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 partial ownership interests, 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, 2023, 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, 2023, we wholly-owned 281 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. We also owned 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 venture comprised approximately 34.4 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, 2023, for our wholly-owned shopping centers, 85% 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. These centers provide an attractive last-mile solution to residents of our communities by providing “Buy Online, Pick-Up in Store”, curbside pick-up, and grocery delivery options. We target investments with attractive going-in yields and growth potential in markets with demographic profiles that support necessity-based retail concepts. • Neighbor-Base —As of December 31, 2023, approximately 70% of our ABR, including the pro rata portion attributable to properties owned through our unconsolidated joint venture, is generated from Neighbors providing necessity-based goods and services. 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 to the Sun Belt and from urban to suburban communities in certain geographic locations; (ii) the continued presence of hybrid work initiatives; (iii) the importance of last mile delivery; (iv) low supply and lack of new construction coupled with high occupancy; and (v) continued consumer resilience 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 PHILLIPS EDISON & COMPANY DECEMBER 31, 2023 FORM 10-K 3 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. • Funding External Growth —We have identified a target market of approximately 5,800 centers across the United States and believe we have a long runway for external growth. We believe our effective shelf registration statement and At-the-Market offering (“ATM”) program allow us to access equity and debt capital, further enhancing our financial flexibility and external growth potential. We believe our investment grade balance sheet and our available liquidity of $606.6 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 with no meaningful maturities in 2024, 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. • Investment Grade Ratings —Our current investment grade ratings are Baa3 (Outlook: Stable) with Moody’s Investors Services and BBB- (Outlook: Positive) with S&P Global Ratings. 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 Locally Smart ™ property managers 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 and 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, 2023, 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 PHILLIPS EDISON & COMPANY DECEMBER 31, 2023 FORM 10-K 4 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. CORPORATE RESPONSIBILITY AND SUSTAINABILITY— Our corporate responsibility and sustainability program (“CRSP”), which we also refer to as our “PECO-ECO Promise™”, is designed to align with our corporate mission and strategic initiatives. With a mission 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 positive impact on all our stakeholders. Our CRSP is overseen by our full Board of Directors (the “Board”) reflecting our comprehensive approach to strong governance. In addition, we have a dedicated director liaison, Ms. Silfen, providing oversight to our PECO-ECO Team members based on her significant experience in energy innovation and sustainability. Our PECO-ECO Team is led by our General Counsel, who provides regular updates to the full Board on our CRSP. Our PECO-ECO Promise™ is based on four pillars that are guided by our mission and our goal of driving long-term value creation for our stakeholders: our People and Culture, Environmental Stewardship, Community, and Oversight and Ethics: PEOPLE AND CULTURE— At PECO, our associates are our greatest asset. We believe in fostering a work environment where every team member feels valued, respected, and empowered. To achieve this, our key areas of focus include: • Engagement and Satisfaction: We empower our associates through personalized coaching and annual stock awards, intended to foster a resilient culture that has earned PECO the title of a Top Place to Work for seven consecutive years by Cincinnati Enquirer. By granting 100% of eligible associates service-based restricted stock units in PECO, we empower and encourage our associates to think and operate like owners, which we believe drives better decision making and strengthens our culture. • Learning and Development: We are committed to continuous learning and the professional development of our associates. Established in 2007, PECO University is a hub for learning and development of our associates, encompassing our online learning platform, PECO U online, leadership development, mentoring programs, and more. PECO’s commitment to continuous learning includes an annual talent management process, workshops on development goal plans, and the PECO Mentor Match program, an internal mentoring program. • Health and Well-Being: We strive to create a workplace that prioritizes the well-being of our associates. Our “Beyond Benefits” wellness program is integral to our Company’s culture and is designed to address our associates’ emotional, physical, and financial well-being. The program includes sponsoring wellness activities and challenges designed to improve the overall health of our associates. • Inclusion and Belonging: At PECO, fostering connection and inclusivity is a core commitment of our culture. We established three associate-led resource groups, PECO Multicultural Opportunities, Resources & Education (“PECO MORE”), PECO Networking Opportunities for Women (“PECO NOW”), and PECO Connect to help further diversity, inclusion, collaboration, and communication throughout the Company. As