UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended September 30, 2023
OR
For the transition period from _____ to _____
Commission File Number: 000-54691
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip code) | |||||||
| (Registrant’s telephone number, including area code) | ||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | ☑ | No ☐ | |||||||||
| Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). | ☑ | No ☐ | |||||||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Accelerated filer | Non-accelerated filer | Smaller reporting company | Emerging growth company | |||||||||||
| ☑ | ☐ | ☐ | ||||||||||||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ | ||||||||||
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes | No ☑ | |||||||||
PHILLIPS EDISON & COMPANY, INC. FORM 10-Q
| TABLE OF CONTENTS | |||||||||||
| NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | |||||||||||
UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES | |||||||||||
PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2023 FORM 10-Q | 1 | ||||||||||
w PART I FINANCIAL INFORMATION | ||
ITEM 1. FINANCIAL STATEMENTS
PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2023 AND DECEMBER 31, 2022
(Condensed and Unaudited)
(In thousands, except per share amounts)
| September 30, 2023 | December 31, 2022 | ||||||||||
| ASSETS | |||||||||||
| Investment in real estate: | |||||||||||
| Land and improvements | $ | $ | |||||||||
| Building and improvements | |||||||||||
| In-place lease assets | |||||||||||
| Above-market lease assets | |||||||||||
| Total investment in real estate assets | |||||||||||
| Accumulated depreciation and amortization | ( | ( | |||||||||
| Net investment in real estate assets | |||||||||||
| Investment in unconsolidated joint ventures | |||||||||||
| Total investment in real estate assets, net | |||||||||||
| Cash and cash equivalents | |||||||||||
| Restricted cash | |||||||||||
| Goodwill | |||||||||||
| Other assets, net | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Liabilities: | |||||||||||
| Debt obligations, net | $ | $ | |||||||||
| Below-market lease liabilities, net | |||||||||||
| Accounts payable and other liabilities | |||||||||||
| Deferred income | |||||||||||
| Total liabilities | |||||||||||
Commitments and contingencies (see Note 8) | |||||||||||
| Equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital (“APIC”) | |||||||||||
Accumulated other comprehensive income (“AOCI”) | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Noncontrolling interests | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
See notes to consolidated financial statements.
PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2023 FORM 10-Q | 2 | ||||||||||
PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(Condensed and Unaudited)
(In thousands, except per share amounts)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Rental income | $ | $ | $ | $ | |||||||||||||||||||
| Fees and management income | |||||||||||||||||||||||
| Other property income | |||||||||||||||||||||||
| Total revenues | |||||||||||||||||||||||
| Operating Expenses: | |||||||||||||||||||||||
| Property operating | |||||||||||||||||||||||
| Real estate taxes | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Other: | |||||||||||||||||||||||
| Interest expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Gain (loss) on disposal of property, net | ( | ||||||||||||||||||||||
| Other expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Net income attributable to noncontrolling interests | ( | ( | ( | ( | |||||||||||||||||||
| Net income attributable to stockholders | $ | $ | $ | $ | |||||||||||||||||||
| Earnings per share of common stock: | |||||||||||||||||||||||
Net income per share attributable to stockholders - basic and diluted (see Note 10) | $ | $ | $ | $ | |||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income: | |||||||||||||||||||||||
| Change in unrealized value on interest rate swaps | ( | ( | |||||||||||||||||||||
| Comprehensive income | |||||||||||||||||||||||
| Net income attributable to noncontrolling interests | ( | ( | ( | ( | |||||||||||||||||||
| Change in unrealized value on interest rate swaps attributable to noncontrolling interests | ( | ( | |||||||||||||||||||||
| Reallocation of comprehensive income upon conversion of noncontrolling interests | |||||||||||||||||||||||
| Comprehensive income attributable to stockholders | $ | $ | $ | $ | |||||||||||||||||||
See notes to consolidated financial statements.
PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2023 FORM 10-Q | 3 | ||||||||||
PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(Condensed and Unaudited)
(In thousands, except per share amounts)
| Three Months Ended September 30, 2023 and 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | APIC | AOCI | Accumulated Deficit | Total Stockholders’ Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at July 1, 2022 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Offering costs, discounts, and commissions | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Change in unrealized value on interest rate swaps | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
Common distributions declared, $ | — | — | — | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Conversion of noncontrolling interests | — | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Balance at July 1, 2023 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | $ | — | $ | ||||||||||||||||||||||||||||||||||||||||||
| Offering costs, discounts, and commissions | — | — | ( | — | — | $ | ( | — | $ | ( | |||||||||||||||||||||||||||||||||||||
| Change in unrealized value on interest rate swaps | — | — | — | ( | — | $ | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||
Common distributions declared, $ | — | — | — | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Conversion of noncontrolling interests | — | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
See notes to consolidated financial statements.
PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2023 FORM 10-Q | 4 | ||||||||||
PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(Condensed and Unaudited)
(In thousands, except per share amounts)
| Nine Months Ended September 30, 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 | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Class B common stock | ( | ( | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Offering costs, discounts, and commissions | — | — | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Change in unrealized value on interest rate swaps | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Common distributions declared, $ | — | — | — | — | — | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of noncontrolling interests | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Settlement of earn-out liability | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2023 | $ | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | — | — | $ | — | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Offering costs, discounts, and commissions | — | — | — | — | ( | — | — | $ | ( | — | $ | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Change in unrealized value on interest rate swaps | — | — | — | — | — | ( | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Common distributions declared, $ | — | — | — | — | — | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of noncontrolling interests | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||
See notes to consolidated financial statements.
PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2023 FORM 10-Q | 5 | ||||||||||
PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(Condensed and Unaudited)
(In thousands)
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization of real estate assets | |||||||||||
| Depreciation and amortization of corporate assets | |||||||||||
| Net amortization of above- and below-market leases | ( | ( | |||||||||
| Amortization of deferred financing expenses | |||||||||||
| Amortization of debt and derivative adjustments | |||||||||||
Gain on disposal of property, net | ( | ( | |||||||||
| Impairment of investment in third parties | |||||||||||
| Change in fair value of earn-out liability | |||||||||||
| Straight-line rent | ( | ( | |||||||||
| Share-based compensation | |||||||||||
| Return on investment in unconsolidated joint ventures | |||||||||||
| Other | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Other assets, net | ( | ( | |||||||||
| Accounts payable and other liabilities | |||||||||||
Net cash provided by operating activities | |||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Real estate acquisitions | ( | ( | |||||||||
| Capital expenditures | ( | ( | |||||||||
| Proceeds from sale of real estate, net | |||||||||||
| Return of investment in unconsolidated joint ventures | |||||||||||
| Insurance proceeds for property damage claims | |||||||||||
| Investment in marketable securities | ( | ||||||||||
Net cash used in investing activities | ( | ( | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Proceeds from revolving credit facility | |||||||||||
| Payments on revolving credit facility | ( | ( | |||||||||
| Payments on mortgages and loans payable | ( | ( | |||||||||
| Proceeds from loans payable | |||||||||||
| Distributions paid | ( | ( | |||||||||
| Distributions to noncontrolling interests | ( | ( | |||||||||
| Proceeds from issuance of common stock | |||||||||||
| Payment of offering costs | ( | ( | |||||||||
Net cash used in financing activities | ( | ( | |||||||||
NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | ( | ( | |||||||||
| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH: | |||||||||||
| Beginning of period | |||||||||||
| End of period | $ | $ | |||||||||
| RECONCILIATION TO CONSOLIDATED BALANCE SHEETS: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | $ | |||||||||
PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2023 FORM 10-Q | 6 | ||||||||||
PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(Condensed and Unaudited)
(In thousands)
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES: | |||||||||||
| Settlement of earn-out liability | |||||||||||
| Right-of-use (“ROU”) assets obtained in exchange for new lease liabilities | |||||||||||
| Accrued capital expenditures | |||||||||||
| Assumed debt obligations, net | |||||||||||
| Assumed below-market debt | |||||||||||
| Change in distributions payable | ( | ||||||||||
| Change in distributions payable - noncontrolling interests | ( | ||||||||||
See notes to consolidated financial statements.
PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2023 FORM 10-Q | 7 | ||||||||||
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 September 30, 2023.
As of September 30, 2023, we wholly-owned 275 real estate properties. Additionally, we owned a 14 % interest in GRP I, which owned 20 properties.
