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 a real estate investment trust (“REIT”) that is one of the nation’s largest owners and operators of omni-channel grocery-anchored shopping centers. Additionally, we operate a third-party investment management business providing property management and advisory services to unconsolidated joint ventures and one private fund (collectively, the “Managed Funds”). The majority of our revenues are lease revenues derived from our real estate investments. Our portfolio primarily consists of neighborhood centers anchored by the #1 or #2 grocer tenants by sales within their respective formats by trade area. As of December 31, 2021, our portfolio was 96.3% occupied. Our tenants, who we refer to as “Neighbors,” are a mix of national, regional, and local retailers that primarily provide necessity-based goods and services. We believe our locations are in fundamentally strong demographic markets throughout the United States. Our brick and mortar assets positively contribute to our Neighbors’ omni-channel strategies and act as the last mile delivery solution.
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. (the “Operating Partnership”), a Delaware limited partnership formed in December 2009. We are a limited partner of the Operating Partnership, and our wholly-owned subsidiary, Phillips Edison Grocery Center OP GP I LLC, is the sole general partner of the Operating Partnership.
As of December 31, 2021, we wholly-owned 268 shopping centers. Additionally, we owned a 20% equity interest in Necessity Retail Partners (“NRP”), a joint venture with an affiliate of TPG Real Estate that owned one shopping center, and a 14% interest in Grocery Retail Partners I LLC (“GRP I”), a joint venture with Northwestern Mutual Life Insurance Company, which owned 20 shopping centers. In total, our managed portfolio of wholly-owned shopping centers and those owned through our unconsolidated joint ventures comprised approximately 33.0 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 in order to deliver long-term growth and value creation to all stakeholders while conducting as a corporate responsible citizen. Our goal is to create great grocery-anchored shopping experiences and improve our communities, one center at a time. We seek to achieve this objective by generating cash flows, income growth, and capital appreciation for our stockholders through our differentiated and focused strategy, responsible balance sheet management, and integrated operating platform.
Differentiated and Focused Strategy — We believe our differentiated strategy drives strong financial and operational performance and future growth, including showing resiliency during economic down cycles.
• Omni-Channel Grocery-Anchored Neighborhood Shopping Centers —We focus on investing in omni-channel shopping centers anchored by the #1 or #2 grocer by sales within their respective trade area. As of December 31, 2021, for our wholly-owned shopping centers, 88% of our annualized base rent (“ABR”) was generated from shopping centers anchored by such grocers. Grocery-anchored shopping centers generally have strong foot traffic leading to high demand for leasing Neighbor spaces, which enhances our ability to increase lease revenue. We target investments with attractive going-in yields and growth potential in markets with demographic profiles that support necessity-based retail concepts.
• Neighbor-base —We believe our centers act as the last mile delivery solution for our omni-channel Neighbors. As of December 31, 2021, approximately 72% of our ABR, including the pro rata portion attributable to properties owned through our unconsolidated joint ventures, is generated from Neighbors providing necessity-based goods and services. We believe our focus on necessity-based goods and services retailers limits our exposure to distressed retailers and allows us to demonstrate resiliency during times of real estate and economic down cycles.
• Targeted Portfolio —We focus on owning centers in trade areas with favorable demographics that align with those of leading grocers. Further, we seek to invest in small format centers where leasing activity is concentrated in smaller tenant spaces and limits exposure to high-risk retailers. We believe that smaller centers provide higher growth potential because they enjoy a positive leasing dynamic as: (i) we believe retailer demand is strongest for inline space, which contains less than 10,000 square feet of gross leasable area; (ii) there is less exposure to big box retailers, which we believe have higher risk because they require larger capital expenditures and have fewer leasing opportunities; and (iii) smaller centers typically have lower capital expenditures. We intend to grow our portfolio through targeted acquisitions that align with our differentiated and focused strategy.
• Macroeconomic Trends —We continually monitor the macroeconomic environment to identify trends that are positive for the growth potential of our shopping centers. We believe recent trends such as: (i) population shifts from urban to suburban communities in certain geographic locations; (ii) the increase in work from home initiatives; (iii) the importance of last mile delivery; (iv) increase in “shop local” trends; and (v) Neighbors relocating from malls to open air shopping centers are complementary to our existing and targeted Neighbor-base, which we believe creates additional leasing demand and growth opportunities for our shopping centers.
