Hi everyone, good morning and thanks for joining us. I'm Caitlin Burrows and I cover REITs at Goldman Sachs. This is the Phillips Edison presentation. Today we have Jeff Edison, Chairman and CEO; Bob Myers, President, and I actually only wrote President, but I think it's also COO; and John Caulfield, Executive Vice President and Chief Financial Officer. I have a bunch of questions that I'll go through, but if anybody else has any, feel free to raise your hand so that I get a gauge and we'll try to get to those too. Maybe with that, starting big picture, the market has been very volatile for the last two months in particular, heavily impacted by tariff updates.
Maybe Jeff, starting with you, could you give an update or overview of the PECO portfolio and some brief commentary on to what extent certain aspects of your business have changed or not since the beginning of April?
Yeah, for sure. It has actually been an awful lot of change over the last, well, couple months. I sort of stepped back and we were at an investor conference the week of the tariff announcements. I was then at ICSC just a couple of weeks ago and now we're here. The transformation in conversation has been pretty amazing. I mean, it's like the world was coming to an end, the world might come to an end, but isn't necessarily going to come to an end. Today we're seeing a lot more of this is sort of what the environment we're going to be in. It's going to have an impact, but we'll deal with it and we're going to move from there.
I think the ICSC was probably one of the best backgrounds because there we were talking to retailers, talking to our neighbors, and what are we going to, like, what are we going to do, where are we going? They are very, they have a very similar philosophy to what PECO has, which is we're in this business on a long-term basis. We're not in this business quarter to quarter. We're not in this business week to week. We're not in this business tariff announcement to tariff announcement. We've got to build our businesses on a long-term basis. You're seeing that emerge. It certainly was not there the first week when we were talking about tariffs.
Today, I think we're in an environment where we know there are going to be shocks, we know there are going to be announcements, we know there are going to be changes. What we're confident in is on a long-term basis, the U.S. customer is one of the strongest, healthiest buying groups in all of retail. We, being in the necessity-based side of that business, are in a really good position for that. We will see ups and downs, but we won't see the ups and downs that you'll see in discretionary retail. When you need to be, when you need something, when you need to buy groceries, when you need to get your hair done, you need to get your nails done, we're where in America you're going to get that done.
Because when you wake up on Saturday morning, you want to get that stuff done, we're the most convenient. We have the best retailers in that space. That's what PECO delivers. Yes, it's volatile, but we're very happy to be in the necessity-based side of the business where it's a lot less volatile. We really do have a very long-term approach to our business and as do our retailers.
Great. Maybe moving over to ICSC, you just mentioned that conference. It seems to me like it's a time when the REITs and the retailers get together to talk about store plans. I was wondering if you guys could just go through maybe some of your goals, what they were going into the event, how the event has changed over the past five to ten years, about the conference itself and the purpose for PECO .
Yeah. So we had over 400 meetings at ICSC. For those of you who do not know, ICSC is our national convention of everyone who is associated with the retail real estate business, from our neighbors to lenders to investors to brokers selling properties to brokers leasing space across the board. It is the ultimate thing. I think there were 30,000 people there in Vegas this year. Our team had over 400 meetings in two days, actually less than two days. That does not include all of the casual meetings that go on during ICSC. It was a very valuable tool for us. It is one of the times during the year where we have the most contact with retailers in a real short period of time. It gives us that pulse of what is going on.
As I said earlier, the general sentiment was it did depend retailer by retailer because the retailers who had the highest exposure to tariff issues, they were a little bit more conservative. Fortunately, when we look at our business, 85% of our retailers are in that category of having low to minimal impact from the tariffs. About 15% of us is in that moderate to high range of impact. Our guys were generally positive and they were looking at increasing their plans. We saw ICSC as really helpful and generally very positive.
I think the other thing I would add about ICSC, and I've been attending ICSC for over 30 years, is it sets the stage for our team. As Jeff touched on, we had over 400 meetings over the course of a couple of days. We send a team out of 40 individuals. We send out our transactions, acquisition folks, our leasing agents, our portfolio managers. The most important aspect is the relationships that you build over those 30 years, especially in the brokerage community with retailers and the transactions market. We learned so much over the course of those two days about what we expect to see in the transactions market going forward for the remainder of the year. We had several meetings with retailers that were looking for our locations.
