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 and the more detailed information contained in our 2021 Annual Report on Form 10-K, filed with the SEC on February 16, 2022. All references to “Notes” throughout this document refer to the footnotes to the consolidated financial statements in “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 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”). These forward-looking statements are based on current expectations, estimates, and projections about the industry and markets in which we operate, and beliefs of, and assumptions made by, management of our company and involve uncertainties that could significantly affect our financial results. 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; (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; (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 concentration of our portfolio in a limited number of industries, geographies, or investments; (xvi) the economic, political, and social impact of, and uncertainty relating to, the COVID-19 pandemic; (xvii) 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; (xviii) the loss or bankruptcy of our tenants; (xix) to the extent we are seeking to dispose of properties, our ability to do so at attractive prices or at all; and (xx) the impact of inflation on us and on our tenants. 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 2021 Annual Report on Form 10-K, filed with the SEC on February 16, 2022, 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. Therefore, such statements are not intended to be a guarantee of our performance in future periods. 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 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. PHILLIPS EDISON & COMPANY JUNE 30, 2022 FORM 10-Q 19 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 at the end of the period 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 unlevered 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 a project upon stabilization and the estimated annualized NOI without the planned improvements. Underwritten incremental unlevered 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 unlevered yields may vary from our underwritten incremental unlevered 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 terms that is executed for substantially the 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) the 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 or cash flows from operations, we utilize non-GAAP metrics to measure our operational and financial performance. See “Non-GAAP Measures” below 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; (iv) transaction and acquisition expenses; and (v) realized performance income. 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 (“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 modification of debt and other; (v) other impairment charges; (vi) transaction and acquisition expenses; and (vii) realized performance income. 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. PHILLIPS EDISON & COMPANY JUNE 30, 2022 FORM 10-Q 20 • Equity Market Capitalization—We calculate equity market capitalization as the total dollar value of all outstanding shares using the closing price for the applicable date. • 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 discounts, 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 have been owned and operational for the entirety of each reporting period (i.e., since January 1, 2021). • 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 shopping centers. Our portfolio primarily consists of neighborhood centers anchored by the #1 or #2 grocer tenants by sales within their respective formats by trade area. Our Neighbors are a mix of national, regional, and local retailers that primarily provide necessity-based goods and services. As of June 30, 2022, we owned equity interests in 289 shopping centers, including 269 wholly-owned shopping centers and 20 shopping centers owned through one unconsolidated joint venture, which comprised approximately 33.1 million square feet in 31 states. In addition to managing our shopping centers, our third-party investment management business provides comprehensive real estate management services to the Managed Funds. In May 2022, we sold the final property in our joint venture with NRP, in which we own a 20% interest. During the three and six months ended June 30, 2022, we recognized income of $2.5 million and $2.7 million, respectively, related to NRP’s achievement of certain performance targets, which is included in Fees and Management Income in our consolidated statements of operations. PORTFOLIO AND LEASING STATISTICS —Below are statistical highlights of our wholly-owned portfolio as of June 30, 2022 and 2021 (dollars and square feet in thousands): June 30, 2022 June 30, 2021 Number of properties 269 272 Number of states 31 31 Total square feet 30,935 30,778 ABR $ 421,019 $ 384,916 % ABR from omni-channel grocery-anchored shopping centers 97.2 % 96.0 % Leased occupancy %: Total portfolio spaces 96.8 % 94.7 % Anchor spaces 98.7 % 96.8 % Inline spaces 93.2 % 90.6 % 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. PHILLIPS EDISON & COMPANY JUNE 30, 2022 FORM 10-Q 21 The following table details information for our unconsolidated joint venture as of June 30, 2022, which is the basis for determining the prorated information included in the subsequent tables (dollars and square feet in thousands): June 30, 2022 Joint Venture Ownership Percentage Number of Properties ABR GLA GRP I 14% 20 $ 30,308 2,210 LEASE EXPIRATIONS —The following chart shows the aggregate scheduled lease expirations, excluding our Neighbors who are occupying space on a temporary basis, after June 30, 2022 for each of the next ten years and thereafter for our wholly-owned properties and the prorated portion of those owned through our unconsolidated