PHILLIPS EDISON & COMPANY, INC. The following discussion and analysis should be read in conjunction with our accompanying consolidated financial statements and notes thereto. See also "Cautionary Note Regarding Forward-Looking Statements" preceding Part I.
KEY PERFORMANCE INDICATORS AND DEFINED TERMS
We use certain key performance indicators ("KPIs"), which include both financial
and nonfinancial metrics, to measure the performance of our operations. We
believe these KPIs, as well as the core concepts and terms defined below, allow
our Board, management, and investors to analyze trends around our business
strategy, financial condition, and results of operations in a manner that is
focused on items unique to the retail real estate industry.
We do not consider our non-GAAP measures to be alternatives to measures required
in accordance with accounting principles generally accepted in the United States
("GAAP"). Certain non-GAAP measures should not be viewed as an alternative
measure of our financial performance as they may not reflect the operations of
our entire portfolio, and they may not 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 shopping centers that
could materially impact our results from operations. Additionally, certain
non-GAAP measures should not be considered as an indication of our liquidity,
nor as an indication of funds available to cover our cash needs, including our
ability to fund distributions, and may not be a useful measure of the impact of
long-term operating performance on value if we do not continue to operate our
business in the manner currently contemplated. Accordingly, non-GAAP measures
should be reviewed in connection with other GAAP measurements and should not be
viewed as more prominent measures of performance than net income (loss) or cash
flows from operations prepared in accordance with GAAP. Other REITs may use
different methodologies for calculating similar non-GAAP measures, and
accordingly, our non-GAAP measures may not be comparable to other REITs.
Our KPIs and terminology can be grouped into three key areas:
PORTFOLIO-Portfolio metrics help management to gauge the health of our centers overall and individually.
•Anchor space-We define an anchor space as a space greater than or equal to 10,000 square feet of gross leasable area ("GLA").
•Annualized Base Rent ("ABR")-We use ABR to refer to the monthly contractual base rent at the end of the period multiplied by twelve months.
•ABR Per Square Foot ("PSF")-This metric is calculated by dividing ABR by leased
GLA. Increases in ABR PSF can be an indication of our ability to create rental
rate growth in our centers, as well as an indication of demand for our spaces,
which generally provides us with greater leverage during lease negotiations.
•GLA-We use GLA to refer to the total occupied and unoccupied square footage of
a building that is available for tenants (whom we refer to as a "Neighbor" or
our "Neighbors") or other retailers to lease.
•Inline space-We define an inline space as a space containing less than 10,000 square feet of GLA.
•Leased Occupancy-This metric is calculated as the percentage of total GLA for
which a lease has been signed regardless of whether the lease has commenced or
the Neighbor has taken possession. High occupancy is an indicator of demand for
our spaces, which generally provides us with greater leverage during lease
negotiations.
•Underwritten incremental unlevered yield-This reflects the yield we target to
generate from a project upon expected stabilization and is calculated as the
estimated incremental net operating income ("NOI") for a project at
stabilization divided by its estimated net project investment. The estimated
incremental NOI is the difference between the estimated annualized NOI we target
to generate by a project upon stabilization and the estimated annualized NOI
without the planned improvements. Underwritten incremental unlevered yield does
not include peripheral impacts, such as lease rollover risk or the impact on the
long term value of the property upon sale or disposition. Actual incremental
unlevered yields may vary from our underwritten incremental unlevered yield
range based on the actual total cost to complete a project and its actual
incremental NOI at stabilization.
•Comparable lease-We use this term to refer to a lease with consistent terms that is executed for substantially the same space that has been vacant less than twelve months. •Comparable rent spread-This metric is calculated as the percentage increase or decrease in first-year ABR (excluding any free rent or escalations) on new or renewal leases (excluding options) where the lease was considered a comparable lease. This metric provides an indication of our ability to generate revenue growth through leasing activity.
•Cost of executing new leases-We use this term to refer to certain costs associated with new leasing, namely, leasing commissions, tenant improvement costs, and tenant concessions.
•Portfolio retention rate-This metric is calculated by dividing (i) the total
square feet of retained Neighbors with current period lease expirations by (ii)
the total square feet of leases expiring during the period. The portfolio
retention rate provides insight into our ability to retain Neighbors at our
shopping centers as their leases approach expiration. Generally, the costs to
retain an existing Neighbor are lower than costs to replace with a new Neighbor.
PHILLIPS EDISON & COMPANY
DECEMBER 31, 2022 FORM 10-K 29
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•Recovery rate-This metric is calculated by dividing (i) total recovery income
by (ii) total recoverable expenses during the period. A high recovery rate is an
indicator of our ability to recover certain property operating expenses and
capital costs from our Neighbors.
FINANCIAL PERFORMANCE-In addition to financial metrics calculated in accordance
with GAAP, such as net income or cash flows from operations, we utilize non-GAAP
metrics to measure our operational and financial performance. See "Non-GAAP
Measures" below for further discussion on the following metrics.
•Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization for
Real Estate ("Adjusted EBITDAre")-To arrive at Adjusted EBITDAre, we adjust
EBITDAre, as defined below, to exclude certain recurring and non-recurring items
including, but not limited to: (i) changes in the fair value of the earn-out
liability; (ii) other impairment charges; (iii) amortization of basis
differences in our investments in our unconsolidated joint ventures; (iv)
transaction and acquisition expenses; and (v) realized performance income. We
use EBITDAre and Adjusted EBITDAre as additional measures of operating
performance which allow us to compare earnings independent of capital structure
and evaluate debt leverage and fixed cost coverage.
•Core Funds From Operations ("FFO")-To arrive at Core FFO, we adjust Nareit FFO
Attributable to Stockholders and OP Unit Holders, as defined below, to exclude
certain recurring and non-recurring items including, but not limited to: (i)
depreciation and amortization of corporate assets; (ii) changes in the fair
value of the earn-out liability; (iii) amortization of unconsolidated joint
venture basis differences; (iv) gains or losses on the extinguishment or
modification of debt and other; (v) other impairment charges; (vi) transaction
and acquisition expenses; and (vii) realized performance income. We believe
Nareit FFO provides insight into our operating performance as it excludes
certain items that are not indicative of such performance. Core FFO provides
further insight into the sustainability of our operating performance and
provides an additional measure to compare our performance across reporting
periods on a consistent basis by excluding items that may cause short-term
fluctuations in net income (loss).
•EBITDAre-The National Association of Real Estate Investment Trusts ("Nareit")
defines EBITDAre as net income (loss) computed in accordance with GAAP before:
(i) interest expense; (ii) income tax expense; (iii) depreciation and
amortization; (iv) gains or losses from disposition of depreciable property; and
(v) impairment write-downs of depreciable property. Adjustments for
unconsolidated partnerships and joint ventures are calculated to reflect
EBITDAre on the same basis.
•Equity Market Capitalization-We calculate equity market capitalization as the
total dollar value of all outstanding shares using the closing price for the
applicable date.