One thing I do want to reiterate about Phillips Edison, as long as we've been doing this over 35 years, we're focused on buying the number one or number two grocer in our markets. That drives foot traffic. We complement it with the right format of about 112,000 sq ft and necessity-based retailers. You'll hear us today speak to fast casual, health and beauty, med-tail. These are examples of the types of retailers that we meet in Las Vegas. We look for locations. They want to go through our rent rolls for 2026, 2027, and even 2028. Retailers in the sentiment coming out of Las Vegas was still very, very positive. As I have visibility, as I see out what our pipeline looks like from a leasing, retention, renewal spreads, new leasing spreads, it's very favorable.
If anything, it's getting stronger for the remainder of the year. It is very positive.
Great. Yeah. Maybe just following up a bit on that leasing discussion, I guess tenant demand for space seems to have been strong for a while now. Occupancy and rent spreads, like you mentioned, are high. How would you compare the leasing environment today versus a year ago, including those negotiations and discussions you're having for 2026 and 2027?
Sure. Yeah, I'll take a crack at that. As an example, in the first quarter, our new leasing spreads as an organization was around 28.1%. Renewal spreads were 20% and retention was around 90%. Second quarter will be stronger than those numbers. In terms of how it compared to last year, it's consistently strong. Again, I'm feeling more encouraged about what we're seeing in our pipeline on the leasing front regarding renewal spreads, demand for our space, the retailers that we're aligning with has been not only very critical, but we're aligned with the necessity-based retailers that are looking to be tied to the number one, number two grocers. I'm very encouraged and optimistic about where occupancy will continue to move between now and the end of the year, backfill scenarios with receiving spaces back that we can release, retention staying very, very high.
Our retailers are profitable. They are very healthy. They have positive health ratios. We want to partner with our retailers.
I just add that we are at the highest level of occupancy that we've been at, and we've stabilized and are continuing to actually improve on that in today's environment. A lot of this is driven by the nature of our business, which is being in necessity-based retail. A big part's also being driven by the fact that there has been no new construction in our space for a long time. That lack of new supply with the retailer's strong demand is what's really driving our results. What we're lucky to have is properties where they can come into a community and they can get that, they can tie up with that number one or two grocer, and they know that that will drive the sales of their stores and will make them successful.
That is what is at the core of our retailer demand for the space and why we are at the occupancy levels that we're at.
The only thing I'll add too, Caitlin, is I'm always looking at metrics and I'm looking at the opportunities in the portfolio. Our leasing activity in the second quarter is about 40% higher than where it was in the first quarter. Feeling very encouraged. We had a very good first quarter.
That's a good place to be.
I guess as you think about that, is there some normal seasonality to leasing that 2Q's normally stronger? Or what do you think's driving that? Or who knows, but that's where we are.
Yeah. No, I mean, the difference between first and second quarter is we tend to talk in quarters, and most of the retail stuff happens over years because they have to be planning over a longer period of time. I think what the difference from our perspective is that there was the anticipation of sort of the chaos that's come, we're hearing from D.C. going on. While we're hearing that, we were expecting a drawback. What we're seeing is that the retailers are saying, "I need more necessity-based number one or two grocer locations as I expand, and I'm not going to stop my expansion." That's what I think is driving it. Quarter to quarter, things happen that it's hard to be totally on why it's changing.
It is a very encouraging sign that we are continuing to see not stabilized growth, but accelerating growth on a quarter to quarter basis. That feels like we are in a really good spot. When you overlay that with the economic uncertainty, it is somewhat surprising.
Bob, I think you made a comment in there about how your tenants and neighbors are profitable. Can you go through what that means for your ability to push rents and also, I guess, their willingness to absorb those increases?
Yeah. Again, just with the focus on having the number one or two grocer, health ratios are very important. They want to be profitable, and we want to make sure they're going to be there long-term. Our average inline space, as an example, is 2,500 sq ft. They've been in our shopping centers an average of about 10 years. So it's critical that they're important. The main thing is if we have a solid consumer that's shopping at the grocery store and foot traffic, April of this year compared to April of last year is up 6%. Grocer sales are up. We're bringing in over 37,000 people a week to these types of shopping centers. The biggest metric is I'm looking at retention, I'm looking at renewal spreads. Look, renewal spreads at 20% are as high as they get.
