Phillips Edison & Company Earnings 2019-03-31

PHLD 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow

10-Q 1 peco_20190331-10q.htm 10-Q Document

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, 2019

¨ 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

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)

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

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
None	None	None

As of May 1, 2019, there were 282.9 million outstanding shares of common stock of the Registrant.

PHILLIPS EDISON & COMPANY, INC.

FORM 10-Q

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION		2

ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)	2

	CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2019 AND DECEMBER 31, 2018	2

	CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018	3

	CONSOLIDATED STATEMENTS OF EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018	4

	CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018	5

	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	7

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	25

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	39

ITEM 4.	CONTROLS AND PROCEDURES	39

PART II. OTHER INFORMATION		39

ITEM 1.	LEGAL PROCEEDINGS	39

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	40

ITEM 5.	OTHER INFORMATION	40

ITEM 6.	EXHIBITS	44

SIGNATURES		45

w PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PHILLIPS EDISON & COMPANY, INC.

CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2019 AND DECEMBER 31, 2018

(Unaudited)

(In thousands, except per share amounts)



	March 31, 2019			December 31, 2018
ASSETS
Investment in real estate:
Land and improvements	$	1,592,232		$	1,598,063
Building and improvements	3,234,798			3,250,420
In-place lease assets	461,805			464,721
Above-market lease assets	66,747			67,140
Total investment in real estate assets	5,355,582			5,380,344
Accumulated depreciation and amortization	(619,874		)	(565,507		)
Net investment in real estate assets	4,735,708			4,814,837
Investment in unconsolidated joint ventures	43,998			45,651
Total investment in real estate assets, net	4,779,706			4,860,488
Cash and cash equivalents	12,684			16,791
Restricted cash	74,074			67,513
Accounts receivable – affiliates	5,958			5,125
Corporate intangible assets, net	13,116			14,054
Goodwill	29,066			29,066
Other assets, net	136,680			153,076
Real estate investment and other assets held for sale	5,764			17,364
Total assets	$	5,057,048		$	5,163,477

LIABILITIES AND EQUITY
Liabilities:
Debt obligations, net	$	2,415,762		$	2,438,826
Below-market lease liabilities, net	127,988			131,559
Earn-out liability	32,000			39,500
Deferred income	12,096			14,025
Accounts payable and other liabilities	119,742			126,074
Liabilities of real estate investment held for sale	275			596
Total liabilities	2,707,863			2,750,580
Commitments and contingencies (Note 10)	—			—
Equity:
Preferred stock, $0.01 par value per share, 10,000 shares authorized, zero shares issued
and outstanding at March 31, 2019 and December 31, 2018, respectively	—			—
Common stock, $0.01 par value per share, 1,000,000 shares authorized, 281,549 and 279,803
shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively	2,815			2,798
Additional paid-in capital	2,693,946			2,674,871
Accumulated other comprehensive (loss) income (“AOCI”)	(61		)	12,362
Accumulated deficit	(745,740		)	(692,045		)
Total stockholders’ equity	1,950,960			1,997,986
Noncontrolling interests	398,225			414,911
Total equity	2,349,185			2,412,897
Total liabilities and equity	$	5,057,048		$	5,163,477

See notes to consolidated financial statements.

PHILLIPS EDISON & COMPANY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(Unaudited)

(In thousands, except per share amounts)



	Three Months Ended March 31,
	2019			2018
Revenues:
Rental income	$	128,860		$	93,886
Fees and management income	3,261			8,712
Other property income	648			601
Total revenues	132,769			103,199
Expenses:
Property operating	22,866			18,115
Real estate taxes	17,348			13,147
General and administrative	13,285			10,461
Depreciation and amortization	60,989			46,427
Impairment of real estate assets	13,717			—
Total expenses	128,205			88,150
Other:
Interest expense, net	(25,009		)	(16,779		)
Gain on disposal of property, net	7,121			—
Other income (expense), net	7,536			(107		)
Net loss	(5,788		)	(1,837		)
Net loss attributable to noncontrolling interests	593			237
Net loss attributable to stockholders	$	(5,195	)	$	(1,600	)
Earnings per common share:
Net loss per share attributable to stockholders - basic and diluted (See Note 13)	$	(0.02	)	$	(0.01	)

Comprehensive (loss) income:
Net loss	$	(5,788	)	$	(1,837	)
Other comprehensive (loss) income:
Change in unrealized value on interest rate swaps	(14,361		)	13,488
Comprehensive (loss) income	(20,149		)	11,651
Net loss attributable to noncontrolling interests	593			237
Comprehensive loss (income) attributable to noncontrolling interests	1,938			(2,603		)
Comprehensive (loss) income attributable to stockholders	$	(17,618	)	$	9,285

See notes to consolidated financial statements.

PHILLIPS EDISON & COMPANY, INC.

CONSOLIDATED STATEMENTS OF EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(Unaudited)

(In thousands, except per share amounts)



	Common Stock					Additional Paid-In Capital			AOCI			Accumulated Deficit			Total Stockholders’ Equity			Noncontrolling Interest			Total Equity
	Shares		Amount			Additional Paid-In Capital			AOCI			Accumulated Deficit			Total Stockholders’ Equity			Noncontrolling Interest			Total Equity
Balance at January 1, 2018	185,233		$	1,852		$	1,629,130		$	16,496		$	(601,238	)	$	1,046,240		$	432,442		$	1,478,682
Share repurchases	(366	)	(4		)	(4,011		)	—			—			(4,015		)	—			(4,015		)
Dividend reinvestment plan (“DRIP”)	1,160		12			12,752			—			—			12,764			—			12,764
Change in unrealized value on interest rate swaps	—		—			—			10,885			—			10,885			2,603			13,488
Common distributions declared, $0.17 per share	—		—			—			—			(31,326		)	(31,326		)	—			(31,326		)
Distributions to noncontrolling interests	—		—			—			—			—			—			(6,789		)	(6,789		)
Share-based compensation expense	—		—			318			—			—			318			—			318
Other	—		—			(13		)	—			—			(13		)	—			(13		)
Net loss	—		—			—			—			(1,600		)	(1,600		)	(237		)	(1,837		)
Balance at March 31, 2018	186,027		$	1,860		$	1,638,176		$	27,381		$	(634,164	)	$	1,033,253		$	428,019		$	1,461,272

Balance at December 31, 2018	279,803		$	2,798		$	2,674,871		$	12,362		$	(692,045	)	$	1,997,986		$	414,911		$	2,412,897
Adoption of new accounting pronouncement (see Note 3)	—		—			—			—			(528		)	(528		)	—			(528		)
Balance at January 1, 2019	279,803		$	2,798		$	2,674,871		$	12,362		$	(692,573	)	$	1,997,458		$	414,911		$	2,412,369
Share repurchases	(605	)	(6		)	(6,674		)	—			—			(6,680		)	—			(6,680		)
DRIP	1,603		16			17,702			—			—			17,718			—			17,718
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 expense	—		—			433			—			—			433			839			1,272
Share-based awards vesting	58		—			—			—			—			—			—			—
Share-based awards retained for taxes	(18	)	—			(206		)	—			—			(206		)	—			(206		)
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

See notes to consolidated financial statements.

PHILLIPS EDISON & COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(Unaudited)

(In thousands)



	Three Months Ended March 31,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(5,788	)	$	(1,837	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of real estate assets	59,342			42,040
Impairment of real estate assets	13,717			—
Depreciation and amortization of corporate assets	1,647			4,128
Amortization of deferred financing expenses	1,297			1,226
Net amortization of above- and below-market leases	(1,133		)	(1,007		)
Gain on disposal of property, net	(7,121		)	—
Change in fair value of earn-out liability	(7,500		)	—
Straight-line rent	(1,713		)	(1,057		)
Share-based compensation expense	1,272			318
Equity in net loss of unconsolidated joint ventures	456			—
Other	2,766			1
Changes in operating assets and liabilities:
Other assets, net	1,923			(4,389		)
Accounts payable and other liabilities	(17,921		)	(15,913		)
Net cash provided by operating activities	41,244			23,510
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate acquisitions	—			(8,374		)
Capital expenditures	(8,574		)	(8,593		)
Proceeds from sale of real estate	35,755			39
Return of investment in unconsolidated joint ventures	1,197			—
Net cash provided by (used in) investing activities	28,378			(16,928		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in credit facility	(22,000		)	(36,000		)
Proceeds from mortgages and loans payable	—			65,000
Payments on mortgages and loans payable	(2,428		)	(2,646		)
Distributions paid, net of DRIP	(30,132		)	(18,710		)
Distributions to noncontrolling interests	(6,958		)	(6,827		)
Repurchases of common stock	(5,444		)	(2,875		)
Other	(206		)	—
Net cash used in financing activities	(67,168		)	(2,058		)
NET INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH	2,454			4,524
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH:
Beginning of period	84,304			27,445
End of period	$	86,758		$	31,969

RECONCILIATION TO CONSOLIDATED BALANCE SHEETS
Cash and cash equivalents	$	12,684		$	14,690
Restricted cash	74,074			17,279
Cash, cash equivalents, and restricted cash at end of period	$	86,758		$	31,969



	2019		2018
SUPPLEMENTAL CASH FLOW DISCLOSURE, INCLUDING NON-CASH INVESTING AND FINANCING ACTIVITIES:
Cash paid for interest	$	21,679	$	15,792
Accrued capital expenditures	2,095		2,252
Change in distributions payable	122		—
Change in distributions payable - noncontrolling interests	209		—
Change in accrued share repurchase obligation	1,236		1,140
Distributions reinvested	17,718		12,764

See notes to consolidated financial statements.

