I'm Craig Mailman with Citi Research, and we're pleased to have with us Phillips Edison and CEO Jeff Edison. This session is for Citi clients only, and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to liveqa.com and enter code GPC26 to submit questions. Jeff, we'll turn it over to you to introduce your company and team, provide any opening remarks, tell the audience the top reasons an investor should buy your stock today, and then we can get into Q&A.
Sounds great. Welcome everybody. Thank Thank you for making it out here early this morning. We hope we're worth your getting up early. With me is Bob Myers, our President, and John Caulfield, our CFO. The reason we think to invest in PECO is the same reason it's been for a long time. We are a company that has very strong internal growth from our properties, which is a very high-quality portfolio. We also have a strong acquisition and development, redevelopment program, which give us external growth. That internal growth and external growth are engines of being able to grow our FFO per share. At the same time, we're focused on necessity-based retail.
We're focused on that neighborhood shopping center close to your home, where you buy your necessity goods. It's a very stable business and has been stable through multiple cycles. When you put those two together, you've got the alpha of the internal and external growth, but you've got a very low beta, and we think that's the premise for investing in PECO. Robert?
I want to add just a little bit more color to that. We've been in business for 35 years, our portfolio has approximately 330 shopping centers in it, we are grocery second-largest landlord with about 65 centers. We have a very strong philosophy and discipline in our acquisition strategy, where we believe that format drives results. Jeff touched on it, our average shopping center size is 113,000 sq ft. We're not in the power space. We are in necessity goods and services. Our average inline space is 2,500 sq ft. That's very strategic for us to do that because that gives you the most opportunities to lease those spaces. It's a lot easier to lease 2,500 feet or 1,200 feet than it is 25,000-30,000 feet.
You'll see when you look at our stats that we have the highest occupancy in the space at 97.3% and our inline occupancy at 95.1%. Our anchor occupancy is currently at 98.7%. We have a lot of pricing power. We have the best leasing spreads in the space, the best renewal spreads. We're seeing renewal spreads over 20% currently, and we've delivered on that for the last three or four years, and the visibility that our team has looks very favorable, even increases above and beyond that. New leasing spreads have danced between 30%-35%, depending on the quarter. What's so great about having high retention with the quality of portfolio at 93% is you don't spend much capital at all to retain them. You have the pricing power.
I believe last quarter, we spent $0.24 a foot, you know, That's very different than spending $50, $60 a foot to retenant somebody. We have the benefit of pricing power, and that's the integrity that Jeff spoke about in terms of our portfolio.
That's helpful. I mean, your rent spreads are very strong. I guess one of the pushbacks I always get from clients just about the retail backdrop is generally across the board, right? Given the supply backdrop, the demand backdrop, clearly you guys feels like outpunching the competition and the ability to capture the value in your centers, but it's still a pretty fragmented industry. Kind of what do you view as the impediments as you talk to tenants about driving that even further? Maybe what are some of the non-monetary considerations you guys are getting in lease negotiations today versus five to 10 years ago that we don't necessarily see fall to the bottom line but inheres a value of the center or opportunities you guys have over time to unlock value?
Yeah. I'll take the first one, then Bob jump in. There has been very little construction in our space for a long time, and that has been one of the big drivers for our ability to drive occupancy to record levels for us. We have the highest occupancy in the shopping center space, all driven by the demand that our retailers have for being in the number one or two grocery anchored center in the markets that we're in, and that has given us pricing power.
What, as you referenced, you know, what that's allowed us to do is to have the largest leasing spreads, both on renewals and also new leases as well. That is a, you know, a powerful driver of our ability. The reason we're not able to do that all at once is because we obviously have lease terms that are staggered and that it's that period of time that we're bringing everyone to market. We have, you know, we anticipate that continuing because of the strong pricing power that we have.
Yeah, just to add on to that a little bit. You asked a couple different questions there. What are some of the non-monetary items that we're seeing? We renew about 600 neighbors every single year through our cycle. Again, you know, the retention's 93%, the renewal spreads have been 20% with above 3% CAGRs. What's been very helpful in that, in the renegotiations, you now have flexibility where you can go back in, and you can renegotiate either options, can caps, restrictions, exclusives, no build areas. You're able to free up a lot of that as part of the leverage and negotiation. We're very focused on doing that. That will allow us to continue to move our overall occupancy, our inline occupancy, another 100-150 basis points.
