Phillips Edison & Company, Inc. (PECO) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to Citi's 2025 Global Property CEO Conference. I'm Craig Mailman with Citi Research, and we're pleased to have with us Phillips Edison and CEO, Jeff Edison. [Operator Instructions]. Jeff, we'll turn it over to you to introduce your company and team provide any opening remarks. Tell the audience the top reasons that investors should buy your stock today and then we can get into Q&A.

Great. Well, thank you, Craig, and thanks, everybody, for -- I think this is the last one of the day. So we'll try and keep you awake and keep -- keep it on course. So the reason we think you should invest in PECO is pretty simple. We think we deliver more alpha with less beta. If you look at what being in the necessity-based retail business is with the #1 or #2 grocer in the market, that's what we do, and we've done it for 30 years. And it's a slice of the market where you're protected because of the necessity-based nature of it and the fact that 31% of our income comes from the grocer. And we -- in times that are challenging like they are right now, I always ask the question like at what point -- how bad do things have to get where you stop eating. And it's -- that's a pretty tough bar. So what we do is we have the ability to drive traffic through the grocer, which is -- on average is 1.6x a week the customer comes to our center. And in doing that, that creates the traffic flow that allow our small stores to do well. And we are very targeted in terms of what we're looking for, which is the #1 or #2 grocer, and then we look for the right size. We -- our focus is 115,000 square feet, for the total center, about 50,000 of that is the grocer. What that does, we think, that -- is a big advantage is that we have very little exposure to big box retail. What we're focused on is delivering necessity goods close to your home. So that when you wake up on Saturday and you have to get your hair done, you got to get -- you want to get a workout in, you want to get your groceries, we're where you think about. And that's what we've built over this 30-year period of time. Today, we have 300 centers. And we've been the biggest buyer of grocery-anchored centers probably for the last 20 years, and we have very strong connections in that business, which allow us to continue to have very strong external growth, which is the alpha part of our story. Both in our ability to grow the existing base income but also to have a strong acquisition process. We've targeted $400 million at the midpoint of our guidance for this year. We bought close to $300 million years ago, $300 million last year, we're targeting $400 million for this year. So this is a -- this is the external part of our business that allows outsized alpha on the stock. So that's our -- the driver behind our business. And with me is Bob Myers, our President; Kimberly Green, who runs our Investor Relations; and John Caulfield, who is our CFO. So with that, we'll open it for questions.

Perfect, thanks Jeff. Maybe just to kick it off here. You've outlined kind of long-term same-store [indiscernible] growth of 3% to 4%. Can you walk us through the math and the puts and takes that kind of gets you at the low end or the high end?

Yes. The 3% to 4% is same center growth.

Same store?

What we are targeting -- what we've laid out our guidance is 5.2% for this year. We -- our long-term target is to be in the mid- to high single-digit FFO per share growth a year with a 3% to 4% dividend, allowing us to get our investors a 10% return with one of the best balance sheets. So in a relatively low leverage environment, which we think gives us a solid return.

Sure. So I'll take the question. So our guidance is 3% to 3.5%. And as we look at it -- Jeff highlighted the diversification we have in our portfolio, really the minimal exposure to some of these bankruptcies we're seeing in the headlines. And so when we think about that range, the long-term range is 3% to 4%, this year at 3% to 3.5%. Last year, we begin this opportunity to remerchandise some of our centers because the anchor activity outside the grocery was incredibly strong. And so we had multiple boxes that we were able to take back and re-lease at very high spreads. The third quarter, we had 8 of them, and we released them at over 100% leasing spreads. So ultimately, it's the best thing for the center, but that is outside of what we normally do, there's a little bit more downtime. And that's -- so occupancy in our 3% to 3.5% is actually a little bit of a headwind. What you're seeing is that in the base of our same-store growth, we have 110 to 120 basis points of embedded rent bumps like organic. We continue to move that each year as we renew leases and sign new ones. So we think over the long term, that 110 -120 could be 130 to 150. Our leasing spreads have been outstanding in 2024 in this environment and continue in '25, we are renewing leases at 20%, cash-on-cash leases and putting in embedded rent bumps. And so that's also going to contribute, let's say, 150 -- or excuse me, 125 to 150 basis points. So when you look at -- sorry. The last piece that will go in there is we do have $40 million to $50 million of development opportunities in redevelopment. It's primarily outparcels that we build, but we get very attractive returns on that. And that's going to give us another 100 to 125 basis points. So as we look at the low end, you would say that perhaps there's a little bit more churn of our neighbors as we're looking to recapture and push leasing spreads that will benefit us in the future. If we look to the high end of our same-store, it would be accelerating some of those openings that we've got, as well as further pushing rent spreads even higher than we have today.

