Phillips Edison & Company, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our accompanying consolidated financial statements and notes thereto. All references to “Notes” throughout this document refer to the footnotes to the consolidated financial statements in “Part I, Item 1. Financial Statements”. See also “Cautionary Note Regarding Forward-Looking Statements” below. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in this Quarterly Report on Form 10-Q (this “Report”) of Phillips Edison & Company, Inc. (“we,” the “Company,” “our,” or “us”) 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”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995 (collectively with the Securities Act and the Exchange Act, the “Acts”). We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in the Acts. Such forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “can,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” “possible,” “initiatives,” “focus,” “seek,” “objective,” “goal,” “strategy,” “plan,” “potential,” “potentially,” “preparing,” “projected,” “future,” “long-term,” “once,” “should,” “could,” “would,” “might,” “uncertainty,” or other similar words. 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. Such statements include, but are not limited to, (a) statements about our plans, strategies, initiatives, and prospects; (b) statements about the COVID-19 pandemic, including its duration and potential or expected impact on our tenants, our business, and our view on forward trends; (c) statements about our underwritten incremental yields; and (d) statements about our future results of operations, capital expenditures, and liquidity. Such statements are subject to known and unknown risks and uncertainties, which could cause actual results to differ materially from those projected or anticipated, including, without limitation: (i) changes in national, regional, or local economic climates; (ii) local market conditions, including an oversupply of space in, or a reduction in demand for, properties similar to those in our portfolio; (iii) vacancies, changes in market rental rates, and the need to periodically repair, renovate, and re-let space; (iv) competition from other available shopping centers and the attractiveness of properties in our portfolio to our tenants; (v) the financial stability of our tenants, including, without limitation, their ability to pay rent; (vi) our ability to pay down, refinance, restructure, or extend our indebtedness as it becomes due; (vii) increases in our borrowing costs as a result of changes in interest rates and other factors, including the potential phasing out of LIBOR after 2021; (viii) potential liability for environmental matters; (ix) damage to our properties from catastrophic weather and other natural events, and the physical effects of climate change; (x) our ability and willingness to maintain our qualification as a REIT in light of economic, market, legal, tax, and other considerations; (xi) changes in tax, real estate, environmental, and zoning laws; (xii) information technology security breaches; (xiii) our corporate responsibility initiatives; (xiv) loss of key executives; (xv) the measures taken by federal, state, and local government agencies and tenants in response to the COVID-19 pandemic, including mandatory business shutdowns, “stay-at-home” orders and social distancing guidelines, the duration of any such measures and the extent to which the revenues of our tenants recover following the lifting of such restrictions; (xvi) the effectiveness or lack of effectiveness of governmental relief in providing assistance to individuals and businesses adversely impacted by the COVID-19 pandemic, including our tenants; (xvii) the effects of the COVID-19 pandemic, including on the demand for consumer goods and services and levels of consumer confidence in the safety of visiting shopping centers as a result of the COVID-19 pandemic; (xviii) the impact of the COVID-19 pandemic on our tenants and their ability and willingness to renew their leases upon expiration; (xix) our ability to re-lease our properties on the same or better terms, or at all, in the event of non-renewal or in the event we exercise our right to replace an existing tenant; (xx) the loss or bankruptcy of our tenants, particularly in light of the adverse impact to the financial health of many retailers and service providers that has occurred and continues to occur as a result of the COVID-19 pandemic; (xxi) the pace of recovery following the COVID-19 pandemic given its unpredictable nature and impact on macroeconomic conditions; (xxii) to the extent we were seeking to dispose of properties in the near term, significantly greater uncertainty regarding our ability to do so at attractive prices or at all; and (xxiii) our ability to implement cost containment strategies. Additional important factors that could cause actual results to differ are described in the filings made from time to time by the Company with the SEC and include the risk factors and other risks and uncertainties described in our 2020 Annual Report on Form 10-K, as originally filed with the SEC on March 12, 2021, and any subsequently filed Quarterly Reports on Form 10-Q, in each case as updated from time to time in our periodic and/or current reports filed with the SEC, which are accessible on the SEC’s website at www.sec.gov. Except as required by law, we do not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. KEY PERFORMANCE INDICATORS AND DEFINED TERMS We use certain key performance indicators (“KPIs”), which include both financial and nonfinancial metrics, to measure the performance of our operations. We believe these KPIs, as well as the core concepts and terms defined below, allow our Board, management, and investors to analyze trends around our business strategy, financial condition, and results of operations in a manner that is focused on items unique to the retail real estate industry. We do not consider our non-GAAP measures to be alternatives to measures required in accordance with GAAP. Certain non-GAAP measures should not be viewed as an alternative measure of our financial performance as they may not reflect the operations of our entire portfolio, and they may not reflect the impact of general and administrative expenses, depreciation and amortization, interest expense, other income (expense), or the level of capital expenditures and leasing costs necessary PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2021 FORM 10-Q 21 to maintain the operating performance of our shopping centers that could materially impact our results from operations. Additionally, certain non-GAAP measures should not be considered as an indication of our liquidity, nor as an indication of funds available to cover our cash needs, including our ability to fund distributions, and may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate our business in the manner currently contemplated. Accordingly, non-GAAP measures should be reviewed in connection with other GAAP measurements, and should not be viewed as more prominent measures of performance than net income (loss) or cash flows from operations prepared in accordance with GAAP. Other REITs may use different methodologies for calculating similar non-GAAP measures, and accordingly, our non-GAAP measures may not be comparable to other REITs. Our KPIs and terminology can be grouped into three key areas: PORTFOLIO —Portfolio metrics help management to gauge the health of our centers overall and individually. • Anchor space—We define an anchor space as a space greater than or equal to 10,000 square feet of gross leasable area (“GLA”). • ABR—We use ABR to refer to the monthly contractual base rent as of September 30, 2021 multiplied by twelve months. • ABR per Square Foot (“PSF”)—This metric is calculated by dividing ABR by leased GLA. Increases in ABR PSF can be an indication of our ability to create rental rate growth in our centers, as well as an indication of demand for our spaces, which generally provides us with greater leverage during lease negotiations. • GLA—We use GLA to refer to the total occupied and unoccupied square footage of a building that is available for tenants (whom we refer to as a “Neighbor” or our “Neighbors”) or other retailers to lease. • Inline space—We define an inline space as a space containing less than 10,000 square feet of GLA. • Leased Occupancy—This metric is calculated as the percentage of total GLA for which a lease has been signed regardless of whether the lease has commenced or the Neighbor has taken possession. High occupancy is an indicator of demand for our spaces, which generally provides us with greater leverage during lease negotiations. • Underwritten incremental yield—This reflects the yield we target to generate from a project upon expected stabilization and is calculated as the estimated incremental NOI for a project at stabilization divided by its estimated net project investment. The estimated incremental NOI is the difference between the estimated annualized NOI we target to generate by project upon stabilization and the estimated annualized NOI without the planned improvements. Underwritten incremental yield does not include peripheral impacts, such as lease rollover risk or the impact on the long term value of the property upon sale or disposition. Actual incremental yields may vary from our underwritten incremental yield range based on the actual total cost to complete a project and its actual incremental NOI at stabilization. LEASING —Leasing is a key driver of growth for our company. • Comparable lease—We use this term to refer to a lease with consistent structure that is executed for substantially the exact same space that has been vacant less than twelve months. • Comparable rent spread—This metric is calculated as the percentage increase or decrease in first-year ABR (excluding any free