Phillips Edison & Company, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS PHILLIPS EDISON & COMPANY, INC. CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2023 AND DECEMBER 31, 2022 (Condensed and Unaudited) (In thousands, except per share amounts) March 31, 2023 December 31, 2022 ASSETS Investment in real estate: Land and improvements $ 1,701,404 $ 1,674,133 Building and improvements 3,639,646 3,572,146 In-place lease assets 478,477 471,507 Above-market lease assets 72,524 71,954 Total investment in real estate assets 5,892,051 5,789,740 Accumulated depreciation and amortization ( 1,373,124 ) ( 1,316,743 ) Net investment in real estate assets 4,518,927 4,472,997 Investment in unconsolidated joint ventures 26,584 27,201 Total investment in real estate assets, net 4,545,511 4,500,198 Cash and cash equivalents 6,405 5,478 Restricted cash 5,559 11,871 Goodwill 29,066 29,066 Other assets, net 200,373 188,879 Total assets $ 4,786,914 $ 4,735,492 LIABILITIES AND EQUITY Liabilities: Debt obligations, net $ 1,967,252 $ 1,896,594 Below-market lease liabilities, net 111,007 109,799 Accounts payable and other liabilities 111,471 113,185 Deferred income 24,243 18,481 Total liabilities 2,213,973 2,138,059 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 March 31, 2023 and December 31, 2022 — — Common stock, $ 0.01 par value per share, 1,000,000 shares authorized, 117,259 and 117,126 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively 1,172 1,171 Additional paid-in capital (“APIC”) 3,382,368 3,383,978 Accumulated other comprehensive income (“AOCI”) 15,181 21,003 Accumulated deficit ( 1,186,074 ) ( 1,169,665 ) Total stockholders’ equity 2,212,647 2,236,487 Noncontrolling interests 360,294 360,946 Total equity 2,572,941 2,597,433 Total liabilities and equity $ 4,786,914 $ 4,735,492 See notes to consolidated financial statements. PHILLIPS EDISON & COMPANY MARCH 31, 2023 FORM 10-Q 2 PHILLIPS EDISON & COMPANY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022 (Condensed and Unaudited) (In thousands, except per share amounts) Three Months Ended March 31, 2023 2022 Revenues: Rental income $ 147,728 $ 138,748 Fees and management income 2,478 2,461 Other property income 858 954 Total revenues 151,064 142,163 Operating Expenses: Property operating 25,062 23,320 Real estate taxes 18,056 17,491 General and administrative 11,533 11,532 Depreciation and amortization 58,498 57,226 Total operating expenses 113,149 109,569 Other: Interest expense, net ( 19,466 ) ( 18,199 ) Gain on disposal of property, net 942 1,368 Other expense, net ( 755 ) ( 4,365 ) Net income 18,636 11,398 Net income attributable to noncontrolling interests ( 2,017 ) ( 1,319 ) Net income attributable to stockholders $ 16,619 $ 10,079 Earnings per share of common stock: Net income per share attributable to stockholders - basic and diluted (see Note 10) $ 0.14 $ 0.09 Comprehensive income: Net income $ 18,636 $ 11,398 Other comprehensive (loss) income: Change in unrealized value on interest rate swaps ( 6,499 ) 27,573 Comprehensive income 12,137 38,971 Net income attributable to noncontrolling interests ( 2,017 ) ( 1,319 ) Change in unrealized value on interest rate swaps attributable to noncontrolling interests 704 ( 2,702 ) Reallocation of comprehensive loss upon conversion of noncontrolling interests ( 27 ) ( 212 ) Comprehensive income attributable to stockholders $ 10,797 $ 34,738 See notes to consolidated financial statements. PHILLIPS EDISON & COMPANY MARCH 31, 2023 FORM 10-Q 3 PHILLIPS EDISON & COMPANY, INC. CONSOLIDATED STATEMENTS OF EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022 (Condensed and Unaudited) (In thousands, except per share amounts) Three Months Ended March 31, 2023 and 2022 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, 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 ) — — — — — — Change in unrealized value on interest rate swaps — — — — — 24,871 — 24,871 2,702 27,573 Common distributions declared, $ 0.27 per share — — — — — — ( 30,915 ) ( 30,915 ) — ( 30,915 ) Distributions to noncontrolling interests — — — — — — — — ( 4,104 ) ( 4,104 ) Share-based compensation 71 1 — — 467 — — 468 2,678 3,146 Conversion of noncontrolling interests 533 5 — — 11,646 ( 212 ) — 11,439 ( 11,439 ) — Settlement of earn-out liability — — — — — — — — 54,245 54,245 Net income — — — — — — 10,079 10,079 1,319 11,398 Balance at March 31, 2022 113,819 $ 1,138 — $ — $ 3,276,151 $ ( 160 ) $ ( 1,111,673 ) $ 2,165,456 $ 372,213 $ 2,537,669 Balance at January 1, 2023 117,126 $ 1,171 — $ — $ 3,383,978 $ 21,003 $ ( 1,169,665 ) $ 2,236,487 $ 360,946 $ 2,597,433 Change in unrealized value on interest rate swaps — — — — — ( 5,795 ) — ( 5,795 ) ( 704 ) ( 6,499 ) Common distributions declared, $ 0.2799 per share — — — — — — ( 33,028 ) ( 33,028 ) — ( 33,028 ) Distributions to noncontrolling interests — — — — — — — — ( 4,073 ) ( 4,073 ) Share-based compensation 133 1 — — ( 1,610 ) — — ( 1,609 ) 2,081 472 Conversion of noncontrolling interests — — — — — ( 27 ) — ( 27 ) 27 — Net income — — — — — — 16,619 16,619 2,017 18,636 Balance at March 31, 2023 117,259 $ 1,172 — $ — $ 3,382,368 $ 15,181 $ ( 1,186,074 ) $ 2,212,647 $ 360,294 $ 2,572,941 See notes to consolidated financial statements. PHILLIPS EDISON & COMPANY MARCH 31, 2023 FORM 10-Q 4 PHILLIPS EDISON & COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022 (Condensed and Unaudited) (In thousands) Three Months Ended March 31, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 18,636 $ 11,398 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of real estate assets 57,953 56,321 Depreciation and amortization of corporate assets 545 905 Net amortization of above- and below-market leases ( 1,228 ) ( 1,002 ) Amortization of deferred financing expenses 894 801 Amortization of debt and derivative adjustments 667 586 Gain on disposal of property, net ( 942 ) ( 1,368 ) Change in fair value of earn-out liability — 1,809 Straight-line rent ( 2,566 ) ( 1,818 ) Share-based compensation 472 3,146 Return on investment in unconsolidated joint ventures 11 — Other ( 350 ) 487 Changes in operating assets and liabilities: Other assets, net ( 16,715 ) ( 10,978 ) Accounts payable and other liabilities 5,386 ( 66 ) Net cash provided by operating activities 62,763 60,221 CASH FLOWS FROM INVESTING ACTIVITIES: Real estate acquisitions ( 69,431 ) ( 101,440 ) Capital expenditures ( 23,878 ) ( 18,608 ) Proceeds from sale of real estate, net 1,091 12,770 Return of investment in unconsolidated joint ventures 606 781 Insurance proceeds for property damage claims 194 — Net cash used in investing activities ( 91,418 ) ( 106,497 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving credit facility 162,000 102,000 Payments on revolving credit facility ( 76,000 ) ( 56,000 ) Payments on mortgages and loans payable ( 25,477 ) ( 62,515 ) Distributions paid ( 33,276 ) ( 30,926 ) Distributions to noncontrolling interests ( 3,977 ) ( 4,343 ) Net cash provided by (used in) financing activities 23,270 ( 51,784 ) NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH ( 5,385 ) ( 98,060 ) CASH, CASH EQUIVALENTS, AND RESTRICTED CASH: Beginning of period 17,349 115,529 End of period $ 11,964 $ 17,469 RECONCILIATION TO CONSOLIDATED BALANCE SHEETS: Cash and cash equivalents $ 6,405 $ 5,063 Restricted cash 5,559 12,406 Cash, cash equivalents, and restricted cash at end of period $ 11,964 $ 17,469 PHILLIPS EDISON & COMPANY MARCH 31, 2023 FORM 10-Q 5 PHILLIPS EDISON & COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022 (Condensed and Unaudited) (In thousands) Three Months Ended March 31, 2023 2022 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 15,166 $ 14,849 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 888 — Accrued capital expenditures 7,570 6,486 Assumed debt obligations, net 9,619 — Assumed below-market debt 443 — Change in distributions payable ( 248 ) ( 11 ) Change in distributions payable - noncontrolling interests 96 ( 239 ) See notes to consolidated financial statements. PHILLIPS EDISON & COMPANY MARCH 31, 2023 FORM 10-Q 6 Phillips Edison & Company, Inc. Notes to Consolidated Financial Statements (Condensed and Unaudited) 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, Grocery Retail Partners I LLC (“GRP I”) and Necessity Retail Partners (“NRP”), in which we have partial ownership interests, and one private fund (collectively, the “Managed Funds”) as of March 31, 2023. As of March 31, 2023, we wholly-owned 275 real estate properties. Additionally, we owned a 14 % interest in GRP I, which owned 20 properties. NRP —As of March 31, 2023, we owned a 20 % equity interest in NRP. NRP was initially formed in March 2016 pursuant to the terms of a joint venture agreement between Phillips Edison Grocery Center REIT II, Inc. and an affiliate of TPG Real Estate and is set to expire seven years after the date of the joint venture contribution agreement unless otherwise extended by the members. In May 2022, we sold the final property in the joint venture as a result of the planned expiration in 2023. With the monetization of the joint venture, we exceeded the targeted return and as such were paid compensation of $ 0.1 million and $ 0.2 million during the three months ended March 31, 2023 and 2022, respectively, which is recorded in Fees and Management Income in our consolidated statements of operations and comprehensive income (“consolidated statements of operations”). 