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EX-99.1 - EXHIBIT 99.1 - Phillips Edison & Company, Inc.peco_20200331-ex991.htm
EX-32.2 - EXHIBIT 32.2 - Phillips Edison & Company, Inc.peco_20200331-ex322.htm
EX-32.1 - EXHIBIT 32.1 - Phillips Edison & Company, Inc.peco_20200331-ex321.htm
EX-31.2 - EXHIBIT 31.2 - Phillips Edison & Company, Inc.peco_20200331-ex312.htm
EX-31.1 - EXHIBIT 31.1 - Phillips Edison & Company, Inc.peco_20200331-ex311.htm
EX-10.1 - EXHIBIT 10.1 - Phillips Edison & Company, Inc.peco_20200331-ex101.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
þ    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
¨     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to              
Commission file number 000-54691
 
pecohorizontallogobluea07.jpg
PHILLIPS EDISON & COMPANY, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
 
Maryland
27-1106076
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
11501 Northlake Drive
 Cincinnati, Ohio
45249
(Address of principal executive offices)
(Zip Code)
(513) 554-1110
(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
None
 
None
 
None
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.    Yes  þ    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).   Yes  þ    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.    
Large accelerated filer
¨
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
þ
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  þ
As of May 1, 2020, there were 290.5 million outstanding shares of common stock of the Registrant.




PHILLIPS EDISON & COMPANY, INC.
FORM 10-Q
TABLE OF CONTENTS
 
PART I. FINANCIAL INFORMATION
 
 
 
ITEM 1.
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
PART II. OTHER INFORMATION
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 5.
 
 
 
ITEM 6.
 
 


1



w PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2020 AND DECEMBER 31, 2019
(Condensed and Unaudited)
(In thousands, except per share amounts)
  
March 31, 2020
 
December 31, 2019
ASSETS
  
 
  
Investment in real estate:
  
 
  

Land and improvements
$
1,547,542

 
$
1,552,562

Building and improvements
3,201,552

 
3,196,762

In-place lease assets
441,492

 
442,729

Above-market lease assets
65,946

 
65,946

Total investment in real estate assets
5,256,532

 
5,257,999

Accumulated depreciation and amortization
(786,328
)
 
(731,560
)
Net investment in real estate assets
4,470,204

 
4,526,439

Investment in unconsolidated joint ventures
41,904

 
42,854

Total investment in real estate assets, net
4,512,108

 
4,569,293

Cash and cash equivalents
36,532

 
17,820

Restricted cash
48,043

 
77,288

Goodwill
29,066

 
29,066

Other assets, net
141,263

 
128,690

Real estate investment and other assets held for sale

 
6,038

Total assets
$
4,767,012

 
$
4,828,195

 
 
 
 
LIABILITIES AND EQUITY
  

 
  

Liabilities:
  

 
  

Debt obligations, net
$
2,356,401

 
$
2,354,099

Below-market lease liabilities, net
108,998

 
112,319

Earn-out liability
22,000

 
32,000

Derivative liability
62,756

 
20,974

Deferred income
13,841

 
15,955

Accounts payable and other liabilities
109,210

 
124,054

Total liabilities
2,673,206

 
2,659,401

Commitments and contingencies (Note 8)

 

Equity:
  

 
  

Preferred stock, $0.01 par value per share, 10,000 shares authorized, zero shares issued and
  
 
  
outstanding at March 31, 2020 and December 31, 2019

 

Common stock, $0.01 par value per share, 1,000,000 shares authorized, 290,416 and 289,047
  
 
  
shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively
2,903

 
2,890

Additional paid-in capital
2,793,803

 
2,779,130

Accumulated other comprehensive loss (“AOCI”)
(58,552
)
 
(20,762
)
Accumulated deficit
(986,292
)
 
(947,252
)
Total stockholders’ equity
1,751,862

 
1,814,006

Noncontrolling interests
341,944

 
354,788

Total equity
2,093,806

 
2,168,794

Total liabilities and equity
$
4,767,012

 
$
4,828,195


See notes to consolidated financial statements.

2



PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
(Condensed and Unaudited)
(In thousands, except per share amounts)
 
Three Months Ended March 31,
  
2020
 
2019
Revenues:
 
 
 
Rental income
$
128,466

 
$
128,860

Fees and management income
2,165

 
3,261

Other property income
892

 
648

Total revenues
131,523

 
132,769

Operating Expenses:
 
 
 
Property operating
21,762

 
22,866

Real estate taxes
17,112

 
17,348

General and administrative
10,740

 
13,285

Depreciation and amortization
56,227

 
60,989

Impairment of real estate assets

 
13,717

Total operating expenses
105,841

 
128,205

Other:
 
 
 
Interest expense, net
(22,775
)
 
(25,009
)
(Loss) gain on disposal of property, net
(1,577
)
 
7,121

Other income, net
9,869

 
7,536

Net income (loss)
11,199


(5,788
)
Net (income) loss attributable to noncontrolling interests
(1,430
)
 
593

Net income (loss) attributable to stockholders
$
9,769


$
(5,195
)
Earnings per common share:
 
 
 
Net income (loss) per share attributable to stockholders - basic and diluted (See Note 10)
$
0.03

 
$
(0.02
)
 
 
 
 
Comprehensive loss:
 
 
 
Net income (loss)
$
11,199

 
$
(5,788
)
Other comprehensive loss:
 
 
 
Change in unrealized value on interest rate swaps
(43,364
)
 
(14,361
)
Comprehensive loss
(32,165
)
 
(20,149
)
Net (income) loss attributable to noncontrolling interests
(1,430
)
 
593

Other comprehensive loss attributable to noncontrolling interests
5,574

 
1,938

Comprehensive loss attributable to stockholders
$
(28,021
)
 
$
(17,618
)

See notes to consolidated financial statements.

3



PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
(Condensed and Unaudited)
(In thousands, except per share amounts)
  
Common Stock
 
Additional Paid-In Capital
 
AOCI
 
Accumulated Deficit
 
Total Stockholders’ Equity
 
Noncontrolling Interests
 
Total Equity
  
Shares
 
Amount
 
 
 
 
 
 
Balance at January 1, 2019
279,803


$
2,798


$
2,674,871


$
12,362


$
(692,573
)
 
$
1,997,458

 
$
414,911

 
$
2,412,369

Dividend reinvestment plan (“DRIP”)
1,603

 
16

 
17,702

 

 

 
17,718

 

 
17,718

Share repurchases
(605
)
 
(6
)
 
(6,674
)
 

 

 
(6,680
)
 

 
(6,680
)
Change in unrealized value on interest
   rate swaps

 

 

 
(12,423
)
 

 
(12,423
)
 
(1,938
)
 
(14,361
)
Common distributions declared, $0.17
   per share

 

 

 

 
(47,972
)
 
(47,972
)
 

 
(47,972
)
Distributions to noncontrolling interests

 

 

 

 

 

 
(7,167
)
 
(7,167
)
Share-based compensation
40

 

 
227

 

 

 
227

 
839

 
1,066

Conversion of noncontrolling interests
708

 
7

 
7,820

 

 

 
7,827

 
(7,827
)
 

Net loss

 

 

 

 
(5,195
)
 
(5,195
)
 
(593
)
 
(5,788
)
Balance at March 31, 2019
281,549

 
$
2,815

 
$
2,693,946

 
$
(61
)
 
$
(745,740
)
 
$
1,950,960

 
$
398,225

 
$
2,349,185

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2020
289,047

 
$
2,890

 
$
2,779,130

 
$
(20,762
)
 
$
(947,252
)
 
$
1,814,006

 
$
354,788

 
$
2,168,794

DRIP
1,436

 
14

 
15,926

 

 

 
15,940

 

 
$
15,940

Share repurchases
(288
)
 
(3
)
 
(2,697
)
 

 

 
(2,700
)
 

 
(2,700
)
Change in unrealized value on interest
rate swaps

 

 

 
(37,790
)
 

 
(37,790
)
 
(5,574
)
 
(43,364
)
Common distributions declared, $0.17
   per share

 

 

 

 
(48,809
)
 
(48,809
)
 

 
(48,809
)
Distributions to noncontrolling interests

 

 

 

 

 

 
(7,105
)
 
(7,105
)
Share-based compensation
103

 
1

 
140

 

 

 
141

 
(290
)
 
(149
)
Conversion of noncontrolling interests
118

 
1

 
1,304

 

 

 
1,305

 
(1,305
)
 

Net income

 

 

 

 
9,769

 
9,769

 
1,430

 
11,199

Balance at March 31, 2020
290,416

 
$
2,903

 
$
2,793,803

 
$
(58,552
)
 
$
(986,292
)
 
$
1,751,862

 
$
341,944

 
$
2,093,806


See notes to consolidated financial statements.