rent or escalations) on new or renewal leases (excluding options) where the lease was considered a comparable lease. This metric provides an indication of our ability to generate revenue growth through leasing activity. • Cost of executing new leases—We use this term to refer to certain costs associated with new leasing, namely, leasing commissions, tenant improvement costs, and tenant concessions. • Portfolio retention rate—This metric is calculated by dividing (i) total square feet of retained Neighbors with current period lease expirations by (ii) the total square feet of leases expiring during the period. The portfolio retention rate provides insight into our ability to retain Neighbors at our shopping centers as their leases approach expiration. Generally, the costs to retain an existing Neighbor are lower than costs to replace with a new Neighbor. • Recovery rate—This metric is calculated by dividing (i) total recovery income by (ii) total recoverable expenses during the period. A high recovery rate is an indicator of our ability to recover certain property operating expenses and capital costs from our Neighbors. FINANCIAL PERFORMANCE —In addition to financial metrics calculated in accordance with GAAP, such as net income, we utilize non-GAAP metrics to measure our operational and financial performance. See the section within this Item 2 titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Measures” for further discussion on the following metrics. • Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization for Real Estate (“Adjusted EBITDA re ”)—To arrive at Adjusted EBITDA re , we adjust EBITDA re , as defined below, to exclude certain recurring and non-recurring items including, but not limited to: (i) changes in the fair value of the earn-out liability; (ii) other impairment charges; (iii) amortization of basis differences in our investments in our unconsolidated joint ventures; and (iv) transaction and acquisition expenses. We use EBITDA re and Adjusted EBITDA re as additional measures of operating performance which allow us to compare earnings independent of capital structure and evaluate debt leverage and fixed cost coverage. • Core Funds From Operations (“Core FFO”)—To arrive at Core FFO, we adjust Nareit FFO attributable to stockholders and OP unit holders, as defined below, to exclude certain recurring and non-recurring items including, but not limited to: (i) depreciation and amortization of corporate assets; (ii) changes in the fair value of the earn-out liability; (iii) amortization of unconsolidated joint venture basis differences; (iv) gains or losses on the extinguishment or PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2021 FORM 10-Q 22 modification of debt, (v) other impairment charges; and (vi) transaction and acquisition expenses. We believe Nareit FFO provides insight into our operating performance as it excludes certain items that are not indicative of such performance. Core FFO provides further insight into the sustainability of our operating performance and provides an additional measure to compare our performance across reporting periods on a consistent basis by excluding items that may cause short-term fluctuations in net income (loss). • EBITDA re —The National Association of Real Estate Investment Trusts (“Nareit”) defines EBITDA re as net income (loss) computed in accordance with GAAP before: (i) interest expense; (ii) income tax expense; (iii) depreciation and amortization; (iv) gains or losses from disposition of depreciable property; and (v) impairment write-downs of depreciable property. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect EBITDA re on the same basis. • Equity Market Capitalization—We calculate equity market capitalization as the total dollar value of all outstanding shares. • Nareit FFO—Nareit defines FFO as net income (loss) computed in accordance with GAAP, excluding: (i) gains (or losses) from sales of property and gains (or losses) from change in control; (ii) depreciation and amortization related to real estate; (iii) impairment losses on real estate and impairments of in-substance real estate investments in investees that are driven by measurable decreases in the fair value of the depreciable real estate held by the unconsolidated partnerships and joint ventures; and (iv) adjustments for unconsolidated partnerships and joint ventures, calculated to reflect FFO on the same basis. We calculate Nareit FFO in a manner consistent with the Nareit definition. • Net Debt—We calculate net debt as total debt, excluding market adjustments and deferred financing expenses, less cash and cash equivalents. • Net Debt to Adjusted EBITDA re —This ratio is calculated by dividing net debt by Adjusted EBITDA re (included on an annualized basis within the calculation). It provides insight into our leverage rate based on earnings and is not impacted by fluctuations in our equity price. • Net Debt to Total Enterprise Value—This ratio is calculated by dividing net debt by total enterprise value, as defined below. It provides insight into our capital structure and usage of debt. • NOI—We calculate NOI as total operating revenues, adjusted to exclude non-cash revenue items, less property operating expenses and real estate taxes. NOI provides insight about our financial and operating performance because it provides a performance measure of the revenues and expenses directly involved in owning and operating real estate assets and provides a perspective not immediately apparent from net income (loss). • Same-Center—We use this term to refer to a property, or portfolio of properties, that has been owned and operational for the entirety of each reporting period (i.e., since January 1, 2020). • Total Enterprise Value—We calculate total enterprise value as our net debt plus our equity market capitalization on a fully diluted basis. OVERVIEW We are a REIT and one of the nation’s largest owners and operators of omni-channel grocery-anchored neighborhood and community shopping centers. The majority of our revenue is lease revenue derived from our real estate investments. Additionally, we operate an investment management business providing property management and advisory services to over $460 million of unconsolidated joint ventures. This business provides comprehensive real estate and asset management services to the Managed Funds. As of September 30, 2021, we wholly-owned 267 real estate properties. Additionally, we owned a 14% interest in GRP I, a joint venture that owned 20 properties, and a 20% interest in NRP, a joint venture that owned two properties. RECAPITALIZATION —On June 18, 2021, our stockholders approved Articles of Amendment that effected the Recapitalization, wherein each share of our common stock outstanding at the time the amendment became effective was converted into one share of a newly created class of Class B common stock. The Articles of Amendment became effective upon filing with, and acceptance by, the State Department of Assessments and Taxation of Maryland on July 2, 2021. Unless otherwise indicated, all information in this Form 10-Q gives effect to the Recapitalization and references to “shares” and per share metrics refer to our common stock and Class B common stock, collectively (see Note 9). REVERSE STOCK SPLIT —On July 2, 2021, our Board approved an amendment to our articles of incorporation to effect a one-for-three reverse stock split. Concurrent with the reverse split, the Operating Partnership enacted a one-for-three reverse split of its outstanding OP units. Unless otherwise indicated, the information in this Form 10-Q gives effect to the reverse stock and OP unit splits (see Note 9). UNDERWRITTEN INITIAL PUBLIC OFFERING —On July 19, 2021, we closed our underwritten IPO, through which we offered 17.0 million shares of a new class of common stock, $0.01 par value per share, at an initial price to the public of $28.00 per share, pursuant to a registration statement filed with the SEC on Form S-11 (File No. 333-255846), as amended. In connection with the underwritten IPO, the underwriters exercised a 30-day option to purchase additional shares of common stock to cover overallotments, and, accordingly, on August 2, 2021, we settled the sale of an additional 2.6 million shares at a price of $28.00 per share. These shares are listed on NASDAQ under the trading symbol “PECO”. The underwritten IPO, including the underwriters overallotment election, resulted in gross proceeds of $547.4 million. PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2021 FORM 10-Q 23 On August 4, 2021, as a result of our underwritten IPO, our Board approved the termination of the DRIP and the SRP. 2021 BOND OFFERING —In October 2021, in connection with our Bond Registration, we settled the 2021 Bond Offering priced at 98.692% of the principal amount and maturing in November 2031. This offering resulted in gross proceeds of $345.4 million. The notes are fully and unconditionally guaranteed by us. COVID-19 STRATEGY —During 2020, as a result of the COVID-19 pandemic, many state governments issued “stay-at-home” mandates that generally limited travel and movement of the general public to essential activities only and required all non-essential businesses to close. All statistics and financial results included in this COVID-19 Strategy section are approximate and include the prorated portion attributable to properties owned through our joint ventures. Our management team determined the recovery of our portfolio was dependent on the execution of key actions, including guiding our Neighbors toward returning to monthly rent payments, recovering missed charges, and monitoring for credit risk. Our actions in conjunction with the resiliency of our tenant mix has led to improved collections from the second quarter of 2020. Further, we believe our collections have returned to levels consistent with those prior to the