Phillips Edison & Company, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS PHILLIPS EDISON & COMPANY, INC. CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2022 AND DECEMBER 31, 2021 (Condensed and Unaudited) (In thousands, except per share amounts) September 30, 2022 December 31, 2021 ASSETS Investment in real estate: Land and improvements $ 1,656,666 $ 1,586,993 Building and improvements 3,539,035 3,355,433 In-place lease assets 470,184 452,504 Above-market lease assets 72,294 68,736 Total investment in real estate assets 5,738,179 5,463,666 Accumulated depreciation and amortization ( 1,272,653 ) ( 1,110,426 ) Net investment in real estate assets 4,465,526 4,353,240 Investment in unconsolidated joint ventures 27,601 31,326 Total investment in real estate assets, net 4,493,127 4,384,566 Cash and cash equivalents 4,789 92,585 Restricted cash 19,657 22,944 Goodwill 29,066 29,066 Other assets, net 183,774 138,050 Real estate investments and other assets held for sale — 1,557 Total assets $ 4,730,413 $ 4,668,768 LIABILITIES AND EQUITY Liabilities: Debt obligations, net $ 1,872,939 $ 1,891,722 Below-market lease liabilities, net 108,548 107,526 Earn-out liability — 52,436 Derivative liabilities — 24,096 Deferred income 21,586 19,145 Accounts payable and other liabilities 112,433 97,229 Liabilities of real estate investments held for sale — 288 Total liabilities 2,115,506 2,192,442 Commitments and contingencies (see Note 8) — — Equity: Preferred stock, $ 0.01 par value per share, 10,000 shares authorized, zero shares issued and outstanding at September 30, 2022 and December 31, 2021 — — Common stock, $ 0.01 par value per share, 1,000,000 shares authorized, 117,084 shares issued and outstanding at September 30, 2022; 650,000 shares authorized, 19,550 shares issued and outstanding at December 31, 2021 1,170 196 Class B common stock, $ 0.01 par value per share, zero shares authorized, issued, and outstanding at September 30, 2022; 350,000 shares authorized, 93,665 shares issued and outstanding at December 31, 2021 — 936 Additional paid-in capital (“APIC”) 3,381,638 3,264,038 Accumulated other comprehensive income (loss) (“AOCI”) 21,123 ( 24,819 ) Accumulated deficit ( 1,150,337 ) ( 1,090,837 ) Total stockholders’ equity 2,253,594 2,149,514 Noncontrolling interests 361,313 326,812 Total equity 2,614,907 2,476,326 Total liabilities and equity $ 4,730,413 $ 4,668,768 See notes to consolidated financial statements. PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2022 FORM 10-Q 2 PHILLIPS EDISON & COMPANY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021 (Condensed and Unaudited) (In thousands, except per share amounts) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Revenues: Rental income $ 142,857 $ 128,826 $ 418,835 $ 386,784 Fees and management income 2,081 2,435 9,323 7,095 Other property income 716 1,073 2,175 1,906 Total revenues 145,654 132,334 430,333 395,785 Operating Expenses: Property operating 23,089 21,608 69,261 65,784 Real estate taxes 18,041 16,375 52,005 49,762 General and administrative 10,843 11,627 33,751 32,905 Depreciation and amortization 60,013 53,901 178,008 165,829 Impairment of real estate assets — 698 — 6,754 Total operating expenses 111,986 104,209 333,025 321,034 Other: Interest expense, net ( 17,569 ) ( 18,570 ) ( 52,895 ) ( 57,765 ) (Loss) gain on disposal of property, net ( 10 ) 14,093 4,151 31,678 Other expense, net ( 3,916 ) ( 7,086 ) ( 9,738 ) ( 25,595 ) Net income 12,173 16,562 38,826 23,069 Net income attributable to noncontrolling interests ( 1,135 ) ( 1,929 ) ( 4,181 ) ( 2,739 ) Net income attributable to stockholders $ 11,038 $ 14,633 $ 34,645 $ 20,330 Earnings per share of common stock: Net income per share attributable to stockholders - basic and diluted (see Note 10) $ 0.09 $ 0.13 $ 0.30 $ 0.21 Comprehensive income: Net income $ 12,173 $ 16,562 $ 38,826 $ 23,069 Other comprehensive income: Change in unrealized value on interest rate swaps 14,008 4,488 51,415 19,981 Comprehensive income 26,181 21,050 90,241 43,050 Net income attributable to noncontrolling interests ( 1,135 ) ( 1,929 ) ( 4,181 ) ( 2,739 ) Change in unrealized value on interest rate swaps attributable to noncontrolling interests ( 1,513 ) ( 562 ) ( 5,750 ) ( 2,471 ) Reallocation of comprehensive income (loss) upon conversion of noncontrolling interests 57 — 277 ( 10 ) Comprehensive income attributable to stockholders $ 23,590 $ 18,559 $ 80,587 $ 37,830 See notes to consolidated financial statements. PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2022 FORM 10-Q 3 PHILLIPS EDISON & COMPANY, INC. CONSOLIDATED STATEMENTS OF EQUITY FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021 (Condensed and Unaudited) (In thousands, except per share amounts) Three Months Ended September 30, 2022 and 2021 Common Stock Class B Common Stock APIC AOCI Accumulated Deficit Total Stockholders’ Equity Noncontrolling Interests Total Equity Shares Amount Shares Amount Balance at July 1, 2021 — $ — 93,640 $ 2,808 $ 2,749,680 $ ( 38,732 ) $ ( 1,041,617 ) $ 1,672,139 $ 323,249 $ 1,995,388 Issuance of common stock 19,550 196 — — 547,205 — — 547,401 — 547,401 Offering costs, discounts, and commissions — — — — ( 39,042 ) — — ( 39,042 ) — ( 39,042 ) Change in unrealized value on interest rate swaps — — — — — 3,926 — 3,926 562 4,488 Common distributions declared, $ 0.255 per share — — — — — — ( 27,499 ) ( 27,499 ) — ( 27,499 ) Distributions to noncontrolling interests — — — — — — — — ( 3,536 ) ( 3,536 ) Share-based compensation — — 23 ( 1 ) 1,871 — — 1,870 2,116 3,986 Impact of reverse stock split — — — ( 1,871 ) 1,871 — — — — — Net income — — — — — — 14,633 14,633 1,929 16,562 Balance at September 30, 2021 19,550 $ 196 93,663 $ 936 $ 3,261,585 $ ( 34,806 ) $ ( 1,054,483 ) $ 2,173,428 $ 324,320 $ 2,497,748 Balance at July 1, 2022 115,782 $ 1,157 — $ — $ 3,341,646 $ 8,571 $ ( 1,129,151 ) $ 2,222,223 $ 372,422 $ 2,594,645 Issuance of common stock 773 8 — — 26,409 — — 26,417 — 26,417 Offering costs, discounts, and commissions — — — — ( 348 ) — — ( 348 ) — ( 348 ) Change in unrealized value on interest rate swaps — — — — — 12,495 — 12,495 1,513 14,008 Common distributions declared, $ 0.2733 per share — — — — — — ( 32,224 ) ( 32,224 ) — ( 32,224 ) Distributions to noncontrolling interests — — — — — — — — ( 3,932 ) ( 3,932 ) Share-based compensation 1 — — — 2,384 — — 2,384 1,784 4,168 Conversion of noncontrolling interests 528 5 — — 11,547 57 — 11,609 ( 11,609 ) — Net income — — — — — — 11,038 11,038 1,135 12,173 Balance at September 30, 2022 117,084 $ 1,170 — $ — $ 3,381,638 $ 21,123 $ ( 1,150,337 ) $ 2,253,594 $ 361,313 $ 2,614,907 See notes to consolidated financial statements. PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2022 FORM 10-Q 4 PHILLIPS EDISON & COMPANY, INC. CONSOLIDATED STATEMENTS OF EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021 (Condensed and Unaudited) (In thousands, except per share amounts) Nine Months Ended September 30, 2022 and 2021 Common Stock Class B Common Stock APIC AOCI Accumulated Deficit Total Stockholders’ Equity Noncontrolling Interests Total Equity Shares Amount Shares Amount Balance at January 1, 2021 — $ — 93,279 $ 2,798 $ 2,739,358 $ ( 52,306 ) $ ( 999,491 ) $ 1,690,359 $ 325,570 $ 2,015,929 