•Nareit FFO-Nareit defines FFO as net income (loss) computed in accordance with
GAAP, excluding: (i) gains (or losses) from sales of property and gains (or
losses) from change in control; (ii) depreciation and amortization related to
real estate; (iii) impairment losses on real estate and impairments of
in-substance real estate investments in investees that are driven by measurable
decreases in the fair value of the depreciable real estate held by the
unconsolidated partnerships and joint ventures; and (iv) adjustments for
unconsolidated partnerships and joint ventures, calculated to reflect FFO on the
same basis. We calculate Nareit FFO in a manner consistent with the Nareit
definition.
•Net Debt-We calculate net debt as total debt, excluding discounts, market adjustments, and deferred financing expenses, less cash and cash equivalents.
•Net Debt to Adjusted EBITDAre-This ratio is calculated by dividing net debt by Adjusted EBITDAre (included on an annualized basis within the calculation). It provides insight into our leverage rate based on earnings and is not impacted by fluctuations in our equity price. •Net Debt to Total Enterprise Value-This ratio is calculated by dividing net debt by total enterprise value, as defined below. It provides insight into our capital structure and usage of debt. •NOI-We calculate NOI as total operating revenues, adjusted to exclude non-cash revenue items, less property operating expenses and real estate taxes. NOI provides insight 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).
•Same-Center-We use this term to refer to a property, or portfolio of
properties, that have been owned and operational for the entirety of the last
two reporting periods (i.e., since
•Total Enterprise Value-We calculate total enterprise value as our net debt plus our equity market capitalization on a fully diluted basis.
OVERVIEW
We are a REIT and one of the nation's largest owners and operators of omni-channel grocery-anchored shopping centers. Our portfolio primarily consists of neighborhood centers anchored by the #1 or #2 grocer tenants by sales within their respective formats by trade area. Our Neighbors are a mix of national, regional, and local retailers that primarily provide necessity-based goods and services. As ofDecember 31, 2022 , we owned equity interests in 291 shopping centers, including 271 wholly-owned shopping centers and 20 shopping centers owned through one unconsolidated joint venture, which comprised approximately 33.3 million square feet in 31 states. In addition to managing our shopping centers, our third-party investment management business provides comprehensive real estate management services to our unconsolidated joint ventures and one private fund (collectively, the "Managed Funds").PHILLIPS EDISON & COMPANY DECEMBER 31, 2022 FORM 10-K 30
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InMay 2022 , we sold the final property in our joint venture withNecessity Retail Partners ("NRP"), in which we own a 20% interest. For the years endedDecember 31, 2022 and 2021, we recognized income of$2.7 million and$0.7 million , respectively, related to NRP's achievement of certain performance targets, which is included in Fees and Management Income in our consolidated statements of operations and comprehensive income (loss) ("consolidated statements of operations"). UNDERWRITTEN INITIAL PUBLIC OFFERING-OnJuly 19, 2021 , we closed our underwritten IPO, through which we issued 19.6 million shares, including the underwriters' overallotment election, of a new class of common stock,$0.01 par value per share, at an initial price to the public of$28.00 per share. As a result of the underwritten IPO, we received gross proceeds of$547.4 million .
Basis of Presentation-The basis of presentation of our shares of common stock is described as follows:
•Reverse Stock Split-OnJuly 2, 2021 , our Board approved an amendment to our charter to effect a one-for-three reverse stock split. Concurrent with the reverse split, theOperating Partnership enacted a one-for-three reverse split of its outstanding OP units. Unless otherwise indicated, the information in this Form 10-K gives effect to the reverse stock and OP unit splits (see Note 12). •Recapitalization-OnJune 18, 2021 , our stockholders approved an amendment to our charter (the "Articles of Amendment") that effected a change of each share of our common stock outstanding at the time the amendment became effective into one share of a newly created class of Class B common stock (the "Recapitalization"). The Articles of Amendment became effective upon filing with, and acceptance by, theState Department of Assessments and Taxation of Maryland onJuly 2, 2021 . Unless otherwise indicated, all information in this Form 10-K gives effect to the Recapitalization and references to "shares" and per share metrics refer to our common stock and Class B common stock, collectively. Our Class B common stock automatically converted into our publicly traded common stock onJanuary 18, 2022 (see Note 12). Prior to the conversion, we have presented common stock and Class B common stock as separate classes within our consolidated balance sheets and consolidated statements of equity. OnMay 5, 2022 , we filed Articles Supplementary to our charter with theMaryland State Department of Assessments and Taxation in order to reclassify and designate all of the 350 million authorized shares of our Class B common stock,$0.01 par value per share, all of which were unissued at such time, as shares of our common stock,$0.01 par value per share. We no longer have Class B common stock authorized for issue. 2021 BOND OFFERING-InOctober 2021 , theOperating Partnership completed the registered offering of$350 million aggregate principal amount of 2.625% senior notes ("2021 Bond Offering") priced at 98.692% of the principal amount and maturing inNovember 2031 . The 2021 Bond Offering resulted in gross proceeds of$345.4 million . The notes are fully and unconditionally guaranteed by us. AT-THE-MARKET OFFERING ("ATM")-OnFebruary 10, 2022 , we and theOperating Partnership entered into a sales agreement relating to the potential sale of shares of common stock pursuant to a continuous offering program. In accordance with the terms of the sales agreement, we may offer and sell shares of our common stock having an aggregate offering price of up to$250 million from time to time through our sales agents, or, if applicable, as forward sellers. No shares were issued under the ATM program during the fourth quarter of 2022. During the year endedDecember 31, 2022 , we issued 2.6 million shares of our common stock under the ATM program for net proceeds of$89.2 million , after approximately$0.9 million in commissions. As ofDecember 31, 2022 ,$159.9 million of common stock remained available for issuance under the ATM program. PORTFOLIO AND LEASING STATISTICS-Below are statistical highlights of our wholly-owned portfolio as ofDecember 31, 2022 and 2021 (dollars and square feet in thousands): 2022 2021 Number of properties 271 268 Number of states 31 31 Total square feet 31,093 30,691 ABR$ 435,712 $ 405,281 % ABR from omni-channel grocery-anchored shopping centers 97.2 % 96.7 % Leased occupancy %: Total portfolio spaces 97.4 % 96.3 % Anchor spaces 99.3 % 98.1 % Inline spaces 93.8 % 92.7 % Average remaining lease term (in years)(1) 4.5
4.6
(1)The average remaining lease term in years excludes future options to extend the term of the lease.