onset of the pandemic. The following table summarizes our collections by quarter, as they were originally reported as well as updated for payments received subsequent to the month billed: Originally Reported Current (1) Q2 2020 86 % 93 % Q3 2020 94 % 97 % Q4 2020 95 % 97 % Q1 2021 95 % 98 % Q2 2021 98 % 99 % Q3 2021 N/A 99 % (1) Collections include those received through October 20, 2021. We believe substantially all Neighbors, including those that were required to temporarily close under governmental mandates, are contractually obligated to continue with their rent payments as documented in our lease agreements with them. However, we decided to negotiate relief for a small subset of our Neighbors, including rent deferrals. As of October 20, 2021, we have $4.2 million of outstanding payment plans with our Neighbors of which approximately 28% are scheduled to be received by December 31, 2021. As of October 20, 2021, the weighted-average term over which we expect to receive remaining amounts owed on executed payment plans is approximately eleven months. We cannot guarantee that we will ultimately be able to collect these amounts. Despite seeing improvements in collections for current and past due amounts during 2021, the negative impact the pandemic has had on our Neighbors continues to be considered in our evaluation of Neighbors who potentially pose a credit risk. For Neighbors with a higher degree of uncertainty as to their creditworthiness, we may not record revenue for amounts billed until the cash is received. For the three and nine months ended September 30, 2021, we had $0.6 million and $4.2 million, respectively, in net unfavorable monthly revenue adjustments for Neighbors who are being accounted for on a cash basis. For the three and nine months ended September 30, 2020, we had $5.3 million and $20.3 million, respectively, in net unfavorable monthly revenue adjustments for Neighbors who were being accounted for on a cash basis. As of September 30, 2021, our Neighbors currently being accounted for on a cash basis represented approximately 8% of our total Neighbor spaces, or approximately 7.3% of portfolio ABR. Further, many of our Neighbors who are on a cash basis of accounting are actively making payments toward their outstanding balances. When considering the ABR associated with Neighbors who are currently on a cash basis of accounting, 79% of this ABR is represented by Neighbors who are actively making payments. Additionally, certain of our Neighbors entered into bankruptcy proceedings. We believe that Neighbors in the bankruptcy process represent an exposure of less than 1% of our total portfolio ABR as of September 30, 2021. We have included our assessment of the impact of these bankruptcies in our estimate of rent collectibility, which impacted recorded revenue, as noted previously. Certain of our Neighbors were unable to remain in their spaces as a result of the factors previously noted. Despite this fallout, our leasing activity has been strong as demand for space in our centers remains high, allowing us to re-lease these spaces to Neighbors who may increase our concentration of necessity-based and omni-channel retailers. For the three and nine months ended September 30, 2021, our wholly-owned portfolio retention rate was 91.2% and 88.3%, respectively. Additionally, for the three and nine months ended September 30, 2021, for our wholly-owned portfolio, we executed 140 and 417 new leases, respectively, each an increase as compared to the same period a year ago. PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2021 FORM 10-Q 24 PORTFOLIO AND LEASING STATISTICS —Below are statistical highlights of our wholly-owned portfolio as of September 30, 2021 and 2020 (dollars and square feet in thousands): September 30, 2021 September 30, 2020 Number of properties 267 283 Number of states 31 31 Total square feet 30,443 31,731 ABR $ 388,272 $ 385,375 % ABR from omni-channel grocery-anchored shopping centers 96.3 % 97.0 % Leased % of rentable square feet: Total portfolio spaces 95.6 % 95.3 % Anchor spaces 97.6 % 98.3 % Inline spaces 91.9 % 89.5 % Average remaining lease term (in years) (1) 4.6 4.5 (1) The average remaining lease term in years excludes future options to extend the term of the lease. The following table details information for our joint ventures as of September 30, 2021, which is the basis for determining the prorated information included in the subsequent tables (dollars and square feet in thousands): September 30, 2021 Joint Venture Ownership Percentage Number of Properties ABR GLA Grocery Retail Partners I 14% 20 $ 29,222 2,214 Necessity Retail Partners 20% 2 4,004 228 PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2021 FORM 10-Q 25 LEASE EXPIRATIONS —The following chart shows the aggregate scheduled lease expirations, excluding our Neighbors who are occupying space on a temporary basis, after September 30, 2021 for each of the next ten years and thereafter for our wholly-owned properties and the prorated portion of those owned through our joint ventures: Our ability to create rental rate growth generally depends on our leverage during new and renewal lease negotiations with prospective and existing Neighbors, which typically occurs when occupancy at our centers is high or during periods of economic growth and recovery. Conversely, we may experience rental rate decline when occupancy at our centers is low or during periods of economic recession, as the leverage during new and renewal lease negotiations may shift to prospective and existing Neighbors. See “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Leasing Activity” of this filing on Form 10-Q for further discussion of leasing activity. PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2021 FORM 10-Q 26 PORTFOLIO TENANCY —We define national Neighbors as those Neighbors that operate in at least three states. Regional Neighbors are defined as those Neighbors that have at least three locations in fewer than three states. The following charts present the composition of our portfolio, including our wholly-owned properties and the prorated portion of those owned through our joint ventures, by Neighbor type as of September 30, 2021: The following charts present the composition of our portfolio by Neighbor industry as of September 30, 2021: PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2021 FORM 10-Q 27 NECESSITY-BASED GOODS AND SERVICES —We define “Necessity-based goods and services” as goods and services that are indispensable, necessary, or common for day-to-day living, or that tend to be inelastic (i.e., those for which the demand does not change based on a consumer’s income level). We estimate that approximately 72% of our ABR, including the pro rata portion attributable to properties owned through our joint ventures, is from Neighbors providing necessity-based goods and services. Additionally, within Necessity-based goods and services, we estimate that approximately 50% of our ABR is from retail and service businesses generally deemed essential under most state and local mandates issued in response to the COVID-19 pandemic, including those that may have temporarily closed at various points during the pandemic due to decreases in foot traffic and customer patronage as a result of “stay-at-home” mandates and social distancing guidelines implemented in response to the pandemic. TOP TWENTY NEIGHBORS —The following table presents our top twenty Neighbors by ABR, including our wholly-owned properties and the prorated portion of those owned through our joint ventures, as of September 30, 2021 (dollars and square feet in thousands): Neighbor (1) ABR % of ABR Leased Square Feet % of Leased Square Feet Number of Locations (2) Kroger $ 25,830 6.6 % 3,244 11.0 % 59 Publix 23,145 5.9 % 2,304 7.8 % 57 Ahold Delhaize 17,113 4.4 % 1,204 4.1 % 22 Albertsons-Safeway 16,804 4.3 % 1,599 5.4 % 29 Walmart 8,933 2.3 % 1,770 6.0 % 13 Giant Eagle 7,924 2.0 % 828 2.8 % 11 TJX Companies 5,205 1.3 % 445 1.5 % 16 Sprouts Farmers Market 5,000 1.3 % 334 1.1 % 11 Raley's 3,884 1.0 % 253 0.9 % 4 Dollar Tree 3,448 0.9 % 351 1.2 % 37 SUPERVALU 3,209 0.8 % 336 1.1 % 5 Subway Group 2,633 0.7 % 106 0.4 % 75 Anytime Fitness, Inc. 2,598 0.7 % 166 0.6 % 34 Schnucks 2,545 0.6 % 249 0.8 % 4 Lowe's 2,470 0.6 % 369 1.3 % 4 Kohl's Corporation 2,241 0.6 % 365 1.3 % 4 Food 4 Less (PAQ) 2,215 0.6 % 118 0.4 % 2 Save Mart 2,174 0.6 % 258 0.9 % 5 Petco Animal Supplies, Inc. 2,130 0.5 % 127 0.4 % 11 Big Y 2,022 0.5 % 115 0.4 % 3 Total $ 141,523 36.2 % 14,541 49.4 % 406 (1) Neighbors are grouped by parent company and may represent multiple subsidiaries and banners. (2) Number of locations excludes auxiliary leases with grocery anchors such as fuel stations, pharmacies, and liquor stores. Additionally, in the event that a parent company has multiple subsidiaries or banners in a single shopping center, those subsidiaries are included as one location. RESULTS OF OPERATIONS KNOWN TRENDS AND UNCERTAINTIES OF THE COVID-19 PANDEMIC —The COVID-19 pandemic resulted in reduced revenues beginning with the second quarter of 2020 and continuing through early 2021, and our estimates around collectibility will likely continue to create volatility in our earnings. Although we have seen improved collections of current and past due rent amounts during 2021, the total impact of such collections and estimates around collectibility on revenue is still volatile at this time. The duration of the pandemic and mitigating measures, and the resulting economic impact, has caused some of our Neighbors to permanently vacate their spaces and/or not renew their leases, and we may have difficulty leasing these spaces on the same or better terms or at all, and/or incur additional costs to lease vacant spaces, which may reduce our occupancy rates in the future and ultimately reduce our revenue. Extended periods of vacancy or reduced revenues may