Issuance of common stock 19,550 196 — — 547,205 — — 547,401 — 547,401 Offering costs, discounts, and commissions — — — — ( 39,042 ) — — ( 39,042 ) — ( 39,042 ) Dividend reinvestment plan (“DRIP”) — — 280 8 7,360 — — 7,368 — 7,368 Share repurchases — — ( 24 ) — ( 123 ) — — ( 123 ) — ( 123 ) Change in unrealized value on interest rate swaps — — — — — 17,510 — 17,510 2,471 19,981 Common distributions declared, $ 0.765 per share — — — — — — ( 75,322 ) ( 75,322 ) — ( 75,322 ) Distributions to noncontrolling interests — — — — — — — — ( 10,315 ) ( 10,315 ) Share-based compensation — — 100 1 4,298 — — 4,299 4,532 8,831 Conversion of noncontrolling interests — — 28 — 687 ( 10 ) — 677 ( 677 ) — Impact of reverse stock split — — — ( 1,871 ) 1,871 — — — — — Other — — — — ( 29 ) — — ( 29 ) — ( 29 ) Net income — — — — — — 20,330 20,330 2,739 23,069 Balance at September 30, 2021 19,550 $ 196 93,663 $ 936 $ 3,261,585 $ ( 34,806 ) $ ( 1,054,483 ) $ 2,173,428 $ 324,320 $ 2,497,748 Balance at January 1, 2022 19,550 $ 196 93,665 $ 936 $ 3,264,038 $ ( 24,819 ) $ ( 1,090,837 ) $ 2,149,514 $ 326,812 $ 2,476,326 Conversion of Class B common stock 93,665 936 ( 93,665 ) ( 936 ) — — — — — — Issuance of common stock 2,633 26 — — 90,098 — — 90,124 — 90,124 Offering costs, discounts, and commissions — — — — ( 1,090 ) — — ( 1,090 ) — ( 1,090 ) Change in unrealized value on interest rate swaps — — — — — 45,665 — 45,665 5,750 51,415 Common distributions declared, $ 0.8133 per share — — — — — — ( 94,145 ) ( 94,145 ) — ( 94,145 ) Distributions to noncontrolling interests — — — — — — — — ( 12,149 ) ( 12,149 ) Share-based compensation 103 1 — — 3,859 — — 3,860 7,495 11,355 Conversion of noncontrolling interests 1,133 11 — — 24,733 277 — 25,021 ( 25,021 ) — Settlement of earn-out liability — — — — — — — — 54,245 54,245 Net income — — — — — — 34,645 34,645 4,181 38,826 Balance at September 30, 2022 117,084 $ 1,170 — $ — $ 3,381,638 $ 21,123 $ ( 1,150,337 ) $ 2,253,594 $ 361,313 $ 2,614,907 See notes to consolidated financial statements. PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2022 FORM 10-Q 5 PHILLIPS EDISON & COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021 (Condensed and Unaudited) (In thousands) Nine Months Ended September 30, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 38,826 $ 23,069 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of real estate assets 175,305 162,979 Impairment of real estate assets — 6,754 Depreciation and amortization of corporate assets 2,703 2,850 Net amortization of above- and below-market leases ( 3,161 ) ( 2,633 ) Amortization of deferred financing expenses 2,516 3,581 Amortization of debt and derivative adjustments 1,838 1,133 Gain on disposal of property, net ( 4,151 ) ( 31,678 ) Change in fair value of earn-out liability 1,809 23,000 Straight-line rent ( 9,086 ) ( 6,884 ) Share-based compensation 11,355 8,831 Return on investment in unconsolidated joint ventures 1,247 1,520 Other 297 1,213 Changes in operating assets and liabilities: Other assets, net ( 8,620 ) ( 7,470 ) Accounts payable and other liabilities 17,885 12,048 Net cash provided by operating activities 228,763 198,313 CASH FLOWS FROM INVESTING ACTIVITIES: Real estate acquisitions ( 229,895 ) ( 88,954 ) Capital expenditures ( 74,348 ) ( 49,315 ) Proceeds from sale of real estate, net 27,286 180,340 Investment in third parties — ( 3,000 ) Return of investment in unconsolidated joint ventures 3,682 4,278 Investment in marketable securities ( 3,000 ) ( 5,514 ) Net cash (used in) provided by investing activities ( 276,275 ) 37,835 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving credit facility 282,000 9,000 Payments on revolving credit facility ( 227,000 ) ( 9,000 ) Proceeds from loans payable — 480,000 Payments on mortgages and loans payable ( 80,628 ) ( 1,077,422 ) Distributions paid, net of DRIP ( 94,118 ) ( 75,669 ) Distributions to noncontrolling interests ( 12,859 ) ( 11,344 ) Proceeds from issuance of common stock 90,124 547,401 Payment of offering costs ( 1,090 ) ( 39,042 ) Repurchases of Class B common stock — ( 77,765 ) Other — ( 29 ) Net cash used in financing activities ( 43,571 ) ( 253,870 ) NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH ( 91,083 ) ( 17,722 ) CASH, CASH EQUIVALENTS, AND RESTRICTED CASH: Beginning of period 115,529 131,937 End of period $ 24,446 $ 114,215 RECONCILIATION TO CONSOLIDATED BALANCE SHEETS: Cash and cash equivalents $ 4,789 $ 24,455 Restricted cash 19,657 89,760 Cash, cash equivalents, and restricted cash at end of period $ 24,446 $ 114,215 PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2022 FORM 10-Q 6 PHILLIPS EDISON & COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021 (Condensed and Unaudited) (In thousands) Nine Months Ended September 30, 2022 2021 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 47,352 $ 53,463 SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES: Settlement of earn-out liability 54,245 — Right-of-use (“ROU”) assets obtained in exchange for new lease liabilities — 239 Accrued capital expenditures 6,887 4,075 Change in distributions payable 27 ( 7,715 ) Change in distributions payable - noncontrolling interests ( 710 ) ( 1,029 ) Change in accrued share repurchase obligation — ( 77,642 ) Distributions reinvested — 7,368 See notes to consolidated financial statements. PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2022 FORM 10-Q 7 Phillips Edison & Company, Inc. Notes to Consolidated Financial Statements (Condensed and Unaudited) As of and for the period ended September 30, 2022 1. ORGANIZATION Phillips Edison & Company, Inc. (“we,” the “Company,” “PECO,” “our,” or “us”) was formed as a Maryland corporation in October 2009. Substantially all of our business is conducted through Phillips Edison Grocery Center Operating Partnership I, L.P., (the “Operating Partnership”), a Delaware limited partnership formed in December 2009. We are a limited partner of the Operating Partnership, and our wholly-owned subsidiary, Phillips Edison Grocery Center OP GP I LLC, is the sole general partner of the Operating Partnership. We are a real estate investment trust (“REIT”) that invests primarily in omni-channel grocery-anchored neighborhood and community shopping centers that have a mix of creditworthy national, regional, and local retailers that sell necessity-based goods and services in strong demographic markets throughout the United States. In addition to managing our own shopping centers, our third-party investment management business provides comprehensive real estate and asset management services to two unconsolidated institutional joint ventures, in which we have a partial ownership interest, and one private fund (collectively, the “Managed Funds”) as of September 30, 2022. As of September 30, 2022, we wholly-owned 270 real estate properties. Additionally, we owned a 14 % interest in Grocery Retail Partners I LLC (“GRP I”), a joint venture that owned 20 properties. In May 2022, we sold the final property in our joint venture with Necessity Retail Partners (“NRP”), in which we own a 20 % interest. We recognized no income during the three months ended September 30, 2022 and $ 2.7 million in income during the nine months ended September 30, 2022 related to NRP’s achievement of certain performance targets, which is included in Fees and Management Income in our consolidated statements of operations and comprehensive income (“consolidated statements of operations”). Underwritten Initial Public Offering —On July 19, 2021, we closed our underwritten initial public offering (“underwritten IPO”), through which we issued 19.6 million shares, including the underwriters’ overallotment election, of a new class of common stock, $ 0.01 par value per share, at an initial price to the public of $ 28.00 per share. As a result of the underwritten IPO, we received gross proceeds of $ 547.4 million. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Set forth below is a summary of the significant accounting estimates and policies that management believes are important to the preparation of our condensed consolidated interim financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by management. For example, significant estimates and assumptions have been made with respect to the useful lives of assets, remaining hold periods of assets, recoverable amounts of receivables, and other fair value measurement assessments required for the preparation of the consolidated interim financial statements. As a result, these estimates are subject to a degree of uncertainty. There were no changes to our significant accounting policies during the nine months ended September 30, 2022, except for those discussed below. For a full summary of our significant accounting policies, refer to our 2021 Annual Report on Form 10-K, filed with the SEC on February 16, 2022. Basis of Presentation and Principles of Consolidation —The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Readers of this Quarterly Report on Form 10-Q should refer to our audited consolidated financial statements for the year ended December 31, 2021, which are included in our 2021 Annual Report on Form 10-K. In the opinion of management, all normal and recurring adjustments necessary for the fair presentation of the unaudited consolidated financial statements for the periods presented have been included in this Quarterly Report. Our results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the operating results expected for the full year. The accompanying consolidated financial statements include our accounts and the accounts of the Operating Partnership and its wholly-owned subsidiaries (over which we exercise financial and operating control). The financial statements of the Operating Partnership are prepared using accounting policies consistent with our accounting policies. All intercompany balances and transactions are eliminated upon consolidation. The basis of presentation of our shares of common stock is described as follows: • Reverse Stock Split—On July 2, 2021, our board of directors (the “Board”) approved an amendment to our charter to effect a one-for-three reverse stock split. Concurrent with the reverse split, the Operating Partnership enacted a one- PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2022 FORM 10-Q 8 for-three reverse split of its outstanding Operating Partnership units (“OP units”). Unless otherwise indicated, the information in this Form 10-Q gives effect to the reverse stock and OP unit splits (see Note 9). • Recapitalization—On June 18, 2021, our stockholders approved an amendment to our charter (the “Articles of Amendment”) that effected a change of each share of our common stock outstanding at the time the amendment became effective into one share of a newly created class of Class B common stock (the “Recapitalization”). The Articles of Amendment became effective on July 2, 2021. Unless otherwise indicated, all information in this Form 10-Q gives effect to the Recapitalization and references to “shares” and per share metrics refer to our common stock and Class B common stock, collectively. Our Class B common stock automatically converted into our publicly traded common stock on January 18, 2022 (see Note 9). Prior to the conversion, we have presented common stock and Class B common stock as separate classes within our consolidated balance sheets and consolidated statements of equity. On May 5, 2022, we filed Articles Supplementary to our charter with the Maryland State Department of Assessments and Taxation in order to reclassify and designate all of the 350 million authorized shares of our Class B common stock, $ 0.01 par value per share, all of which were unissued at such time, as shares of our common stock, $ 0.01 par value per share. We no longer have Class B common stock authorized for issue. Income Taxes —Our consolidated financial statements include the operations of wholly-owned subsidiaries that have jointly elected to be treated as taxable REIT subsidiary entities and are subject to U.S. federal, state, and local income taxes at regular corporate tax rates. We recognized an insignificant amount of federal, state, and local income tax expense for the three and nine months ended September 30, 2022 and 2021, and we retain a full valuation allowance for our net deferred tax asset. All income tax amounts are included in Other Expense, Net on our consolidated statements of operations. Newly Adopted Accounting Pronouncements —There were no newly adopted accounting pronouncements during the nine months ended September 30, 2022 that impacted the Company. Reclassifications —Certain prior year amounts have been reclassified to conform to the current year presentation. 3. LEASES Lessor —The majority of our leases are largely similar in that the leased asset is retail space within our properties, and the lease agreements generally contain similar provisions and features, without substantial variations. All of our leases are currently classified as operating leases. Lease income related to our operating leases was as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Rental income related to fixed lease payments (1) $ 105,252 $ 95,080 $ 309,925 $ 284,531 Rental income related to variable lease payments (1)(2) 32,545 29,919 95,443 88,774 Straight-line rent amortization (3) 3,752 2,365 8,617 6,627 Amortization of lease assets 1,059 898 3,113 2,602 Lease buyout income 221 560 2,362 3,138 Adjustments for collectibility (4) 28 4 ( 625 ) 1,112 Total rental income $ 142,857 $ 128,826 $ 418,835 $ 386,784 (1) Includes rental income related to lease payments before assessing for collectibility. (2) Variable payments are primarily related to tenant recovery income. (3) Includes revenue adjustments to straight-line rent for tenants considered non-creditworthy. (4) Includes general reserves as well as adjustments for tenants considered non-creditworthy for which we are recording revenue on a cash basis, per Accounting Standards Codification (“ASC”) Topic 842, Leases . Approximate future fixed contractual lease payments to be received under non-cancelable operating leases in effect as of September 30, 2022, assuming no new or renegotiated leases or option extensions on lease agreements, and including the impact of rent abatements and tenants who have been moved to the cash basis of accounting for revenue recognition purposes, are as follows (in thousands): Year Amount Remaining 2022 $ 102,503 2023 412,634 2024 364,652 2025 307,774 2026 243,613 Thereafter 626,853 Total $ 2,058,029 No single tenant comprised 10% or more of our aggregate annualized base rent (“ABR”) as of September 30, 2022. As of September 30, 2022, our wholly-owned real estate investments in Florida and California represented 11.7 % and 10.6 % of our PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2022 FORM 10-Q 9 ABR, respectively. As a result, the geographic concentration of our portfolio makes it particularly susceptible to adverse weather or economic events in the Florida and California real estate markets (See “Hurricane Ian” in Note 4). 