Phillips Edison & Company, Inc.

Notes to Consolidated Financial Statements

(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 invest 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 properties, our third-party investment management business provides comprehensive real estate and asset management services to (i) Phillips Edison Grocery Center REIT III, Inc. (“PECO III”), a non-traded publicly registered REIT; (ii) three institutional joint ventures; and (iii) one private fund (collectively, the “Managed Funds”).

In November 2018, we completed a merger (the “Merger”) with Phillips Edison Grocery Center REIT II, Inc. (“REIT II”), a

public non-traded REIT that was advised and managed by us, in a 100% stock-for-stock transaction valued at approximately

$1.9 billion. As a result of the Merger, we acquired 86 properties and a 20% equity interest in Necessity Retail Partners (“NRP” or the “NRP joint venture”), a joint venture that owned 13 properties. For a more detailed discussion, see Note 4.

In November 2018, through our direct or indirect subsidiaries, we entered into a joint venture with The Northwestern

Mutual Life Insurance Company (“Northwestern Mutual”) and we contributed or sold 17 grocery-anchored shopping centers

with a fair value of approximately $359 million at formation to the new joint venture, Grocery Retail Partners I LLC (“GRP I” or the “GRP I joint venture”), in exchange for a 15% ownership interest in GRP I. For a more detailed discussion, see Note 6.

As of March 31, 2019, we wholly-owned fee simple interests in 300 real estate properties. In addition, we owned a 20% equity interest in NRP and a 15% interest in GRP I, as described previously.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.

Other than those noted below, there have been no changes to our significant accounting policies during the three months ended March 31, 2019. For a full summary of our accounting policies, refer to our 2018 Annual Report on Form 10-K filed with the SEC on March 13, 2019.

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, 2018, which are included in our 2018 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, 2019, 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.

Leases—We are party to a number of lease agreements, both as a lessor as well as a lessee of various types of assets.

Lessor—The majority of our revenue is lease revenue derived from our real estate assets, which is accounted for under Accounting Standards Codification (“ASC”) Topic 842, Leases (“ASC 842”). We adopted the accounting guidance contained within ASC 842 on January 1, 2019, the effective date of the standard for public companies. We record lease and lease-related revenue as Rental Income on the consolidated statements of operations and comprehensive (loss) income, also referred to herein as our “consolidated statements of operations”, in accordance with ASC 842.

We enter into leases primarily as a lessor as part of our real estate operations, and leases represent the majority of our revenue. We lease space in our properties generally in the form of operating leases. Our leases typically provide for reimbursements from tenants for common area maintenance, insurance, and real estate tax expenses. Common area maintenance reimbursements can be fixed, with revenue earned on a straight-line basis over the term of the lease, or variable, with revenue recognized as services are performed for which we will be reimbursed.

The terms and expirations of our operating leases with our tenants are generally similar. The majority of leases for inline (non-anchor) tenants have terms that range from 2 to 10 years, and the majority of leases for anchor tenants range from 3 to 13 years. In both cases, the full term of the lease prior to our acquisition or assumption of the lease will generally be longer, however, we are measuring the commencement date for these purposes as being the date that we acquired or assumed the lease, excluding option periods.

The lease agreements frequently contain fixed-price renewal options to extend the terms of leases and other terms and conditions as negotiated. In calculating the term of our leases, we consider whether these options are reasonably certain to be exercised. Our determination involves a combination of contract-, asset-, entity-, and market-based factors and involves considerable judgment. We retain substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Currently, our tenants have no options to purchase at the end of the lease term, although in a small number of leases, a tenant, usually the anchor tenant, may have the right of first refusal to purchase one of our properties if we elect to sell the center.

Beginning January 1, 2019, we evaluate whether a lease is an operating, sales-type, or direct financing lease using the criteria established in ASC 842. Leases will be considered either sales-type or direct financing leases if any of the following criteria are met:


•	if the lease transfers ownership of the underlying asset to the lessee by the end of the term;


•	if the lease grants the lessee an option to purchase the underlying asset that is reasonably certain to be exercised;


•	if the lease term is for the major part of the remaining economic life of the underlying asset; or


•	if the present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset.

We utilize substantial judgment in determining the fair value of the leased asset, the economic life of the leased asset, and the relevant borrowing rate in performing our lease classification analysis. If none of the criteria listed above are met, the lease is classified as an operating lease. Currently all of our leases are classified as operating leases, and we expect that the majority, if not all, of our leases will continue to be classified as operating leases based upon our typical lease terms.

We commence revenue recognition on our leases based on a number of factors. In most cases, revenue recognition under a lease begins when the lessee takes possession of or controls the physical use of the leased asset. The determination of when revenue recognition under a lease begins, as well as the nature of the leased asset, is dependent upon our assessment of who is the owner, for accounting purposes, of any related tenant improvements. If we are the owner, for accounting purposes, of the tenant improvements, then the leased asset is the finished space, and revenue recognition begins when the lessee takes possession of the finished space, typically when the improvements are substantially complete.

If we conclude that we are not the owner, for accounting purposes, of the tenant improvements (i.e. the lessee is the owner), then the leased asset is the unimproved space and any tenant allowances funded under the lease are treated as lease incentives, which reduce revenue recognized over the term of the lease. In these circumstances, we begin revenue recognition when the lessee takes possession of the unimproved space to construct their own improvements. We consider a number of different factors in evaluating whether the lessee or we are the owner of the tenant improvements for accounting purposes. These factors include:


•	whether the lease stipulates how and on what a tenant improvement allowance may be spent;


•	whether the tenant or landlord retains legal title to the improvements;


•	the uniqueness of the improvements;


•	the expected economic life of the tenant improvements relative to the length of the lease; and


•	who constructs or directs the construction of the improvements.

The majority of our leases provide for fixed rental escalations, and we recognize rental income on a straight-line basis over the term of each lease in such instances. The difference between rental income earned on a straight-line basis and the cash rent due under the provisions of the lease agreements is recorded as deferred rent receivable and is included as a component of Other Assets, Net. Due to the impact of the straight-line adjustments, rental income generally will be greater than the cash collected in the early years and will be less than the cash collected in the later years of a lease.

Reimbursements from tenants for recoverable real estate taxes and operating expenses that are fixed per the terms of the applicable lease agreements are recorded on a straight-line basis, as described above. The majority of our lease agreements with tenants, however, provide for tenant reimbursements that are variable depending upon the applicable expenses incurred. These reimbursements are accrued as revenue in the period in which the applicable expenses are incurred. We make certain assumptions and judgments in estimating the reimbursements at the end of each reporting period. We do not expect the actual results to materially differ from the estimated reimbursements. Both fixed and variable tenant reimbursements are recorded as Rental Income in the consolidated statements of operations. In certain cases, the lease agreement may stipulate that a tenant make a direct payment for real estate taxes to the relevant taxing authorities. In these cases, beginning on January 1, 2019, we no longer record any revenue or expense related to these tenant expenditures. Although we expect such cases to be rare, in the event that a direct-paying tenant failed to make their required payment to the taxing authorities, we would potentially be liable for such amounts, although they are not recorded as a liability in our consolidated balance sheets per the requirements of ASC 842. We have made a policy election to exclude amounts collected from customers for all sales tax and other similar taxes from the transaction price in our recognition of lease revenue.