joint venture: 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 “Results of Operations - Leasing Activity” below for further discussion of leasing activity. PHILLIPS EDISON & COMPANY JUNE 30, 2022 FORM 10-Q 22 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 unconsolidated joint venture, by Neighbor type as of June 30, 2022: The following charts present the composition of our portfolio by Neighbor industry as of June 30, 2022: PHILLIPS EDISON & COMPANY JUNE 30, 2022 FORM 10-Q 23 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 71% of our ABR, including the pro rata portion attributable to properties owned through our unconsolidated joint venture, is generated from Neighbors providing necessity-based goods and services. TOP 20 NEIGHBORS —The following table presents our top 20 Neighbors by ABR, including our wholly-owned properties and the prorated portion of those owned through our unconsolidated joint venture, as of June 30, 2022 (dollars and square feet in thousands): Neighbor (1) ABR % of ABR Leased Square Feet % of Leased Square Feet Number of Locations (2) Kroger $ 27,423 6.4 % 3,366 11.1 % 61 Publix 23,623 5.6 % 2,314 7.6 % 57 Albertsons 18,232 4.3 % 1,709 5.6 % 31 Ahold Delhaize 17,662 4.2 % 1,249 4.1 % 23 Walmart 8,933 2.1 % 1,770 5.9 % 13 Giant Eagle 7,810 1.8 % 828 2.7 % 12 Sprouts Farmers Market 6,494 1.5 % 421 1.4 % 14 TJX Companies 6,030 1.4 % 516 1.7 % 18 Raley's 3,884 0.9 % 253 0.8 % 4 Dollar Tree 3,454 0.8 % 329 1.1 % 36 SUPERVALU 3,244 0.8 % 336 1.1 % 5 Subway Group 2,574 0.6 % 100 0.3 % 71 Lowe's 2,469 0.6 % 369 1.2 % 4 Anytime Fitness, Inc. 2,405 0.6 % 150 0.5 % 31 Kohl's Corporation 2,241 0.5 % 365 1.2 % 4 Office Depot 2,237 0.5 % 179 0.6 % 8 Food 4 Less (PAQ) 2,215 0.5 % 118 0.4 % 2 Save Mart 2,174 0.5 % 258 0.9 % 5 Starbucks Corporation 2,136 0.5 % 49 0.2 % 30 Petco Animal Supplies, Inc. 2,136 0.5 % 127 0.4 % 11 Total $ 147,376 34.6 % 14,806 48.8 % 440 (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 —The COVID-19 pandemic resulted in reduced revenues beginning with the second quarter of 2020 through early 2021. Our collections returned to pre-COVID levels during the second half of 2021 and have continued through the first half of 2022. As of June 30, 2022, our Neighbors currently being accounted for on a cash basis represented approximately 5.0% of portfolio ABR. We believe our collections have stabilized, which will reduce volatility in our earnings during 2022 as compared to 2021. Due to changing economic conditions and supply chain limitations, there has been an increase in wages and costs for materials. The resulting increased inflation may negatively impact some of our Neighbors and increase our operating and construction costs. Additionally, macroeconomic and geopolitical risks may create challenges that cause current market conditions in the United States to worsen. The policies implemented to address these risks, including raising interest rates, could result in adverse impacts on the United States economy, including a slowing of growth or potentially a recession. PHILLIPS EDISON & COMPANY JUNE 30, 2022 FORM 10-Q 24 SUMMARY OF OPERATING ACTIVITIES FOR THE THREE MONTHS ENDED JUNE 30, 2022 AND 2021 Three Months Ended June 30, Favorable (Unfavorable) Change (Dollars in thousands) 2022 2021 $ % (1) Revenues: Rental income $ 137,230 $ 130,335 $ 6,895 5.3 % Fees and management income 4,781 2,374 2,407 101.4 % Other property income 505 361 144 39.9 % Total revenues 142,516 133,070 9,446 7.1 % Operating Expenses: Property operating 22,852 21,974 (878) (4.0) % Real estate taxes 16,473 16,814 341 2.0 % General and administrative 11,376 11,937 561 4.7 % Depreciation and amortization 60,769 56,587 (4,182) (7.4) % Impairment of real estate assets — 1,056 1,056 NM Total operating expenses 111,470 108,368 (3,102) (2.9) % Other: Interest expense, net (17,127) (19,132) 2,005 10.5 % Gain on disposal of property, net 2,793 3,744 (951) (25.4) % Other expense, net (1,457) (2,924) 1,467 50.2 % Net income 15,255 6,390 8,865 138.7 % Net income attributable to noncontrolling interests (1,727) (796) (931) (117.0) % Net income attributable to stockholders $ 13,528 $ 5,594 $ 7,934 141.8 % (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 255 properties that were owned and operational prior to January 1, 2021. 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, 2020, which includes 26 properties disposed of and 13 properties acquired. Below are explanations of the significant fluctuations in the results of operations for the three months ended June 30, 2022 and 2021: Rental Income increased $6.9 million primarily as follows: • $2.2 million increase related to our same-center portfolio as follows: ▪ $3.1 million increase primarily due to a $0.37 increase in average minimum rent PSF and a 1.6% improvement in average occupancy owing largely to the strength of our leasing results during 2021; and ▪ $1.4 million increase owing largely to an increase in recoverable income attributable to the 1.6% improvement in average occupancy and lower reserves for common area maintenance as compared to 2021; offset by ▪ $2.2 million decrease primarily due to the stabilization of collections in 2022 compared to the recovery of prior year income in 2021 and the reversal of reserves for uncollectibility from 2020 resulting from the recovery of our portfolio in the wake of the COVID-19 pandemic. • $4.7 million increase primarily related to our acquisition and disposition activity. Fees and Management Income: • The $2.4 million increase in fees and management income was primarily due to the achievement of certain performance targets related to our joint venture with NRP. Property Operating Expenses: • The $0.9 million increase in property operating expenses was largely related to our same-center portfolio and corporate operating activities primarily as follows: ▪ $1.2 million increase in