4. REAL ESTATE ACTIVITY Acquisitions — The following table summarizes our real estate acquisition activity (dollars in thousands): Nine Months Ended September 30, 2022 2021 Number of properties acquired 5 4 Number of outparcels acquired (1) 3 3 Contract price $ 228,842 $ 88,451 Total price of acquisitions (2) 229,895 88,954 (1) Outparcels acquired are adjacent to shopping centers that we own. (2) Total price of acquisitions includes closing costs and credits. The aggregate purchase price of the assets acquired during the nine months ended September 30, 2022 and 2021 were allocated as follows (in thousands): September 30, 2022 September 30, 2021 ASSETS Land and improvements $ 71,564 $ 35,173 Building and improvements 144,988 52,105 In-place lease assets 19,296 8,728 Above-market lease assets 3,814 198 Total assets 239,662 96,204 LIABILITIES Below-market lease liabilities 9,767 7,250 Total liabilities 9,767 7,250 Net assets acquired $ 229,895 $ 88,954 The weighted-average amortization periods for in-place, above-market, and below-market lease intangibles acquired during the nine months ended September 30, 2022 and 2021 are as follows (in years): September 30, 2022 September 30, 2021 Acquired in-place leases 11 10 Acquired above-market leases 9 5 Acquired below-market leases 19 17 PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2022 FORM 10-Q 10 Property Dispositions — The following table summarizes our real estate disposition activity (dollars in thousands): Nine Months Ended September 30, 2022 2021 Number of properties sold (1) 3 20 Number of outparcels sold (2)(3) 3 3 Contract Price $ 28,737 $ 188,252 Proceeds from sale of real estate, net (4) 27,286 180,340 Gain on sale of property, net (5) 4,151 33,121 (1) We retained an outparcel for one property sold during the nine months ended September 30, 2021, and therefore the sale did not result in a reduction in our total property count. (2) During the nine months ended September 30, 2021, our outparcel sales included: (i) the only remaining portion of one of our properties, which resulted in a reduction in our total property count; and (ii) an undeveloped parcel of land, as well as an outparcel adjacent to one of our centers, neither of which resulted in a reduction in our total property count. (3) In addition to the three outparcels sold during the nine months ended September 30, 2021, a tenant at one of our properties exercised a bargain purchase option to acquire a parcel of land that we previously owned. This generated minimal proceeds for us. (4) Total proceeds from sale of real estate, net includes closing costs and credits. (5) During the nine months ended September 30, 2021, (Loss) 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. Hurricane Ian - On September 28, 2022, Hurricane Ian struck the southeast United States and caused various amounts of damage to our properties located in the region. While we are still in the process of finalizing the damages sustained to the properties, we expect to collect insurance proceeds of $ 1.1 million (net of a deductible of $ 1.9 million) equal to the replacement cost of the damaged property. As of September 30, 2022, we have recorded gross cumulative accelerated depreciation of $ 3.0 million, which has been reduced by expected insurance recoveries, for damages sustained to the properties. We have also recognized a receivable for estimated insurance recoveries in excess of the deductible. As of September 30, 2022, we have received no insurance recoveries and have a receivable balance of $ 1.1 million, which is recorded in Other Assets, Net on our consolidated balance sheets. 5. OTHER ASSETS, NET The following is a summary of Other Assets, Net outstanding as of September 30, 2022 and December 31, 2021, excluding amounts related to assets classified as held for sale (in thousands): September 30, 2022 December 31, 2021 Other assets, net: Deferred leasing commissions and costs $ 48,060 $ 44,968 Deferred financing expenses (1) 8,984 4,898 Office equipment, including capital lease assets, and other 27,978 24,823 Corporate intangible assets 6,705 6,706 Total depreciable and amortizable assets 91,727 81,395 Accumulated depreciation and amortization ( 46,842 ) ( 41,236 ) Net depreciable and amortizable assets 44,885 40,159 Accounts receivable, net (2) 33,439 36,762 Accounts receivable - affiliates 483 711 Deferred rent receivable, net (3) 49,006 40,212 Derivative assets 26,319 — Prepaid expenses and other 19,359 11,655 Investment in third parties 3,000 3,000 Investment in marketable securities 7,283 5,551 Total other assets, net $ 183,774 $ 138,050 (1) Deferred financing expenses per the above table are related to our revolving credit facility, and as such we have elected to classify them as an asset rather than as a contra-liability. (2) Net of $ 3.7 million and $ 3.5 million of general reserves for uncollectible amounts as of September 30, 2022 and December 31, 2021, respectively. Receivables that were removed for tenants considered to be non-creditworthy were $ 6.3 million and $ 9.2 million as of September 30, 2022 and December 31, 2021, respectively. (3) Net of $ 4.3 million and $ 4.7 million of receivables removed as of September 30, 2022 and December 31, 2021, respectively, related to straight-line rent for tenants previously or currently considered to be non-creditworthy. PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2022 FORM 10-Q 11 6. DEBT OBLIGATIONS The following is a summary of the outstanding principal balances and interest rates, which include the effect of derivative financial instruments, for our debt obligations as of September 30, 2022 and December 31, 2021 (dollars in thousands): Interest Rate (1) September 30, 2022 December 31, 2021 Revolving credit facility SOFR + 1.2 % $ 55,000 $ — Term loans (2) 2.5 % - 4.2 % 955,000 955,000 Senior unsecured notes due 2031 2.6 % 350,000 350,000 Secured loan facilities 3.4 % - 3.5 % 395,000 395,000 Mortgages 3.5 % - 6.4 % 134,419 213,316 Finance lease liability 620 766 Discount on notes payable ( 7,172 ) ( 7,680 ) Assumed market debt adjustments, net ( 1,353 ) ( 1,530 ) Deferred financing expenses, net ( 8,575 ) ( 13,150 ) Total $ 1,872,939 $ 1,891,722 Weighted-average interest rate (3) 3.3 % 3.3 % (1) Interest rates are as of September 30, 2022. (2) Our term loans carry an interest rate of LIBOR or SOFR plus a spread. While most of the rates are fixed through the use of swaps, a portion of these loans are not subject to a swap, and thus are still indexed to LIBOR or SOFR, as applicable. (3) Includes the effects of derivative financial instruments (see Notes 7 and 12). 