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 three months ended March 31, 2023, except for those discussed below. For a full summary of our significant accounting policies, refer to our 2022 Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (“SEC”) on February 21, 2023. 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 (“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, 2022, which are included in our 2022 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 months ended March 31, 2023 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. 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 months ended March 31, 2023 and 2022, 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 three months ended March 31, 2023 that impacted the Company. PHILLIPS EDISON & COMPANY MARCH 31, 2023 FORM 10-Q 7 Reclassifications —Certain prior period amounts have been reclassified to conform to current year presentation in the consolidated statements of equity. The reallocation of operating partnership interests is now reflected within Conversion of Noncontrolling Interests, as opposed to being presented as a separate financial statement line item. There was no impact to the Company’s financial position as a result of this reclassification. 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 March 31, 2023 2022 Rental income related to fixed lease payments (1) $ 108,864 $ 101,510 Rental income related to variable lease payments (1)(2) 35,763 33,467 Straight-line rent amortization (3) 2,443 1,695 Amortization of lease assets 1,216 992 Lease buyout income 355 1,964 Adjustments for collectibility (4) ( 913 ) ( 880 ) Total rental income $ 147,728 $ 138,748 (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 March 31, 2023, 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 2023 $ 326,815 2024 403,547 2025 346,840 2026 281,485 2027 216,408 Thereafter 539,314 Total $ 2,114,409 No single tenant comprised 10% or more of our aggregate annualized base rent (“ABR”) as of March 31, 2023. As of March 31, 2023, our wholly-owned real estate investments in Florida and California represented 12.2 % and 10.9 % of our ABR, respectively. As a result, the geographic concentration of our portfolio makes it particularly susceptible to adverse weather or economic events in the Florida (see “Hurricane Ian” in Note 4) and California real estate markets. PHILLIPS EDISON & COMPANY MARCH 31, 2023 FORM 10-Q 8 4. REAL ESTATE ACTIVITY Acquisitions — The following table summarizes our real estate acquisition activity (dollars in thousands): Three Months Ended March 31, 2023 2022 Number of properties acquired 4 3 Contract price $ 78,650 $ 100,400 Total price of acquisitions (1) 69,431 101,440 (1) Total price of acquisitions includes closing costs less credits and assumed debt obligations. The aggregate purchase price of the assets acquired during the three months ended March 31, 2023 and 2022 were allocated as follows (in thousands): March 31, 2023 March 31, 2022 ASSETS Land and improvements $ 25,079 $ 30,274 Building and improvements 49,853 65,028 In-place lease assets 592 8,557 Above-market lease assets 7,111 708 Below-market debt 443 — Total assets 83,078 104,567 LIABILITIES Debt obligations, net 9,619 — Below-market lease liabilities 4,028 3,127 Total liabilities 13,647 3,127 Net assets acquired $ 69,431 $ 101,440 The weighted-average amortization periods for in-place, above-market, and below-market lease intangibles and below-market debt acquired during the three months ended March 31, 2023 and 2022 are as follows (in years): March 31, 2023 March 31, 2022 Acquired in-place leases 12 14 Acquired above-market leases 8 6 Acquired below-market leases 18 24 Assumed below-market debt 2 — Property Dispositions — The following table summarizes our real estate disposition