Phillips Edison & Company, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS PHILLIPS EDISON & COMPANY, INC. CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2020 AND DECEMBER 31, 2019 (Condensed and Unaudited) (In thousands, except per share amounts) September 30, 2020 December 31, 2019 ASSETS Investment in real estate: Land and improvements $ 1,547,154 $ 1,552,562 Building and improvements 3,220,949 3,196,762 In-place lease assets 441,670 442,729 Above-market lease assets 65,637 65,946 Total investment in real estate assets 5,275,410 5,257,999 Accumulated depreciation and amortization ( 892,090 ) ( 731,560 ) Net investment in real estate assets 4,383,320 4,526,439 Investment in unconsolidated joint ventures 39,575 42,854 Total investment in real estate assets, net 4,422,895 4,569,293 Cash and cash equivalents 103,910 17,820 Restricted cash 32,888 77,288 Goodwill 29,066 29,066 Other assets, net 133,014 128,690 Real estate investment and other assets held for sale — 6,038 Total assets $ 4,721,773 $ 4,828,195 LIABILITIES AND EQUITY Liabilities: Debt obligations, net $ 2,319,003 $ 2,354,099 Below-market lease liabilities, net 105,223 112,319 Earn-out liability 22,000 32,000 Derivative liabilities 60,615 20,974 Deferred income 14,092 15,955 Accounts payable and other liabilities 93,187 124,054 Total liabilities 2,614,120 2,659,401 Commitments and contingencies (Note 8) — — Equity: Preferred stock, $ 0.01 par value per share, 10,000 shares authorized, zero shares issued and outstanding at September 30, 2020 and December 31, 2019 — — Common stock, $ 0.01 par value per share, 1,000,000 shares authorized, 290,466 and 289,047 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively 2,905 2,890 Additional paid-in capital (“APIC”) 2,796,655 2,779,130 Accumulated other comprehensive loss (“AOCI”) ( 55,630 ) ( 20,762 ) Accumulated deficit ( 980,534 ) ( 947,252 ) Total stockholders’ equity 1,763,396 1,814,006 Noncontrolling interests 344,257 354,788 Total equity 2,107,653 2,168,794 Total liabilities and equity $ 4,721,773 $ 4,828,195 See notes to consolidated financial statements. 2 PHILLIPS EDISON & COMPANY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (Condensed and Unaudited) (In thousands, except per share amounts) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Revenues: Rental income $ 123,298 $ 132,715 $ 367,418 $ 390,605 Fees and management income 2,581 2,766 7,506 9,078 Other property income 816 528 2,334 1,676 Total revenues 126,695 136,009 377,258 401,359 Operating Expenses: Property operating 20,835 23,296 62,226 67,095 Real estate taxes 17,282 18,016 50,847 53,294 General and administrative 9,595 11,537 30,141 38,287 Depreciation and amortization 56,095 58,477 168,692 179,020 Impairment of real estate assets — 35,710 — 74,626 Total operating expenses 103,807 147,036 311,906 412,322 Other: Interest expense, net ( 20,388 ) ( 25,309 ) ( 65,317 ) ( 76,151 ) Gain on disposal of property, net 10,734 5,048 8,616 10,903 Other income (expense), net 196 1,561 9,565 ( 1,476 ) Net income (loss) 13,430 ( 29,727 ) 18,216 ( 77,687 ) Net (income) loss attributable to noncontrolling interests ( 1,646 ) 3,850 ( 2,251 ) 10,045 Net income (loss) attributable to stockholders $ 11,784 $ ( 25,877 ) $ 15,965 $ ( 67,642 ) Earnings per common share: Net income (loss) per share attributable to stockholders - basic and diluted (Note 10) $ 0.04 $ ( 0.09 ) $ 0.05 $ ( 0.24 ) Comprehensive income (loss): Net income (loss) $ 13,430 $ ( 29,727 ) $ 18,216 $ ( 77,687 ) Other comprehensive income (loss): Change in unrealized value on interest rate swaps 5,098 ( 9,731 ) ( 40,013 ) ( 47,737 ) Comprehensive income (loss) 18,528 ( 39,458 ) ( 21,797 ) ( 125,424 ) Net (income) loss attributable to noncontrolling interests ( 1,646 ) 3,850 ( 2,251 ) 10,045 Other comprehensive (income) loss attributable to noncontrolling interests ( 653 ) 1,293 5,145 6,399 Comprehensive income (loss) attributable to stockholders $ 16,229 $ ( 34,315 ) $ ( 18,903 ) $ ( 108,980 ) See notes to consolidated financial statements. 3 PHILLIPS EDISON & COMPANY, INC. CONSOLIDATED STATEMENTS OF EQUITY FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (Condensed and Unaudited) (In thousands, except per share amounts) Three Months Ended September 30, 2020 and 2019 Common Stock APIC AOCI Accumulated Deficit Total Stockholders’ Equity Noncontrolling Interests Total Equity Shares Amount Balance at July 1, 2019 283,770 $ 2,838 $ 2,718,871 $ ( 20,538 ) $ ( 830,358 ) $ 1,870,813 $ 371,213 $ 2,242,026 Dividend reinvestment plan (“DRIP”) 1,475 14 16,357 — — 16,371 — 16,371 Share repurchases ( 1,660 ) ( 17 ) ( 18,193 ) — — ( 18,210 ) — ( 18,210 ) Change in unrealized value on interest rate swaps — — — ( 8,438 ) — ( 8,438 ) ( 1,293 ) ( 9,731 ) Common distributions declared, $ 0.17 per share — — — — ( 48,062 ) ( 48,062 ) — ( 48,062 ) Distributions to noncontrolling interests — — — — — — ( 6,978 ) ( 6,978 ) Share-based compensation 1 — 502 — — 502 1,674 2,176 Net loss — — — — ( 25,877 ) ( 25,877 ) ( 3,850 ) ( 29,727 ) Balance at September 30, 2019 283,586 $ 2,835 $ 2,717,537 $ ( 28,976 ) $ ( 904,297 ) $ 1,787,099 $ 360,766 $ 2,147,865 Balance at July 1, 2020 290,465 $ 2,905 $ 2,795,434 $ ( 60,075 ) $ ( 991,939 ) $ 1,746,325 $ 341,144 $ 2,087,469 Change in unrealized value on interest rate swaps — — — 4,445 — 4,445 653 5,098 Share-based compensation 1 — 1,036 — — 1,036 818 1,854 Other — — 185 — ( 379 ) ( 194 ) ( 4 ) ( 198 ) Net income — — — — 11,784 11,784 1,646 13,430 Balance at September 30, 2020 290,466 $ 2,905 $ 2,796,655 $ ( 55,630 ) $ ( 980,534 ) $ 1,763,396 $ 344,257 $ 2,107,653 Nine Months Ended September 30, 2020 and 2019 Common Stock APIC AOCI Accumulated Deficit Total Stockholders’ Equity Noncontrolling Interests Total Equity Shares Amount Balance at January 1, 2019 279,803 $ 2,798 $ 2,674,871 $ 12,362 $ ( 692,573 ) $ 1,997,458 $ 414,911 $ 2,412,369 DRIP 4,636 45 51,284 — — 51,329 — 51,329 Share repurchases ( 2,806 ) ( 28 ) ( 30,856 ) — — ( 30,884 ) — ( 30,884 ) Change in unrealized value on interest rate swaps — — — ( 41,338 ) — ( 41,338 ) ( 6,399 ) ( 47,737 ) Common distributions declared, $ 0.50 per share — — — — ( 144,082 ) ( 144,082 ) — ( 144,082 ) Distributions to noncontrolling interests — — — — — — ( 21,206 ) ( 21,206 ) Share-based compensation 65 1 1,358 — — 1,359 4,404 5,763 Conversion of noncontrolling interests 1,888 19 20,880 — — 20,899 ( 20,899 ) — Net loss — — — — ( 67,642 ) ( 67,642 ) ( 10,045 ) ( 77,687 ) Balance at September 30, 2019 283,586 $ 2,835 $ 2,717,537 $ ( 28,976 ) $ ( 904,297 ) $ 1,787,099 $ 360,766 $ 2,147,865 Balance at January 1, 2020 289,047 $ 2,890 $ 2,779,130 $ ( 20,762 ) $ ( 947,252 ) $ 1,814,006 $ 354,788 $ 2,168,794 DRIP 1,436 14 15,926 — — 15,940 — 15,940 Share repurchases ( 288 ) ( 3 ) ( 2,697 ) — — ( 2,700 ) — ( 2,700 ) Change in unrealized value on interest rate swaps — — — ( 34,868 ) — ( 34,868 ) ( 5,145 ) ( 40,013 ) Common distributions declared, $ 0.17 per share — — — — ( 48,809 ) ( 48,809 ) — ( 48,809 ) Distributions to noncontrolling interests — — — — — — ( 7,105 ) ( 7,105 ) Share-based compensation 109 2 2,508 — — 2,510 1,336 3,846 Conversion of noncontrolling interests 168 2 1,859 — — 1,861 ( 1,861 ) — Other ( 6 ) — ( 71 ) — ( 438 ) ( 509 ) ( 7 ) ( 516 ) Net income — — — — 15,965 15,965 2,251 18,216 Balance at September 30, 2020 290,466 $ 2,905 $ 2,796,655 $ ( 55,630 ) $ ( 980,534 ) $ 1,763,396 $ 344,257 $ 2,107,653 See notes to consolidated financial statements. 