2022 Debt Activity— In May 2022, we amended our credit facility agreement (the “Amendment”) 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 the London Interbank Offered Rate (“LIBOR”) with the Secured Overnight Financing Rate (“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. In August 2022, we amended two of our interest rate swaps with a total notional amount of $ 430 million to replace LIBOR with SOFR as the benchmark interest rate in conjunction with the Amendment (see Note 7) . During the nine months ended September 30, 2022, we executed early repayments of $ 74.9 million in mortgage debt. Debt Allocation — The allocation of total debt between fixed-rate and variable-rate as well as between secured and unsecured, excluding market debt adjustments, discount on senior notes, and deferred financing expenses, net, and including the effects of derivative financial instruments as of September 30, 2022 and December 31, 2021 is summarized below (in thousands): September 30, 2022 December 31, 2021 As to interest rate: Fixed-rate debt (1) $ 1,635,039 $ 1,889,082 Variable-rate debt 255,000 25,000 Total $ 1,890,039 $ 1,914,082 As to collateralization: Unsecured debt $ 1,360,000 $ 1,305,000 Secured debt 530,039 609,082 Total $ 1,890,039 $ 1,914,082 (1) Fixed-rate debt includes, and variable-rate debt excludes, the portion of such debt that has been hedged by interest rate derivatives. As of September 30, 2022, $ 755 million in variable rate debt is hedged to a fixed rate for a weighted-average period of 1.8 years. PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2022 FORM 10-Q 12 7. DERIVATIVES AND HEDGING ACTIVITIES Risk Management Objective of Using Derivatives —We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposure to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of our debt funding, and through the use of derivative financial instruments. Specifically, we enter into interest rate swaps to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash receipts and our known or expected cash payments principally related to our investments and borrowings. Cash Flow Hedges of Interest Rate Risk —Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for our making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The changes in the fair value of derivatives designated, and that qualify, as cash flow hedges are recorded in AOCI and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the nine months ended September 30, 2022 and 2021, such derivatives were used to hedge the variable cash flows associated with certain variable-rate debt. Amounts reported in AOCI related to these derivatives will be reclassified to Interest Expense, Net as interest payments are made on the variable-rate debt. During the next twelve months, we estimate that an additional $ 15.4 million will be reclassified from AOCI as a decrease to Interest Expense, Net. In May 2022, we replaced LIBOR with SOFR as the benchmark interest rate for the two $ 240 million senior unsecured term loan tranches, maturing in November 2025 and July 2026. In accordance with ASC Topic 848, Reference Rate Reform (“ASC 848”), we elected not to dedesignate our LIBOR denominated interest rate swaps related to this hedged debt. As a result of this change in the benchmark rate of the two senior unsecured term loans, in August 2022, we amended two of our interest rate swaps with a total notional amount of $ 430 million to change the benchmark interest rate from LIBOR to SOFR. As a result of these amendments, we have elected to apply practical expedients in accordance with ASC 848 related to contract modifications, changes in critical terms, and updates to the designated hedged risks as qualifying changes have been made to applicable debt and derivative contracts. The following is a summary of our interest rate swaps that were designated as cash flow hedges of interest rate risk as of September 30, 2022 and December 31, 2021 (dollars in thousands): September 30, 2022 December 31, 2021 SOFR Swaps LIBOR Swaps LIBOR Swaps Count 2 2 5 Notional amount $ 430,000 $ 325,000 $ 930,000 Fixed interest rate 1.2 % - 2.1 % 2.2 % - 2.9 % 1.3 % - 2.9 % Maturity date 2023-2024 2024-2025 2022-2025 Weighted-average term (in years) 1.4 2.4 1.9 The table below details the nature of the gain and loss recognized on interest rate derivatives designated as cash flow hedges in the consolidated statements of operations (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Amount of gain (loss) recognized in Other Comprehensive Income $ 14,084 $ ( 417 ) $ 44,063 $ 5,397 Amount of (gain) loss reclassified from AOCI into Interest Expense, Net ( 76 ) 4,905 7,352 14,584 Credit-risk-related Contingent Features —We have agreements with our derivative counterparties that contain provisions where, if we default, or are capable of being declared in default, on any of our indebtedness, we could also be declared to be in default on our derivative obligations. As of September 30, 2022, there were no derivatives with a fair value in a net liability position, which would include accrued interest but exclude any adjustment for nonperformance risk related to these agreements. 8. COMMITMENTS AND CONTINGENCIES Litigation —We are involved in various claims and litigation matters arising in the ordinary course of business, some of which involve claims for damages. Many of these matters are covered by insurance, although they may nevertheless be subject to deductibles or retentions. Although the ultimate liability for these matters cannot be determined, based upon information currently available, we believe the resolution of such claims and litigation will not have a material adverse effect on our consolidated financial statements. Environmental Matters —In connection with the ownership and operation of real estate, we may potentially be liable for costs and damages related to environmental matters. In addition, we may own or acquire certain properties that are subject PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2022 FORM 10-Q 13 to environmental remediation. Depending on the nature of the environmental matter, the seller of the property, a tenant of the property, and/or another third party may be responsible for environmental remediation costs related to a property. Additionally, in connection with the purchase of certain properties, the respective sellers and/or tenants may agree to indemnify us against future remediation costs. We also carry environmental liability insurance on our properties that provides limited coverage for any remediation liability and/or pollution liability for third-party bodily injury and/or property damage claims for which we may be liable. We are not aware of any environmental matters which we believe are reasonably likely to have a material effect on our consolidated financial statements. Captive Insurance —Our captive insurance company, Silver Rock Insurance, Inc. (“Silver Rock”), provides general liability insurance, wind, reinsurance, and other coverage to us and our GRP I joint venture. We capitalize Silver Rock in accordance with applicable regulatory requirements. Silver Rock established annual premiums based on the past loss experience of the insured properties. An independent third party was engaged to perform an actuarial estimate of projected future claims, related deductibles, and projected future expenses necessary to fund associated risk management programs. Premiums paid to Silver Rock may be adjusted based on this estimate, and such premiums may be reimbursed by tenants pursuant to specific lease terms. As of September 30, 2022, we had four letters of credit outstanding totaling approximately $ 11.2 million to provide security for our obligations under Silver Rock’s insurance and reinsurance contracts. 