Balance Sheet Management Positioned for External Growth — Our strategy is to grow our portfolio by pursuing acquisitions in a disciplined manner, while maintaining an attractive leverage profile and flexible balance sheet to preserve our investment grade rating. 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.
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• Funding External Growth —We believe the closing of our underwritten IPO, and the reduction in our leverage it facilitated, allows us to access equity and debt capital previously not available to us, further enhancing our financial flexibility and external growth potential. We believe our investment grade balance sheet provides us with the financial capacity to pursue external growth initiatives in an accretive and prudently capitalized manner. Additionally, our investment management platform enables us to source and manage incremental sources of capital through unconsolidated joint ventures, which provide us incremental fee revenue opportunities.
• Debt Maturity Profile —We believe we have maintained an appropriately staggered debt maturity profile, which will position us for long-term growth. Our outstanding debt obligations are composed primarily of (i) unsecured debt, including term loans, senior notes, and a revolving credit facility, and (ii) secured mortgage debt.
Internal Growth Through Our Integrated Operating Platform — We believe our internally-staffed, vertically-integrated operating platform to lease and manage omni-channel grocery-anchored neighborhood shopping centers will continue to provide stability and generate growth in our existing portfolio, optimizing returns for our stockholders.
• Leasing —Our national footprint of experienced, locally-smart, leasing professionals is dedicated to increasing net operating income (“NOI”) at our centers by: (i) maximizing rental rates while improving the credit profile of our rental revenue; (ii) attracting high quality retailers while improving the merchandising mix; (iii) capitalizing on below-market rent opportunities by increasing rents as leases expire; (iv) executing leases with contractual rent increases; and (v) increasing occupancy.
• Property Management Services —We believe 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. Further, we provide our Neighbors with responsive customer service, marketing tools, as well as other sophisticated solutions, such as a centralized accounting, billing, and tax review platform to facilitate our daily operations.
• Development and Redevelopment —Our team of seasoned professionals identify opportunities to unlock additional value at our properties through investments in our outparcel and redevelopment program. Our strategies include outparcel development, footprint reconfiguration, anchor repositioning, and anchor expansion, among others. These projects create opportunities to increase the overall yield and value of our properties, which we believe will allow us to deliver long-term growth and value creation to all stakeholders while creating great grocery-anchored shopping center experiences.
During 2020, in response to the coronavirus (“COVID-19”) pandemic and the resulting economic downturn, we implemented various initiatives to mitigate the negative impact on our operations. Our overall business objectives and strategies remained principally the same, which allowed us to execute the recovery of our portfolio during 2021. See “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - COVID-19 Strategy” for a detailed discussion of the recovery of our portfolio as a result of the COVID-19 pandemic.
COMPETITION— Our business is inherently competitive. We believe that the competition is highly fragmented. We are subject to considerable competition in seeking shopping centers to acquire and in attracting and retaining Neighbors in our shopping centers. We compete with institutional investors and other REITs, as well as local, regional, and national owner-operators for property acquisitions. We compete with other properties including malls, lifestyle centers, power centers, community centers, neighborhood centers, free-standing retail, and main street retail in attracting new Neighbors and retaining existing Neighbors when their leases expire. The competition for Neighbors varies depending on the characteristics of each property.
We believe that the principal competitive factors in attracting and retaining Neighbors are the quality of the grocery anchor, location, trade area demographics, tenant mix, physical condition of the shopping center, and occupancy cost. These factors combine to determine the level of occupancy and rental rates that we are able to achieve at our properties. We believe that the quality of our omni-channel grocery-anchored shopping centers enables us to compete effectively for Neighbors. We believe that we maintain a competitive position in the acquisition market due to our track record and positive reputation.
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.
COMPLIANCE WITH 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 “Item 1A. Risk Factors” below 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).
As of December 31, 2021, we are not aware of any environmental conditions or material costs of complying with environmental or other government regulations that would have a material adverse effect on our overall business. However, it is possible that we are not aware of, or may become subject to potential environmental liabilities or material costs of complying with government regulations due to changes in requirements or otherwise that could be material to our business.