FINANCIAL HIGHLIGHTS-Owning, operating, and managing well-occupied omni-channel grocery-anchored real estate is a core part of our business strategy, and as ofDecember 31, 2022 , 97.2% of our ABR was derived from omni-channel grocery-anchored shopping centers. As ofDecember 31, 2022 , total leased occupancy improved 1.1% to 97.4% and inline occupancy improved 1.1% to 93.8%, when compared toDecember 31, 2021 . Our financial performance highlights during 2022 are as follows: •Net income of$54.5 million , an increase of$37.3 million from a year ago, primarily due to positive operating results attributable to our Same-Center portfolio, the net impact of our 2022 acquisition and disposition activity, and the final settlement of the earn-out liability with the issuance of 1.6 million OP units inJanuary 2022 .PHILLIPS EDISON & COMPANY DECEMBER 31, 2022 FORM 10-K 31
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•Core FFO per diluted share improved by
•Same-Center NOI improved 4.5% to
•Acquired
•Declared and paid monthly distributions of
EXECUTING OUR STRATEGY-Our performance for the year is linked to our key initiatives: differentiated and focused strategy, integrated operating platform, and responsible balance sheet management. We believe these initiatives will result in long-term growth and value creation to all of our stakeholders.
Differentiated and Focused Strategy-We actively monitor the commercial real estate sector for shopping centers that meet our investment objectives. Capital raised through our underwritten IPO combined with our effective shelf registration statement and ATM program allow us to access equity and debt capital that we intend to use, in part, to grow our portfolio of assets. Highlights of our asset composition and acquisitions are as follows:
•97.2% of our ABR was derived from omni-channel grocery-anchored shopping
centers as of
•71.1% of our ABR was derived from Neighbors providing necessity-based goods and services.
•Acquired seven properties and four outparcels for a net cash outlay of
Internal Growth Through Our Integrated Operating Platform-We have focused on improving our occupancy through leasing vacant spaces, increasing lease revenue through rent growth, and executing development and redevelopment opportunities. Highlights of our wholly-owned operational activity as of and for the year endedDecember 31, 2022 are as follows:
•Leased occupancy for our wholly-owned portfolio improved to 97.4% as of
•Total ABR per leased square foot for executed new leases improved 12.9% to$19.31 , and inline ABR per leased square foot for executed new leases improved 17.9% to$24.33 during the year endedDecember 31, 2022 .
•For the year ended
•As of
•Created
Balance Sheet Management Positioned for External Growth-Our management team has executed strategies to improve the flexibility of our balance sheet, including gaining access to additional forms of liquidity through our effective shelf registration statement and ATM program. This execution well-positions us to maintain our investment grade rating, fund distributions to our stockholders, and invest in our targeted acquisitions. As ofDecember 31, 2022 , we had$726.7 million of total liquidity, comprised of$17.3 million of cash, cash equivalents, and restricted cash, plus$709.4 million of borrowing capacity available on our$800 million revolving credit facility. Our balance sheet management highlights as of and for the year endedDecember 31, 2022 are as follows:
•We issued 2.6 million shares of our common stock under the ATM program for net
proceeds of
•Our investment grade ratings were reaffirmed by Moody's Investors Services
(Baa3) and
•We amended our credit facility to increase the total amount available under our
unsecured revolving credit facility from
•Our ratio of net debt to Adjusted EBITDAre was 5.3x as ofDecember 31, 2022 , as compared to 5.6x as ofDecember 31, 2021 (see "Liquidity and Capital Resources - Financial Leverage Ratios" below for a discussion and calculation).PHILLIPS EDISON & COMPANY DECEMBER 31, 2022 FORM 10-K 32
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•As of
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LEASING ACTIVITY-Below is a summary of leasing activity for our wholly-owned
properties for the years ended
Total Deals Inline Deals
2022 2021 2022 2021
New leases:
Number of leases 390 538 375 517
Square footage (in thousands) 1,230 1,805 819 1,193
ABR (in thousands) $ 23,750 $ 30,889 $ 19,919 $ 24,622
ABR PSF $ 19.31 $ 17.11 $ 24.33 $ 20.63
Cost PSF of executing new leases $ 36.25 $ 28.44 $ 39.56 $ 29.55
Number of comparable leases 145 228 143 224
Comparable rent spread 32.2 % 15.7 % 26.5 % 15.7 %
Weighted average lease term (in years) 8.1 8.1 7.4 6.4
Renewals and options:
Number of leases 611 597 551 537
Square footage (in thousands) 3,554 3,834 1,213 1,130
ABR (in thousands) $ 49,625 $ 47,603 $ 29,172 $ 25,891
ABR PSF $ 13.96 $ 12.42 $ 24.04 $ 22.92
ABR PSF prior to renewals $ 12.77 $ 11.68 $ 21.18 $ 20.86
Percentage increase in ABR PSF 9.3 % 6.3 % 13.4 % 9.9 %
Cost PSF of executing renewals and options $ 1.89 $ 0.63 $ 1.10 $ 1.23
Number of comparable leases(2) 472 496 459 475
Comparable rent spread(2) 14.6 % 8.1 % 15.2 % 10.2 %
Weighted average lease term (in years) 4.9 4.8 4.2 4.1
Portfolio retention rate 90.7 % 87.8 % 77.5 % 79.4 %
(1)PSF amounts may not recalculate exactly based on other amounts presented within the table due to rounding.
(2)Excludes exercise of options.
RESULTS OF OPERATIONS
KNOWN TRENDS AND UNCERTAINTIES-The COVID-19 pandemic resulted in reduced revenues beginning with the second quarter of 2020 and continuing through early 2021. Our collections returned to pre-COVID levels during the second half of 2021 and have remained strong throughout 2022. As ofDecember 31, 2022 , our Neighbors currently being accounted for on a cash basis represented approximately 4% of portfolio ABR. We believe our collections have stabilized, which has reduced volatility in our earnings during 2022 as compared to 2021. Due to changing economic conditions, rising interest rates, labor shortages, and supply chain limitations, there has been an increase in wages and costs for materials. The resulting increased inflation may negatively impact some of our Neighbors and increase our operating and construction costs. Substantially all of our leases contain provisions designed to mitigate the adverse effect of inflation, including requirements for Neighbors to pay their allocable share of operating expenses that includes common area maintenance, utilities, real estate taxes, insurance, and certain capital expenditures. Additionally, many of our leases are for terms of less than ten years, which allows us to target increased rents to current market rates upon renewal. In addition to inflation, macroeconomic and geopolitical risks may create challenges that cause current market conditions inthe United States to worsen. The policies implemented to address these risks, including raising interest rates, could result in adverse impacts onthe United States economy, including a slowing of growth or potentially a recession.PHILLIPS EDISON & COMPANY DECEMBER 31, 2022 FORM 10-K 34
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SUMMARY OF OPERATING ACTIVITIES FOR THE YEARS ENDED
Favorable (Unfavorable) Change
(Dollars in thousands) 2022 2021 $ %(1)
Revenues:
Rental income $ 560,538 $ 519,495 $ 41,043 7.9 %
Fees and management income 11,541 10,335 1,206 11.7 %
Other property income 3,293 3,016 277 9.2 %
Total revenues 575,372 532,846 42,526 8.0 %
Operating Expenses:
Property operating 95,359 92,914 (2,445) (2.6) %
Real estate taxes 67,864 65,381 (2,483) (3.8) %
General and administrative 45,235 48,820 3,585 7.3 %
Depreciation and amortization 236,224 221,433 (14,791) (6.7) %
Impairment of real estate assets 322 6,754 6,432 95.2 %
Total operating expenses 445,004 435,302 (9,702) (2.2) %
Other:
Interest expense, net (71,196) (76,371) 5,175 6.8 % Gain on disposal of property, net 7,517 30,421 (22,904) (75.3) % Other expense, net (12,160) (34,361) 22,201 64.6 % Net income 54,529 17,233 37,296 NM Net income attributable to noncontrolling interests (6,206) (2,112) (4,094) NM
Net income attributable to stockholders
NM
(1)Line items that result in a percent change that exceed certain limitations are considered not meaningful ("NM") and indicated as such.
