Phillips Edison & Company, Inc. Q2 FY2021 Earnings Call

Good morning, and welcome to Phillips Edison & Company's Second Quarter 2021 Results Presentation. My name is Josh, and I will be your conference call operator today. Before we begin, I would like to remind our listeners that today's presentation is being recorded and simultaneously webcast. A replay of today's presentation will be available this afternoon on the Investors section of the Phillips Edison & Company website at phillipsedison.com/investors. The company's earnings release, quarterly financial supplement and 10-Q were issued yesterday, August 5, after market close. These documents are available for download on the Investors section of the Phillips Edison & Company website at phillipsedison.com/investors. I would now like to turn the call over to Michael Koehler with Phillips Edison & Company. Sir, please proceed.

Thank you, operator. Good morning, everyone, and thank you for joining us. I am Michael Koehler, Vice President of Investor Relations with Phillips Edison & Company. Joining me on today's call are our Chairman and Chief Executive Officer, Jeff Edison; our President, Devin Murphy; and our Chief Financial Officer, John Caulfield. Because this is our first earnings call as a publicly traded company, during today's presentation, Jeff will provide some background on Phillips Edison's 30-year history and our unique and differentiated strategy. Jeff will also discuss our transformative underwritten initial public offering that closed on July 19, 2021. John will then review our second quarter operational and financial results, our recent capital markets activity and discuss our guidance. Jeff will then return to provide an update on acquisitions and recap our long-term growth strategy. Following our prepared remarks, we will answer questions from the institutional analyst community. Before we begin, I would like to remind our audience that statements made during today's call may be considered forward-looking which are subject to various risks and uncertainties as described in our SEC filings. In addition, we will also refer to certain non-GAAP financial measures. Information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in our earnings release and supplemental disclosure issued yesterday, which are available for download on our website. With that, it's my pleasure to turn the call over to Jeff Edison, our Chief Executive Officer. Jeff?

Thank you, Michael, and good morning, everyone. Before we get into our results for the quarter, I would like to provide a brief overview of Phillips Edison, speak to our differentiated strategy, highlight our portfolio and review our growth plans. We are one of the nation's largest owners and operators of neighborhood grocery-anchored, omnichannel shopping centers. We've built our fully integrated operating platform for 30 years; our team of 300 associates is experienced, engaged and competitive. Our senior management team has an average of over 27 years' experience and 14 years with PECO. Our bench is broad and deep. This team has successfully navigated numerous business cycles. We brought our first center in Danville, Virginia in 1991, which had a net operating income of $260,000. Today, we have 294 properties and an annualized net operating income of over $350 million. Importantly, this team is also aligned with shareholders. Every associate who has been with PECO over 1 year owns stock in the company. They think like owners. I personally have never sold a share of PECO, and PECO leadership owns approximately 7% of the company. It's hard to find better alignment than having meaningful skin in the game. Our mission is clear and has been consistent for 30 years. We create great omnichannel, grocery-anchored shopping experiences, and we improve our communities one center at a time. We are grocery-centered and community-focused. One thing that you may hear during this presentation today is that we call our tenants our neighbors. Why do we call our tenants our neighbors? Because we work hard to create community at our centers and we treat our retailers as neighbors in that community. We believe in customer service and think it helps to remind the organization to treat our tenants like we would our neighbors. Our strategy is simple. We own and operate grocery-anchored neighborhood centers. Our centers are typically an open-air center that's 3 miles from your home. It sits at the corner of Main and Main, not Exit 15 on Interstate 80. It has a 45,000 square foot grocery store and is open 24 hours a day. You shop there twice a week, more than any other retailer you visit. This is the center you run to when you forget ketchup and you're grilling burgers for dinner. In addition to groceries, you can also get a lot of your necessity-based goods and services from the 65,000 square feet of small store shops at our centers. Think haircuts, dry cleaning, fast food, fitness and medical. Think Starbucks, Chipotle, Orangetheory, Walgreens and Wells Fargo. Our centers are not where you go to get your electronics or home improvement goods, discount clothing, sporting goods or office supplies. Those are power centers. They're usually twice the size of our centers. As you'd expect, these 2 types of centers are in very different businesses and have very different economics. We get 35% of our rent from our grocers. On average, our customers come to our centers nearly 2 times a week. We have limited exposure to big box retailers. We have pricing power and leasing. Historically, leasing demand has been consistently high for our 2,100 square foot average in-line spaces. Our capital requirements are significantly lower for keeping our centers fully occupied as well. We focus on owning centers with the #1 or #2 grocer within the market, a neighbor base with omnichannel strategy, where the grocer has both buy online and pick up in-store, or BOPIS, and home delivery capabilities. It has high exposure to neighbors selling necessity-based goods and services, and a trade area with favorable demographics for our neighbors to be successful. Each of these components is critical to our success. When it comes to our centers, we believe that format drives results. Our average center is 113,000 square feet, which is the smallest in the REIT shopping center universe. We own smaller centers in targeted neighborhood locations. Our centers create a positive leasing dynamic and align well with retailer demand. We see retailer demand concentrated in smaller footprint stores. Considering the average size of our in-line neighbors' 2,100 square feet, we believe our centers are best positioned to meet retailer demand. Our smaller centers allow for better growth because of our high retention rates and high re-leasing spreads. Our retention rates averaged 87% between 2017 and 2020. High retention rates result in less downtime and lower TI costs. This leads to higher NOI growth. From 2017 to 2020, our average cash re-leasing spreads were 8.8%, providing a meaningful avenue for NOI growth. Over the past 3 calendar years, our total CapEx, including development and redevelopment spend as a percentage of our NOI, has averaged just 20%. Our smaller format centers and lower exposure to secondary anchors require less CapEx than other retail real estate. Lower CapEx leads to higher AFFO. 73% of our ABR comes from neighbors that offer necessity-based goods and services. This means that we have limited exposure to high-risk retail categories like apparel, department stores and home furnishings. The top markets in our portfolio are Atlanta, Chicago, Dallas, Minneapolis-St. Paul and Denver. But we don't think about markets this way. We don't compete in MSAs. We compete at the neighborhood level, on the corner of Indian School Road in North 28th Street in Phoenix, and the corner of Vierling Drive and Marschall Road in Minneapolis. We target trade areas where our grocers and our small stores can be successful. Our average population density and median household incomes mirror that of Publix and Kroger, our top 2 neighbors. We make money where our top neighbors make money. Our 3-mile demographics, as you'd expect, are typically of the average American suburb. We have 61,000 people with a median household income of $68,000 in our average 3-mile trade area. Our shopping centers provide necessity-based goods and services to the average American. Our portfolio was built one asset at a time. We purchased 280 centers for over $4.7 billion between 2012 and 2018. On average, we bought over $670 million of properties per year during this time frame. More recently, we were the largest acquirer of neighborhood centers among our peers between 2018 and 2020. Acquisitions are an important part of our growth story. The following are PECO's key drivers of growth. Growing rents is the base of our internal growth strategy. Over the last 4 years, we have had sector-leading leasing spreads. We lease up vacant space to new neighbors. At June 30, 2021, we were at 90.6% in-line occupancy. We believe we can continue to increase this over time. We have built-in rent bumps from in-line neighbors. We've been able to build at least 2% rent bumps into approximately 80% of the new leases we have written this year, in addition to our strong re-leasing spreads. We execute redevelopment opportunities. These are primarily made up of outparcel development opportunities where we can build single-tenant or multitenant space on the existing or acquired land. These are, on average, $2 million per project. Our redevelopment opportunities also include teardown and rebuild opportunities with our grocers. We're targeting an average of 9% to 11% incremental underwritten yields on these projects. Our current projects are expected to deliver an average underwritten yield between 9.5% and 10.5%. As I noted, we have a strong track record of growing through acquisitions. We selectively acquire new assets that fit our focused strategy. Our plan is to purchase over $1 billion of assets over the next 3 years. PECO has grown consistently for 30 years, and we built a platform scaled for growth. We also have a best-in-class balance sheet that positions us for growth. We believe that there are also macro, demographic and economic tailwinds in our markets, which will augment the growth. These include the shift to work from home; the population shift to the suburbs into the Sunbelt, where approximately 50% of our properties are located; and the consumers buying locally. We believe our strategy generates superior risk-adjusted returns. Our targeted acquisition strategy in lower-profile trade areas allows us to purchase properties at initial yields 50 to 100 basis points higher than in coastal markets. We upgrade and remerchandise centers we acquire. This lowers the risk of our properties and creates income growth and value. Better going-in yields plus better growth plus lower CapEx leads to superior returns. Importantly, our portfolio has performed well in up cycles and proven to be resilient in down cycles. This delivers more alpha and less beta to our shareholders. Throughout our 30-year history, having access to low cost of capital has been a key driver to our success. On July 19, 2021, we completed our underwritten initial public offering, issuing 19.5 million shares of stock at $28 per share, generating $547 million of gross proceeds. This capital gives us the strongest balance sheet in the strip center REIT space, with a debt to adjusted EBITDAre ratio of 5.5x. With this balance sheet capacity, we can add external growth to the internal growth we generated year after year. The IPO is a major milestone for our company, but it is the beginning. And we remain focused, motivated and committed to successfully executing our strategy.