Additionally, we record an immaterial amount of variable revenue in the form of percentage rental income. Our policy for percentage rental income is to defer recognition of contingent rental income until the specified target (i.e. breakpoint) that triggers the contingent rental income is achieved.

In some instances, as part of our negotiations, we may offer lease incentives to our tenants. These incentives usually take the form of payments made to or on behalf of the tenant, and such incentives will be deducted from the lease payment and recorded on a straight-line basis over the term of the new lease.

We record lease termination income if there is a signed termination agreement, all of the conditions of the agreement have been met, collectability is reasonably assured and the tenant is no longer occupying the property. Upon early lease termination, we provide for losses related to unrecovered tenant-specific intangibles and other assets. We record lease termination income as rental income in the consolidated statements of operations.

Historically, we periodically reviewed the collectability of outstanding receivables. Following the adoption of ASC 842, as of January 1, 2019, lease receivables are reviewed continually to determine whether or not it is likely that we will realize all amounts receivable for each of our tenants (i.e. whether a tenant is deemed to be a credit risk). If we determine that the tenant is not a credit risk, no reserve or reduction of revenue is recorded, except in the case of disputed charges. If we determine that the tenant is a credit risk, revenue for that tenant is recorded on a cash basis, including any amounts relating to straight-line rent receivables and/or receivables for recoverable expenses. Under ASC 842, the aforementioned adjustments as well as any reserve for disputed charges are recorded as a reduction of Rental Income rather than in Property Operating, where our reserves were previously recorded, on the consolidated statements of operations.

Lessee—We enter into leases as a lessee as part of our real estate operations in the form of ground leases of land, and as part of our corporate operations in the form of office space and office equipment leases. Ground leases typically have initial terms of 15-40 years with one or more options to renew for additional terms of 3-5 years, and may include options that grant us as the lessee the right to terminate the lease, without penalty, in advance of the full lease term. Our office space leases generally have terms of less than ten years with no renewal options. Office equipment leases typically have terms ranging from 3-5 years with options to extend the term for a year or less, but contain minimal termination rights. In calculating the term of our leases, we consider whether we are reasonably certain to exercise renewal and/or termination options. Our determination involves a combination of contract-, asset-, entity-, and market-based factors and involves considerable judgment.

Currently, neither our operating leases nor our finance leases have residual value guarantees or other restrictions or covenants, but a small number may contain nonlease components which have been deemed not material. Beginning January 1, 2019, we evaluate whether a lease is a finance or operating lease using the criteria established in ASC 842. The criteria we use to determine whether a lease is a finance lease are the same as those we use to determine whether a lease is sales-type lease as a lessor. If none of the finance lease criteria is met, we classify the lease as an operating lease.

We record right-of-use (“ROU”) assets and liabilities in the consolidated balance sheets based upon the terms and conditions of the applicable lease agreement. We use discount rates to calculate the present value of lease payments when determining lease classification and measuring our lease liability. We use the rate implicit in the lease as our discount rate unless that rate cannot be readily determined, in which case we consider various factors to select an appropriate discount rate. This requires the application of judgment, and we consider the length of the lease as well as the length and securitization of our outstanding debt agreements in selecting an appropriate rate.

Revenue Recognition—In addition to our lease-related revenue, we also earn fee revenues by providing services to the Managed Funds. These fees are accounted for within the scope of ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), and are recorded as Fees and Management Income on the consolidated statements of operations. We provide services to the Managed Funds, all of which are considered related parties. These services primarily include asset acquisition and disposition services, asset management, operating and leasing of properties, construction management, and other general and administrative responsibilities. These services are currently provided under various combinations of advisory agreements, property management agreements, and other service agreements (the “Management Agreements”). The wide variety of duties within the Management Agreements makes determining the performance obligations within the contracts a matter of judgment. We have concluded that each of the separately disclosed fee types in the below table represents a separate performance obligation within the Management Agreements.

The table below shows the most significant of these fee types in the Management Agreements:



Fee	Performance Obligation Satisfied	Timing of Payment	Description
Asset Management	Over time	Monthly, in cash and/or ownership units	Because each increment of service is distinct, although substantially the same, revenue is recognized at the end of each reporting period based upon asset base and the applicable rate.
Property Management	Over time	In cash, monthly	Because each increment of service is distinct, although substantially the same, revenue is recognized at the end of each month based on a percentage of the properties’ cash receipts.
Leasing Commissions	Point in time (upon close of a transaction)	In cash, upon completion	Revenue is recognized in an amount equal to the fees charged by unaffiliated persons rendering comparable services in the same geographic location.
Construction Management	Point in time (upon close of a project)	In cash, upon completion	Revenue is recognized in an amount equal to the fees charged by unaffiliated persons rendering comparable services in the same geographic location.
Acquisition	Point in time (upon close of a transaction)	In cash, upon close of the transaction	Revenue is recognized based on a percentage of the purchase price of the property acquired.
Disposition	Point in time (upon close of a transaction)	In cash, upon close of the transaction	Revenue is recognized based on a percentage of the disposition price of the property sold.

Due to the nature of the services being provided under our Management Agreements, each performance obligation has a variable component. Therefore, when we determine the transaction price for the contracts, we are required to constrain our estimate to an amount that is not probable of significant revenue reversal. For most of these fee types, such as acquisition fees and leasing commissions, compensation only occurs if a transaction takes place and the amount of compensation is dependent upon the terms of the transaction. For our property and asset management fees, due to the large number and broad range of possible consideration amounts, we calculate the amount earned at the end of each month.

In addition to the fees listed above, certain of our Management Agreements include the potential for additional revenues if certain market conditions are in place or certain events take place. We have not recognized revenue related to these fees, nor will we until it is no longer highly probable that there would be a material reversal of revenue.

Additionally, effective January 1, 2018, sales or transfers to non-customers of non-financial assets or in substance non-financial assets that do not meet the definition of a business are accounted for within the scope of ASC Topic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (“ASC 610-20”). Generally, our sales of real estate would be considered a sale of a non-financial asset as defined by ASC 610-20. Under ASC 610-20, if we determine we do not have a controlling financial interest in the entity that holds the asset and the arrangement meets the criteria to be accounted for as a contract, we would de-recognize the asset and recognize a gain or loss on the sale of the real estate when control of the underlying asset transfers to the buyer. Further, we may defer a tax gain through an Internal Revenue Code (the “Code”) Section 1031 like-kind exchange by purchasing another property within a specified time period. For additional information regarding gain on sale of assets, refer to Note 5.

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, 2019 and 2018, no income tax expense or benefit was reported as we recorded a full valuation allowance for our net deferred tax asset.

Recently Issued and Newly Adopted Accounting Pronouncements—The following table provides a brief description of recent accounting pronouncements that could have a material 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	The amendments in this update replace 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 clarifies that receivables arising from operating leases are not within the scope of Topic 326. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842. This update is effective for public entities in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted after December 15, 2018.	January 1, 2020	We are currently evaluating the impact the adoption of this standard will have on our consolidated financial statements.
ASU 2018-13, Fair Value Measurement (Topic 820)	This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of the Financial Accounting Standards Board’s disclosure framework project. It is effective for annual and interim reporting beginning after December 15, 2019, but early adoption is accepted.	January 1, 2020	We are currently evaluating the impact the adoption of this standard will have on our consolidated financial statements.
ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities	This Update amends two aspects of the related-party guidance in ASC 810: (1) adds 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 should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. For entities other than private companies, the amendments in this update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. All entities are required to apply the amendments in this update retrospectively with a cumulative effect adjustment to retained earnings at the beginning of the earliest period presented. Early adoption is permitted.	January 1, 2020	We are currently evaluating the impact the adoption of this standard will have on our consolidated financial statements.

