Hey, good morning, everybody. For those who don't know me, I'm Andy Liu. I'm a CREN Services and REITs analyst at Wolfe Research, and it's my pleasure to be joined with CEO of Phillips Edison, Jeff here, as well as CFO John Caulfield. Jeff, I want to kick things off by handing the mic over to you. You've been with PECO for over 35 years. You've built this amazing portfolio, 326 properties, over 37 million sq ft. I want to just let you highlight the value proposition of PECO to investors today.
Well, thank you, and thanks, everybody, for coming in this morning. You made the elevator work. We did have a little more difficulty than most, but we got here. We started PECO 35 years ago with a focus on necessity-based retail. We were in a small market in the Southeast, and we bought a grocery-anchored shopping center. We did it, and that was the beginning of what we've continued to do for 35 years, which is to find projects where they're driven by necessity-based retail, primarily grocer. That's the portfolio we've built, and that's what an investment is PECO is. It's having that stable cash flow from our necessity-based retailers that sustains over a long period of time. We build a portfolio with less beta, but we didn't get to almost 40 million sq uare feet without a lot of growth.
What we're trying to do is to combine that strong beta, the low beta, so that we've got that dependable income with a lot of alpha. The alpha we build primarily through our acquisition program, which has been very active. This year, we're guiding to between $400 million and $500 million, and I think we're almost at $400 million already this year of acquisitions. Could be a really good acquisition year. We'll see how that progresses through the year. That's a big part of our alpha. We also have really good growth through the portfolio of properties that we've built.
You're combining the ability to grow from the core portfolio and that consistent growth from that, the acquisition growth on the external side, and that can give what we look at as our long-term consistent target of providing a mid-to-high single-digit FFO per share growth, and then adding into that a 3.5% dividend. You're in the 10 - 11 return, but on a consistent basis without a lot of beta in that and without a lot of risk. We built the company around that. We built our balance sheet around that, making sure that we have that solid core, but then with solid growth. That's what an investment in PECO is. It's finding places where you can have your alpha. We want that 10% return but without taking a huge amount of risk.
That's what we've done and been able to do for a long period of time and consistently produce that. That's not an easy thing to do, but we have, we believe the best team in the country to focus on it, and that's how we've been able to get to our results.
No, I think it's a great introduction, Jeff. I know, Ray, you pointed out the portfolio. You're predominantly grocery-anchored centers with a top one or two grocer. You have a great necessity-based tenant base in there. Can you just walk through sort of how has retail kind of transformed over the past decade? Because right now we've heard, you were at ICSC, the supply and demand environment is really great. Can you just dig a little bit more into that?
Sure. If you step back, retail's gone through a lot of cycles really over the last 20 years, and it was highly out of favor 10 years ago. The internet was going to take it over. There were going to be no more shopping centers. We got through that piece of the pie, and really what that did was it stopped any new development in our space. For the last 10-15 years, there's been very minimal new development in the grocery-anchored shopping center business. At the same time, we've had a very solid growth of a number of the retailers.
You've got this retail demand continuing while there's no new development. That's moved us from a position where there was relatively high vacancy, there was relatively low pricing power as we were leasing the space to the place we are today, which we've got very strong pricing power. We've got very strong demand for our space. We're at the highest occupancy level that we've been at in really the history of the company. We're able to grow rents substantially on a year-over-year basis. That's a big change in the environment that's happened over the last 10 years. It's not rocket science. It's supply and demand. There has been very little supply while demand has been increasing and robust. We've taken advantage of that in the growth that we've been able to do in our portfolio.
I would also add that if you look at the merchandising mix that you've seen in the portfolio, that continues to evolve and change as well. Clearly, 95% of our centers are anchored by a grocery store, with over 80% of them being the number one or number two grocer in that market. Over the last 10 years, really the part that has, I would say, changed is more service and quick service revenue and Medtail or medical retail over soft goods. When you look at, we were at ICSC a few weeks ago, and the brands that are coming out, all the coffee concepts, all the chicken concepts, but also you have the medical uses like a Pacific Dental and Pearle Vision, veterinarians, things. People getting services closer to their home.
That is something that continues to make our shopping centers very relevant in the communities and the neighborhoods that they're in. I think there's just, to Jeff's point, the low supply is being complemented with just continued increased demand.
Right. Of course, the supply and demand environment is really supportive of the industry right now. There are some macro headwinds we hear out there, for example, oil prices being elevated these days. Is there any real-time data that you're seeing that might have been impacting some of your retailers? Perhaps, how is the PECO portfolio positioned to mitigate or insulate itself from these macro headwinds?