recoverable expenses attributed to higher common area maintenance costs, as compared to 2021; offset by ▪ $0.5 million decrease in compensation expenses due to decreases in performance-based compensation, as compared to 2021. PHILLIPS EDISON & COMPANY JUNE 30, 2022 FORM 10-Q 25 Real Estate Tax Expenses: • The $0.3 million decrease in real estate tax expenses is primarily due to the impact of favorable real estate tax reassessments and appeals. General and Administrative Expenses decreased $0.6 million primarily as follows: • $1.6 million decrease in compensation expense owing largely to a decrease in performance- and service-based compensation of approximately $0.8 million and $0.4 million, respectively; and • $0.3 million decrease primarily due to lower third-party consultant and custodial costs; offset by • $1.0 million increase primarily due to increases in technology-related costs and travel and conference expenses; and • $0.5 million increase primarily due to an increase in directors and officers insurance as a result of our becoming a publicly traded company. Depreciation and Amortization: • The $4.2 million increase in depreciation and amortization is primarily due to the execution of our acquisition strategy and investment in improvements to our Neighbor spaces. Impairment of Real Estate Assets: • The $1.1 million decrease in impairment of real estate assets was due to assets that were sold during 2021 at a disposition price that was less than the carrying value. Interest Expense, Net: • The $2.0 million decrease was primarily due to net repayments of debt outstanding in 2021, partially offset by higher average interest rates in 2022. Interest Expense, Net was comprised of the following (dollars in thousands): Three Months Ended June 30, 2022 2021 Interest on unsecured term loans and senior notes, net $ 9,512 $ 10,573 Interest on secured debt 5,147 6,246 Interest on revolving credit facility, net 521 207 Non-cash amortization and other 1,818 1,687 Loss on extinguishment or modification of debt and other, net (1) 129 419 Interest expense, net $ 17,127 $ 19,132 Weighted-average interest rate as of end of period 3.2 % 2.9 % Weighted-average term (in years) as of end of period 4.9 3.7 (1) Includes defeasance fees related to early repayments of debt. Gain on Disposal of Property, Net: • The $1.0 million decrease was primarily related to the sale of one property and two outparcels with a net gain of $2.8 million during the three months ended June 30, 2022, as compared to the sale of seven properties (in addition to other property-related miscellaneous disposals and write-offs) with a net gain of $3.7 million during the three months ended June 30, 2021 (see Note 4). Other Expense, Net: • The $1.5 million decrease was primarily related to a 2021 charge in connection with the change in the fair value of our earn-out liability, which was settled in January 2022, combined with an increase from equity in income of our unconsolidated joint ventures, partially offset by an increase in transaction and acquisition expenses owing largely to the amortization of the restricted stock units awarded at the time of our underwritten IPO and a decrease in the value of our investment in marketable securities. Other Expense, Net was comprised of the following (in thousands): Three Months Ended June 30, 2022 2021 Increase in fair value of earn-out liability (see Note 12) $ — $ (2,000) Equity in net income of unconsolidated joint ventures 1,228 87 Transaction and acquisition expenses (2,035) (934) Federal, state, and local income tax expense (97) (165) Other (553) 88 Other expense, net $ (1,457) $ (2,924) PHILLIPS EDISON & COMPANY JUNE 30, 2022 FORM 10-Q 26 SUMMARY OF OPERATING ACTIVITIES FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021 Six Months Ended June 30, Favorable (Unfavorable) Change (Dollars in thousands) 2022 2021 $ % (1) Revenues: Rental income $ 275,978 $ 257,958 $ 18,020 7.0 % Fee and management income 7,242 4,660 2,582 55.4 % Other property income 1,459 833 626 75.2 % Total revenues 284,679 263,451 21,228 8.1 % Operating Expenses: Property operating 46,172 44,176 (1,996) (4.5) % Real estate taxes 33,964 33,387 (577) (1.7) % General and administrative 22,908 21,278 (1,630) (7.7) % Depreciation and amortization 117,995 111,928 (6,067) (5.4) % Impairment of real estate assets — 6,056 6,056 NM Total operating expenses 221,039 216,825 (4,214) (1.9) % Other: Interest expense, net (35,326) (39,195) 3,869 9.9 % Gain on disposal of property, net 4,161 17,585 (13,424) (76.3) % Other expense, net (5,822) (18,509) 12,687 68.5 % Net income 26,653 6,507 20,146 NM Net income attributable to noncontrolling interests (3,046) (810) (2,236) NM Net income attributable to stockholders $ 23,607 $ 5,697 $ 17,910 NM (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 “Summary of Operating Activities for the Three Months Ended June 30, 2022 and 2021” above. Below are explanations of the significant fluctuations in the results of operations for the six months ended June 30, 2022 and 2021: Rental Income increased $18.0 million as follows: • $10.5 million increase related to our same-center portfolio primarily as follows: ▪ $9.0 million increase primarily due to a $0.37 increase in average minimum rent per square foot and a 1.4% improvement in average occupancy; and ▪ $3.1 million increase owing largely to an increase in recoverable income attributed to an increase in common area maintenance spending and lower reserves for common area maintenance, as compared to 2021, and the 1.4% improvement in average occupancy; offset by ▪ $1.7 million decrease primarily due to the stabilization of collections in 2022 compared to the recovery of prior year income in 2021 and the reversal of reserves for uncollectibility from 2020 resulting from the recovery of our portfolio in the wake of the COVID-19 pandemic. • $7.6 million increase