What we're finding in terms of having leverage, sure, there's no new supply coming on the market that's really competing with us, but our necessity-based focus with fast casual health and beauty services medtail is really where those neighbors wanna be with the number one, number two grocer. What we've been very focused on is making sure that our neighbors are profitable. One thing about profitability is you gotta make sure that the rents aren't crazy high. Our rents on average for inline are $27-$28 a foot compared to some of our peers that are $40-$50. It's easier to take an increase from $27 up 20% over every three or five-year cycle versus starting at $40 or $50. Our average health ratio for inline neighbors is 10%.
We feel that we can gradually move that up to eleven, twelve, and thirteen while keeping our neighbors very profitable.
What does that imply on the breakout between, you know, the grocery tenant versus your inline to get to that and bring that 10 up to maybe 11, 12, or 13?
Yeah. Our grocer's health ratios are approximately 2.3%. Yeah. My comm is very specific on our inline neighbors.
Okay.
Yep. That would be right around the 10%.
Okay. That wasn't the blend. That was the inline guys.
You got it.
Gotcha. Thank you for clarifying.
Sure.
On the option side of things, what are you guys doing with the grocery-type tenants versus inline? 'Cause I know this has been one of the issues is everyone's got this huge mark-to-market, but when you have, you know, multiple extension options, we might not be here to see that mark-to-market realized one day. As these kind of anchor boxes are rolling, what are you guys doing, and how does that negotiation go with some of these tenants that are used to controlling that box for, you know, 20 years with minimal kind of bumps as they go along?
When you look at the layout, about 28% of our income comes from the grocer. We consider that effectively a flat rent, and it will be flat with their full control for, you know, 10-30 years, depending on the lease terms. None of our projections anticipate getting that space back or getting that space and being able to do dramatic rent bumps. Our focus is on the small store space outside of that grocery anchor. That's where we get our growth.
That's what when we talk about rent spreads, that's where we're able to get and move those rents, which, you know, allow us to have, you know, what's our target, which is we wanna be able to deliver mid to high single-digit FFO per share growth, pay a 3% - 4% dividend and, you know, have, you know, a 10% - 12% annual increase in value year in, year out, with, you know, a relatively low beta investment. That's our, that's our thought process through that. All of that includes that anchor structure that we have today.
Just kind of shifting gears a little bit, you talked about on your business update, you know, being able to buy $300 million with no additional equity. Stock and the group have been kind of trading strong here. Would you issue equity today at these levels?
We're a lot closer than we were, let's say, four weeks ago, five weeks ago. It's still a little early for us, but it certainly is an option. The beauty is the way we think about it is not can we raise the capital? It's where can we match fund the capital we raise with really good investments that will give us that long-term growth and give us the a wider breadth of a portfolio. That's what we're looking for. They're all the... You know, as you know, they're all the pieces that are part of, you know, where you get your capital.
They're really driven by the acquisition market and what we can find that really will make our portfolio better. That's what we're looking for, and we'll continue to have that be the driver of our capital. It is, it's a little nicer to be closer to where you'd be interested in raising capital than we were, you know, a little short time ago.
The market's pretty competitive, right? The private guys are back in looking to buy. You know, you earmarked $300 million. What's the visibility on that? I guess that dovetails back to, like, you would seemingly issue equity if you're gonna outpace that significantly, right? Then it gives you more runway. What do you feel like the visibility is on that? That $300 you talked about, are you finding more that fits the buy box that would maybe have you guys look at equity today? Even maybe just walk through the opportunity set.
We've targeted $400 million-$500 million of acquisitions this year. $450 at the midpoint, let's say. We can do $300 of it without going back to the markets, using just free cash flow and the growth in our the rest of the cash flow. I would say that We feel good about the guidance. Whether we can outpace the guidance will be driven by the market and what comes to market and what we see as opportunities there. It's the acquisition market will drive our decision. As you point out, the private markets have been.
Are very aggressive on pricing right now in terms of what they're buying, and we're not. We've been doing this for 35 years. We're very disciplined in terms of what we buy, and if we can buy it, we'll buy as much of it as we can, and if the pricing gets outside of where we won't buy it. That's. It's been the kind of that simple over, you know, over a long period of time. It takes a very disciplined plan to do that, and these other pieces, like when we're raising equity and debt and all the rest, they're really driven by this, the acquisition machine we have, but also, you know, what the market is.
Maybe I'll jump in here.
Yeah.