of December 31, 2023, 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 51% of our workforce is female and 49% is male. Our senior leadership team is 18% female and 82% male, while manager roles and above are approximately 39% female and 61% male. For the year ended December 31, 2023, our overall turnover rate was 8%, with 6% voluntary turnover, compared to our previous three year overall turnover average of 13%, with 10% voluntary turnover. ENVIRONMENTAL STEWARDSHIP— Environmental stewardship is an important component of our commitment to sustainability, encapsulated in our PECO-ECO Promise™. We recognize that sustainable practices are not only beneficial for the environment but also important for our business success and contributing to the well-being of the communities we operate in. A key component of our sustainable practices is focused on improving operational efficiencies and resource reductions within our portfolio. Our initiatives include calculating our Scope 1 and Scope 2 GHG emissions, participating in the Global Real Estate Sustainability Benchmark ("GRESB") Real Estate Assessment, pursuing energy efficiency, developing on-site solar projects, and installing electric vehicle (“EV”) charging stations. We are also focused on attaining sustainable property certifications, implementing water conservation measures, and managing waste effectively. We are proud to highlight the milestones below, as of December 31, 2023, in our ongoing sustainability journey: • Exterior Lighting: Completed the retrofit of 98.1% of our wholly-owned portfolio to LED parking lot lighting, moving closer to our goal of retrofitting 100% of our portfolio by 2025. • Renewable Energy: Installed 14 solar array systems to date. • Water Conservation: Conserved over 62 million gallons of water in 2023 (through September) through the implementation of xeriscaping and our “Smart Water Control Program”, generating cost savings of over $200,000. • EV Charging Stations: Installed EV chargers at 17.7% of our eligible properties to date. • Waste Management: Achieved a waste diversion rate of approximately 26.0% at properties with a landlord-controlled waste program. • Building Certifications: Secured WELL Health-Safety recertification for our company headquarters in Cincinnati, Ohio and Institute of Real Estate Management Certified Sustainable Property Certifications at 163 properties in 2023, bringing the total number of properties with certifications to 172. COMMUNITY— Through our mission of “creating great omni-channel grocery-anchored shopping center experiences and improving our communities, one shopping center at a time”, we strive to actively engage with our Neighbors and the local communities that we serve. Our focus is on being Locally Smart ™ and understanding the unique needs of each community. This commitment to our communities extends to its physical spaces, with initiatives like Front Row to Go ® providing convenient curbside pickup for our local shoppers, and a retailer mix that offers storefront windows and drive-through stores for additional convenience for local shoppers. PHILLIPS EDISON & COMPANY DECEMBER 31, 2023 FORM 10-K 5 Our community commitment is also evident in our initiatives like our PECO Community Partnership, an award-winning, associate-led program that encourages community involvement and connects our associates to causes they care about. In 2023, PECO Community Partnership sponsored 15 community service events and contributed over 440 service hours, including a volunteer day in partnership with Keep Cincinnati Beautiful at Green Man Park where 69 associates participated in a park cleanup and revitalization project. PECO's partnership with communities also extends to disaster relief efforts, exemplified by our Incident Response Team. This team provides support to Neighbors and communities impacted by disasters, such as Hurricane Idalia in August 2023, as part of PECO's commitment to being there for its Neighbors and communities during challenging times. OVERSIGHT AND ETHICS— Our governance framework guides our decision-making and accountability. Supported by an experienced executive management team, we maintain a robust system of corporate governance policies, designed to foster an ethical culture committed to the PECO-ECO Promise™ and to driving our goal of creating long-term value. 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 oversight of our Board, which is comprised of nine directors, seven of whom meet the independence criteria set forth by the 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 annually evaluating our Board and each of its committees. We are cognizant of “overboarding” and none of our directors serve on more than two other public company boards. We are compliant with Nasdaq’s Board Diversity Rule and have three female directors and two directors who are members of underrepresented racial or ethnic minorities. More information about our CRSP is available on our website and in our Corporate Responsibility Report, which are 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, 2023: Name Age Title Joined PECO Jeffrey S. Edison 63 Chairman & Chief Executive Officer Co-Founder Devin I. Murphy (1) 63 President 2013 Robert F. Myers (1) 51 Chief Operating Officer & Executive Vice President 2003 John P. Caulfield 43 Chief Financial Officer, Executive Vice President & Treasurer 2014 Tanya E. Brady 56 General Counsel, Executive Vice President & Secretary 2013 (1) Devin Murphy stepped down as President effective December 31, 2023 and became Managing Director of Investment Management effective January 1, 2024 through his retirement date of June 30, 2024. Effective January 1, 2024, Robert Myers became President. 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. PHILLIPS EDISON & COMPANY DECEMBER 31, 2023 FORM 10-K 6