trigger impairments of our real estate assets. We believe that our investment focus on grocery-anchored shopping centers that provide daily necessities has helped and will continue to help lessen the negative effect of the pandemic on our business compared to non-grocery anchored shopping centers. PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2021 FORM 10-Q 28 SUMMARY OF OPERATING ACTIVITIES FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 Three Months Ended September 30, Favorable (Unfavorable) Change (Dollars in thousands) 2021 2020 $ % (1) Revenues: Rental income $ 128,826 $ 123,298 $ 5,528 4.5 % Fee and management income 2,435 2,581 (146) (5.7) % Other property income 1,073 816 257 31.5 % Total revenues 132,334 126,695 5,639 4.5 % Operating Expenses: Property operating expenses 21,608 20,835 (773) (3.7) % Real estate tax expenses 16,375 17,282 907 5.2 % General and administrative expenses 11,627 9,595 (2,032) (21.2) % Depreciation and amortization 53,901 56,095 2,194 3.9 % Impairment of real estate assets 698 — (698) NM Total operating expenses 104,209 103,807 (402) (0.4) % Other: Interest expense, net (18,570) (20,388) 1,818 8.9 % Gain on disposal of property, net 14,093 10,734 3,359 31.3 % Other (expense) income, net (7,086) 196 (7,282) NM Net income 16,562 13,430 3,132 23.3 % Net income attributable to noncontrolling interests (1,929) (1,646) (283) (17.2) % Net income attributable to stockholders $ 14,633 $ 11,784 $ 2,849 24.2 % (1) Line items that result in a percent change that exceed certain limitations are considered not meaningful (“NM”) and indicated as such. Our basis for analyzing significant fluctuations in our results of operations generally includes review of the results of our same-center portfolio, non-same-center portfolio, and revenues and expenses from our management activities. We define our same-center portfolio as the 261 properties that were owned and operational prior to January 1, 2020. We define our non-same-center portfolio as those properties that were not fully owned and operational in both periods owing to real estate asset activity occurring after December 31, 2019, which includes 26 properties disposed of and six properties acquired. Below are explanations of the significant fluctuations in the results of operations for the three months ended September 30, 2021 and 2020: Rental Income increased $5.5 million as follows: • $7.9 million increase related to our same-center portfolio primarily as follows: ▪ $5.6 million increase primarily due to stronger collections in 2021 as compared with lower collections in 2020, the increase owing largely to the ongoing recovery of our portfolio in the wake of the COVID-19 pandemic and its economic impact, including a decrease in Neighbors we have identified as a credit risk; and ▪ $2.2 million increase primarily due to a $0.53 increase in average minimum rent per square foot, partially offset by a 0.8% decline in average occupancy. • $2.4 million decrease primarily related to our net disposition of 20 properties. Property Operating Expenses increased $0.8 million primarily as follows: • $1.1 million increase related to our same-center portfolio and corporate operating activities as follows: ▪ $0.6 million increase owing largely to lower performance-based compensation in 2020 as a result of the COVID-19 pandemic, as compared to 2021; and ▪ $0.5 million increase in insurance expenses primarily due to higher market rates and an increase in claims and claim development. • $0.4 million decrease related to our net disposition of 20 properties. Real Estate Tax Expenses: • The $0.9 million decrease in real estate tax expenses is primarily due to successful tax appeals and favorable assessments at our centers, as well as our net disposition of 20 properties. General and Administrative Expenses increased $2.0 million primarily as follows: • $1.5 million increase owing largely to lower expense for performance-based compensation in 2020 as a result of the COVID-19 pandemic, as compared to 2021; and PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2021 FORM 10-Q 29 • $0.5 million increase primarily due to an increase in directors and officers insurance costs as a result of our underwritten IPO. Depreciation and Amortization decreased $2.2 million as follows: • $1.2 million decrease related to our net disposition of 20 properties; and • $1.0 million decrease related to our same-center portfolio and corporate operating activities, primarily due to intangible assets becoming fully amortized. Interest Expense, Net: • The $1.8 million decrease during the three months ended September 30, 2021 as compared to the same period in 2020 was due to lower outstanding debt as a result of repayments. Interest Expense, Net was comprised of the following (dollars in thousands): Three Months Ended September 30, 2021 2020 Interest on revolving credit facility, net $ 237 $ 260 Interest on term loans, net 8,913 11,195 Interest on secured debt 6,049 7,308 Loss on extinguishment or modification of debt, net 1,674 — Non-cash amortization and other 1,697 1,625 Interest expense, net $ 18,570 $ 20,388 Weighted-average interest rate as of end of period 3.3 % 3.1 % Weighted-average term (in years) as of end of period 4.2 4.3 Gain on Disposal of Property, Net: • The $3.4 million increase was primarily related to the sale of seven properties and two outparcels with a net gain (in addition to other property-related miscellaneous disposals and write-offs) of $14.1 million during the three months ended September 30, 2021, as compared to the sale of two properties (as well as other property-related miscellaneous disposals and write-offs) with a net gain of $10.7 million during the three months ended September 30, 2020 (see Note 4). Other (Expense) Income, Net: • The $7.3 million change was largely due to the change in the fair value of our earn-out liability as a result of general improving market conditions, as well as an increase in transaction and acquisition expenses as a result of restricted stock units awarded in connection with our underwritten IPO. Other (Expense) Income, Net was comprised of the following (dollars in thousands): Three Months Ended September 30, 2021 2020 Change in fair value of earn-out liability $ (5,000) $ — Transaction and acquisition expenses (1,775) (152) Equity in net (loss) income of unconsolidated joint ventures (54) 133 Federal, state, and local income tax expense (165) (173) Other (92) 388 Other (expense) income, net $ (7,086) $ 196 PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2021 FORM 10-Q 30 SUMMARY OF OPERATING ACTIVITIES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 Nine Months Ended September 30, Favorable (Unfavorable) Change (Dollars in thousands) 2021 2020 $ % (1) Revenues: Rental income $ 386,784 $ 367,418 $ 19,366 5.3 % Fee and management income 7,095 7,506 (411) (5.5) % Other property income 1,906 2,334 (428) (18.3) % Total revenues 395,785 377,258 18,527 4.9 % Operating Expenses: Property operating expenses 65,784 62,226 (3,558) (5.7) % Real estate tax expenses 49,762 50,847 1,085 2.1 % General and administrative expenses 32,905 30,141 (2,764) (9.2) % Depreciation and amortization 165,829 168,692 2,863 1.7 % Impairment of real estate assets 6,754 — (6,754) NM Total operating expenses 321,034 311,906 (9,128) (2.9) % Other: Interest expense, net (57,765) (65,317) 7,552 11.6 % Gain on disposal of property, net 31,678 8,616 23,062 NM Other (expense) income, net (25,595) 9,565 (35,160) NM Net income 23,069 18,216 4,853 26.6 % Net income attributable to noncontrolling interests (2,739) (2,251) (488) (21.7) % Net income attributable to stockholders $ 20,330 $ 15,965 $ 4,365 27.3 % (1) Line items that result in a percent change that exceed certain limitations are considered not meaningful (“NM”) and indicated as such. For details surrounding our basis for analyzing significant fluctuations in our results of operations as well as definitions related to our portfolio of real estate assets, please see the Summary of Operating Activities for the Three Months Ended September 30, 2021 and 2020 section above. Below are explanations of the significant fluctuations in the results of operations for the nine months ended September 30, 2021 and 2020: Rental Income increased $19.4 million as follows: • $23.0 million increase related to our same-center portfolio primarily as follows: ▪ $21.2 million increase primarily due to stronger collections in 2021 as compared with lower collections in 2020, the increase owing largely to the ongoing recovery of our portfolio in the wake of the COVID-19 pandemic and its economic impact, including a decrease in Neighbors we have identified as a credit risk, as well as collections on charges that were uncollected in 2020; ▪ $4.2 million increase primarily due to a $0.48 increase in average minimum rent per square foot, partially offset by a 0.9% decline in average occupancy; and ▪ $2.3 million decrease owing largely to lower recoveries from a lower recovery rate and lower occupancy. • $3.6 million decrease primarily related to our net disposition of 20 properties. Property Operating Expenses increased $3.6 million primarily as follows: • $4.0 million increase related to our same-center portfolio and corporate operating activities as follows: ▪ $2.8 million increase owing largely to lower expense for performance-based compensation in 2020 as a result of the COVID-19 pandemic, as compared to 2021; and ▪ $1.2 million increase primarily due to higher insurance expenses attributed to higher market rates and an increase in claims and claim development. • $0.5 million decrease related to our net disposition of 20 properties. Real Estate Tax Expenses: • The $1.1 million decrease in real estate tax expenses is primarily due to successful tax appeals and favorable assessments at our centers, as well as our net disposition of 20 properties. General