of net operating income reported by each of PECO I and PELP in 2016, revisions to the net operating income forecasts for each of PECO I and PELP in 2017, projected increases to PELP’s general and administrative expenses, PELP’s fundraising strategy with respect to PECO III and changes to PELP’s balance sheet since the date of the Term Sheet, including the status of four assets listed in the Term Sheet as targeted for disposition prior to closing. The Special Committee and representatives of Lazard additionally discussed key financial and other assumptions, which the Special Committee approved for use in Lazard’s underwriting. A discussion among the Special Committee and the representatives of Sidley Austin and Lazard then ensued regarding the potential next steps in the process.

 

On May 9, 2017, the Board of Directors reaffirmed its estimated net asset value per Common Share of $10.20 based on a financial analysis performed by an independent valuation expert. Also on May 9, 2017, representatives of Latham delivered to representatives of Sidley Austin a draft of the form of Services Agreement. Commencing later that day and continuing through May 17, 2017, representatives of Sidley Austin and Latham negotiated the terms of the form of Services Agreement.

 

The Special Committee held a telephonic meeting with its financial and legal advisors on May 10, 2017. The Special Committee reviewed with its advisors the status of the negotiations with PELP, including the current draft of the Contribution Agreement and updated summary of Lazard’s financial due diligence findings with respect to the Real Estate Portfolio, the Asset Management Business and certain of PELP’s other related assets. The representatives of Lazard discussed with the Special Committee potential adjustments to certain terms of the draft Contribution Agreement based on Lazard’s financial due diligence findings. The representatives of Sidley Austin then provided the Special Committee with an update on the draft Ancillary Agreements to the draft Contribution Agreement. The Special Committee and the representatives of Sidley Austin and Lazard then discussed potential next steps in the process.

 

On May 12, 2017, representatives of Sidley Austin delivered a revised draft Contribution Agreement to representatives of Latham, which revised, among other things, provisions relating to the earn-out, debt consents, and PELP’s use of the names “PECO” and “Phillips Edison” after the closing of the possible transaction. Representatives of Latham delivered to representatives of Sidley Austin a draft of the form of Escrow Agreement. Over the course of the next several days, representatives of Sidley Austin and Latham negotiated the terms of the form of Escrow Agreement.

 

On May 13, 2017, Mr. Quazzo and Mr. Edison discussed remaining outstanding issues related to the Contribution Agreement. Later that day, Mr. Quazzo conferred with representatives of Lazard regarding the same.

 

On May 14, 2017, representatives of Latham delivered a revised draft Contribution Agreement to representatives of Sidley Austin, which, among other things, included dollar thresholds for various representations and warranties, removed references to assets held by PELP that were targeted for disposition and modified language relating to PELP’s use of the names “PECO” and “Phillips Edison” after the closing of the possible transaction.

 

On May 15, 2017, representatives of Latham delivered to representatives of Sidley Austin a revised draft of the Transaction Steps Memo.

 

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On May 16, 2017, Mr. Quazzo and Mr. Edison discussed a potential downward adjustment to the consideration based on due diligence findings and Lazard’s fairness analysis.

 

Also on May 16, 2017, the Special Committee held a telephonic meeting at which representatives of Sidley Austin, Lazard and the Accounting Firm were present. The representatives of the Accounting Firm provided a summary of their accounting and tax diligence findings to the Special Committee with respect to the possible transaction involving PELP. The representatives of Lazard then provided updates to its discussion at the meetings of the Special Committee held on May 8, 2017 and May 10, 2017, regarding the possible transaction and an updated summary of Lazard’s financial due diligence findings with respect to the Real Estate Portfolio, the Asset Management Business and certain of PELP’s other related assets. The representatives of Lazard discussed with the Special Committee the status of the potential consideration adjustments to certain terms of the draft Contribution Agreement (as contemplated by the Term Sheet) based on Lazard’s financial diligence findings and the Special Committee’s negotiations with PELP. The representatives of Sidley Austin then provided the Special Committee with an update on the current drafts of the Contribution Agreement, the Ancillary Agreements and the status of the Special Committee’s negotiations with PELP. The Special Committee and the representatives of Sidley Austin and Lazard then discussed potential next steps in the process.

 

Later that same day, representatives of Sidley Austin delivered a revised draft Contribution Agreement to representatives of Latham, which revised, among other things, provisions relating to the earn-out and PELP’s use of the names, “PECO” and “Phillips Edison” after the closing of the possible transaction.

 

On May 17, 2017, Mr. Quazzo and Mr. Edison discussed and resolved how to treat the final downward adjustment to the valuation. Following such conversation, representatives of Lazard and PELP discussed and agreed to certain changes in the Contribution Agreement, including a revised consideration amount that included 40,360,504 OP Units of PECO I OP to be issued at closing of the PELP Transaction and an opportunity to earn up to 12,490,196 additional OP Units of PECO I OP if certain milestones are met after the closing. The number of OP Units to be delivered at closing decreased, and the potential earn-out opportunity increased, from the Term Sheet because of certain mechanical adjustments as contemplated by the Term Sheet, a change in the consideration mix to include $50.0 million of cash consideration, the exclusion of certain assets in the Real Estate Portfolio and other assets and a decrease in the valuation of the Real Estate Portfolio, the Asset Management Business and certain of PELP’s other related assets.

 

Also on May 17, 2017, representatives of Latham delivered revised drafts of the Transaction Steps Memo and the Contribution Agreement to representatives of Sidley Austin, which revised, among other things, PELP’s use of the names, “PECO” and “Phillips Edison” after the closing of the possible transaction. Representatives of Sidley Austin and Latham also negotiated the remaining open issues in the form of Tax Protection Agreement and other Ancillary Agreements. The agreed upon form of Tax Protection Agreement contemplates that, among other things, for a period of ten years following the closing, PECO I OP will (i) indemnify each Contributor for certain tax liabilities resulting from a transaction involving a direct or indirect taxable disposition of all or a portion of the protected property such Contributor contributed to PECO I OP, (ii) maintain and allocate to each Contributor for tax purposes minimum levels of liabilities and, under certain circumstances, permit the Contributors to guarantee certain debt of PECO I OP and (iii) indemnify each Contributor for certain tax liabilities resulting from a failure to comply with certain requirements in connection with certain fundamental transactions (including change of control transactions involving PECO I or PECO I OP).

 

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On May 18, 2017, representatives of Sidley Austin and Latham negotiated the remaining open issues and exchanged a draft of the Contribution Agreement. The Contribution Agreement contemplated PECO I’s acquisition of the Real Estate Portfolio, which included 76 shopping center real estate assets, the Asset Management Business and certain of PELP’s other related assets in exchange for $50.0 million in cash, the issuance by PECO I of 40,360,504 OP Units of PECO I OP (at an assumed value of $10.20 per OP Unit) plus the assumed vesting of the already issued Class B Units of PECO I OP. The consideration also includes an opportunity for PELP to earn up to 12,490,196 additional OP Units if certain milestones are achieved, including a liquidity event for the Stockholders no later than December 31, 2021 or the successful raising of equity capital for PECO III, with the greatest aggregate consideration contingent on achieving a liquidity event for Stockholders by December 31, 2019 at a value per Common Share of $10.20 or greater and the successful raising of $1.5 billion of equity capital by December 31, 2019 for PECO III. Assuming full achievement of the earn-out opportunity and the vesting of the already issued Class B Units of PECO I OP, the OP Unit consideration represents a pro forma ownership of approximately 23.9%. The Contribution Agreement also contemplated the assumption of outstanding PELP debt of approximately $501 million, as of March 31, 2017.

Later that day, the Special Committee held a telephonic meeting at which representatives of Sidley Austin, Lazard and Venable were present. Mr. Massey was unable to attend the meeting. The representatives of Venable provided a reminder briefing to the Special Committee of the duties of members of the Special Committee and the Board of Directors under Maryland law. The representatives of Sidley Austin then provided the Special Committee a summary of the key terms of the Contribution Agreement and the Ancillary Agreements. The representatives of Lazard then reviewed with the Special Committee their financial analysis of the possible transaction involving PELP. The representatives of Lazard then provided the Special Committee with its oral opinion, which representatives of Lazard confirmed by delivery of a written opinion dated May 18, 2017, that, as of such date and subject to the assumptions, limitations and qualifications set forth in the opinion, the consideration to be paid by PECO I OP in the possible transaction was fair, from a financial point of view, to PECO I. The representatives of Lazard also re-confirmed that Lazard had no conflicts of interest with respect to the possible transaction. The members of the Special Committee present at the meeting then unanimously (i) determined that the Contribution Agreement and the Ancillary Agreements, the performance thereof and the consummation of the possible transaction were advisable and in the best interests of PECO I; (ii) recommended and declared it advisable for the Board of Directors to authorize, approve and adopt the draft Contribution Agreement, the draft Ancillary Agreements and the possible transaction; (iii) recommended and declared it advisable for the Board of Directors to direct that the current drafts of the Contribution Agreement and the Ancillary Agreements and the possible transaction be submitted to a vote at a meeting of the Stockholders, and for the Board of Directors to recommend to the Stockholders to approve the Contribution Agreement, the Ancillary Agreements and the possible transaction at such meeting of the Stockholders.

Immediately following the meeting of the Special Committee, the Board of Directors (other than Mr. Massey who was unable to attend) held a telephonic special meeting. Based on the recommendations of the Special Committee, all of the members of the Board of Directors present (excluding Mr. Edison who has a material financial interest in the PELP Transaction and, accordingly, abstained from voting) unanimously approved the Contribution Agreement, the Ancillary Agreements and the possible transaction. Subsequent to the meetings of the Special Committee and the Board of Directors, Mr. Massey affirmed his support of the PELP Transaction.

After the meeting of the Board of Directors, each of PECO I, PECO I OP, PELP and the other parties thereto executed the Contribution Agreement.

On May 19, 2017, PECO I and PELP issued a joint press release announcing the execution of the Contribution Agreement.

 

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Rationale for Recommending the Approval of the PELP Transaction

 

Rationale for the Recommendation of the Special Committee

 

The Special Committee recommended that the Board of Directors approve the PELP Transaction based upon a variety of factors. In evaluating the PELP Transaction, the independent directors held dozens of telephonic and in-person meetings over a multi-year period during which they considered various proposals from PELP and consulted with their legal, financial and other advisors as described in greater detail in the section entitled “The PELP Transaction—Background of the PELP Transaction” beginning on page 50.

 

Expected Strategic Benefits

 

After carefully evaluating the PELP Transaction, the Special Committee believes it is reasonably likely to create significant operational and financial benefits, including:

 

Maintains Grocery Focus. The combined real estate portfolio will be focused entirely on grocery-anchored shopping centers with an emphasis on necessity-based retailers, which are likely to be more internet and recession resilient.

 

Improved Earnings. The PELP Transaction is expected to be accretive to FFO, as defined by NAREIT.

 

Strengthened Balance Sheet. The post-closing combined enterprise is expected to have an improved capital position on a total debt/EBITDA basis, which positions the company well for attractive future financing opportunities.

 

Better Alignment of Management. An internalized management structure creates better alignment with Stockholders. Through its investment in OP Units, management will be PECO I’s largest equity owner, owning over 19 million OP Units and Common Shares, with a long-term view of Stockholder value and will be subject to traditional and customary lock-ups.

 

Increased Potential for Future Growth and Dividend Coverage. The Real Estate Portfolio has the opportunity for higher net operating income growth. Additionally, potential future fee income from the Asset Management Business is expected to further support PECO I’s dividend as well as other capital allocation strategies.

 

Improved Geographic and Tenant Diversity. The post-closing combined enterprise will own a high-quality portfolio of 230 grocery-anchored shopping centers comprising approximately 25.5 million square feet in established trade areas located in 32 states and will benefit from greater geographic, grocery anchor and tenant diversification.

  

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Superior Financial Strength and Flexibility. With enhanced size and scale, the combined enterprise will have additional access to capital, which can be used to support strategic investments to drive future growth opportunities.

 

Cost Savings. As a result of terminating the agreements between PECO I and its external advisor and property manager, PECO I will no longer be obligated to pay asset management, property management, development and other fees, including a disposition fee, to PE-NTR and the Property Manager.

 

Liquidity Opportunities. Given its enhanced size, scale, improved financials and internalized management structure, the post-closing combined enterprise is better positioned to capitalize on capital market opportunities, including certain potential liquidity alternatives.

 

Consideration of Strategic Alternatives to the PELP Transaction

 

The Special Committee, with the assistance of its financial advisors, at the outset of the process conducted a strategic review of alternatives for PECO I, which included, in addition to the potential PELP Transaction: (i) continuing to operate PECO I as an externally managed REIT; (ii) pursuing a listing on a national securities exchange; (iii) pursuing an all-stock combination transaction with a publicly traded merger partner; and (iv) pursuing an all-cash sale to third parties.