Those are incredible spreads, especially when you compare it to our peers. We are going to see even an improvement on those numbers. When you see new leasing spreads of 28%, the demand that we are seeing for our space when we retain a space is going to be well in the 30s. We are seeing continued demand. Now, how do we get the retailers to pay for it? They need to be profitable. They are getting the benefit from the grocer foot traffic. They are looking at what we call a health ratio, their sales to rent ratio, which is roughly around 10%. If you look at that 10% and you look at our average ABR on inline space is around $27- $28 a foot, there is room to grow that over a long period of time to upwards of 12%, 13%, 15%.
It all depends on who the retailer is and the particular use. Every retailer can pay a different health ratio. Across the board, we're at around 10% and it puts us in a very, very good spot to continue to drive rents well into the 30s over a long period of time. We'll see those health ratios move up strategically tenant by tenant to 11%, 12%, 13% over the next few years.
Great. One thing about the PECO portfolio is that you do not have a lot of these large boxes that some of the other shopping center companies out there have, but you do have a few. I guess in 2025, Party City, Big Lots, and Joann Fabrics are headwinds to some extent for the industry, also opportunities. Can you go through kind of the exposure that you had? I guess it was 60 basis points of rents, the status of the retailers in your portfolio, and then the replacement and reopening plans?
Before we jump into just directly addressing those, Bob will address the three. When you're in the necessity-based retail business, which we are, your target is to have the number one or two grocer and then to have enough small store space that that grocer's traffic will support and allow them to thrive and grow. That's the core of our business. Because of that, it's very intentional. We have limited exposure to big boxes. We kind of see the power center business as a very different business than what we're in. When you think about our business, it's at the corner of Main and Main in every suburban community around the country. What we have found is that that brings a really nice assortment of national as well as local merchants who have a long-term commitment to growing their retail business at our location.
That's what we see as what is the core part of our business, and it's what drives those retailer results.
Yeah. I think the only other thing I would add to that is our current anchor occupancy in the portfolio is around 98.4%. We ended up having four Party City and three Big Lots. I think when I looked at the portfolio at the end of the first quarter, we only had 15 spaces in our portfolio that were over 10,000 sq ft. We've seen very strong demand in that category as well. Currently, we have letters of intent or leases out for signature on 80% of those opportunities. We have a vision here where we think that we can see anchor occupancy back up to the 99-99.2 or 3% range by the end of the year with the demand we're seeing.
Again, as Jeff touched on, moving occupancy in our portfolio, even though we're at 97.1 or 97.2 today, we feel like there's a path to get another 100-150 basis points on our inline occupancy, which is currently around 94.6%. I think we'll be well into hopefully 95.5, 96 potentially. If we can be at 99, 99.2, that's the type of not only retention, but retailer demand that we're seeing in both categories of small spaces and spaces over 10,000 sq ft. The key to our format and the key to our success, which is why we're reporting really, really good spreads, is our format of 112,000 sq ft. We don't have 50 Party Cities. We had four. We didn't have 25 Big Lots. We had three. I think we have five Joann Fabrics, and we already have retailers focused on those.
If you look at the retailers that are focused on backfilling those spaces, it's the TJX brands. They're very, very active. They want to open up 150 new locations this year. So T.J. Maxx, you think about Marshalls, Sierra, Ulta, to name a few. There's a lot of retailers that are very active looking to grow. Planet Fitness, Crunch Fitness, Dollar Tree is an example, Daiso. There's a list of retailers that are very active. The other part that's encouraging about none of the landlords love getting this space back, but what they do love is the mark-to-market opportunities because a lot of these spaces were paying mid to high single-digit rents in that $6 to, say, $10.50 range.
When you look at the lack of supply that is out there, which we do not see coming back, any new development for the next 8-10 years, it is an opportunity for us to really have some aggressive mark-to-market opportunities. I know in our portfolio with the spaces that we are backfilling in this example, we are seeing mark-to-market opportunities anywhere between 50% up to 350% case by case, center by center. There is real opportunity.
Just to clarify, that 50%-350, those are on the larger boxes that you're turning over?
Yeah, that's an example on the backfill scenarios to the Big Lots, Joann, Party City noise.
We do have good potential on our small store as well. I mean, that's how we're getting 30% plus rent growth in those mark-to-market situations.
That's right.
Maybe just moving over to the bad debt side. Guidance for this year is 60-120 basis points. Can you go through, I guess, your confidence in that metric, also how the watch list has evolved year to date, maybe how it compares to last year?
