Item 1. Business
ITEM 1. BUSINESS
All references to “Notes” throughout this Annual Report on Form 10-K refer to the footnotes to the consolidated financial statements in “Part II, Item 8. Financial Statements and Supplementary Data”.
Overview
Phillips Edison & Company, Inc. (“we,” the “Company,” “PECO,” “our,” or “us”) is an internally-managed real estate investment trust (“REIT”) that is one of the nation’s largest owners and operators of grocery-anchored shopping centers. Additionally, we operate an investment management business providing property management and advisory services to third-party owned grocery-anchored real estate. Our portfolio primarily consists of well-occupied, grocery-anchored neighborhood and community shopping centers having a mix of national, regional, and local retailers providing necessity-based goods and services. Our locations in strong demographic markets throughout the United States provide omni-channel retailers with a solution for the last mile of delivery.
We were formed as a Maryland corporation in October 2009 and have elected to be taxed as a REIT for U.S. federal income tax purposes. Substantially all of our business is conducted through Phillips Edison Grocery Center Operating Partnership I, L.P. (“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, is the sole general partner of the Operating Partnership. The majority of our revenues are lease revenues derived from our owned real estate investments. In October 2017, we internalized our management structure through the acquisition of Phillips Edison Limited Partnership (“PELP”).
In November 2018, we completed a merger (the “Merger”) with Phillips Edison Grocery Center REIT II, Inc. (“REIT II”), a public non-traded REIT that was advised and managed by us (see Note 4). In the same month, we also contributed or sold 17 properties in the formation of Grocery Retail Partners I LLC (“GRP I”), a joint venture with Northwestern Mutual Life Insurance Company (“Northwestern Mutual”); see Note 7 for more detail.
On October 31, 2019, we completed a merger with Phillips Edison Grocery Center REIT III, Inc. (“REIT III”), a public non-traded REIT that was advised and managed by us, in a transaction valued at approximately $71 million. This resulted in the acquisition of three properties, as well as a 10% equity interest in Grocery Retail Partners II LLC (“GRP II”), a joint venture with Northwestern Mutual that owns three properties. On October 1, 2020, GRP I acquired GRP II, and our ownership in the combined entity was adjusted to approximately 14%; see Notes 5 and 7 for more detail.
As of December 31, 2020, we wholly-owned 283 real estate properties. Additionally, we owned a 20% equity interest in Necessity Retail Partners (“NRP”), a joint venture with an affiliate of TPG Real Estate that owned five properties, and a 14% interest in GRP I, which owned 20 properties. In total, our managed portfolio of wholly-owned properties and those owned through our joint ventures comprises approximately 34.4 million square feet located in 31 states.
Business Objectives and Strategies
Our business objective is to own, operate, and manage well-occupied, grocery-anchored shopping centers, which generate cash flows, income growth, and capital appreciation to create value for, and continue paying distributions to, our stockholders. We seek to achieve this objective through our focus on core operations; strategic growth and portfolio management; and responsible balance sheet management. Altogether, our goal is to provide great grocery-anchored shopping experiences and improve our communities one center at a time.
In response to the COVID-19 pandemic and the resulting economic downturn, we implemented various initiatives to mitigate the negative impact on our operations. Although we continue to address challenges brought about by the pandemic, our overall business objectives and strategies remain principally unchanged.
Focus on Core Operations —We believe our focus on our operating fundamentals will continue to provide stability and ultimately generate growth in our portfolio and optimize returns for our stockholders.
• Property Management Services—We add value by overseeing all aspects of operations at our properties. Our property managers maintain a local presence in order to effectively manage costs while maintaining a pleasant, clean, and safe environment where retailers can be successful and customers can enjoy a great shopping experience. We utilize our centralized accounting, billing, and tax review platform to facilitate our daily operations.
• Leasing—Our national footprint of experienced leasing professionals is dedicated to (i) creating the optimal merchandising mix at our centers, (ii) increasing occupancy at our centers, (iii) maximizing rental income through capitalizing on below-market rent opportunities by means of increasing rents as leases expire, and (iv) executing leases with contractual rent increases. In response to the COVID-19 pandemic, our capital expenditures were prioritized in part to support new leasing activity.
Strategic Growth and Portfolio Management —Our goal is to identify growth opportunities within our portfolio of properties as well through the use of our existing management resources and knowledge.
• Development and Redevelopment—Our team of seasoned professionals identifies opportunities to unlock additional value at our properties through investments in our development and redevelopment program. Our strategies include outparcel development, footprint reconfiguration, anchor repositioning, and anchor expansion, among others. While our capital expenditures were prioritized in 2020 to support new leasing activity, we continue to look for development and redevelopment opportunities to increase the overall yield and value of our properties, which will allow us to generate higher returns for our stockholders while creating great grocery-anchored shopping center experiences.