 

The Special Committee reviewed the range of possible benefits to PECO I and its Stockholders of the various strategic alternatives and the timing, costs, risks and likelihood of accomplishing the goals of these alternatives. The Special Committee assessed at the outset of the process that none of the above-described strategic alternatives was reasonably likely to present superior opportunities for PECO I, or reasonably likely to create greater value for the Stockholders, than the PELP Transaction.

 

Aggregate Consideration 

The Special Committee also considered the following, with respect to the Aggregate Consideration:

 

that the Aggregate Consideration was the result of extensive, multi-year negotiations with representatives of PELP and many price decreases from PELP’s initial offer;

 

the Special Committee’s belief that the Aggregate Consideration represented the lowest consideration to which PELP was willing to agree;

 

the further alignment of management’s interests with the post-closing success of the combined enterprise by incorporating an earn-out structure such that the Contributors have a right to receive additional consideration if certain milestones are achieved, with the greatest additional consideration contingent on achieving a liquidity event for the Stockholders by December 31, 2019 at a per Common Share value of $10.20 or greater and the successful raising of $1.5 billion of equity capital by December 31, 2019 for PECO III; and

 

the financial analysis presented by representatives of Lazard at the Special Committee meeting held on May 18, 2017, and the oral opinion of Lazard delivered to the Special Committee on that date, which was confirmed by delivery of a written opinion dated May 18, 2017, as to the fairness, as of such date, from a financial point of view, to PECO I of the Aggregate Consideration to be paid by PECO I OP pursuant to the Contribution Agreement, which opinion was based on and subject to the assumptions made, factors considered and qualifications set forth in the opinion, as more fully described below in the section entitled “The PELP Transaction—Opinion of Financial Advisor to the Special Committee” beginning on page 72.

 

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Contribution Agreement and Ancillary Agreements

 

The Special Committee also considered, among other things, the following, with respect to the Contribution Agreement and the Ancillary Agreements:

 

General. The general terms and conditions of the Contribution Agreement, including the parties’ representations, warranties and covenants set forth therein, together with the material terms of the Ancillary Agreements contemplated thereby, are fair and commercially reasonable and the product of extensive negotiations.

 

Indemnification; Escrow. The provisions of the Contribution Agreement providing for indemnification for breaches of representations, warranties and covenants and certain other matters and the fact that 7.5% of the Closing Consideration will be placed into escrow to satisfy the indemnification obligations of the Contributors.

 

Non-Solicitation. The provisions of the Contribution Agreement generally prohibiting the Contributors’ solicitation of third-party proposals relating to a merger, sale of securities, sale of substantial assets or similar transaction involving the target subsidiaries of PELP and restricting the Contributors’ ability to furnish non-public information to, or participate in any discussions or negotiations with, any third party with respect to such transactions, subject to certain limited exceptions.

 

Lock-up Periods. The provisions of the form of Equityholder Agreement contemplating that each of Messrs. Edison, Murphy and Addy will not transfer their OP Units for the following periods of time, subject to certain exceptions set forth therein (i) with respect to Mr. Edison, three years from the Closing; and (ii) with respect to Messrs. Murphy and Addy, two years from the Closing.

 

Restrictive Covenants. The terms of the Severance Plan Term Sheet contemplating that each of Messrs. Edison, Murphy, Addy and Robert F. Myers will be participants in a severance plan of PECO I OP pursuant to which, among other things, each will be subject to customary non-competition and non-solicitation covenants and will be entitled to certain severance payments upon a termination of his employment without cause by PECO I OP or with good reason by such executive.

 

Potentially Negative Factors

 

The Special Committee also considered certain risks and other potentially negative factors concerning the PELP Transaction, including:

 

the fact that the form of Tax Protection Agreement contemplates that, for a period of ten years following the Closing, PECO I OP will, among other things, (i) indemnify each Contributor for certain tax liabilities resulting from a transaction involving a direct or indirect taxable disposition of all or a portion of protected property such Contributor contributed to PECO I OP, (ii) maintain and allocate to each Contributor for tax purposes minimum levels of liabilities and, under certain circumstances, permit the Contributors to guarantee certain debt of PECO I OP and (iii) indemnify each Contributor for certain tax liabilities resulting from a failure to comply with certain requirements in connection with certain fundamental transactions (including change of control transactions involving PECO I or PECO I OP);

 

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the fact that the form of Equityholder Agreement contemplates that Mr. Edison, or his designee, will be nominated to the Board of Directors for each of the ten succeeding annual meetings following the Closing, subject to certain terminating events including the sale or transfer of more than 35% of the OP Units that he beneficially owns immediately following the Closing;

 

the fact that certain provisions of the Contribution Agreement, the form of Services Agreement and the form of License Agreement grant certain licenses to use the names “PECO” and “Phillips Edison” to certain Contributors and their affiliates after the Closing;

 

the fact that the Contribution Agreement contemplates amending and restating the bylaws of PECO I in connection with the Closing to incorporate a provision providing that Mr. Edison shall continue to serve as Chair of the Board of Directors until the third anniversary of the Closing, subject to certain terminating events including the listing of the Common Shares on a national securities exchange;

 

the fact that the PECO I OP Amended and Restated Partnership Agreement contemplates certain changes, designed to, among other things, grant certain rights and protections to the limited partners, including changes clarifying limited partners’ redemption rights and providing for procedural limited partner protections in connection with certain fundamental transactions (including consent procedures with respect to change of control transactions involving PECO I or PECO I OP);

 

the fact that the PELP Transaction might not be consummated in a timely manner or at all, due to a failure of certain conditions;

 

the fact that PECO I has incurred and will incur substantial expenses related to the PELP Transaction, regardless of whether the PELP Transaction is consummated;

 

the substantial time and effort required to complete the PELP Transaction, which may disrupt PECO I’s business operations; and

 

the risks and contingencies related to the announcement and pendency of the PELP Transaction, including the impact on PECO I’s relationships with existing and prospective tenants and other third parties.

 

Other

 

The Special Committee also considered the fact that Mr. Edison (Chair of the Board and Chief Executive Officer of PECO I) and certain of PECO I’s executive officers have material financial interests in the PELP Transaction that are different from, and in addition to, those of the Stockholders.

 

The foregoing discussion of the information and factors considered by the Special Committee is not intended to be exhaustive but includes the material factors considered by the Special Committee. In view of the wide variety of factors considered in connection with its evaluation of the PELP Transaction and the complexity of these matters, the Special Committee did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching its determination and recommendation. In addition, individual directors may have given different weights to different factors. The Special Committee did not undertake to make any specific determination as to whether, or to what extent, any factor, or any particular aspect of any factor, supported or did not support its ultimate determination. The Special Committee based its recommendation on the totality of the information presented, including the factors described above.

 

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Rationale for the Recommendation of the Board of Directors

 

The Board of Directors (excluding Mr. Edison who has a material financial interest in the PELP Transaction and, accordingly, abstained from voting on the Board of Director’s recommendation) approved the Contribution Agreement, the Ancillary Agreements and the PELP Transaction, having determined that they are advisable and in the best interests of PECO I. Accordingly, the Board of Directors (excluding Mr. Edison who has a material financial interest in the PELP Transaction and, accordingly, abstained from voting on the Board of Director’s recommendation) recommends that you vote “FOR” the PELP Proposal.

 

The Board of Directors based its determination that the PELP Transaction is advisable and in the best interests of PECO I on, among other things:

 

The factors considered and conclusions of the Special Committee (which were adopted by the Board of Directors as its own).

 

The extensive negotiations of the Special Committee with representatives of PELP.

 

The receipt by the Special Committee of the opinion, dated May 18, 2017, of Lazard to the Special Committee as to the fairness as of such date, from a financial point of view, to PECO I of the aggregate consideration to be paid by PECO I OP pursuant to the Contribution Agreement, which opinion was based on and subject to the assumptions made, procedures followed, factors considered and limitations and qualifications on the review undertaken as more fully described below in the section entitled “The PELP Transaction—Opinion of Financial Advisor to the Special Committee” beginning on page 72.

 

The Board of Directors did not find it practical to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching its determination.

 

Opinion of Financial Advisor to the Special Committee

 

At a meeting of the Special Committee held to evaluate the PELP Transaction on May 18, 2017, Lazard rendered an opinion to the Special Committee to the effect that, as of such date, and subject to the assumptions, limitations and qualifications set forth in the opinion, the Aggregate Consideration, if any, to be paid by PECO I OP in the PELP Transaction was fair, from a financial point of view, to PECO I.

 

The full text of Lazard’s opinion, dated May 18, 2017, which sets forth the assumptions made, factors considered and limitations and qualifications on the review undertaken by Lazard in connection with its opinion, is attached as Annex I to this proxy statement and is incorporated into this proxy statement by reference.

 

Lazard’s opinion was directed to and for the benefit of the Special Committee for the information and assistance of the Special Committee in connection with its evaluation of the PELP Transaction and only addressed the fairness, from a financial point of view, to PECO I of the Aggregate Consideration, if any, to be paid by PECO I OP pursuant to the Contribution Agreement as of the date of Lazard’s opinion, and Lazard’s opinion did not address any other aspect of the PELP Transaction. Lazard’s opinion did not address the relative merits of the PELP Transaction as compared to any other transaction or business strategy in which PECO I or PECO I OP might engage or the merits of the underlying decision by PECO I and PECO I OP to engage in the PELP Transaction. Lazard’s opinion was not intended to and does not constitute a recommendation to any holder of securities as to how such holder should vote or act with respect to the PELP Transaction or any matter relating thereto.

 

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Lazard’s opinion was necessarily based on economic, monetary, market and other conditions as in effect on, and the information made available to Lazard as of, the date of Lazard’s opinion. Lazard assumed no responsibility for updating or revising its opinion based on circumstances or events occurring after the date of Lazard’s opinion. Lazard’s opinion did not express any opinion as to the prices at which securities of PECO I, PECO I OP or any affiliate thereof may trade at any time after the announcement of the PELP Transaction.

 

The following is a summary of Lazard’s opinion. The description of Lazard’s opinion set forth in this proxy statement is qualified in its entirety by reference to the full text of Lazard’s written opinion attached as Annex I to this proxy statement. We encourage you to read Lazard’s opinion and this section carefully and in their entirety.

 

In connection with its opinion, Lazard:

 

reviewed the financial terms and conditions of a draft, dated May 17, 2017, of the Contribution Agreement;

 

reviewed certain historical business and financial information relating to the Contributed Companies, the Contributed Properties, the Contributed Businesses, PECO I and PECO I OP; 

 

reviewed various financial forecasts and other data relating to the Contributed Companies, the Contributed Properties and the Contributed Businesses provided to Lazard by management of the Contributors, in its capacity as management of the Contributors, as directed and approved for Lazard’s use by the Special Committee (the “Contributed Businesses Forecasts”);

 

reviewed various financial forecasts and other data relating to the businesses of PECO I and PECO I OP provided to Lazard by management of the Contributors, as management for PECO I and PECO I OP, as directed and approved for Lazard’s use by the Special Committee (the “PECO I Forecasts”);

 

reviewed the projected synergies, cost savings (including the projected cost savings to PECO I and PECO I OP resulting from the elimination of the existing management arrangements between PECO I, PECO I OP and an affiliate of the Contributors) and other benefits, including the amount and timing thereof, anticipated by management of the Contributors, as management of PECO I and PECO I OP, to be realized from the PELP Transaction, as directed and approved for Lazard’s use by the Special Committee (the “Synergies”);

 

reviewed the potential pro forma financial impact of the PELP Transaction on PECO I utilizing pro forma financial forecasts for PECO I and PECO I OP giving effect to the PELP Transaction provided by management of the Contributors, as management of PECO I and PECO I OP and as management of the Contributors, respectively, as directed and approved for Lazard’s use by the Special Committee (the “Pro Forma Projections,” together with the Contributed Businesses Forecasts, the PECO I Forecasts and the Synergies, the “Forecasts”);

 

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held discussions with members of management of the Contributors, as management of PECO I and PECO I OP, and as management of the Contributors, respectively, with respect to the businesses and prospects of the Contributed Companies, the Contributed Properties, the Contributed Businesses, PECO I and PECO I OP, and with respect to the Synergies;

 

reviewed public information with respect to certain other companies in lines of business Lazard believed to be generally relevant in evaluating the Contributed Companies, the Contributed Properties, the Contributed Businesses, PECO I and PECO I OP; and

 

conducted such other financial studies, analyses and investigations as Lazard deemed appropriate.