4 PHILLIPS EDISON & COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (Condensed and Unaudited) (In thousands) Nine Months Ended September 30, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 18,216 $ ( 77,687 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization of real estate assets 164,288 174,501 Impairment of real estate assets — 74,626 Depreciation and amortization of corporate assets 4,404 4,519 Net amortization of above- and below-market leases ( 2,394 ) ( 3,266 ) Amortization of deferred financing expenses 3,739 3,758 Amortization of debt and derivative adjustments 2,154 6,007 Gain on disposal of property, net ( 8,616 ) ( 10,903 ) Change in fair value of earn-out liability ( 10,000 ) ( 7,500 ) Straight-line rent ( 3,131 ) ( 7,024 ) Share-based compensation 3,846 5,971 Other impairment charges — 9,661 Other 1,497 1,223 Changes in operating assets and liabilities: Other assets, net ( 11,089 ) 858 Accounts payable and other liabilities ( 5,669 ) 1,138 Net cash provided by operating activities 157,245 175,882 CASH FLOWS FROM INVESTING ACTIVITIES: Real estate acquisitions ( 23,014 ) ( 49,880 ) Capital expenditures ( 40,772 ) ( 48,079 ) Proceeds from sale of real estate 48,276 86,159 Return of investment in unconsolidated joint ventures 1,949 2,498 Net cash used in investing activities ( 13,561 ) ( 9,302 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net change in credit facility — ( 73,359 ) Proceeds from mortgages and loans payable — 60,000 Payments on mortgages and loans payable ( 37,778 ) ( 7,973 ) Distributions paid, net of DRIP ( 49,083 ) ( 92,484 ) Distributions to noncontrolling interests ( 9,406 ) ( 20,616 ) Repurchases of common stock ( 5,211 ) ( 30,178 ) Other ( 516 ) ( 208 ) Net cash used in financing activities ( 101,994 ) ( 164,818 ) NET INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH 41,690 1,762 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH: Beginning of period 95,108 84,304 End of period $ 136,798 $ 86,066 RECONCILIATION TO CONSOLIDATED BALANCE SHEETS: Cash and cash equivalents $ 103,910 $ 29,516 Restricted cash 32,888 56,550 Cash, cash equivalents, and restricted cash at end of period $ 136,798 $ 86,066 5 PHILLIPS EDISON & COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (Condensed and Unaudited) (In thousands) 2020 2019 SUPPLEMENTAL CASH FLOW DISCLOSURE, INCLUDING NON-CASH INVESTING AND FINANCING ACTIVITIES: Cash paid for interest $ 59,906 $ 66,811 Right-of-use (“ROU”) assets obtained in exchange for new lease liabilities 551 1,444 Accrued capital expenditures 3,587 3,036 Change in distributions payable ( 16,214 ) 269 Change in distributions payable - noncontrolling interests ( 2,301 ) 590 Change in accrued share repurchase obligation ( 2,511 ) 706 Distributions reinvested 15,940 51,329 See notes to consolidated financial statements. 6 Phillips Edison & Company, Inc. Notes to Consolidated Financial Statements (Condensed and Unaudited) 1. ORGANIZATION Phillips Edison & Company, Inc. (“we,” the “Company,” “PECO,” “our,” or “us”) was formed as a Maryland corporation in October 2009. Substantially all of our business is conducted through Phillips Edison Grocery Center Operating Partnership I, L.P., (the “Operating Partnership”), a Delaware limited partnership formed in December 2009. We are a limited partner of the Operating Partnership, and our wholly-owned subsidiary, Phillips Edison Grocery Center OP GP I LLC (the “General Partner”), is the sole general partner of the Operating Partnership. We are a real estate investment trust (“REIT”) that invests primarily in well-occupied, grocery-anchored, neighborhood and community shopping centers that have a mix of creditworthy national, regional, and local retailers that sell necessity-based goods and services in strong demographic markets throughout the United States. In addition to managing our own shopping centers, our third-party investment management business provides comprehensive real estate and asset management services to three institutional joint ventures, in which we have a partial ownership interest, and one private fund (collectively, the “Managed Funds”) as of September 30, 2020. As of September 30, 2020, we wholly-owned 283 real estate properties. Additionally, we owned a 20 % equity interest in Necessity Retail Partners (“NRP”), a joint venture that owned six properties; a 15 % interest in Grocery Retail Partners I LLC (“GRP I”), a joint venture that owned 17 properties; and a 10 % interest in Grocery Retail Partners II LLC (“GRP II”), a joint venture that owned three properties. On October 1, 2020, GRP I acquired GRP II. Our ownership in the combined entity was adjusted upon consummation of the transaction, and we own approximately a 14 % equity interest in GRP I as a result of the acquisition. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Set forth below is a summary of the significant accounting estimates and policies that management believes are important to the preparation of our consolidated interim financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by management. For example, significant estimates and assumptions have been made with respect to the useful lives of assets, recoverable amounts of receivables, and other fair value measurement assessments required for the preparation of the consolidated financial statements. As a result, these estimates are subject to a degree of uncertainty. During the first quarter of 2020, a novel coronavirus (“COVID-19”) began spreading globally, with the outbreak being classified as a pandemic by the World Health Organization on March 11, 2020. Because of the adverse economic conditions that exist as a result of the impacts of the COVID-19 pandemic, it is possible that the estimates and assumptions that have been utilized in the preparation of the consolidated financial statements could change significantly. Specifically, as it relates to our business, the current economic situation resulted in temporary tenant closures at our shopping centers, often as a result of “stay-at-home” government mandates which limited travel and movement of the general public to essential activities only and required all non-essential businesses to close. Temporary closures of tenant spaces at our centers peaked in April and have significantly decreased as states reduced or removed restrictions on business operations and the travel and movement of the general public. Certain tenants remain temporarily closed, have since closed after reopening, are limiting the number of customers allowed in their stores, or have modified their operations in other ways that may impact their profitability, either as a result of government mandates or self-elected efforts to reduce the spread of COVID-19. Some states and localities have temporarily reinstated certain mandates in response to increasing reported cases of COVID-19. These actions could result in increased permanent store closings and could reduce the demand for leasing space in our shopping centers and result in a decline in occupancy and rental revenues in our real estate portfolio. All of this activity impacts our estimates around the collectability of revenue and valuation of real estate assets, goodwill and other intangible assets, and certain liabilities, among others. There were no changes to our significant accounting policies during the nine months ended September 30, 2020. For a full summary of our accounting policies, refer to our 2019 Annual Report on Form 10-K filed with the SEC on March 12, 2020. Basis of Presentation and Principles of Consolidation —The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Readers of this Quarterly Report on Form 10-Q should refer to our audited consolidated financial statements for the year ended December 31, 2019, which are included in our 2019 Annual Report on Form 10-K. In the opinion of management, all normal and recurring adjustments necessary for the fair presentation of the unaudited consolidated financial statements for the periods presented have been included in this Quarterly Report. Our results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the operating results expected for the full year. The accompanying consolidated financial statements include