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 254 properties that were owned and operational prior toJanuary 1, 2021 . 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 afterDecember 31, 2020 , which includes 27 properties disposed of and 16 properties acquired. Below are explanations of the significant fluctuations in the results of operations for the years endedDecember 31, 2022 and 2021:
Rental Income increased
•$20.2 million increase related to our same-center portfolio as follows:
?
?
?
•$20.8 million increase primarily related to our acquisition activity, net of dispositions.
Fees and Management Income: •The$1.2 million increase in fees and management income was primarily due to the achievement of certain performance targets related to our joint venture with NRP, partially offset by the reduction in revenue as result of our joint venture with NRP fully liquidating its assets.
Property Operating Expenses:
•The
Real Estate Tax Expenses:
•The
General and Administrative Expenses decreased
•$2.6 million decrease in compensation expense owing largely to lower performance-based compensation; and
•$1.3 million decrease primarily due to lower third-party consultant and custodial costs; partially offset by
PHILLIPS EDISON & COMPANY DECEMBER 31, 2022 FORM 10-K 35
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•$0.4 million increase due to an increase in directors and officers insurance as
a result of our becoming a publicly traded company in
Depreciation and Amortization:
•The$14.8 million increase in depreciation and amortization is primarily due to the execution of our acquisition strategy, investment in improvements to our Neighbor spaces, and accelerated depreciation related to damage sustained at our properties as a result of Hurricane Ian.
Impairment of Real Estate Assets:
•The
Interest Expense, Net:
•The$5.2 million decrease during the year endedDecember 31, 2022 as compared to the same period in 2021 was primarily due to net repayments of debt outstanding in 2021, partially offset by higher average interest rates in 2022. Interest Expense, Net was comprised of the following (dollars in thousands): Year Ended December 31, 2022 2021 Interest on unsecured term loans and senior notes, net $ 40,975 $ 40,107 Interest on secured debt 20,768 25,044 Interest on revolving credit facility, net 2,069 870 Non-cash amortization and other 6,359 6,758
Loss on extinguishment or modification of debt and other, net(1)
1,025 3,592
Interest expense, net $ 71,196 $ 76,371
Weighted-average interest rate as of end of year 3.6 % 3.3 % Weighted-average term (in years) as of end of year 4.4 5.2
(1)Includes defeasance fees related to early repayments of debt.
Gain on Disposal of Property, Net:
•The$22.9 million decrease was primarily related to the sale of four properties and four outparcels with a net gain of$7.5 million during the year endedDecember 31, 2022 , as compared to the sale of 24 properties and four outparcels (in addition to other property-related miscellaneous disposals and write-offs) with a net gain of$30.4 million during the year endedDecember 31, 2021 (see Note 4). Other Expense, Net: •The$22.2 million decrease was primarily related to a 2021 charge in connection with the change in the fair value of our earn-out liability, which was settled inJanuary 2022 , partially offset by an increase in transaction and acquisition expenses owing largely to the amortization of the restricted stock units awarded at the time of our underwritten IPO combined with costs for activities related to the execution of our growth strategy. Other Expense, Net was comprised of the following (in thousands): Year EndedDecember 31, 2022 2021
Change in fair value of earn-out liability (see Note 16)
$ (30,436) Equity in net income of unconsolidated joint ventures 1,280 1,695 Transaction and acquisition expenses (10,551) (5,363) Federal, state, and local income tax expense (806) (327) Other (274) 70 Other expense, net$ (12,160) $ (34,361)
SUMMARY OF OPERATING ACTIVITIES FOR THE YEARS ENDED
For a discussion of the year-to-year comparisons in the results of operations
for the years ended
PHILLIPS EDISON & COMPANY DECEMBER 31, 2022 FORM 10-K 36
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NON-GAAP MEASURES
See "Key Performance Indicators and Defined Terms" above for additional information related to the following non-GAAP measures.
SAME-CENTER NOI-Same-Center NOI is presented as a supplemental measure of our performance, as it highlights operating trends such as occupancy levels, rental rates, and operating costs for our Same-Center portfolio. Other REITs may use different methodologies for calculating Same-Center NOI, and accordingly, our Same-Center NOI may not be comparable to other REITs. For the years endedDecember 31, 2022 and 2021, Same-Center NOI represents the NOI for the 254 properties that were wholly-owned and operational for the entire portion of all comparable reporting periods. 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 for the years ended
Favorable (Unfavorable)
2022 2021 $ Change % Change
Revenues:
Rental income(1) $ 378,971 $ 360,093 $ 18,878
Tenant recovery income 120,141 115,848 4,293
Reserves for uncollectibility(2) (1,528) 1,820 (3,348)
Other property income 2,630 2,764 (134)
Total revenues 500,214 480,525 19,689 4.1 %
Operating expenses:
Property operating expenses 76,792 72,023 (4,769)
Real estate taxes 62,179 62,818 639
Total operating expenses 138,971 134,841 (4,130) (3.1) %
Total Same-Center NOI $ 361,243 $ 345,684 $ 15,559 4.5 %
(1)Excludes straight-line rental income, net amortization of above- and below-market leases, and lease buyout income.
(2)Includes billings that will not be recognized as revenue until cash is collected or the Neighbor resumes regular payments and/or we deem it appropriate to resume recording revenue on an accrual basis, rather than on a cash basis.
Same-CenterNOI Reconciliation-Below is a reconciliation of Net Income to NOI and Same-Center NOI for the years endedDecember 31, 2022 and 2021 (in thousands): 2022 2021 Net income$ 54,529 $ 17,233 Adjusted to exclude: Fees and management income (11,541) (10,335) Straight-line rental income(1) (12,265) (9,404) Net amortization of above- and below-market leases (4,324) (3,581) Lease buyout income (2,414) (3,485) General and administrative expenses 45,235 48,820 Depreciation and amortization 236,224 221,433 Impairment of real estate assets 322 6,754 Interest expense, net 71,196 76,371 Gain on disposal of property, net (7,517) (30,421) Other expense, net 12,160 34,361
Property operating expenses related to fees and management income
3,046 4,855
NOI for real estate investments 384,651 352,601
Less: Non-same-center NOI(2) (23,408) (6,917)
Total Same-Center NOI $ 361,243 $ 345,684 (1)Includes straight-line rent adjustments for Neighbors for whom revenue is being recorded on a cash basis.