 

Lazard assumed and relied upon the accuracy and completeness of the foregoing information, without independent verification of such information. Lazard did not conduct any independent valuation or appraisal of any of the assets or liabilities (contingent or otherwise) of the Contributed Companies, the Contributed Properties, the Contributed Businesses, PECO I or PECO I OP or concerning the solvency or fair value of the Contributed Companies, the Contributed Properties, the Contributed Businesses, PECO I or PECO I OP, and Lazard was not furnished with any such valuation or appraisal and, at the direction of the Special Committee, Lazard assumed that there were no material undisclosed liabilities of or relating to the Contributed Companies, the Contributed Properties or the Contributed Businesses for which appropriate reserves, indemnification or other provisions had not been made. With respect to the forecasts utilized in its analyses (the “Forecasts”), Lazard assumed, at the direction of the Special Committee, that they had been reasonably prepared on bases reflecting the best currently available estimates and judgments as to the future financial performance of the Contributed Companies, the Contributed Properties, the Contributed Businesses, PECO I and PECO I OP, respectively. In addition, Lazard assumed, at the direction of the Special Committee, that the Forecasts would be realized in the amounts and at the times contemplated thereby. Lazard assumed no responsibility for and expressed no view as to any such forecasts or the assumptions on which they are based. At the direction of the Special Committee, for purposes of its analyses, Lazard assumed that, in the absence of the PELP Transaction, PECO I and PECO I OP would continue to be managed by management of the Contributors under the terms of their existing management arrangements, and Lazard assumed no responsibility for such assumption. Lazard further assumed for purposes of its analyses, at the direction of the Special Committee, that the Cash Consideration would be paid entirely in cash, and that any restrictions on the Class B Units of PECO I OP would be satisfied at or prior to the consummation of the PELP Transaction and that such Class B Units would be converted into OP Units of PECO I OP as more particularly set forth in the Contribution Agreement. Further, for purposes of its analysis of the Contingent Consideration and the targets set forth in the Contribution Agreement upon which payment of all or a portion of the Contingent Consideration is based, at the direction of the Special Committee, Lazard relied upon the judgments of management of the Contributors regarding the timing and likelihood of the achievement of such targets. Lazard expressed no opinion regarding the likelihood that the targets upon which payment of all or a portion of the Contingent Consideration is based will be achieved or the timing thereof. Lazard noted that, in the absence of precedent transactions believed by Lazard to be sufficiently relevant for purposes of evaluating the PELP Transaction, Lazard did not conduct precedent transactions analyses in connection with its opinion.

 

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In rendering its opinion, Lazard assumed, with the consent of the Special Committee, that the PELP Transaction would be consummated on the terms described in the Contribution Agreement, without any waiver or modification of any material terms or conditions. Representatives of PECO I advised Lazard, and Lazard assumed, with the consent of the Special Committee, that the Contribution Agreement, when executed, would conform to the draft reviewed by Lazard in all material respects. Lazard further assumed, with the consent of the Special Committee, that adjustments (if any) to the Aggregate Consideration would not be material in any respect to its analyses or opinion. Lazard also assumed, with the consent of the Special Committee, that obtaining the necessary governmental, regulatory or third-party approvals and consents for the PELP Transaction would not have an adverse effect on PECO I, PECO I OP, the Contributors, the Contributed Companies, the Contributed Properties, the Contributed Businesses or the PELP Transaction. Lazard further assumed, with the consent of the Special Committee, that, following the PELP Transaction, PECO I would continue its status as a REIT under the Internal Revenue Code. Lazard did not express any opinion as to any tax or other consequences that might result from the PELP Transaction, nor did Lazard’s opinion address any legal, tax, regulatory or accounting matters, as to which Lazard understood that the Special Committee obtained such advice as it deemed necessary from qualified professionals. Lazard expressed no view or opinion as to any terms or other aspects (other than the Aggregate Consideration to the extent expressly specified herein) of the PELP Transaction, including, without limitation, the form or structure of the PELP Transaction, the Plan of Reorganization (as defined in the Contribution Agreement) contemplated by the Contribution Agreement, the allocation of the Aggregate Consideration pursuant to, or any agreements or arrangements entered into in connection with, or contemplated by, the PELP Transaction. In addition, Lazard expressed no view or opinion as to the fairness of the amount or nature of, or any other aspects relating to, the compensation to any officers, directors or employees of any parties to the PELP Transaction or any of their affiliates, or class of such persons, relative to the Aggregate Consideration or otherwise.

 

For a summary of the material financial analyses presented by Lazard to the Special Committee in connection with delivery of Lazard’s opinion, see “—Summary of Financial Analyses of Lazard” below.

 

The Special Committee selected Lazard to act as its financial advisor in connection with the PELP Transaction based on Lazard’s qualifications, experience, reputation, and familiarity with PECO I, PECO I OP, the Contributors and their respective businesses. Lazard is an internationally recognized investment banking firm providing a broad range of financial advisory and other services. Lazard, as part of its investment banking business, is continually engaged in valuations of businesses and securities, including in connection with mergers and acquisitions, leveraged buyouts, financings and restructurings.

 

Summary of Material Financial Analyses

 

The following is a brief summary of the material financial and comparative analyses that Lazard deemed to be appropriate for this type of transaction and that were reviewed with the Special Committee in connection with rendering Lazard’s opinion. The summary of Lazard’s financial analyses described below is not a complete description of the analyses underlying its opinion. The preparation of a financial opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analyses and the application of those methods to the particular circumstances and, therefore, is not readily able to be summarized. In arriving at its opinion, Lazard did not draw, in isolation, conclusions from or with regard to any factor or analysis considered by it. Rather, Lazard made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of the analyses. Considering selected portions of the analyses and reviews in the summary set forth below without considering the analyses and reviews as a whole could create an incomplete or misleading view of the analyses and reviews underlying Lazard’s opinion.

 

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For purposes of its analyses and reviews, Lazard considered industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of PECO I, PECO I OP, and PELP. No company, business or transaction used in Lazard’s analyses and reviews as a comparison is identical to PECO I or PELP or the Contributors, and an evaluation of the results of those analyses and reviews is not entirely mathematical. Rather, the analyses and reviews involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies, businesses or transactions used in Lazard’s analyses and reviews. The estimates contained in Lazard’s analyses and reviews and the ranges of valuations resulting from any particular analysis or review are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by Lazard’s analyses and reviews. In addition, analyses and reviews relating to the value of companies, businesses or securities do not purport to be appraisals or to reflect the prices at which companies, businesses or securities actually may be sold. Accordingly, the estimates used in, and the results derived from, Lazard’s analyses and reviews are inherently subject to substantial uncertainty.

 

The summary of the analyses and reviews provided below includes information presented in tabular format. In order to understand fully Lazard’s analyses and reviews, the tables must be read together with the full text of each summary. The tables alone do not constitute a complete description of Lazard’s analyses and reviews. Considering the data in the tables below without considering the full description of the analyses and reviews, including the methodologies and assumptions underlying the analyses and reviews, could create a misleading or incomplete view of Lazard’s analyses and reviews.

 

Lazard performed the analyses and reviews described below for the purpose of deriving implied equity value reference ranges for PECO I and PELP. In the case of PELP, Lazard assumed, with the consent of the Special Committee, a $1.5 billion capital raise for PECO III (the “$1.5B PECO III Fundraising Plan”) and, for the purposes of evaluating up front consideration contemplated by the PELP Transaction, a $500 million capital raise for PECO III (the “$500MM PECO III Fundraising Plan”) reflective of adjustments made by Lazard to the $1.5B PECO III Fundraising Plan. Lazard used the implied equity value reference ranges for PECO I and PELP derived from its analyses to calculate implied ranges of the number of OP Units to be issued to PELP in the PELP Transaction (and corresponding ranges of implied PELP ownership in PECO I after consummation of the PELP Transaction (“Pro Forma PECO I”)), assuming, with the consent of the Special Committee, that the Cash Consideration will be paid entirely in cash. Lazard compared the implied ranges of OP Units to be issued to PELP assuming the $500MM PECO III Fundraising Plan to (i) the approximately 40 million OP Units which will be issued to PELP in the event that $500 million (or less) is raised for PECO III by December 31, 2019 and no liquidity event is achieved prior to December 31, 2021 and (ii) the approximately 45 million OP Units that will be issued to PELP in the event that $500 million (or less) is raised for PECO III by December 31, 2019 and a liquidity event for Pro Forma PECO I at a share price greater than or equal to $10.20 is achieved prior to December 31, 2019 (the “Liquidity Event Earn Out Only OP Unit Consideration”). Lazard then compared the implied ranges of OP Units to be issued to PELP assuming the $1.5B PECO III Fundraising Plan to the approximately 53 million OP Units that will be issued to PELP in the event that $1.5 billion is raised for PECO III by December 31, 2019 and a liquidity event for Pro Forma PECO I at a share price greater than or equal to $10.20 is achieved prior to December 31, 2019 (the “Maximum Earn Out OP Unit Consideration”).

 

Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before May 17, 2017 and is not necessarily indicative of current market conditions.

 

Illustrative Discounted Cash Flow Analysis

 

Illustrative PECO I Discounted Cash Flow Analysis

 

Lazard performed a discounted cash flow analysis for the purpose of determining the illustrative equity value of PECO I on a standalone basis. In conducting the discounted cash flow analysis, Lazard utilized projections provided by management of the Contributors, in its capacity as management for PECO I as directed for Lazard’s use and approved by the Special Committee. Lazard arithmetically derived the estimated standalone unlevered free cash flows that PECO I was forecasted to generate from March 31, 2017 through December 31, 2021, based on such projections.

 

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Lazard also calculated a range of illustrative terminal values for PECO I utilizing the EBITDA multiple method by applying a forward multiple of 13.1x to 14.1x to the estimated EBITDA of PECO I in the terminal year ending on December 31, 2022. The range of forward multiples applied was based on Lazard’s professional judgment given the nature of PECO I and its business and industry and informed by an analysis of the following select comparable companies:

 

Brixmor Property Group Inc.

Cedar Realty Trust, Inc.

Kite Realty Group Trust

Ramco-Gershenson Properties Trust

 

The unlevered free cash flows and the range of illustrative terminal values were then discounted to present value using a discount rate of 6.4% to 7.4%, based on an estimate of PECO I’s weighted-average cost of capital, to derive a range of illustrative enterprise values for PECO I. Lazard determined the weighted-average cost of capital for PECO I based on the capital asset pricing model. A range of illustrative equity values for PECO I was then calculated by reducing the range of illustrative enterprise values by the amount of PECO I’s mortgages and loans payable and then adding back cash, cash equivalents and other tangible assets as of March 31, 2017. Lazard’s analysis indicated an illustrative equity value reference range for PECO I on a standalone basis of $1.398 billion to $1.644 billion.

 

Illustrative PELP Sum-of-the-Parts Discounted Cash Flow Analysis

 

Lazard conducted a sum-of-the-parts discounted cash flow analysis to derive an illustrative equity value reference range for PELP. In carrying out this analysis, PELP’s cash flow sources were divided into three segments: (i) the Real Estate Portfolio; (ii) the in-place business plan for PELP’s Asset Management Business (“PELP In-Place”); and (iii) the Asset Management Business’ PECO III business plan at PELP’s share (under each of the $500MM PECO III Fundraising Plan and the $1.5B PECO III Fundraising Plan) (“PELP PECO III”). At the direction of the Special Committee, Lazard used the $500MM PECO III Fundraising Plan (reflective of adjustments made by Lazard to the $1.5B PECO III Fundraising Plan) in order to evaluate up front consideration contemplated by the PELP Transaction. To derive the illustrative equity value reference range for PELP, Lazard performed a discounted cash flow analysis to calculate a range of values for each of the foregoing segments (adjusting for debt of the Real Estate Portfolio). Lazard then aggregated the illustrative equity values for the Real Estate Portfolio, PELP In-Place and PELP PECO III generated by the discounted cash flow analyses and added the net value of other tangible assets (including cash and cash equivalents) on PELP’s balance sheet, to derive an illustrative equity value reference range for PELP as of March 31, 2017 of (i) $465 million to $573 million assuming the $500MM PECO III Fundraising Plan and (ii) $537 million to $697 million assuming the $1.5B PECO III Fundraising Plan.

  

Illustrative Adjusted Exchange Ratio / Ownership Analysis

 

Lazard performed an illustrative adjusted exchange ratio analysis by (1) dividing the low end of the illustrative equity value reference range for PELP (for each of the $500MM PECO III Fundraising Plan and the $1.5B PECO III Fundraising Plan), less the Cash Consideration (assuming fully paid in cash), by the high end of the illustrative equity value reference range for PECO I indicated by the discounted cash flow analyses described above and by dividing the high end of the illustrative equity value reference range for PELP (for each of the $500MM PECO III Fundraising Plan and the $1.5B PECO III Fundraising Plan), less the Cash Consideration (assuming fully paid in cash), by the low end of the illustrative equity value reference range for PECO I indicated by the discounted cash flow analyses described above and (2) multiplying the resulting quotient by PECO I’s total units outstanding (including all OP Units and vested and unvested Class B Units as if converted to OP Units on a one-to-one ratio). These analyses indicated the illustrative reference ranges of OP Units to be issued to PELP and corresponding illustrative reference ranges of PELP ownership of Pro Forma PECO I shown in the table below.