activity (dollars in thousands): Three Months Ended March 31, 2023 2022 Number of properties sold — 2 Contract price $ — $ 13,325 Proceeds from sale of real estate, net (1)(2) 1,091 12,770 Gain on disposal of property, net (2) 942 1,368 (1) Total proceeds from sale of real estate, net includes closing costs less credits. (2) Activity for the three months ended March 31, 2023 was primarily related to land acquired from us by local authorities. PHILLIPS EDISON & COMPANY MARCH 31, 2023 FORM 10-Q 9 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. Based on our estimates at March 31, 2023, we expect to collect insurance proceeds of $ 1.0 million (net of deductibles and self-insurance of $ 1.7 million) equal to the replacement cost of the damaged properties. During 2022, we recorded gross cumulative accelerated depreciation of $ 2.7 million, which was reduced by expected insurance recoveries, for damages sustained to the properties. We also recognized a receivable for estimated insurance recoveries in excess of the deductible. As of March 31, 2023, we have received no insurance recoveries and have a receivable balance of $ 1.0 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 March 31, 2023 and December 31, 2022, excluding amounts related to assets classified as held for sale (in thousands): March 31, 2023 December 31, 2022 Other assets, net: Deferred leasing commissions and costs $ 50,253 $ 49,687 Deferred financing expenses (1) 9,069 8,984 Office equipment, including capital lease assets, and other 23,132 23,051 Corporate intangible assets 6,692 6,692 Total depreciable and amortizable assets 89,146 88,414 Accumulated depreciation and amortization ( 48,407 ) ( 47,483 ) Net depreciable and amortizable assets 40,739 40,931 Accounts receivable, net (2) 43,471 37,274 Accounts receivable - affiliates 1,470 513 Deferred rent receivable, net (3) 54,729 52,141 Derivative assets 19,200 25,853 Prepaid expenses and other 22,745 14,575 Investment in third parties 9,800 9,800 Investment in marketable securities 8,219 7,792 Total other assets, net $ 200,373 $ 188,879 (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 $ 2.8 million and $ 3.0 million of general reserves for uncollectible amounts as of March 31, 2023 and December 31, 2022, respectively. Receivables that were removed for tenants considered to be non-creditworthy were $ 5.9 million and $ 6.2 million as of March 31, 2023 and December 31, 2022, respectively. (3) Net of $ 4.0 million and $ 4.2 million of receivables removed as of March 31, 2023 and December 31, 2022, respectively, related to straight-line rent for tenants previously or currently considered to be non-creditworthy. PHILLIPS EDISON & COMPANY MARCH 31, 2023 FORM 10-Q 10 6. DEBT OBLIGATIONS The following is a summary of the outstanding principal balances and interest rates, which includes the effect of derivative financial instruments, for our debt obligations as of March 31, 2023 and December 31, 2022 (dollars in thousands): Interest Rate (1) March 31, 2023 December 31, 2022 Revolving credit facility SOFR + 1.1 % $ 165,000 $ 79,000 Term loans (2) 2.5 % - 6.0 % 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 % 117,549 133,199 Finance lease liability 529 585 Discount on notes payable ( 6,828 ) ( 7,001 ) Assumed market debt adjustments, net ( 1,512 ) ( 1,226 ) Deferred financing expenses, net ( 7,486 ) ( 7,963 ) Total $ 1,967,252 $ 1,896,594 Weighted-average interest rate (3) 3.8 % 3.6 % (1) Interest rates are as of March 31, 2023. (2) Our term loans carry an interest rate of the Secured Overnight Financing Rate (“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 SOFR. (3) Includes the effects of derivative financial instruments that were effective as of March 31, 2023 and December 31, 2022 (see Notes 7 and 12). 