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HUMAN CAPITAL— As of December 31, 2021, we had approximately 290 associates located in 19 states across the country, with concentrations in our corporate offices in Cincinnati, Ohio; Park City, Utah; and Atlanta, Georgia. Approximately 53% of our workforce is female and 47% is male. Our senior leadership team is 19% female and 81% male, while manager roles and above are approximately 31% female and 69% male. For the year ended December 31, 2021, our overall turnover rate was 14%, with voluntary turnover being 12%, compared to our previous 3 year overall turnover average of 15% with a voluntary turnover rate of 11%. Further, we had no turnover among our senior leadership team during 2021.
We have a highly engaged team of dedicated associates, as reflected in our fifth consecutive recognition as a top place to work by the Cincinnati Enquirer in 2021. Our Board of Directors ( the “Board”), and specifically our Compensation Committee, is actively engaged and oversees our human capital management practices.
We believe that the following components of human capital management are important:
Culture and Inclusion — We believe o ur team of highly engaged associates plays a key role in achieving long-term success for our stakeholders. We are committed to a Company culture that is collaborative, inclusive, and that provides significant opportunities for professional and personal development. Our culture is shaped by our core values (Do The Right Thing, Have Fun and Get it Done, Think Big Act Small, and Always Keep Learning) that empower and encourage our associates to “think and operate like owners.” Our strong culture enables us to attract, develop and retain high performing and talented individuals who we believe help us t o drive our business strategies and objectives , including attractive risk-adjusted returns for our stockholders. 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 Company, regardless of level or tenure, has the opportunity for equity grants on an annual basis. During the year ended December 31, 2021, 100% of eligible associates received grants of service-based restricted stock units in the Company. Upon vesting, associates will receive shares of common stock, which encourages our associates to “think and operate like owners” of the Company.
Our commitment to an inclusive work environment is reinforced by two associate-led business resource groups: PECO Multicultural Opportunities, Resources & Education (“PECO MORE”), and PECO Networking Opportunities for Women (“PECO NOW”). PECO MORE is dedicated to furthering diversity and inclusion within the Company, the communities that we serve, and the commercial real estate industry. 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.
As an outward demonstration of our commitment to an inclusive culture, in 2021, Jeff Edison, our CEO, signed the CEO Action for Diversity & Inclusion™ Pledge on behalf of the Company. The pledge outlines a specific set of actions signatory CEOs will take to cultivate a trusting environment where all ideas are welcome and associates feel comfortable and empowered to have discussions about diversity and inclusion. Additionally, the role of our human resources leader was expanded to Chief People, Diversity & Inclusion Officer to further advance diversity, equity, and inclusion (“DE&I”) within the Company. In 2021, we offered a series of interactive learning opportunities focused on unconscious bias, psychological safety, and communicating across cultures. Each of these sessions were designed to increase awareness, create dialogue, and lay a common framework for associates to build upon related to DE&I issues. As part of our external community efforts, in 2021, we also partnered with industry group ICSC (Innovating Commerce Serving Communities) and their Launch Academy, which was designed to recruit and prepare racially or ethnically diverse undergraduate students for a career in the commercial real estate industry. In addition to assisting with development of the Launch Academy curriculum, PECO hosted interns in its Cincinnati and Atlanta offices.
Learning and Development — “Always Keep Learning” is one of our core values. We are committed to continuous learning and both personal and professional development of our associates as part of what we call PECO XP, or the PECO Experience. During 2021, our associates participated in over 3,500 hours of internal training hours across the Company. Trainings ranged from managers sharpening their coaching skills and soft-skill communication sessions utilizing the DiSC © model, a personal assessment tool used to help improve teamwork, communication, and productivity in the workplace, to a week-long Company focus on Customer Service in September as well as on-demand technical offerings.
One example of our commitment to continuous learning and development is our Company-wide talent management process, whereby all associates are expected to set development goals for the upcoming year. During 2021, to help facilitate this process, managers were offered workshops specifically focused on holding development focused conversations , and associates were offered workshops and office hours to help them draft their development goals. These conversations are designed to focus on career progression and put action items in place to keep each associate moving forward. We also launched a formal mentoring program, PECO Mentor Match, in 2021 to increase our emphasis on career development.