 

$500MM PECO III Fundraising Plan

$1.5B PECO III Fundraising Plan

OP Units Issued (millions)

PELP Ownership Range

OP Units Issued (millions)

PELP Ownership Range

47.5 – 70.4 22.2% – 29.1% 55.7 – 87.1 24.8% – 33.4%

 

Lazard then compared (1) the illustrative reference range of OP Units to be issued to PELP under the $500MM PECO III Fundraising Plan to the Base OP Unit Consideration and the Liquidity Event Earn Out Only OP Unit Consideration and (2) the illustrative reference range of OP Units to be issued to PELP under the $1.5B PECO III Fundraising Plan to the Maximum Earn Out OP Unit Consideration.

 

 

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Selected Publicly Traded Companies Analyses

 

PECO I Selected Publicly Traded Companies Analysis

 

In performing a selected publicly traded companies analysis of PECO I, Lazard reviewed publicly available financial and market information for the selected public companies listed in the table below (the “PECO I Selected Public Companies”), which Lazard deemed most relevant to consider in relation to PECO I, based on Lazard’s professional judgment and experience. Lazard reviewed, among other things, equity values of the PECO I Selected Public Companies as a multiple of projected funds from operations (“FFO”) and adjusted funds from operations (“AFFO”) for calendar years 2017 and 2018. The financial data of the PECO I Selected Public Companies used by Lazard for this analysis were based on publicly available research analysts’ estimates and, in the case of PECO I, on projections based on PECO I’s existing management agreement and assuming such agreement remained in effect, as provided by management of the Contributors, in its capacity as management for PECO I, as directed and approved for Lazard’s use by the Special Committee. The 2017E and 2018E FFO and AFFO multiples for each of the PECO I Selected Public Companies are set forth in the table below.

  

PECO I
Selected Public Company

 

Equity Value /
2017E FFO

 

Equity Value /
2017E AFFO

 

Equity Value /
2018E FFO

 

Equity Value /
2018E AFFO

Ramco-Gershenson Properties Trust  9.2x  11.2x  9.0x  11.1x
Cedar Realty Trust, Inc.  9.2x  11.4x  8.8x  10.9x
Kite Realty Group Trust  9.0x  11.1x  8.6x  9.8x
Brixmor Property Group Inc.  8.5x  10.6x  8.2x  10.1x

 

Lazard then applied, based on its judgment and review of the PECO I Selected Public Companies (and in particular, the multiples listed in the tables above) and its experience and professional judgment, to the projections provided to Lazard by the management of the Contributors, in its capacity as management of PECO I, as directed and approved for Lazard’s use by the Special Committee, of the projected FFO and AFFO of PECO I for 2017 and 2018, median multiples (and in each case, plus or minus 1x) of (i) 9.1x with respect to the projected 2017 FFO of PECO I; (ii) 11.1x with respect to the projected 2017 AFFO of PECO I; (iii) 8.7x with respect to the projected 2018 FFO of PECO I; and (iv) 10.5x with respect to the projected 2018 AFFO of PECO I. Lazard’s analysis resulted in an indicative implied equity value range of (i) $1,010 - $1,260 million in respect to the projected 2017 FFO of PECO I; (ii) $902 – $1,080 million in respect to the projected 2017 AFFO of PECO I; (iii) $989 – $1,245 million in respect to the projected 2018 FFO of PECO I; and (iv) $923 – $1,116 million in respect to the projected 2018 AFFO of PECO I.

   

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PELP Sum-of-the-Parts Selected Public Companies Analysis

 

Lazard conducted a sum-of-the-parts selected publicly traded companies analysis to derive an implied equity value reference range for PELP. In carrying out this analysis, Lazard performed separate selected comparable company analyses to derive equity value reference ranges for the Real Estate Portfolio and the Asset Management Business, as described below, and added the incremental value of other net tangible assets on PELP’s balance sheet to the sum of such values to arrive at an aggregate equity value reference range for PELP on a standalone basis.

 

PELP’s Real Estate Portfolio

 

In performing a selected publicly traded companies analysis of the Real Estate Portfolio, Lazard reviewed publicly available financial and market information for the selected public companies listed in the table below (the “PELP RE Selected Public Companies”), which Lazard deemed most relevant to consider in relation to the Real Estate Portfolio, based on its professional judgment and experience. Lazard reviewed, among other things, equity values of the PELP RE Selected Public Companies as a multiple of projected FFO and AFFO for calendar years 2017 and 2018. The financial data of the PELP RE Selected Publicly Traded Companies used by Lazard for this analysis was based on publicly available research analysts’ estimates and, in the case of the Real Estate Portfolio, on projections provided by management of the Contributors, in its capacity as management for PELP, as directed and approved for Lazard’s use by the Special Committee. The 2017E and 2018E FFO and AFFO multiples for each of the PELP RE Selected Public Companies are set forth in the table below.

  

PELP RE

Selected Public Company

 

Equity Value /
2017E FFO

 

Equity Value /
2017E AFFO

 

Equity Value /
2018E FFO

 

Equity Value /
2018E AFFO

Ramco-Gershenson Properties Trust  9.2x  11.2x  9.0x  11.1x
Cedar Realty Trust, Inc.  9.2x  11.4x  8.8x  10.9x
Kite Realty Group Trust  9.0x  11.1x  8.6x  9.8x
Brixmor Property Group Inc.  8.5x  10.6x  8.2x  10.1x
Slate Retail REIT  8.5x  11.4x  8.1x  10.7x

 

PELP’s Asset Management Business

 

In performing a selected publicly traded companies analysis of the Asset Management Business, Lazard reviewed publicly available financial and market information for the selected public companies listed in the table below (the “PELP AM Selected Public Companies”), which Lazard deemed most relevant to consider in relation to the Asset Management Business, based on its professional judgment and experience. Lazard reviewed, among other things, enterprise values of the PELP AM Selected Public Companies as a multiple of estimated EBITDA for calendar years 2017 and 2018. The financial data of the PELP AM Selected Public Companies used by Lazard for this analysis were based on publicly available research analysts’ estimates and, in the case of the Asset Management Business, on projections provided by management of the Contributors, in its capacity as management for PELP, as directed and approved for Lazard’s use by the Special Committee. The 2017E and 2018E EBITDA multiples for each of the PELP AM Selected Public Companies are set forth in the table below.

 

PELP AM
Selected Public Company

 

TEV / 2017E EBITDA

 

TEV / 2018E EBITDA

Legg Mason, Inc.   7.8x   7.8x
Federated Investors, Inc.   8.3x   N/A
Cohen & Steers, Inc.   10.1x   9.1x
Artisan Partners Asset Management Inc.   7.5x   8.4x
OM Asset Management plc   6.7x   6.2x
Waddell & Reed Financial, Inc.   4.6x   4.9x
Virtus Investment Partners, Inc.   5.5x   7.1x
Manning & Napier, Inc.   5.7x   N/A
CBRE Group, Inc.   7.7x   7.4x
Jones Lang LaSalle, Incorporated   8.1x   7.4x

 

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Sum-of-the-Parts

 

 Lazard then conducted a sum-of-the-parts analysis to derive a range of indicative implied equity values of PELP for the $500MM PECO III Fundraising Plan and the $1.5B PECO III Fundraising Plan. In carrying out this analysis, Lazard applied, based on its judgment and review of the PELP RE Selected Public Companies and the PELP AM Selected Public Companies (and in particular, the multiples listed in the tables above) and its experience and professional judgment, to the projections provided to Lazard by the management of the Contributors, in its capacity as management of PELP, as directed and approved for Lazard’s use by the Special Committee, of the projected EBITDA, FFO and AFFO of PELP for 2017 and 2018, median multiples of (i) 9.0x (plus or minus 1x) with respect to the projected 2017 FFO of the Real Estate Portfolio; (ii) 11.2x (plus or minus 1x) with respect to the projected 2017 AFFO of the Real Estate Portfolio; (iii) 8.6x (plus or minus 1x) with respect to the projected 2018 FFO of the Real Estate Portfolio; (iv) 10.7x (plus or minus 1x) with respect to the projected 2018 AFFO of the Real Estate Portfolio and a reference range of multiples of 4.6x-10.1x with respect to the projected 2017 EBITDA of the Asset Management Business; and 4.9x-9.1x with respect to the projected 2018 EBITDA of the Asset Management Business. Lazard then combined the equity value ranges of the Real Estate Portfolio and the Asset Management Business implied by the results of this analysis, in each case adjusting for the net value of other tangible assets on PELP’s balance sheet as of March 31, 2017, to derive ranges of indicative implied equity values of PELP. Lazard’s analysis resulted in indicative implied equity value ranges with respect to the $1.5B PECO III Fundraising Plan of (i) $417 – $560 million in respect to the projected 2017 FFO of the Real Estate Portfolio and the projected 2017 EBITDA of the Asset Management Business; (ii) $288 – $390 million in respect to the projected 2017 AFFO of the Real Estate Portfolio and the projected 2017 EBITDA of the Asset Management Business; (iii) $500 – $683 million in respect to the projected 2018 FFO of the Real Estate Portfolio and the projected 2018 EBITDA of the Asset Management Business; and (iv) $431 – $584 million in respect to the projected 2018 AFFO of the Real Estate Portfolio and the projected 2018 EBITDA of the Asset Management Business, and indicative implied equity value ranges with respect to the $500MM PECO III Fundraising Plan of (i) $413 – $550 million in respect to the projected 2017 FFO of the Real Estate Portfolio and the projected 2017 EBITDA of the Asset Management Business; (ii) $283 – $380 million in respect to the projected 2017 AFFO of the Real Estate Portfolio and the projected 2017 EBITDA of the Asset Management Business; (iii) $466 – $621 million in respect to the projected 2018 FFO of the Real Estate Portfolio and the projected 2018 EBITDA of the Asset Management Business; and (iv) $397 – $522 million in respect to the projected 2018 AFFO of the Real Estate Portfolio and the projected 2018 EBITDA of the Asset Management Business. 

 

Implied Adjusted Exchange Ratio / Implied Ownership Analysis

 

Lazard performed an implied adjusted exchange ratio analysis by (1) dividing the low end of the implied equity value reference range for PELP (for each of the $500MM PECO III Fundraising Plan and the $1.5B PECO III Fundraising Plan), less the Cash Consideration (assuming fully paid in cash), by the high end of the implied equity value reference range for PECO I indicated by the comparable companies analyses described above and by dividing the high end of the implied equity value reference range for PELP (for each of the $500MM PECO III Fundraising Plan and the $1.5B PECO III Fundraising Plan), less the Cash Consideration (assuming fully paid in cash), by the low end of the implied equity value reference range for PECO I indicated by the comparable companies analyses described above and (2) multiplying the resulting quotient by PECO I’s total units outstanding (including all OP Units and vested and unvested Class B Units as if converted to OP Units on a one-to-one ratio). These analyses indicated implied ranges of OP Units to be issued to PELP and corresponding implied ranges of PELP ownership of Pro Forma PECO I shown in the table below.

 

           

PELP’s Real
Estate Portfolio
and PECO I

Applied Multiple

PELP’s Asset
Management
Business

Applied
Multiple

$500MM PECO III Fundraising
Plan

$1.5B PECO III Fundraising
Plan

OP Units
Issued
(millions)

PELP
Ownership
Range

OP Units
Issued
(millions)

PELP
Ownership
Range

2017 FFO 2017 EBITDA 54.1 – 93.1 24.3% – 34.8% 54.8 – 95.0 24.5% – 35.3%
2017 AFFO 2017 EBITDA 40.6 – 68.8 19.8% – 28.7% 41.4 – 70.9 20.1% – 29.2%
2018 FFO 2018 EBITDA 62.8 – 108.7 27.0% – 38.3% 67.9 – 120.5 28.4% – 40.6%
2018 AFFO 2018 EBITDA 58.4 – 96.3 25.7% – 35.6% 64.2 – 109.0 27.4% – 38.3%

 

Lazard then compared (1) the implied ranges of OP Units to be issued to PELP under the $500MM PECO III Fundraising Plan to the Base OP Unit Consideration and the Liquidity Event Earn Out Only OP Unit Consideration and (2) the implied ranges of OP Units to be issued to PELP under the $1.5B PECO III Fundraising Plan to the Maximum Earn Out OP Unit Consideration.

 

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Other Analyses

 

The analyses and data described below were presented to the Special Committee for informational purposes only and they were not considered by Lazard in rendering its opinion.