9. EQUITY General —The holders of common stock are entitled to one vote per share on all matters voted on by stockholders, including one vote per nominee in the election of the Board. Our charter does not provide for cumulative voting in the election of directors. At-the-Market Offering (“ATM”) —On February 10, 2022, we and the Operating Partnership entered into a sales agreement relating to the potential sale of shares of common stock pursuant to a continuous offering program. In accordance with the terms of the sales agreement, we may offer and sell shares of our common stock having an aggregate offering price of up to $ 250 million from time to time through our sales agents, or, if applicable, as forward sellers. During the three months ended September 30, 2022, we issued 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. During the nine months ended September 30, 2022, we issued 2.6 million shares of our common stock under the ATM program for net proceeds of $ 89.2 million, after approximately $ 0.9 million in commissions. As of September 30, 2022, $ 159.9 million of common stock remained available for issuance under the ATM program. Reverse Stock Split —On July 2, 2021, we effected a one-for-three reverse stock split. Concurrent with the reverse split, the Operating Partnership enacted a one-for-three reverse split of its outstanding OP units. Neither the number of authorized shares nor the par value of the common stock were impacted. As a result of the reverse split, every three shares of our common stock or OP units were automatically combined and converted into one issued and outstanding share of common stock or OP unit rounded to the nearest 1/100th share. The reverse stock split impacted all common stock and OP units proportionately and had no impact on any stockholder’s percentage ownership of common stock. Class B Common Stock —On June 18, 2021, our stockholders approved Articles of Amendment that effected the Recapitalization, wherein each share of our common stock outstanding at the time the amendment became effective was converted into one share of a newly created class of Class B common stock. Our Class B common stock was identical to our common stock, except that it was not listed on a national securities exchange. Per the terms of the Recapitalization, on January 18, 2022, each share of our Class B common stock automatically converted into one share of our listed common stock. On May 5, 2022, we filed Articles Supplementary to our charter with the Maryland State Department of Assessments and Taxation in order to reclassify and designate all of the 350 million authorized shares of our Class B common stock, $ 0.01 par value per share, all of which were unissued at such time, as shares of our common stock, $ 0.01 par value per share. We no longer have Class B common stock authorized for issue. Underwritten IPO —On July 19, 2021, we completed an underwritten IPO and issued 17.0 million shares of common stock at an offering price to the public of $ 28.00 per share. We used a portion of the net proceeds to reduce our leverage and used the remaining amount to fund external growth with property acquisitions and for other general corporate uses. As part of the underwritten IPO, underwriters were granted an option exercisable within 30 days from July 14, 2021 to purchase up to an additional 2.6 million shares of common stock at the underwritten IPO price, less underwriting discounts and commissions. On July 29, 2021, the underwriters exercised their option. The underwritten IPO, including the underwriters’ overallotment election, resulted in gross proceeds of $ 547.4 million. PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2022 FORM 10-Q 14 Distributions —Distributions paid to stockholders and OP unit holders of record subsequent to September 30, 2022 were as follows (dollars in thousands, excluding per share amounts): Month Date of Record Date Distribution Paid Monthly Distribution Rate Cash Distribution September 9/16/2022 10/3/2022 $ 0.0933 $ 12,202 October 10/17/2022 11/1/2022 0.0933 12,202 On November 2, 2022, our Board authorized a distribution for November and December 2022, as well as January 2023, of $ 0.0933 per share to the stockholders of record at the close of business on November 15, 2022, December 15, 2022, and January 17, 2023, respectively. OP unit holders will receive distributions at the same rate as common stockholders, subject to certain withholdings. Convertible Noncontrolling Interests —As of September 30, 2022 and December 31, 2021, we had approximately 14.0 million and 13.4 million outstanding OP units, respectively. Additionally, certain of our outstanding restricted share and performance share awards will result in the issuance of OP units upon vesting in future periods. Under the terms of the Fourth Amended and Restated Agreement of Limited Partnership, OP unit holders may elect to cause the Operating Partnership to redeem their OP units. The Operating Partnership controls the form of the redemption, and may elect to redeem OP units for shares of our common stock, provided that the OP units have been outstanding for at least one year, or for cash. As the form of redemption for OP units is within our control, the OP units outstanding as of September 30, 2022 and December 31, 2021 are classified as Noncontrolling Interests within permanent equity on our consolidated balance sheets. On January 18, 2022, we issued approximately 1.6 million OP units in full settlement of the earn-out liability (see note 12). The table below is a summary of our OP unit activity for the three and nine months ended September 30, 2022 and 2021 (dollars and shares in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 OP units converted into shares of common stock (1) 528 — 1,133 28 Distributions paid on OP units (2) $ 3,932 $ 3,536 $ 12,149 $ 10,315 (1) Prior to the Recapitalization, OP units were converted to shares of common stock at a 1 :1 ratio. From the Recapitalization through January 18, 2022, OP units were converted into shares of our Class B common stock at a 1 :1 ratio. On January 18, 2022, each share of our Class B common stock automatically converted into one share of our listed common stock, and going forward, OP units will be converted into shares of our common stock at a 1 :1 ratio. (2) Distributions paid on OP units are included in Distributions to Noncontrolling Interests on the consolidated statements of equity and cash flows. Dividend Reinvestment Plan and Share Repurchase Programs —On August 4, 2021, as a result of our underwritten IPO, our Board approved the termination of the DRIP and the original share repurchase program. On August 3, 2022, our Board approved a new share repurchase program of up to $ 250.0 million of common stock. The program may be suspended or discontinued at any time, and does not obligate us to repurchase any dollar amount or particular number of shares. No share repurchases have been made to date under this program. 