4



PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
(Condensed and Unaudited)
(In thousands)
 
Three Months Ended March 31,
  
2020
 
2019
CASH FLOWS FROM OPERATING ACTIVITIES:
  
 
  
Net income (loss)
$
11,199

 
$
(5,788
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
  

 
  

Depreciation and amortization of real estate assets
54,817

 
59,342

Impairment of real estate assets

 
13,717

Depreciation and amortization of corporate assets
1,410

 
1,647

Net amortization of above- and below-market leases
(788
)
 
(1,133
)
Amortization of deferred financing expenses
1,251

 
1,297

Amortization of debt and derivative adjustments
1,061

 
2,227

Loss (gain) on disposal of property, net
1,577

 
(7,121
)
Change in fair value of earn-out liability
(10,000
)
 
(7,500
)
Straight-line rent
(2,288
)
 
(1,713
)
Share-based compensation
(149
)
 
1,272

Other
707

 
995

Changes in operating assets and liabilities:
  

 
  

Other assets, net
(14,871
)
 
1,923

Accounts payable and other liabilities
(8,313
)
 
(17,921
)
Net cash provided by operating activities
35,613


41,244

CASH FLOWS FROM INVESTING ACTIVITIES:
  

 
  

Real estate acquisitions
(4,319
)
 

Capital expenditures
(15,965
)
 
(8,574
)
Proceeds from sale of real estate
17,447

 
35,755

Return of investment in unconsolidated joint ventures
424

 
1,197

Net cash (used in) provided by investing activities
(2,413
)
 
28,378

CASH FLOWS FROM FINANCING ACTIVITIES:
  

 
  

Net change in credit facility
34,000

 
(22,000
)
Payments on mortgages and loans payable
(32,657
)
 
(2,428
)
Distributions paid, net of DRIP
(32,792
)
 
(30,132
)
Distributions to noncontrolling interests
(7,108
)
 
(6,958
)
Repurchases of common stock
(5,176
)
 
(5,444
)
Other

 
(206
)
Net cash used in financing activities
(43,733
)
 
(67,168
)
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
(10,533
)
 
2,454

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH:
  

 
  

Beginning of period
95,108

 
84,304

End of period
$
84,575

 
$
86,758

 
 
 
 
RECONCILIATION TO CONSOLIDATED BALANCE SHEETS:
 
 
 
Cash and cash equivalents
$
36,532

 
$
12,684

Restricted cash
48,043

 
74,074

Cash, cash equivalents, and restricted cash at end of period
$
84,575

 
$
86,758


5



PHILLIPS EDISON & COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
(Unaudited)
(In thousands)
  
2020
 
2019
SUPPLEMENTAL CASH FLOW DISCLOSURE, INCLUDING NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
Cash paid for interest
$
20,329

 
$
21,679

Right-of-use (“ROU”) assets obtained in exchange for new lease liabilities
551

 
36

Accrued capital expenditures
3,392

 
2,095

Change in distributions payable
77

 
122

Change in distributions payable - noncontrolling interests
(3
)
 
209

Change in accrued share repurchase obligation
(2,476
)
 
1,236

Distributions reinvested
15,940

 
17,718


See notes to consolidated financial statements.

6



Phillips Edison & Company, Inc.
Notes to Consolidated Financial Statements
(Condensed and Unaudited)

1. ORGANIZATION
Phillips Edison & Company, Inc. (“we,” the “Company,” “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 well-occupied, 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 three institutional joint ventures, in which we have a partial ownership interest, and one private fund (collectively, the “Managed Funds”).
As of March 31, 2020, we wholly-owned 285 real estate properties. Additionally, we owned a 20% equity interest in Necessity Retail Partners (“NRP”), a joint venture that owned seven properties; a 15% interest in Grocery Retail Partners I LLC (“GRP I”), a joint venture that owned 17 properties; and a 10% interest in Grocery Retail Partners II LLC (“GRP II”), a joint venture that owned three properties.

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 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, recoverable amounts of receivables, and other fair value measurement assessments required for the preparation of the consolidated financial statements. As a result, these estimates are subject to a degree of uncertainty.
During the first quarter of 2020, a novel coronavirus (“COVID-19”) began spreading globally, with the outbreak being classified as a pandemic by the World Health Organization on March 11, 2020. Because of the adverse economic conditions that exist as a result of the impacts of the COVID-19 pandemic, it is possible that the estimates and assumptions that have been utilized in the preparation of the consolidated financial statements could change significantly. Specifically as it relates to our business, the current economic situation has resulted in temporary tenant closures at our shopping centers, often as a result of “stay-at-home” government mandates which limit travel and movement of the general public to essential activities only and require all non-essential businesses to close. These mandates could result in increased permanent retail store closings nationally if the duration of the closures is prolonged. This could reduce the demand for leasing space in our shopping centers and result in a decline in occupancy and rental revenues in our real estate portfolio. All of this activity impacts our estimates around the collectability of revenue and valuation of real estate assets, goodwill and other intangible assets, and certain liabilities, among others.
There were no changes to our significant accounting policies during the three months ended March 31, 2020. For a full summary of our accounting policies, refer to our 2019 Annual Report on Form 10-K filed with the SEC on March 11, 2020.
Basis of Presentation and Principles of Consolidation—The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Readers of this Quarterly Report on Form 10-Q should refer to our audited consolidated financial statements for the year ended December 31, 2019, which are included in our 2019 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, 2020 are not necessarily indicative of the operating results expected for the full year.
The accompanying consolidated financial statements include our accounts and those of our majority-owned subsidiaries. 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 Subsidiaries (“TRS”) and are subject to U.S. federal, state, and local income taxes at regular corporate tax rates. During the three months ended March 31, 2020, an immaterial amount of federal income tax benefit was reported, and we recorded a full valuation allowance for our net deferred tax asset. We recorded no income tax expense or benefit for the three months ended March 31, 2019. We recognized an immaterial amount of state and local income tax expense for the three months ended March 31, 2020 and 2019, which is included in Other Income, Net on the consolidated statements of operations and comprehensive loss (“consolidated statements of operations”).


7



Recently Issued and Newly Adopted Accounting Pronouncements—The following table provides a brief description of newly adopted accounting pronouncements and their effect on our consolidated financial statements:
Standard
 
Description
 
Date of Adoption
 
Effect on the Financial Statements or Other Significant Matters
Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments

ASU 2018-19, Financial Instruments - Credit Losses (Topic 326): Codification Improvements

ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief
ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses

ASU 2020-02, Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842)

 
The amendments in this update replaced the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. It clarified that receivables arising from operating leases are not within the scope of Accounting Standards Codification (“ASC”) Topic 326. Instead, impairment of receivables arising from operating leases will be accounted for in accordance with Topic 842. It also allowed election of the fair value option on certain financial instruments.
 
January 1, 2020
 
The adoption of this standard did not have a material impact on our consolidated financial statements. The majority of our financial instruments result from operating lease transactions, which are not within the scope of this standard.
ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities
 
This ASU amended two aspects of the related-party guidance in Topic 810: (1) added an elective private-company scope exception to the variable interest entity guidance for entities under common control and (2) indirect interests held through related parties in common control arrangements will be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests.
 
January 1, 2020
 
The adoption of this standard did not have a material impact on our consolidated financial statements.
ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments
 
This ASU amended a variety of topics, improving certain aspects of previously issued ASUs, including ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.
 
January 1, 2020
 
The adoption of this standard did not have a material impact on our consolidated financial statements.
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
 
This ASU contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur.
 
March 12, 2020
 
We have elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. We continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
In response to the COVID-19 pandemic, the FASB issued interpretive guidance addressing the accounting treatment of lease concessions stemming from the pandemic. Under this guidance, entities may make an election to account for lease concessions granted in conjunction with the pandemic consistent with how those concessions would be accounted for under ASC Topic 842, Leases (“ASC 842”) if those enforceable rights and obligations for those concessions already existed within the lease agreement. This accounting treatment may be applied regardless of whether enforceable rights and obligations for those concessions are explicitly outlined within the lease. As a result, entities that make this election will not have to analyze each lease to determine whether enforceable rights and obligations for concessions exist within the contract, and may elect not to account for these concessions as lease modifications within the scope of ASC 842. We will continue to assess the potential impact of this accounting treatment. As of May 11, 2020, we had not yet made any such concessions.