And I know this year, we've had an uptick in bankruptcies. You guys are less focused on some of those acres. But in a typical year, what were you dialing for bad debt?

So last year, our bad debt was 75 basis points. This year, we expanded the range just to give us some flexibility. So it's 60 to 120 basis points in our guidance. But I would expect it to be in line with basically last year around, let's call it, 75 to 80 basis points. The bankruptcies that have been in the headlines around Party City, Big Lots, JoAnne Fabrics. In aggregate, all of them combined up to 60 basis points worth of rent. And so we just have -- our concentration is with our grocers. We're Kroger's biggest landlord, we're Publix's second largest landlord. That is our focus and concentration. Outside of the grocer, our largest individual concentration is -- are the T.J.Maxx brands at 1.4% of rent. Everything else is less than 1% that is not a grocer. So that diversification really does contribute to the less beta that Jeff referenced.

Perfect. If anyone in the room has a question, just raise your hand. Jeff, you had mentioned acquisitions, you're kind of dialing in a little bit of an acceleration this year relative to the last 2 years. Can you just talk about what the visibility you have of that $400 million is today? And also kind of what you guys are underwriting from an IRR perspective or going in cap rate kind of how you think about the world?

Yes. So we underwrite to a 9% unlevered IRR. So -- and we've actually exceeded that on the -- for the first 3 years as a public company in terms of our ability to outperform what we underwrite to. So 9% is the unlevered focus. And the other part of the question was?

Just what visibility do you have on that [indiscernible]

So we bought $100 million of assets in December. We have -- as we -- I think we announced a few weeks ago, we have $150 million backlog going into the year. And we're seeing today probably close to 100% more product on the market than what we saw this time last year. So I think that, along with the backlog we have going forward beyond the $150 million gives us pretty good visibility, at least for the first half of the year that we'll be well on that target, the midpoint of $400 million for this year.

And are you -- I'm kind of curious, some of your re-peers have been kind of targeting some of the bigger centers where maybe there's been a little bit less competition, so a little bit better pricing. That may change. But are you seeing -- what are you seeing on the competition side for the smaller community, grocery-anchored centers?

We shop in a very different market than they do. We're -- our average center is probably a $35 million acquisition. And the competition we're seeing is -- probably is accelerated from last year, but we're also seeing a lot more product on the market. So that gives us pretty good -- a pretty good feeling that we will see a pretty strong volume this year.

And I mean is there a chance that you can exceed that $400 million? Do you have the capital in place or line of sight on that capital to do more if it's available?

We're really disciplined in our buying. If we can find a product that meets our requirements and gets to that 9% plus unlevered IRR, we would definitely exceed that number. And if we don't, we won't. That is sort of -- that's how we look at it. We hate giving guidance on acquisitions, but it's an important part of our business. And we -- so we do give that guidance. But hopefully, it will be a better year than -- and will give us the ability to exceed that number.

We absolutely do have the ability. We have a very strong demonstrated access to capital. We're 5.0x levered on a debt-to-EBITDA basis. Last year, we had two very successful bond offerings. We're BBB flat, BAA2 stable with both agencies. We want to continue our plans as a repeat issuer in the unsecured bond market. We raised equity in the fourth quarter of about $73 million. And so we are very open that if we find the opportunities, we can invest and support it accretively with our cost of capital.

And I know you guys are primarily focused on the grocery-anchored. But given the kind of the long-term control that the grocers have and the minimal rent bumps and your focus on getting that 3% to 4% same-stores. You guys are targeting acquisitions. What are your thoughts on unanchored retail as a potential asset class or mixing in -- I know TJX is a very small piece of it. But mixing in some of those off-price discounters as your anchor where you're able to get some annual bumps?