our accounts and those of our majority-owned subsidiaries. All intercompany balances and transactions are eliminated upon consolidation. Leases —Lease receivables are reviewed continually to determine whether or not it is probable that we will realize all amounts owed to us for each of our tenants (i.e., whether a tenant is deemed to be a credit risk). If we determine that the tenant is not a credit risk, no reserve or reduction of revenue is recorded, except in the case of disputed charges. If we determine that the 7 tenant is a credit risk, revenue for that tenant is recorded on a cash basis, including any amounts relating to straight-line rent receivables and/or receivables for recoverable expenses. The COVID-19 pandemic has increased the uncertainty of collecting rents from a number of our tenants. In our efforts to maximize collections in the near term while also supporting our tenants as they operate through this pandemic, we have begun negotiating rent relief primarily in the form of payment plans and deferrals on rent and recovery charges, which allow for changes in the timing of payments, but not the total amount of consideration due to us under the lease. In a limited number of instances, we may also agree to waive certain charges due to us under the lease; for additional details, please refer to Note 3. Income Taxes —Our consolidated financial statements include the operations of wholly-owned subsidiaries that have jointly elected to be treated as Taxable REIT Subsidiaries and are subject to U.S. federal, state, and local income taxes at regular corporate tax rates. We recognized an insignificant amount of federal, state, and local income tax expense for the three and nine months ended September 30, 2020 and 2019, and we retain a full valuation allowance for our deferred tax asset. All income tax amounts are included in Other Income (Expense), Net on the consolidated statements of operations and comprehensive income (loss) (“consolidated statements of operations”). Recently Issued and Newly Adopted Accounting Pronouncements —In response to the COVID-19 pandemic, the Financial Accounting Standards Board (“FASB”) issued interpretive guidance addressing the accounting treatment for lease concessions attributable to the pandemic. Under this guidance, entities may elect to account for such lease concessions consistent with how they would be accounted for under ASC Topic 842, Leases, (“ASC 842”) if the enforceable rights and obligations for the lease concessions already existed within the lease agreement, regardless of whether such enforceable rights and obligations are explicitly outlined within the lease. This accounting treatment may only be applied if (1) the lease concessions were granted as a direct result of the pandemic, and (2) the total cash flows under the modified lease are less than or substantially the same as the cash flows under the original lease agreement. As a result, entities that make this election will not have to analyze each lease to determine whether enforceable rights and obligations for concessions exist within the contract, and may elect not to account for these concessions as lease modifications within the scope of ASC 842. Some concessions will provide a deferral of payments, which may affect the timing of cash receipts without substantively impacting the total consideration per the original lease agreement. The FASB has stated that there are multiple acceptable methods to account for deferrals under the interpretive guidance: • Account for the concession as if no changes to the lease contract were made, increasing the lease receivable as payments accrue and continuing to recognize income; or • Account for deferred lease payments as variable lease payments. We have elected not to account for any qualifying lease concessions granted as a result of the COVID-19 pandemic as lease modifications and will account for any qualifying concessions granted as if no changes to the lease contract were made. This will result in an increase to the related lease receivable as payments accrue while we continue to recognize rental income. We will, however, assess the impact of any such concessions on estimated collectability of the related lease payments and will reflect any adjustments as necessary as an offset to Rental Income on the consolidated statements of operations. 8 The following table provides a brief description of newly adopted accounting pronouncements and their effect on our consolidated financial statements: Standard Description Date of Adoption Effect on the Financial Statements or Other Significant Matters Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ASU 2018-19, Financial Instruments - Credit Losses (Topic 326): Codification Improvements ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses ASU 2020-02, Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842) The amendments in this update replaced the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. It clarified that receivables arising from operating leases are not within the scope of Accounting Standards Codification (“ASC”) Topic 326. Instead, impairment of receivables arising from operating leases will be accounted for in accordance with Topic 842. It also allowed election of the fair value option on certain financial instruments. January 1, 2020 The adoption of this standard did not have a material impact on our consolidated financial statements. The majority of our financial instruments result from operating lease transactions, which are not within the scope of this standard. ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities This ASU amended two aspects of the related-party guidance in Topic 810: (1) added an elective private-company scope exception to the variable interest entity guidance for entities under common control and (2) indirect interests held through related parties in common control arrangements will be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. January 1, 2020 The adoption of this standard did not have a material impact on our consolidated financial statements. ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments This ASU amended a variety of topics, improving certain aspects of previously issued ASUs, including ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. January 1, 2020 The adoption of this standard did not have a material impact on our consolidated financial statements. ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting This ASU contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. March 12, 2020 We have elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. We continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur. Reclassifications —The following line item on our consolidated balance sheet as of December 31, 2019 was reclassified to conform to current year presentation: • Corporate Intangible Assets, Net was included in Other Assets, Net. The following line item on our consolidated statement of operations for the nine months ended September 30, 2019 was reclassified to conform to current year presentation: • Other Impairment Charges was included in Other Income (Expense), Net. The following line item on our consolidated statement of cash flows for the nine months ended September 30, 2019 was reclassified to conform to current year presentation: • Payments of Deferred Financing Expenses was included in Payments on Mortgages and Loans Payable. 