Phillips Edison & Company, Inc. 10-K

ITEM 1. BUSINESS All references to “Notes” throughout this Annual Report on Form 10-K refer to the footnotes to the consolidated financial statements in “Part II, Item 8. Financial Statements and Supplementary Data”. OVERVIEW —Phillips Edison & Company, Inc. (“we,” the “Company,” “PECO,” “our,” or “us”), a real estate investment trust (“REIT”) founded in 1991, is one of the nation’s largest owners and operators of omni-channel grocery-anchored shopping centers. Additionally, we operate a third-party investment management business providing property management and advisory services to two unconsolidated institutional joint ventures, in which we have a partial ownership interest, and one private fund (collectively, the “Managed Funds”). The majority of our revenues are lease revenues derived from our real estate investments. Our portfolio primarily consists of neighborhood centers anchored by the #1 or #2 grocer tenants by sales within their respective formats by trade area. As of December 31, 2022, our portfolio was 97.4% leased. Our tenants, who we refer to as “Neighbors,” are a mix of national, regional, and local retailers that primarily provide necessity-based goods and services. We believe our locations are in fundamentally strong demographic markets throughout the United States. Our brick and mortar assets positively contribute to our Neighbors’ omni-channel strategies and act as the last mile delivery solution. We were formed as a Maryland corporation in October 2009 and have elected to be taxed as a REIT for U.S. federal income tax purposes. Substantially all of our business is conducted through Phillips Edison Grocery Center Operating Partnership I, L.P. (the “Operating Partnership”), a Delaware limited partnership formed in December 2009. We are a limited partner of the Operating Partnership, and our wholly-owned subsidiary, Phillips Edison Grocery Center OP GP I LLC, is the sole general partner of the Operating Partnership. As of December 31, 2022, we wholly-owned 271 shopping centers. Additionally, we owned a 14% interest in Grocery Retail Partners I LLC (“GRP I”), a joint venture with Northwestern Mutual Life Insurance Company, which owned 20 shopping centers, and a 20% equity interest in Necessity Retail Partners (“NRP”), a joint venture with an affiliate of TPG Real Estate. In May 2022, we sold the final property in our NRP joint venture. In total, our managed portfolio of wholly-owned shopping centers and those owned through our unconsolidated joint ventures comprised approximately 33.3 million square feet located in 31 states. BUSINESS OBJECTIVES AND STRATEGIES —Our business objective is to own, operate, and manage well-occupied grocery-anchored shopping centers in order to deliver long-term growth and value creation to all stakeholders while acting as a responsible corporate citizen. We seek to achieve this objective by generating cash flows, income growth, and capital appreciation for our stockholders through our differentiated and focused strategy, responsible balance sheet management, and integrated operating platform. Our goal is to create great grocery-anchored shopping experiences and improve our communities, one center at a time. Differentiated and Focused Strategy — We believe our differentiated strategy drives strong financial and operational performance and future growth, including showing resiliency during economic down cycles. • Omni-Channel Grocery-Anchored Neighborhood Shopping Centers —We focus on investing in omni-channel shopping centers anchored by the #1 or #2 grocer by sales within their respective trade area. As of December 31, 2022, for our wholly-owned shopping centers, 86% of our annualized base rent (“ABR”) was generated from shopping centers anchored by such grocers. Grocery-anchored shopping centers generally have strong foot traffic leading to high demand for leasing Neighbor spaces, which enhances our ability to increase lease revenue. We target investments with attractive going-in yields and growth potential in markets with demographic profiles that support necessity-based retail concepts. • Neighbor-base —We believe our centers act as the last mile delivery solution for our omni-channel Neighbors. As of December 31, 2022, approximately 71% of our ABR, including the pro rata portion attributable to properties owned through our unconsolidated joint ventures, is generated from Neighbors providing necessity-based goods and services. We believe our focus on necessity-based goods and services retailers limits our exposure to distressed retailers and allows us to demonstrate resiliency during times of real estate and economic down cycles. • Targeted Portfolio —We focus on owning centers in trade areas with favorable demographics that align with those of leading grocers. Further, we seek to invest in small format centers where leasing activity is concentrated in smaller tenant spaces and limits exposure to high-risk retailers. We believe that smaller centers provide higher growth potential because they enjoy a positive leasing dynamic as: (i) we believe retailer demand is strongest for inline space, which