I think part of it is the market is extremely large. That ultimately in the grocery anchor number one and number two, there's approximately 5,800 centers that would fit our primary criteria, you know, valuation notwithstanding. Then we have Everyday Retail centers, which we've begun talking about as well, which have over 50,000 opportunities in markets that we already are in. Yes, there is greater volume in the, in the private transaction market, which also tells us that we believe there continues to be opportunities in the public markets for improvement and closer to where we believe the value of our portfolio is. As we look at these opportunities, we do think we feel very confident in our ability to, you know, hit our acquisition targets and exceed those.
We are disciplined buyers. We buy our grocery anchored product to a 9% unlevered IRR. Every asset we buy clears that 9%. On the Everyday Retail, it clears a 10% IRR, and we're very successful at that. We've bought over $1 billion in the last fiive years, and all of those are above those numbers and actually exceeding their underwriting. We feel very good about the opportunity set there, and as Jeff was saying, we look to match it to the best cost of capital that we can.
To get that nine or 10, depending on the asset you're hitting, what's kind of the going-in cap rate you need given your underwriting on rents and your platform's ability to lease things up maybe better than some other one? Kind of where is that going in versus maybe where you estimate your cost of capital is today blended either debt or equity or straight up debt?
I'll go ahead and take that one. To what Jeff and John has already discussed, I was going back through our numbers. We looked at 600 deals last year. We ended up underwriting about 300. Yeah, the market's a little bit more competitive now, but we're also seeing a lot more opportunity. The 600 last year and the 300 we underwrote was double what we saw in 2024. What's interesting about what we've seen so far in 2026 is we've closed on $77 million, I believe, through January, and we have another pipeline that we've been awarded of another $150 million-$200 million that will close by the early second quarter. We're off and running.
With that being said, even though we underwrote 300 deals last year and saw over 600 opportunities, I've seen a 70% increase in the opportunities this year. We're going to continue to see opportunities. John touched on our return thresholds. We've seen a lot of success in what we've acquired year to date. We are disciplined buyers. We stay in our box in terms of delivering the 9%, the 10% unlevered return. We do feel like we're in a very good spot to be between $400 million and $500 million. We're seeing all the opportunities, and we're well-positioned. In terms of cap rates, if you look at what we've acquired, you know, in 2023, we averaged about 6.6%.
We were 6-7 in 2025 and 2024, and then our Everyday Retail has been dancing right around a 6-9. We look at deals all the time. There's some that are 5.5 , 5.75s. There's some that are 7s and 7.5 . It all depends on the amount of vacancy and the occupancy lift and whether or not we feel like our team can execute to get it, you know, above a nine or a 10. I will share in our Everyday Retail category, we own about $180 million. It's early days for us. We have nine so far. Over the last 2 years, we've already moved the needle from 92% occupancy to about 96%. We're also seeing exceptional new leasing spreads at 45% and renewal spreads at 27%.
Our average cost per center are right around $320 a foot. We like that space. Those opportunities have serious alpha associated with them, and in some cases, the centers that we're acquiring are 80% occupied, some are 90, and some are even 100 that have mark-to-market opportunities. Those assets will generate, in some cases, between 4.5 upwards to 9% NOI growth over the period. When you blend that with our other existing portfolio, which we delivered 3.8% on last year, it's a really nice recipe for a lot of growth in alpha in our organization.
I guess, you know, since the financial crisis, the REIT industry's been very focused on bringing debt-to-EBITDA down, running at a lower leverage balance sheet. You guys had an extensive history in the private market, right? You've seen both sides of things. I guess from a high level, the debate internally may be about what the right leverage number to run at, given, you know, you guys are going in close to a seven, so the LTV at a five times debt-to-EBITDA is different than if you're a five or a six cap buyer, right? Just as you compete with the private guys who run at higher leverage, I'm just kinda curious about the intellectual debates about where the right leverage number is versus maybe where public investors feel like you should be trading and it...
You know, I know it's a little bit dogmatic on our side since the GFC, but...
Yeah.
I don't know. Any thoughts on that?
Yeah, I think it's a great question. It's a little frustrating right now to see some of the private equity firms looking for 18%-20% returns on their equity using 65%-70% leverage and competing with us. They love our product because it does have growth, but it's also very stable, so they can leverage up quite a bit. That adds some competition, particularly for the portfolio deals that are out there. They don't tend to mess with our markets that much. We, you know, we're individual buyers of assets that gives us a ton of power in these markets. I don't think that's a big problem.