9 3. LEASES Lessor —The majority of our leases are largely similar in that the leased asset is retail space within our properties, and the lease agreements generally contain similar provisions and features, without substantial variations. All of our leases are currently classified as operating leases. Lease income related to our operating leases was as follows for the three and nine months ended September 30, 2020 and 2019 (dollars in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Rental income related to fixed lease payments (1) $ 94,511 $ 97,328 $ 285,572 $ 289,318 Rental income related to variable lease payments 31,781 33,626 94,278 93,105 Straight-line rent amortization (2) 1,772 2,548 3,103 7,055 Amortization of lease assets 802 1,032 2,367 3,230 Lease buyout income 664 632 972 1,088 Adjustments for collectability (2)(3) ( 6,232 ) ( 2,451 ) ( 18,874 ) ( 3,191 ) Total rental income $ 123,298 $ 132,715 $ 367,418 $ 390,605 (1) Includes rental income related to fixed lease payments before assessing for collectability. (2) Includes revenue adjustments for non-creditworthy tenants. (3) Contains general reserves; excludes reserves for straight-line rent amortization. Approximate future fixed contractual lease payments to be received under non-cancelable operating leases in effect as of September 30, 2020, assuming no new or renegotiated leases or option extensions on lease agreements, are as follows (in thousands): Year Amount Remaining 2020 $ 98,238 2021 364,782 2022 330,635 2023 282,988 2024 227,052 Thereafter 594,574 Total $ 1,898,269 During the nine months ended September 30, 2020, we executed payment plans with our tenants agreeing to defer approximately $ 3.7 million in rent and related charges, and we granted rent abatements totaling approximately $ 1.3 million. These payment plans and rent abatements represented 0.9 % and 0.3 % of our wholly-owned portfolio’s annualized base rent (“ABR”), respectively, and the weighted-average term over which we expect to receive payment on executed payment plans is approximately eight months. For the three and nine months ended September 30, 2020, we had $ 5.2 million and $ 20.0 million, respectively, in billings that will not be recognized as revenue until cash is collected or the tenant resumes regular payments and/or is considered creditworthy. These amounts include the estimated impact of tenants who have filed for bankruptcy. No single tenant comprised 10% or more of our aggregate ABR as of September 30, 2020. As of September 30, 2020, our real estate investments in Florida and California represented 12.3 % and 10.6 % of our ABR, respectively. As a result, the geographic concentration of our portfolio makes it particularly susceptible to adverse weather or economic events, including the impact of the COVID-19 pandemic, in the Florida and California real estate markets. Lessee — Lease assets and liabilities, grouped by balance sheet line where they are recorded, consisted of the following as of September 30, 2020 and December 31, 2019 (in thousands): Balance Sheet Information Balance Sheet Location September 30, 2020 December 31, 2019 ROU assets, net - operating leases (1) Investment in Real Estate $ 3,895 $ 7,613 ROU assets, net - operating and finance leases Other Assets, Net 1,998 2,111 Operating lease liability Accounts Payable and Other Liabilities 5,880 9,453 Finance lease liability Debt Obligations, Net 240 443 (1) During the nine months ended September 30, 2020, one of our acquisitions was land upon which one of our shopping centers is situated that was previously subject to a ground lease in which the lessor controlled an option requiring us to purchase the land subject to the lease. Our valuation of the ROU asset and lease liability as of December 31, 2019 for this ground lease reflected the assumption that the lessor would exercise this option and that we would purchase the underlying land asset. 10 4. REAL ESTATE ACTIVITY Property Sales — The following table summarizes our real estate disposition activity (dollars in thousands): Nine Months Ended September 30, 2020 2019 Number of properties sold (1) 6 10 Number of outparcels sold — 1 Proceeds from sale of real estate $ 48,276 $ 86,159 Gain on sale of properties, net (2) 9,915 12,369 (1) We retained certain outparcels of land associated with one of our property dispositions during the nine months ended September 30, 2020, and as a result, this property is still included in our total property count. (2) The gain on sale of properties, net does not include miscellaneous write-off activity, which is also recorded in Gain on Disposal of Property, Net on the consolidated statements of operations. Subsequent to September 30, 2020, we sold one outparcel for approximately $ 1.1 million. Impairment of Real Estate Assets —During the three and nine months ended September 30, 2020, we did not recognize any impairment charges. During the three and nine months ended September 30, 2019, we recognized impairment charges totaling $ 35.7 million and $ 74.6 million, respectively. The impairments were associated with certain anticipated property dispositions where the net book value exceeded the estimated fair value. Our estimated fair value was based upon the contracted price to sell or the marketed price for disposition, less estimated costs to sell. We applied reasonable estimates and judgments in determining the amount of impairment recognized. Acquisitions —During the nine months ended September 30, 2020, we acquired one property and two parcels of land for a total of $ 23.0 million. Both parcels of land are adjacent to shopping centers that we own. During the nine months ended September 30, 2019, we acquired one property and one outparcel for a total of $ 49.9 million. The fair value and weighted-average useful life at acquisition for lease intangibles acquired as part of acquisitions in the nine months ended September 30, 2020 and 2019 are as follows (dollars in thousands, weighted-average useful life in years): Nine Months Ended September 30, 2020 September 30, 2019 Fair Value Weighted-Average Useful Life Fair Value Weighted-Average Useful Life In-place leases $ 1,682 16 $ 4,736 11 Above-market leases 120 5 825 8 Below-market leases ( 1,882 ) 26 ( 2,097 ) 16 Subsequent t o September 30, 2020, we purchased one property for approximately $ 18.4 million. 11 5. OTHER ASSETS, NET The following is a summary of Other Assets, Net outstanding as of September 30, 2020 and December 31, 2019, excluding amounts related to assets classified as held for sale (in thousands): September 30, 2020 December 31, 2019 Other assets, net: Deferred leasing commissions and costs $ 40,465 $ 38,738 Deferred financing expenses 13,971 13,971 Office equipment, ROU assets, and other 21,772 19,430 Corporate intangible assets 4,883 4,883 Total depreciable and amortizable assets 81,091 77,022 Accumulated depreciation and amortization ( 43,565 ) ( 35,055 ) Net depreciable and amortizable assets 37,526 41,967 Accounts receivable, net (1) 50,384 46,125 Accounts receivable - affiliates 622 728 Deferred rent receivable 32,179 29,291 Derivative assets — 2,728 Prepaid expenses and other 12,303 7,851 Total other assets, net $ 133,014 $ 128,690 (1) Net of $ 7.1 million and $ 6.9 million of general reserves for uncollectible amounts. Receivables that were removed for tenants considered to be non-creditworthy were $ 23.4 million and $ 6.9 million as of September 30, 2020 and December 31, 2019, respectively. 