 

Illustrative “Has-Gets” Analysis from the Perspective of PECO I Owners

 

Lazard compared the stand-alone per share value of PECO I to the pro forma per share value of Pro Forma PECO I after giving effect to the PELP Transaction, including (1) PECO I’s illustrative implied 78.1% share of PELP based on the midpoint of the illustrative equity value reference range for PELP derived by the PELP sum-of-the-parts discounted cash flow analysis described above, (2) realization of projected cost savings at PECO I’s illustrative 78.1% share as provided to Lazard by management of the Contributors, (3) avoidance of the PECO I disposition fee pursuant to the termination of the existing PE-NTR Agreement, (4) the impact from differing inputs and assumptions with respect to valuation methodologies for PECO I and Pro Forma PECO I, respectively, (5) a 78.1% / 21.9% ownership split of Pro Forma PECO I by former PECO I owners and former PELP owners, respectively, assuming payment of the Maximum Earn Out OP Unit Consideration, (6) the impact of the Cash Consideration (assuming fully paid in cash), and (7) the inclusion of estimated transaction costs. Lazard used the foregoing assumptions to calculate, utilizing the discounted cash flow methodology described above, an illustrative estimated premium of 19% to PECO I owners from the PELP Transaction.

 

Illustrative Net Asset Value Analysis

 

Illustrative PECO I Net Asset Value Analysis

 

Lazard performed a net asset value analysis for the purpose of determining the illustrative net asset value of PECO I on a standalone basis. In conducting the net asset value analysis, Lazard utilized projections provided by management of the Contributors, in its capacity as management for PECO I as directed for Lazard’s use and approved by the Special Committee.

 

Lazard calculated a range of illustrative net asset values for PECO I by applying a cap rate of 6.3% to 6.8% to PECO I’s projected 2017 net operating income of $185 million, which reflects PECO I’s in-place portfolio of 151 assets as of March 31, 2017 and excludes any impact from projected 2017 acquisition activity, as adjusted to account for a recent acquisition and two assets currently targeted for disposition, PECO I’s mortgages and loans payable, cash, cash equivalents, other tangible assets and a disposition fee pursuant to the existing PE-NTR Agreement. Lazard’s analysis indicated an illustrative net asset value reference range for PECO I on a standalone basis of $1.673 billion to $1.886 billion.

 

Illustrative PELP Sum-of-the-Parts Net Asset Value Analysis

 

Lazard performed a net asset value analysis for the purpose of determining the illustrative net asset value of the Real Estate Portfolio. In conducting the net asset value analysis, Lazard utilized projections provided by management of the Contributors, as directed for Lazard’s use and approved by the Special Committee.

 

Lazard calculated a range of illustrative net asset values for the Real Estate Portfolio by applying a cap rate of 7.3% to 7.8% to the Real Estate Portfolio’s projected 2017 net operating income of $55 million.

 

Lazard used the illustrative reference range of net asset values of the Real Estate Portfolio to derive an illustrative net asset value reference range for PELP though a sum-of-the-parts analysis. To carry out this analysis, Lazard aggregated the illustrative reference range of net asset values of the Real Estate Portfolio, as adjusted for debt, with the illustrative equity value reference ranges for PELP In-Place and PELP PECO III generated by the discounted cash flow analyses (discussed above under “Illustrative PELP Sum-of-the-Parts Discounted Cash Flow Analysis”) and added the net value of other tangible assets (including cash and cash equivalents) on PELP’s balance sheet, to derive an illustrative net asset value reference range for PELP as of March 31, 2017 of (i) $410 million to $490 million assuming the $500MM PECO III Fundraising Plan and (ii) $482 million to $614 million assuming the $1.5B PECO III Fundraising Plan.

 

Illustrative Adjusted Exchange Ratio / Ownership Analysis

 

Lazard performed an illustrative adjusted exchange ratio analysis by (1) dividing the low end of the illustrative net asset value reference range for PELP (for each of the $500MM PECO III Fundraising Plan and the $1.5B PECO III Fundraising Plan), less the Cash Consideration (assuming fully paid in cash), by the high end of the illustrative net asset value reference range for PECO I as indicated by the net asset value analyses described above and by dividing the high end of the illustrative net asset value reference range for PELP (for each of the $500MM PECO III Fundraising Plan and the $1.5B PECO III Fundraising Plan), less the Cash Consideration (assuming fully paid in cash), by the low end of the illustrative net asset value reference range for PECO I as indicated by the net asset value analyses described above and (2) multiplying the resulting quotient by PECO I’s total units outstanding (including all OP Units and vested and unvested Class B Units as if converted to OP Units on a one-to-one ratio). These analyses indicated the illustrative reference ranges of OP Units to be issued to PELP and corresponding illustrative reference ranges of PELP ownership of Pro Forma PECO I shown in the table below.

 

$500MM PECO III Fundraising Plan

$1.5B PECO III Fundraising Plan

OP Units Issued (millions)

PELP Ownership Range

OP Units Issued (millions)

PELP Ownership Range

35.9 – 49.4 18.2% – 22.8% 43.1 – 63.4 20.7% – 27.1%

 

Lazard then compared (1) the illustrative reference range of OP Units to be issued to PELP under the $500MM PECO III Fundraising Plan to the Base OP Unit Consideration and the Liquidity Event Earn Out Only OP Unit Consideration and (2) the illustrative reference range of OP Units to be issued to PELP under the $1.5B PECO III Fundraising Plan to the Maximum Earn Out OP Unit Consideration.

 

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Miscellaneous

In connection with Lazard’s services as financial advisor, the Special Committee has agreed to pay Lazard an aggregate fee of approximately $4.0 million, of which $1.75 million has been paid to date and $2.25 million is payable upon the Closing. In addition, the Special Committee may pay Lazard a discretionary fee (a “Lazard Discretionary Fee”) up to a maximum amount of $1.0 million, determined by the Special Committee in its sole discretion, upon the Closing. The Special Committee also agreed to reimburse Lazard for certain expenses incurred in connection with Lazard’s engagement and to indemnify Lazard and certain related persons under certain circumstances against certain liabilities that may arise from or relate to Lazard’s engagement.

 

Lazard has not in the past provided investment banking services to the Contributors (including PELP) or the Contributed Companies. Lazard may in the future provide certain investment banking services to PECO I, PECO I OP and certain of their respective affiliates, for which Lazard may receive compensation. In the past two years, Lazard has received $1.5 million from PECO I as compensation for the provision of investment banking services to the Special Committee in connection with the Special Committee’s consideration of a possible transaction with PELP before the Special Committee terminated its discussions with PELP regarding a possible transaction and Lazard’s engagement relating thereto in 2015. In addition, in the ordinary course, Lazard and its affiliates and employees may trade securities of PECO I, PECO I OP and certain of their respective affiliates and of certain affiliates of the Contributors for their own accounts and for the accounts of their customers and, accordingly, may at any time hold a long or short position in such securities, and may also trade and hold securities on behalf of PECO I, PECO I OP, and certain of their respective affiliates, the Contributors and certain affiliates of the Contributors, and receive compensation therefor. The issuance of Lazard’s opinion was approved by the opinion committee of Lazard.

 

Lazard is an internationally recognized investment banking firm providing a full range of financial advisory and other services. Lazard was selected to act as a financial advisor to the Special Committee because of its qualifications, expertise and reputation in investment banking and mergers and acquisitions.

 

Lazard prepared these analyses solely for purposes of, and the analyses were delivered to the Special Committee in connection with, the provision of its opinion to the Special Committee as to the fairness, from a financial point of view, to PECO I of the Aggregate Consideration to be paid by PECO I OP in the PELP Transaction. The terms of the PELP Transaction, including the consideration, were determined through arm’s-length negotiations among, as applicable, the Special Committee, the Board of Directors and PELP, and the decision to enter into the Contribution Agreement was solely that of the Special Committee and the Board of Directors. Lazard did not recommend any specific consideration to the Special Committee or that any given consideration constituted the only appropriate consideration for the PELP Transaction. Lazard’s opinion was one of many factors considered by the Special Committee, as discussed further in “—Rationale for Recommending the Approval of the PELP Transaction.”

  

Certain Unaudited Prospective Financial Information Reviewed by PECO I

 

PECO I is including below certain unaudited prospective financial information of PECO I and PELP that was prepared by PECO I and PELP, as applicable. PECO I and PELP do not as a matter of course make public projections as to future sales, earnings, or other results. However, the management of PECO I and PELP have prepared the prospective financial information set forth below to present the relevant information made available to PECO I and the Special Committee in connection with the evaluation of the PELP Transaction and to Lazard in connection with its respective financial analyses and opinion. The accompanying prospective financial information was not prepared with a view toward public disclosure or with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in the view of PECO I and PELP’s management, was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of management’s knowledge and belief, the expected course of action and the expected future financial performance of PECO I. However, this information is not fact and should not be relied upon as being necessarily indicative of future results, and readers of this proxy statement are cautioned not to place undue reliance on the prospective financial information.

 

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The inclusion of this information should not be regarded as an indication that any of PECO I, the Board of Directors, the Special Committee, PELP, or their respective affiliates or advisors or any other recipient of this information considered, or now considers, it to be necessarily predictive of actual future results. The unaudited prospective financial information is included in this proxy statement because it was provided to the Special Committee and Lazard in connection with the evaluation of the PELP Transaction not with a view towards public disclosure. Moreover, this unaudited prospective financial information was based on estimates and assumptions made by PECO I and PELP, as applicable, at the time of their preparation and speak only as of such time. Except to the extent required by applicable law, neither PECO I nor PELP has any obligation to update the unaudited prospective financial information included in this proxy statement and has not done so and does not intend to do so.

 

The unaudited prospective financial information was, in general, prepared solely for internal use and is subjective in many respects. As a result, the prospective results may not be realized and actual results may be significantly higher or lower than estimated. Since the unaudited prospective financial information covers multiple years, that information by its nature becomes less predictive with each successive year. Accordingly, there can be no assurance that the prospective financial information summarized below will be realized or that actual results will not differ materially from the prospective financial information summarized below, and the financial projections cannot be considered a guarantee of future operating results and should not be relied upon as such.

 

You should review the SEC filings of PECO I for a description of risk factors with respect to the business of PECO I. See “Risk Factors,” “Cautionary Statement Concerning Forward-Looking Statements” and “Where You Can Find More Information.” The unaudited prospective financial information was not prepared with a view toward public disclosure, published guidelines of the SEC or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. In addition, the unaudited prospective financial information requires significant estimates and assumptions that make it inherently less comparable to any similarly titled GAAP measures in PECO I’s historical GAAP financial statements.

 

Neither PECO I’s independent auditors, nor any other independent accountants, have compiled, examined, or performed any procedures with respect to the prospective financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the prospective financial information. Furthermore, the unaudited prospective financial information does not take into account any circumstances or events occurring after the date on which it was prepared.

 

PECO I Prospective Financial Information

 

The following table presents selected unaudited prospective financial data for the years ended December 31, 2017, 2018, 2019, 2020 and 2021 for PECO I, including potential projected acquisitions and dispositions and assuming the existing PE-NTR Agreement remains in place throughout the projection period. It does not give effect to the PELP Transaction. The following selected unaudited prospective financial data speaks only as of the time it was prepared and does not, and will not be updated to, take into account any circumstances or events that have occurred since it was prepared or that may occur in the future and such information is not intended to be used, and should not be used, for purposes of guidance or forecasting.

  

PECO I

($ in millions)

2017E 2018E 2019E 2020E 2021E
Net Operating Income (“NOI”) $195 $208 $215 $221 $226
       

 

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In addition, at the direction of the Special Committee, Lazard calculated, from the financial projections and based on certain assumptions provided by PECO I and PELP, and adjusted for comparability with publicly traded companies, EBITDA for PECO I, Unlevered Cash Flow for PECO I (calculated as EBITDA adjusted for capital expenditures) for use in its discounted cash flow analysis (see above under “ Selected Unaudited Pro Forma Financial Information of PECO I”), as well as Funds from Operations and Adjusted Funds from Operations for use in its multiples analysis, as summarized below:

 

PECO I

($ in millions)

2017E 2018E 2019E 2020E 2021E
EBITDA $163 $173 $180 $185 $190
Unlevered Cash Flow 96 138 148 155 164
Funds from Operations 124 128 133 136 140
Adjusted Funds from Operations 89 97 103 107 115

 

PECO I Post PELP Transaction Prospective Financial Information

 

The following table presents selected unaudited prospective financial data for the years ended December 31, 2017, 2018, 2019, 2020 and 2021 for PECO I, including potential projected acquisitions and dispositions. It gives effect to the PELP Transaction, including potential projected cost savings and synergies. The following selected unaudited prospective financial data speaks only as of the time it was prepared and does not, and will not be updated to, take into account any circumstances or events that have occurred since it was prepared or that may occur in the future and such information is not intended to be used, and should not be used, for purposes of guidance or forecasting.

 

PECO I

($ in millions)

2017E 2018E 2019E 2020E 2021E
NOI $249 $266 $277 $286 $291

  

In addition, at the direction of the Special Committee, Lazard calculated, from the financial projections and based on certain assumptions provided by PECO I and PELP, and adjusted based on certain allocation methodologies and for comparability with publicly traded companies, EBITDA for PECO I, Unlevered Cash Flow for PECO I (calculated as EBITDA adjusted for capital expenditures) for use in its discounted cash flow analysis (see above under “ Selected Unaudited Pro Forma Financial Information of PECO I”), as summarized below:

 

PECO I

($ in millions)

2017E 2018E 2019E 2020E 2021E
EBITDA(1) $238 $272 $299 $374 $295
Unlevered Cash Flow 148 223 254 331 259

 

(1)PECO III at $1.5 billion in fundraising.