8



Reclassifications—The following line item on our consolidated balance sheets as of December 31, 2019 was reclassified to conform to current year presentation:
Corporate Intangible Assets, Net was included in Other Assets, Net.
The following line items on our consolidated statements of cash flows for the three months ended March 31, 2019 were reclassified to conform to current year presentation:
Amortization of Debt and Derivative Adjustments was listed on a separate line from Other Cash Flows from Operating Activities; and
Equity in Net Loss of Unconsolidated Joint Ventures was combined with Other Cash Flows from Operating Activities.

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 for the three months ended March 31, 2020 and 2019 (dollars in thousands):
 
March 31, 2020
 
March 31, 2019
Rental income related to fixed lease payments
$
98,335

 
$
97,586

Rental income related to variable lease payments
31,838

 
30,527

Other(1)
(1,707
)
 
747

Total rental income
$
128,466

 
$
128,860

(1) 
Amounts consist of amortization of above- and below-market lease intangibles, lease inducements, revenue adjustments related to changes in collectability, settlement income, and lease buyout income.
Approximate future fixed contractual lease payments to be received under non-cancelable operating leases in effect as of March 31, 2020, assuming no new or renegotiated leases or option extensions on lease agreements, are as follows (in thousands):
Year
Amount
Remaining 2020
$
281,778

2021
341,849

2022
305,829

2023
257,200

2024
201,367

Thereafter
537,322

Total
$
1,925,345

No single tenant comprised 10% or more of our aggregate annualized base rent (“ABR”) as of March 31, 2020. As of March 31, 2020, our real estate investments in Florida and California represented 12.3% and 10.5% of our ABR, respectively. As a result, the geographic concentration of our portfolio makes it particularly susceptible to adverse weather or economic events, including the impact of the COVID-19 pandemic, in the Florida and California real estate markets. As of May 11, 2020, there were approximately 210 and 170 tenant spaces temporarily closed as a result of the COVID-19 pandemic in Florida and California, respectively.
States have issued “stay-at-home” orders that have resulted in temporary business closures but have exempted businesses providing essential goods and services from these mandatory closures. While the definition of what constitutes an essential business and related guidelines vary between different states and municipalities, as it pertains to our portfolio, we believe this generally includes grocers and supermarkets, healthcare providers and pharmacies, banks, gas stations, automotive repair shops, pet stores, laundromats, and other businesses offering goods and services that would similarly be considered critical for a functional society and life-sustaining activities. Even among those that are considered to be essential, many businesses have seen sharp decreases in foot traffic and customer patronage as a result of “stay-at-home” mandates and social distancing guidelines. State mandates have continued to evolve from the initial closures in late March, with certain states implementing “stay-at-home” orders in April, and other states beginning to ease restrictions in late April and early May. As of March 31, 2020, we believe tenants comprising approximately 51% of our portfolio’s ABR are considered essential retail businesses and services. In addition to these essential retail businesses and services, restaurants, comprising approximately 15% of our ABR, are also characterized as essential in many states and municipalities, and may remain open for takeout and delivery.

9



Lessee—Lease assets and liabilities, grouped by balance sheet line where they are recorded, consisted of the following as of March 31, 2020 and December 31, 2019 (in thousands):
Balance Sheet Information
Balance Sheet Location
March 31, 2020
 
December 31, 2019
ROU assets, net - operating leases(1)
Investment in Real Estate
$
3,952

 
$
7,613

ROU assets, net - operating and finance leases
Other Assets, Net
2,396

 
2,111

Operating lease liability
Accounts Payable and Other Liabilities
6,168

 
9,453

Finance lease liability
Debt Obligations, Net
384

 
443

(1) 
During the three months ended March 31, 2020, one of our acquisitions was land upon which one of our shopping centers is situated that was previously subject to a ground lease in which the lessor controlled an option requiring us to purchase the land subject to the lease. Our valuation of the ROU asset and lease liability as of December 31, 2019 for this ground lease reflected the assumption that the lessor would exercise this option and that we would purchase the underlying land asset.

4. REAL ESTATE ACTIVITY
Property Sales—The following table summarizes our real estate disposition activity (dollars in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Number of properties sold(1)
3

 
3

Proceeds from sale of real estate
$
17,447

 
$
35,755

(Loss) gain on sale of properties, net(2)
(826
)
 
7,399

(1) 
We retained certain outparcels of land associated with one of our property dispositions during the three months ended March 31, 2020, and as a result, this property is still included in our total property count.
(2) 
The (loss) gain on sale of properties, net does not include miscellaneous write-off activity, which is also recorded in (Loss) Gain on Disposal of Property, Net on the consolidated statements of operations.
Impairment of Real Estate Assets—During the three months ended March 31, 2020, we did not recognize any impairment charges. During the three months ended March 31, 2019, we recognized impairment charges totaling $13.7 million. The impairments were associated with certain anticipated property dispositions where the net book value exceeded the estimated fair value. Our estimated fair value was based upon the contracted price to sell or the marketed price for disposition, less estimated costs to sell. We have applied reasonable estimates and judgments in determining the amount of impairment recognized.
Acquisitions—During the three months ended March 31, 2020, we acquired two parcels of land for a total of $4.3 million, both of which are either underneath or adjacent to shopping centers that we own.
There were no acquisitions during the three months ended March 31, 2019.


10



5. OTHER ASSETS, NET
The following is a summary of Other Assets, Net outstanding as of March 31, 2020 and December 31, 2019, excluding amounts related to assets classified as held for sale (in thousands):
 
March 31, 2020
 
December 31, 2019
Other assets, net:
 
 
 
Deferred leasing commissions and costs
$
39,667

 
$
38,738

Deferred financing expenses
13,971

 
13,971

Office equipment, ROU assets, and other
20,612

 
19,430

Corporate intangible assets
4,883

 
4,883

Total depreciable and amortizable assets
79,133

 
77,022

Accumulated depreciation and amortization
(37,880
)
 
(35,055
)
Net depreciable and amortizable assets
41,253

 
41,967

Accounts receivable, net(1)
52,854

 
46,125

Accounts receivable - affiliates
972

 
728

Deferred rent receivable, net
31,572

 
29,291

Derivative asset
18

 
2,728

Prepaid expenses and other
14,594

 
7,851

Total other assets, net
$
141,263

 
$
128,690

(1) 
Net of $6.2 million and $6.9 million of reserves for uncollectible amounts.

6. DEBT OBLIGATIONS
The following is a summary of the outstanding principal balances and interest rates, which include the effect of derivative financial instruments, for our debt obligations as of March 31, 2020 and December 31, 2019 (dollars in thousands):
   
Interest Rate(1)
 
March 31, 2020
 
December 31, 2019
Revolving credit facility(2)
LIBOR + 1.4%
 
$
34,000

 
$

Term loans(3)
2.01% - 4.59%
 
1,622,500

 
1,652,500

Secured loan facilities
3.35% - 3.52%
 
395,000

 
395,000

Mortgages
3.45% - 7.91%
 
322,127

 
324,578

Finance lease liability
 
 
384

 
443

Assumed market debt adjustments, net
 
 
(1,285
)
 
(1,218
)
Deferred financing expenses, net
 
 
(16,325
)
 
(17,204
)
Total  
 
 
$
2,356,401

 
$
2,354,099

(1) 
Interest rates are as of March 31, 2020.
(2) 
The gross borrowings and payments under our revolving credit facility were $55.0 million and $21.0 million, respectively, during the three months ended March 31, 2020. The gross borrowings and payments under our revolving credit facility were $64.0 million and $86.0 million, respectively, during the three months ended March 31, 2019.
(3) 
Our term loans carry an interest rate of LIBOR plus a spread. While most of the rates are fixed through the use of swaps, there is still a portion of these loans that is not fixed through a swap, and thus is still indexed to LIBOR.
In January 2020, we made the final $30 million payment on our term loan maturing in 2021. Following this payment, the next term loan maturity is in April 2022.
In March 2020, we borrowed $34 million on our $500 million revolving credit facility in order to satisfy general operating needs. In April 2020, we borrowed an additional $200 million on our revolving credit facility to meet our operating needs for a sustained period due to the COVID-19 pandemic. As of May 11, 2020, total availability on our revolving credit facility, net of any letters of credit, was $254.7 million. Our debt is subject to certain covenants, and as of March 31, 2020, we were in compliance with the restrictive covenants of our outstanding debt obligations.