I don't think we've felt the total impact of what's going on in Iran right now. I don't think that there's still a lot of sort of time to take place what's going to happen there. To date, our April traffic numbers were up 2% over last year. That's not a consumer that is retracting. If you talk to our retailers, they're continuing to see solid growth and solid demand, and that's from the grocer to the fitness store. They're seeing the consumer being a lot more resilient than the press would have you feel about it. I think it is a risk and it's something that we got to keep our eye on. We're really seeing no impact to date from that. We went through this whole tariff process. There was the conversation that that was going to disrupt everything.
The consumer stayed strong. I think what you see on the ground versus what you read in the paper are two different things. We're keeping our eye on our shopping centers, and we're keeping our ear listening to our retailers. If you listen to the retailers, they're as optimistic as they were 12 months ago and 24 months ago.
No, I think that's a great rundown. Given just the things we've talked about, the demand, the supply, and things are unabated despite these macro headlines that we hear. Around two years ago, you put out the same store NOI growth expectations, kind of 3%-4%. You've been delivering on that. 2025, you were at the high end of that. For 2026, you're guiding kind of consistent to these growth rates. You've actually put out two separate breakdowns of it. You have one where you have the occupancy growth tailwind. One, even if you hit full occupancy, you could still get to this growth rate. I want to dig deeper into that and kind of appreciate the growth prospects of a portfolio.
Great. John, you want to take that?
Yeah. We believe our portfolio can deliver 3%-4% same store NOI growth on a year in, year out basis. Last year, we were at 3.8%. This year, our initial guide is 3%-4%, and we're well on our way. I think we are at 3.5% in the first quarter. That is what this steady, predictable, growing cash flow portfolio that we have that we're going to be able to do. When you look at it, there's really a couple of components. We do, actually, although we have the highest occupancy of the retail shopping centers, we still believe we can push in-line occupancy another 100-150 basis points over the next 18-24 months. That's going to add somewhere between zero and 50 basis points a year in same store NOI growth.
The next piece is the supply part that we're talking about, which is everywhere is full, is allowing us to push rents. In the first quarter, our new rent spreads were up 36%. On our renewal spreads, which nine out of 10 of our neighbors renew with us, we were able to push those rents 21% in the first quarter. This is our third year now of over 20% renewal spreads. When you look at our ability to push those spreads, that's going to be another 100 basis points -1 50 basis points per year in NOI growth, and we do not see that slowing down. As we look at our leasing going out from here, which is pretty much the rest of the year, we see continued strength in the ranges that we're talking about. The other piece that we've been working on is pushing contractual rent bumps.
Right now, that's about 100 basis points of annual NOI growth in our portfolio. We actually think that we're going to continue to improve that. We attribute 100 basis points- 120 basis points of annual growth. We think that can continue to rise, but we're going to stay on the more conservative end right now. In the renewals, we're getting about 3% escalators in those renewal contracts. In the new leasing, that's a little bit closer to 2%. The last piece is we have a pretty robust redevelopment and development plan. These are primarily outparcels, so $2 million-$3 million parking lots and adjacent land or part of the parking lot that's not being used at the center. We get great returns on that, and we're going to do between $70 million and $80 million worth of those projects this year.
That delivers 9%-12% cash-on-cash returns, that's going to give us about another 100 basis points of growth. Andy mentioned that in our materials, we actually show kind of one with and without occupancy because we, for a number of years, have heard you guys can't put any more people in, yet we continue to drive occupancy. If we're not able to get any more growth from occupancy, we just think that spreads will move even higher because of the pricing power that we have. Spreads will make up for that, and we'll get even better rent bumps. Overall, 3%-4% on a year-in, year-out basis in our portfolio.
I think that's a really great rundown, John. I get that for the occupancy piece, right? It's not just about getting the occupancy number up there. The more important piece is having the right occupancy, or having the right merchandise mix, the right retailer mix who could get the sales that could support these rents. Can you kind of talk about, as you lease some of these properties and some of these spaces, what are some of the retailers that you're excited to perhaps have at your center? Are there any retailers or kind of retail categories where they might be willing to do a deal with you, but you're kind of thinking, well, maybe you're not the right
Yeah
kind of one we want in our center?