primarily related to our acquisition and disposition activity. Fees and management income: • The $2.6 million increase in fees and management income was primarily due to the achievement of certain performance targets related to our joint venture with NRP. Property Operating Expenses increased $2.0 million primarily as follows: • $1.4 million increase related to our same-center portfolio and corporate operating activities as follows: ▪ $1.9 million increase attributable to higher common area maintenance costs, as compared to 2021; and ▪ $0.6 million increase primarily due to higher insurance expenses attributed to higher market rates and an increase in claims and claim development; offset by ▪ $0.4 million decrease in compensation expenses due to decreases in performance-based compensation, as compared to 2021. • $0.5 million increase primarily due to our acquisition activity. Real Estate Tax Expenses: • The $0.6 million increase in real estate tax expenses is primarily due to our acquisition activity. PHILLIPS EDISON & COMPANY JUNE 30, 2022 FORM 10-Q 27 General and Administrative Expenses increased $1.6 million primarily as follows: • $1.2 million increase primarily due to an increase in directors and officers insurance as a result of our becoming a publicly traded company; and • $1.0 million increase primarily due to increases in overhead attributed to technology-related costs and travel and conference expenses; offset by • $0.5 million decrease in compensation expense owing largely to lower performance-based compensation. Depreciation and Amortization: • The $6.1 million increase in depreciation and amortization is primarily due to the execution of our acquisition strategy and investment in improvements to our Neighbor spaces. Impairment of Real Estate Assets: • The $6.1 million decrease in impairment of real estate assets was due to assets that were sold during 2021 at a disposition price that was less than the carrying value. Interest Expense, Net: • The $3.9 million decrease was primarily due to net repayments of debt outstanding in 2021, partially offset by higher average interest rates in 2022. Interest Expense, Net was comprised of the following (dollars in thousands): Six Months Ended June 30, 2022 2021 Interest on unsecured term loans and senior notes, net $ 19,428 $ 21,206 Interest on secured debt 10,678 13,026 Interest on revolving credit facility, net 768 435 Non-cash amortization and other 3,423 3,418 Loss on extinguishment or modification of debt and other, net (1) 1,029 1,110 Interest expense, net $ 35,326 $ 39,195 Weighted-average interest rate as of end of period 3.2 % 2.9 % Weighted-average term (in years) as of end of period 4.9 3.7 (1) Includes defeasance fees related to early repayments of debt. Gain on Disposal of Property, Net: • The $13.4 million decrease was primarily related to the sale of three properties and two outparcels with a net gain of $4.2 million during the six months ended June 30, 2022, as compared to the sale of 13 properties and one outparcel (as well as other property-related miscellaneous disposals and write-offs) with a net gain of $17.6 million during the six months ended June 30, 2021 (see Note 4). PHILLIPS EDISON & COMPANY JUNE 30, 2022 FORM 10-Q 28 Other Expense, Net: • The $12.7 million decrease was primarily related to a 2021 charge in connection with the change in the fair value of our earn-out liability, which was settled in January 2022, combined with an increase from equity in income of our unconsolidated joint ventures, partially offset by an increase in transaction and acquisition expenses owing largely to the amortization of the restricted stock units awarded at the time of our underwritten IPO and a decrease in the value of our investment in marketable securities. Other Expense, Net was comprised of the following (in thousands): Six Months Ended June 30, 2022 2021 Increase in fair value of earn-out liability (see Note 12) $ (1,809) $ (18,000) Equity in net income of unconsolidated joint ventures 1,174 801 Transaction and acquisition expenses (4,080) (1,075) Federal, state, and local income tax expense (194) (331) Other (913) 96 Other expense, net $ (5,822) $ (18,509) LEASING ACTIVITY —Below is a summary of leasing activity for our wholly-owned properties for the three months ended June 30, 2022 and 2021 (1) : Total Deals Inline Deals 2022 2021 2022 2021 New leases: Number of leases 105 124 98 121 Square footage (in thousands) 404 341 225 278 ABR (in thousands) $ 7,479 $ 6,338 $ 5,479 $ 5,816 ABR PSF $ 18.51 $ 18.57 $ 24.40 $ 20.94 Cost PSF of executing new leases $ 35.10 $ 31.01 $ 35.18 $ 29.30 Number of comparable leases 38 57 37 55 Comparable rent spread 39.0 % 18.5 % 24.5 % 19.0 % Weighted-average lease term (in years) 9.0 7.2 7.6 6.8 Renewals and options: Number of leases 160 174 141 159 Square footage (in thousands) 1,225 1,049 290 333 ABR (in thousands) $ 15,132 $ 12,895 $ 7,290 $ 7,306 ABR PSF $ 12.35 $ 12.30 $ 25.17 $ 21.95 ABR PSF prior to renewals $ 11.49 $ 11.55 $ 22.46 $ 20.08 Percentage increase in ABR PSF 7.5 % 6.5 % 12.1 % 9.3 % Cost PSF of executing renewals and options (2) $ 0.55 $ 0.89 $ 0.75 $ 1.11 Number of comparable leases (3) 120 155 118 148 Comparable rent spread (3) 14.4 % 8.0 % 13.4 % 9.4 % Weighted-average lease term (in years) 5.5 5.4 4.2 4.0 Portfolio retention rate 92.1 % 85.5 % 85.3 % 79.5 % (1) PSF 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 PSF 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 JUNE 30, 2022 FORM 10-Q 29 Below is a summary of leasing activity for our wholly-owned properties for the six months ended June 30, 2022 and 2021 (1) : Total Deals Inline Deals 2022 2021 2022 2021 New leases: Number of leases 197 277 186 268 Square footage (in thousands) 661 808 411 619 ABR (in thousands) $ 12,421 $ 14,458 $ 9,800 $ 12,421 ABR PSF $ 18.80 $ 17.89 $ 23.86 $ 20.06 Cost PSF of executing new leases $ 