(2)Includes operating revenues and expenses from non-same-center properties which includes properties acquired or sold and corporate activities.
PHILLIPS EDISON & COMPANY DECEMBER 31, 2022 FORM 10-K 37
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NAREIT FFO AND CORE FFO-Nareit FFO is a non-GAAP financial performance measure that is widely recognized as a measure of REIT operating performance. Core FFO is an additional financial performance measure used by us as Nareit FFO includes certain non-comparable items that affect our performance over time. We believe that Core FFO is helpful in assisting management and investors with assessing the sustainability of our operating performance in future periods. Nareit FFO, Nareit FFO Attributable to Stockholders and OP Unit Holders, and Core FFO should not be considered alternatives to net income (loss) under GAAP, as an indication of our liquidity, nor as an indication of funds available to cover our cash needs, including our ability to fund distributions. Core FFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate our business plan in the manner currently contemplated. Accordingly, Nareit FFO, Nareit FFO Attributable to Stockholders and OP Unit Holders, and Core FFO should be reviewed in connection with other GAAP measurements, and should not be viewed as more prominent measures of performance than net income (loss) or cash flows from operations prepared in accordance with GAAP. Our Nareit FFO, Nareit FFO Attributable to Stockholders and OP Unit Holders, and Core FFO, as presented, may not be comparable to amounts calculated by other REITs.
The following table presents our calculation of Nareit FFO Attributable to
Stockholders and OP Unit Holders and Core FFO for the years ended
2022 2021 2020
Calculation of Nareit FFO Attributable to Stockholders and OP Unit Holders Net income
$ 54,529 $ 17,233 $ 5,462 Adjustments: Depreciation and amortization of real estate assets 232,571 217,564 218,738 Impairment of real estate assets 322 6,754 2,423 Gain on disposal of property, net (7,517) (30,421) (6,494) Adjustments related to unconsolidated joint ventures 842 72 1,552
Nareit FFO attributable to stockholders and OP unit holders
$ 280,747 $ 211,202 $ 221,681 Calculation of Core FFO Nareit FFO attributable to stockholders and OP unit holders$ 280,747 $ 211,202 $ 221,681 Adjustments: Depreciation and amortization of corporate assets 3,653 3,869 5,941 Change in fair value of earn-out liability 1,809 30,436 (10,000) Transaction and acquisition expenses 10,551 5,363 539
Loss on extinguishment or modification of debt and other, net
1,025 3,592 4
Amortization of unconsolidated joint venture basis differences
220 1,167 1,883
Realized performance income(1) (2,742) (675) -
Other impairment charges - - 359
Core FFO $ 295,263 $ 254,954 $ 220,407 Nareit FFO Attributable to Stockholders and OP Unit Holders/Core FFO per diluted share Weighted-average shares of common stock outstanding - diluted
130,332 116,672 111,156
Nareit FFO attributable to stockholders and OP unit
holders per share - diluted $ 2.15 $ 1.81 $ 1.99
Core FFO per share - diluted $ 2.27 $ 2.19 $ 1.98 (1)Realized performance income includes fees received related to the achievement of certain performance targets in our NRP joint venture.
EBITDAre and ADJUSTED EBITDAre-We use EBITDAre and Adjusted EBITDAre as additional measures of operating performance which allow us to compare earnings independent of capital structure, determine debt service and fixed cost coverage, and measure enterprise value. Additionally, we believe they are a useful indicator of our ability to support our debt obligations.
EBITDAre and Adjusted EBITDAre should not be considered as alternatives to net
income (loss), as an indication of our liquidity, nor as an indication of funds
available to cover our cash needs, including our ability to fund distributions.
Accordingly, EBITDAre and Adjusted EBITDAre should be reviewed in connection
with other GAAP measurements, and should not be viewed as more prominent
measures of performance than net income (loss) or cash flows from operations
prepared in accordance with GAAP. Our EBITDAre and Adjusted EBITDAre, as
presented, may not be comparable to amounts calculated by other REITs.
PHILLIPS EDISON & COMPANY
DECEMBER 31, 2022 FORM 10-K 38
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The following table presents our calculation of EBITDAre and Adjusted EBITDAre
for the years ended
2022 2021 2020
Calculation of EBITDAre
Net income $ 54,529 $ 17,233 $ 5,462
Adjustments:
Depreciation and amortization 236,224 221,433 224,679
Interest expense, net 71,196 76,371 85,303
Gain on disposal of property, net (7,517) (30,421) (6,494)
Impairment of real estate assets 322 6,754 2,423
Federal, state, and local tax expense 806 327 491
Adjustments related to unconsolidated joint ventures 1,987
1,431 3,355
EBITDAre $ 357,547 $ 293,128 $ 315,219
Calculation of Adjusted EBITDAre
EBITDAre $ 357,547 $ 293,128 $ 315,219
Adjustments:
Change in fair value of earn-out liability 1,809 30,436 (10,000)
Transaction and acquisition expenses 10,551 5,363 539
Amortization of unconsolidated joint venture basis differences
220 1,167 1,883
Realized performance income(1) (2,742) (675) -
Other impairment charges - - 359
Adjusted EBITDAre $ 367,385 $ 329,419 $ 308,000 (1)Realized performance income includes fees received related to the achievement of certain performance targets in our NRP joint venture.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL-Aside from standard operating expenses, we expect our principal cash demands to be for:
•investments in real estate;
•cash distributions to stockholders;
•redevelopment and repositioning projects;
•capital expenditures and leasing costs; and
•principal and interest payments on our outstanding indebtedness.
We expect our primary sources of liquidity to be:
•operating cash flows;
•borrowings from our unsecured revolving credit facility and proceeds from debt financings;
•proceeds from any ATM offering activities;
•proceeds received from the disposition of properties; and
•available, unrestricted cash and cash equivalents.
At this time, we believe our current sources of liquidity are sufficient to meet our short- and long-term cash demands.
IMPACT OF THE UNDERWRITTEN IPO-OnJuly 19, 2021 , we closed our underwritten IPO, from which we received gross proceeds of$547.4 million . See "Overview" above for more details. The underwritten IPO has allowed us access to forms of capital not previously available to us, as follows: •InOctober 2021 , we completed the registered offering of$350 million aggregate principal amount of 2.625% senior notes, which resulted in gross proceeds of$345.4 million . •InFebruary 2022 , we filed an automatically effective shelf registration statement on Form S-3 providing for the public offering and sale, from time to time, by us of our preferred stock, common stock, debt securities, depository shares, warrants, rights, units, and guarantees of debt securities and by theOperating Partnership of its debt securities, in each case in unlimited amounts. •In connection with ourFebruary 2022 Form S-3 filing, we commenced the ATM program through which we may offer and sell shares of our common stock having an aggregate offering price of up to$250 million . No shares were issued under the ATM program during the fourth quarter of 2022. During the year endedDecember 31, 2022 , we issued 2.6 million shares of our common stock under the ATM program for net proceeds of$89.2 million . As ofDecember 31, 2022 ,$159.9 million of common stock remained available for issuance under the ATM program.PHILLIPS EDISON & COMPANY DECEMBER 31, 2022 FORM 10-K 39
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DEBT-The following table summarizes information about our debt as of
2022 2021
Total debt obligations, gross $ 1,912,784 $ 1,914,082
Weighted-average interest rate 3.6 % 3.3 % Weighted-average term (in years) 4.4
5.2
Revolving credit facility capacity(1)
489,329
(1)The revolving credit facility matures inJanuary 2026 , extendable at our option toJanuary 2027 . In addition, the revolving credit facility also includes an accordion feature that permits us to increase our aggregate borrowing capacity thereunder to up to$1 billion , subject to the satisfaction of certain conditions.