 

In preparing the foregoing unaudited prospective financial information, PECO I made a number of assumptions and estimates regarding, among other things, interest rates, corporate financing activities, including PECO I’s ability to finance its operations and investments and refinance certain of its outstanding indebtedness and the terms of any such financing or refinancing and leverage ratios, the amount and timing of investments by PECO I and the yield to be achieved on such investments, the amount and timing of capital expenditures, the amount and timing of asset dispositions and returns achieved on them, distribution rates, occupancy and customer retention levels, changes in rent, timing of portfolio stabilization, the timing with respect to certain liquidity events, the ability to achieve certain fundraising thresholds with respect to sponsored investment vehicles, the amount of income taxes paid and the amount of employee costs and other general and administrative costs.

  

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PELP Prospective Financial Information

 

The following reflects selected unaudited prospective financial data for the years ended December 31, 2017, 2018, 2019, 2020 and 2021 for PELP. It does not give effect to the PELP Transaction. The following selected unaudited prospective financial data speaks only as of the time it was prepared and does not, and will not be updated to, take into account any circumstances or events that have occurred since it was prepared or that may occur in the future. Lazard calculated, from the financial projections and based on certain assumptions provided by PECO I and PELP, and adjusted based on certain allocation methodologies and for comparability with publicly traded companies, EBITDA for PELP, Unlevered Cash Flow for PELP (calculated as EBITDA adjusted for capital expenditures) for use in its discounted cash flow analysis (see above under “—Selected Unaudited Pro Forma Financial Information of PECO I”), as well as Funds from Operations and Adjusted Funds from Operations for use in its multiples analysis, as summarized below:

 

PELP Real Estate

 

PELP

($ in millions)

2017E 2018E 2019E 2020E 2021E
NOI $55 $58 $62 $65 $65
Unlevered Cash Flow 21 35 42 49 53
Funds from Operations 34 38 43 50 53
Adjusted Funds from Operations 14 23 29 36 43

 

PELP Asset Management

 

PELP

($ in millions)

2017E 2018E 2019E 2020E 2021E
EBITDA(1) $14 $26 $37 $41 $26
(1)PECO III at $1.5 billion in fundraising.

  

NOI, EBITDA, Unlevered Cash Flow, FFO and AFFO are non-GAAP financial measures. PECO I and PELP use NOI, EBITDA, Unlevered Cash Flow, FFO and AFFO to measure the operating performance of their businesses. 

 

    NOI is defined as the sum of base rent, percentage rent, and recoveries from tenants and other income, less operating and maintenance, real estate taxes, ground rent, and provision for doubtful accounts from the properties owned by PECO I / PELP. NOI excludes straight-line rental income and above and below market rent. NOI is a non-GAAP financial measure and should not be considered as an alternative to net income as a measure of operating performance.

 

    EBITDA is defined as NOI (adjusted for certain fee eliminations, where applicable, as contemplated by the PELP Transaction) less corporate general and administrative expenses. EBITDA is a non-GAAP financial measure and should not be considered as an alternative to net income as a measure of operating performance or cash provided by operating activities as a cash flow measurement.

 


 
  Unlevered Cash Flow is defined as EBITDA less any capital expenditures related to maintenance, development, redevelopment, leasing commissions or net acquisitions or dispositions. Unlevered Cash Flow is a non-GAAP financial measure and should not be considered as an alternative to net income as a measure of operating performance or cash provided by operating activities as a cash flow measurement.

 

    FFO is a non-GAAP financial performance measure defined by NAREIT, and represents net income, computed in accordance with GAAP, excluding gains or losses from sales and impairments of depreciated property, plus depreciation and amortization.
       
    AFFO is a non-GAAP financial performance measure that adjusts FFO for straight-line rents, amortization of in-place leases, gain or loss on the extinguishment of debt, tenant improvements, leasing costs and capital expenditure reserves.

 

General

 

The assumptions made in preparing the above unaudited prospective financial information may not accurately reflect future conditions. The estimates and assumptions underlying the unaudited prospective financial information involve judgments with respect to, among other things, future economic, competitive, regulatory and financial market conditions and future business decisions, which may not be realized and that are inherently subject to significant business, economic, competitive and regulatory uncertainties and contingencies, including, among others, risks and uncertainties described under “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements,” as well as the risks described in the periodic reports of PECO I filed with the SEC, all of which are difficult to predict and many of which are beyond the control of PECO I and PELP and will be beyond the control of PECO I. Accordingly, the projected results may not be realized, and actual results likely will differ, and may differ materially, from those reflected in the unaudited prospective financial information, whether or not the PELP Transaction is completed.

 

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You should not place undue reliance on the unaudited prospective financial information set forth above. No representation is made by PECO I, PELP or any other person to any PECO I Stockholder regarding the ultimate performance of PECO I or PELP compared to the information included in the above unaudited prospective financial information. The inclusion of unaudited prospective financial information in this proxy statement should not be regarded as an indication that the prospective financial information will be necessarily predictive of actual future events, and such information should not be relied on as such. You should review the description of PECO I’s reported results of operations and financial condition and capital resources during 2016 and the first three months of 2017, including in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in PECO I’s periodic reports filed with the SEC.

 

PECO I DOES NOT INTEND TO UPDATE OR OTHERWISE REVISE THE ABOVE UNAUDITED PROSPECTIVE FINANCIAL RESULTS TO REFLECT CIRCUMSTANCES EXISTING AFTER THE DATE THEY WERE PREPARED OR TO REFLECT THE OCCURRENCE OF FUTURE EVENTS, EVEN IN THE EVENT THAT ANY OR ALL OF THE ASSUMPTIONS UNDERLYING SUCH UNAUDITED PROSPECTIVE FINANCIAL RESULTS ARE NO LONGER APPROPRIATE, EXCEPT AS MAY BE REQUIRED BY APPLICABLE LAW.

 

NONE OF PECO I OR ITS AFFILIATES, ADVISORS, OFFICERS, DIRECTORS OR REPRESENTATIVES HAS MADE OR MAKES ANY REPRESENTATION TO ANY STOCKHOLDER OR OTHER PERSON REGARDING THE ULTIMATE PERFORMANCE OF PECO I COMPARED TO THE INFORMATION CONTAINED IN THE FINANCIAL PROJECTIONS OR THAT PROJECTED RESULTS WILL BE ACHIEVED.

 

Regulatory Approvals Required for the PELP Transaction

 

The PELP Transaction may be subject to certain regulatory requirements of municipal, state and federal, domestic or foreign, governmental agencies and authorities, including those relating to the offer and sale of securities. PELP and PECO I are currently working to evaluate and comply in all material respects with these requirements, as appropriate, and do not currently anticipate that they will hinder, delay or restrict completion of the PELP Transaction. Under the Contribution Agreement, PELP and PECO I have each agreed to use their reasonable best efforts to take all actions necessary, proper or advisable to complete the PELP Transaction and the other transactions contemplated by the Contribution Agreement.

 

Completion of the PELP Transaction is conditioned on the expiration of the waiting period (and any extension thereof) or the granting of early termination applicable to the completion of the PELP Transaction under the HSR Act. On June 9, 2017, PECO I filed its respective notification and report forms under the HSR Act with the Antitrust Division of the U.S. Department of Justice and the FTC, which triggered the start of the HSR Act 30-day waiting period. On June 16, 2017, the FTC granted early termination of the waiting period under the HSR Act.

  

We currently expect to obtain all antitrust and other regulatory approvals that are required for the completion of the PELP Transaction during the second half of 2017; however, we cannot guarantee when any such approvals will be obtained, or that they will be obtained at all.

 

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Accounting Treatment of the PELP Transaction

 

The PELP Transaction will be accounted for as a business combination under ASC 805, Business Combinations, with PECO I treated as the accounting acquirer. The assets (including identifiable intangible assets) and liabilities of PELP will be recorded at their respective fair values at the date of acquisition. Any excess purchase price over the net amount of the fair values of the tangible and intangible identified assets and liabilities will be recorded as goodwill. Consolidated financial statements after the acquisition will reflect the fair value adjustments and the combined results of operations from the date of the acquisition. PECO I, with the assistance of independent valuation professionals, has calculated preliminary fair values; however the allocation is based upon a valuation that has not yet been finalized and will not be finalized until the PELP Transaction has closed.

  

Material U.S. Federal Income Tax Consequences of the PELP Transaction

 

The following is a discussion of material U.S. federal income tax consequences of the PELP Transaction to us and to Stockholders that are U.S. persons (as defined in the Internal Revenue Code). For purposes of this discussion, references to “we,” “our” and “us” mean only PECO I, and do not include any of its subsidiaries, including PECO I OP, except as otherwise indicated. This discussion is for general information only and is not tax advice. The information in this discussion is based on:

 

the Internal Revenue Code;

 

current, temporary and proposed Treasury Regulations promulgated under the Internal Revenue Code;

 

the legislative history of the Internal Revenue Code;

 

administrative interpretations and practices of the Internal Revenue Service; and

 

court decisions,

 

in each case, as of the date of this proxy statement. In addition, the administrative interpretations and practices of the Internal Revenue Service include its practices and policies as expressed in private letter rulings that are not binding on the Internal Revenue Service except with respect to the particular taxpayers that received those rulings. The sections of the Internal Revenue Code and the corresponding Treasury Regulations that relate to the U.S. federal income tax treatment of the matters discussed in this discussion are highly technical and complex. This discussion is qualified in its entirety by the applicable Internal Revenue Code provisions, the Treasury Regulations, and related administrative and judicial interpretations thereof. Future legislation, Treasury Regulations, administrative interpretations and practices and/or court decisions may change or adversely affect the tax considerations in this discussion. Any such change could apply retroactively to transactions preceding the date of the change. We have not requested and do not intend to request a ruling from the Internal Revenue Service with respect to the issues addressed in this discussion, and the statements in this discussion are not binding on the Internal Revenue Service or any court. Thus, we can provide no assurance that the tax considerations contained in this discussion will not be challenged by the Internal Revenue Service or will be sustained by a court if so challenged. This discussion does not include any state, local or non-U.S. tax consequences associated with the matters discussed herein, or any tax consequences arising under any U.S. federal tax laws other than U.S. federal income tax laws. This discussion does not address all the tax consequences that may be relevant to us or to particular Stockholders.

 

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Stockholders are urged to consult their tax advisors regarding the U.S. federal income tax consequences of the PELP Transaction, as well as the effects of U.S. federal tax laws other than income tax laws, and state, local and non-U.S. tax laws, including possible changes in applicable tax laws.

 

Tax Consequences Relating to the PELP Transaction

 

As described above, the PELP Transaction involves the contribution of interests in a number of entities that own real property, a management business, an insurance business and certain other assets (collectively, the “Contributed Assets”) to PECO I OP in exchange for OP Units. Assuming PECO I OP is treated as a partnership for U.S. federal income tax purposes, the PELP Transaction is intended to constitute a tax-deferred contribution by the Contributors to PECO I OP for such purposes. As a result, none of the Contributors, PECO I OP or PECO I is expected to recognize any material gain or loss for U.S. federal income tax purposes solely as a result of the PELP Transaction. In addition, the PELP Transaction is not expected to adversely affect our ability to continue to qualify as a REIT.

 

We expect that PECO I OP’s initial tax basis in each Contributed Asset will be based on the Contributors’ tax basis in the Contributed Asset immediately prior to the PELP Transaction. As a result, PECO I OP’s tax basis in the Contributed Asset is expected to be substantially lower than the Contributed Asset’s fair market value at the time of such acquisition. Under Section 704(c) of the Internal Revenue Code, income, gain, loss and deduction attributable to appreciated (or depreciated) property that is contributed to a partnership in exchange for an interest in the partnership must be allocated in a manner so that the contributing partner is charged with the unrealized gain (or benefits from the unrealized loss) associated with such property at the time of the contribution. The amount of the unrealized gain (or unrealized loss) generally is equal to the difference between the fair market value or book value and the adjusted tax basis of the contributed property at the time of contribution (this difference is referred to as a book-tax difference), as adjusted from time to time. These allocations are solely for U.S. federal income tax purposes and do not affect the book capital accounts or other economic or legal arrangements among the partners. Treasury Regulations issued under Section 704(c) of the Internal Revenue Code provide partnerships with a choice of several methods of accounting for book-tax differences.