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• Investment Management—Our investment management business provides comprehensive real estate, asset management, and accounting and support services to third-party funds. Although the uncertainty surrounding the financial and real estate markets as a result of the COVID-19 pandemic has slowed the pace of joint venture and other growth opportunities, we believe that our investment management business will expand our platform and relationships while preserving our balance sheet and will afford us the opportunity to consider acquisitions in the future similar to what we have done historically.
Responsible Balance Sheet Management —Our strategy is to improve and monitor our leverage ratios and debt maturities and dispose of certain shopping centers in order to maximize our potential future valuation in the public equity markets. We believe this is a critical part of maintaining access to multiple forms of capital, including common stock, unsecured debt, bank debt, and mortgage debt, to maximize availability and minimize our overall cost of capital.
• Disposition Program—We are actively evaluating our portfolio for opportunities to dispose of assets that no longer meet our growth and investment objectives due to stabilization or perceived future risk. These dispositions provide us with capital to fund acquisitions, fund redevelopment opportunities at owned properties, and reduce our leverage.
• Debt Maturity Profile—We have prioritized maintaining an appropriately staggered debt maturity profile, which will position us for long-term growth. Our outstanding debt obligations are composed primarily of unsecured debt, including term loans and a revolving credit facility, and secured mortgage debt. Certain of our upcoming unsecured debt agreements include options to extend their maturities, which provide flexibility in managing refinancing through changing market conditions.
Competition
We are subject to significant competition in seeking real estate investments and tenants (whom we refer to as a “Neighbor” or our “Neighbors”). We compete with many third parties engaged in real estate investment activities including other REITs, specialty finance companies, savings and loan associations, banks, insurance companies, mutual funds, institutional investors, investment banking firms, hedge funds, and other persons. Some of these competitors, including larger REITs, have greater financial resources than we do and may potentially enjoy competitive advantages that primarily result from increased access to capital, lower cost of capital, and enhanced operating efficiencies. In addition to these entities, we also face competition from smaller landlords and companies at the local level in seeking Neighbors to occupy our shopping centers. This further increases the number of competitors we have and the type of competition that we face in seeking to execute on our business objectives and strategies.
Segment Data
Our principal business is the ownership and operation of community and neighborhood shopping centers. We do not distinguish our principal business or group our operations by geography or size for purposes of measuring performance. Accordingly, we have presented our results as a single reportable segment.
Government Regulation
Compliance with various governmental regulations has an impact on our business, including our capital expenditures, earnings, and competitive position. The impact of these governmental regulations can be material to our business. We incur costs to monitor and take action to comply with governmental regulations that are applicable to our business, which include, among others: federal securities laws and regulations; REIT and other tax laws and regulations; environmental and health and safety laws and regulations; local zoning, usage and other regulations relating to real property; and the Americans with Disabilities Act of 1990, as amended (“ADA”). See “Part I, Item 1A. Risk Factors” of this filing on Form 10-K for a discussion of material risks to us (including those, to the extent material to our competitive position, relating to governmental regulations) and see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this filing on Form 10-K, together with our consolidated financial statements and accompanying footnotes, for a discussion of material information relevant to an assessment of our financial condition and results of operations (including, to the extent material, the effects that compliance with governmental regulations may have upon our capital expenditures and earnings).
Human Capital
As of December 31, 2020, we had approximately 300 associates located in 20 states across the country, with concentrations in our corporate offices in Cincinnati, Ohio; Park City, Utah; and Atlanta, Georgia. Approximately 55% of our workforce is female and 45% is male. Our senior leadership team is 19% female and 81% male, while manager roles and above are approximately 40% female and 60% male. For the year ended December 31, 2020, our overall turnover rate was 17%, with voluntary turnover being 10%.
Our human capital objectives include, as applicable, identifying, recruiting, retaining, developing, incentivizing, and integrating our existing and prospective employees. We provide associates with competitive salaries, bonuses, incentives, and opportunities for equity ownership. One unique aspect of our compensation philosophy is that each associate in the organization, regardless of level or tenure, has the opportunity for equity grants on an annual basis. During the year ended December 31, 2020, 100% of eligible associates received grants of service-based restricted stock units in the Company. Upon vesting, associates will receive actual shares of common stock, which we believe encourages our employees to think like owners of the Company.