10. EARNINGS PER SHARE Basic earnings per share (“EPS”) is computed by dividing Net Income Attributable to Stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS reflects the potential dilution that could occur from share equivalent activity. PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2022 FORM 10-Q 15 The following table provides a reconciliation of the numerator and denominator of the earnings per share calculations (in thousands, except per share amounts): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Numerator: Net income attributable to stockholders - basic $ 11,038 $ 14,633 $ 34,645 $ 20,330 Net income attributable to convertible OP units (1) 1,135 1,929 4,181 2,739 Net income - diluted $ 12,173 $ 16,562 $ 38,826 $ 23,069 Denominator: Weighted-average shares - basic 116,760 108,997 114,833 98,761 OP units (1) 14,289 13,388 14,462 13,371 Dilutive restricted stock awards 544 188 510 185 Adjusted weighted-average shares - diluted 131,593 122,573 129,805 112,317 Earnings per common share: Basic and diluted income per share $ 0.09 $ 0.13 $ 0.30 $ 0.21 (1) OP units include units that are convertible into common stock or cash, at the Operating Partnership’s option. The Operating Partnership income or loss attributable to these OP units, which is included as a component of Net Income Attributable to Noncontrolling Interests on the consolidated statements of operations, has been added back in the numerator as these OP units were included in the denominator for all periods presented. OP units are allocated income on a consistent basis with the common stockholder and therefore have no dilutive impact to earnings per share of common stock. 11. RELATED PARTY TRANSACTIONS Revenue —We have entered into agreements with the Managed Funds related to certain advisory, management, and administrative services we provide to their real estate assets in exchange for fees and reimbursement of certain expenses. Summarized below are amounts included in Fees and Management Income. The revenue includes the fees and reimbursements earned by us from the Managed Funds and other revenues that are not in the scope of ASC Topic 606, Revenue from Contracts with Customers, but that are included in this table for the purpose of disclosing all related party revenues (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Recurring fees (1) $ 943 $ 1,040 $ 3,013 $ 3,268 Realized performance income (2) — — 2,742 — Transactional revenue and reimbursements (3) 306 573 1,147 1,502 Insurance premiums (4) 832 822 2,421 2,325 Total fees and management income $ 2,081 $ 2,435 $ 9,323 $ 7,095 (1) Recurring fees include asset management fees and property management fees. (2) Realized performance income includes fees received related to the achievement of certain performance targets in our NRP joint venture. (3) Transactional revenue includes items such as leasing commissions, construction management fees, and acquisition fees. (4) Insurance premium income includes amounts for reinsurance from third parties not affiliated with us. Tax Protection Agreement —Through our Operating Partnership, we are currently party to a tax protection agreement (the “2017 TPA”) with certain partners that contributed property to our Operating Partnership on October 4, 2017, among them certain of our executive officers, including Jeffrey S. Edison, our Chairman and Chief Executive Officer, under which the Operating Partnership has agreed to indemnify such partners for tax liabilities that could accrue to them personally related to our potential disposition of certain properties within our portfolio. The 2017 TPA will expire on October 4, 2027. On July 19, 2021, we entered into an additional tax protection agreement (the “2021 TPA”) with certain of our executive officers, including Mr. Edison. The 2021 TPA carries a term of four years and will become effective upon the expiration of the 2017 TPA. As of September 30, 2022, the potential “make-whole amount” on the estimated aggregate amount of built-in gain subject to protection under the agreements is approximately $ 137.9 million. The protection provided under the terms of the 2021 TPA will expire in 2031. We have not recorded any liability related to the 2017 TPA or the 2021 TPA on our consolidated balance sheets for any periods presented, nor recognized any expense since the inception of the 2017 TPA, owing to the fact that any potential liability under the agreements is controlled by us and we believe we will either (i) continue to own and operate the protected properties or (ii) be able to successfully complete tax-deferred exchanges under Section 1031 of the Internal Revenue Code of 1986, as amended (unless there is a change in applicable law) or complete other tax-efficient transactions to avoid any liability under the agreements. PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2022 FORM 10-Q 16 Other Related Party Matters — As of September 30, 2022, we were the limited guarantor of a $ 175 million mortgage loan secured by GRP I properties. Our guaranty for the GRP I debt is limited to being the non-recourse carveout guarantor and the environmental indemnitor. Further, we are also party to an agreement with GRP I in which any potential liability under such guarantee will be apportioned between us and GRP I based on our respective ownership percentages in the joint venture. We have no liability recorded on our consolidated balance sheets for the guaranty as of September 30, 2022 and December 31, 2021. 12. FAIR VALUE MEASUREMENTS The following describes the methods we use to estimate the fair value of our financial and nonfinancial assets and liabilities: Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, and Accounts Payable —We consider the carrying values of these financial instruments to approximate fair value because of the short period of time between origination of the instruments and their expected realization. Real Estate Investments —The purchase prices of the investment properties, including related lease intangible assets and liabilities, are allocated at estimated fair value based on Level 3 inputs, such as discount rates, capitalization rates, comparable sales, replacement costs, income and expense growth rates, and current market rents and allowances as determined by management. Debt Obligations —We estimate the fair value of our revolving credit facility, term loans, secured portfolio of loans, and mortgages by discounting the future cash flows of each instrument at rates currently offered for similar debt instruments of comparable maturities by our lenders using Level 3 inputs. The discount rates used approximate current lending rates for loans or groups of loans with similar maturities and credit quality, assuming the debt is outstanding through maturity and considering the debt’s collateral (if applicable). We have utilized market information, as available, or present value techniques to estimate the amounts required to be disclosed. We estimate the fair value of our senior unsecured notes by using quoted prices in active markets, which