11



The allocation of total debt between fixed-rate and variable-rate as well as between secured and unsecured, excluding market debt adjustments and deferred financing expenses, net, as of March 31, 2020 and December 31, 2019, is summarized below (in thousands):
   
March 31, 2020
 
December 31, 2019
As to interest rate:(1)
 
 
 
Fixed-rate debt
$
1,944,511

 
$
2,122,021

Variable-rate debt
429,500

 
250,500

Total
$
2,374,011

 
$
2,372,521

As to collateralization:
 
 
 
Unsecured debt
$
1,656,500

 
$
1,652,500

Secured debt
717,511

 
720,021

Total  
$
2,374,011

 
$
2,372,521

 
 
 
 
Weighed-average interest rate(1)
3.3
%
 
3.4
%
(1) 
Includes the effects of derivative financial instruments (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 three months ended March 31, 2020 and 2019, 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 $18.7 million will be reclassified from AOCI as an increase to Interest Expense, Net.
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, 2020 and December 31, 2019 (notional amounts in thousands):
 
March 31, 2020
 
December 31, 2019
Count
8

 
9

Notional amount
$
1,227,000

 
$
1,402,000

Fixed LIBOR
0.8% - 2.9%

 
0.8% - 2.9%

Maturity date
2020 - 2025

 
2020 - 2025

The table below details the nature of the gain or loss recognized on interest rate derivatives designated as cash flow hedges in the consolidated statements of operations (in thousands):
 
Three Months Ended March 31,
  
2020
 
2019
Amount of (loss) recognized in other comprehensive income on derivatives
$
(44,916
)
 
$
(12,857
)
Amount of loss (gain) reclassified from AOCI into interest expense
1,552

 
(1,504
)
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, 2020, 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, was approximately $62.8 million. As of March 31, 2020, 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 $62.8 million.

12



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 aware of any environmental matters which we believe are reasonably likely to have a material effect on our consolidated financial statements.
Captive Insurance—Our captive insurance company, Silver Rock Insurance, Inc. (“Silver Rock”) provides general liability insurance, wind, reinsurance, and other coverage to us and our related-party joint ventures. We capitalize Silver Rock in accordance with applicable regulatory requirements.
Silver Rock established annual premiums based on the past loss experience of the insured properties. An independent third party was engaged to perform an actuarial estimate of projected future claims, related deductibles, and projected future expenses necessary to fund associated risk management programs. Premiums paid to Silver Rock may be adjusted based on these estimates, and such premiums may be reimbursed by tenants pursuant to specific lease terms.
As of March 31, 2020, we had four cash collateralized letters of credit outstanding totaling approximately $9.7 million to provide security for our obligations under Silver Rock’s insurance and reinsurance contracts.
COVID-19—As of March 31, 2020, we were not aware of any significant liabilities or obligations to waive rent that we have incurred under force majeure or co-tenancy clauses in tenant leases.

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 (“Board”). Our charter does not provide for cumulative voting in the election of directors.
On May 6, 2020, our Board decreased the estimated value per share (“EVPS”) of our common stock to $8.75 based substantially on the estimated market value of our portfolio of real estate properties and our third-party investment management business as of March 31, 2020. The decrease was primarily driven by the negative impact of the COVID-19 pandemic on PECO’s non-grocery tenants resulting from social distancing and stay-at-home guidelines and the uncertainty of the duration and full effect on the overall economy. We engaged a third-party valuation firm to provide a calculation of the range in EVPS of our common stock as of March 31, 2020, which reflected certain balance sheet assets and liabilities as of that date. Previously, our EVPS was $11.10, based substantially on the estimated market value of our portfolio of real estate properties and our third-party investment management business as of March 31, 2019.
Shares of our common stock were issued under the DRIP, as discussed below, at the same price as the EVPS in effect at the time of issuance.
Dividend Reinvestment Plan—The DRIP allows stockholders to invest distributions in additional shares of our common stock, subject to certain limits. Stockholders who elect to participate in the DRIP may choose to invest all or a portion of their cash distributions in shares of our common stock at a price equal to our most recent EVPS.
Stockholders who elect to participate in the DRIP, and who are subject to U.S. federal income taxation laws, will incur a tax liability on an amount equal to the fair value on the relevant distribution date of the shares of our common stock purchased with reinvested distributions, even though such stockholders have elected not to receive the distributions in cash.
On March 27, 2020, the DRIP was temporarily suspended. The March 2020 distribution was paid all in cash on April 1, 2020.
Distributions—On March 27, 2020, our Board temporarily suspended stockholder distributions, effective after the payment of the March 2020 dividend on April 1, 2020 as a result of the uncertainty surrounding the COVID-19 pandemic, including the impact that the pandemic and the measures taken by governmental agencies and tenants in response to the pandemic are expected to continue to have on our shopping centers and our financial condition, liquidity sources, and capital needs.
Distributions paid entirely in cash to stockholders and OP unit holders of record subsequent to March 31, 2020 were as follows (in thousands, except distribution rate):
Month
Date of Record
 
Distribution Rate
 
Date Distribution Paid
 
Amount of Distribution Paid
March 2020
3/16/2020
 
$0.05583344
 
4/1/2020
 
$
18,541


13



Share Repurchase Program (“SRP”)—Our SRP provides an opportunity for stockholders to have shares of common stock repurchased, subject to certain restrictions and limitations. The Board reserves the right, in its sole discretion, at any time and from time to time, to reject any request for repurchase.
On August 7, 2019, the Board suspended the SRP with respect to standard repurchases. Our SRP for death, qualifying disability, or determination of incompetence was temporarily suspended effective March 27, 2020.
Convertible Noncontrolling Interests—Under the terms of the Fourth Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”), Operating Partnership unit (“OP unit”) holders may elect to exchange OP units. The Operating Partnership controls the form of the redemption, and may elect to exchange 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, 2020 and December 31, 2019 are classified as Noncontrolling Interests within permanent equity on our consolidated balance sheets. The distributions that have been paid on OP units are included in Distributions to Noncontrolling Interests on the consolidated statements of equity. During the three months ended March 31, 2020 and 2019, 0.1 million and 0.7 million OP units were converted into shares of our common stock at a 1:1 ratio, respectively. There were approximately 42.7 million OP units outstanding as of March 31, 2020 and December 31, 2019. Additionally, certain of our outstanding time- and performance-based equity awards will result in the issuance of shares or OP units upon vesting in future periods.

10. EARNINGS PER SHARE
We use the two-class method of computing earnings per share (“EPS”), which is an earnings allocation formula that determines EPS for common stock and any participating securities according to dividends declared (whether paid or unpaid). Under the two-class method, basic EPS is computed by dividing Net Income (Loss) 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.
OP units held by limited partners other than us are considered to be participating securities because they contain non-forfeitable rights to dividends or dividend equivalents, and have the potential to be exchanged for an equal number of shares of our common stock in accordance with the terms of the the Partnership Agreement.
In previous periods, we issued certain share-based awards to employees which are tied to the value of our EVPS, but that are paid in cash upon vesting. We have a small number of these awards that remain outstanding, however, they are not considered to be participating securities as they are not convertible into common stock, and as such are not included as a component of our basic or diluted EPS calculation.
The impact of outstanding OP units on basic and diluted EPS has been calculated using the two-class method whereby earnings are allocated to the OP units based on dividends declared and the OP units’ participation rights in undistributed earnings. The effects of the two-class method on basic and diluted EPS were immaterial to the consolidated financial statements as of March 31, 2020 and 2019.
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,
 
2020
 
2019
Numerator:
 
 
 
Net income (loss) attributable to stockholders - basic
$
9,769

 
$
(5,195
)
Net income (loss) attributable to convertible OP units(1)
1,430

 
(783
)
Net income (loss) - diluted
$
11,199

 
$
(5,978
)
Denominator:
 
 
 
Weighted-average shares - basic
289,955

 
281,263

OP units(1)
42,848

 
43,996

Dilutive restricted stock awards
425

 

Adjusted weighted-average shares - diluted
333,228

 
325,259

Earnings per common share:
 
 
 
Basic and diluted
$
0.03

 
$
(0.02
)
(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) Loss 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 years presented.
Approximately 2.6 million unvested time- and performance-based stock awards were outstanding as of March 31, 2019. These securities were anti-dilutive for the three months ended March 31, 2019, and, as a result, their impact was excluded from the weighted-average common shares used to calculate diluted EPS for that period.