(2)Net of any outstanding balance and letters of credit.
Debt Activity-During the years endedDecember 31, 2022 and 2021, we took steps to increase debt amounts available to us for future investment activity. Our debt activity during the year endedDecember 31, 2022 was as follows: •InMay 2022 , we amended our credit facility agreement (the "Amendment") to, among other things, increase the total amount available under our unsecured revolving credit facility from$500 million to$800 million . The unsecured revolving credit facility also includes an accordion feature that permits us to increase our aggregate borrowing capacity thereunder to up to$1 billion , subject to the satisfaction of certain conditions. The unsecured revolving credit facility is scheduled to mature inJanuary 2026 , extendable at our option toJanuary 2027 .
•During 2022, we repaid
Our debt activity during the year ended
•InJuly 2021 , we entered into a new$980 million credit facility comprised of a$500 million senior unsecured revolving credit facility and two$240 million senior unsecured term loan tranches (the "Refinancing"). In connection with the Refinancing, we paid off a$472.5 million term loan due inNovember 2025 . Additionally, we used proceeds from the underwritten IPO to retire a$375 million term loan that was set to mature inApril 2022 .
•In
•InOctober 2021 , we completed the 2021 Bond Offering priced at 98.692% of the principal amount and maturing inNovember 2031 . The 2021 Bond Offering resulted in gross proceeds of$345.4 million . InOctober 2021 , net proceeds were used, in part, to pay down the remaining$150 million balance of the term loan that was set to mature inNovember 2023 . The notes are fully and unconditionally guaranteed by us.
•During 2021, we executed early repayments of
Future Debt Obligations-As ofDecember 31, 2022 , including the impact of our swap agreements, our future contractual debt obligations were$115.2 million of debt principal and interest payments during 2023, and$2.1 billion of debt principal and interest payments thereafter (see Note 8). Debt Obligation Guarantees-The 2.625% senior notes issued by theOperating Partnership pursuant to an effective registration statement inOctober 2021 were, and debt securities of theOperating Partnership registered under our automatically effective shelf registration statement on Form S-3 filed inFebruary 2022 will be, fully and unconditionally guaranteed by us. AtDecember 31, 2022 , theOperating Partnership had issued and outstanding its 2.625% senior notes. The obligations of theOperating Partnership to pay principal, premiums, if any, and interest on the 2.625% senior notes are fully and unconditionally guaranteed by us on a senior basis. As a result of the amendments to SEC Rule 3-10 of Regulation S-X, subsidiary issuers of obligations guaranteed by the parent are not required to provide separate financial statements, provided that: (i) the subsidiary obligor is consolidated into the parent company's consolidated financial statements; (ii) the parent guarantee is "full and unconditional"; and (iii) subject to certain exceptions as set forth below, the alternative disclosure required by Rule 13-01 of Regulation S-X is provided, which includes narrative disclosure and summarized financial information. We meet the conditions of this requirement and thus, are not presenting separate financial statements. Furthermore, as permitted under Rule 13-01(a)(4)(vi) of Regulation S-X, we have excluded the summarized financial information for theOperating Partnership because the assets, liabilities, and results of operations of theOperating Partnership are not materially different than the corresponding in our consolidated financial statements, and management believes such summarized financial information would be repetitive and would not provide incremental value to investors. Covenants-Credit agreements for our unsecured revolving credit facility and unsecured term loans contain customary financial covenants, including a leverage ratio of 60% or less, with a surge to 65% or less following a material acquisition, and require the fixed-charge ratio to be 1.5:1 or greater. Our unsecured senior notes due 2031 are also subject to customary financial covenants, including a leverage ratio of 65% or less, and require the fixed-charge ratio to be 150% or greater. As ofDecember 31, 2022 , we were in compliance with the restrictive covenants of our outstanding debt obligations and we expect to continue to meet the requirements of these covenants over the next twelve months.PHILLIPS EDISON & COMPANY DECEMBER 31, 2022 FORM 10-K 40
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OTHER CONTRACTUAL COMMITMENTS AND CONTINGENCIES AND OFF BALANCE SHEET ARRANGEMENTS-We enter into leases as a lessee as part of our real estate operations in the form of ground leases of land for certain properties, and as part of our corporate operations in the form of office space and office equipment leases. Currently, neither our operating leases nor our finance leases have residual value guarantees or other restrictions or covenants. We expect to fund these obligations through existing financing or cash flows from operations. As ofDecember 31, 2022 , our future contractual obligations as a lessee included operating lease obligations of$0.7 million during 2023, and$6.8 million thereafter. As ofDecember 31, 2022 , our future contractual finance lease obligations included$0.3 million during 2023, and$0.3 million thereafter. We have an off-balance sheet arrangement that includes being the limited guarantor of a$175 million mortgage loan secured byGrocery Retail Partners I LLC ("GRP I") properties. Our guaranty for the GRP I debt is limited to being the non-recourse carveout guarantor and the environmental indemnitor. Further, we are also party to an agreement with our institutional joint venture partner in which any potential liability under such guarantee will be apportioned between us and our joint venture partner based on our respective ownership percentage in the joint venture. As ofDecember 31, 2022 , GRP I had an outstanding debt balance of$174.0 million . Additionally, our off-balance sheet arrangements include the notional amount of our interest rate swaps which we use to hedge a portion of our exposure to interest rate fluctuations. Currently, all of our interest rate swaps fix the variable rate interest on our term loan debt. We intend to fund our interest rate swap payments utilizing cash flows from operations. As ofDecember 31, 2022 , the notional amount of our interest rate swaps was$0.8 billion . As ofDecember 31, 2022 , our future interest rate swap recoverables are$15.9 million during 2023 and$11.2 million thereafter. FINANCIAL LEVERAGE RATIOS-We believe our net debt to Adjusted EBITDAre, net debt to total enterprise value, and debt covenant compliance as ofDecember 31, 2022 allow us access to future borrowings as needed in the near term. The following table presents our calculation of net debt and total enterprise value, inclusive of our prorated portion of net debt and cash and cash equivalents owned through our unconsolidated joint ventures, as ofDecember 31, 2022 and 2021 (in thousands): 2022 2021
Net debt: Total debt, excluding discounts, market adjustments, and deferred financing expenses
$ 1,937,142 $ 1,941,504 Less: Cash and cash equivalents 5,740 93,109 Total net debt$ 1,931,402 $ 1,848,395 Enterprise value: Net debt$ 1,931,402 $ 1,848,395 Total equity market capitalization(1)(2) 4,178,204 4,182,996 Total enterprise value $
6,109,606
(1)Total equity market capitalization is calculated as diluted shares multiplied by the closing market price per share, which includes 131.2 million and 126.6 million diluted shares as ofDecember 31, 2022 and 2021, respectively, and the closing market price per share of$31.84 and$33.04 as ofDecember 31, 2022 and 2021, respectively. (2)Fully diluted shares include common stock and OP units as ofDecember 31, 2022 and Class B common stock, common stock, and OP units as ofDecember 31, 2021 . The following table presents our calculation of net debt to Adjusted EBITDAre and net debt to total enterprise value as ofDecember 31, 2022 and 2021 (dollars in thousands): 2022 2021 Net debt to Adjusted EBITDAre - annualized: Net debt$ 1,931,402 $
1,848,395
Adjusted EBITDAre - annualized(1) 367,385
329,419
Net debt to Adjusted EBITDAre - annualized 5.3x
5.6x
Net debt to total enterprise value: Net debt$ 1,931,402 $
1,848,395
Total enterprise value 6,109,606
6,031,391
Net debt to total enterprise value 31.6%
30.6%
(1)Adjusted EBITDAre is based on a trailing twelve month period. See "Non-GAAP
Measures - EBITDAre and Adjusted EBITDAre" above for a reconciliation to Net
Income.