NRP—As of September 30, 2023, we owned a 20 % equity interest in NRP. NRP was initially formed in March 2016 pursuant to the terms of the joint venture agreement, as amended, between Phillips Edison Grocery Center REIT II, Inc. and an affiliate of TPG Real Estate and is set to expire in 2024 unless otherwise extended by the members. In May 2022, we sold the final property in the joint venture as a result of its planned expiration. With the monetization of the joint venture, we exceeded the targeted return and as such were paid compensation of $0.1 million and $2.7 million during the nine months ended September 30, 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”). We received no
| 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | ||
Set forth below is a summary of the significant accounting estimates and policies that management believes are important to the preparation of our condensed consolidated interim financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by management. For example, significant estimates and assumptions have been made with respect to the useful lives of assets, remaining hold periods of assets, recoverable amounts of receivables, and other fair value measurement assessments required for the preparation of the consolidated interim financial statements. As a result, these estimates are subject to a degree of uncertainty.
There were no changes to our significant accounting policies during the nine months ended September 30, 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 and nine months ended September 30, 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.
PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2023 FORM 10-Q | 8 | ||||||||||
| 3. LEASES | ||
Lessor—The majority of our leases are largely similar in that the leased asset is retail space within our properties, and the lease agreements generally contain similar provisions and features, without substantial variations. All of our leases are currently classified as operating leases. Lease income related to our operating leases was as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
Rental income related to fixed lease payments(1) | $ | $ | $ | $ | |||||||||||||||||||
Rental income related to variable lease payments(1)(2) | |||||||||||||||||||||||
Straight-line rent amortization(3) | |||||||||||||||||||||||
| Amortization of lease assets | |||||||||||||||||||||||
| Lease buyout income | |||||||||||||||||||||||
Adjustments for collectibility(4) | ( | ( | ( | ||||||||||||||||||||
| Total rental income | $ | $ | $ | $ | |||||||||||||||||||
(1)Includes rental income related to lease payments before assessing for collectibility.
(2)Variable payments are primarily related to tenant recovery income.
(3)Includes revenue adjustments to straight-line rent for tenants considered non-creditworthy.
(4)Includes general reserves as well as adjustments for tenants considered non-creditworthy for which we are recording revenue on a cash basis, per Accounting Standards Codification (“ASC”) Topic 842, Leases.
Approximate future fixed contractual lease payments to be received under non-cancelable operating leases in effect as of September 30, 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 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total | $ | ||||
No single tenant comprised 10% or more of our aggregate annualized base rent (“ABR”) as of September 30, 2023. As of September 30, 2023, our wholly-owned real estate investments in Florida and California represented 12.3 % and 10.7 % 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 SEPTEMBER 30, 2023 FORM 10-Q | 9 | ||||||||||
| 4. REAL ESTATE ACTIVITY | ||
Acquisitions—The following table summarizes our real estate acquisition activity (dollars in thousands):
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Number of properties acquired | |||||||||||
Number of outparcels acquired(1) | |||||||||||
| Contract price | $ | $ | |||||||||
Total price of acquisitions(2) | |||||||||||
(1)Outparcels acquired are adjacent to shopping centers that we own.
Subsequent to September 30, 2023, we acquired one property and one outparcel for $19.4 million
The aggregate purchase price of the assets acquired during the nine months ended September 30, 2023 and 2022 were allocated as follows (in thousands):
| September 30, 2023 | September 30, 2022 | ||||||||||
| ASSETS | |||||||||||
| Land and improvements | $ | $ | |||||||||
| Building and improvements | |||||||||||
| In-place lease assets | |||||||||||
| Above-market lease assets | |||||||||||
| Below-market debt | |||||||||||
| Total assets | |||||||||||
| LIABILITIES | |||||||||||
| Debt obligations, net | |||||||||||
| Below-market lease liabilities | |||||||||||
| Total liabilities | |||||||||||
| Net assets acquired | $ | $ | |||||||||
The weighted-average amortization periods for in-place, above-market, and below-market lease intangibles and below-market debt acquired during the nine months ended September 30, 2023 and 2022 are as follows (in years):
| September 30, 2023 | September 30, 2022 | ||||||||||
| Acquired in-place leases | |||||||||||
| Acquired above-market leases | |||||||||||
| Acquired below-market leases | |||||||||||
| Assumed below-market debt | — | ||||||||||
Property Dispositions—The following table summarizes our real estate disposition activity (dollars in thousands):
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Number of properties sold | |||||||||||
| Number of outparcels sold | |||||||||||
| Contract price | $ | $ | |||||||||
Proceeds from sale of real estate, net(1)(2) | |||||||||||
Gain on disposal of property, net(2) | |||||||||||
(1)Total proceeds from sale of real estate, net includes closing costs less credits.
PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2023 FORM 10-Q | 10 | ||||||||||
| 5. OTHER ASSETS, NET | ||
The following is a summary of Other Assets, Net outstanding as of September 30, 2023 and December 31, 2022, excluding amounts related to assets classified as held for sale (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Other assets, net: | |||||||||||
| Deferred leasing commissions and costs | $ | $ | |||||||||
Deferred financing expenses(1) | |||||||||||
| Office equipment, including capital lease assets, and other | |||||||||||
| Corporate intangible assets | |||||||||||
| Total depreciable and amortizable assets | |||||||||||
| Accumulated depreciation and amortization | ( | ( | |||||||||
| Net depreciable and amortizable assets | |||||||||||
Accounts receivable, net(2) | |||||||||||
| Accounts receivable - affiliates | |||||||||||
Deferred rent receivable, net(3) | |||||||||||
| Derivative assets | |||||||||||
| Prepaid expenses and other | |||||||||||
Investment in third parties(4) | |||||||||||
| Investment in marketable securities | |||||||||||
| Total other assets, net | $ | $ | |||||||||
(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 $2.7 million and $3.0 million of general reserves for uncollectible amounts as of September 30, 2023 and December 31, 2022, respectively. Receivables that were removed for tenants considered to be non-creditworthy were $6.7 million and $6.2 million as of September 30, 2023 and December 31, 2022, respectively.
(3)Net of $4.4 million and $4.2 million of receivables removed as of September 30, 2023 and December 31, 2022, respectively, related to straight-line rent for tenants previously or currently considered to be non-creditworthy.
| 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 September 30, 2023 and December 31, 2022 (dollars in thousands):
Interest Rate(1) | September 30, 2023 | December 31, 2022 | |||||||||||||||
| Revolving credit facility | SOFR + | $ | $ | ||||||||||||||
Term loans(2) | |||||||||||||||||
| Senior unsecured notes due 2031 | |||||||||||||||||
| Secured loan facilities | |||||||||||||||||
| Mortgages | |||||||||||||||||
| Finance lease liability | |||||||||||||||||
| Discount on notes payable | ( | ( | |||||||||||||||
| Assumed market debt adjustments, net | ( | ( | |||||||||||||||
| Deferred financing expenses, net | ( | ( | |||||||||||||||
| Total | $ | $ | |||||||||||||||
Weighted-average interest rate(3) | % | % | |||||||||||||||
(1)Interest rates are as of September 30, 2023.
PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2023 FORM 10-Q | 11 | ||||||||||
(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 September 30, 2023 and December 31, 2022 (see Notes 7 and 12).
2023 Debt Activity—During the nine months ended September 30, 2023, we repaid $46.3 million in mortgage debt.
On July 31, 2023, we amended three senior unsecured term loans with a total notional amount of $475.0 million scheduled to mature during 2024. The amended three senior unsecured term loans have a total notional amount of $484.8 million. The $161.8 million unsecured term loan is priced at SOFR plus 1.35 % and is scheduled to mature on January 31, 2026 extendable with two -year options to 2028. The $158.0 million and $165.0 million unsecured term loans are priced at SOFR plus 1.35
Debt Allocation—The allocation of total debt between fixed-rate and variable-rate as well as between secured and unsecured, excluding market debt adjustments, discount on senior notes, and deferred financing expenses, net, and including the effects of derivative financial instruments as of September 30, 2023 and December 31, 2022 is summarized below (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| As to interest rate: | |||||||||||
Fixed-rate debt(1) | $ | $ | |||||||||
| Variable-rate debt | |||||||||||
| Total | $ | $ | |||||||||
| As to collateralization: | |||||||||||
| Unsecured debt | $ | $ | |||||||||
| Secured debt | |||||||||||
| Total | $ | $ | |||||||||
(1)Fixed-rate debt includes, and variable-rate debt excludes, the portion of such debt that has been hedged by interest rate derivatives. As of September 30, 2023, $700 million in variable-rate debt is hedged to a fixed rate for a weighted-average period of 1.8 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.
Cash Flow Hedges of Interest Rate Risk—Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for our making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The changes in the fair value of derivatives designated, and that qualify, as cash flow hedges are recorded in AOCI and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the nine months ended September 30, 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 $17.3 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.
PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2023 FORM 10-Q | 12 | ||||||||||
The following is a summary of our interest rate swaps that were designated as cash flow hedges of interest rate risk as of September 30, 2023 and December 31, 2022 (dollars in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Count | |||||||||||
| Notional amount | $ | $ | |||||||||
| Fixed SOFR | |||||||||||
| Maturity date | 2024-2026 | 2023-2025 | |||||||||
| Weighted-average term (in years) | |||||||||||
The table below details the nature of the gain and loss recognized on interest rate derivatives designated as cash flow hedges in the consolidated statements of operations (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
Amount of gain recognized in Other Comprehensive Income | $ | $ | $ | $ | |||||||||||||||||||
Amount of (gain) loss reclassified from AOCI into Interest Expense, Net | ( | ( | ( | ||||||||||||||||||||
Credit-risk-related Contingent Features—We have agreements with our derivative counterparties that contain provisions where, if we default, or are capable of being declared in default, on any of our indebtedness, we could also be declared to be in default on our derivative obligations. As of September 30, 2023, there were no derivatives with a fair value in a net liability position, which would include accrued interest but exclude any adjustment for nonperformance risk related to these agreements.
| 8. COMMITMENTS AND CONTINGENCIES | ||
Litigation—We are involved in various claims and litigation matters arising in the ordinary course of business, some of which involve claims for damages. Many of these matters are covered by insurance, although they may nevertheless be subject to deductibles or retentions. Although the ultimate liability for these matters cannot be determined, based upon information currently available, we believe the resolution of such claims and litigation will not have a material adverse effect on our consolidated financial statements.
Environmental Matters—In connection with the ownership and operation of real estate, we may potentially be liable for costs and damages related to environmental matters. In addition, we may own or acquire certain properties that are subject 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.
As of September 30, 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.
PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2023 FORM 10-Q | 13 | ||||||||||
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 and nine months ended September 30, 2023, we issued 2.0 70.1 0.7 0.8 million shares of our common stock under the ATM program for net proceeds of $26.2 million, after approximately $0.3 million in commissions. During the nine months ended September 30, 2022, we issued 2.6 million shares of our common stock under the ATM program for net proceeds of $89.2 million, after approximately $0.9 million in commissions. As of September 30, 2023, approximately $89.0 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 and paid 2023 monthly distributions of $0.0933 per common share and Operating Partnership unit (“OP unit”) for each month beginning January 2023 through August 2023. On September 1, 2023, the Board authorized a 4.5 % increase of our monthly distribution rate to $0.0975 per common share and OP unit. We declared and paid 2023 monthly distributions of $0.0975 per common share and OP unit for September 2023 and October 2023. Distributions paid to stockholders and OP unit holders of record subsequent to September 30, 2023 were as follows (dollars in thousands, excluding per share amounts):
| Month | Date of Record | Date Distribution Paid | Monthly Distribution Rate | Cash Distribution | |||||||||||||
| September | 9/15/2023 | 10/2/2023 | $ | $ | |||||||||||||
| October | 10/16/2023 | 11/1/2023 | |||||||||||||||
Convertible Noncontrolling Interests—As of September 30, 2023 and December 31, 2022, we had approximately 14.0 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 September 30, 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 and nine months ended September 30, 2023 and 2022 (dollars and shares in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
OP units converted into shares of common stock(1) | |||||||||||||||||||||||
Distributions declared on OP units(2) | $ | $ | $ | $ | |||||||||||||||||||
(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 SEPTEMBER 30, 2023 FORM 10-Q | 14 | ||||||||||
| 10. EARNINGS PER SHARE | ||
The following table provides a reconciliation of the numerator and denominator of the earnings per share calculations (in thousands, except per share amounts):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
Net income attributable to stockholders - basic | $ | $ | $ | $ | |||||||||||||||||||
Net income attributable to convertible OP units(1) | |||||||||||||||||||||||
Net income - diluted | $ | $ | $ | $ | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average shares - basic | |||||||||||||||||||||||
OP units(1) | |||||||||||||||||||||||
| Dilutive restricted stock awards | |||||||||||||||||||||||
| Adjusted weighted-average shares - diluted | |||||||||||||||||||||||
| Earnings per common share: | |||||||||||||||||||||||
Basic and diluted income per share | $ | $ | $ | $ | |||||||||||||||||||
(1)OP units include units that are convertible into common stock or cash, at the Operating Partnership’s option. The Operating Partnership income or loss attributable to these OP units, which is included as a component of Net Income Attributable to Noncontrolling Interests on the consolidated statements of operations, has been added back in the numerator as these OP units were included in the denominator for all periods presented. OP units are allocated income on a consistent basis with the common stockholder and therefore have no dilutive impact to earnings per share of common stock.