Employee Health and Wellness — Our “Beyond Benefits” wellness program is an essential element of our culture and 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. In 2021, we contributed to associates’ Health Savings Accounts for each covered associate, spouse, and dependent who received a COVID-19 vaccine. To keep associates engaged in wellness activities during 2021, we held five wellness challenges where individuals and teams could earn incentive dollars for winning competitions that tracked steps, workout activity, and water consumption. In May 2021, we also invested in a month-long focus on mental health providing a broad range of activities such as a Transformational Leadership Workshop and Mental Health Matters, a resiliency journal challenge, and frequent communications with resources, articles and support to raise awareness and acceptance of mental health issues. All of these efforts have facilitated a continued dedication to wellness and preventive care among our associates, and as a result, we were recognized for a second year in a row by Healthiest Employers LLC as one of the “Healthiest Employers of Ohio” in 2021.
As a Company, we have also taken the step in 2021 to solidify our commitment to flexibility and the future of the workplace, heightened by the issues brought forward through the COVID-19 pandemic, recognizing that work takes place in a variety of settings. Regardless of work location, we are always committed to ensuring that the operations at all our properties and corporate offices are conducted in a manner that safeguards the health and safety of associates, Neighbors, contractors, and
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members of the public who are either present at, or affected by, operations at these locations. This commitment increased in importance in 2020 and continued throughout 2021 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.
CORPORATE RESPONSIBILITY— Being a responsible corporate citizen has always been integral to our corporate strategy and we operate under a clear mission statement of “creating great omni-channel grocery-anchored shopping center experiences and improving our communities, one shopping center at a time”. We strive to have a strong corporate culture based on our core values - Do the Right Thing, Have Fun and Get it Done, Think Big Act Small, Always Keep Learning – which is designed to drive accountability in all aspects of our business with the overarching goal of achieving long-term growth and value creation for our stakeholders. We recognize that successful corporate responsibility is both internally and externally focused. With the goal of being able to better quantify the qualitative components of our corporate responsibility values and provide greater transparency to all of our stakeholders, in 2021, we established an internal cross-functional “ESG Team” consisting of our department heads from Portfolio Management, Construction, Property Management, Leasing, Investor Relations, Marketing, Human Resources, and Legal. Our General Counsel has overall responsibility for leading and managing our ESG Team, and reporting on our corporate responsibility and ESG matters to our Board, as more fully described below. Our ESG Team is tasked with conducting more detailed materiality and risk assessments and identifying opportunities with measurable key performance indicators and enhanced reporting, with the overall goal of driving long-term growth and value creation for all of our stakeholders.
Environmental Stewardship — We believe that sustainable business practices fit with our core value of “Do The Right Thing” while at the same time being in the best interests of all our stakeholders by having a positive impact on our properties and the communities in which they are located. We recently began participating in the Global Real Estate Sustainability Benchmark (“GRESB”) Real Estate Assessment using the GRI reporting standards, and our Corporate Social Responsibility Report is designed to align with a number of the 17 United Nations Sustainable Development Goals. Our sustainability initiatives include energy efficiency, alternative power sources, water conservation, sustainable design and waste management, among others. Through these initiatives, we continue to make progress towards mitigating the environmental impact of our shopping centers.
In our ongoing commitment to sustainability, we can highlight the following achievements:
• to further reduce energy consumption, the installation of over 3.5 million square feet of white reflective roofing was completed, resulting in over 900,000 kWh in savings and contributing to the minimalization of heat islands;
• our exterior lighting program included the execution of 54 LED retrofits in 2021, which brought the total number of centers retrofitted to 249 and has produced savings of 8.6 million kWH annually; and
• since the inception of the smart water control program, PECO has realized 285.3 million gallons of water saved.
As noted above, we align with GRI reporting standards and have realized a 9% increase in GRESB scoring from 2020 to 2021 assessments.
Our team of seasoned professionals identify opportunities in our redevelopment program, which includes outparcel development, footprint reconfiguration, anchor repositioning, and anchor expansions, among others. These projects create attractive sustainability opportunities to increase the overall value of our properties, while improving the environmental impact on our communities. Our ESG Team has been and will continue to be focused on strategic sustainability initiatives to enhance resource efficiencies as part of that program.