32.69 $ 28.51 $ 34.37 $ 28.00 Number of comparable leases 72 127 70 125 Comparable rent spread 36.6 % 15.3 % 25.8 % 15.3 % Weighted-average lease term (in years) 8.1 7.7 7.5 6.5 Renewals and options: Number of leases 312 337 287 306 Square footage (in thousands) 1,744 2,027 613 645 ABR (in thousands) $ 24,379 $ 24,367 $ 14,592 $ 14,375 ABR PSF $ 13.98 $ 12.02 $ 23.81 $ 22.30 ABR PSF prior to renewals $ 12.84 $ 11.27 $ 21.14 $ 20.54 Percentage increase in ABR PSF 8.8 % 6.6 % 12.7 % 8.6 % Cost PSF of executing renewals and options (2) $ 0.58 $ 0.71 $ 0.81 $ 1.34 Number of comparable leases (3) 248 291 244 281 Comparable rent spread (3) 14.6 % 8.0 % 14.0 % 8.7 % Weighted-average lease term (in years) 5.1 4.9 4.0 4.0 Portfolio retention rate 90.6 % 87.2 % 81.6 % 79.9 % (1) PSF 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 PSF 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 “Key Performance Indicators and Defined Terms” above for additional information related to the following non-GAAP measures. SAME-CENTER NOI —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 six months ended June 30, 2022 and 2021, Same-Center NOI represents the NOI for the 255 properties that were wholly-owned and operational for the entire portion of all comparable reporting 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 JUNE 30, 2022 FORM 10-Q 30 The table below presents our Same-Center NOI (dollars in thousands): Three Months Ended June 30, Favorable (Unfavorable) Six Months Ended June 30, Favorable (Unfavorable) 2022 2021 $ Change % Change 2022 2021 $ Change % Change Revenues: Rental income (1) $ 94,169 $ 89,516 $ 4,653 $ 188,562 $ 179,141 $ 9,421 Tenant recovery income 28,375 26,818 1,557 59,772 56,921 2,851 Reserves for uncollectibility (2) 256 2,783 (2,527) (515) 1,221 (1,736) Other property income 439 286 153 1,186 751 435 Total revenues 123,239 119,403 3,836 3.2 % 249,005 238,034 10,971 4.6 % Operating expenses: Property operating expenses 18,337 17,043 (1,294) 38,105 35,756 (2,349) Real estate taxes 15,213 16,331 1,118 31,650 32,341 691 Total operating expenses 33,550 33,374 (176) (0.5) % 69,755 68,097 (1,658) (2.4) % Total Same-Center NOI $ 89,689 $ 86,029 $ 3,660 4.3 % $ 179,250 $ 169,937 $ 9,313 5.5 % (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 June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net income $ 15,255 $ 6,390 $ 26,653 $ 6,507 Adjusted to exclude: Fees and management income (4,781) (2,374) (7,242) (4,660) Straight-line rental income (1) (3,319) (2,970) (5,128) (4,392) Net amortization of above- and below-market leases (1,078) (887) (2,080) (1,725) Lease buyout income (176) (1,781) (2,141) (2,578) General and administrative expenses 11,376 11,937 22,908 21,278 Depreciation and amortization 60,769 56,587 117,995 111,928 Impairment of real estate assets — 1,056 — 6,056 Interest expense, net 17,127 19,132 35,326 39,195 Gain on disposal of property, net (2,793) (3,744) (4,161) (17,585) Other expense, net 1,457 2,924 5,822 18,509 Property operating expenses related to fees and management income 1,287 1,306 2,357 2,122 NOI for real estate investments 95,124 87,576 190,309 174,655 Less: Non-same-center NOI (2) (5,435) (1,547) (11,059) (4,718) Total Same-Center NOI $ 89,689 $ 86,029 $ 179,250 $ 169,937 (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. We believe that Core FFO is helpful in assisting management and investors with assessing the sustainability of our operating performance in future periods. 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. PHILLIPS EDISON & COMPANY JUNE 30, 2022 FORM 10-Q 31 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 June 30, Six Months Ended June 30, 2022 2021 2022 2021 Calculation of Nareit FFO Attributable to Stockholders and OP Unit Holders Net income $ 15,255 $ 6,390 $ 26,653 $ 6,507 Adjustments: Depreciation and amortization of real estate assets 59,849 55,654 116,169 109,995 Impairment of real estate assets — 1,056 — 6,056 Gain on disposal of property, net (2,793) (3,744) (4,161) (17,585) Adjustments related to unconsolidated joint ventures (1,186) 537 (481) (100) Nareit FFO attributable to stockholders and OP unit holders $ 71,125 $ 59,893 $ 138,180 $ 104,873 Calculation of Core FFO Nareit FFO attributable to stockholders and OP unit holders $ 71,125 $ 59,893 $ 138,180 $ 104,873 Adjustments: Depreciation and amortization of corporate assets 920 933 1,826 1,933 Change in fair value of earn-out liability — 2,000 1,809 18,000 Transaction and acquisition expenses 2,035 934 4,080 1,075 Loss on extinguishment or modification of debt and other, net 129 419 1,029 1,110 Amortization of unconsolidated joint venture basis differences 175 79 219 825 Realized performance income (1) (2,546) — (2,742) — Core FFO $ 71,838 $ 64,258 $ 144,401 $ 127,816 Nareit FFO Attributable to Stockholders and OP Unit Holders/Core FFO per diluted share Weighted-average shares of common stock outstanding - diluted 129,117 107,175 128,857 107,102 Nareit FFO attributable to stockholders and OP unit holders per share - diluted $ 0.55 $ 0.56 $ 1.07 $ 0.98 Core FFO per share - diluted $ 0.56 $ 0.60 $ 1.12 $ 1.19 (1) Realized performance income includes fees received related to the achievement of certain performance targets in our NRP joint venture. PHILLIPS EDISON & COMPANY JUNE 30, 2022 FORM 10-Q 32 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 June 30, Six Months Ended June 30, Year Ended December 31, 2022 2021 2022 2021 2021 Calculation of EBITDA re Net income $ 15,255 $ 6,390 $ 26,653 $ 6,507 $ 17,233 Adjustments: Depreciation and amortization 60,769 56,587 117,995 111,928 221,433 Interest expense, net 17,127 19,132 35,326 39,195 76,371 Gain on disposal of property, net (2,793) (3,744) (4,161) (17,585) (30,421) Impairment of real estate assets — 1,056 — 6,056 6,754 Federal, state, and local tax expense 97 165 194 331 327 Adjustments related to