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
ASU 2016-02, Leases (Topic 842) ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842 ASU 2018-10, Codification Improvements to Topic 842, Leases ASU 2018-11, Leases (Topic 842): Targeted Improvements ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors ASU 2019-01, Lease (Topic 842): Codification Improvements	These updates amended existing guidance by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.	January 1, 2019	We adopted this standard on January 1, 2019 and a modified retrospective transition approach was required. We determined that the adoption had a material impact on our consolidated financial statements; please refer to Note 3 for additional details. We elected to utilize the following optional practical expedients upon adoption: - Package of practical expedients which permits us not to reassess our prior conclusions about lease identification, lease classification, and initial direct costs. - Practical expedient permitting us not to assess whether existing, expired, or current land easements either are or contain a lease. - Practical expedient which permits us as a lessor not to separate non-lease components, such as common area maintenance reimbursements, from the associated lease component, provided that the timing and pattern of transfer of the services are substantially the same. Because of our decision to elect this practical expedient, we will no longer present our Rental Income and Tenant Recovery Income amounts separately on our statements of income, and have reclassified Tenant Recovery Income amounts to Rental Income for all periods presented on the consolidated statements of operations and comprehensive income (loss). - Practical expedient which permits us not to record a right of use asset or lease liability related to leases of twelve months or fewer, but instead allows us to record expense related to any such leases as it is incurred.
ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting	The amendments in this update expanded the scope of Topic 718: Compensation - Stock Compensation to include share-base payment transactions for acquiring goods and services from non-employees, except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period).	January 1, 2019	The adoption of this standard did not have a material impact on our consolidated financial statements.
ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes	This update permitted use of the OIS rate based on the SOFR as a US benchmark interest rate for hedge accounting purposes under Topic 815. The purpose of this was to facilitate the LIBOR to SOFR transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk management and hedge accounting purposes.	January 1, 2019	The adoption of this standard did not have a material impact on our consolidated financial statements.

Reclassifications—The following line item on our consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2018, was reclassified to conform to current year presentation:


•	Tenant Recovery was combined with Rental Income.

The following line items on our consolidated statements of cash flows for the three months ended March 31, 2018, were reclassified to conform to current year presentation:


•	Accounts Receivable - Affiliates was combined with Other Assets;


•	Share-based Compensation Expense was reclassified from Other; and


•	Accounts Payable - Affiliates was combined with Accounts Payable and Other Liabilities.

3. LEASES

Standard Adoption—Effective January 1, 2019, we adopted ASU 2016-02, Leases. This standard was adopted in conjunction with the related updates, ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; ASU 2018-11, Leases (Topic 842): Targeted Improvements; and ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors, collectively “ASC 842,” using a modified-retrospective approach, as required. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.

The adoption of ASC 842 resulted in a $0.5 million adjustment to the current year’s opening balance in Accumulated Deficit on the consolidated balance sheets as a result of recognizing ROU assets and lease liabilities as well as adjustments to our collectability reserve. Beginning in January 1, 2019, due to the new standard’s narrowed definition of initial direct costs, we now expense as incurred significant lease origination costs which were previously capitalized as initial direct costs and amortized to expense over the lease term. We capitalized $6.2 million of internal costs for the year ended December 31, 2018, some of which we will continue to capitalize in accordance with the standard. During the three months ended March 31, 2019, the amounts capitalized were $0.7 million, compared to $1.1 million during the three months ended March 31, 2018. Amounts that were capitalized prior to the adoption of ASC 842 will continue to be amortized over their remaining lives.

Additionally, ASC 842 requires that lessors exclude from variable payments all costs paid by a lessee directly to a third party. For the year ended December 31, 2018, $8.0 million in real estate tax payments made by tenants directly to third parties was recorded by us as both Tenant Recovery Income and Real Estate Taxes. This amount was approximately $1.4 million for the three months ended March 31, 2018. Beginning January 1, 2019, such amounts are no longer recognized by us. As the recorded expense was completely offset by the related payments made directly by the tenants to the taxing authorities, this has no net impact to earnings.

Beginning January 1, 2019, operating lease receivables are accounted for under ASC 842, which requires us to recognize changes in the collectability assessment for an operating lease as an adjustment to lease income. For the year ended December 31, 2018, $2.9 million of expense was recorded as Property Operating on our consolidated statements of operations, which would have been recorded as a reduction to Rental Income under the new standard. For the three months ended March 31, 2019, the total amount recorded as a reduction to Rental Income as a result of collectability reserves was $0.5 million.

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.

Approximate future fixed contractual lease payments to be received under non-cancelable operating leases in effect as of March 31, 2019, assuming no new or renegotiated leases or option extensions on lease agreements, are as follows (in thousands):



Year	Operating
Remaining 2019	$	281,819
2020	349,800
2021	304,000
2022	259,800
2023	209,120
2024 and thereafter	591,618
Total	$	1,996,157

No single tenant comprised 10% or more of our aggregate annualized base rent (“ABR”) as of March 31, 2019. As of March 31, 2019, our real estate investments in Florida and California represented 12.2% and 10.2% of our ABR, respectively. As a result, the geographic concentration of our portfolio makes it particularly susceptible to adverse economic or weather developments in the Florida and California real estate markets.

Lessee—As a lessee, we recognized additional operating liabilities of $6.2 million with corresponding ROU assets of $6.0 million, and the difference between them was recorded as an adjustment to Accumulated Deficit on the consolidated balance sheets. These asset and liability amounts represent the present value of the remaining minimum rental payments under current leasing standards for existing leases, adjusted as appropriate for amounts written off in transition to the new guidance. The initial measurement of a ROU asset may differ from the initial measurement of the corresponding lease liability due to initial direct costs, prepaid lease payments, and lease incentives.

Below are the amounts recorded in our consolidated statements of operations and cash flows related to our ROU assets and lease liabilities by lease type (dollars in thousands):



	Three Months Ended
	March 31, 2019
Statements of operations information:
Finance lease cost:
Amortization of ROU assets	$	64
Interest on lease liabilities	5
Operating lease costs	348
Short term lease expense	391

Statements of cash flows information:
Operating cash flows used for operating leases	$	(362	)
Financing cash flows used for finance leases	(60		)
ROU assets obtained in exchange for new lease liabilities	36

Lease assets, grouped by balance sheet line where they are recorded, consisted of the following as of March 31, 2019 (in thousands):



	March 31, 2019
Assets
Investment in Real Estate:
ROU asset - operating leases	$	4,707
Less: accumulated amortization	(85		)
Total in Investment in Real Estate	4,622
Other Assets:
ROU asset - operating leases	1,340
ROU asset - finance leases	575
Less: accumulated amortization	(314		)
Total in Other Assets	1,601
Total ROU lease assets⁽¹⁾	$	6,223

Liabilities
Accounts Payable and Other Liabilities:
Operating lease liability	$	5,886
Debt Obligations, Net:
Finance lease liability	512
Total lease liabilities⁽¹⁾	$	6,398


⁽¹⁾	As of March 31, 2019, the weighted average remaining lease term was approximately 2.0 years for finance leases and 20.5 years for operating leases. The weighted average discount rate was 3.55% for finance leases and 4.16% for operating leases.

Future undiscounted payments for fixed lease charges by lease type as of March 31, 2019, are as follows (in thousands):



	Undiscounted
	Operating		Finance
Remaining 2019	$	1,026	$	198
2020	927		263
2021	446		66
2022	392		—
2023	238		—
Thereafter	6,248		—
Total undiscounted cash flows from leases	9,277		527
Total lease liabilities recorded at present value	5,886		512
Difference between undiscounted cash flows and present value of lease liabilities	$	3,391	$	15

4. MERGER WITH REIT II

During November 2018, we acquired 86 properties as part of the Merger with REIT II. Under the terms of the Merger, at the time of closing, the following consideration was given in exchange for REIT II common stock (in thousands):



	Amount
Fair value of PECO common stock issued⁽¹⁾	$	1,054,745
Fair value of REIT II debt:
Corporate debt	719,181
Mortgages and notes payable	102,727
Derecognition of REIT II management contracts, net⁽²⁾	30,428
Transaction costs	11,587
Total consideration and debt activity	1,918,668
Less: debt assumed	464,462
Total consideration	$	1,454,206


⁽¹⁾	The total number of shares of common stock issued was 95.5 million.


⁽²⁾	Previously a component of Other Assets, Net.

To complete the Merger, we issued 2.04 shares of our common stock in exchange for each issued and outstanding share of REIT II common stock, which was equivalent to $22.54 based on our most recent estimated value per share (“EVPS”), as of the date of the transaction, of $11.05. The exchange ratio was based on a thorough review of the relative valuation of each entity, including factoring in our investment management business as well as each company’s transaction costs.

Upon completion of the Merger, our continuing stockholders owned approximately 71% of the issued and outstanding shares of the Company on a fully diluted basis (determined as if each Operating Partnership unit (“OP unit”) were exchanged for one share of our common stock) and former REIT II stockholders owned approximately 29% of the issued and outstanding shares of the Company on a fully diluted basis (determined as if each OP unit were exchanged for one share of our common stock).