14



11. REVENUE RECOGNITION AND RELATED PARTY TRANSACTIONS
Revenue—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,
 
2020
 
2019
Recurring fees(1)
$
1,216

 
$
1,582

Transactional revenue and reimbursements(2)
430

 
1,222

Insurance premiums(3)
519

 
457

Total fees and management income
$
2,165

 
$
3,261

(1) 
Recurring fees include asset management fees and property management fees.
(2) 
Transactional revenue includes items such as leasing commissions, construction management fees, and acquisition fees.
(3) 
Insurance premium income from other parties includes amounts from third parties not affiliated with us.
Certain related party accounts receivable and organization and offering costs payable that were outstanding as of March 31, 2019 related to Phillips Edison Grocery Center REIT III, Inc. (“REIT III”) and were settled when we merged with REIT III in October 2019.
Other Related Party Matters—We are the limited guarantor for up to $190 million, capped at $50 million in most instances, of debt for our NRP joint venture. We are also the limited guarantor of a $175 million mortgage loan for GRP I. Our guaranty in both cases is limited to being the non-recourse carveout guarantor and the environmental indemnitor. We are also party to a separate agreement with our joint venture partner in which any potential liability under our guaranty for GRP I will be apportioned between us and our joint venture partner based on our respective ownership percentages in GRP I. We have no liability recorded on our consolidated balance sheets for either guaranty as of March 31, 2020 and December 31, 2019.

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, were 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 debt 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.
The following is a summary of borrowings as of March 31, 2020 and December 31, 2019 (in thousands):
 
March 31, 2020
 
December 31, 2019
 
Recorded Principal Balance(1)
 
Fair Value
 
Recorded Principal Balance(1)
 
Fair Value
Revolving credit facility
$
34,000

 
33,767

 
$

 
$

Term loans
1,607,464

 
1,594,503

 
1,636,470

 
1,656,765

Secured portfolio loan facilities
390,769

 
384,068

 
390,780

 
399,054

Mortgages(2)
324,168

 
325,219

 
326,849

 
337,614

Total
$
2,356,401

 
$
2,337,557

 
$
2,354,099

 
$
2,393,433

(1) 
Recorded principal balances include net deferred financing expenses of $16.3 million and $17.2 million as of March 31, 2020 and December 31, 2019, respectively. Recorded principal balances also include assumed market debt adjustments of $1.3 million and $1.2 million as of March 31, 2020 and December 31, 2019, respectively. There are deferred financing expenses related to our revolving credit facility that are in an asset position and thus are not included in these balances.
(2) 
Our finance lease liability is included in the mortgages line item, as presented.

15



Recurring and Nonrecurring Fair Value Measurements—Our earn-out liability and interest rate swaps are measured and recognized at fair value on a recurring basis, while certain real estate assets and liabilities are measured and recognized at fair value as needed. Fair value measurements that occurred as of and during the three months ended March 31, 2020 and the year ended December 31, 2019, were as follows (in thousands):
 
March 31, 2020
 
December 31, 2019
 
Level 1
Level 2
Level 3
 
Level 1
Level 2
Level 3
Recurring
 
 
 
 
 
 
 
Derivative assets(1)
$

$
18

$

 
$

$
2,728

$

Derivative liability(1)

(62,756
)

 

(20,974
)

Earn-out liability


(22,000
)
 


(32,000
)
Nonrecurring
 
 
 
 
 
 
 
Impaired real estate assets, net(2)



 

280,593


Impaired corporate intangible asset, net(3)



 


4,401

(1) 
We record derivative assets in Other Assets, Net and derivative liabilities in Derivative Liability 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.
(3) 
The carrying value of our impaired corporate intangible asset, net, which consists of in-place management contracts, subsequently decreased after the measurement date due to amortization as well as through derecognition as part of the merger with REIT III.
Derivative Instruments—As of March 31, 2020 and December 31, 2019, we had interest rate swaps that fixed LIBOR 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, 2020 and December 31, 2019, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Earn-out—As part of our acquisition of Phillips Edison Limited Partnership (“PELP”), 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. After the expiration of certain provisions in 2019, PELP is now eligible to earn up to five million OP units based on the timing and valuation of a liquidity event for PECO, which can occur no later than December 31, 2021 in order for the performance targets to be achieved per the terms of the agreement.
We estimate the fair value of this liability on a quarterly basis using the Monte Carlo method. This method requires us to make assumptions about future dividend yields, volatility, and timing and pricing of liquidity events, which are unobservable and are considered Level 3 inputs in the fair value hierarchy. A change in these inputs to a different amount might result in a significantly higher or lower fair value measurement at the reporting date. In calculating the fair value of this liability, we have determined that the most likely range of potential outcomes includes a possibility of no additional OP units issued as well as up to a maximum of five million units being issued.
Changes in the fair value of the earn-out liability have been and will continue to be recognized in earnings. The following table presents a reconciliation of the change in the earn-out liability measured at fair value on a recurring basis using Level 3 inputs and recognized as Other Income, Net in the consolidated statements of operations (in thousands):
 
Earn-Out Liability
Balance at December 31, 2019
$
32,000

Change in fair value recognized in Other Income, Net
(10,000
)
Balance at March 31, 2020
$
22,000

Real Estate Asset Impairment—Our real estate assets are measured and recognized at fair value less costs to sell on a nonrecurring basis dependent upon when we determine an impairment has occurred. During the three months ended March 31, 2019, we impaired assets that were under contract or actively marketed for sale at a disposition price that was less

16



than carrying value, or that had other operational impairment indicators. The valuation technique used for the fair value of all impaired real estate assets was the expected net sales proceeds, which we consider to be a Level 2 input in the fair value hierarchy. We did not impair any assets during the three months ended March 31, 2020.
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 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 proceed to 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 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. If the estimated fair value of the property is less than the recorded net book value at the balance sheet date, we record an impairment charge.
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.
Our quarterly impairment procedures have not been altered by the COVID-19 pandemic, as we believe key impairment indicators such as temporary store closings and large dark or vacant spaces will continue to be identified in our review. We have utilized forecasts that incorporate estimated decreases in net operating income (“NOI”) and cash flows as a result of the COVID-19 pandemic in performing our review procedures for the three months ended March 31, 2020. However, it is possible that we could experience unanticipated changes in assumptions that are employed in our impairment review which could impact our cash flows and fair value conclusions. Such unanticipated changes relative to our expectations include but are not limited to: increases or decreases in the duration or permanence of tenant closures, increases or decreases in collectability reserves and write-offs, additional capital required to fill vacancies, extended lease-up periods, future closings of large tenants, changes in macroeconomic assumptions such as rate of inflation and capitalization rates, and changes to the estimated timing of disposition of the properties under review.
We recorded the following expense upon impairment of real estate assets (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Impairment of real estate assets
$

 
$
13,717


13. SUBSEQUENT EVENTS
In preparing the condensed and unaudited consolidated financial statements, we have evaluated subsequent events through the 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.

17



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All references to “Notes” throughout this document refer to the footnotes to the consolidated financial statements in Part I, Item 1. Financial Statements.