contains less than 10,000 square feet of gross leasable area; (ii) there is less exposure to big box retailers, which we believe have higher risk because they require larger capital expenditures and have fewer leasing opportunities; and (iii) smaller centers typically have lower capital expenditures. We intend to grow our portfolio through targeted acquisitions that align with our differentiated and focused strategy. • Macroeconomic Trends —We continually monitor the macroeconomic environment to identify trends that are positive for the growth potential of our shopping centers. We believe recent trends such as: (i) population shifts from urban to suburban communities in certain geographic locations; (ii) the increase in work from home initiatives; (iii) the importance of last mile delivery; (iv) the increase in “shop local” trends; and (v) low supply and lack of new construction will create additional leasing demand and growth opportunities for our shopping centers. Balance Sheet Management Positioned for External Growth — Our strategy is to grow our portfolio by pursuing acquisitions in a disciplined manner, while maintaining an attractive leverage profile and flexible balance sheet to preserve our investment grade rating. We believe this is a critical part of maintaining access to multiple forms of capital, including common stock, unsecured debt, bank debt, and mortgage debt, to maximize availability and minimize our overall cost of capital. PHILLIPS EDISON & COMPANY DECEMBER 31, 2022 FORM 10-K 3 • Funding External Growth —We believe our effective shelf registration statement and At-the-Market offering (“ATM”) program allow us to access equity and debt capital previously not available to us, further enhancing our financial flexibility and external growth potential. We believe our investment grade balance sheet and our available liquidity of $709.4 million under our senior unsecured revolving credit facility provide us with the financial capacity to pursue external growth initiatives in an accretive and prudently capitalized manner. Additionally, our investment management platform enables us to source and manage incremental sources of capital through unconsolidated joint ventures, which provide us incremental fee revenue opportunities. • Debt Maturity Profile —We believe we have maintained an appropriately staggered debt maturity profile, which will position us for long-term growth. Our outstanding debt obligations are composed primarily of (i) unsecured debt, including term loans, senior notes, and a revolving credit facility, and (ii) secured mortgage debt. Internal Growth Through Our Integrated Operating Platform — We believe our internally-staffed, vertically-integrated operating platform to lease and manage omni-channel grocery-anchored neighborhood shopping centers will continue to provide stability and generate growth in our existing portfolio, optimizing returns for our stockholders. • Leasing —Our national footprint of experienced and locally-smart leasing professionals is dedicated to increasing net operating income (“NOI”) at our centers by: (i) maximizing rental rates while improving the credit profile of our rental revenue; (ii) attracting high-quality retailers while improving the merchandising mix; (iii) capitalizing on below-market rent opportunities by increasing rents as leases expire; (iv) executing leases with contractual rent increases; and (v) increasing occupancy. • Property Management Services —We believe we add value by overseeing all aspects of operations at our properties. Our property managers maintain a local presence in order to effectively manage costs while maintaining a pleasant, clean, and safe environment where retailers can be successful and customers can enjoy a great shopping experience. Further, we provide our Neighbors with responsive customer service, marketing tools, as well as other sophisticated solutions, such as a centralized accounting, billing, and tax review platform to facilitate our daily operations. • Development and Redevelopment —Our team of seasoned professionals identify opportunities to unlock additional value at our properties through investments in our outparcel and redevelopment program. Our strategies include outparcel development, footprint reconfiguration, anchor repositioning, and anchor expansion, among others. These projects create opportunities to increase the overall yield and value of our properties, which we believe will allow us to deliver long-term growth and value creation to all stakeholders while creating great grocery-anchored shopping center experiences. COMPETITION— Our business is inherently competitive. We believe that the competition is highly fragmented. We are subject to considerable competition in both seeking shopping centers to acquire and attracting and retaining Neighbors in our existing shopping centers. We compete with institutional investors and other REITs, as well as local, regional, and national owner-operators for property acquisitions. We compete with other properties including malls, lifestyle centers, power centers, community centers, neighborhood centers, free-standing retail, and main street