So our focus is on that grocery-anchored center, and that will be vast majority of what we are investing in. But we do see opportunity in the -- both the shadow anchored where you don't own the grocer, but you do own the small store space, and that is a part of our acquisition strategy. we kind of underwrite that to a 9.5% unlevered IRR. And then the unanchored centers are select opportunities that we find in markets where we have a strong presence that we think there is opportunity. Those are -- we think they're riskier assets, so we underwrite those to a 10%. But they -- and that -- we think there's definitely opportunity there -- and it's -- a lot of this is driven by the fact that the level of new construction in our space is de minimis. So it's very small. And so we the product we buy, we think, in the markets that we are familiar with and have the most boots on the ground, we think we can find some opportunities there. It will remain less than 10% of our business, but it is -- we do think there is opportunity there.

And then -- on the health of the consumer, what are your retailer customers telling you? And maybe what are you seeing on Placer data or other kind of tracking systems that you have on the foot traffic that's been happening at your centers?

The Placer numbers continue to be positive. We're seeing increased growth and our retailers are seeing good sales. So we're not really seeing any kind of slowdown in that market. We're obviously watching for it in the -- just with the confusion that's going on. I think the necessity-based nature of our retail, we're kind of the last thing that people cut out of their budget. We're not in that discretionary side where that is much more volatile.

Sure. And I know in the past, we've met -- I brought up your demographics and you guys have pushed back that they're not that different, right? Can you walk through the perception of your demos, which are a little bit lower than peers, but not at the low end of the income level for the U.S.?

I think we define quality based upon where our retailers define quality. And if you look at our occupancy, we have the highest occupancy in the shopping center space. We have the highest retention rates. We have the highest rent spreads on those retained tenants, and we have some of the best spreads on our new leasing. So the retailers who are voting with their leases are voting for our properties. And it's not sort of rocket science in that they want to be near the #1 or #2 grocer. They know the risk to them of opening a new store where they where they know how that traffic will work, and they know from the sales of the grocer what they can do, it's a much lower risk investment for them than it is going somewhere outside of that. And that's driven our ability to drive market-leading rent spreads and market-leading occupancy. And we really look very closely at like we can all talk about like which demos are best. But what we want is we want the demos that are best for the retailers. We're Kroger's large landlord. We're Publix's second largest landlord. And there are a lot of retailers who want to be around those top grocers, and that drives our decision. The -- and the demos were -- I think we're -- our median household income average is 20% above the median for the country, and densities are in the 68,000 to 70,000 in a 3-mile radius. What's really different about our business is we don't compete in Orlando. We don't compete in Tampa, where we compete is the 3-mile radius on two main streets in a market. And we have to win in that 3-mile radius. We have to be where the shopper wants to go. And that is a -- getting the right merchandising mix into that center so that when they wake up on Saturday and they're looking for where they want to get there and assess these stuff, they come to our center. And that's a very different look than if you're in the power center business where you have a much more regional draw where you're looking out in a wider range. We have a very specific areas that we have to compete in. And that's why it's kind of a different look than you might see with others. And if you look at where Kroger and Publix make their money, they make their money at our kind of centers. And that's why they're there, and that's why we're there.

And I've asked this of all your peers. The evolution of retail with the lack of supply and the demand, right? This is some of the best fundamentals we've seen in years. And at the same time, there's a lot of -- well, there's only so much we can push because we don't want to put our retailers out of business. But at a certain point, right, you would think there could be some possibility to reprice retail real estate to the upside. And part of that is on the anchors, right? And groceries have historically kind of flat leases, a long time to have control. You have these market-to-markets, but they're theoretical because you can never get to them, right? We'll all be dead in this room before that happens. So I'm just curious, as some of the anchor boxes do come up for expiration in the near to medium term. Kind of what are the steps you guys are taking to try to if you can't get fully just economic concession to them in the form of higher rents, what are some of the other concessions you're looking at that may be non-economic, but give you opportunities to extract value out of your centers in other ways?

Let me start and then [indiscernible] you jump in. The other concessions, Bob, maybe you can cover that. But -- what we're focused on is the profitability of our retailers. And we look at that primarily through health ratio, which is across the board less than 10% for our retailers. They can make money at that kind of a rent. And we have room to grow that and that's why we've been able to get some of the highest rent spreads and the highest retention rent spreads in the space because they -- they've, on average, been there 10 years. These the retailers have. And they are now coming up and they're saying, okay, do I want to stay there? And they're staying there with a 20% increase and 3% annual growth because they -- they're profitable. If they weren't profitable, they wouldn't be staying. And that's our -- that's how we look at our ability to continue to grow rents at outsized pace because of the -- that. And the lack of supply is sort of a big piece of that.