are considered Level 1 inputs. The following is a summary of borrowings as of September 30, 2022 and December 31, 2021 (in thousands): September 30, 2022 December 31, 2021 Recorded Principal Balance (1) Fair Value Recorded Principal Balance (1) Fair Value Revolving credit facility $ 55,000 $ 55,000 $ — $ — Term loans 947,769 956,036 943,127 955,919 Senior unsecured notes due 2031 342,828 253,106 342,320 344,099 Secured portfolio loan facilities 391,973 339,974 391,612 394,356 Mortgages (2) 135,369 133,175 214,663 221,741 Total $ 1,872,939 $ 1,737,291 $ 1,891,722 $ 1,916,115 (1) As of September 30, 2022 and December 31, 2021, respectively, recorded principal balances include: (i) net deferred financing fees of $ 8.6 million and $ 13.2 million; (ii) assumed market debt adjustments of $ 1.4 million and $ 1.5 million; and (iii) notes payable discounts of $ 7.2 million and $ 7.7 million. (2) Our finance lease liability is included in the mortgages line item, as presented . Recurring and Nonrecurring Fair Value Measurements —Our marketable securities, earn-out liability, and interest rate swaps are measured and recognized at fair value on a recurring basis, while certain real estate assets and liabilities are measured and recognized at fair value as needed. Fair value measurements that occurred as of and during the nine months ended September 30, 2022 and the year ended December 31, 2021 were as follows (in thousands): September 30, 2022 December 31, 2021 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Recurring Marketable securities $ 7,283 $ — $ — $ 5,551 $ — $ — Derivative assets (1) — 26,319 — — — — Derivative liabilities — — — — ( 24,096 ) — Earn-out liability — — — — ( 52,436 ) — Nonrecurring Impaired real estate assets, net (2) $ — $ — $ — $ — $ 24,000 $ — (1) We record derivative assets in Other Assets, Net on our consolidated balance sheets. (2) The carrying value of impaired real estate assets may have subsequently increased or decreased after the measurement date due to capital improvements, depreciation, or sale. Marketable Securities— We estimate the fair value of marketable securities using Level 1 inputs. We utilize unadjusted quoted prices for identical assets in active markets that we have the ability to access. PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2022 FORM 10-Q 17 Derivative Instruments— As of September 30, 2022 and December 31, 2021, we had interest rate swaps that fixed LIBOR or SOFR on portions of our unsecured term loan facilities. All interest rate swap agreements are measured at fair value on a recurring basis. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of ASC Topic 820, Fair Value Measurement , we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. Although we determined that the significant inputs used to value our derivatives fell within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our counterparties and our own credit risk utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and our counterparties. However, as of September 30, 2022 and December 31, 2021, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. Earn-out —As part of our acquisition of Phillips Edison Limited Partnership (“PELP”) in 2017, an earn-out structure was established which gave PELP the opportunity to earn additional OP units based upon the potential achievement of certain performance targets subsequent to the acquisition. On January 11, 2022, we finalized the fair value of the earn-out liability based on our share price and issued approximately 1.6 million OP units in full settlement of the liability with a value of $ 54.2 million. Changes in the fair value of the earn-out liability were recorded to Other Expense, Net in the consolidated statements of operations. We recorded no expense for the three months ended September 30, 2022 and $ 5.0 million in expense for the three months ended September 30, 2021. We recorded expense of $ 1.8 million and $ 23.0 million, respectively, for the nine months ended September 30, 2022 and September 30, 2021. Real Estate Asset Impairment —Our real estate assets are measured and recognized at fair value, less costs to sell for held-for-sale properties, on a nonrecurring basis dependent upon when we determine an impairment has occurred. There were no impairment charges recorded during the three and nine months ended September 30, 2022. During the three and nine months ended September 30, 2021, we impaired assets that were under contract at a disposition price that was less than carrying value, or that had other operational impairment indicators. The valuation technique used for the fair value of all impaired real estate assets was the expected net sales proceeds, which we consider to be a Level 2 input in the fair value hierarchy. On a quarterly basis, we employ a multi-step approach to assess our real estate assets for possible impairment and record any impairment charges identified. The first step is the identification of potential triggering events, such as significant decreases in occupancy or the presence of large dark or vacant spaces. If we observe any of these indicators for a shopping center, we then perform an additional screen test consisting of a years-to-recover analysis to determine if we will recover the net book value of the property over its remaining economic life based upon net operating income (“NOI”) as forecasted for the current year. In the event that the results of this first step indicate a triggering event for a center, we proceed to the second step, utilizing an undiscounted cash flow model for the center to identify potential impairment. If the undiscounted cash flows are less than the net book value of the center as of the balance sheet date, we record an impairment charge based on the fair value determined in the third step. In performing the third step, we utilize market data such as capitalization rates and sales price per square foot on comparable recent real estate transactions to estimate the fair value of the real estate assets. We also utilize expected net sales proceeds to estimate the fair value of any centers that are actively being marketed for sale. In addition to these procedures, we also review undeveloped or unimproved land parcels that we own for evidence of impairment and record any impairment charges as necessary. Primary impairment triggers for these land parcels are changes to our plans or intentions with regards to such properties, or planned dispositions at prices that are less than the current carrying values. We recorded the following expense upon impairment of real estate assets (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Impairment of real estate assets $ — $ 698 $ — $ 6,754 13. SUBSEQUENT EVENTS In preparing the condensed and unaudited consolidated financial statements, we have evaluated subsequent events through the date of filing of this report on Form 10-Q for recognition and/or disclosure purposes. Based on this evaluation, we have determined that there were no events that have occurred that require recognition or disclosure, other than certain events and transactions that have been disclosed elsewhere in these consolidated financial statements. PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2022 FORM 10-Q 18