retail in attracting new Neighbors and retaining existing Neighbors when their leases expire. The competition for Neighbors varies depending on the characteristics of each property. We believe that the principal competitive factors in attracting and retaining Neighbors are the quality of the grocery anchor, location, trade area demographics, tenant mix, physical condition of the shopping center, and occupancy cost. These factors combine to determine the level of occupancy and rental rates that we are able to achieve at our properties. We believe that the quality of our omni-channel grocery-anchored shopping centers enables us to compete effectively for Neighbors. We believe that we maintain a competitive position in the acquisition market due to our track record and positive reputation. SEGMENT DATA— Our principal business is the ownership and operation of community and neighborhood shopping centers. We do not distinguish our principal business or group our operations by geography or size for purposes of measuring performance. Accordingly, we have presented our results as a single reportable segment. COMPLIANCE WITH GOVERNMENT REGULATION— Compliance with various governmental regulations has an impact on our business, including our capital expenditures, earnings, and competitive position. The impact of these governmental regulations can be material to our business. We incur costs to monitor and take action to comply with governmental regulations that are applicable to our business, which include, among others: federal securities laws and regulations; REIT and other tax laws and regulations; environmental and health and safety laws and regulations; local zoning, usage and other regulations relating to real property; and the Americans with Disabilities Act of 1990, as amended (“ADA”). See “Item 1A. Risk Factors” below for a discussion of material risks to us (including those, to the extent material to our competitive position, relating to governmental regulations) and see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this filing on Form 10-K, together with our consolidated financial statements and accompanying footnotes, for a discussion of material information relevant to an assessment of our financial condition and results of operations (including, to the extent material, the effects that compliance with governmental regulations may have upon our capital expenditures and earnings). As of December 31, 2022, we are not aware of any environmental conditions or material costs of complying with environmental or other government regulations that would have a material adverse effect on our overall business. However, it is possible that we are not aware of, or may become subject to potential environmental liabilities or material costs of complying with government regulations due to changes in requirements or otherwise that could be material to our business. PHILLIPS EDISON & COMPANY DECEMBER 31, 2022 FORM 10-K 4 CORPORATE RESPONSIBILITY— Being a responsible corporate citizen has always been integral to our corporate strategy and we operate under a clear mission statement of “creating great omni-channel grocery-anchored shopping center experiences and improving our communities, one shopping center at a time”. We strive to have a strong corporate culture based on our four core values - Do the Right Thing, Have Fun and Get it Done, Think Big Act Small, Always Keep Learning – which are designed to drive accountability in all aspects of our business with the overarching goal of achieving long-term growth and value creation for our stakeholders. We recognize that successful corporate responsibility is both internally and externally focused. Our General Counsel has overall responsibility for leading and managing our Environmental, Social and Governance (“ESG”) Team and reporting on our corporate responsibility and ESG matters to our Board of Directors (the “Board”). The ESG Team, comprised of department heads from Portfolio Management, Construction, Property Management, Leasing, Investor Relations, Marketing, Human Resources, and Legal is tasked with conducting more detailed materiality and risk assessments and identifying opportunities with measurable key performance indicators and enhanced reporting, with the overall goal of driving long-term growth and value creation for all of our stakeholders. HUMAN CAPITAL— As of December 31, 2022, we had approximately 290 associates located in 20 states across the country, with concentrations in our corporate offices in Cincinnati, Ohio; Park City, Utah; and Atlanta, Georgia. Approximately 52% of our workforce is female and 48% is male. Our senior leadership team is 18% female and 82% male, while manager roles and above are approximately 36% female and 64% male. For the year ended December 31, 2022, our overall turnover rate was 16%, with voluntary turnover being 13%, compared to our previous three year overall turnover average of 16% with a voluntary turnover rate of 11%. We have a highly engaged team of dedicated associates, as reflected in our sixth consecutive recognition as a top place to work by the Cincinnati Enquirer in 2022. One way we keep a pulse