unconsolidated joint ventures (885) (535) 134 597 1,431 EBITDA re $ 89,570 $ 79,051 $ 176,141 $ 147,029 $ 293,128 Calculation of Adjusted EBITDA re EBITDA re $ 89,570 $ 79,051 $ 176,141 $ 147,029 $ 293,128 Adjustments: Change in fair value of earn-out liability — 2,000 1,809 18,000 30,436 Transaction and acquisition expenses 2,035 934 4,080 1,075 5,363 Amortization of unconsolidated joint venture basis differences 175 79 219 825 1,167 Realized performance income (1) (2,546) — (2,742) — (675) Adjusted EBITDA re $ 89,234 $ 82,064 $ 179,507 $ 166,929 $ 329,419 (1) Realized performance income includes fees received related to the achievement of certain performance targets in our NRP joint venture. LIQUIDITY AND CAPITAL RESOURCES GENERAL —Aside from standard operating expenses, we expect our principal cash demands to be for: • investments in real estate; • cash distributions to stockholders; • redevelopment and repositioning projects; • capital expenditures and leasing costs; and • principal and interest payments on our outstanding indebtedness. We expect our primary sources of liquidity to be: • operating cash flows; • proceeds received from the disposition of properties; • borrowings from our unsecured revolving credit facility and proceeds from debt financings; • proceeds from any ATM offering activities; • distributions received from our unconsolidated joint ventures; and • available, unrestricted cash and cash equivalents. At this time, we believe our current sources of liquidity are sufficient to meet our short- and long-term cash demands. PHILLIPS EDISON & COMPANY JUNE 30, 2022 FORM 10-Q 33 IMPACT OF THE UNDERWRITTEN IPO —On July 19, 2021, we closed our underwritten IPO, from which we received gross proceeds of $547.4 million. The underwritten IPO has allowed us access to forms of capital not previously available to us as follows: • In October 2021, we settled the registered offering of $350 million aggregate principal amount of 2.625% senior notes, which resulted in gross proceeds of $345.4 million. • In February 2022, we filed an automatically effective shelf registration statement on Form S-3 providing for the public offering and sale, from time to time, by us of our preferred stock, common stock, debt securities, depository shares, warrants, right, units, and guarantees of debt securities and by the Operating Partnership of its debt securities, in each case in unlimited amounts. • In connection with our February 2022 Form S-3 filing, we commenced the ATM program through which we may offer and sell shares of our common stock having an aggregate offering price of up to $250 million. During the three months ended June 30, 2022, we issued 1.9 million shares of our common stock under the ATM program for net proceeds of $63.0 million, after approximately $0.6 million in commissions. As of June 30, 2022, $186.3 million of common stock remained available for issuance under the ATM program. In July 2022, we issued an additional 0.8 million shares of our common stock under the ATM program for net proceeds of $26.2 million, after approximately $0.3 million in commissions. We received a weighted-average price of $34.23 per share for the 2.6 million shares of commons stock sold under the ATM program through July 2022. DEBT —The following table summarizes information about our debt as of June 30, 2022 and December 31, 2021 (dollars in thousands): June 30, 2022 December 31, 2021 Total debt obligations, gross $ 1,895,109 $ 1,914,082 Weighted-average interest rate 3.2 % 3.3 % Weighted-average term (in years) 4.9 5.2 Revolving credit facility capacity (1) $ 800,000 $ 500,000 Revolving credit facility availability (2) 740,706 489,329 (1) The revolving credit facility matures in January 2026, extendable at our option to January 2027. In addition, the revolving credit facility also includes an accordion feature that permits us to increase our aggregate borrowing capacity thereunder to up to $1 billion, subject to the satisfaction of certain conditions. (2) Net of any outstanding balance and letters of credit. In May 2022, we amended our credit facility agreement to, among other things, increase the total amount available under our unsecured revolving credit facility from $500 million to $800 million. The unsecured revolving credit facility also includes an accordion feature that permits us to increase our aggregate borrowing capacity thereunder to up to $1 billion, subject to the satisfaction of certain conditions. The unsecured revolving credit facility is scheduled to mature in January 2026, extendable at our option to January 2027. In addition to expanding the borrowing capacity, the Amendment replaces LIBOR with SOFR as the benchmark interest rate for the unsecured revolving credit facility and the two $240 million senior unsecured term loan tranches, maturing in November 2025 and July 2026. The 2.625% senior notes issued by the Operating Partnership pursuant to an effective registration statement in October 2021 were, and debt securities of the Operating Partnership registered under our automatically effective shelf registration statement on Form S-3 filed in February 2022 will be, fully and unconditionally guaranteed by us. At June 30, 2022, the Operating Partnership had issued and outstanding its 2.625% senior notes. The obligations of the Operating Partnership to pay principal, premiums, if any, and interest on the 2.625% senior notes are fully and unconditionally guaranteed by us on a senior basis. As a result of the amendments to SEC Rule 3-10 of Regulation S-X, subsidiary issuers of obligations guaranteed by the parent are not required to provide separate financial statements, provided that: (i) the subsidiary obligor is consolidated into the parent company’s consolidated financial statements; (ii) the parent guarantee is “full and unconditional”; and (iii) subject to certain exceptions as set forth below, the