I think the fundamental of that is you can't drive rents unless you can drive sales. If your merchants are not doing really good sales and growing those sales, you can't grow their rents because they won't be profitable, and they won't be able to survive and things. The curating of the neighbors in your shopping center is a really important part of our job. It's difficult because we're in basically 320 different markets, and each center has to be merchandised to its market, to its anchor, to its demographics, to its overall position in which state it's in. All those pieces do play into how you merchandise it. If you don't do that really well, they then don't do well. They don't grow their sales. We can't grow our rents.
We are very meticulous about that process of finding the right merchandising mix for each center that we have. It changes. The population is aging. As people age, they tend to shrink the area within which they move, and they want things closer to their home. That becomes a big advantage for us because we are close to their home. We are within 3 mi of their home, you start to look at it and say, "Well, what would be there?" Well, if you look at Medtail, the whole medical community is moving their product closer to people's home. That's where they want to be. Our centers are where that really fits because they can get their groceries. It's a place that they're familiar with.
We're seeing a number of these Medtail uses that are expanding and create sort of a different option for our shopping centers, and that's been really positive. The food business is bifurcating a little bit. Certainly, the restaurant part of our business continues to be very strong. It's a little bit surprising that it continues to be as successful as it is. The grocery business, on the other hand, you look at and you say, well, that's kind of an old school thing. They're doing really different things inside the grocery store to bring you in. If you look at the sales of the good grocers, they're consistently seeing really good growth. I think that merchandising mix is a key part of our job is to get the right mix at every center.
We think that once we get that will assure our ability to continue to grow our rents.
No, I think that's really great. Zooming in on sort of the occupancy costs here. I know it differs by the retailer category, right? Grocer is kind of in the low single digits. It could be higher for some more inline tenants. As you push rents and you sign these leases, kind of how are you thinking about the occupancy cost? What is the right level, and what are the implications of that to how much further you could push rents?
In our portfolio, the grocers are actually between 2% and 2.5%. I think our average right now is 2.3%. The strong grocer maintaining that low occupancy cost ratio for them is extremely important for their commitment to the center because they bring in the foot traffic that feeds all of our inline neighbors. When we look at the neighbors that are not in grocery, that is closer to 10%, and that has actually held really constant over the last several years as we've been pushing rents meaningfully, which goes to Jeff's point, which is finding the right merchandising mix and the right neighbors that can continue to drive their sales, where we're able to push 20% renewal increases and 30%+ new leasing spreads. We actually think that we still have more room to go. We're around 10% today.
We think that can get to 12% and still be very successful. Andy's totally right. It does vary based on the use. Some can have higher than others. As a generalization, we still think that there is a long runway to go as we have new operators and new ideas that come in and can really increase that productivity. Our retailers are doing really well.
Right. It sounds like the occupancy side, the merchandising mix and spreads are trending really great. To take a step back, kind of thinking about what could be some of the negatives in there, for retail, it's always been credit, right? We have cycles of credit loss issues. Although when I look through your top 10 list, I usually don't find the typical names that I look out for. Looking at your credit loss expectations for the year, $5 million-$8 million, you're actually trending quite below that for the first quarter. Just want to talk through what are some of the names you're looking at or any retailer categories that you're monitoring currently.
When we look at our portfolio, our first and biggest credit decision is really around the grocer, making sure that they are incredibly healthy and committed to their space. That is a great part of our business. When we look at the remainder of it, we are so highly diversified. Our concentration, if you look at our disclosures, are all around the groceries. If you look at the largest non-grocer concentration, it's the TJ Maxx brands, and that's only 1.4% of our revenue. That's why when Andy's looking for troubled names and things, we just don't have that concentration. We would say that on a national level, our watch list is close to 2%, but they're going to be all the names that you're familiar with, but are add up to little things.
You might have a Kohl's in there, a Michaels, some of the pet stores. Those are just things we're watching. Actually, they're doing quite well. For us, our bad debt, our guidance range is around 60 basis points-100 basis points. Last year, it was 78, right in the middle. Our first quarter was at the low end, which is part of the question where you're going, "Well, isn't there an oil shock?" As Jeff said, we're not seeing it yet. Credit continues to be incredibly strong in our portfolio, and we actually see those as opportunities for new leasing because we are so highly occupied that our new leasing agents are basically trying to lease 100% occupied centers. That's where our acquisition and our growth strategy comes in trying to buy centers with additional vacancy or things like that.
I mean, our credit watch list is incredibly tight, even in today's environment.