on engagement is by regularly surveying our associates about a variety of company topics. In 2022, we had a 96% participation rate in our associate experience survey that was conducted utilizing a third-party tool. Results indicated a 90% engagement index score. Additionally, our Board, and specifically our Compensation Committee, is actively engaged and oversees our human capital management practices. We believe that the following components of human capital management are important: Culture and Inclusion — We believe our team of highly engaged associates plays a key role in achieving long-term success for our stakeholders. We are committed to a company culture that is collaborative, inclusive, and that provides significant opportunities for professional and personal development. Our culture is shaped by our core values (Do The Right Thing, Have Fun and Get it Done, Think Big Act Small, and Always Keep Learning) that empower and encourage our associates to “think and operate like owners.” Our strong culture enables us to attract, develop and retain high performing and talented individuals who we believe help us to drive our business strategies and objectives, including attractive risk-adjusted returns for our stockholders. We provide associates with competitive salaries, bonuses, incentives, and opportunities for equity ownership. One unique aspect of our compensation philosophy is that each associate in the Company, regardless of level or tenure, has the opportunity for equity grants on an annual basis. During the year ended December 31, 2022, 100% of eligible associates received grants of service-based restricted stock units in the Company. Upon vesting, associates will receive shares of common stock, which encourages our associates to “think and operate like owners” of the Company. Our commitment to an inclusive work environment is reinforced by two associate-led business resource groups: PECO Multicultural Opportunities, Resources & Education (“PECO MORE”), and PECO Networking Opportunities for Women (“PECO NOW”). PECO MORE is dedicated to furthering diversity and inclusion within the Company, the communities that we serve, and the commercial real estate industry. PECO MORE’s programming has focused on providing education, raising awareness, and hosting events around Veterans Day, the Chinese New Year, Black History Month, Pride Month, and Dia de los Muertos (Day of the Dead). PECO NOW was recognized for excellence by the Innovating Commerce Serving Communities (“ICSC”) in 2016. PECO NOW’s mission statement focuses on fostering a community where every woman at PECO understands her value, is inspired to share her perspectives, and has courage to make decisions. PECO NOW has focused on increasing leadership opportunities for numerous female associates and sponsoring collaborative networking events. As part of our external community efforts in 2022, we continued our partnership with ICSC and their Launch Academy, which was designed to recruit and prepare racially or ethnically diverse undergraduate students for a career in the commercial real estate industry. Our support included hosting two Launch Academy interns and sponsoring a professional development session for all program participants. PECO was proud to fund a $5,000 ICSC Foundation scholarship to an underrepresented student with interest in pursuing a career in real estate and the shopping center industry. In addition to our support of ICSC’s early career development efforts, we hosted interns in our Cincinnati and Atlanta offices. Of the 32 students we hired in 2022 for an internship position, 50% either worked for PECO for multiple semesters or were converted to full-time hires. Almost 30% of the 2022 PECO internship class identified as racially or ethnically diverse. The PECO internship program has been a key element in our early career talent pipeline. Learning and Development — “Always Keep Learning” is one of our core values. We are committed to continuous learning and both personal and professional development of our associates as part of what we call PECO XP, or the PECO Experience. During 2022, our associates took part in over 4,700 hours of internal training hours across the Company. Trainings ranged from business oriented sessions such as finance for non-finance associates and cybersecurity awareness to department specific soft-skill training utilizing the DiSC © model for increased communication, empathy, and team building among associates. A cohort style frontline leadership program was launched and completed during the year. This program focused on developing managerial skills and providing support for first-level managers promoted during the COVID-19 pandemic. Additionally, two female focused development programs were introduced at PECO in 2022. One was an internally created program sponsored by PECO NOW with the primary goal of developing future female leaders in the organization by creating opportunities for collaboration, networking, personal development, and innovation. The other was a cohort style program for females currently in mid-level leadership roles designed to create community, share knowledge, enhance