CAPITAL EXPENDITURES AND REDEVELOPMENT ACTIVITY-We make capital expenditures
during the course of normal operations, including maintenance capital
expenditures and tenant improvements, as well as value-enhancing anchor space
repositioning and redevelopment, ground-up outparcel development, and other
accretive projects.
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DECEMBER 31, 2022 FORM 10-K 41
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During the years ended
2022 2021
Capital expenditures for real estate:
Capital improvements $ 17,828 $ 15,862
Tenant improvements 24,194 23,485
Redevelopment and development 53,671 31,579
Total capital expenditures for real estate 95,693 70,926 Corporate asset capital expenditures
3,292 2,194
Capitalized indirect costs(1) 3,430 1,915
Total capital spending activity(2) $ 102,415 $ 75,035 (1)Amount includes internal salaries and related benefits of personnel who work directly on capital projects as well as capitalized interest expense.
(2)For the year ended
We expect our capital expenditures to reach$105 million -$115 million in 2023, which includes$50 million -$60 million related to development and redevelopment projects. We anticipate that obligations related to capital improvements, as well as redevelopment and development, in 2023 can be met with cash flows from operations, cash flows from dispositions, or borrowings on our unsecured revolving credit facility. Generally, we expect our development and redevelopment projects to stabilize within 24 months. Our underwritten incremental unlevered yields on development and redevelopment projects are expected to average between 9%-11%. Our current in process projects represent an estimated total investment of$50.3 million . Actual incremental unlevered yields may vary from our underwritten incremental unlevered yield range based on the actual total cost to complete a project and its actual incremental annual NOI at stabilization. See "Key Performance Indicators and Defined Terms" above for further information.
REAL ESTATE ACQUISITION ACTIVITY-We actively monitor the commercial real estate
market for properties that have future growth potential, are located in
attractive demographic markets, and support our business objectives. The
following table highlights our property acquisitions during the years ended
2022 2021
Number of properties acquired 7 9
Number of outparcels acquired(1) 4 5
Contract price $ 280,515 $ 307,551 Total price of acquisitions(2) 282,000 308,358
(1)Outparcels acquired are adjacent to shopping centers that we own.
(2)Total price of acquisitions includes closing costs and credits.
Subsequent to
REAL ESTATE DISPOSITION ACTIVITY-We continually evaluate our portfolio of assets for opportunities to make strategic dispositions of assets that no longer meet our growth and investment objectives or assets that have stabilized in order to capture their value. The following table highlights our property dispositions during the years endedDecember 31, 2022 and 2021 (dollars in thousands): 2022 2021 Number of properties sold(1) 4 24 Number of outparcels sold(2)(3) 4 4 Contract price$ 53,987 $ 216,052
Proceeds from sale of real estate, net(4) 52,019 206,377 Gain on sale of property, net(5)
7,517 34,309
(1)We retained an outparcel for one property sold during the year ended
(2)During the year endedDecember 31, 2021 , our outparcel sales included: (i) the only remaining portion of one of our properties, which resulted in a reduction in our total property count; and (ii) an undeveloped parcel of land, as well as two outparcels adjacent to two of our centers, none of which resulted in a reduction in our total property count. (3)In addition to the four outparcels sold during the year endedDecember 31, 2021 , a tenant at one of our properties exercised a bargain purchase option to acquire a parcel of land that we previously owned. This generated minimal proceeds for us.
(4)Total proceeds from sale of real estate, net includes closing costs and credits.
(5)During the year ended
PHILLIPS EDISON & COMPANY DECEMBER 31, 2022 FORM 10-K 42
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DISTRIBUTIONS-We elected to be taxed as a REIT for federal income tax purposes commencing with our taxable year endedDecember 31, 2010 . As a REIT, we have made, and intend to continue to make, distributions each taxable year equal to at least 90% of our taxable income (excluding capital gains and computed without regard to the dividends paid deduction). We declared and paid 2022 monthly distributions of$0.09 per share, or$1.08 annualized, for each month beginningJanuary 2022 throughAugust 2022 . We declared and paid 2022 monthly distributions of$0.0933 per share, or$1.12 annualized, an increase of 3.7%, for each month beginningSeptember 2022 throughDecember 2022 . TheDecember 2022 andJanuary 2023 distributions of$0.0933 per share were paid onJanuary 3, 2023 andFebruary 1, 2023 , respectively. OnFebruary 8, 2023 , our Board authorized 2023 distributions for February, March, and April of$0.0933 per share to the stockholders of record at the close of business onFebruary 21, 2023 ,March 15, 2023 , andApril 17, 2023 , respectively. OP unit holders will receive distributions at the same rate as common stockholders, subject to certain withholdings. The timing and amount of distributions is determined by our Board and is influenced in part by our intention to comply with REIT requirements of the IRC. We declared and paid 2021 monthly distributions of$0.085 per share, or$1.02 annualized, for each month beginningJanuary 2021 throughSeptember 2021 . We declared and paid 2021 monthly distributions of$0.09 per share, or$1.08 annualized, forOctober 2021 throughDecember 2021 . To maintain our qualification as a REIT, we must make aggregate annual distributions to our stockholders of at least 90% of our REIT taxable income (which is computed without regard to the dividends paid deduction or net capital gain, and which does not necessarily equal net income or loss as calculated in accordance with GAAP). We generally will not be subject toU.S. federal income tax on the income that we distribute to our stockholders each year due to meeting the REIT qualification requirements. However, we may be subject to certain state and local taxes on our income, property, or net worth and to federal income and excise taxes on our undistributed income.