Yes. I'd also add that the conversations we're having with the grocers and some of the nonmonetary clauses would be just working with us on restrictions. I can give you an example on an HEB deal that we bought recently in Texas where they had some restrictions on uses and given our relationships with the grocers, we were able to talk them into giving us consent to put in a very, very nice high-end retailer to shopping centers. So again, being an owner, Kroger's largest landlord, Publix' second largest landlord, relationships with the grocers. Restrictions. The other thing that we also see is a lot of consents on out-parcel developments. In front of a lot of these grocery stores, there's a lot of parking, parking ratios 5:1, 6:1 and some of the parking goes untapped. We have a very nice strategy in Phillips Edison where we're developing $40 million to $50 million of small strip centers in these out-parcels. So in some cases, we'll do Starbucks, Chipotle, Chick-fil-A's. Other cases, we may be adding fuel for the grocer. So you may not always see it in terms of lease structure economically with the grocer that may have four or five, 5-year options. And in some cases, those may be flat. In other cases, you may get a 5% or 10% increase every 5 years, but you can unlock value at these properties in their parking lots and through waivers and consents.

And are you having success trying to get kind of shorter option periods? Or are they still pushing for maybe a 10-, 20-year lease with another 20 or 30 years of control?

The grocers are not giving up their options. And they're very important to our mix. But remember, when we buy these properties, and we're not big portfolio buyers. We buy individual assets that fit what we're doing. When we buy into those, the 9% unlevered includes a basically flat grocer income. So we -- it's -- we buy into it knowing that, but we can still get the growth. And it gives us a great stability. I mean if you look at that -- when you've got a -- you know the checks coming from Kroger, and that's powerful.

Any questions from the audience? Yes?

[indiscernible]

There's definitely. I mean, we love HEB and they -- there is opportunity there. The -- we just actually closed last week on a center where -- that HEB is the anchor. HEB's tended to own their own real estate. So what we would be buying there is the small store space around an HEB. Which we're very willing to do because the amount of attraction they have and the quality they bring to the center gives us the ability to really grow rents in those markets. And -- but their -- we'll -- we haven't been able to get a lot of development work with them primarily because they've already picked out and owned a lot of the real estate that they're going to -- where they're going to go. And so we're -- we'd love to. We'd love to do more of it.

Yes. I think over the last 2 or 3 years, I've only seen three or four HEB deals come up for sale. We acquired on fourth quarter in 2023 and then, as Jeff mentioned, we just recently acquired some shadow space on an HEB deal out of Houston. So we like HEB a lot.

Any other questions? So you guys had a long history as a private company. Now you've been public. Is there anything that in this current environment, you kind of miss being a private company that you could do that the public investors don't quite understand, but are long-term value enhancing?

I think we bring a lot of the value of a private company to how we operate. We are very cash flow driven. We want to drive cash flow growth. And that's a very private company thing, but it's also, we think, the key to doing it. And the other is, as a private investor, you're -- you think longer term. You are -- we obviously are reporting quarter-to-quarter and doing that, and we've been successful in that part. But where our focus is, is creating long-term value in the company. And that, I think, is something that we learned over the 30 years that we were building this business, and we bring it to the decisions we make every day. And we have a company that we've built, where we've got a very focused strategy, and it is a differentiated strategy from the rest of our peers. But we also have a team that thinks like an owner. And when they think like an owner and they make decisions like an owner, we find that, that helps to drive really, really strong results.

So you guys run the defensive portfolio, leverage is at 5x. You're finding acquisitions. I mean, what is it that you worry about in this environment?

What happened today? We're a little worried about that, but. . .

Has anyone checked Twitter in the last 20 minutes?

Listen, I try -- [indiscernible] I ask that question before because who knows how that's going to play out, but please feel free to [indiscernible] -- how you guys think that could play out for your tenant base and retailer base?

Yes. The thing that we like about our business is through the cycles, and we've been through all. I mean, we've been through the cycles over the last 30 years. Our -- the necessity-based focus does protect us on the downside. And that grocer income, that 31% is really flat. When things aren't going well, that really flat income is actually really very, very powerful. So we -- I think the way we sort of think about it is we can sell through pretty tough times and have. I mean, if you look at the great financial crisis and you look at the pandemic, during the great financial crisis, we lost 1.6% of occupancy. And we were the fastest -- that was the smallest amount of loss of our peers. We were also the first to be back to that same level in the PFC. And it was the same thing in the pandemic. We lost 60 basis points of occupancy, and then we were back to that the fastest of any of the peers. So we -- I mean, I think when we look at times that are -- where there's a lot of up and down, we're looking for the opportunity. We're looking for what opportunities is that going to create for us to be able to buy properties to developed properties to grow our portfolio with and with the strong balance sheet, it gives us a lot of flexibility.