leadership skills, and provide additional access to senior leadership team members. PECO has continued our commitment to continuous learning and development in 2022 with our annual Company-wide talent management process, where all associates are expected to set development goals for the upcoming year. Managers are expected to hold coaching conversations designed to focus on career progression and put action items in place to keep each PHILLIPS EDISON & COMPANY DECEMBER 31, 2022 FORM 10-K 5 associate moving forward as part of this process as well. To help facilitate this process in 2022, associates were offered an interactive workshop specifically focused on creating and enhancing their development goal plans. We also completed our first round of PECO Mentor Match, a formal mentoring program focused on career development, with over 240 recorded hours of mentorship activities. Employee Health and Wellness — Our “Beyond Benefits” wellness program is an essential element of our culture and focuses on our associates’ emotional, physical, and financial well-being. Together with an external partner, we offer a full wellness platform providing Health Savings Account incentive contributions for biometric screening results, preventive care, and activity-based items such as step counts, nutrition tracking, and workout activity minutes. To keep associates engaged in wellness activities during 2022, we held four wellness challenges where individuals and teams could earn incentive dollars for winning competitions that tracked steps, workout activity, and nutrition. In May 2022, we also invested in a month-long focus on mental health providing a broad range of activities such as a “It’s Okay to Not be Okay” webinar, bring your dog to work day, our third annual Mental Health May 5k, and frequent communications with resources, articles, and support to raise awareness and acceptance of mental health issues. In October 2022, prior to the associate open enrollment period, we hosted a Wellness Week with a variety of fitness activities and a stress management seminar, nutrition workshop, and wellness fair. We believe a ll of these efforts have facilitated a continued dedication to wellness and preventive care among our associates, and as a result, we were recognized for the third year in a row by Healthiest Employers LLC as one of the "Healthiest Employers of Ohio" in 2022. ENVIRONMENTAL STEWARDSHIP— We believe that sustainable business practices fit with our core value of “Do The Right Thing” while at the same time acting in the best interests of all our stakeholders by having a positive impact on our properties and the communities in which they are located. We participate in the Global Real Estate Sustainability Benchmark ("GRESB") Real Estate Assessment, and our Corporate Social Responsibility Report is designed to align with a number of the 17 United Nations Sustainable Development Goals. Our sustainability initiatives include energy efficiency, alternative power sources, water conservation, sustainable design and waste management, among others. Through these initiatives, we continue to make progress towards mitigating the environmental impact of our shopping centers. In our ongoing commitment to sustainability, we can highlight the following achievements: • Completion of the retrofit of 92% of our portfolio to LED, which puts us well ahead of our goal to retrofit 100% of our portfolio by 2025. • 17 solar array systems in our shopping centers producing over 4.5MW of solar energy. • Over 55 million gallons of water conserved through the implementation of xeriscaping and our “Smart Water Control Program,” which in turn has generated cost savings of $0.9 million. • Establishment of a new waste diversion program aimed at achieving a 25% total diversion rate at eligible properties by 2030. • Installations of EV amenities at 22% of our properties in route to achieving our target of installing EV amenities at 50% of our eligible properties by 2030. • WELL Health-Safety recertification for our company headquarters in Cincinnati, Ohio, a certification that less than 1% of buildings in the state of Ohio have received. Our team of seasoned professionals identify opportunities in our redevelopment program, which includes outparcel development, footprint reconfiguration, anchor repositioning, and anchor expansions, among others. These projects create attractive sustainability opportunities to increase the overall value of our properties, while improving the environmental impact on our communities. Our ESG Team has been and will continue to be focused on strategic sustainability initiatives to enhance resource efficiencies as part of that program. CORPORATE GOVERNANCE AND COMPLIANCE— We have a steadfast commitment to operating our business with the utmost integrity and the highest ethical standards as stewards of our investors’ capital. We believe our corporate governance structure closely aligns our interests with those of our stockholders. Notable features include: (i) each of our directors is subject to election annually, and our charter prevents us from classifying our Board unless we receive prior stockholder