Assets Acquired and Liabilities Assumed—After consideration of all applicable factors pursuant to the business combination accounting rules under ASC 805, Business Combinations (“ASC 805”), including the application of a screen test to evaluate if substantially all the fair value of the acquired properties is concentrated in a single asset or group of similar assets, we concluded that the Merger qualified as an asset acquisition.

Additionally, prior to the close of the Merger, all of REIT II’s real properties were managed and leased by us, under the terms of various management agreements. As we had contractual relationships with REIT II, we considered the provisions of ASC 805 regarding the settlement of pre-existing relationships. This guidance provides that a transaction that in effect settles pre-existing relationships between the acquirer and acquiree should be evaluated under the guidance set forth in ASC 805 for possible gain/loss recognition.

In applying the relevant guidance to the settlement of our contractual relationships with REIT II, we noted that the provisions of the various agreements provided both parties to each of the agreements with substantial termination rights. The agreements permitted either party to terminate without cause or penalty upon prior written notice within a specified number of days’ notice. Therefore, we determined that the termination of the agreements did not result in a settlement gain or loss under the relevant guidance, and thus no gain or loss was recorded in the consolidated financial statements.

Prior to the consummation of the Merger, we did, however, have an existing intangible asset related to our acquisition of certain REIT II management contracts. Because this relationship was internalized as part of the Merger, we derecognized the carrying value of these intangible assets upon completion of the Merger and have included the derecognized contract value of $30.4 million in our calculation of total consideration in the table above.

As of December 31, 2018, we capitalized approximately $11.6 million in costs related to the Merger. The following table summarizes the final purchase price allocation based on a valuation report prepared by a third-party valuation specialist that was subject to management’s review and approval (in thousands):



	Amount
Assets:
Land and improvements	$	561,100
Building and improvements	1,198,884
Intangible lease assets	197,384
Fair value of unconsolidated joint venture	16,470
Cash and cash equivalents	354
Restricted cash	5,159
Accounts receivable and other assets	33,045
Total assets acquired	2,012,396
Liabilities:
Debt assumed	464,462
Intangible lease liabilities	60,421
Accounts payable and other liabilities	33,307
Total liabilities assumed	558,190
Net assets acquired	$	1,454,206

The allocation of the purchase price is based on management’s assessment, which requires a significant amount of judgment and represents management’s best estimate of the fair value as of the acquisition date.

5. REAL ESTATE ACTIVITY

Acquisitions—During the three months ended March 31, 2019, we did not acquire any properties.

During the three months ended March 31, 2018, we acquired one property for approximately $8.4 million which was classified as an asset acquisition. The fair value and weighted-average useful life at acquisition for lease intangibles acquired as part of this acquisition are as follows (dollars in thousands, weighted-average useful life in years):



	Three Months Ended
	March 31, 2018
	Fair Value			Weighted-Average Useful Life
In-place lease assets	$	946		6
Above-market lease assets	74			3
Below-market lease liabilities	(457		)	16

Property Sales—The following table summarizes our property sales activity. We had no property sales during the three months ended March 31, 2018 (dollars in thousands):



	Three Months Ended
	March 31, 2019
Number of properties sold	3
Proceeds from sale of real estate	$	35,755
Gain on sale of properties, net⁽¹⁾	7,399


⁽¹⁾	The gain on sale of properties, net does not include miscellaneous write-off activity, which is also recorded in Gain on Disposal of Property, Net on the consolidated statements of operations.

Property Held for Sale—As of March 31, 2019, one property was classified as held for sale. The property was sold subsequent to March 31, 2019. As of December 31, 2018, we had two properties that were classified as held for sale, and both were sold during the three months ended March 31, 2019. Properties classified as held for sale as of March 31, 2019 and December 31, 2018, were under contract to sell, with no substantive contingencies, and the prospective buyers had significant funds at risk as of the respective reporting date. A summary of assets and liabilities for the properties held for sale as of March 31, 2019 and December 31, 2018, is below (in thousands):



	March 31, 2019		December 31, 2018
ASSETS
Total investment in real estate assets, net	$	5,630	$	16,889
Other assets, net	134		475
Total assets	$	5,764	$	17,364
LIABILITIES
Below-market lease liabilities, net	$	223	$	208
Accounts payable and other liabilities	52		388
Total liabilities	$	275	$	596

Impairment of Real Estate Assets—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 costs to sell. We have applied reasonable estimates and judgments in determining the amount of impairment recognized. We did not recognize any impairment charges during the three months ended March 31, 2018.

6. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

We co-invest with third parties in joint ventures that own multiple properties. As a result of the Merger in November 2018, we acquired a 20% interest in the NRP joint venture. In November 2018, we also entered into an agreement (the “Joint Venture Agreement”) with Northwestern Mutual to create the GRP I joint venture. Under the terms of the Joint Venture Agreement, we contributed or sold all of our ownership interests in 17 grocery-anchored shopping centers to the GRP I joint venture.

The following table details our investment balances in these unconsolidated joint ventures, which are accounted for using the equity method of accounting and are considered to be related parties to us as of March 31, 2019 and December 31, 2018 (dollars in thousands):



	March 31, 2019						December 31, 2018
	NRP			GRP I			NRP			GRP I
Ownership percentage	20		%	15		%	20		%	15		%
Number of properties	13			17			13			17
Investment balance	$	15,473		$	28,525		$	16,198		$	29,453
Unamortized basis adjustments⁽¹⁾	5,671			—			6,026			—


⁽¹⁾	Our investment in NRP differs from our proportionate share of the entity’s underlying net assets due to basis differences initially recorded at $6.2 million arising from the Merger and recording the investment at fair value.

The following table summarizes the operating information of the unconsolidated joint ventures and their impact on our consolidated statements of operations and consolidated statements of equity. We did not have any investments in unconsolidated joint ventures during the three months ended March 31, 2018 (dollars in thousands):



	Three Months Ended
	March 31, 2019
	NRP		GRP I
Loss from unconsolidated joint ventures, net	$	88	$	13
Amortization of basis adjustments⁽¹⁾	355		—
Distributions after formation or assumption	282		915


⁽¹⁾	These amounts are amortized starting at the date of the Merger and recorded as an offset to earnings from the NRP joint venture in Other Income (Expense), Net on our consolidated statements of operations.

7. OTHER ASSETS, NET

The following is a summary of Other Assets, Net as of March 31, 2019 and December 31, 2018, excluding amounts related to assets classified as held for sale (in thousands):



	March 31, 2019			December 31, 2018
Other assets, net:
Deferred leasing commissions and costs	$	33,981		$	32,957
Deferred financing expenses	13,971			13,971
Office equipment, ROU assets, and other	16,177			14,315
Total depreciable and amortizable assets	64,129			61,243
Accumulated depreciation and amortization	(26,583		)	(24,382		)
Net depreciable and amortizable assets	37,546			36,861
Accounts receivable, net	43,903			56,104
Deferred rent receivable, net	22,912			21,261
Derivative asset	16,154			29,708
Investment in affiliates	700			700
Prepaids and other	15,465			8,442
Total other assets, net	$	136,680		$	153,076

8. DEBT OBLIGATIONS

The following is a summary of the outstanding principal balances and interest rates, which include the effect of derivative financial instruments, on our debt obligations as of March 31, 2019 and December 31, 2018 (dollars in thousands):



	Interest Rate⁽¹⁾	March 31, 2019			December 31, 2018
Revolving credit facility⁽²⁾	LIBOR + 1.40%	$	51,359		$	73,359
Term loans	2.06%-4.59%	1,858,410			1,858,410
Secured portfolio loan facility	3.52%	195,000			195,000
Mortgages	3.45%-7.91%	331,749			334,117
Finance lease liability		512			552
Assumed market debt adjustments, net		(4,209		)	(4,571		)
Deferred financing expenses, net		(17,059		)	(18,041		)
Total		$	2,415,762		$	2,438,826


⁽¹⁾	Interest rates are as of March 31, 2019.


⁽²⁾	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. The gross borrowings and payments under our revolving credit facility were $55.0 million and $91.0 million, respectively, during the three months ended March 31, 2018.

As of March 31, 2019 and December 31, 2018, the weighted-average interest rate, including the effect of derivative financial instruments, for all of our debt obligations was 3.5%.

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, 2019 and December 31, 2018, is summarized below (in thousands):



	March 31, 2019		December 31, 2018
As to interest rate:⁽¹⁾
Fixed-rate debt	$	2,114,261	$	2,216,669
Variable-rate debt	322,769		244,769
Total	$	2,437,030	$	2,461,438
As to collateralization:
Unsecured debt	$	1,909,769	$	1,931,769
Secured debt	527,261		529,669
Total	$	2,437,030	$	2,461,438


⁽¹⁾	Includes the effects of derivative financial instruments (see Notes 9 and 15).