Caitlin, Bob gets to talk about new retailers coming in and I get bad debt. Yes, I would say that we do have a wide range for this year. Ultimately, I would say in the first quarter, year- over- year, our bad debt went down. Ultimately, we believe in the strength of our retailers, and we were very positive to reaffirm both that range and our 3-3.5% same store range for the full year. Ultimately, we believe that these retailers are very successful in our centers with the foot traffic that he's talking about. There will be some pieces like we just talked about, the Party Cities and the Big Lots and what have you. Ultimately, the overall strength of our shopping centers is still driving over 3% same store growth. We will see how bad debt is for the year.
Ultimately, it was 75 basis points in the first quarter, and I think that's the same mark as it was in 2024. We don't see anything really changing for 2025.
I guess when you look at the watch list today, though, that might inform the coming quarters in 2026. When you think of the size of the watch list, tenants that might be concerning you and your exposure to them, is there any other comparison you'd make versus history or the past, recent past?
Yeah. Our watch list, because of the format that Bob was highlighting in our reduced footprint relative to some of those larger names that are plaguing some of the other landlords, we do not have any Rite Aids. We do not have any At Homes. Ultimately, our watch list still remains between 1.5% and 2%. It is going to be consistent names that you think about where you are looking at perhaps a Michaels, but even then, again, it is limited locations. I think we have five. It is going to be we are monitoring pet formats. We think that they continue to be strong, especially those that have services and elements. Our pet locations are very strong, but that is a name that or a category, I would say, that people are watching for.
Ultimately, those that are most troubled are not in the necessity-based goods and services or near the grocer with our at our centers.
Maybe switching gears to the acquisition transaction side. So that's an active, I don't know, pursuit strategy for Phillips Edison. Back to that market volatility that we were talking about in the beginning, can you go through how that's impacted transactions in April and May?
First, it's early, and it does take time. The life process of selling a property is you usually decide you're going to sell. You select a broker. The broker puts together an OM. You take it out to market. As in the market, you then whittle it down, and then there's a 60-day, 45- to 60-day due diligence period. When we're talking about feedback, we're not really going to be able to get good feedback on what's happened in the last 60 days for some period of time. A lot of what we'll say is what we think is kind of going to be the outcome of the environment we're in as opposed to we've seen that dramatic change. We haven't seen deals fall out because of the disruption. Coming out of ICSC, a little surprisingly, there was a very high volume.
I mean, if we were to guess where the total volume of product coming out, it's over $7.5 billion of new product coming out that is in the open-air shopping center business at ICSC, which is a near-record kind of amount. A really big amount of supply coming onto the market to sell, which we love because that, we think, will give us the ability to find some select opportunities that meet our goals, which is on traditional grocery-anchored shopping centers, we are looking for a 9% on unlevered IRR. If we can find that with the number one or two grocer, that is product that we have been the largest buyer of for probably 15 years. We are seeing a market that we think is going to be generally positive.
The only issue for us, I mean, since supply is going to be good, the demand side has also accelerated a lot more. Institutional investors are coming into our space. We do not like it when they come into our space, but they can do that. We think that the supply will be bigger than the impact of this increasing demand, which will give us some pretty good buying opportunities.
I guess just specifically on your guidance for this year, so it's $350 million-$450 million of acquisitions, obviously with that 9% IRR that you guys target. I guess what's your confidence in meeting that range and what would lead you to be below or above it?
Yeah. We believe we'll be at the high end of it given what's here. If it opens up, we have a balance sheet that allows us to go well beyond our guidance if we can find those opportunities. It's going to be, we're very disciplined buyers. We have been for 30 years. We will continue to be. If we can find our product at a larger scale, that is something that we'd be very, very interested in doing.
The only other thing I would add is with our guidance of $350 million-$450 million, we've closed on right around $267 million. We are in a very good spot. To Jeff's point, we can be very selective between what we want to buy between now and the end of the year, certainly assets that would be accretive in nature. As Jeff mentioned, we are solving for above a 9% unlevered return. We continue to look for assets that are anchored by the number one, number two grocer that's providing good CAGR growth, good NOI growth between 3% and 5%. As I look at it, we bought 11 properties this year. Some of those are 87% occupied, some are 90%. If you look at what we acquired in 2023, there were 14 assets, about 87% occupied by Publix, H-E-Bs.