2023 Debt Activity— During the three months ended March 31, 2023, we repaid $ 25.4 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 March 31, 2023 and December 31, 2022 is summarized below (in thousands): March 31, 2023 December 31, 2022 As to interest rate: Fixed-rate debt (1) $ 1,618,078 $ 1,633,784 Variable-rate debt 365,000 279,000 Total $ 1,983,078 $ 1,912,784 As to collateralization: Unsecured debt $ 1,470,000 $ 1,384,000 Secured debt 513,078 528,784 Total $ 1,983,078 $ 1,912,784 (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 March 31, 2023, $ 755 million in variable-rate debt is hedged to a fixed rate for a weighted-average period of 1.3 years (see Notes 7 and 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. PHILLIPS EDISON & COMPANY MARCH 31, 2023 FORM 10-Q 11 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 three months ended March 31, 2023 and 2022, 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 $ 15.5 million will be reclassified from AOCI as a decrease to Interest Expense, Net. On March 15, 2023, we entered into an interest rate swap which has a notional amount of $ 200 million and swaps SOFR for a fixed rate of approximately 3.36 % effective September 15, 2023 and maturing September 1, 2026. The following is a summary of our interest rate swaps that were designated as cash flow hedges of interest rate risk as of March 31, 2023 and December 31, 2022 (dollars in thousands): March 31, 2023 December 31, 2022 Count 5 4 Notional amount (1) $ 755,000 $ 755,000 Fixed SOFR 1.2 % - 3.4 % 1.2 % - 2.8 % Maturity date 2023-2026 2023-2025 Weighted-average term (in years) 2.1 1.6 (1) Notional amount includes only interest rate swaps that were effective as of March 31, 2023 and December 31, 2022. 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 March 31, 2023 2022 Amount of (loss) gain recognized in Other Comprehensive (Loss) Income $ ( 1,952 ) $ 22,899 Amount of (gain) loss reclassified from AOCI into Interest Expense, Net ( 4,547 ) 4,674 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 March 31, 2023, the fair value of our derivatives in a net liability position, which included accrued interest but excluded any adjustment for nonperformance risk related to these agreements and approximated $ 0.2 million, are recorded in Accounts Payable and Other Liabilities on our consolidated balance sheets. As of March 31, 2023, we had not posted any collateral related to these agreements and were not in breach of any agreement provisions. If we had breached any of these provisions, we could have been required to settle our obligations under the agreements at their termination value of $ 0.2 million. 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 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 currently aware of any environmental matters that we believe are reasonably likely to have a material adverse 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 establishes 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. PHILLIPS EDISON & COMPANY MARCH 31, 2023 FORM 10-Q 12 As of March 31, 2023, we had four letters of credit outstanding totaling approximately $ 12.5 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 our Board of Directors (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 March 31, 2023 and 2022, no shares of our common stock were issued under the ATM program. As of March 31, 2023, $ 159.9 million of common stock remained available for issuance under the ATM program. Class B Common Stock —On June 18, 2021, our stockholders approved an amendment to our charter (the “Articles of Amendment”) that effected a change, wherein each share of our common stock outstanding at the time the Articles of Amendment became effective was converted into one share of a newly created class of Class B common stock (the “Recapitalization”). 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. Distributions —We declared 2023 monthly distributions of $ 0.0933 per common share and Operating Partnership unit (“OP unit”) for each month beginning January 2023 through April 2023. Distributions paid to stockholders and OP unit holders of record subsequent to March 31, 2023 were as follows (dollars in thousands, excluding per share amounts): Month Date of Record Date Distribution Paid Monthly Distribution Rate Cash Distribution March 3/15/2023 4/3/2023 $ 0.0933 $ 12,226 April 4/17/2023 5/1/2023 0.0933 12,226 Convertible Noncontrolling Interests —As of March 31, 2023 and December 31, 2022, we had approximately 14.3 million and 14.1 million outstanding non-voting 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 March 31, 2023 and December 31, 2022 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 months ended March 31, 2023 and 2022 (dollars and shares in thousands): Three Months Ended March 31, 2023 2022 OP units converted into shares of common stock (1) — 533 Distributions declared on OP units (2) $ 4,073 $ 4,104 (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 declared on OP units are included in Distributions to Noncontrolling Interests on the consolidated statements of equity. Share Repurchase Program —On August 3, 2022, our Board approved a new share repurchase program of up to $ 250 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. PHILLIPS EDISON & COMPANY MARCH 31, 2023 FORM 10-Q 13 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. 