Social Responsibility — Our culture is driven by our team’s connection to each other and the communities in which we live and work. Our associates are one of our most valuable resources and we strive to have an outstanding culture that is collaborative, inclusive and that provides significant opportunities for professional and personal development. We encourage and strongly support associate-led programs such as PECO MORE, PECO NOW, and PECO Community Partnership (as described below). These groups give our associates opportunities to effect positive change within our Company, our industry, and our communities.
PECO MORE (Multicultural Opportunities, Resources, and Education) is dedicated to furthering diversity and inclusion within PECO, the communities we serve, and the commercial real estate industry, and uses a multi-pronged approach including education and awareness, community and industry partnerships, internal engagement, recruiting, and metric-led accountability. PECO NOW (Networking Opportunities for Women), whose mission is to provide leadership opportunities to women at PECO through advocacy, support, scholarship, and development, is working to develop and spotlight women leaders in our industry. Since the group’s inception, the number of women in leadership at PECO has tripled. Currently, we have nine women in roles at the VP level or higher - including three women in the C-Suite; we also have two women who are independent directors on our Board. PECO Community Partnership is dedicated to encouraging community involvement and connecting associates to causes important to them, providing associates at every level and in different locations with an opportunity to participate. In 2021, the Community Partnership Group sponsored six community service focused events - that associates participated in - ranging from meal delivery, holiday giving, repair work, and food pantry organization that resulted in over 200 hours of community service. In addition, the group sponsored two educational events for the Company on recycling and living our core value of “Do the Right Thing”.
Our local teams and property managers are passionate about the Neighbors they work with daily and engaging with the shoppers at our centers and the local communities. Their passion to their work and the communities in which our properties operate help drive great shopping experiences at our centers and improve the communities in which they are located.
Corporate Governance and Compliance — We have a steadfast commitment to operating our business with the utmost integrity and the highest ethical standards as stewards of our investors’ capital. We believe our corporate governance structure closely aligns our interests with those of our stockholders. Notable features include: (i) each of our directors is subject to election annually, and our charter prevents us from classifying our Board unless we receive prior stockholder approval; (ii) we have opted out of the business combination and control share acquisition statutes in the Maryland General Corporation Law; (iii) we do not have a stockholder rights plan; (iv) we have a Stock Ownership Policy that requires each non-associate director, our CEO and each other named executive officer to own a certain amount of our equity; and (v) our bylaws
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provide that our stockholders may alter or replace our bylaws upon the affirmative vote of a majority of the votes entitled to be cast.
We operate under the direction of our Board, which is comprised of eight directors, seven of whom are independent per applicable Nasdaq and SEC rules. Our Audit, Nominating and Governance (“N&G”), and Compensation Committees are comprised solely of independent directors who complete annual self-assessments. Our board has adopted Corporate Governance Guidelines that, among other things, establish criteria and expectations for our directors, and our N&G Committee has responsibility for evaluating our Board. We are cognizant of “overboarding” and none of our directors serve on more than two other public company boards. We are compliant with the diverse director requirements under Nasdaq’s Board Diversity Rule, and our upcoming 2022 proxy statement will include a Board diversity matrix.
Our full Board oversees each of our corporate social responsibility, ESG (environmental, social and governance) and ERM (enterprise risk management) programs, and our Audit Committee oversees our robust ethics and compliance program. Management provides periodic updates on each such program to the directors.
All of our associates are required to complete regular training on our Code of Business Conduct and Ethics and our Insider Trading Policy, and provide annual Code of Conduct Compliance Certifications to our Chief Ethics and Compliance Officer. We encourage our associates to speak up when our ethics standards are not being met, including by maintaining a 24-hour ethics hotline for reporting concerns and keeping our Audit Committee apprised of all reported concerns.
More information about our corporate responsibility strategy, goals and reporting is available on our website, which is not incorporated by reference and should not be considered part of this Annual Report on Form 10-K.
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 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. We intend to disclose on our website under “Investors - Governance - Governance Overview” any amendment to, or waiver of, any provisions of our Code of Business Conduct and Ethics applicable to the directors and/or officers of the Company that would otherwise be required to be disclosed under the rules of the SEC or Nasdaq. We also disclose, and intend to disclose, on our website under “Investors” material nonpublic information to comply with our disclosure obligations under Regulation FD. The contents of our website are not incorporated by reference.