The leasing demand that I spoke to earlier, that 87% occupancy is now at 98% with that retailer demand. If you look at the 14 assets we acquired last year, they were around 92.1%, I'm sorry, 93.1% occupied. Those assets are now around 95% occupied. You are going to see us run a parallel path with our acquisition strategy to buy good quality grocery-anchored projects that provide us more occupancy growth and NOI growth, in addition to working our leasing spreads, renewal spreads, and retention to get good organic growth in the portfolio. I think if we do that well, we will be able to drive 3%-4% same center NOI growth and hopefully more than that over the next few years. We are in a very, very good spot.
Maybe John, moving to you as you think about funding the acquisitions of the business generally. I think you have used equity in the past. I know you want to access the unsecured bond market. What's your current thinking on those two funding sources?
Sure. Ultimately, we think it's really important that we maintain our flexibility in terms of accessing both the debt markets and the equity markets. As we've talked about our guidance, we did raise equity in 2024. As we look to 2025, our current guidance does not contemplate equity. We have the ability to buy $350 million-$450 million while maintaining our long-term leverage target of mid 5 times on a debt-to-equity basis. We did increase our revolver in January to $1 billion to give us that flexibility. Ultimately, we want to be able to access the debt and equity opportunistically. We would look to extend our history of issuing in the unsecured bond market. We are BBB flat rated with both agencies. Ultimately, we would look to the equity markets opportunistically based on the continued strength of the acquisition environment.
The key thing that we're focused on is we buy assets that are going to meet or exceed our 9% unlevered IRR target, and we're looking to grow our FFO and AFFO per share. If we can do those things, then I think the opportunities in front of us are great.
Does anybody in the audience have a question? No? Okay. Maybe we'll just talk about redevelopment for a little bit. In addition to the acquisition and the same store activity, you guys have a $40 million-$50 million investment of kind of redevelopment each year. Can you go through these opportunities and to what extent they're in the existing portfolio versus in the acquisition properties and how deep that opportunity is?
Do you want to go through them?
Sure. Yeah. Thanks for the question. For the last few years, we've been targeting between $40 million and $50 million of additional ground-up development. Our development pipeline looks a little different than some of our peers. What we typically do is we build smaller, I'll say 5,000, 10,000 sq ft buildings in the parking lots of our shopping centers. We've done this successfully for several years. By doing that, we're leveraging our national account footprint with the Chipotle, Starbucks, Chick-fil-A, Pacific Dinners of the world, with a nice national lineup to occupy those spaces. We're finding that rents can be anywhere between $45 and $70 a foot. We've developed over 45 of those in our 300 shopping centers, as I mentioned, over the last five years. In addition to that, one thing that makes us unique in this business is our relationship with Publix.
We're Publix's second largest landlord with about 60 locations. They have a concept called a tear-down rebuild. Whenever they have a store that's about 30- 35 years old, they use us. They want our locations, and we partner together with them to give them a brand new store. They actually do a tear-down, and they close the store for about a year and then rebuild it and reopen. That is also part of what we do. We've done about five or six of those and have a wonderful relationship with Publix, and we'll probably continue to do those in the future as well.
I think the one thing to add, which is that our returns on these projects are generally between 9% and 12% on a cash-on-cash basis. We get great returns in this. It does come from both our existing portfolio as well as the acquisitions we're looking for. I think that's a way that we know that we can execute and deliver. We're looking for adjacent parcels. We're looking for, particularly on the new acquisitions, opportunities to continue to do that. I would say we have probably a good two, three years' worth of projects in terms of our upcoming. Two years ago, I would have told you it was two to three years. Here we're two to three years. It's something that we're going to continue to push forward.
Just in ending, we thank everybody for being here. Caitlin, thank you for moderating. We think PECO is in a unique position today that we think is very advantageous given the uncertainty that is going on. When you have a business that has a really strong offense where we can grow and have good growth, but we also have great defense. When you look at 30% of our income coming from our grocers, you look at our low leverage, you look at our necessity-based nature of our retail, you look at the diversity of the neighbors that we have, you look at the team that has been together for 30 years, you realize that what we are acquiring is below replacement costs, so they cannot beat us on price. You look at the fact that we provide the customer what they want.
We provide price, selection, convenience, and safety to them close to their home. That is what PECO delivers. We think that that opportunity of really strong offense where we can grow through our leasing and our acquisitions and our development, at the same time, you have got the protection. That in this environment is a really good place to be. That is why we hope that you guys will continue to support PECO . Thank you.
Thanks, everybody.
Yes. Thanks.