9. 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, 2019 and 2018, 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 $3.7 million will be reclassified from AOCI as a decrease 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, 2019 and December 31, 2018 (notional amounts in thousands):



	March 31, 2019		December 31, 2018
Count	11		12
Notional amount	$	1,587,000	$	1,687,000
Fixed LIBOR	0.7% - 2.9%		0.7% - 2.9%
Maturity date	2019 - 2025		2019 - 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 and comprehensive income (in thousands):



	Three Months Ended
	March 31,
	2019			2018
Amount of (loss) gain recognized in other comprehensive income on derivatives⁽¹⁾	$	(12,857	)	$	13,440
Amount of (gain) loss reclassified from AOCI into interest expense⁽¹⁾	(1,504		)	48


⁽¹⁾	Changes in value are solely driven from changes in LIBOR futures as a result of various economic factors.

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, 2019, 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 $6.3 million. As of March 31, 2019, 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 $6.3 million.

10. 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.

11. 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 8, 2019, our Board increased the EVPS of our common stock to $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. We engaged a third-party valuation firm to provide a calculation of the range in EVPS of our common stock as of March 31, 2019, which reflected certain balance sheet assets and liabilities as of that date. Previously, on May 9, 2018, our Board increased the EVPS of our common stock to $11.05 from $11.00 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, 2018.

Shares of our common stock are issued under the DRIP and redeemed under the Share Repurchase Program (“SRP”), as discussed below, at the same price as the EVPS in effect at the time of issuance or redemption.

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 estimated value per share.

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.

Share Repurchase Program—Our SRP provides an opportunity for stockholders to have shares of common stock repurchased, subject to certain restrictions and limitations, at a price equal to our most recent EVPS. The Board reserves the right, in its sole discretion, at any time and from time to time, to reject any request for repurchase. Further, the cash available for repurchases on any particular date, of which we may use all or any portion, will generally be limited to the proceeds from the DRIP during the preceding four fiscal quarters, less amounts already used for repurchases since the beginning of that period.

During the three months ended March 31, 2019, repurchase requests surpassed the funding limits under the SRP. Approximately 0.6 million shares of our common stock were repurchased under the SRP during the three months ended March 31, 2019. Repurchase requests in connection with a stockholder’s death, “qualifying disability,” or “determination of incompetence” were completed in full. We will continue to fulfill repurchases sought upon a stockholder's death, “qualifying disability,” or “determination of incompetence” in accordance with the terms of the SRP.

Convertible Noncontrolling Interests—Under the terms of the Partnership Agreement, 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. As the form of redemption for OP units is within our control, the OP units outstanding as of March 31, 2019 and December 31, 2018, are classified as Noncontrolling Interests within permanent equity on our consolidated balance sheets. The cumulative 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, 2019, 0.7 million OP units were converted into shares of our common stock at a 1:1 ratio. There were approximately 43.9 million and 44.5 million OP units outstanding as of March 31, 2019 and December 31, 2018, respectively.

Nonconvertible Noncontrolling Interests—In addition to partnership units of the Operating Partnership, Noncontrolling Interests also includes a 25% ownership share of one of our subsidiaries who provides advisory services, which was not significant to our results.

12. COMPENSATION

Awards to employees under our Amended and Restated 2010 Long-Term Incentive Plan are typically granted and vest during the first quarter of each year. We also grant restricted stock to our independent directors under our Amended and Restated 2010 Independent Director Stock Plan, which vest based upon the completion of a service period. Certain of our executives have made the election to receive OP units in lieu of shares of common stock upon vesting of their award grants. All share-based compensation awards, regardless of the form of payout upon vesting, are presented in the following table, which summarizes our stock-based award activity (number of units in thousands):



	Three Months Ended
	March 31, 2019
	Restricted Stock Awards		Performance Stock Awards⁽¹⁾	Phantom Stock Units		Weighted-Average Grant-Date Fair Value⁽²⁾
Nonvested at December 31, 2018	808		199	998		$	10.60
Granted	464		1,275	—		11.05
Vested	(172	)	—	—		11.00
Forfeited	(1	)	—	(1	)	10.58
Nonvested at March 31, 2019	1,099		1,474	997		$	10.80

⁽¹⁾

Certain performance-based awards granted during the period contain terms which dictate that the number of award units to be issued will vary based upon actual performance compared to target performance. The number of shares deemed to be issued per this table reflect our probability-weighted estimate of the number of shares that will vest based upon current and expected company performance. The maximum number of award units to be issued under all outstanding grants, excluding phantom stock units as they are settled in cash, was 4.0 million and 1.2 million as of March 31, 2019 and December 31, 2018, respectively.


⁽²⁾	On an annual basis, we engage an independent third-party valuation advisory consulting firm to estimate the EVPS of our common stock.

On March 12, 2019, the Compensation Committee of the Company’s Board of Directors (the “Committee”) approved a new form of award agreement under the Company’s Amended and Restated 2010 Long-Term Incentive Plan for performance-based long term incentive units (“Performance LTIP Units”) and made one-time grants of Performance LTIP Units to certain of our executives. Any amounts earned under the Performance LTIP Unit award agreements will be issued in the form of LTIP Units, which represent OP units that are structured as a profits interest in the Operating Partnership. Dividends will accrue on the Performance LTIP Units until the measurement date, subject to a quarterly distribution of 10% of the regular quarterly distributions.

The expense for all stock-based awards, including phantom stock units, during the three months ended March 31, 2019 and 2018 was $2.0 million and $1.6 million, respectively. We had $26.3 million of unrecognized compensation costs related to these awards that we expect to recognize over a weighted average period of approximately 4.3 years. The fair value at the vesting date for stock-based awards that vested during the period ended March 31, 2019 was $1.9 million.

13. 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 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 Fourth Amended and Restated Agreement of Limited Partnership of the Operating Partnership. Phantom stock units are not considered to be participating securities, as they are not convertible into common stock.

The impact of 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, 2019 and 2018.

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,
	2019			2018
Numerator:
Net loss attributable to stockholders - basic	$	(5,195	)	$	(1,600	)
Net income (loss) attributable to convertible OP units⁽¹⁾	(783		)	(334		)
Net loss - diluted	$	(5,978	)	$	(1,934	)
Denominator:
Weighted-average shares - basic	281,263			185,899
OP units⁽¹⁾	43,996			44,453
Adjusted weighted-average shares - diluted	325,259			230,352
Earnings per common share:
Basic and diluted	$	(0.02	)	$	(0.01	)

⁽¹⁾ OP units include units that are convertible into common stock or cash, at the Operating Partnership’s option. The Operating Partnership income (loss) attributable to these OP units, which is included as a component of Net 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.

As of March 31, 2019 and 2018, approximately 2.6 million and 1.0 million, respectively, unvested restricted stock awards were outstanding. These securities were anti-dilutive, and, as a result, their impact was excluded from the weighted-average common shares used to calculate diluted EPS.

14. REVENUE RECOGNITION AND RELATED PARTY TRANSACTIONS

Revenue—Summarized below are amounts included in Fee 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 606 but are included in this table for the purpose of disclosing all related party revenues (in thousands):



	Three Months Ended
	March 31, 2019
	PECO III		Joint Ventures		Other Parties⁽¹⁾		Total
Recurring fees⁽²⁾	$	194	$	1,329	$	59	$	1,582
Transactional revenue and reimbursements⁽³⁾	812		405		5		1,222
Insurance premiums	3		—		454		457
Total fees and management income	$	1,009	$	1,734	$	518	$	3,261


⁽¹⁾	Insurance premium income from other parties includes amounts from third parties not affiliated with us in the amount of $0.5 million for the three months ended March 31, 2019.


⁽²⁾	Recurring fees include asset management fees and property management fees.


⁽³⁾	Transaction revenue includes items such as leasing commissions, construction management fees, and acquisition fees.



	Three Months Ended
	March 31, 2018
	REIT II⁽¹⁾		PECO III		Joint Ventures		Other Parties⁽²⁾		Total
Recurring fees	$	5,144	$	181	$	376	$	76	$	5,777
Transactional revenue and reimbursements	1,711		322		320		58		2,411
Other revenue	80		—		—		444		524
Total fees and management income	$	6,935	$	503	$	696	$	578	$	8,712


⁽¹⁾	All amounts earned from REIT II were earned prior to the close of the Merger in November 2018, and ceased upon its acquisition by us.