We have not established a minimum distribution level, and our charter does not require that we make distributions to our stockholders.
DIVIDEND REINVESTMENT PLAN AND SHARE REPURCHASE PROGRAMS-OnAugust 4, 2021 , as a result of our underwritten IPO, our Board approved the termination of the DRIP and the original share repurchase program. OnAugust 3, 2022 , our Board approved a new share repurchase program of up to$250 million of common stock. The program may be suspended or discontinued at any time, and does not obligate us to repurchase any dollar amount or particular number of shares. No share repurchases have been made to date under this program.
CASH FLOW ACTIVITIES-As of
Below is a summary of our cash flow activity for the years ended
2022 2021 $ Change % Change
Net cash provided by operating activities $ 290,890 $ 262,902 $ 27,988 10.6 %
Net cash used in investing activities (331,245) (180,491) (150,754) (83.5) %
Net cash used in financing activities (57,825) (98,819) 40,994 41.5 %
OPERATING ACTIVITIES-Our net cash provided by operating activities was primarily impacted by the following:
•Property operations and working capital-Most of our operating cash comes from rental and tenant recovery income and is offset by property operating expenses, real estate taxes, and general and administrative costs. The increase in property operations was primarily due to a$15.6 million , or 4.5%, improvement in Same-Center NOI as compared to 2021, and the execution of our acquisition strategy. During the year endedDecember 31, 2022 , we had a net cash outlay of$0.2 million from changes in working capital as compared to a net cash inflow of$4.0 million during the same period in 2021. This change was primarily driven by the timing of receivables and lower performance-based compensation accruals, partially offset by higher real estate tax accruals. •Fee and management income-We also generate operating cash from our third-party investment management business, pursuant to various management and advisory agreements between us and the Managed Funds. Our fee and management income was$11.5 million for the year endedDecember 31, 2022 , an increase of$1.2 million as compared to the same period in 2021. The increase in fees and management income was primarily due to our joint venture with NRP from which we recognized income related to NRP's achievement of certain performance targets of$2.7 million for the year endedDecember 31, 2022 , compared to income of$0.7 million in 2021. •Cash paid for interest-During the year endedDecember 31, 2022 , we paid$65.1 million for interest, a decrease of$3.0 million over the same period in 2021, largely due to net repayments of debt outstanding in 2021, partially offset by higher average interest rates in 2022.PHILLIPS EDISON & COMPANY DECEMBER 31, 2022 FORM 10-K 43
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INVESTING ACTIVITIES-Our net cash used in investing activities was primarily impacted by the following:
•Real estate acquisitions-During the year ended
•Real estate dispositions-During the year ended
•Capital expenditures-We invest capital into leasing our properties and maintaining or improving the condition of our properties. During the year endedDecember 31, 2022 , we paid$104.5 million for capital expenditures, an increase of$29.5 million over the same period in 2021, primarily due to an increase in tenant improvements owing largely to an increase in leasing volume as compared to the same period a year ago.
FINANCING ACTIVITIES-Our net cash used in financing activities was primarily impacted by the following:
•Debt borrowings and payments-During the year endedDecember 31, 2022 , we had$1.3 million in net repayment of debt as compared to$402.3 million in net repayment of debt during the same period a year ago. See "Debt Activity" above for more details. •Distributions to stockholders and OP unit holders-Cash used for distributions to common stockholders and OP unit holders increased by$22.3 million during the year endedDecember 31, 2022 as compared to the same period in 2021, primarily due to an increase in shares of common stock outstanding as a result of our underwritten IPO. •Issuance of common stock-During the year endedDecember 31, 2022 , we issued 2.6 million shares of our common stock under the ATM program for net proceeds of$89.2 million . During the year endedDecember 31, 2021 , we had net proceeds from the issuance of common stock of$508.4 million from our underwritten IPO.
•Share repurchases-Cash outflows for share repurchases decreased by
CRITICAL ACCOUNTING ESTIMATES
Below is a discussion of our critical accounting estimates. Our accounting policies have been established to conform with GAAP. We consider these policies critical because they involve significant management judgments and assumptions, require estimates about matters that are inherently uncertain, and are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets at the dates of the consolidated financial statements, as well as the reported amounts of revenue during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our consolidated financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. Real Estate Valuation-We assess the fair value of acquired real estate and allocate the purchase price of real estate assets and liabilities acquired based upon their estimated fair values as of the acquisition date. The allocation requires the use of market based estimates and assumptions including estimated market lease rates and comparable acquisitions, historical operating results, carrying costs during lease-up periods, discount and capitalization rates, market absorption periods, and the number of years the property will be held for investment. Quarterly, we review our owned real estate properties, including those classified as real estate held for sale, for evidence of impairment, which requires us, at times, to estimate the fair value of our real estate assets. Valuing our investment in real estate assets requires us to utilize a significant amount of judgment in the inputs that we select for impairment testing and other analyses. We select these inputs based on all available evidence and using techniques that are commonly employed by other real estate companies. Examples of these inputs include projected revenue and expense growth rates, estimates of future cash flows, anticipated holding periods, capitalization rates, general economic conditions and trends, and other available market data.
We believe that our real estate valuation estimates are based on reasonable assumptions. However, the use of inappropriate estimates could result in an incorrect valuation of our real estate properties, at acquisition or during our ownership period, which could result in material impairment losses in the future.
Rental Income-The majority of our revenue is lease revenue derived from our real
estate assets, for which we are the lessor. Lease receivables are reviewed
continually to determine whether or not it is probable that we will realize
substantially all remaining lease payments for each of our Neighbors (i.e.,
whether a Neighbor is deemed to be a credit risk). If we determine it is not
probable that we will collect substantially all of the remaining lease payments
from a Neighbor, revenue for that Neighbor is recorded on a cash basis
("cash-basis Neighbor"), including no longer recognizing straight-line rent
receivables and/or receivables for recoverable expenses. We will resume
recording lease income on an accrual basis for cash-basis Neighbors once we
believe the collection of rent for the remaining lease term is probable, which
will generally be after a period of regular payments and no remaining unpaid
rent for a certain timeframe.
Additionally, we record a general reserve based on our review of operating lease
receivables at a company level to ensure they are properly valued based on
analysis of historical uncollectible tenant receivables, outstanding balances,
and the current economic climate.
The aforementioned adjustments, as well as any reserve for disputed charges, are recorded as a reduction of Rental Income on the consolidated statements of operations.
Our revenue collectibility estimates are made based on historical experience,
the current economic climate, and other Neighbor-specific factors. While we do
not believe there is a reasonable likelihood of a material change in the
estimates or
PHILLIPS EDISON & COMPANY
DECEMBER 31, 2022 FORM 10-K 44
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assumptions that we use to recognize revenue, if actual payment levels were to vary significantly from estimates, we may be exposed to decreases in rental income that could be material or increases of non-cash straight-line income when a cash-basis Neighbor moves back to accrual accounting in accordance with GAAP.
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