I do think that, our view on leverage is, you know, it's part of our low beta, thing. Is 30% or 40% debt, does that change the risk profile? Probably not. It, you know, it is where the market is today, and I think it's, very important to make sure that you are in that part of the market, so that there's a relatively even comparison. 'Cause we all know it's really expensive to delever. Those that have done it's, you know, have gotten out of whack. That's been a real problem.
Unless the investors say, "Look, we want more leverage," we are where we're gonna be in that, you know, mid to low, or 5% - 5.5% debt-to-EBITDA.
We did have a question come in from the audience. Do you have any interest in the outparcel on street/convenience asset type, multi-tenant, not single-tenant, as a potential growth to your acquisition pipeline buy box similar to Curb's strategy?
That is the Everyday Retail that.
Right.
That we talk about.
Yeah.
Yes, we do have interest in it. We actually spoke quite a bit about it on our business update, and we think that there's a great opportunity there. We can buy $1 billion over the next three to five years.
It is a different product. I wouldn't put it directly in Curb's basket. We don't compete with them very often in terms of product on. We look to buy properties where we can use that are close to existing properties where we can use the PICO machine to create value, not just buy assets that will have a certain cash flow, but actually be able to take it, remerchandise it, add capital to. You know, we're spending capital on these properties. We're trying to, you know, to get to a 10. You've gotta, you've gotta be working the properties.
You know, That market's more of a 7%, 8% unlevered IRR business from what we've seen than, you know, than where we are. That's our. We have a slightly different strategy there.
I know we've hit the acquisition side a lot. Maybe on the dispo side, what you guys are seeing there, kind of what your focus has been on and some of the cap rates you're getting to kind of redeploy into new investments.
Last year, we sold about $145 million. Every year, we've always sold a handful of assets, either risk-averse assets or what I would consider flat assets that were 100% stabilized. When you look at what we're selling, that's exactly the profile. It's gonna have a little bit of both in it. Some of the assets that we've already stabilized that are generating a forward-looking IRR of a 6.5-7, you know, we're looking for more growth than that. That's why we're focused on recycling that capital into buying new acquisitions that'll deliver the 9%-10%. I think this year it's likely to think that we would sell between $100 million-$200 million. There's a lot of demand out there, so we're testing the market.
Cap rates that we're seeing on the product we're taking range from 5.2% up to 6.8%, 6.9%. Just depends on the market, the anchor, and so forth.
You guys have, as you kinda said, the beta with some of the alphas. You guys kinda look at the model. You have the strong underlying sustainable growth, but where's the upside maybe as you guys look at the algorithm? I know external growth is one of them, but where is the, kind of the real opportunity to push for investors?
Well, I think the real opportunity is the, is really the macro dynamics of our business, which is there's very little grocery-anchored shopping center space being built. We own some of the best, and we're buying the other parts of it. We've been able to sort of redefine a little bit of the REIT markets in terms of where you can go to create really strong returns but with limited risk. That's where, you know, when you can go into Cincinnati and buy the number one or two grocer in a market and pay significantly less than what you'd have to pay in, you know.
Here
L.A. or.
Here.
Here. Here, yeah. Here. You know, we've been able to sort of expand that, and that gives us the opportunity to find better returns still with very low risk. Not all businesses can apply to that because they are different in different markets. The number one or two grocer is sort of a. If you have the number one or two grocer, you have a, basically a monopolistic position on the market, where if a national retailer's coming into that market, that's where they wanna be. They wanna be next to the one or two anchor or grocer anchor. That has been a sort of.
We think that's what's allowed us to get the kind of returns we have. You're starting to see some of our peers sort of step into some of that a little bit, who have sworn it off as the end of the world if you ever have to do that. It's what we've done for 35 years. We know those markets. We know how to actually make a lot of money in those markets and with less competition. That's one of the things that I think gives PECO that ability to have outsized growth while maintaining that low beta.
Good job not naming names on the, those companies pivoting.
We've been getting abused by it for a while, so it's kinda like, "All right. Well, maybe, you know...
Can't beat them, join them.
Yeah, exactly.
As you guys look at guidance for the year, what gets you to the low end and the high end?
I'll take that. Ultimately, I would say continued strength in the consumer, you know, getting to our economic occupancy faster, moving neighbors in sooner. Continued strength in our spread. As Bob said, we've seen leasing renewal spreads over 20% in our pipeline, which looks out for, you know, another six months. It continues to be that strong, along with new leases out. I would say strength in the acquisition market and really, you know, perhaps better going in yields relative to that cost to capital. I would say all of that would help us to get to the higher end. Lower end, it would be, you know, more disruption from the consumer, perhaps slightly higher bad debt. Again, even on bad debt, I mean, it was just under 80 basis points last year.