I think that's really great because that 2%, I've heard it before, right? It's been 2% for many quarters now. To your credit, right? You're watching, you're monitoring it, ultimately, there's no real fallout there. I think that's trending really well. I was going to move over to sort of the external growth piece of the business, I want to see if there's any questions out there in the audience for internal growth. Yes.
Yeah. Question on the stat that you gave on traffic being up 2%?
Yeah
I think it was in April. Is that just on the grocery store or is it on the total property?
Total property, Placer information, Placer.ai. That's where we got that.
Anyone else for anything before I move on to the external growth piece? Yes.
Given all the positivity, why is there such a lack of new development? Is it lack of sites available, or they just don't pencil?
It's a combination of a couple things. The biggest driver of being the construction cost. The cost of building a shopping center when development was at its peak, which was really the power center kind of timeframe, probably 10-15 years ago, probably in the $250 a foot kind of range, maybe $300 with land and everything in it. Today that number is $500-$600 a foot. That cost means that the rents have got to basically double to get the same return, right? A big chunk of the development in that is what the grocer's willing to pay and what the box guys are willing to pay, and they're just not willing to. They haven't gotten to that kind of a price level. The only new development that when you dig through what development's actually happening, is development for almost a cause.
Either a city wants to have that represented, and they give large tax breaks, and they can make things kind of get there from that. It's a situation where the grocer is driving, in our space, where the grocer is driving development, and they basically are buying the land themselves and building it. It's not really a landlord position. The landlord might be able to build some small storage space around that and make that work better. It's the cost and then the inability to drive retail rents to that kind of a level. You're talking about big dollar rents, and that means the sales got to be even bigger, right? The retailer's just like, "We can't get there." Until that gap changes and I think it's years.
I mean, if you look at most projections, we'll be at very low new development numbers for at least the next five years. Does that answer your question? Great.
All right. Anyone else on internal growth? All right, I'm going to switch gears now, excuse me, to the external growth prospects of the business. You guys have been very active in the transactions market, right? You guys guided to kind of $400 million or $500 million of gross acquisitions this year. You're predominantly grocery anchored now, but you look at a lot of things. You look at shadow anchored, you look at unanchored assets as well. Just want you to talk a little bit more about how owning these different types of assets in the portfolio could synergize.
Yeah.
Our basic market that we go after is necessity-based retail. It is the type of retail that's close to your home, that when you drive by it, you're remembering, "Oh, I got to get that. I got to get that done. I got to get that done." You're getting your necessity-based things done at our shopping centers. It is that market that we look at to capture and to use our market knowledge to give us a competitive advantage over everyone else, and to be able to do better, and to be able to lease better, to have higher occupancy, and to be able to buy product better. That's what we focus on. It includes all of those pieces, but at our core, we are a grocery-anchor shopping center business.
We believe in the core view that grocery-anchor shopping centers with a number one or two grocer and right-sized will draw, is the optimum structure for the person when they wake up on Saturday, and they've got to get stuff done. They need groceries. They want to get a workout. They want to get something to eat. They got to get their nails done or their hair cut. All that stuff that we think is kind of mundane, we want to be the place that everybody thinks about in their community when they do it. We want to add to that community in providing the best of each of those alternatives so you're getting the best. You don't do that, it doesn't happen randomly.
It happens intentionally when you can take your team, and you can then get them focused on finding the very best retailers in each one of those categories. Then there's a synergy there that is created because the hairstylist and nail salon are talking to each other and, "Oh, what are you doing for your" All of a sudden you start to say, "Oh, well, I'm going to do that on Saturday, and then I'm going to go to the grocery store." Those pieces are really important. That's what is really hard to do in our business, but it's really rewarding, too, because you are actually bringing to the community the very best shopping opportunity in a really safe, clean, interesting environment. That's what we do, and we love it.
I would add that this is really a huge opportunity for us. In the last five years, we've acquired $1.4 billion in assets. Year to date, we're at about $200 million, on a full year guide of $400 million-$500 million, and we actually have a pipeline of about $200 million in assets that we'll expect to close in the next 60 - 90 days. The interesting thing about this is that when you look at that, our core focus all around necessity-based retail, we estimate there's about 6,000 grocery-anchored shopping centers in the country that PECO would own. When we think about everyday retail, which we're very excited about, we own about 12 of them today and expect to own about a billion dollars over the next three years.