and Administrative Expenses increased $2.8 million primarily as follows: • $5.8 million increase owing largely to lower expense for performance-based compensation in 2020 as a result of the COVID-19 pandemic, as compared to 2021; • $1.7 million decrease primarily due to lower third-party consultant and custodial costs; and PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2021 FORM 10-Q 31 • $1.4 million decrease related to expense reductions taken in 2020 to reduce the impact of the COVID-19 pandemic, with the majority of these decreases related to overhead costs at our corporate offices. Depreciation and Amortization decreased $2.9 million as follows: • $1.8 million decrease related to our net disposition of 20 properties; and • $1.1 million decrease related to our same-center portfolio and corporate operating activities, primarily due to intangible assets becoming fully amortized. Impairment of Real Estate Assets: • The $6.8 million increase in impairment of real estate assets was due to assets that have sold during 2021 as well as assets that are actively being marketed for sale at a disposition price that is less than the carrying value. Interest Expense, Net: • The $7.6 million decrease during the nine months ended September 30, 2021 as compared to the same period in 2020 was due to: (i) lower borrowings as a result of early repayments of debt; (ii) the $200 million draw and subsequent repayment of our draw on the revolver during the second quarter of 2020; and (iii) lower average interest rates due to the decrease in LIBOR. Interest Expense, Net was comprised of the following (dollars in thousands): Nine Months Ended September 30, 2021 2020 Interest on revolving credit facility, net $ 672 $ 1,455 Interest on term loans, net 30,119 35,611 Interest on secured debt 19,075 21,973 Loss on extinguishment or modification of debt, net 2,784 73 Non-cash amortization and other 5,115 6,205 Interest expense, net $ 57,765 $ 65,317 Weighted-average interest rate as of end of period 3.3 % 3.1 % Weighted-average term (in years) as of end of period 4.2 4.3 Gain on Disposal of Property, Net: • The $23.1 million increase was primarily related to the sale of 20 properties and three outparcels (in addition to other miscellaneous property-related disposals and write-offs) with a net gain of $31.7 million during the nine months ended September 30, 2021, as compared to the sale of six properties (as well as other property-related miscellaneous disposals and write-offs) with a net gain of $8.6 million during the nine months ended September 30, 2020 (see Note 4). Other (Expense) Income, Net: • The $35.2 million change was largely due to the change in the fair value of our earn-out liability as a result of general improving market conditions, as well as an increase in transaction and acquisition expenses as a result of restricted stock units awarded in connection with our underwritten IPO. Other (Expense) Income, Net was comprised of the following (in thousands): Nine Months Ended September 30, 2021 2020 Change in fair value of earn-out liability $ (23,000) $ 10,000 Transaction and acquisition expenses (2,850) (211) Equity in income (loss) of unconsolidated joint ventures 747 (506) Federal, state, and local income tax expense (496) (382) Other 4 664 Other (expense) income, net $ (25,595) $ 9,565 PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2021 FORM 10-Q 32 LEASING ACTIVITY —Below is a summary of leasing activity for our wholly-owned properties for the three months ended September 30, 2021 and 2020 (1) : Total Deals Inline Deals 2021 2020 2021 2020 New leases: Number of leases 140 111 133 110 Square footage (in thousands) 551 302 312 287 ABR (in thousands) $ 9,172 $ 5,181 $ 6,749 $ 5,023 ABR per square foot $ 16.63 $ 17.15 $ 21.64 $ 17.49 Cost per square foot of executing new leases $ 24.11 $ 27.25 $ 31.15 $ 26.01 Number of comparable leases 57 34 56 34 Comparable rent spread 14.1 % 8.2 % 14.1 % 8.2 % Weighted-average lease term (in years) 8.6 6.6 6.2 6.3 Renewals and options: Number of leases 128 119 110 101 Square footage (in thousands) 854 1,035 211 244 ABR (in thousands) $ 11,082 $ 12,473 $ 5,377 $ 4,993 ABR per square foot $ 12.98 $ 12.06 $ 25.53 $ 20.45 ABR per square foot prior to renewals $ 12.30 $ 11.56 $ 22.85 $ 19.16 Percentage increase in ABR per square foot 5.5 % 4.3 % 11.7 % 6.7 % Cost per square foot of executing renewals and options (2) $ 0.22 $ 0.60 $ 0.86 $ 1.39 Number of comparable leases (3) 97 87 91 82 Comparable rent spread (3) 8.9 % 4.1 % 13.1 % 6.4 % Weighted-average lease term (in years) 5.4 4.8 4.6 4.2 Portfolio retention rate 91.2 % 90.4 % 80.4 % 74.9 % (1) Per square foot amounts may not recalculate exactly based on other amounts presented within the table due to rounding. (2) During the third quarter of 2021, we refined our calculation of cost per square foot of executing renewals and options to better align with actual costs incurred. Prior period amounts have been adjusted to reflect costs on the same basis. (3) Excludes exercise of options. PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2021 FORM 10-Q 33 Below is a summary of leasing activity for our wholly-owned properties for the nine months ended September 30, 2021 and 2020 (1) : Total Deals Inline Deals 2021 2020 2021 2020 New leases: Number of leases 417 259 401 245 Square footage (in thousands) 1,360 881 931 627 ABR (in thousands) $ 23,630 $ 13,778 $ 19,171 $ 11,038 ABR per square foot $ 17.38 $ 15.63 $ 20.59 $ 17.62 Cost per square foot of executing new leases $ 27.52 $ 23.25 $ 30.05 $ 25.89 Number of comparable leases 184 79 181 78 Comparable rent spread 14.9 % 9.7 % 14.9 % 9.7 % Weighted-average lease term (in years) 8.1 7.7 6.4 6.6 Renewals and options: Number of leases 465 354 416 309 Square footage (in thousands) 2,880 2,749 855 702 ABR (in thousands) $ 35,449 $ 31,135 $ 19,752 $ 14,498 ABR per square foot $ 12.31 $ 11.33 $ 23.10 $ 20.64 ABR per square foot prior to renewals $ 11.58 $ 10.74 $ 21.11 $ 18.94 Percentage increase in ABR per square foot 6.3 % 5.4 % 9.4 % 9.0 % Cost per square foot of executing renewals and options (2) $ 0.56 $ 0.72 $ 1.22 $ 1.18 Number of comparable leases (3) 388 263 372 252 Comparable rent spread (3) 8.2 % 7.4 % 9.8 % 9.9 % Weighted-average lease term (in years) 5.0 4.9 4.1 4.0 Portfolio retention rate 88.3 % 82.7 % 80.1 % 70.5 % (1) Per square foot amounts may not recalculate exactly based on other amounts presented within the table due to rounding. (2) During the third quarter of 2021, we refined our calculation of cost per square foot of executing renewals and options to better align with actual costs incurred. Prior period amounts have been adjusted to reflect costs on the same basis. (3) Excludes exercise of options. NON-GAAP MEASURES See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Key Performance Indicators and Defined Terms” of this filing on Form 10-Q for a discussion related to the following non-GAAP measures. SAME-CENTER NET OPERATING INCOME —Same-Center NOI is presented as a supplemental measure of our performance, as it highlights operating trends such as occupancy levels, rental rates, and operating costs for our Same-Center portfolio. Other REITs may use different methodologies for calculating Same-Center NOI, and accordingly, our Same-Center NOI may not be comparable to other REITs. For the three and nine months ended September 30, 2021 and 2020, Same-Center NOI represents the NOI for the 261 properties that were wholly-owned and operational for the entire portion of both comparable periods. Same-Center NOI should not be viewed as an alternative measure of our financial performance as it does not reflect the operations of our entire portfolio, nor does it reflect the impact of general and administrative expenses, depreciation and amortization, interest expense, other income (expense), or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties that could materially impact our results from operations. PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2021 FORM 10-Q 34 The table below presents our Same-Center NOI for the current period and the comparable prior period (dollars in thousands): Three Months Ended September 30, Favorable (Unfavorable) Nine Months Ended September 30, Favorable (Unfavorable) 2021 2020 $ Change % Change 2021 2020 $ Change % Change Revenues: Rental income (1) $ 91,490 $ 89,188 $ 2,302 $ 271,643 $ 269,669 $ 1,974 Tenant recovery income 29,937 31,102 (1,165) 87,025 91,211 (4,186) Reserves for uncollectibility (2) 57 (5,807) 5,864 1,318 (17,817) 19,135 Other property income 1,010 765 245 1,740 2,213 (473) Total revenues 122,494 115,248 7,246 6.3 % 361,726 345,276 16,450 4.8 % Operating expenses: Property operating expenses 17,333 16,439 (894) 53,397 50,448 (2,949) Real estate taxes 16,039 16,793 754 48,452 49,648 1,196 Total operating expenses 33,372 33,232 (140) (0.4) % 101,849 100,096 (1,753) (1.8) % Total Same-Center NOI $ 89,122 $ 82,016 $ 7,106 8.7 % $ 259,877 $ 245,180 $ 14,697 6.0 % (1) Excludes straight-line rental income, net amortization of above- and below-market leases, and lease buyout income. (2) Includes billings that will not be recognized as revenue until cash is collected or the Neighbor resumes regular payments and/or we deem it appropriate to resume recording revenue on an accrual basis, rather than on a cash basis. SAME-CENTER NOI RECONCILIATION —Below is a reconciliation of Net Income to NOI and Same-Center NOI (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net income $ 16,562 $ 13,430 $ 23,069 $ 18,216 Adjusted to exclude: Fees and management income (2,435) (2,581) (7,095) (7,506) Straight-line rental income (1) (2,476) (1,800) (6,868) (3,164) Net amortization of above- and below-market leases (908) (811) (2,633) (2,394) Lease buyout income (560) (664) (3,138) (972) General and administrative expenses 11,627 9,595 32,905 30,141 Depreciation and amortization 