6. DEBT OBLIGATIONS The following is a summary of the outstanding principal balances and interest rates, which include the effect of derivative financial instruments, for our debt obligations as of September 30, 2020 and December 31, 2019 (dollars in thousands): Interest Rate (1) September 30, 2020 December 31, 2019 Revolving credit facility (2) LIBOR + 1.40 % $ — $ — Term loans (3) 2.58 % - 4.59 % 1,622,500 1,652,500 Secured loan facilities 3.35 % - 3.52 % 395,000 395,000 Mortgages 3.45 % - 7.91 % 317,148 324,578 Finance lease liability 240 443 Assumed market debt adjustments, net ( 1,419 ) ( 1,218 ) Deferred financing expenses, net ( 14,466 ) ( 17,204 ) Total $ 2,319,003 $ 2,354,099 (1) Interest rates are as of September 30, 2020. (2) We had $ 255.0 million of both gross borrowings and payments under our revolving credit facility during the nine months ended September 30, 2020. The gross borrowings and payments under our revolving credit facility were $ 116.6 million and $ 190.0 million, respectively, during the nine months ended September 30, 2019. (3) Our term loans carry an interest rate of LIBOR plus a spread. While a majority of the rates are fixed through the use of swaps, some of these rates are not fixed through a swap, and thus are still indexed to LIBOR. In January 2020, we made the final $ 30 million payment on our term loan maturing in 2021. Following this payment, the next term loan maturity is in April 2022. In April 2020, we borrowed $ 200 million on our revolving credit facility to meet our operating needs for a sustained period due to the COVID-19 pandemic. In June 2020, we paid down the outstanding balance on our revolving credit facility. Our debt is subject to certain covenants, and as of September 30, 2020, we were in compliance with the restrictive covenants of our outstanding debt obligations. In October 2020, we executed early repayments of $ 20.4 million in mortgage debt securing two of our properties. 12 The allocation of total debt between fixed-rate and variable-rate as well as between secured and unsecured, excluding market debt adjustments and deferred financing expenses, net, as of September 30, 2020 and December 31, 2019, is summarized below (in thousands): September 30, 2020 December 31, 2019 As to interest rate: (1) Fixed-rate debt $ 1,754,388 $ 2,122,021 Variable-rate debt 580,500 250,500 Total $ 2,334,888 $ 2,372,521 As to collateralization: Unsecured debt $ 1,622,500 $ 1,652,500 Secured debt 712,388 720,021 Total $ 2,334,888 $ 2,372,521 Weighed-average interest rate (1) 3.1 % 3.4 % (1) Includes the effects of derivative financial instruments (see Notes 7 and 12). 7. DERIVATIVES AND HEDGING ACTIVITIES Risk Management Objective of Using Derivatives —We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposure to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of our debt funding, and through the use of derivative financial instruments. Specifically, we enter into interest rate swaps to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash receipts and our known or expected cash payments principally related to our investments and borrowings. Cash Flow Hedges of Interest Rate Risk —Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for our making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The changes in the fair value of derivatives designated, and that qualify, as cash flow hedges are recorded in AOCI and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the nine months ended September 30, 2020 and 2019, such derivatives were used to hedge the variable cash flows associated with certain variable-rate debt. Amounts reported in AOCI related to these derivatives will be reclassified to Interest Expense, Net as interest payments are made on the variable-rate debt. During the next twelve months, we estimate that an additional $ 19.4 million will be reclassified from AOCI as an increase to Interest Expense, Net. The following is a summary of our interest rate swaps that were designated as cash flow hedges of interest rate risk as of September 30, 2020 and December 31, 2019 (notional amounts in thousands): September 30, 2020 December 31, 2019 Count 6 9 Notional amount $ 1,042,000 $ 1,402,000 Fixed LIBOR 1.3 % - 2.9 % 0.8 % - 2.9 % Maturity date 2021 - 2025 2020 - 2025 The table below details the nature of the gain or loss recognized on interest rate derivatives designated as cash flow hedges in the consolidated statements of operations (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Amount of loss recognized in other comprehensive income on derivatives $ ( 45 ) $ ( 9,193 ) $ ( 51,575 ) $ ( 44,398 ) Amount of loss (gain) reclassified from AOCI into interest expense 5,143 ( 538 ) 11,562 ( 3,339 ) 13 Credit-risk-related Contingent Features —We have agreements with our derivative counterparties that contain provisions where, if we default, or are capable of being declared in default, on any of our indebtedness, we could also be declared to be in default on our derivative obligations. As of September 30, 2020, the fair value of our derivatives in a net liability position, which included accrued interest but excluded any adjustment for nonperformance risk related to these agreements, was approximately $ 60.6 million. As of September 30, 2020, we had not posted any collateral related to these agreements and were not in breach of any agreement provisions. If we had breached any of these provisions, we could have been required to settle our obligations under the agreements at their termination value of $ 60.6 million. 8. COMMITMENTS AND CONTINGENCIES Litigation —We are involved in various claims and litigation matters arising in the ordinary course of business, some of which involve claims for damages. Many of these matters are covered by insurance, although they may nevertheless be subject to deductibles or retentions. Although the ultimate liability for these matters cannot be determined, based upon information currently available, we believe the resolution of such claims and litigation will not have a material adverse effect on our consolidated financial statements. Environmental Matters —In connection with the ownership and operation of real estate, we may potentially be liable for costs and damages related to environmental matters. In addition, we may own or acquire certain properties that are subject to environmental remediation. Depending on the nature of the environmental matter, the seller of the property, a tenant of the property, and/or another third party may be responsible for environmental remediation costs related to a property. Additionally, in connection with the purchase of certain properties, the respective sellers and/or tenants may agree to indemnify us against future remediation costs. We also carry environmental liability insurance on our properties that provides limited coverage for any remediation liability and/or pollution liability for third-party bodily injury and/or property damage claims for which we may be liable. We are not aware of any environmental matters which we believe are reasonably likely to have a material effect on our consolidated financial statements. Captive Insurance —Our captive insurance company, Silver Rock Insurance, Inc. (“Silver Rock”) provides general liability insurance, wind, reinsurance, and other coverage to us and our related-party joint ventures. We capitalize Silver Rock in accordance with applicable regulatory requirements. Silver Rock established annual premiums based on the past loss experience of the insured properties. An independent third party was engaged to perform an actuarial estimate of projected future claims, related deductibles, and projected future expenses necessary to fund associated risk management programs. Premiums paid to Silver Rock may be adjusted based on these estimates, and such premiums may be reimbursed by tenants pursuant to specific lease terms. As of September 30, 2020, we had four letters of credit outstanding totaling approximately $ 8.0 million to provide security for our obligations under Silver Rock’s insurance and reinsurance contracts. COVID-19 —As of September 30, 2020, we were not aware of any significant liabilities or obligations to waive rent that we have incurred under force majeure or co-tenancy clauses in tenant leases. 