Cautionary Note Regarding Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q (this “Report”) 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. We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in those Acts. Such forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “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 U.S. Securities and Exchange Commission (“SEC”). Such statements include, but are not limited to, statements about our focus, plans, strategies, initiatives, and prospects; statements about the global pandemic of a novel coronavirus (“COVID-19”), including its duration and potential or expected impact on our tenants, our business, and our estimated value per share; statements about our estimated value per share and when it may be updated; statements about the duration or extent of the suspension of our distributions, share repurchase program, and dividend reinvestment program; and 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) changes in interest rates and the availability of permanent mortgage financing; (v) competition from other available properties and the attractiveness of properties in our portfolio to our tenants; (vi) the financial stability of tenants, including the ability of tenants to pay rent; (vii) changes in tax, real estate, environmental, and zoning laws; (viii) the concentration of our portfolio in a limited number of industries, geographies, or investments; (ix) the effects of the COVID-19 pandemic, including on the demand for consumer goods and services and levels of consumer confidence in the safety of visiting shopping centers as a result of the COVID-19 pandemic; (x) the measures taken by federal, state, and local government agencies and tenants in response to the COVID-19 pandemic, including mandatory business shutdowns, stay-at-home orders and social distancing guidelines; (xi) the impact of the COVID-19 pandemic on our tenants and their ability to pay rent on time or at all, or to renew their leases and, in the case of non-renewal, our ability to re-lease the space at the same or more favorable terms or at all; (xii) the length and severity of the COVID-19 pandemic in the United States; (xiii) the pace of recovery following the COVID-19 pandemic given the current severe economic contraction and increase in unemployment rates; (xiv) our ability to implement cost containment strategies; (xv) our and our tenants’ ability to obtain loans under the CARES Act or similar state programs; (xvi) our ability to pay down, refinance, restructure, or extend our indebtedness as it becomes due; (xvii) to the extent we were seeking to dispose of properties in the near term, significantly greater uncertainty regarding our ability to do so at attractive prices; (xviii) the impact of the COVID-19 pandemic on our business, results of operations, financial condition, and liquidity; and (xix) supply chain disruptions due to the COVID-19 pandemic. 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 2019 Annual Report on Form 10-K, filed with the SEC on March 11, 2020, and those included in this Report, in each case 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.
Except as required by law, we do not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.

Overview
We are an internally-managed REIT and one of the nation’s largest owners and operators of grocery-anchored shopping centers. The majority of our revenue is lease revenue derived from our real estate investments. Additionally, we operate an investment management business providing property management and advisory services to approximately $570 million of third-party assets. This business provides comprehensive real estate and asset management services to the Managed Funds.
During the first quarter of 2020, the COVID-19 pandemic began spreading globally, with the outbreak being classified as a pandemic by the World Health Organization on March 11, 2020. We began preparing for the effects of the COVID-19 pandemic on our business as well as the economic climate as a whole. Our employees are almost entirely working remotely to help combat the spread of the virus, while also allowing us to be as productive as possible during this time. Some of our initiatives to respond to the ongoing pandemic are:
We temporarily suspended stockholder distributions (see Note 9 for more detail);
We temporarily suspended the SRP for death, qualifying disability, or determination of incompetence, while our standard SRP remains suspended;
Our Compensation Committee approved a temporary 25% reduction to the base salary of our chief executive officer; a temporary 10% reduction to the base salaries of our president, chief operating officer, chief financial officer, and general counsel; and a 10% reduction to board members’ base compensation for the 2020-2021 term;

18



We have implemented expense reductions at the property and corporate levels, including the temporary reductions in executive salaries and director compensation, and workforce reductions;
We are delaying capital projects to the extent possible; and
We have borrowed $200 million on our revolving credit facility to ensure that we are able to meet our operating needs for a sustained period.
As a result of the pandemic, many state governments have issued “stay-at-home” mandates that generally limit travel and movement of the general public to essential activities only and require all non-essential businesses to close. The impact these measures are having on our portfolio has evolved since March 31, 2020 and will continue to do so. Our wholly-owned properties and those owned through our joint ventures contained approximately 5,550 tenant spaces as of May 11, 2020. The following statistics are related to our wholly-owned properties and those owned through our joint ventures as of May 11, 2020 (all statistics are approximate; ABR, GLA, and rent include the prorated portion attributable to properties owned through our joint ventures):
30% of all tenant spaces, totaling 21% of our ABR and 16% of our GLA, remained temporarily closed
Temporary closures include 7% of tenant spaces that we believe are considered to be essential retail and service businesses, totaling 3% of the ABR and 2% of the GLA associated with all essential retail and service businesses; even though they are generally exempted from “stay-at-home” mandates, some essential businesses have temporarily closed due to sharp decreases in foot traffic and customer patronage as a result of these mandates and social distancing guidelines
Received 2,120 rent relief requests from tenant spaces representing 29% of our ABR, all of which are still being evaluated
Collected 77% of rent and recoveries billed for April 2020 and 74% of rent and recoveries billed for the month of May
We believe substantially all tenants, including those that have been deemed non-essential businesses, are contractually obligated to continue with their rent payments as documented in our lease agreements with them. The Coronavirus Aid, Relief, and Economic Security Act, including the Paycheck Protection Program and Health Care Enhancement Act (collectively, the “CARES Act”), is intended to provide economic relief and stimulus to taxpayers and businesses in order to mitigate the economic impact of the pandemic, and provides an estimated $2.7 trillion to combat the COVID-19 pandemic and stimulate the economy through the provision of government loans and grants to affected individuals and businesses. We have begun working directly with our tenants to inform them of the benefits available through the CARES Act and other small business programs. We have created a resource page on our website to assist in these information efforts.
Portfolio and Leasing Statistics—Below are statistical highlights of our wholly-owned portfolio:
  
March 31, 2020
Number of properties
285

Number of states
31

Total square feet (in thousands)
31,862

Leased % of rentable square feet
95.6
%
Average remaining lease term (in years)(1)
4.6

% ABR from grocery-anchored properties
97.0
%
(1) 
The average remaining lease term in years excludes future options to extend the term of the lease.
The following table details information for our joint ventures, which is the basis for determining the prorated information included in the subsequent tables as of March 31, 2020 (dollars and square feet in thousands):
 
March 31, 2020
Joint Venture
Ownership Percentage
 
Number of Properties
 
ABR(1)
 
GLA(2)
Necessity Retail Partners
20%
 
7
 
$
11,933

 
851

Grocery Retail Partners I
15%
 
17
 
24,462

 
1,909

Grocery Retail Partners II
10%
 
3
 
3,840

 
312

(1) 
We calculate ABR as monthly contractual rent as of March 31, 2020, multiplied by 12 months.
(2) 
Gross leasable area (“GLA”) is defined as the portion of the total square feet of a building that is available for tenant leasing.

19



Lease Expirations—The following chart shows, on an aggregate basis, all of the scheduled lease expirations after March 31, 2020 for each of the next ten years and thereafter for our wholly-owned properties and the prorated portion of those owned through our joint ventures:
chart-913b7c216024591a8ed.jpg
Our ability to create rental rate growth generally depends on our leverage during new and renewal lease negotiations with prospective and existing tenants, which typically occurs when occupancy at our centers is high or during periods of economic growth and recovery. Conversely, we may experience rental rate decline when occupancy at our centers is low or during periods of economic recession, as the leverage during new and renewal lease negotiations may shift to prospective and existing tenants.
We continued to meet or exceed average rental rates on expiring leases during the first quarter of 2020 and our leased occupancy remained high as of March 31, 2020 at 95.6%; however, due to the impact of the COVID-19 pandemic, a large number of our tenant spaces have temporarily closed. Most of our grocery tenants remain open and continue to service their customers during this pandemic; however, many other tenants are either not currently operating or have significantly reduced sales due to government-mandated social distancing and “stay-at-home” guidelines. We expect increased volatility in new and renewal rental rates until the business environment becomes more stable.
For our wholly-owned properties and the prorated share of those owned through our joint ventures, subsequent to March 31, 2020, we renewed approximately 0.3 million total square feet and $2.6 million of total ABR of future expiring leases. This includes four anchor leases that were renewed pursuant to the exercise of an option to extend the lease.
See the section below titled Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Leasing Activity for further discussion of leasing activity.


20



Portfolio Tenancy—We define national tenants as those tenants that operate in at least three states. Regional tenants are defined as those tenants that have at least three locations in fewer than three states. The following charts present the composition of our portfolio, including our wholly-owned properties and the prorated portion of those owned through our joint ventures, by tenant type as of March 31, 2020:
chart-a8a3001173df5eedba0.jpgchart-08be1fb58f23575681f.jpg

The following charts present the composition of our portfolio by tenant industry as of March 31, 2020:
chart-2e1fd35defb25610a16.jpgchart-02cea3e7c6c156389ac.jpg

21



In response to the COVID-19 pandemic, as of May 11, 2020, 15 states have state-wide “stay-at-home” mandates in place and 26 states have partial mandates in place, with 4 states that we expect to begin lifting mandates in the coming weeks. We estimate that approximately 51.1% of our ABR, including the pro rata portion attributable to our properties owned through our joint ventures, is from retail and service businesses generally deemed essential under most state and local mandates as of March 31, 2020:
essentialtenantschartv6.jpg
(1) 
Includes tenants that we believe are considered to be essential retail and service businesses but that may have temporarily closed due to sharp decreases in foot traffic and customer patronage as a result of “stay-at-home” mandates and social distancing guidelines.