| 11. RELATED PARTY TRANSACTIONS | ||
Revenue—We have entered into agreements with the Managed Funds related to certain advisory, management, and administrative services we provide to their real estate assets in exchange for fees and reimbursement of certain expenses. Summarized below are amounts included in Fees and Management Income. The revenue includes the fees and reimbursements earned by us from the Managed Funds and other revenues that are not in the scope of ASC Topic 606, Revenue from Contracts with Customers, but that are included in this table for the purpose of disclosing all related party revenues (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
Recurring fees(1) | $ | $ | $ | $ | |||||||||||||||||||
Realized performance income(2) | |||||||||||||||||||||||
Transactional revenue and reimbursements(3) | |||||||||||||||||||||||
Insurance premiums(4) | |||||||||||||||||||||||
| Total fees and management income | $ | $ | $ | $ | |||||||||||||||||||
(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 SEPTEMBER 30, 2023 FORM 10-Q | 15 | ||||||||||
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 September 30, 2023, the potential “make-whole amount” on the estimated aggregate amount of built-in gain subject to protection under the agreements is approximately $122.7 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 September 30, 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 September 30, 2023 and December 31, 2022.
During 2021, we made a cash investment of $3.0 million into a third-party company in exchange for preferred shares of their stock. As part of the investment agreement, the third-party company entered into leases at two of our properties. During the quarter ended September 30, 2023, we determined that the investment in the third-party company was fully impaired due to the value of the investment being significantly reduced, which is not deemed to be temporary, indicated by the company’s inability to pay rent. As a result, we recorded impairment expense of $3.0 0.2 million as of September 30, 2023 as the company is considered to be non-creditworthy.
| 12. FAIR VALUE MEASUREMENTS | ||
The following describes the methods we use to estimate the fair value of our financial and nonfinancial assets and liabilities:
Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, and Accounts Payable—We consider the carrying values of these financial instruments to approximate fair value because of the short period of time between origination of the instruments and their expected realization.
Real Estate Investments—The purchase prices of the investment properties, including related lease intangible assets and liabilities, are allocated at estimated fair value based on Level 3 inputs, such as discount rates, capitalization rates, comparable sales, replacement costs, income and expense growth rates, and current market rents and allowances as determined by management.
Debt Obligations—We estimate the fair value of our revolving credit facility, term loans, secured portfolio of loans, and mortgages by discounting the future cash flows of each instrument at rates currently offered for similar debt instruments of comparable maturities by our lenders using Level 3 inputs. The discount rates used approximate current lending rates for loans or groups of loans with similar maturities and credit quality, assuming the debt is outstanding through maturity and considering the debt’s collateral (if applicable). We have utilized market information, as available, or present value techniques to estimate the amounts required to be disclosed. We estimate the fair value of our senior unsecured notes by using quoted prices in active markets, which are considered Level 1 inputs.
The following is a summary of borrowings as of September 30, 2023 and December 31, 2022 (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
Recorded Principal Balance(1) | Fair Value | Recorded Principal Balance(1) | Fair Value | ||||||||||||||||||||
| Revolving credit facility | $ | $ | $ | $ | |||||||||||||||||||
| Term loans | |||||||||||||||||||||||
| Senior unsecured notes due 2031 | |||||||||||||||||||||||
| Secured portfolio loan facilities | |||||||||||||||||||||||
Mortgages(2) | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
(1)As of September 30, 2023 and December 31, 2022, respectively, recorded principal balances include: (i) net deferred financing fees of $11.2 million and $8.0 million; (ii) assumed market debt adjustments of $1.1 million and $1.2 million; and (iii) notes payable discounts of $6.5 million and $7.0 million.
PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2023 FORM 10-Q | 16 | ||||||||||
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 nine months ended September 30, 2023 and the year ended December 31, 2022 were as follows (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||
| Recurring | |||||||||||||||||||||||
Marketable securities(1) | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Derivative assets(1) | |||||||||||||||||||||||
| Nonrecurring | |||||||||||||||||||||||
Impaired real estate assets, net(2) | $ | $ | $ | $ | $ | $ | |||||||||||||||||
(1)We record marketable securities and derivative assets in Other Assets, Net on our consolidated balance sheets.