alternative disclosure required by Rule 13-01 of Regulation S-X is provided, which includes narrative disclosure and summarized financial information. We meet the conditions of this requirement and thus, are not presenting separate financial statements. Furthermore, as permitted under Rule 13-01(a)(4)(vi) of Regulation S-X, we have excluded the summarized financial information for the Operating Partnership because the assets, liabilities, and results of operations of the Operating Partnership are not materially different than the corresponding in our consolidated financial statements, and management believes such summarized financial information would be repetitive and would not provide incremental value to investors. PHILLIPS EDISON & COMPANY JUNE 30, 2022 FORM 10-Q 34 FINANCIAL LEVERAGE RATIOS —We believe our net debt to Adjusted EBITDA re , net debt to total enterprise value, and debt covenant compliance as of June 30, 2022 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 June 30, 2022 and December 31, 2021 (in thousands): June 30, 2022 December 31, 2021 Net debt: Total debt, excluding discounts, market adjustments, and deferred financing expenses $ 1,919,467 $ 1,941,504 Less: Cash and cash equivalents 25,072 93,109 Total net debt $ 1,894,395 $ 1,848,395 Enterprise value: Net debt $ 1,894,395 $ 1,848,395 Total equity market capitalization (1)(2) 4,354,726 4,182,996 Total enterprise value $ 6,249,121 $ 6,031,391 (1) Total equity market capitalization is calculated as diluted shares multiplied by the closing market price per share, which includes 130.3 million and 126.6 million diluted shares as of June 30, 2022 and December 31, 2021, respectively, and the closing market price per share of $33.41 and $33.04 as of June 30, 2022 and December 31, 2021, respectively. (2) Fully diluted shares include common stock and OP units as of June 30, 2022 and Class B common stock, common stock, and OP units as of December 31, 2021. The following table presents our calculation of net debt to Adjusted EBITDA re and net debt to total enterprise value as of June 30, 2022 and December 31, 2021 (dollars in thousands): June 30, 2022 December 31, 2021 Net debt to Adjusted EBITDA re - annualized : Net debt $ 1,894,395 $ 1,848,395 Adjusted EBITDA re - annualized (1) 341,997 329,419 Net debt to Adjusted EBITDA re - annualized 5.5x 5.6x Net debt to total enterprise value: Net debt $ 1,894,395 $ 1,848,395 Total enterprise value 6,249,121 6,031,391 Net debt to total enterprise value 30.3% 30.6% (1) Adjusted EBITDA re is based on a trailing twelve month period. See “Non-GAAP Measures - EBITDA re and Adjusted EBITDA re ” above 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. PHILLIPS EDISON & COMPANY JUNE 30, 2022 FORM 10-Q 35 During the six months ended June 30, 2022 and 2021, we had capital spend of $42.9 million and $30.2 million, respectively. Below is a summary of our capital spending activity, excluding leasing commissions, on a cash basis (in thousands): Six Months Ended June 30, 2022 2021 Capital expenditures for real estate: Capital improvements $ 4,822 $ 3,101 Tenant improvements 11,924 9,557 Redevelopment and development 22,590 15,658 Total capital expenditures for real estate 39,336 28,316 Corporate asset capital expenditures 2,085 1,007 Capitalized indirect costs (1) 1,525 907 Total capital spending activity $ 42,946 $ 30,230 (1) Amount includes internal salaries and related benefits of personnel who work directly on capital projects as well as capitalized interest expense. We anticipate that obligations related to capital improvements, as well as redevelopment and development, in 2022 can be met with cash flows from operations, cash flows from dispositions, or borrowings on our unsecured revolving credit facility. Generally, we expect our development and redevelopment projects to stabilize within 24 months. Our underwritten incremental unlevered yields on development and redevelopment projects are expected to range between 10%-12%. Our current in process projects represent an estimated total investment of $59.5 million. Actual incremental unlevered yields may vary from our underwritten incremental unlevered yield range based on the actual total cost to complete a project and its actual incremental annual NOI at stabilization. See “Key Performance Indicators and Defined Terms” above for further information. ACQUISITION ACTIVITY —We are actively monitoring the commercial real estate market for properties that have future growth potential, are located in attractive demographic markets, and support our business objectives. We expect to continue to make strategic acquisitions during the remainder of 2022. The following table highlights our property acquisitions (dollars in thousands): Six Months Ended June 30, 2022 2021 Number of properties acquired 4 2 Number of outparcels acquired (1) 1 3 Contract price $ 169,342 $ 40,190 Total price of acquisitions (2) 170,186 40,459 (1) Outparcels acquired are adjacent to shopping centers that we own. (2) Total price of acquisitions includes closing costs and credits. DISPOSITION ACTIVITY —We continually evaluate 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. The following table highlights our property dispositions (dollars in thousands): Six Months Ended June 30, 2022 2021 Number of properties sold (1) 3 13 Number of outparcels sold (2) 2 1 Contract price $ 28,342 $ 125,247 Proceeds from sale of real estate, net (3) 27,077 119,638 Gain on sale of property, net (4) 4,161 18,713 (1) We retained an outparcel for one property sold during the six months ended June 30, 2021, and therefore the sale did not result in a reduction in our total property count. (2) During the six months ended June 30, 2021, the one outparcel sale included the only remaining portion of a property we previously owned; therefore, the sale resulted in a reduction in our total property count. (3) Total proceeds from sale of real estate, net includes closing costs and credits. (4) During the six months ended June 30, 2021, Gain on Disposal of Property, Net on the consolidated statements of operations includes miscellaneous write-off activity, which is not included in gain on sale of property, net, presented above. PHILLIPS EDISON & COMPANY JUNE 30, 2022 FORM 10-Q 36 DISTRIBUTIONS —We paid 2022 monthly distributions of $0.09 per share, or $1.08 annualized, for each month beginning January 2022 through July 2022. On August 3, 2022, our Board authorized a distribution for August 2022 of $0.09 per share to the stockholders of record at the close of business on August 15, 2022. OP unit holders will receive distributions at the same rate as common stockholders, subject to certain withholdings. 