 

In connection with the PELP Transaction, the parties will enter into a Tax Protection Agreement that requires, among other things, the use of the “traditional method” for accounting for book-tax differences for properties contributed in the PELP Transaction that are protected under such agreement. Under the traditional method, which is the least favorable method to us, the carryover basis of the Contributed Assets in the hands of PECO I OP (i) could cause us to be allocated lower amounts of depreciation deductions for tax purposes than would be allocated to us if such properties were to have a tax basis equal to their fair market value at the time of the contribution and (ii) could cause us to be allocated taxable gain in the event of a sale of a Contributed Asset in excess of the economic or book income allocated to us as a result of such sale, with a corresponding benefit to the other partners in PECO I OP. An allocation described in clause (ii) above might cause us to recognize taxable income in excess of our cash proceeds in the event of a sale or other disposition of any such property, which might adversely affect our ability to comply with the REIT distribution requirements or increase the taxable income to our Stockholders. See “The PELP Transaction Documents—The Tax Protection Agreement” on page 115 for a summary of other aspects of the Tax Protection Agreement.

 

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Tax Aspects of PECO I OP

 

An entity, such as PECO I OP, that would otherwise be treated as a partnership for U.S. federal income tax purposes may nonetheless be treated as a corporation for U.S. federal income tax purposes if it is a “publicly traded partnership” (“PTP”) and certain other requirements are met. A PTP is any partnership (i) in which interests are traded on an established securities market, or (ii) in which interests are readily tradable on a “secondary market (or the substantial equivalent thereof).” Interests in PECO I OP are not traded on an established securities market. Interests in a partnership such as PECO I OP will not be treated as readily tradable on a secondary market, or the substantial equivalent thereof, if the partnership satisfies one or more safe harbors from such treatment. Failure to satisfy a safe harbor does not mean the interests will be treated as so traded, but instead the facts would need to be reviewed to make such determination. We believe that PECO I OP has previously qualified for one or more safe harbors from treatment as a PTP. One such safe harbor requires that all interests in the partnership were issued in one or more transactions that were not required to be registered under the Securities Act, and the partnership does not have more than 100 partners at any time during the taxable year of the partnership, taking into account certain ownership attribution and anti-avoidance rules (the “100 Partner Safe Harbor”). We believe that the issuance of OP Units in connection with the PELP Transaction will not cause PECO I OP to cease to qualify for the 100 Partner Safe Harbor. However, there can be no assurance that the Internal Revenue Service will not disagree with such determination or that PECO I OP will continue to qualify for the 100 Partner Safe Harbor in the future. In the event that the 100 Partner Safe Harbor or certain other safe harbor provisions of applicable Treasury Regulations are not available, PECO I OP could be treated as a PTP.

 

If PECO I OP were to be treated as a PTP, it would be taxable as a corporation unless it qualified for the statutory “90% qualifying income exception.” Under that exception, a PTP is not subject to corporate-level tax if 90% or more of its gross income consists of dividends, interest, “rents from real property” (as that term is defined for purposes of the rules applicable to REITs, with certain modifications), gain from the sale or other disposition of real property, and certain other types of qualifying income.

 

If PECO I OP were to be treated as a PTP taxable as a corporation, such treatment would cause us to cease to qualify as a REIT and have a material adverse impact on an investment in us.

 

Investment in and Income from Taxable REIT Subsidiaries

 

As a REIT, we generally will be unable to conduct directly or indirectly (except as described below), in whole or in part, the Asset Management Business and the insurance business that we acquire in connection with the PELP Transaction. Therefore, we generally intend to conduct those operations through one or more TRSs. A TRS is an entity treated as a corporation for U.S. federal income tax purposes, other than a REIT, in which a REIT directly or indirectly holds an ownership interest, and that has made a joint election with such REIT to be treated as a TRS. A TRS is subject to regular corporate income tax on its net income. As a result, the net income generated by those operations generally will be subject to regular corporate income tax.

  

Stock and other securities of a TRS constitute nonqualifying assets for purposes of the 75% asset test applicable to REITs. Thus, no more than 25% of the value of our total gross assets may be comprised of the stock or other securities of our TRSs and other nonqualifying assets. Furthermore, for taxable years beginning after December 31, 2017, no more than 20% of the value of our total gross assets may be comprised of the stock or other securities of our TRSs. We believe that the aggregate value of the stock or other securities of our TRSs and other nonqualifying assets will not exceed 25% of the value of our total gross assets, and, for taxable years beginning after December 31, 2017, the aggregate value of the stock or other securities of our TRSs will not exceed 20% of the value of our total gross assets. There can be no assurance, however, that the Internal Revenue Service will not disagree with our determinations of value.

 

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Dividends paid by TRSs constitute qualifying income for purposes of the 95% gross income test applicable to REITs, but nonqualifying income for purposes of the 75% gross income test applicable to REITs. We may directly or indirectly provide certain third-party services under a subcontracting arrangement with one or more of our TRSs, which would generate nonqualifying income to us for purposes of the gross income tests. We will monitor the amount of the dividend and other income from our TRSs and will take actions intended to keep this income, and any other nonqualifying income, within the limitations of the gross income tests. Although we expect these actions will be sufficient to prevent a violation of the gross income tests, we cannot guarantee that such actions will in all cases prevent such a violation.

 

Interests of Certain Persons in the PELP Transaction

 

In considering the recommendation of the Board of Directors to vote for the proposals described in this proxy statement, you should be aware that certain of our current directors and executive officers, including Mr. Edison, who is one of the five directors being nominated for re-election in this proxy statement, have interests in the PELP Transaction that may be different from, or in addition to, the interests of the Stockholders generally and that may create potential conflicts of interest. These interests are described in more detail below.

  

Mr. Edison is the Chair of our Board of Directors and Chief Executive Officer of PECO I and also the Chief Executive Officer of PELP. Mr. Murphy is the Chief Financial Officer, Treasurer and Secretary of PECO I and is also the Chief Financial Officer of PELP. Mr. Addy is the President and Chief Operating Officer of PECO I and an employee of PELP. Ms. Robison is the Chief Accounting Officer of PECO I and is also the Chief Accounting Officer of PELP. The respective roles of these individuals in PELP may create additional conflicts of interest in respect of the PELP Transaction.

  

Messrs. Edison, Murphy and Addy are holders of common units and profits interest units and also hold Common Shares. By virtue of the foregoing individuals’ equity ownership in PELP, as a result of the PELP Transaction, such individuals will be distributed after the Closing a portion of the PELP Transaction Consideration, as further described below. In addition, Messrs. Edison, Murphy and Addy and Ms. Robison own RMUs, as further described below. As a result of the PELP Transaction and pursuant to the Contribution Agreement, after the Closing, the foregoing individuals will receive phantom units in PECO I OP.

 

The Special Committee was aware of each of these interests in reviewing, considering and negotiating the terms of the PELP Transaction and in recommending to the Board to pursue the PELP Transaction. The Board was also aware of these interests in approving the Contribution Agreement, the other transaction documents contemplated thereby and in recommending the approval of the Contribution Agreement, the other transaction documents contemplated thereby and the PELP Transaction to Stockholders.

 

Interests of Messrs. Edison, Murphy and Addy in the Aggregate Consideration

 

Payment of the Aggregate Consideration to Contributors

 

The Contribution Agreement provides that the Contributors will receive as consideration for the Contributed Companies in the PELP Transaction, the Aggregate Consideration, subject to certain adjustments as further described in this proxy statement.

 

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At Closing, the Contributors will receive approximately (i) 40,360,504 OP Units with a total value of approximately $411.7 million based on the Implied Valuation, subject to certain adjustments, and (ii) $50.0 million in cash, subject to certain adjustments, as further described in the Contribution Agreement. In addition, after the Closing, in the event the maximum amounts payable for the Earn-out Consideration pursuant to the terms of the Contribution Agreement are paid by PECO I OP, additional OP Units with a total value of approximately $127.4 million based on the Implied Valuation will be received by the Contributors, subject to certain adjustments. The Contributors (other than PELP) are direct and indirect subsidiaries of PELP. Therefore, by virtue of their ownership interests in PELP, Messrs. Edison, Murphy and Addy will each have an indirect interest in a portion of the PELP Aggregate Consideration received by the Contributors. See “Transaction Documents—Consideration” for a summary of the Aggregate Consideration and Earn-out Consideration.

  

Allocation of OP Units from the PELP Aggregate Consideration

 

Messrs. Edison, Murphy and Addy own a combination of common units and profits interest units in PELP. Pursuant to the term of such profits interest units, as the value of the Earn-out Consideration achieved under the Contribution Agreement increases, such executive officer’s allocable share of the Earn-out Consideration will also increase. The estimated value of the amounts attributable to the Aggregate Consideration payable to each executive officer under the Contribution Agreement are set forth below:

 

Name/Title    Estimated Value of Interest in Closing Consideration (without Earn-out) ($)(1)   Percentage Interest in Closing Consideration (without Earn-out) (%)(2)   Estimated Value of Interest in Potential Total Aggregate Consideration (Assuming Full Earn-out) ($)(3)   Percentage Interest in Potential Total Aggregate  Consideration (Assuming Full Earn-out) (%)(4) 
Jeffrey S. Edison/Chair of the Board of Directors and Chief Executive Officer    $199,061,955    44.3%  $259,254,256    45.0%
Devin I. Murphy/Chief Financial Officer    $10,495,755    2.3%  $20,873,623    3.6%
R. Mark Addy/President and Chief Operating Officer    $600,623    0.1%  $849,223    0.1%

 

(1) For the purposes of the presentation in this table, the estimated value of the interest in the Closing Consideration of each applicable executive officer (i) is equal to the product of (A) the Implied Valuation and (B) the estimated total number of OP Units and amount of cash received by the Contributors attributable to the Closing Consideration, net of estimated transaction expenses, that is allocated to the executive officer, which is estimated to be 19,515,878 for Mr. Edison, 1,028,996 for Mr. Murphy and 58,885 for Mr. Addy, (ii) assumes that no closing adjustments or post-closing consideration adjustments are made in respect of the Closing Consideration and (iii) does not include the value of such executive officer’s interest in the amount of any additional OP Units that may become payable to the Contributors as a result of the Earn-out Consideration, which is described in footnote 3 to this table. 

 

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(2) For the purposes of the presentation in this table, the estimated percentage interest in the Closing Consideration of each applicable executive officer is (i) equal to (A) product of the Base OP Unit Consideration and the Implied Valuation, net of estimated transaction expenses, assuming that no closing adjustments or post-closing consideration adjustments are made in respect of the Base OP Unit Consideration plus, the Cash Consideration, divided by (B) the estimated value of the Aggregate Consideration that is allocated to the executive officer, as shown in the second column of this table and (ii) does not include the value of such executive officer’s interest in the amount of any additional OP Units which may become payable to the Contributors as a result of the Earn-out Consideration, which is described in footnote 4 to this table.

 

(3) For the purposes of the presentation in this table, the estimated value of the interest in the potential total Aggregate Consideration of each applicable executive officer is equal to the sum of (i) the estimated value of the interest in the Closing Consideration, net of estimated transaction expenses, of each executive officer, as shown in the left column of this table, and (ii) the product of (A) Implied Valuation and (B) the estimated total number of OP Units allocable to each executive officer in the event the Contributors receive the maximum number of OP Units from the Earn-out Consideration, which is estimated to be 5,901,206 for Mr. Edison, 1,017,438 for Mr. Murphy and 24,373 for Mr. Addy.

 

(4) For the purposes of the presentation in this table, the estimate percentage interest in the Aggregate Consideration of each applicable executive officer is equal to the sum of (i) the estimated percentage interest in the Closing Consideration, net of estimated transaction expenses, of each executive officer, shown in third column of this table, and (ii) the product of (A) the Implied Valuation and 12,490,196 OP Units, divided by (B) the estimated value of the Aggregate Consideration that is allocated to each executive officer in the fourth column of this table.

 

The amounts and percentages shown in the above table represent only estimated values. The actual values of the portion of the Aggregate Consideration allocable to each executive officer at or after the Closing may vary subject to certain closing adjustments and post-closing consideration adjustments as further described in the Contribution Agreement. See “Transaction Documents—Consideration” for a summary of the adjustments to the Base OP Unit Consideration.

 

The amounts and percentages shown in the above table do not reflect the value of any OP Units that may be received by PE-NTR as a result of the ultimate conversion into OP Units of Class B Units held by PE-NTR.

 

In addition, the amounts and percentages shown in the above table do not include the value of any PECO I OP phantom units such executive officers may receive as a result of the treatment of RMUs, as further described below.

  

Continued Interests in Legacy PELP

 

After the Closing, Messrs. Edison, Murphy and Addy will continue to own equity interests in PELP and also serve in their current roles with PECO I. After the Closing, PELP will continue to own and operate certain real properties and legacy funds (the “Legacy Assets”) which are not being contributed to PECO I OP in the PELP Transaction pending the sale of those assets and the winding-down of PELP’s legacy businesses, which may take a number of years. It is expected that after the Closing of the PELP Transaction the Property Manager will continue to provide asset management services for the legacy properties remaining with PELP. As equityholders of PELP, the above named executive officers will benefit from the asset management services that PECO I will indirectly provide (through the Property Manager) to PELP after the Closing and the respective roles of these executive officers in PELP may create potential conflicts of interest with PELP regarding management of the Legacy Assets. See “The Asset Management Business—Legacy PELP” for a summary of the types of asset management services that may be provided and fees that may be payable under such agreements.