53,901 56,095 165,829 168,692 Impairment of real estate assets 698 — 6,754 — Interest expense, net 18,570 20,388 57,765 65,317 Gain on disposal of property, net (14,093) (10,734) (31,678) (8,616) Other expense (income), net 7,086 (196) 25,595 (9,565) Property operating expenses related to fees and management income 1,489 1,058 3,611 2,586 NOI for real estate investments 89,461 83,780 264,116 252,735 Less: Non-same-center NOI (2) (339) (1,764) (4,239) (7,555) Total Same-Center NOI $ 89,122 $ 82,016 $ 259,877 $ 245,180 (1) Includes straight-line rent adjustments for Neighbors for whom revenue is being recorded on a cash basis. (2) Includes operating revenues and expenses from non-same-center properties which includes properties acquired or sold and corporate activities. NAREIT FFO AND CORE FFO —Nareit FFO is a non-GAAP financial performance measure that is widely recognized as a measure of REIT operating performance. Core FFO is an additional financial performance measure used by us as Nareit FFO includes certain non-comparable items that affect our performance over time. Core FFO is helpful in assisting management and investors with assessing the sustainability of our operating performance in future periods. PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2021 FORM 10-Q 35 Nareit FFO, Nareit FFO Attributable to Stockholders and OP Unit Holders, and Core FFO should not be considered alternatives to net income (loss) under GAAP, as an indication of our liquidity, nor as an indication of funds available to cover our cash needs, including our ability to fund distributions. Core FFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate our business plan in the manner currently contemplated. Accordingly, Nareit FFO, Nareit FFO Attributable to Stockholders and OP Unit Holders, and Core FFO should be reviewed in connection with other GAAP measurements, and should not be viewed as more prominent measures of performance than net income (loss) or cash flows from operations prepared in accordance with GAAP. Our Nareit FFO, Nareit FFO Attributable to Stockholders and OP Unit Holders, and Core FFO, as presented, may not be comparable to amounts calculated by other REITs. The following table presents our calculation of Nareit FFO Attributable to Stockholders and OP Unit Holders, and Core FFO (in thousands, except per share amounts): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 (1) 2021 2020 (1) Calculation of Nareit FFO Attributable to Stockholders and OP Unit Holders Net income $ 16,562 $ 13,430 $ 23,069 $ 18,216 Adjustments: Depreciation and amortization of real estate assets 52,984 54,579 162,979 164,288 Impairment of real estate assets 698 — 6,754 — Gain on disposal of property, net (14,093) (10,734) (31,678) (8,616) Adjustments related to unconsolidated joint ventures 776 166 676 1,760 Nareit FFO attributable to stockholders and OP unit holders $ 56,927 $ 57,441 $ 161,800 $ 175,648 Calculation of Core FFO Nareit FFO attributable to stockholders and OP unit holders $ 56,927 $ 57,441 $ 161,800 $ 175,648 Adjustments: Depreciation and amortization of corporate assets 917 1,516 2,850 4,404 Change in fair value of earn-out liability 5,000 — 23,000 (10,000) Amortization of unconsolidated joint venture basis differences 80 546 905 1,267 Transaction and acquisition expenses 1,775 152 2,850 211 Loss on extinguishment or modification of debt, net 1,674 — 2,784 73 Core FFO $ 66,373 $ 59,655 $ 194,189 $ 171,603 Nareit FFO Attributable to Stockholders and OP Unit Holders/Core FFO per Share (1) Weighted-average shares of common stock outstanding - diluted 122,573 111,188 112,317 111,160 Nareit FFO attributable to stockholders and OP unit holders per share - diluted $ 0.46 $ 0.52 $ 1.44 $ 1.58 Core FFO per share - diluted $ 0.54 $ 0.54 $ 1.73 $ 1.54 (1) Certain prior period amounts have been reclassified to conform with current year presentation. (2) Restricted stock awards were dilutive to Nareit FFO Attributable to Stockholders and OP Unit Holders per share and Core FFO per share for the three and nine months ended September 30, 2021 and 2020, and, accordingly, their impact was included in the weighted-average shares of common stock used in their respective per share calculations. PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2021 FORM 10-Q 36 EBITDA re and ADJUSTED EBITDA re —We use EBITDA re and Adjusted EBITDA re as additional measures of operating performance which allow us to compare earnings independent of capital structure, determine debt service and fixed cost coverage, and measure enterprise value. Additionally, we believe they are a useful indicator of our ability to support our debt obligations. EBITDA re and Adjusted EBITDA re should not be considered as alternatives to net income (loss), as an indication of our liquidity, nor as an indication of funds available to cover our cash needs, including our ability to fund distributions. Accordingly, EBITDA re and Adjusted EBITDA re should be reviewed in connection with other GAAP measurements, and should not be viewed as more prominent measures of performance than net income (loss) or cash flows from operations prepared in accordance with GAAP. Our EBITDA re and Adjusted EBITDA re , as presented, may not be comparable to amounts calculated by other REITs. The following table presents our calculation of EBITDA re and Adjusted EBITDA re (in thousands): Three Months Ended September 30, Nine Months Ended September 30, Year Ended December 31, 2021 2020 2021 2020 2020 Calculation of EBITDA re Net income $ 16,562 $ 13,430 $ 23,069 $ 18,216 $ 5,462 Adjustments: Depreciation and amortization 53,901 56,095 165,829 168,692 224,679 Interest expense, net 18,570 20,388 57,765 65,317 85,303 Gain on disposal of property, net (14,093) (10,734) (31,678) (8,616) (6,494) Impairment of real estate assets 698 — 6,754 — 2,423 Federal, state, and local tax expense 165 173 496 382 491 Adjustments related to unconsolidated joint ventures 1,107 594 1,704 3,162 3,355 EBITDA re $ 76,910 $ 79,946 $ 223,939 $ 247,153 $ 315,219 Calculation of Adjusted EBITDA re EBITDA re $ 76,910 $ 79,946 $ 223,939 $ 247,153 $ 315,219 Adjustments: Change in fair value of earn-out liability 5,000 — 23,000 (10,000) (10,000) Transaction and acquisition expenses 1,775 152 2,850 211 539 Amortization of unconsolidated joint venture basis differences 80 546 905 1,267 1,883 Other impairment charges — — — — 359 Adjusted EBITDA re $ 83,765 $ 80,644 $ 250,694 $ 238,631 $ 308,000 LIQUIDITY AND CAPITAL RESOURCES GENERAL —Aside from standard operating expenses, we expect our principal cash demands to be for: • cash distributions to stockholders; • investments in real estate; • capital expenditures and leasing costs; • redevelopment and repositioning projects ; and • principal and interest payments on our outstanding indebtedness . We expect our primary sources of liquidity to be: • net proceeds from our underwritten IPO; • operating cash flows; • proceeds received from the disposition of properties; • proceeds from equity and debt financings, including borrowings in connection with our Bond Registration and those under our unsecured revolving credit facility; • distributions received from our unconsolidated joint ventures; and • available, unrestricted cash and cash equivalents. At this time, we believe our current sources of liquidity, most significantly the net proceeds from our underwritten IPO, our operating cash flows, and borrowing availability on our revolving credit facility, are sufficient to meet our short- and long-term cash demands. PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2021 FORM 10-Q 37 UNDERWRITTEN INITIAL PUBLIC OFFERING —On July 19, 2021, we closed our underwritten IPO, through which we offered 17.0 million shares of a new class of common stock, $0.01 par value per share, at an initial price to the public of $28.00 per share, pursuant to a registration statement filed with the SEC on Form S-11 (File No. 333-255846), as amended. In connection with the underwritten IPO, the underwriters exercised a 30-day option to purchase additional shares of common stock to cover overallotments, and, accordingly, on August 2, 2021, we settled the sale of an additional 2.6 million shares at a price of $28.00 per share. These shares are listed on NASDAQ under the trading symbol “PECO”. The underwritten IPO, including the underwriters overallotment election, resulted in gross proceeds of $547.4 million. DEBT —The following table summarizes information about our debt as of September 30, 2021 and December 31, 2020 (dollars in thousands): September 30, 2021 December 31, 2020 Total debt obligations, gross $ 1,715,714 $ 2,307,686 Weighted-average interest rate 3.3 % 3.1 % Weighted-average term (in years) 4.2 4.1 Revolving credit facility capacity (1) $ 500,000 $ 500,000 Revolving credit facility availability (2) 489,329 490,404 (1) In July 2021, we refinanced the revolving credit facility and exercised our option to extend its maturity as noted below. (2) Net of any outstanding balance and letters of credit. During the nine months ended September 30, 2021, we took steps to reduce our leverage and appropriately ladder our debt maturities as follows: • In July 2021, we completed the Refinancing. In connection with the Refinancing, we paid off a $472.5 million term loan due in November 2025. The revolving credit facility will mature in January 2026, and the two senior unsecured term loan tranches will mature in November 2025 and July 2026, respectively. Additionally, we used proceeds from the underwritten IPO to retire a $375.0 million term loan that was set to mature in April 2022. • In August 2021, we executed a $150 million partial pay down on a term loan that was set to mature in November 2023 utilizing cash on hand. BOND OFFERING —On September 20, 2021, the SEC declared effective our Bond Registration. We intend to use net proceeds from any sale of offered securities to repay outstanding indebtedness and for general corporate purposes, including funding future investment activity. In October 2021, we settled the 2021 Bond Offering priced at 98.692% of the principal amount and maturing in November 2031. This offering resulted in gross proceeds of $345.4 million. The notes are fully and unconditionally guaranteed by us. In October 2021, net proceeds from the bond settlement were used, in part, to pay down the remaining $150 million balance of the term loan debt that was set to mature in November 2023. Based on our current borrowings, we expect to save approximately $11.2 million in interest annually as a result of our debt activity. 