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. CASH FLOW ACTIVITIES —As of June 30, 2022, we had cash and cash equivalents and restricted cash of $43.7 million, a net cash decrease of $71.8 million during the six months ended June 30, 2022. Below is a summary of our cash flow activity (dollars in thousands): Six Months Ended June 30, 2022 2021 $ Change % Change (1) Net cash provided by operating activities $ 142,499 $ 129,897 $ 12,602 9.7 % Net cash (used in) provided by investing activities (185,893) 49,837 (235,730) NM Net cash used in financing activities (28,448) (200,270) 171,822 85.8 % (1) Line items that result in a percent change that exceed certain limitations are considered not meaningful (“NM”) and indicated as such. 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. The increase in property operations was primarily due to a $9.3 million, or 5.5%, improvement in same center NOI as compared to the same period in 2021, and the execution of our acquisition strategy. During the six months ended June 30, 2022, we had a net cash outlay of $3.7 million from changes in working capital as compared to a net cash inflow of $2.1 million during the same period in 2021. This change was primarily driven by higher bonus payments, lower receivables collections due to the stabilization of collections in 2022 compared to the recovery of prior year receivables in 2021, and the timing of interest payments, partially offset by the timing of real estate tax payments. • 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 $7.2 million for the six months ended June 30, 2022, an increase of $2.6 million as compared to the same period in 2021. The increase in fees and management income was primarily due to our joint venture with NRP from which we recognized income of $2.7 million related to NRP’s achievement of certain performance targets. • Cash paid for interest —During the six months ended June 30, 2022, we paid $34.1 million for interest, a decrease of $2.7 million over the same period in 2021, primarily due to our debt activity in 2021, including early repayments of debt outstanding. INVESTING ACTIVITIES —Our net cash (used in) provided by investing activities was primarily impacted by the following: • Real estate acquisitions —During the six months ended June 30, 2022, our acquisitions resulted in a total cash outlay of $170.2 million, as compared to a total cash outlay of $40.5 million during the same period in 2021. • Real estate dispositions —During the six months ended June 30, 2022, our dispositions resulted in a net cash inflow of $27.1 million, as compared to a net cash inflow of $119.6 million during the same period in 2021. • Capital expenditures —We invest capital into leasing our properties and maintaining or improving the condition of our properties. During the six months ended June 30, 2022, we paid $42.9 million for capital expenditures, an increase of $12.7 million over the same period in 2021, primarily due to an increase in tenant improvements owing largely to our leasing volume during 2022 and 2021. FINANCING ACTIVITIES —Our net cash used in financing activities was primarily impacted by the following: • Debt borrowings and payments —During the six months ended June 30, 2022, we had $20.6 million in net repayment of debt primarily as a result of early repayments of mortgage loans, partially offset by our net borrowings under our revolving credit facility. During the six months ended June 30, 2021, we had net payments of $66.2 million, primarily as a result of early repayments of mortgage loans. PHILLIPS EDISON & COMPANY JUNE 30, 2022 FORM 10-Q 37 • Distributions to stockholders and OP unit holders —Cash used for distributions to common stockholders and OP unit holders increased $14.6 million for the six months ended June 30, 2022 as compared to the same period in 2021, primarily due to an increase in shares of common stock outstanding as a result of our underwritten IPO. • Issuance of common stock— During the six months ended June 30, 2022, we issued 1.9 million shares of our common stock under the ATM program for net proceeds of $63.0 million, after approximately $0.6 million in commissions. • Share repurchases —Cash outflows for share repurchases decreased by $77.8 million for the six months ended June 30, 2022 as compared to the same period in 2021, primarily as a result of a tender offer which was settled in January 2021. CRITICAL ACCOUNTING ESTIMATES “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates” of our 2021 Annual Report on Form 10-K, filed with the SEC on February 16, 2022, contains a description of our critical accounting estimates, including those relating to the valuation of real estate assets and rental income. There have been no significant changes to our critical accounting policies during 2022. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes from the quantitative and qualitative disclosures about market risk disclosed in “Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk” of our 2021 Annual Report on Form 10-K filed with the SEC on February 16, 2022.