approval; (ii) we have opted out of the business combination and control share acquisition statutes in the Maryland General Corporation Law; (iii) we do not have a stockholder rights plan; (iv) we have a Stock Ownership Policy that requires each non-associate director, our CEO and each other named executive officer to own a certain amount of our equity; and (v) our bylaws provide that our stockholders may alter or replace our bylaws upon the affirmative vote of a majority of the votes entitled to be cast. We operate under the direction of our Board, which is comprised of eight directors, seven of whom are independent per applicable Nasdaq Global Select Market (“Nasdaq”) and U.S. Securities and Exchange Commission (“SEC”) rules. Our Audit, Nominating and Governance (“N&G”), and Compensation Committees are comprised solely of independent directors who complete annual self-assessments. Our Board has adopted Corporate Governance Guidelines that, among other things, establish criteria and expectations for our directors, and our N&G Committee has responsibility for evaluating our Board. We are cognizant of “overboarding” and none of our directors serve on more than two other public company boards. We are compliant with the diverse director requirements under Nasdaq’s Board Diversity Rule, and our upcoming 2023 proxy statement will include a Board diversity matrix. Our full Board oversees each of our corporate social responsibility, ESG and enterprise risk management programs, and our Audit Committee oversees our ethics and compliance program. Management provides periodic updates on each such program to the directors. All of our associates are required to complete regular training on our Code of Business Conduct and Ethics and our Insider Trading Policy, and provide annual Code of Conduct Compliance Certifications to our Chief Ethics and Compliance Officer. Furthermore, PECO has conducted extensive cybersecurity training initiatives and campaigns, including ongoing tabletop cybersecurity exercises and cybersecurity training for all associates. Our cybersecurity initiatives also included an interview PHILLIPS EDISON & COMPANY DECEMBER 31, 2022 FORM 10-K 6 conducted with a Regional Cybersecurity Advisor from the Cybersecurity and Infrastructure Security Agency of the Department of Homeland Security, weekly security series training, and monthly simulated phishing campaigns. We encourage our associates to speak up when our ethics standards are not being met, including by maintaining a 24-hour ethics hotline for reporting concerns and keeping our Audit Committee apprised of all reported concerns. More information about our corporate responsibility strategy, goals and reporting is available on our website, which is not incorporated by reference and should not be considered part of this Annual Report on Form 10-K. INFORMATION ABOUT OUR EXECUTIVE OFFICERS— The following table details information for our executive officers as of December 31, 2022: Name Age Title Joined PECO Jeffrey S. Edison 62 Chairman & Chief Executive Officer Co-Founder Devin I. Murphy 62 President 2013 Robert F. Myers 50 Chief Operating Officer & Executive Vice President 2003 John P. Caulfield 42 Chief Financial Officer, Executive Vice President & Treasurer 2014 Tanya E. Brady 55 General Counsel, Chief Ethics & Compliance Officer, Executive Vice President & Secretary 2013 CORPORATE HEADQUARTERS— Our corporate headquarters, located at 11501 Northlake Drive, Cincinnati, Ohio 45249, is where we conduct a majority of our management, leasing, construction, and investment activities, as well as administrative functions such as accounting and finance. Additionally, we maintain two regional offices located in Atlanta, Georgia and Park City, Utah. ACCESS TO COMPANY INFORMATION— We electronically file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy and Information statements, and all amendments to those reports with the SEC. The SEC maintains an internet site at www.sec.gov that contains the reports, proxy and information statements, and other information regarding issuers, including ours that are filed electronically. We make available, free of charge, the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports on our website, www.phillipsedison.com. These reports are available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Also available on our website are (i) our Corporate Governance Guidelines, (ii) our Code of Business Conduct and Ethics, and (iii) our Whistleblower Policy. In the event of any changes to these documents, revised copies will be made available on our website. We intend to disclose on our website under “Investors - Governance - Governance Overview” any amendment to, or waiver of, any provisions of our Code of Business Conduct and Ethics applicable to the directors and/or officers of the Company that would otherwise be required to be disclosed under the rules of the SEC or Nasdaq. We also disclose, and intend to disclose, on our website under “Investors” material nonpublic information to comply with our disclosure obligations under Regulation FD. The contents of our website are not incorporated by reference.