We recognize the importance of the health, safety, and environmental well-being of our employees, and are committed to providing and maintaining a healthy work environment. Our 2020 all-associate engagement survey, which had an 89% participation rate, showed 84% overall engagement, and 91% of associates reported they felt proud to tell people where they work, compared to an 80% global average as reported by Qualtrics XM, while 93% of associates felt they could be successful at the Company. In 2020, we were named a top place to work by the Cincinnati Enquirer for the fourth year in a row. We also won special recognition each of the past four years, including being recognized for “clued-in senior management” in 2020.
Our strong culture and commitment to inclusion is reinforced by two associate-led business resource groups: PECO MORE (Multicultural Opportunities, Resources & Education), and PECO NOW (Networking Opportunities for Women). PECO MORE is
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dedicated to furthering diversity and inclusion within the Company, the communities that we serve, and the commercial real estate industry. In June 2020, PECO MORE hosted “BEGIN” conversations, a series of 23 small group discussions, attended by approximately 50% of the workforce, designed to “begin” dialogue around diversity, inclusion, and equity. PECO MORE’s programming has focused on providing education, raising awareness, and hosting events around Veterans Day, the Chinese New Year, Black History Month, Pride Month, and Women’s History Month. PECO NOW’s mission is to provide leadership opportunities to women through advocacy, support, scholarship, and development. PECO NOW was recognized for excellence by the International Council of Shopping Centers in 2016.
“Always Keep Learning” is one of our core values. Each year, we sponsor an annual meeting that provides associates with the ability to hear directly from company leadership about our performance, goals, and strategy. We host external speakers to facilitate discussions on relevant industry topics, and educational roundtables are led by internal subject-matter experts. This annual learning event provides associates with the information needed to understand how their roles and responsibilities directly impact the Company’s performance and growth. Associates are also kept apprised of company information through town halls conducted throughout the year. While the COVID-19 pandemic impacted many planned learning opportunities in 2020, we focused on providing managers with skills-based training to coach their associates and navigate through tough conversations while addressing virtual team challenges. We look forward to returning to a regular learning cycle in 2021, adapted for the COVID-19 environment, with an inaugural virtual Core Values Week in February 2021.
Our “Beyond Benefits” wellness program focuses on our associates’ emotional, physical, and financial well-being. Together with an external partner, we offer a full wellness platform providing Health Savings Account incentive contributions for biometric screening results, preventive care, and activity-based items such as step counts, nutrition tracking, and workout activity minutes. To keep remote associates engaged during 2020, we held six wellness challenges where individuals and teams could earn incentive dollars for winning competitions that tracked steps, workout activity, and water consumption. Such efforts have facilitated a continued dedication to wellness and preventive care among our associates, and as a result, we were recognized by Healthiest Employers LLC as one of the “Healthiest Employers of Ohio” in 2020.
We are also committed to ensuring that the operations at all of our properties and corporate offices are conducted in a manner that safeguards the health and safety of employees, Neighbors, contractors, and members of the public who are either present at, or affected by, operations at these locations. This commitment increased in importance in 2020 due to the unique challenges posed by the COVID-19 pandemic, and we continue to work with all of our stakeholders to mitigate the pandemic’s impact.
In addition to the increased number of activity-based individual and team challenges, we maintained a proactive approach to all aspects of well-being during the COVID-19 pandemic, with a specific focus on mental health, including offering virtual Meditation and Mindfulness sessions throughout the spring and summer of 2020. We also maintained an intranet page with information related to COVID-19, work-from-home tips, and services available to associates, such as multiple free virtual fitness app memberships and a mental health, meditation and mindfulness app. Our communications team sent out regular company-wide emails to keep associates connected with helpful practical information, as well as fun topics such as healthy recipes and photos of our associates’ at-home office spaces and new “co-workers.”
Corporate Headquarters
Our corporate headquarters, located at 11501 Northlake Drive, Cincinnati, Ohio 45249, is where we conduct a majority of our management, leasing, construction, and investment activities, as well as administrative functions such as accounting and finance. Additionally, we maintain two regional offices located in Atlanta, Georgia and Park City, Utah.
Access to Company Information
We electronically file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy and Information statements, and all amendments to those reports with the U.S. Securities and Exchange Commission (“SEC”). The SEC maintains an Internet site at www.sec.gov that contains the reports, proxy and information statements, and other information regarding issuers, including ours that are filed electronically.
We make available, free of charge, the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports on our website, www.phillipsedison.com . These reports are available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Also available on our website are (i) our Corporate Governance Guidelines, (ii) our Code of Business Conduct and Ethics, and (iii) our Whistleblower Policy. In the event of any changes to these documents, revised copies will be made available on our website. The contents of our website are not incorporated by reference.