9. EQUITY General —The holders of common stock are entitled to one vote per share on all matters voted on by stockholders, including one vote per nominee in the election of our board of directors (“Board”). Our charter does not provide for cumulative voting in the election of directors. On November 4, 2020, our Board approved an amendment to our articles of incorporation to effect a one-for-four reverse stock split effective in March 2021. Neither the number of authorized shares nor the par value of the common stock will be changed. In addition, we intend to amend the limited partnership agreement of our Operating Partnership to effect a corresponding reverse stock split of the OP units. As a result of the reverse stock split, every four shares of our common stock or OP units will be automatically combined and converted into one issued and outstanding share of common stock or OP unit rounded to the nearest 1/100 th share, after which our stockholders will have an estimated value per share (“EVPS”) of $35.00. The reverse stock split impacts all common stock proportionately and will have no impact on any stockholder’s percentage ownership of common stock. On May 6, 2020, our Board decreased the EVPS of our common stock to $ 8.75 based substantially on the estimated market value of our portfolio of real estate properties and our third-party investment management business as of March 31, 2020. The decrease was primarily driven by the negative impact of the COVID-19 pandemic on our non-grocery tenants resulting from social distancing and stay-at-home guidelines and the uncertainty of the duration and full effect on the overall economy. We engaged a third-party valuation firm to provide a calculation of the range in EVPS of our common stock as of March 31, 2020, which reflected certain balance sheet assets and liabilities as of that date. Previously, our EVPS was $ 11.10 , based substantially on the estimated market value of our portfolio of real estate properties and our third-party investment management business as of March 31, 2019. Distributions —On March 27, 2020, our Board suspended stockholder distributions, effective after the payment of the March 2020 distribution on April 1, 2020, as a result of the uncertainty surrounding the COVID-19 pandemic. On November 4, 2020, our Board authorized distributions for stockholders of record at the close of business on December 28, 2020 equal to a monthly amount of $ 0.02833333 per share of common stock, or $0.34 annually. Operating partnership unit (“OP Unit”) holders will receive distributions at the same rate as common stockholders. We expect to pay this distribution on January 7, 2021. 14 Dividend Reinvestment Plan —The DRIP allows stockholders to invest distributions in additional shares of our common stock, subject to certain limits. Stockholders who elect to participate in the DRIP may choose to invest all or a portion of their cash distributions in shares of our common stock at a price equal to our most recent EVPS. Stockholders who elect to participate in the DRIP, and who are subject to U.S. federal income taxation laws, will incur a tax liability on an amount equal to the fair value on the relevant distribution date of the shares of our common stock purchased with reinvested distributions, even though such stockholders have elected not to receive the distributions in cash. On March 27, 2020, the DRIP was suspended, and the March 2020 distribution was paid in all cash on April 1, 2020. The DRIP remained suspended as of September 30, 2020. On November 4, 2020, our Board reinstated the DRIP, which will be effective beginning with the December 2020 distribution to be paid in January 2021. Tender Offer —On November 4, 2020, our Board approved a voluntary tender offer commencing on November 10, 2020 (the “Tender Offer”) for up to 4.5 million shares of our outstanding common stock at a price of $ 5.75 per share, for a total value of approximately $ 26 million. Share Repurchase Program (“SRP”) —The SRP provides an opportunity for stockholders to have shares of common stock repurchased, subject to certain restrictions and limitations. The Board reserves the right, in its sole discretion, at any time and from time to time, to reject any request for repurchase. On August 7, 2019, the Board suspended the SRP with respect to standard repurchases. The SRP for death, qualifying disability, or determination of incompetence (“DDI”) was suspended effective March 27, 2020, in response to the uncertainty of COVID-19. Both the SRP with respect to standard repurchases and the SRP for death, qualifying disability, or determination of incompetence remain suspended as of September 30, 2020. We expect to restart share repurchases for DDI at $5.75 per share, but no shares will be repurchased until at least 10 business days after completion of the Tender Offer. The SRP with respect to standard repurchases will remain suspended. Convertible Noncontrolling Interests —Under the terms of the Fourth Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”), OP Unit holders may elect to exchange OP units. The Operating Partnership controls the form of the redemption, and may elect to exchange OP units for shares of our common stock, provided that the OP units have been outstanding for at least one year, or for cash. As the form of redemption for OP units is within our control, the OP units outstanding as of September 30, 2020 and December 31, 2019 are classified as Noncontrolling Interests within permanent equity on our consolidated balance sheets. The distributions that have been paid on OP units are included in Distributions to Noncontrolling Interests on the consolidated statements of equity. During the nine months ended September 30, 2020 and 2019, 0.2 million and 1.9 million OP units were converted into shares of our common stock at a 1:1 ratio, respectively. There were approximately 42.7 million OP units outstanding as of September 30, 2020 and December 31, 2019. Additionally, certain of our outstanding time- and performance-based equity awards will result in the issuance of shares or OP units upon vesting in future periods. Simultaneously with the reverse stock split described above, to be made effective in 2021, every four OP units then outstanding will be automatically combined and converted into one OP unit. 10. EARNINGS PER SHARE We use the two-class method of computing earnings per share (“EPS”), which is an earnings allocation formula that determines EPS for common stock and any participating securities according to dividends declared (whether paid or unpaid). Under the two-class method, basic EPS is computed by dividing Net Income (Loss) Attributable to Stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS reflects the potential dilution that could occur from share equivalent activity. OP units held by limited partners other than us are considered to be participating securities because they contain non-forfeitable rights to dividends or dividend equivalents, and have the potential to be exchanged for an equal number of shares of our common stock in accordance with the terms of the the Partnership Agreement. The impact of outstanding OP units on basic and diluted EPS has been calculated using the two-class method whereby earnings are allocated to the OP units based on dividends declared and the OP units’ participation rights in undistributed earnings. The effects of the two-class method on basic and diluted EPS were immaterial to the consolidated financial statements during the nine months ended September 30, 2020 and 2019. 