I also think that we have a defensive portfolio, but we also have an offensive portfolio. And I think it's noteworthy that on the defensive piece, it's not just the grocer, but I think you were asking questions about nongrocery anchors and the ability to get bumps and things like that. That's actually, I would argue where omnichannel has been, or the e-commerce has been, the most disruptive. And we just had the latest wave and who knows what the next wave will be. And so ultimately part of our resilience is that we have 115,000 square foot center. Our concentration is with the grocer and then small shop. When you have those large box anchors, your list of potential replacements is shorter than for the average space in our center, which is 2,500 square feet, and that's pages worth of demand. That demand then allows us to be very offensive. And so over a long period of time, we believe this portfolio can deliver 3% to 4% same-store growth on an annual day in, day out basis. And then we're able to use that leverage -- and we're in 31 states. And ultimately, our footprint in competing on that center -- on that corner, gives us a very large market that's very addressable. We think that's almost 6,000 shopping centers that we can own, and we own 300 today. And we have to buy a very small piece of that. We're targeting from an offensive standpoint. 9% unlevered IRR returns, which I haven't heard people have said this conference, but we're tracking. We believe that, that is stronger than many of our peers are targeting with a still more defensive portfolio, and ultimately, we're driving towards mid- to high single-digit core FFO per share growth over a long period of time. This year, our guidance is approximately 5%. But that's also because there's almost 200 basis points of interest headwinds in there. We'd be at almost 7%. So we know we can deliver that mid- to high single-digit growth, which is why it goes back to. We believe that we do have that defensive portfolio, but we also have an opportunity to outperform with stronger growth and strong returns for our investors.

And I want to give you an example. In 2023, we acquired $275 million worth of assets, about 14 properties. When we acquired those, they were 87% occupied. And 18 months later, we were at 98% occupied. In 2024, we purchased 18 properties, right around 93.1% occupied, and we've already moved that to 94.4%. So format drives results. And what we're finding is that retailers want to be aligned with the #1 - #2 grocer in the markets where we exist, where the grocers are making money. Retail demand is one of the strongest environments I've seen in over 20 - 25 years in this business. You will continue to see Phillips Edison focus on a necessity-based merchant. So I think fast casual restaurants. Health and beauty, med-tail as examples. When I meet with the retailers, they're going through our rent rolls, trying to find locations to open in 2025, '26 and '27. So again, we have some very nice tailwinds as we've touched on, our occupancy at 98% in line at 95%, new leasing spreads of 35%, renewal spreads at 20% plus annual escalators of 3%. We're in a very, very strong offensive position to continue to provide superior results for the next few years.

Just curious, you mentioned Kroger and Albertsons are two of your biggest tenants. That merger clearly fell apart. We've had a CEO change over at Kroger. Any kind of concern about strategy shift or fallout from the merger dying and having new management over at Kroger?

No. I mean who knows what the story is what happened. But the -- I mean, a company like Kroger has had a succession plan for Rodney for years. It's not -- they didn't expect this to happen yesterday or the day before, but they have a plan. And when you see the Board member who's moving in on an interim basis, I mean, this is a board that has a very consistent strategy. I'd be shocked if there are any major changes because of that. And Albertsons do -- the same thing. I mean they just -- they announced that their CEO is moving out. But they're putting in their -- the one who ran their -- who is their Chief Operating Officer. And word is that she is very strong and will be a very positive impact on that. And the merger for us was one that we've obviously been looking at for 2.5 years. And the -- overall, we have really strong Albertsons in terms of the sales, and we have really strong Kroger. So we're not -- we think it's kind of -- it will stay on sort of steady course.

Perfect. We'll just end here with the rapid fires. For retail in 2026, what do you think same-store NOI growth overall could be?

3.5%.

And 12 months from now, more or less of the same amount of public retail companies?

Probably less.

Great. Thank you.

Thank you.

Thanks, everybody, for your time. We appreciate it.