⁽²⁾	Recurring fees and other revenue from other parties includes amounts from third parties not affiliated with us in the amount of $0.4 million for the three months ended March 31, 2018.

Organization and Offering Costs—Under the terms of one of our Management Agreements, we have incurred organization and offering costs related to PECO III since 2017. As of March 31, 2019, we have incurred organization and offering costs related to PECO III’s private placement and public offering, which were approximately $2.3 million and $2.4 million, respectively, and were recorded in Accounts Receivable - Affiliates on the consolidated balance sheets. The amounts recognized in Accounts Receivable-Affiliates were $4.7 million and $4.5 million as of March 31, 2019 and December 31, 2018, respectively.

During the public offering period for PECO III, we will receive a contingent advisor payment of 2.15% of the contract purchase price of each property or other real estate investment it acquires. This reimbursement is intended to allow us to recoup a portion of the dealer manager fees and organization and offering costs advanced by PECO III’s advisor, in which we have a 75% interest. Therefore, this reimbursement shall not exceed the amount of organization and offering costs and dealer manager fees outstanding at the time of closing for the acquired property.

The initial $4.5 million we may incur to fund organization and offering costs related to the PECO III public offering shall be retained by PECO III until the termination of its public offering, at which time such amount shall be paid.

In addition to organization and offering costs, we have receivables related to Management Agreements from related parties of $1.3 million and $0.6 million as of March 31, 2019 and December 31, 2018, respectively. This amount was recorded in Accounts Receivable - Affiliates on the consolidated balance sheets.

Other Related Party Matters—A portion of organization and offering costs was incurred by Griffin Capital Company, LLC (“Griffin sponsor”), a co-sponsor of PECO III. The Griffin sponsor owns a 25% interest, and we own a 75% interest, in the PECO III advisor. As such, of the receivable we have from PECO III, $1.3 million and $1.2 million were reimbursable to the Griffin sponsor as of March 31, 2019 and December 31, 2018, respectively, and is recorded in Accounts Payable and Other Liabilities on the consolidated balance sheets.

PECO Air L.L.C. (“PECO Air”), an entity in which Mr. Edison, our Chairman, Chief Executive Officer, and President, owns a 50% interest, owns an airplane that we use for business purposes in the course of our operations. We paid approximately $0.3 million and $0.2 million to PECO Air for use of its airplane for the three months ended March 31, 2019 and 2018, respectively.

We are the limited guarantor for up to $200 million, capped at $50 million in most instances, of debt for our NRP joint venture. Our guarantee is limited to being the non-recourse carveout guarantor and the environmental indemnitor. Additionally, as a part of the GRP I joint venture, GRP I assumed from us a $175 million mortgage loan for which we assumed the obligation of limited guarantor. Our guarantee is limited to being the non-recourse carveout guarantor and the environmental indemnitor. We entered into a separate agreement with Northwestern Mutual in which we agree to apportion any potential liability under this guaranty between us and them based on our respective ownership percentages.

15. 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, 2019 and December 31, 2018 (in thousands):



	March 31, 2019		December 31, 2018
Fair value	$	2,434,064	$	2,467,317
Recorded value⁽¹⁾	2,432,821		2,456,867


⁽¹⁾	Recorded value does not include net deferred financing expenses of $17.1 million and $18.0 million as of March 31, 2019 and December 31, 2018, respectively.

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. The fair value measurements that occurred as of March 31, 2019 and December 31, 2018, were as follows (in thousands):



	March 31, 2019								December 31, 2018
	Level 1		Level 2			Level 3			Level 1		Level 2			Level 3
Recurring
Derivative assets⁽¹⁾	$	—	$	16,154		$	—		$	—	$	29,708		$	—
Derivative liability⁽¹⁾	—		(6,305		)	—			—		(3,633		)	—
Earn-out liability	—		—			(32,000		)	—		—			(39,500		)
Nonrecurring
Impaired real estate assets	—		27,473			—			—		71,991			—


⁽¹⁾	We record derivative assets in Other Assets, Net and derivative liabilities in Accounts Payable and Other Liabilities on our consolidated balance sheets.

Derivative Instruments—As of March 31, 2019 and December 31, 2018, 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, 2019 and December 31, 2018, 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—In connection with the PELP transaction, the Company entered into a contribution agreement (the “Contribution Agreement”), dated as of May 18, 2017, with the Operating Partnership and the contributors listed therein. The Contribution Agreement established an earn-out structure by which PELP was given the opportunity to earn a maximum of 12.5 million additional OP units if certain milestones related to (i) fundraising in the investment management business, and (ii) the timing and valuation related to a liquidity event for PECO, were achieved by certain dates. The liquidity event earn-out provisions provided, in relevant part, that the contributors would have the right to receive a minimum of 3 million and a maximum of 5 million OP units as contingent consideration if a “liquidity event” (as defined in the Contribution Agreement) was successfully achieved by the Company by December 31, 2019. On March 12, 2019, the Company entered into an amendment to the Contribution Agreement (“Amendment”). Pursuant to the terms of the Amendment, the initial liquidity earn-out term has been extended by two years through December 31, 2021 and the threshold for the maximum payout of 5 million OP units has been raised to $11.20 per share from $10.20 per share.

We estimate the fair value of this liability using weighted-average probabilities of likely outcomes. These estimates require us to make various assumptions about future share prices, timing of liquidity events, equity raise projections, and other items that are unobservable and are considered Level 3 inputs in the fair value hierarchy. 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 5.0 million out of the maximum 12.5 million units being issued.

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 (in thousands):



	Earn-Out Liability
Balance at December 31, 2018	$	39,500
Change in fair value recognized in Other Income (Expense), Net	(7,500		)
Balance at March 31, 2019	$	32,000

Real Estate Asset Impairment—Our real estate assets are measured and recognized at fair value on a nonrecurring basis dependent upon when we determine an impairment has occurred. During the three months ended March 31, 2019, we impaired four assets that were under contract or actively marketed for sale at a disposition price that was less than carrying value, or 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. We determined that valuation to fall under Level 2 of the fair value hierarchy.

We recorded the following expense as a result of the impaired real estate assets (in thousands):



	Three Months Ended
	March 31,
	2019		2018
Impairment of real estate assets	$	13,717	$	—

16. SUBSEQUENT EVENTS

Distributions—Distributions paid to stockholders and OP unit holders of record subsequent to March 31, 2019, were as follows (in thousands, except distribution rate):



Month	Date of Record	Distribution Rate	Date Distribution Paid	Gross Amount of Distribution Paid		Distribution Reinvested through the DRIP		Net Cash Distribution
March	3/15/2019	$0.05583344	4/1/2019	$	18,036	$	5,816	$	12,220
April	4/15/2019	$0.05583344	5/1/2019	18,054		5,747		12,307

In May 2019 our Board authorized distributions for June, July, and August 2019 to the stockholders of record at the close of business on June 17, 2019, July 15, 2019, and August 15, 2019, respectively, equal to a monthly amount of $0.05583344 per share of common stock. The distributions for May 2019 were previously authorized by our Board and are expected to be paid on June 3, 2019. OP unit holders will receive distributions at the same rate as common stockholders. We pay distributions to stockholders and OP unit holders based on monthly record dates. We expect to pay these distributions on the first business day after the end of each month.

Acquisitions—Subsequent to March 31, 2019, we acquired the following property (dollars in thousands):

Property Name

Location

Anchor Tenant

Square Footage

Purchase Date

Contractual Purchase Price

Naperville Crossings

Naperville, IL

ALDI

146,591

4/26/2019

49,850

Property Sales—Subsequent to March 31, 2019, we sold the following real estate property, which was classified as held for

sale as of March 31, 2019 (dollars in thousands):

Property Name

Location

Anchor Tenant

Square Footage

Disposition Date

Sale Price

White Oaks Plaza

Spindale, NC

Save-A-Lot

183,040

4/10/2019

5,760

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 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”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 can generally be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” “seek,” “objective,” “goal,” “strategy,” “plan,” “should,” “could,” 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, in particular, statements about our plans, strategies, and prospects, and are subject to certain risks and uncertainties, including known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. These risks include, 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; and (ix) any of the other risks included in this Quarterly Report on Form 10-Q. Therefore, such statements are not intended to be a guarantee of our performance in future periods.