15 The following table provides a reconciliation of the numerator and denominator of the earnings per share calculations (in thousands, except per share amounts): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Numerator: Net income (loss) attributable to stockholders - basic $ 11,784 $ ( 25,877 ) $ 15,965 $ ( 67,642 ) Net income (loss) attributable to convertible OP units (1) 1,646 ( 3,893 ) 2,251 ( 10,319 ) Net income (loss) - diluted $ 13,430 $ ( 29,770 ) $ 18,216 $ ( 77,961 ) Denominator: Weighted-average shares - basic 290,465 283,827 290,295 282,714 OP units (1) 42,742 42,783 42,792 43,356 Dilutive restricted stock awards 356 — 393 — Adjusted weighted-average shares - diluted 333,563 326,610 333,480 326,070 Earnings per common share: Basic and diluted income (loss) per share $ 0.04 $ ( 0.09 ) $ 0.05 $ ( 0.24 ) (1) OP units include units that are convertible into common stock or cash, at the Operating Partnership’s option. The Operating Partnership income or loss attributable to these OP units, which is included as a component of Net (Income) Loss Attributable to Noncontrolling Interests on the consolidated statements of operations, has been added back in the numerator as these OP units were included in the denominator for all years presented. Approximately 1.0 million time-based and 2.5 million performance-based unvested stock units were outstanding as of September 30, 2019. These securities were anti-dilutive for the three and nine months ended September 30, 2019, and as a result, their impact was excluded from the weighted-average common shares used to calculate diluted EPS for those periods. 11. REVENUE RECOGNITION AND RELATED PARTY TRANSACTIONS Revenue — Summarized below are amounts included in Fees and Management Income. The revenue includes the fees and reimbursements earned by us from the Managed Funds, and other revenues that are not in the scope of ASC Topic 606, Revenue from Contracts with Customers, but that are included in this table for the purpose of disclosing all related party revenues (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Recurring fees (1) $ 1,233 $ 1,669 $ 3,631 $ 4,890 Transactional revenue and reimbursements (2) 719 606 2,109 2,655 Insurance premiums (3) 629 491 1,766 1,533 Total fees and management income $ 2,581 $ 2,766 $ 7,506 $ 9,078 (1) Recurring fees include asset management fees and property management fees. (2) Transactional revenue includes items such as leasing commissions, construction management fees, and acquisition fees. (3) Insurance premium income includes amounts from third parties not affiliated with us. During the nine months ended September 30, 2019, we recognized a net charge of $ 1.9 million in Other Expense, Net on our consolidated statements of operations. The charge was related to a reduction in our related party accounts receivable and organization and offering costs payable for amounts incurred in connection with the Phillips Edison Grocery Center REIT III, Inc. (“REIT III”) public offering. Remaining accounts receivable and organization and offering costs payable that were outstanding as of September 30, 2019 related to REIT III were settled when we merged with REIT III in October 2019. Other Related Party Matters —We are the limited guarantor for up to $ 190 million, capped at $ 50 million in most instances, of debt for our NRP joint venture. As of September 30, 2020, we were also the limited guarantor of a $ 175 million mortgage loan for GRP I. Our guaranty in both cases is limited to being the non-recourse carveout guarantor and the environmental indemnitor. We are also party to a separate agreement with our joint venture partner in which any potential liability under our guaranty for GRP I will be apportioned between us and our joint venture partner based on our respective ownership percentages in GRP I. We have no liability recorded on our consolidated balance sheets for either guaranty as of September 30, 2020 and December 31, 2019. 16 12. FAIR VALUE MEASUREMENTS The following describes the methods we use to estimate the fair value of our financial and nonfinancial assets and liabilities: Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, and Accounts Payable —We consider the carrying values of these financial instruments to approximate fair value because of the short period of time between origination of the instruments and their expected realization. Real Estate Investments —The purchase prices of the investment properties, including related lease intangible assets and liabilities, were allocated at estimated fair value based on Level 3 inputs, such as discount rates, capitalization rates, comparable sales, replacement costs, income and expense growth rates, and current market rents and allowances as determined by management. Debt Obligations —We estimate the fair value of our debt by discounting the future cash flows of each instrument at rates currently offered for similar debt instruments of comparable maturities by our lenders using Level 3 inputs. The discount rates used approximate current lending rates for loans or groups of loans with similar maturities and credit quality, assuming the debt is outstanding through maturity and considering the debt’s collateral (if applicable). We have utilized market information, as available, or present value techniques to estimate the amounts required to be disclosed. The following is a summary of borrowings as of September 30, 2020 and December 31, 2019 (in thousands): September 30, 2020 December 31, 2019 Recorded Principal Balance (1) Fair Value Recorded Principal Balance (1) Fair Value Term loans $ 1,609,291 $ 1,602,032 $ 1,636,470 $ 1,656,765 Secured portfolio loan facilities 391,011 404,971 390,780 399,054 Mortgages (2) 318,701 330,159 326,849 337,614 Total $ 2,319,003 $ 2,337,162 $ 2,354,099 $ 2,393,433 (1) Recorded principal balances include net deferred financing expenses of $ 14.5 million and $ 17.2 million as of September 30, 2020 and December 31, 2019, respectively. Recorded principal balances also include assumed market debt adjustments of $ 1.4 million and $ 1.2 million as of September 30, 2020 and December 31, 2019, respectively. We have recorded deferred financing expenses related to our revolving credit facility in Other Assets, Net on our consolidated balance sheets which are not included in these balances. (2) Our finance lease liability is included in the mortgages line item, as presented . Recurring and Nonrecurring Fair Value Measurements —Our earn-out liability and interest rate swaps are measured and recognized at fair value on a recurring basis, while certain real estate assets and liabilities are measured and recognized at fair value as needed. F air value measurements that occurred as of and during the nine months ended September 30, 2020 and the year ended December 31, 2019, were as follows (in thousands): September 30, 2020 December 31, 2019 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Recurring Derivative assets (1) $ — $ — $ — $ — $ 2,728 $ — Derivative liabilities (1) — ( 60,615 ) — — ( 20,974 ) — Earn-out liability — — ( 22,000 ) — — ( 32,000 ) Nonrecurring Impaired real estate assets, net (2) — — — — 280,593 — Impaired corporate intangible asset, net (3) — — — — — 4,401 (1) We record derivative assets in Other Assets, Net and derivative liabilities in Derivative Liabilities on our consolidated balance sheets. (2) The carrying value of impaired real estate assets may have subsequently increased or decreased after the measurement date due to capital improvements, depreciation, or sale. (3) The carrying value of our impaired corporate intangible asset, net, which consists of in-place management contracts, subsequently decreased after the measurement date due to amortization as well as through derecognition as part of the merger with REIT III. Derivative Instruments— As of September 30, 2020 and December 31, 2019, we had interest rate swaps that fixed LIBOR on portions of our unsecured term loan facilities. All interest rate swap agreements are measured at fair value on a recurring basis. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of ASC Topic 820, Fair Value Measurement , we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair 17 value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. Although we determined that the significant inputs used to value our derivatives fell within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our counterparties and our own credit risk utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and our counterparties. However, as of September 30, 2020 and December 31, 2019, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. Earn-out —As part of our acquisition of Phillips Edison Limited Partnership (“PELP”), an earn-out structure was established which gave PELP the opportunity to earn additional OP units based upon the potential achievement of certain performance targets subsequent to the acquisition. After the expiration of certain provisions in 2019, PELP is now eligible to earn between three million and five million OP units based on the timing and valuation of a liquidity event for PECO. The liquidity event can occur no later than December 31, 2021 for the maximum shares to be awarded, but can occur as late as December 31, 2023. We estimate the fair value of this liability on a quarterly basis using the Monte Carlo method. This method requires us to make assumptions about future dividend yields, volatility, and timing and pricing of liquidity events, which are unobservable and are considered Level 3 inputs in the fair value hierarchy. A change in these inputs to a different amount might result in a significantly higher or lower fair value measurement at the reporting date. In calculating the fair value of this liability as of September 30, 2020, we have determined that the most likely range of potential outcomes includes a possibility of no additional OP units issued as well as up to a maximum of five million units being issued. Changes in the fair value of the earn-out liability have been and will continue to be recognized in earnings. The following table presents a reconciliation of the change in the earn-out liability measured at fair value on a recurring basis using Level 3 inputs and recognized as Other Income (Expense), Net in the consolidated statements of operations (in thousands): Earn-Out Liability Balance at December 31, 2019 $ 32,000 Change in fair value recognized in Other Income (Expense), Net ( 10,000 ) Balance at September 30, 2020 $ 22,000 Real Estate Asset Impairment —Our real estate assets are measured and recognized at fair value, less costs to sell for held-for-sale properties, on a nonrecurring basis dependent upon when we determine an impairment has occurred. During the three and nine months ended September 30, 2019, we impaired assets that were under contract or actively marketed for sale at a disposition price that was less than carrying value, or that had other operational impairment indicators. The valuation technique used for the fair value of all impaired real estate assets was the expected net sales proceeds, which we consider to be a Level 2 input in the fair value hierarchy. There were no impairment charges recorded during the three and nine months ended September 30, 2020. On a quarterly basis, we employ a multi-step approach to assess our real estate assets for possible impairment and record any impairment charges identified. The first step is the identification of potential triggering events, such as significant decreases in occupancy or the presence of large dark or vacant spaces. If we observe any of these indicators for a shopping center, we then perform an additional screen test consisting of a years-to-recover analysis to determine if we will recover the net book value of the property over its remaining economic life based upon net operating income as forecasted for the current year. In the event that the results of this first step indicate a triggering event for a center, we proceed to the second step, utilizing an undiscounted cash flow model for the center to identify potential impairment. If the undiscounted cash flows are less than the net book value of the center as of the balance sheet date, we proceed to the third step. In performing the third step, we utilize market data such as capitalization rates and sales price per square foot on comparable recent real estate transactions to estimate fair value of the real estate assets. We also utilize expected net sales proceeds to estimate the fair value of any centers that are actively being marketed for sale. If the estimated fair value of the property is less than the recorded net book value at the balance sheet date, we record an impairment charge. In addition to these procedures, we also review undeveloped or unimproved land parcels that we own for evidence of impairment and record any impairment charges as necessary. Primary impairment triggers for these land parcels are changes to our plans or intentions with regards to such properties, or planned dispositions at prices that are less than the current carrying values. Our quarterly impairment procedures have not been altered by the COVID-19 pandemic, as we believe key impairment indicators such as temporary store closings and large dark or vacant spaces will continue to be identified in our review. We have utilized forecasts that incorporate estimated decreases in net operating income (“NOI”) and cash flows as a result of the COVID-19 pandemic in performing our review procedures for the three and nine months ended September 30, 2020. However, it is possible that we could experience unanticipated changes in assumptions that are employed in our impairment review which could impact our cash flows and fair value conclusions. Such unanticipated changes relative to our expectations may include but are not limited to: increases or decreases in the duration or permanence of tenant closures, increases or decreases in collectability reserves and write-offs, additional capital required to fill vacancies, extended lease-up periods, future closings of large tenants, changes in macroeconomic assumptions such as rate of inflation and capitalization rates, and changes to the estimated timing of disposition of the properties under review. 18 We recorded the following expense upon impairment of real estate assets (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Impairment of real estate assets $ — $ 35,710 $ — $ 74,626 Corporate Intangible Asset Impairment —In connection with our acquisition of PELP, we acquired a corporate intangible asset consisting of in-place management contracts. We evaluate our corporate intangible asset for impairment when a triggering event occurs, or circumstances change, that indicate the carrying value may not be recoverable. In June 2019, the suspension of the REIT III public offering constituted a triggering event for further review of the corporate intangible asset’s fair value compared to its carrying value. We estimated the fair value of the corporate intangible asset using a discounted cash flow model which leveraged certain Level 3 inputs. The evaluation of corporate intangible assets for potential impairment required management to exercise significant judgment and to make certain assumptions. The assumptions utilized in the evaluation included projected future cash flows and a discount rate of 19 %. Based on this analysis, we concluded the carrying value exceeded the estimated fair value of the corporate intangible asset, and an impairment charge of $ 7.8 million was recorded in Other Income (Expense), Net on the consolidated statements of operations in the second quarter of 2019. We have not noted any triggering events related to our corporate intangible asset, and accordingly have not recorded any impairments, subsequent to this date. 13. SUBSEQUENT EVENTS In preparing the condensed and unaudited consolidated financial statements, we have evaluated subsequent events through the filing of this report on Form 10-Q for recognition and/or disclosure purposes. Based on this evaluation, we have determined that there were no events that have occurred that require recognition or disclosure, other than certain events and transactions that have been disclosed elsewhere in these consolidated financial statements. 19