If we only look around shopping centers that we are already locally smart, where we have a presence in the market, those are 50,000 opportunities. We think there's a great growth opportunity set where we can take the PECO platform that buys well, that operates well, that leases well, and supports all of that. That's a huge opportunity for us, and we're well on our way here in 2026.
Can I ask one question? We have a young group over here. Where are you guys from?
Katie.
Are you-
Katie.
Yeah.
Oh, great. That's awesome.
That was my guess.
No, that is great. As I look at even the stuff that you've bought over the past year, right? You've bought some stuff. You target some of these value-add opportunities, and you've bought assets that when I looked at it last year, it was like in the occupancies, it was in the 1980s, right? Now I look at it again, your supplemental, and these are 95%+ occupied. What is the secret here for PECO where Because obviously someone sold that center to you, right?
Yeah.
Why were they operating in the 1980s, and then you step in, and then you're able to push occupancy to 95+? What is the secret here?
It's relationships. When we step into any center that we buy, the first thing we do is work on becoming locally smart. A lot of times we're locally smart because we already own something close to it, and we understand what retailers want to be in there. We understand where it is that what we see this center as in terms of its contribution to its community, and it's that look that when we buy a center, we have a merchandising plan for that center of what we want it to look like. We don't buy it unless we have that. Then we work really hard to get to that. When you get to that, what you do is you change that entire center because you are starting to think of it as a merchant, not as just a piece of real estate.
You're trying to drive traffic to that center. You're trying to get the best retailers into that center, that changes it. That's where we have been successful. Yes, it translates into going from 80% occupied to 100% occupied, which we love and we make our money on it, and all that's great. The more interesting part is it drives sales, and it drives the view of that center relative to the community retail experience. We are that. We become that. All of a sudden, yeah, you go from 80 to 100, but it happens naturally because we are the place you want to be if you're a retailer. Mostly it's because they can drive the best sales. They also bring the best product, and they work together.
Yep, your local knowledge definitely stands out.
Yeah
in the earnings prints you guys put out.
Yeah. By the way, you don't get locally smart without a heavy use of technology. We have leveraged technology from the very start of the company to be able to be in multiple markets. We're basically in 30 states. You can't do that with 6,000 neighbors really well, without a heavy understanding of where can you leverage technology to get the best results. We've done that consistently, really from the very start of the company.
Yeah, that is amazing.
Yeah.
As we're pushing up on time, is there any standing questions from the audience here? Yeah.
What's the status of the Cohen & Steers joint venture? How many assets are there, and how does their strategy differ from PECO?
Let me start with the strategy. The strategy is different in that our typical shopping center is a grocery-anchored center that is 115,000 sq ft Our target for Cohen & Steers is somewhere between 200,000 and 300,000 sq ft . The Cohen & Steers JV includes some bigger box kind of participation, which we don't put on our balance sheet. Right now I think it's 250.
Yeah.
250.
We just closed on a new asset last week, actually.
Yeah. It's around, say, $250 million. We're hoping to get that to $700 million-$750 million over the next 12- 18 months as we continue to buy. They've been a great partner, and we're excited about the venture. It sort of widens the scope of what we can buy or what we're willing to buy. We've so far found we basically have five centers that we wouldn't have had without the JV. We consider that kind of a good win.
Any other questions? All right. With that, Jeff, I know we've gone through a lot today. Is there any closing remarks that the audience should take away when they walk out of this room?
Well, I think it's a really simple thing to say that you're creating more alpha and with low beta. We have built a platform that can do that, and we can do it day in, day out. That is what we think is special about PECO in terms of a financial return basis. What actually I think is really special about PECO is the fact that we take our centers, we create a community. When we own a center, it changes the community around it. We upgrade it consistently, and we create a better environment, which then helps the communities that we go into. That is a part of our story that is not looked at because we're in a financial analysis part. I think that's part. The other part is we've built a team over 30 years.
When our president retired, the person replacing him had worked for us for 25 years. We have a really strong team. This more alpha part creates opportunity, because we're constantly buying properties, turning properties around, creating new centers out of kind of not-so-good centers. That creates an excitement, and it challenges people. That, I think, is part of what the success that the company's had. Because, yes, we do really good numbers, and we have the best numbers in the thing, but that's not why we're doing it. We're doing it because we have the best team in the market, and we're going to continue to grow that. I think that's going to continue to create that alpha that we're talking about.
All right. Awesome. I appreciate it. Thank you so much, John and Jeff.
Yeah.
Thanks, Andy.
Yeah, thanks for that . Thanks, Andy.