See Part I, Item 1A. Risk Factors of our 2018 Annual Report on Form 10-K, filed with the SEC on March 13, 2019, for a discussion of some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause actual results to differ materially from those presented in our forward-looking statements. Except as required by law, we do not undertake any obligation to update or revise any forward-looking statements contained in this Form 10-Q.

Overview

We are an internally-managed real estate investment trust (“REIT”) and one of the nation’s largest owners and operators of grocery-anchored shopping centers. The majority of our revenues are lease revenues derived from our real estate investments. Additionally, we operate an investment management business providing property management and advisory services to approximately $743 million of third-party assets. This business provides comprehensive real estate and asset management services to (i) Phillips Edison Grocery Center REIT III, Inc. (“PECO III”), a non-traded publicly registered REIT currently raising up to $1.5 billion in equity; (ii) three institutional joint ventures; and (iii) one private fund (collectively, the “Managed Funds”).

In November 2018, through our direct or indirect subsidiaries, we entered into a joint venture with Northwestern Mutual, and contributed or sold 17 grocery-anchored shopping centers with a fair value of approximately $359 million at formation to the new joint venture, GRP I, in exchange for a 15% ownership interest in GRP I. For a more detailed discussion, see Note 6.

In November 2018, we completed the Merger with REIT II, a public non-traded REIT that was advised and managed by us, in a 100% stock-for-stock transaction valued at approximately $1.9 billion. As a result of the Merger, we acquired 86 properties and a 20% equity interest in NRP, a joint venture that owned 13 properties. For a more detailed discussion, see Note 4.

Portfolio and Leasing Statistics—Below are statistical highlights of our portfolio:



	Total Portfolio as of March 31, 2019
Number of properties	300
Number of states	32
Total square feet (in thousands)	34,121
Leased % of rentable square feet	93.0	%
Average remaining lease term (in years)⁽¹⁾	4.9


⁽¹⁾	The average remaining lease term in years excludes future options to extend the term of the lease.

The following table summarizes the portfolio information of the joint ventures and our ownership percentage as of March 31, 2019 (dollars and square feet in thousands):



	March 31, 2019
Joint Venture	Ownership Percentage	Number of Properties	ABR⁽¹⁾		GLA⁽²⁾
Necessity Retail Partners	20%	13	$	18,213	1,391
Grocery Retail Partners I	15%	17	24,373		1,908


⁽¹⁾	We calculate annualized base rent (“ABR”) as monthly contractual rent as of March 31, 2019, 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.

Lease Expirations—The following chart shows, on an aggregate basis, all of the scheduled lease expirations after March 31, 2019, for each of the next ten years and thereafter for our 300 properties and the prorated portion of those owned through our joint ventures. The chart shows the leased square feet and ABR represented by the applicable lease expiration year:

Additionally, subsequent to March 31, 2019, we renewed approximately 0.1 million total square feet and $2.2 million of total ABR of the expiring leases, inclusive of our pro rata share related to our joint ventures.

Based on current market base rental rates, we continue to believe we will achieve an overall positive increase in our average ABR for expiring leases. However, changes in base rental income associated with individual signed leases on comparable spaces may be positive or negative, and we can provide no assurance that the base rents on new leases will continue to increase from current levels.

See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations -

Leasing Activity, for further discussion of leasing activity.

Portfolio Tenancy—Prior to the acquisition of a property, we assess the suitability of the grocery-anchor tenant and other tenants in light of our investment objectives, namely, preserving capital and providing stable cash flows for distributions. Generally, we assess the strength of the tenant by consideration of company factors, such as its financial strength and market share in the geographic area of the property, as well as location-specific factors, such as the store’s sales, local competition, and demographics. When assessing the tenancy of the non-anchor space at the property, we consider the tenant mix at each property in light of our portfolio, the proportion of national and national-franchise tenants, the creditworthiness of specific tenants, and the timing of lease expirations. When evaluating non-national tenancy, we attempt to obtain credit enhancements to leases, which typically come in the form of deposits and/or guarantees from one or more individuals.

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. 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, 2019:

The following charts present the composition of our portfolio by tenant industry as of March 31, 2019:

The following table presents our top twenty tenants, including our wholly-owned properties and the prorated portion of those owned through our joint ventures, grouped according to parent company, by ABR, as of March 31, 2019 (dollars and square feet in thousands):



	March 31, 2019
Tenant	ABR		% of ABR		Leased Square Feet	% of Leased Square Feet		Number of Locations⁽¹⁾
Kroger	$	27,221	6.9	%	3,549	11.0	%	69
Publix	21,979		5.6	%	2,231	6.9	%	58
Albertsons-Safeway	16,948		4.3	%	1,680	5.2	%	32
Ahold Delhaize	16,733		4.3	%	1,262	3.9	%	25
Walmart	10,451		2.7	%	1,956	6.1	%	16
Giant Eagle	9,121		2.3	%	900	2.8	%	13
Sprouts Farmers Market	4,311		1.1	%	304	0.9	%	10
Dollar Tree	4,280		1.1	%	480	1.5	%	48
Raley's	3,788		1.0	%	253	0.8	%	4
SUPERVALU	3,610		0.9	%	428	1.3	%	10
Subway	3,120		0.8	%	132	0.4	%	98
Schnuck's	2,953		0.8	%	328	1.0	%	5
Save Mart	2,868		0.7	%	359	1.1	%	7
Southeastern Grocers	2,799		0.7	%	331	1.0	%	8
Anytime Fitness	2,584		0.7	%	177	0.5	%	38
Lowe's	2,407		0.6	%	371	1.1	%	4
Kohl's	2,215		0.6	%	365	1.1	%	4
Food 4 Less (PAQ)	2,124		0.5	%	118	0.4	%	2
Petco	2,085		0.5	%	127	0.4	%	11
H&R Block	2,079		0.5	%	116	0.4	%	65
	$

10-Q	2019-03-31	Quarter: 2019-03-31
10-K	2018-12-31	Annual: 2018-12-31
10-Q	2018-09-30	Quarter: 2018-09-30
10-Q	2018-06-30	Quarter: 2018-06-30
10-Q	2018-03-31	Quarter: 2018-03-31
10-K	2017-12-31	Annual: 2017-12-31
10-Q	2017-09-30	Quarter: 2017-09-30
10-Q	2017-06-30	Quarter: 2017-06-30
10-Q	2017-03-31	Quarter: 2017-03-31
10-K	2016-12-31	Annual: 2016-12-31
10-Q	2016-09-30	Quarter: 2016-09-30
10-Q	2016-06-30	Quarter: 2016-06-30
10-Q	2016-03-31	Quarter: 2016-03-31
10-K	2015-12-31	Annual: 2015-12-31
10-Q	2015-09-30	Quarter: 2015-09-30
10-Q	2015-06-30	Quarter: 2015-06-30
10-Q	2015-03-31	Quarter: 2015-03-31
10-K	2014-12-31	Annual: 2014-12-31
10-Q	2014-09-30	Quarter: 2014-09-30
10-Q	2014-06-30	Quarter: 2014-06-30
10-Q	2014-03-31	Quarter: 2014-03-31
10-K	2013-12-31	Annual: 2013-12-31

8-K	2019-05-09	Earnings, Regulation FD, Exhibits
8-K	2019-03-12	Earnings, Regulation FD, Exhibits
8-K	2018-11-16	M&A, Off-BS Arrangement, Sale of Shares, Officers, Amend Bylaw, Shareholder Vote, Regulation FD, Other Events, Exhibits
8-K	2018-11-05	Earnings, Regulation FD, Exhibits
8-K	2018-08-08	Earnings, Regulation FD, Exhibits
8-K	2018-08-06	Enter Agreement, Other Events, Exhibits
8-K	2018-07-19	Other Events, Exhibits
8-K	2018-07-17	Enter Agreement, Amend Bylaw, Other Events, Exhibits
8-K	2018-03-14	Earnings, Regulation FD, Exhibits

BHC	Bausch	9,120
GNRC	Generac Holdings	3,620
ARA	American Renal Associates Holdings	232
MBOT	Microbot Medical	33
ISNS	Image Sensing Systems	28
BMRA	Biomerica	22
RAND	Rand Capital	19
HIT	Hospitality Investors Trust	0
RIT	Rodin Income Trust	0
PWON	Powin Energy	0

EX-4.1	peco_20190331-ex41.htm
EX-31.1	peco_20190331-ex311.htm
EX-31.2	peco_20190331-ex312.htm
EX-32.1	peco_20190331-ex321.htm
EX-32.2	peco_20190331-ex322.htm
EX-99.1	peco_20190331-ex991.htm