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 March 31, 2023 2022 Numerator: Net income attributable to stockholders - basic $ 16,619 $ 10,079 Net income attributable to convertible OP units (1) 2,017 1,319 Net income - diluted $ 18,636 $ 11,398 Denominator: Weighted-average shares - basic 117,223 113,571 OP units (1) 14,234 14,558 Dilutive restricted stock awards 486 374 Adjusted weighted-average shares - diluted 131,943 128,503 Earnings per common share: Basic and diluted income per share $ 0.14 $ 0.09 (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 March 31, 2023 2022 Recurring fees (1) $ 1,012 $ 1,075 Realized performance income (2) 75 196 Transactional revenue and reimbursements (3) 542 394 Insurance premiums (4) 849 796 Total fees and management income $ 2,478 $ 2,461 (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 and construction management fees. (4) Insurance premium income includes amounts for reinsurance from third parties not affiliated with us. PHILLIPS EDISON & COMPANY MARCH 31, 2023 FORM 10-Q 14 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 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 March 31, 2023, the potential “make-whole amount” on the estimated aggregate amount of built-in gain subject to protection under the agreements is approximately $ 147.8 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. Other Related Party Matters — As of March 31, 2023, 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 March 31, 2023 and December 31, 2022. 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 March 31, 2023 and December 31, 2022 (in thousands): March 31, 2023 December 31, 2022 Recorded Principal Balance (1) Fair Value Recorded Principal Balance (1) Fair Value Revolving credit facility $ 165,000 $ 165,677 $ 79,000 $ 79,299 Term loans 949,089 959,281 948,429 959,319 Senior unsecured notes due 2031 343,172 263,277 342,999 257,446 Secured portfolio loan facilities 392,214 343,049 392,093 343,921 Mortgages (2) 117,777 115,763 134,073 132,563 Total $ 1,967,252 $ 1,847,047 $ 1,896,594 $ 1,772,548 (1) As of March 31, 2023 and December 31, 2022, respectively, recorded principal balances include: (i) net deferred financing fees of $ 7.5 million and $ 8.0 million; (ii) assumed market debt adjustments of $ 1.5 million and $ 1.2 million; and (iii) notes payable discounts of $ 6.8 million and $ 7.0 million. (2) Our finance lease liability is included in the mortgages line item, as presented . PHILLIPS EDISON & COMPANY MARCH 31, 2023 FORM 10-Q 15 Recurring and Nonrecurring Fair Value Measurements —Our marketable securities 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 three months ended March 31, 2023 and the year ended December 31, 2022 were as follows (in thousands): March 31, 2023 December 31, 2022 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Recurring Marketable securities (1) $ 8,219 $ — $ — $ 7,792 $ — $ — Derivative assets (1) — 19,200 — — 25,853 — Derivative liabilities (2) — 184 — — — — Nonrecurring Impaired real estate assets, net (3) $ — $ — $ — $ — $ 5,225 $ — (1) We record marketable securities and derivative assets in Other Assets, Net on our consolidated balance sheets. (2) We record derivative liabilities in Accounts Payable and Other Liabilities on our consolidated balance sheets. (3) 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. Derivative Instruments— As of March 31, 2023 and December 31, 2022, we had interest rate swaps that fixed 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 March 31, 2023 and December 31, 2022, 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. 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 months ended March 31, 2023 and March 31, 2022. 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. PHILLIPS EDISON & COMPANY MARCH 31, 2023 FORM 10-Q 16 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 March 31, 2023 and $ 1.8 million in expense for the three months ended March 31, 2022. 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 MARCH 31, 2023 FORM 10-Q 17