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, and including the effects of derivative financial instruments (see Notes 7 and 12) as of September 30, 2021 and December 31, 2020 is summarized below (in thousands): September 30, 2021 December 31, 2020 As to interest rate: Fixed-rate debt $ 1,540,714 $ 1,727,186 Variable-rate debt 175,000 580,500 Total $ 1,715,714 $ 2,307,686 As to collateralization: Unsecured debt $ 1,105,000 $ 1,622,500 Secured debt 610,714 685,186 Total $ 1,715,714 $ 2,307,686 Our maturity schedule as of September 30, 2021 with respective principal payment obligations, excluding finance lease liabilities, market debt adjustments, and deferred financing expenses, is as follows (in thousands): 2021 2022 2023 2024 2025 Thereafter Total Term loans $ — $ — $ 150,000 $ 475,000 $ 240,000 $ 240,000 $ 1,105,000 Secured debt 1,803 84,926 42,942 28,124 27,877 424,925 610,597 Total $ 1,803 $ 84,926 $ 192,942 $ 503,124 $ 267,877 $ 664,925 $ 1,715,597 PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2021 FORM 10-Q 38 FINANCIAL LEVERAGE RATIOS —We believe our net debt to Adjusted EBITDA re , net debt to total enterprise value, and debt covenant compliance as of September 30, 2021 allow us access to future borrowings as needed in the near term. The following table presents our calculation of net debt and total enterprise value, inclusive of our prorated portion of net debt and cash and cash equivalents owned through our unconsolidated joint ventures, as of September 30, 2021 and December 31, 2020 (in thousands): September 30, 2021 December 31, 2020 Net debt: Total debt, excluding market adjustments and deferred financing expenses $ 1,746,487 $ 2,345,620 Less: Cash and cash equivalents 24,855 104,952 Total net debt $ 1,721,632 $ 2,240,668 Enterprise value: Net debt $ 1,721,632 $ 2,240,668 Total equity value (1) 3,887,303 2,797,234 Total enterprise value $ 5,608,935 $ 5,037,902 (1) As of September 30, 2021, total equity value was calculated as the 126.6 million diluted shares multiplied by the closing market price per share of common stock of $30.71. As of December 31, 2020, prior to the underwritten IPO, total equity value was calculated as 106.6 million diluted shares multiplied by the EVPS of $26.25. Diluted shares include shares of common stock and OP units. The following table presents our calculation of net debt to Adjusted EBITDA re and net debt to total enterprise value as of September 30, 2021 and December 31, 2020 (dollars in thousands): September 30, 2021 December 31, 2020 Net debt to Adjusted EBITDA re - annualized : Net debt $ 1,721,632 $ 2,240,668 Adjusted EBITDA re - annualized (1) 320,063 308,000 Net debt to Adjusted EBITDA re - annualized 5.4x 7.3x Net debt to total enterprise value Net debt $ 1,721,632 $ 2,240,668 Total enterprise value 5,608,935 5,037,902 Net debt to total enterprise value 30.7% 44.5% (1) Adjusted EBITDA re is based on a trailing twelve month period. See “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Measures - EBITDA re and Adjusted EBITDA re” of this filing on Form 10-Q for a reconciliation to Net Income. CAPITAL EXPENDITURES AND REDEVELOPMENT ACTIVITY —We make capital expenditures during the course of normal operations, including maintenance capital expenditures and tenant improvements, as well as value-enhancing anchor space repositioning and redevelopment, ground-up outparcel development, and other accretive projects. During the nine months ended September 30, 2021 and 2020, we had capital spend of $49.3 million and $40.8 million, respectively. Generally, we expect our development and redevelopment projects to stabilize within 24 months. We anticipate that obligations related to capital improvements as well as redevelopment and development in 2021 can be met with cash flows from operations, cash flows from dispositions, or borrowings on our unsecured revolving line of credit. Below is a summary of our capital spending activity, excluding leasing commissions, on a cash basis (dollars in thousands): Nine Months Ended September 30, 2021 2020 Capital expenditures for real estate (1) : Capital improvements $ 5,900 $ 5,580 Tenant improvements 16,350 8,788 Redevelopment and development 24,312 23,519 Total capital expenditures for real estate 46,562 37,887 Corporate asset capital expenditures 1,429 1,565 Capitalized indirect costs (1) 1,324 1,320 Total capital spending activity $ 49,315 $ 40,772 (1) Amount includes internal salaries and related benefits of personnel who work directly on capital projects as well as capitalized interest expense. Our underwritten incremental yields on development and redevelopment projects are expected to range between 9% - 11%. Our current in process projects represent an estimated total investment of $42.6 million, and the total underwritten PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2021 FORM 10-Q 39 incremental yield range on this estimated investment is approximately 9.5% - 10.5%. Actual incremental yields may vary from our underwritten incremental yield range based on the actual total cost to complete a project and its actual incremental annual NOI at stabilization. See “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Key Performance Indicators and Defined Terms” of this filing on Form 10-Q for further information. ACQUISITION ACTIVITY —We continually monitor the commercial real estate market for properties that have future growth potential, are located in attractive demographic markets, and support our business objectives. The following table highlights our property acquisitions (dollars in thousands): Nine Months Ended September 30, 2021 2020 Number of properties acquired 4 1 Number of outparcels acquired (1) 3 2 Total acquisition price $ 88,954 $ 23,014 (1) Outparcels acquired are adjacent to shopping centers that we own. Subsequent to September 30, 2021, we purchased two properties for $91.2 million. DISPOSITION ACTIVITY —We are actively evaluating our portfolio of assets for opportunities to make strategic dispositions of assets that no longer meet our growth and investment objectives or assets that have stabilized in order to capture their value. We expect to continue to make strategic dispositions during the remainder of 2021. The following table highlights our property dispositions (dollars in thousands): Nine Months Ended September 30, 2021 2020 Number of properties sold (1) 20 6 Number of outparcels sold (2)(3) 3 — Proceeds from sale of real estate $ 180,340 $ 48,276 Gain on sale of property, net (4) 33,121 9,915 (1) We retained an outparcel for one property sold during the nine months ended September 30, 2021, and therefore the sale did not result in a reduction in our total property count. (2) During the nine months ended September 30, 2021, our outparcel sales included: (i) the only remaining portion of one of our properties; therefore, resulting in a reduction in our total property count; and (ii) an undeveloped parcel of land, as well as an outparcel adjacent to one of our centers, neither of which resulted in a reduction in our total property count. (3) In addition to the three outparcels sold during the nine months ended September 30, 2021, a tenant at one of our properties exercised a bargain purchase option to acquire a parcel of land that we previously owned. This generated minimal proceeds for us. (4) 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, 2021, we sold one property for $4.4 million. PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2021 FORM 10-Q 40 DISTRIBUTIONS —Distributions to our common stockholders and OP unit holders, including key financial metrics for comparison purposes, for the nine months ended September 30, 2021 and 2020, are as follows (in thousands): Cash distributions to OP unit holders Net cash provided by operating activities Cash distributions to common stockholders Core FFO (1) Distributions reinvested through the DRIP (1) See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Key Performance Indicators” for the definition of Core FFO, or information regarding why we present Core FFO. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Measures - Nareit FFO and Core FFO” for a reconciliation of this non-GAAP financial measure to Net Income. We paid monthly distributions of $0.085 per share, or $1.02 annualized, for the months of December 2020, and each month beginning January 2021 through September 2021. On September 28, 2021, our Board authorized an increase of 6% on the monthly distribution in the amount of $0.090 per share, or $1.08 annualized, which was paid on November 1, 2021. On November 3, 2021, our Board authorized distributions for November and December 2021, as well as January 2022, to the stockholders of record at the close of business on November 15, 2021, December 15, 2021, and January 19, 2022, respectively, of $0.09 per share of common stock. OP unit holders will receive distributions at the same rate as common stockholders. To maintain our qualification as a REIT, we must make aggregate annual distributions to our stockholders of at least 90% of our REIT taxable income (which is computed without regard to the dividends paid deduction or net capital gain, and which does not necessarily equal net income or loss as calculated in accordance with GAAP). We generally will not be subject to U.S. federal income tax on the income that we distribute to our stockholders each year due to meeting the REIT qualification requirements. However, we may be subject to certain state and local taxes on our income, property, or net worth and to federal income and excise taxes on our undistributed income. We have not established a minimum distribution level, and our charter does not require that we make distributions to our stockholders. DRIP AND THE SRP —On August 4, 2021, as a result of our underwritten IPO, our Board approved the termination of the DRIP and the SRP. PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2021 FORM 10-Q 41 CASH FLOW ACTIVITIES —As of September 30, 2021, we had cash and cash equivalents and restricted cash of $114.2 million, a net cash decrease of $17.7 million during the nine months ended September 30, 2021. Below is a summary of our cash flow activity (dollars in thousands): Nine Months Ended September 30, 2021 2020 $ Change % Change Net cash provided by operating activities $ 198,313 $ 157,245 $ 41,068 26.1 % Net cash provided by (used in) investing activities 37,835 (13,561) 51,396 NM Net cash used in financing activities (253,870) (101,994) (151,876) 148.9 % OPERATING ACTIVITIES —Our net cash provided by operating activities was primarily impacted by the following: • Property operations and working capital —Most of our operating cash comes from rental and tenant recovery income and is offset by property operating expenses, real estate taxes, and general and administrative costs. During the nine months ended September 30, 2021, we had a net cash inflow of $4.6 million from changes in working capital as compared to a net cash outlay of $17.6 million during the same period in 2020. This change was primarily driven by improved collections on amounts due from Neighbors as well as expense reduction initiatives, and was partially offset by higher leasing commissions and prepaid expenses. • Fee and management income —We also generate operating cash from our third-party investment management business, pursuant to various management and advisory agreements between us and the Managed Funds. Our fee and management income was $7.1 million for the nine months ended September 30, 2021, a decrease of $0.4 million as compared to the same period in 2020. • Cash paid for interest —During the nine months ended September 30, 2021, we paid $53.5 million for interest, a decrease of $6.4 million over the same period in 2020, largely due to: (i) lower borrowings as a result of early repayments of debt; (ii) the $200 million draw and subsequent repayment of our draw on the revolver during the second quarter of 2020; and (iii) lower average interest rates due to the decrease in LIBOR. INVESTING ACTIVITIES —Our net cash provided by (used in) investing activities was primarily impacted by the following: • Real estate acquisitions —During the nine months ended September 30, 2021, our acquisitions resulted in a total cash outlay of $89.0 million, as compared to a total cash outlay of $23.0 million during the same period in 2020. • Real estate dispositions —During the nine months ended September 30, 2021, our dispositions resulted in a net cash inflow of $180.3 million, as compared to a net cash inflow of $48.3 million during the same period in 2020. • Capital expenditures —We invest capital into leasing our properties and maintaining or improving the condition of our properties. During the nine months ended September 30, 2021, we paid $49.3 million for capital expenditures, an increase of $8.5 million over the same period in 2020, primarily due to in increase in tenant improvements owing largely to an increase in leasing volume as compared to the same period a year ago. • Return of investment in unconsolidated joint ventures —During the nine months ended September 30, 2021, we had a return of investment in unconsolidated joint ventures of $4.3 million, including $2.1 million in connection with NRP primarily as a result of property dispositions. During the nine months ended September 30, 2020, we had a return of investment in unconsolidated joint ventures of $1.9 million. • Investment in third parties —During the nine months ended September 30, 2021, we made an investment in a third party business that resulted in a net cash outflow of $3.0 million. FINANCING ACTIVITIES —Our net cash used in financing activities was primarily impacted by the following: • Underwritten IPO —Upon consummation of our underwritten IPO in July 2021, including the over-allotment option exercised in full by the underwriters, we had gross proceeds from the issuance of common stock of $547.4 million, offset by a cash outflow of $39.0 million for offering costs, discounts, and commissions during the nine months ended September 30, 2021. We did not issue any common shares during the nine months ended September 30, 2020. • Debt borrowings and payments —During the nine months ended September 30, 2021, we had $597.4 million in net repayment of debt primarily as a result of: (i) a pay down in July 2021 of a $375 million term loan set to mature in 2022 using proceeds from our underwritten IPO; (ii) a partial pay down in August 2021 of a $150 million term loan set to mature in 2023 utilizing cash on hand; and (iii) early repayments of mortgage loans. During the nine months ended September 30, 2020 we had net payments of $37.8 million, primarily as a result of a pay down in January 2020 of $30.0 million on term loan debt that was set to mature in 2021. • Distributions to stockholders and OP unit holders —Cash used for distributions to common stockholders and OP unit holders increased $28.5 million for the nine months ended September 30, 2021 as compared to the same period in 2020, due to an increase in our distribution rate, an increase in common shares outstanding as a result of our underwritten IPO, and the suspension of our distributions from April 2020 through September 2020. • Share repurchases —Cash outflows for share repurchases increased by $72.6 million for the nine months ended September 30, 2021 as compared to the same period in 2020, primarily as a result of a tender offer, which was settled in January 2021. PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2021 FORM 10-Q 42 CONTRACTUAL COMMITMENTS AND CONTINGENCIES We have debt obligations related to both our secured and unsecured debt. In addition, we have operating leases pertaining to office equipment for our business as well as ground leases at certain of our shopping centers. We are presenting an update to our future contractual commitments and contingencies as a result of our material debt transactions occurring in the third quarter of 2021 (see Note 6 for more details). The table below excludes obligations related to tenant allowances and improvements because such amounts are not fixed or determinable. However, we believe we currently have sufficient financing in place to fund any such amounts as they arise through cash from operations or borrowings. The following table details our contractual obligations as of September 30, 2021 (in thousands): Payments Due by Period Total 2021 2022 2023 2024 2025 Thereafter Debt obligations - principal payments (1) $ 1,715,597 $ 1,803 $ 84,926 $ 192,942 $ 503,124 $ 267,877 $ 664,925 Debt obligations - interest payments (2) 227,429 14,145 54,242 50,221 37,535 24,687 46,599 Operating lease obligations 8,504 215 823 672 546 317 5,931 Finance lease obligations 121 12 45 40 24 — — Total $ 1,951,651 $ 16,175 $ 140,036 $ 243,875 $ 541,229 $ 292,881 $ 717,455 (1) In July 2021, we amended our $500 million revolving credit facility to extend the maturity from October 2021 to January 2026, and lower the interest rate spread from 1.40% over LIBOR to 1.35% over LIBOR. Additionally, the new terms include two six-month maturity extension options. As of September 30, 2021, we have no outstanding balance on our revolving credit facility. (2) Future variable-rate interest payments are based on interest rates as of September 30, 2021, including the impact of our swap agreements. Our portfolio debt instruments and the unsecured revolving credit facility contain certain covenants and restrictions. The following list provides an update to certain restrictive covenants specific to the unsecured revolving credit facility and unsecured term loans that were deemed significant as a result of our debt activity occurring in July 2021: • limits the ratio of total debt to total asset value, as defined, to 60% or less with a surge to 65% for a period of four consecutive fiscal quarters following a material acquisition; • limits the ratio of secured debt to total asset value, as defined, to 35% or less with a surge to 40% for a period of four consecutive fiscal quarters following a material acquisition; • requires the fixed-charge ratio, as defined, to be 1.5:1 or greater; • limits the ratio of cash dividend payments to Nareit FFO, as defined, to 95%; • limits the ratio of unsecured debt to unencumbered total asset value, as defined, to 60% or less with a surge to 65% for a period of four consecutive fiscal quarters following a material acquisition; • requires the unencumbered NOI to interest expense ratio, as defined, to be 1.75:1 or greater; and • if we were to lose our investment grade rating in the future, the current tangible net worth will be required to exceed the minimum tangible net worth, as defined, at that time. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our 2020 Annual Report on Form 10-K, originally filed with the SEC on March 12, 2021, contains a description of our critical accounting policies and estimates, including those relating to real estate acquisitions, rental income, and the valuation of real estate assets. There have been no significant changes to our critical accounting policies during 2021.