22



The following table presents our top twenty tenants by ABR, including our wholly-owned properties and the prorated portion of those owned through our joint ventures, as of March 31, 2020 (dollars and square feet in thousands):
 
March 31, 2020
Tenant(1)
ABR
 
% of ABR
 
Leased Square Feet
 
% of Leased Square Feet
 
Number of Locations(2)
Kroger
$
26,877

 
6.9
%
 
3,466

 
11.2
%
 
66

Publix
22,019

 
5.6
%
 
2,241

 
7.3
%
 
56

Ahold Delhaize
17,496

 
4.5
%
 
1,278

 
4.1
%
 
25

Albertsons-Safeway
16,674

 
4.3
%
 
1,629

 
5.3
%
 
31

Walmart
8,933

 
2.3
%
 
1,770

 
5.7
%
 
13

Giant Eagle
8,085

 
2.1
%
 
823

 
2.7
%
 
12

TJX Companies
4,968

 
1.3
%
 
428

 
1.4
%
 
15

Sprouts Farmers Market
4,885

 
1.2
%
 
334

 
1.1
%
 
11

Dollar Tree
4,194

 
1.1
%
 
445

 
1.4
%
 
45

Raley's
3,798

 
1.0
%
 
253

 
0.8
%
 
4

SUPERVALU
3,480

 
0.9
%
 
386

 
1.2
%
 
8

Subway Group
3,077

 
0.8
%
 
127

 
0.4
%
 
92

Schnuck's
2,993

 
0.8
%
 
329

 
1.1
%
 
5

Save Mart
2,619

 
0.7
%
 
309

 
1.0
%
 
6

Southeastern Grocers
2,599

 
0.7
%
 
291

 
0.9
%
 
8

Anytime Fitness, Inc.
2,581

 
0.7
%
 
173

 
0.6
%
 
37

Lowe's
2,407

 
0.6
%
 
371

 
1.2
%
 
4

Kohl's Corporation
2,255

 
0.6
%
 
365

 
1.2
%
 
4

Food 4 Less (PAQ)
2,215

 
0.6
%
 
118

 
0.4
%
 
2

Petco Animal Supplies, Inc.
2,099

 
0.5
%
 
127

 
0.4
%
 
11

 
$
144,254

 
37.2
%
 
15,263

 
49.4
%
 
455

(1) 
Tenants are grouped by parent company and may represent multiple subsidiaries and banners.
(2) 
Number of locations excludes auxiliary leases with grocery anchors such as fuel stations, pharmacies, and liquor stores. Additionally, in the event that a parent company has multiple subsidiaries or banners serving as tenants in a single shopping center, those subsidiaries are included as one location.
Of our top 20 tenants, TJX Companies and Kohl’s Corporation had announced the temporary closure of all their stores nationwide as of March 31, 2020. As of May 11, certain TJX Companies and Kohl’s Corporation store locations have begun to reopen. While no other top 20 tenants have announced company-wide closures, certain locations may be closed due to specific state regulations. We are not aware, at this time, of the bankruptcy or permanent closure of any of the top 20 tenants in our shopping centers. No tenant represents more than 6.9% of our ABR on a pro-rata basis.

23



Results of Operations
Impact of the COVID-19 Pandemic
The COVID-19 pandemic did not significantly affect our results of operations for the first quarter of 2020, with the exception of certain items noted in our discussion of results below. However, the negative impact on our results of operations in the second quarter of 2020 and future quarters could be significant, depending on a number of factors outside of our control, including the duration and severity of the pandemic; the nature and duration of “stay-at-home” mandates and business shut-downs as well as physical and social distancing guidelines and recommendations from governmental authorities; the nature and effectiveness of any economic stimulus or relief measures, including the CARES Act; overall economic conditions on both a macro and micro level, including consumer demand as well as retailer demand for space within our shopping centers; and the impact of all of the factors above, including other potentially unknown factors, on our tenants’ ability to continue paying rent and related charges on time or at all and tenants’ willingness to renew their leases on the same terms or at all.
The potential impact of the COVID-19 pandemic to our second quarter results may be significant and may include reduced revenue from tenant concessions, increased collectability reserves, decreased recovery rates on expenses, and other unforeseen impacts that may arise in the course of operating during these circumstances. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview for our observation of certain of these factors through May 11, 2020. The duration of the pandemic and mitigating measures, and their economic impact, may cause some of our current tenants to permanently vacate their spaces and/or not renew their leases, and we may have difficulty leasing these spaces on the same or better terms or at all, and/or incur additional costs to lease the space. Extended periods of vacancy or reduced revenues could also trigger impairments of our real estate assets. Moreover, we anticipate a reduction in our disposition and acquisition activity, as well as potential joint venture activities, during the second quarter and potentially for the remainder of 2020. Conversely, the disruption to our workforce upon the emergence of the COVID-19 pandemic has been and is expected to be minimal as the nature of our operations, coupled with our IT infrastructure, allows our employees to successfully work remotely.
We believe that our investment focus on grocery-anchored shopping centers that provide daily necessities will help lessen the negative effect of the pandemic on our business compared to non-grocery anchored retail shopping centers. We are closely monitoring the occupancy, operating performance, and tenants’ sales in our centers, including those tenants operating with reduced hours or under government-imposed restrictions. We are also taking action to maximize our financial flexibility by implementing expense reductions at the property and corporate level, delaying capital projects to the extent possible, drawing on our revolving credit facility, and temporarily suspending monthly distributions and share repurchases for death, disability, or determination of incompetence.

Summary of Operating Activities
 
 
Three Months Ended
March 31,
 
Favorable (Unfavorable)
Change
(Dollars in thousands)
 
2020
 
2019
 
$
 
%
Revenues:
 
 
 
 
 
 
 


Rental income
 
$
128,466

 
$
128,860

 
$
(394
)
 
(0.3
)%
Fee and management income
 
2,165

 
3,261

 
(1,096
)
 
(33.6
)%
Other property income
 
892

 
648

 
244

 
37.7
 %
Operating Expenses:
 
 
 
 
 
 
 
 
Property operating expenses
 
(21,762
)
 
(22,866
)
 
1,104

 
4.8
 %
Real estate tax expenses
 
(17,112
)
 
(17,348
)
 
236

 
1.4
 %
General and administrative expenses
 
(10,740
)
 
(13,285
)
 
2,545

 
19.2
 %
Depreciation and amortization
 
(56,227
)
 
(60,989
)
 
4,762

 
7.8
 %
Impairment of real estate assets
 

 
(13,717
)
 
13,717

 
NM

Other:
 
 
 
 
 
 
 
 
Interest expense, net
 
(22,775
)
 
(25,009
)
 
2,234

 
8.9
 %
 (Loss) gain on disposal of property, net
 
(1,577
)
 
7,121

 
(8,698
)
 
(122.1
)%
Other income, net
 
9,869

 
7,536

 
2,333

 
31.0
 %
Net income (loss)
 
11,199

 
(5,788
)
 
16,987

 
NM

Net (income) loss attributable to noncontrolling interests
 
(1,430
)
 
593

 
(2,023
)
 
NM

Net income (loss) attributable to stockholders
 
$
9,769

 
$
(5,195
)
 
$
14,964

 
NM

Our basis for analyzing significant fluctuations in our results of operations generally includes review of the results of our same-center portfolio, non-same-center portfolio, and revenues and expenses from our management activities. We define our same-center portfolio as the 279 properties that were owned and operational prior to January 1, 2019. We define our non-same-center portfolio as those properties that were not fully owned and operational in both periods owing to real estate asset activity occurring after December 31, 2018, which includes 24 properties disposed of and five properties acquired. Below are explanations of the significant fluctuations in the results of operations for the three months ended March 31, 2020 and 2019:

24



Rental Income decreased $0.4 million as follows:
$3.4 million decrease related to our non-same-center portfolio, namely our net disposition of 19 properties; and
$3.0 million increase related to our same-center portfolio primarily as follows:
$2.3 million increase in rental revenues primarily due to a $0.23 increase in average minimum rent per square foot and a 1.7% increase in average occupancy;
$2.1 million increase in recovery income largely as a result of higher recoverable real estate taxes and insurance expenses;
$0.6 million increase in temporary and variable rent as well as non-cash adjustments; partially offset by
$2.1 million decrease due to higher adjustments for tenants that have been identified as a credit risk, including as a result of the COVID-19 pandemic.
Fee and Management Income:
The $1.1 million decrease in fee and management income is primarily due to fees no longer received from REIT III following its acquisition by us in October 2019.
Property Operating Expenses decreased $1.1 million primarily as follows:
$0.8 million decrease related to our net disposition of 19 properties; and
$0.3 million decrease related to our same-center portfolio and corporate operating activities.
General and Administrative Expenses:
The $2.5 million decrease in general and administrative expenses was primarily due to a decrease in estimated performance-based compensation, including adjustments made as a result of the COVID-19 pandemic.
Depreciation and Amortization decreased $4.8 million primarily as follows:
$2.2 million decrease related to our net disposition of 19 properties; and
$1.8 million decrease related to our same-center portfolio, primarily due to intangible lease assets becoming fully amortized by December 31, 2019.
Impairment of Real Estate Assets:
The decrease in impairment of real estate assets of $13.7 million was primarily due to less disposition activity. Our impairments during the three months ended March 31, 2019 were related to assets under contract or actively marketed for sale at a disposition price that was less than the carrying value, the proceeds from which were or will be used to fund tax-efficient acquisitions, to fund redevelopment opportunities in owned centers, and for general corporate purposes. We continue to sell non-core assets and may potentially recognize impairments in future quarters, but such disposition activity will likely be delayed or reduced due to current market conditions as a result of the COVID-19 pandemic.
Interest Expense, Net:
The $2.2 million decrease was largely due to repricing activities executed during 2019. Interest Expense, Net was comprised of the following (dollars in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Interest on revolving credit facility, net
$
216

 
$
855

Interest on term loans, net
12,731

 
14,853

Interest on secured debt
7,350

 
5,771

Non-cash amortization and other
2,478

 
3,530

Interest expense, net
$
22,775

 
$
25,009

 
 
 
 
Weighted-average interest rate as of end of period
3.3
%
 
3.5
%
Weighted-average term (in years) as of end of period
4.7

 
4.8

(Loss) Gain on Disposal of Property, Net:
The $8.7 million decrease was primarily related to the sale of three properties with a net loss and associated write-offs of $1.6 million during the three months ended March 31, 2020, as compared to the sale of three properties with a net gain of $7.1 million during the three months ended March 31, 2019 (see Note 4).

25



Other Income, Net:
The $2.3 million increase was largely due to the change in the fair value of our earn-out liability during the three months ended March 31, 2020 as compared to the same period in 2019. Other Income, Net was comprised of the following (dollars in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Change in fair value of earn-out liability
$
10,000

 
$
7,500

Equity in loss of unconsolidated joint ventures
(280
)
 
(456
)
Transaction and acquisition expenses
(45
)
 
(88
)
Federal, state, and local income tax expense
(29
)
 

Other
223

 
580

Other income, net
$
9,869

 
$
7,536


Leasing Activity—The average rent per square foot and cost of executing leases fluctuates based on the tenant mix, size of the leased space, and lease term. Leases with national and regional tenants generally require a higher cost per square foot to execute than those with local tenants. However, generally such national and regional tenants will also pay higher rates for a longer term.
Below is a summary of leasing activity for our wholly-owned properties for the three months ended March 31, 2020 and 2019:
 
 
Total Deals(1)
 
Inline Deals(1)(2)
 
 
2020
 
2019
 
2020
 
2019
New leases:
 
 
 
 
 
 
 
 
Number of leases
 
87

 
107

 
77

 
103

Square footage (in thousands)
 
382

 
323

 
180

 
252

ABR (in thousands)
 
$
5,563

 
$
4,878

 
$
3,214

 
$
4,167

ABR per square foot
 
$
14.56

 
$
15.08

 
$
17.84

 
$
16.54

Cost per square foot of executing new leases(3)
 
$
22.03

 
$
27.61

 
$
27.94

 
$
27.95

Number of comparable leases(4)
 
25

 
40

 
25

 
38

Comparable rent spread(5)
 
6.8
%
 
17.2
%
 
6.8
%
 
14.9
%
Weighted average lease term (in years)
 
9.1

 
7.1

 
6.6

 
6.5

Renewals and options:
 
 
 
 
 
 
 
 
Number of leases
 
127

 
163

 
113

 
152

Square footage (in thousands)
 
739

 
688

 
249

 
326

ABR (in thousands)
 
$
9,720

 
$
10,550

 
$
5,364

 
$
7,106

ABR per square foot
 
$
13.15

 
$
15.34

 
$
21.53

 
$
21.80

ABR per square foot prior to renewals
 
$
12.33

 
$
14.15

 
$
19.18

 
$
19.32

Percentage increase in ABR per square foot
 
6.7
%
 
8.4
%
 
12.2
%
 
12.8
%
Cost per square foot of executing renewals and options
 
$
3.41

 
$
3.25

 
$
4.36

 
$
5.05

Number of comparable leases(4)
 
89

 
130

 
86

 
127

Comparable rent spread(5)
 
11.2
%
 
12.3
%
 
14.4
%
 
13.6
%
Weighted average lease term (in years)
 
4.7

 
4.8

 
4.0

 
4.7

Portfolio retention rate(6)
 
71.2
%
 
84.4
%
 
67.3
%
 
80.8
%
(1) 
Per square foot amounts may not recalculate exactly based on other amounts presented within the table due to rounding.
(2) 
We consider an inline deal to be a lease for less than 10,000 square feet of GLA.
(3) 
The cost of executing new leases, renewals, and options includes leasing commissions, tenant improvement costs, landlord work, and tenant concessions. The costs associated with landlord work are excluded for repositioning and redevelopment projects, if any.
(4) 
A comparable lease is a lease that is executed for the exact same space (location and square feet) in which a tenant was previously located. For a lease to be considered comparable, it must have been executed within 365 days from the earlier of legal possession or the day the prior tenant physically vacated the space.
(5) 
The comparable rent spread compares the percentage increase (or decrease) of new or renewal leases (excluding options) to the expiring lease of a unit that was occupied within the past twelve months.
(6) 
The portfolio retention rate is calculated by dividing (a) total square feet of retained tenants with current period lease expirations by (b) the square feet of leases expiring during the period.


26




Non-GAAP Measures
Same-Center Net Operating IncomeWe present Same-Center NOI as a supplemental measure of our performance. We define NOI as total operating revenues, adjusted to exclude non-cash revenue items, less property operating expenses and real estate taxes. For the three months ended March 31, 2020, Same-Center NOI represents the NOI for the 279 properties that were wholly-owned and operational for the entire portion of both comparable reporting periods. We believe Same-Center NOI provides useful information to our investors about our financial and operating performance because it provides a performance measure of the revenues and expenses directly involved in owning and operating real estate assets and provides a perspective not immediately apparent from net income (loss). Because Same-Center NOI excludes the change in NOI from properties acquired or disposed of after December 31, 2018, it highlights operating trends such as occupancy levels, rental rates, and operating costs on properties that were operational for both comparable periods. Other REITs may use different methodologies for calculating Same-Center NOI, and accordingly, our Same-Center NOI may not be comparable to other REITs.
Same-Center NOI should not be viewed as an alternative measure of our financial performance as it does not reflect the operations of our entire portfolio, nor does it reflect the impact of general and administrative expenses, depreciation and amortization, interest expense, other income (expense), or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties that could materially impact our results from operations.
The table below compares Same-Center NOI (dollars in thousands):
 
Three Months Ended March 31,
 
Favorable (Unfavorable)
 
2020
 
2019
 
$ Change
 
% Change
Revenues:
 
 
 
 
 
 
 
Rental income(1)
$
90,447


$
89,684

 
$
763

 
 
Tenant recovery income
31,036


28,947

 
2,089

 
 
Other property income
878


613

 
265

 
 
Total revenues
122,361

 
119,244

 
3,117

 
2.6
 %
Operating expenses:
 
 
 
 
 
 
 
Property operating expenses
18,281


18,112

 
(169
)
 
 
Real estate taxes
17,155


16,418

 
(737
)
 
 
Total operating expenses
35,436

 
34,530

 
(906
)
 
(2.6
)%
Total Same-Center NOI
$
86,925