(2)The carrying value of impaired real estate assets may have subsequently increased or decreased after the measurement date due to capital improvements, depreciation, or sale.
Marketable Securities—We estimate the fair value of marketable securities using Level 1 inputs. We utilize unadjusted quoted prices for identical assets in active markets that we have the ability to access.
Derivative Instruments—As of September 30, 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 September 30, 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
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 SEPTEMBER 30, 2023 FORM 10-Q | 17 | ||||||||||
| 13. SUBSEQUENT EVENTS | ||
In preparing the condensed and unaudited consolidated financial statements, we have evaluated subsequent events through the date of filing of this report on Form 10-Q for recognition and/or disclosure purposes. Based on this evaluation, we have determined that there were no events that have occurred that require recognition or disclosure, other than certain events and transactions that have been disclosed elsewhere in these consolidated financial statements.
PHILLIPS EDISON & COMPANY SEPTEMBER 30, 2023 FORM 10-Q | 18 | ||||||||||
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our accompanying consolidated financial statements and notes thereto and the more detailed information contained in our 2022 Annual Report on Form 10-K, filed with the SEC on February 21, 2023. All references to “Notes” throughout this document refer to the footnotes to the consolidated financial statements in “Item 1. Financial Statements”. See also “Cautionary Note Regarding Forward-Looking Statements” below.
| CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS | ||
Certain statements contained in this Quarterly Report on Form 10-Q of Phillips Edison & Company, Inc. (“we,” the “Company,” “our,” or “us”) other than historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995 (collectively with the Securities Act and the Exchange Act, the “Acts”). These forward-looking statements are based on current expectations, estimates, and projections about the industry and markets in which we operate, and beliefs of, and assumptions made by, management of our company and involve uncertainties that could significantly affect our financial results. We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in the Acts. Such forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “can,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” “possible,” “initiatives,” “focus,” “seek,” “objective,” “goal,” “strategy,” “plan,” “potential,” “potentially,” “preparing,” “projected,” “future,” “long-term,” “once,” “should,” “could,” “would,” “might,” “uncertainty,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the SEC. Such statements include, but are not limited to: (a) statements about our plans, strategies, initiatives, and prospects; (b) statements about our underwritten incremental yields; and (c) statements about our future results of operations, capital expenditures, and liquidity. Such statements are subject to known and unknown risks and uncertainties, which could cause actual results to differ materially from those projected or anticipated, including, without limitation: (i) changes in national, regional, or local economic climates; (ii) local market conditions, including an oversupply of space in, or a reduction in demand for, properties similar to those in our portfolio; (iii) vacancies, changes in market rental rates, and the need to periodically repair, renovate, and re-let space; (iv) competition from other available shopping centers and the attractiveness of properties in our portfolio to our tenants; (v) the financial stability of our tenants, including, without limitation, their ability to pay rent; (vi) our ability to pay down, refinance, restructure, or extend our indebtedness as it becomes due; (vii) increases in our borrowing costs as a result of changes in interest rates and other factors; (viii) potential liability for environmental matters; (ix) damage to our properties from catastrophic weather and other natural events, and the physical effects of climate change; (x) our ability and willingness to maintain our qualification as a REIT in light of economic, market, legal, tax, and other considerations; (xi) changes in tax, real estate, environmental, and zoning laws; (xii) information technology security breaches; (xiii) our corporate responsibility initiatives; (xiv) loss of key executives; (xv) the concentration of our portfolio in a limited number of industries, geographies, or investments; (xvi) the economic, political, and social impact of, and uncertainty relating to, pandemics or other health crises; (xvii) our ability to re-lease our properties on the same or better terms, or at all, in the event of non-renewal or in the event we exercise our right to replace an existing tenant; (xviii) the loss or bankruptcy of our tenants; (xix) to the extent we are seeking to dispose of properties, our ability to do so at attractive prices or at all; and (xx) the impact of inflation on us and on our tenants. Additional important factors that could cause actual results to differ are described in the filings made from time to time by the Company with the SEC and include the risk factors and other risks and uncertainties described in our 2022 Annual Report on Form 10-K, filed with the SEC on February 21, 2023, as updated from time to time in our periodic and/or current reports filed with the SEC, which are accessible on the SEC’s website at www.sec.gov. Therefore, such statements are not intended to be a guarantee of our performance in future periods.