This is a very low beta profile. I would also say when you were talking about with leverage and things like that, going back to the GFC and the pandemic, the occupancy loss is meaningfully less than anyone realized. Ultimately, we lost 60 basis points of occupancy in the pandemic. We lost close to 1.5% in the GFC. That's all. It was both of those were recovered within 12 months. I think that's part of what everyone realizes about the strength of grocery-anchored shopping centers is that lower beta profile. We actually feel really good about our guidance numbers for the year. Actually, you know, each year we understand the opportunities to exceed expectations, and that's what we're on our path to do.
On the watch list, you know, how does that look this year? As you think about it too, as you guys kind of blend more towards Everyday Retail without the anchor, kind of do you feel like that conversation becomes less important for you guys, or at least on the margin, right, versus some others?
I think the watch list is always something that has been. We kind of, you know, entertain the question, but I mean, we just don't have concentration outside the grocers. Our job is to make sure that grocer is present and healthy and happy. But ultimately, we just don't have concentration. Our largest non-grocery concentration are the T.J.Maxx brands at 1.3% of our rent. Ultimately, we don't have exposure to those large pieces. As we bring in Everyday Retail, ultimately, the part of the beauty of that is that it is where we know our business. It's ultimately.
That'll wake us up, right?
Okay.
Yeah.
Ultimately, it's more neighbors to our platform. We believe that, you know, our guidance is 60 to 100 basis points of bad debt, and we think it'll be right in there. Ultimately, giving us a chance where we know this portfolio can deliver 3% - 4% same-store growth on an annual and long-term basis.
We think that if you increase the everyday result, there's an opportunity to actually increase that. That's all even with the, you know, the bad debt profile. That is a part of the strategy, is to avoid having a large watch list.
I'm gonna pivot a little bit to AI. Hopefully it's smooth.
Yeah
you know, you guys have a, as you said, a more defensive portfolio. One of the big topics in retail has been agentic commerce and the impact on brick-and-mortar from that. What's your views on that? Kind of how do you feel your assets are positioned if that shift continues to happen?
Well, there has been a consistent sort of headwind for retail for a long time of. You know, starting with the sort of internet and shopping online and that piece. I think it's kind of been. A lot of that conversation has been eliminated because of the realization that customer acquisition is very expensive online. That is one of the reasons that the grocers have moved to BOPIS. One of the reasons the that they've moved to they'd much rather have you shopping in their store. The consumer's kind of gone along with it saying, "That is actually what I want. I do want options. I want to be able to get my stuff, order my stuff online.
I wanna be able to pick it up at the store, but I also really wanna be able to shop online. That's sort of taken that part away. What's AI going to do on top of that? There'll be a lot of, you know, supply chain issues that AI will become a very important part of. We hope that will drive down costs, drive up margins for the retailers, which would be, you know, which would allow them to pay more rent, which would be a very positive thing.
The, you know, disruption that we're gonna see in, I think, a number of other areas is probably gonna be less there on the retail side from our view. You know, and then from a PECO perspective, you know, we've had a data analyst for, I think, seven or eight years inside PECO helping us to use our data to make better decisions. For us, AI is just sort of taking that and stepping it up a, you know, a notch. We have 21 AI projects going right now inside the company. We are, you know...
We're committed to using it as an important part of the, of running the company part of it, not the retailers part of it. There are tremendous opportunities we think there to make the company more efficient and better in areas using AI. That's why we've, you know, committed to it. It's why we've committed, you know, literally for as long as PECO's been around, we've been heavy investors in technology, and this, for us, is the next step, and it's a very promising step. I mean, I think there's some really interesting things that we're pretty excited about that will help us to be even better than we are, and we're excited about that.
Perfect. just on our rapid fires here, what do you think same store for the retail group will be next year?
4%.
M&A, more, fewer, the same amount of companies this time next year?
Fewer.
Quick, one more quick one. Who do you have one particular kind of platform of AI that you prefer over the others like Google, OpenAI, Anthropic?
We're using Microsoft.
Microsoft?
Yeah.
Awesome.
It's a bet that a lot of people. You know, you're having to think through the bet on what is who's gonna be the survivor. Our bet is that Microsoft will be one of the survivors.
Thank you guys so much.
Yeah. Thanks, everybody.
Thanks, everybody, for coming.