  

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Interests of Named Executive Officers in Transaction Documents

 

Interests of Messrs. Edison, Murphy and Addy in the Third Amended and Restated Limited Partnership Agreement of PECO I OP

 

In connection with the PELP Transaction and pursuant to the Contribution Agreement, PECO I will enter into the PECO I OP Amended and Restated Partnership Agreement with the various persons receiving OP Units, including Messrs. Edison, Murphy and Addy, our executive officers. As a result, these persons will become limited partners of PECO I OP. Pursuant to the PECO I OP Amended and Restated Partnership Agreement, limited partners of PECO I OP and certain permitted assignees of limited partners will have certain rights, including the right to require PECO I OP to redeem part or all of the OP Units for cash (provided that the general partner of PECO I OP has the right to require PECO I to acquire part or all of such OP Units for Common Shares in lieu of cash) (determined in accordance with the PECO I OP Amended and Restated Partnership Agreement), certain procedural protections and consent rights over fundamental transactions and indemnification rights.

 

After the Closing, PELP will receive (i) OP Units allocated to PELP as a Contributor under the Contribution Agreement and (ii) OP Units from distributions made by the Contributors that are its subsidiaries. PELP generally expects to make distributions of the OP Units received as Aggregate Consideration under the Contribution Agreement promptly after the Closing, but may retain a substantial portion of the Aggregate Consideration to satisfy potential consideration adjustments, indemnification obligations, certain tax-related requirements and other contingent matters pursuant to the Contribution Agreement.

  

Pursuant to the Amended and Restated Agreement of Limited Partnership of PELP, Phillips Edison & Company, Inc., an entity that is controlled by Mr. Edison and Mr. Michael Phillips, has the sole authority and control over the voting rights with respect to the OP Units that will be held by PELP after the Closing. Therefore, until the OP Units received by PELP as consideration under the Contribution Agreement are distributed to PELP’s limited partners, Mr. Edison will have significant control over the voting rights with respect to all OP Units held by PELP. The voting rights related to the OP Units are further described in the PECO I OP Amended and Restated Partnership Agreement attached to this proxy statement as Annex D. See “Transaction Documents—The Third Amended and Restated Agreement of Limited Partnership of PECO I OP” for a summary of certain provisions of the PECO I OP Amended and Restated Partnership Agreement.

 

Interests of Messrs. Edison, Murphy and Addy in the Executive Severance Plan

 

In connection with the PELP Transaction and pursuant to the terms of the Severance Plan Term Sheet, it is anticipated that PECO I OP will adopt an executive severance plan, effective as of Closing, in which each of (i) Mr. Edison, who is expected to continue to serve as our Chief Executive Officer following the Closing, (ii) Mr. Murphy, who is expected to continue to serve as our Chief Financial Officer following the Closing, and (iii) Mr. Addy, who is expected to continue to serve as our President and Chief Operating Officer, will participate following the Closing. This plan has not yet been adopted and the terms of each executive’s participation in such plan have not yet been finalized.

 

The foregoing executives are also expected to be eligible to participate in certain of PECO I’s benefit plans and other benefits that the executives received immediately prior to Closing.

 

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The plan will also provide that each executive will be entitled to certain severance payments upon a termination of such executive’s employment without cause by PECO I OP or with good reason by such executive. The amount of the severance is a multiple of the base salary and average cash bonus paid for the three most recent years. The multiple depends upon whether the termination is during the 24 months following, or in connection with, a change in control of PECO I. If the termination is not in connection with a change in control, then the multiple is 2x for Mr. Edison and 1.5x for Messrs. Murphy and Addy. If the termination is in connection with a change in control, then the multiple is 2.5x for Mr. Edison and 2x for Messrs. Murphy and Addy.

 

In addition, the plan will provide that, upon a qualifying termination of employment that is not in connection with a change in control of PECO I, each of the executives will vest in the phantom PECO I OP units discussed below and any other time-vested long-term incentive awards received that would have otherwise vested over his “severance period.” The executives will also be eligible for vesting in any performance vesting long-term incentive awards earned at the end of a performance period, but prorated based on actual performance achieved and the portion of the performance period during which they were employed. For this purpose, Mr. Edison’s severance period is 24 months and the severance periods for Messrs. Murphy and Addy are 18 months.

 

The plan will also provide that, upon a qualifying termination of employment during the 24 months following a change in control of PECO I, each of the executives will fully vest in all time vested long-term incentive awards. At the time of such a change in control, the number of performance based long-term incentive awards eligible for vesting will be determined based on the actual performance as determined by the Board of Directors, which will pro rate the performance targets for the shortened performance period. That number of performance awards will then vest based on continued service through the end of the performance period and will become time vesting awards, subject to full acceleration upon a qualifying termination of employment.

 

The estimated values of the severance payments upon the termination of each executive’s employment with PECO I OP under the anticipated terms of each such executive’s participation in the severance plan are set forth below. For the purposes of presentation in the table below, the estimated values of the severance payments to each executive officer (i) assumes that the base salary and average cash bonus for each executive officer for the three years prior to the date of the severance payment is $716,167 for Mr. Edison, $716,167 for Mr. Murphy and $1,364,229 for Mr. Addy (which is based on each executive’s historical base salary and bonus prior to filing of this proxy statement) and (ii) assumes the vesting of any PECO I OP phantom units or other equity awards in accordance with the severance plan.

  

Name/Title    Estimated Value of Severance Payment ($)   Estimated Value of Severance Payment Upon a Change in Control ($) 
Jeffrey S. Edison/ Chair of the Board of Directors and Chief Executive Officer    $4,473,973   $7,110,227 
Devin I. Murphy/ Chief Financial Officer    $3,449,606   $5,892,345 
R. Mark Addy/ President and Chief Operating Officer    $2,234,961   $3,025,339 

 

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The amounts shown above represent only estimated values. The actual values of the estimated severance payments of the named executive officers may vary subject to the final terms of their participation in the severance plan. See “Transaction Documents—Executive Severance Plan” for a further discussion on the expected terms of each executive’s participation in the severance plan.

 

Interests of Messrs. Edison, Murphy and Addy and Ms. Robison in the Treatment of RMUs

 

Pursuant to their current employment arrangements with PELP, Messrs. Edison, Murphy and Addy and Ms. Robison hold RMUs in PELP. Pursuant to the Contribution Agreement, at Closing, PECO I OP will grant PECO I OP phantom units to holders of RMUs, who agree to cancel their RMUs in exchange for PECO I OP phantom units, including Messrs. Edison, Murphy and Addy and Ms. Robison. Each cancelled RMU will be exchanged for three phantom units. The phantom units will pay the holder thereof in cash the value of one OP Unit at the time the phantom unit vests. Phantom units will be subject to the same vesting schedule and terms as the corresponding cancelled RMUs in PELP. In general, RMUs either cliff vest after five years from the date of grant or vest pro rata after four years from the date of grant. See “Transaction Documents—Other Covenants” for a summary of the treatment of RMUs under the Contribution Agreement.

 

The estimated value of the PECO I OP phantom units each executive will receive at Closing under the Contribution Agreement as a result of the PELP Transaction are set forth below:

 

Name/Title  Estimated Number of Phantom Units (1)   Estimated Value
of  Phantom Units ($)(2)
 

Jeffrey S. Edison/ Chair of the Board of Directors and Chief Executive Officer

   521,550    5,319,810 
Devin I. Murphy/ Chief Financial Officer   437,256    4,460,011 
R. Mark Addy/ President and Chief Operating Officer   29,106    296,881 
Ms. Jennifer Robison/ Chief Accounting Officer   32,676    333,295 

 

(1) For the purposes of presentation in this table, the estimated number of PECO I OP phantom units to be received by each executive at Closing is based on the number of RMUs expected to be held by such executive on October 1, 2017 and assumes that each executive will agree to cancel all of his or her RMUs in exchange for the PECO I OP phantom units.

 

(2) For the purposes of presentation in this table, the estimated value of PECO I OP phantom units held by each applicable executive at Closing is equal to the product of (i) the Implied Valuation and (ii) the estimated number of PECO I phantom units to be received by such executive at Closing, as set forth in the second column of this table.

 

Interests of Messrs. Edison, Murphy and Addy in the Equityholder Agreement

 

In connection with the PELP Transaction and pursuant to the Contribution Agreement, it is expected that each of Messrs. Edison, Murphy and Addy will enter into the Equityholder Agreement at Closing with PECO I and PECO I OP, pursuant to which each of the foregoing executives will receive certain information and participation rights upon any listing of the Common Shares on a national securities exchange, pursuant to the terms and conditions of the Equityholder Agreement. See “Transaction Documents—Registration and Rule 144 Information Rights” for a summary of these rights.  

  

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In addition, under the terms of the Equityholder Agreement, Mr. Edison or his designee, will receive the right to be nominated to the Board of Directors at each of the ten succeeding annual meetings following the Closing. See “Transaction Documents—Nomination Rights” for a further discussion of Mr. Edison’s director nomination rights.

 

Interests of Messrs. Edison, Murphy and Addy in the Tax Protection Agreement

 

In connection with the PELP Transaction and pursuant to the Contribution Agreement, it is expected that each of Messrs. Edison, Murphy and Addy will enter into the Tax Protection Agreement with PECO I, PECO I OP and the other signatories thereto at Closing. Under the Tax Protection Agreement, PECO I OP will indemnify certain limited partners, including the foregoing executives for certain tax liabilities, for a period of ten years commencing on the date of the Closing (the “Closing Date”). See “Transaction Documents—The Tax Protection Agreement” for a summary of the terms and conditions of the Tax Protection Agreement.

 

Interest of Mr. Edison in the Third Amended and Restated Bylaws of PECO I

 

In connection with the PELP Transaction and pursuant to the Contribution Agreement, the existing bylaws of PECO I will be amended to provide that Mr. Edison shall continue to serve as Chair of the Board of Directors until the third anniversary of the Closing, subject to certain exceptions. See “Transaction Documents—The Third Amended and Restated Bylaws of PECO I” for a summary of the Third Amended and Restated Bylaws of PECO I.

 

Indemnification of Directors and Officers

 

The charter and bylaws of PECO I provide for certain indemnification rights for its directors and officers, procedures for indemnification and advancements by PECO I of certain expenses and costs relating to claims, suits or proceedings arising from their service as officers and directors of PECO I.

  

In addition, pursuant to the terms of the Contribution Agreement, the directors and officers of PELP, including Messrs. Edison, Murphy and Addy will receive the same rights to indemnification in their capacity as directors and officers of PELP as currently provided under the organizational documents of PELP and will receive coverage under directors’ and officers’ liability insurance after the Closing for a period of six years.

 

Interests of Named Executive Officers under Equity Incentive Award Plan

 

In connection with the PELP Transaction and pursuant to the Contribution Agreement, on the Closing Date, PECO I and PECO I OP will adopt an equity incentive plan, pursuant to which OP Units may be granted to employees of the Contributed Companies. The Board of Directors is still in the process of developing, approving and implementing such plan.

 

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THE PELP TRANSACTION DOCUMENTS

 

The following is a summary of the material terms of the Contribution Agreement and the other transaction documents contemplated thereby. This summary does not purport to describe all of the terms of the Contribution Agreement or the other transaction documents contemplated thereby, and the Contribution Agreement, the form of Escrow Agreement, the form of Tax Protection Agreement, the form of Equityholder Agreement, the Severance Plan Term Sheet, the form of Services Agreement, the form of PECO I OP Amended and Restated Partnership Agreement, the form of Third Amended and Restated Bylaws of PECO I and the form of License Agreement are each attached to this proxy statement as Annexes A through H to this proxy statement and are incorporated by reference in this proxy statement. All Stockholders are urged to read the Contribution Agreement carefully and in its entirety.

  

The Contribution Agreement is being summarized in this proxy statement and has been included as Annex A to this proxy statement to provide you with information regarding its terms. The Contribution Agreement is not intended to provide you with any factual, financial or other information about PECO I or its affiliates, the Contributors or their affiliates or the Contributed Companies. The Contribution Agreement contains representations and warranties that the parties thereto made to each other as of specific dates. The assertions embodied in those representations and warranties were made solely for purposes of the Contribution Agreement and the transactions and agreements contemplated thereby among the respective parties thereto and may be subject to important qualifications and limitations agreed to by PECO I and the Contributors in connection with negotiating the terms thereof. Moreover, some of those representations and warranties may not be accurate or complete as of any specified date, may be subject to a contractual standard of materiality different from those generally applicable to Stockholders or may have been used for the purpose of allocating risk among the parties to the Contribution Agreement rather than establishing matters as facts. You should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or conditions of PECO I or its affiliates. PECO I