Thank you, Jeff, and good morning, everyone. Our results continue to benefit from the reopening of the economy as 100% of our leased ABR is open for business for the second consecutive quarter. Leased portfolio occupancy totaled 94.7% compared to 95.6% at June 30, 2020; anchor-leased occupancy totaled 96.8%; and in-line occupancy totaled 90.6%. The leased occupancy to economic occupancy spread was 60 basis points for the quarter. During the quarter, we executed 124 new leases and 174 renewal leases and options, totaling 1.4 million square feet. Comparable new lease rent spreads were 18.5% and comparable renewal rent spreads were 8%. Combined rent spreads were 10.4%. Our in-house leasing team has been busy executing new in-line leases with neighbors like the UPS Store, Jersey Mike's, Wingstop, Popeyes and Starbucks. Demand from retailers to be in our well-located, grocery-anchored centers continues to be high, illustrated by our strong leasing metrics and our 85.5% retention rate for the quarter. We continue to be optimistic about our long-term growth prospects. Collections during the second quarter of 2021 were 98% of our monthly billings, and we're on the cusp of reaching our pre-COVID collection levels which were typically between 99% and 100%. COVID validated our thesis that our necessity-based portfolio performs well in the good times and outperforms in the challenging times. Our first quarter 2021 collections increased to 98%, up from our originally announced figure of 95%, and fourth quarter 2020 collections increased to 97%, up from 95%. As of June 30, 2021, our outstanding balance of missed billing was approximately $12 million. Of this figure, approximately $5 million is to be collected under executed payment plans. We continue to work with our neighbors in order to collect unpaid billings. The $12 million of missed billings represents less than 3% of our total billings since April 1, 2020. Our second quarter core FFO increased 24.3% to $64.3 million. On a per-share basis, core FFO increased by $0.13 per share to $0.50 per diluted share during the second quarter of 2021. The increase in core FFO for the second quarter was driven by improved collections and lower interest expense. Core FFO per share also benefited from fewer shares outstanding as a result of our tender offer which closed in December 2020. Our second quarter 2021 same-center net operating income, or NOI, increased to $87.7 million, up 10.5% from a year ago. This improvement was primarily driven by stronger collections compared to 2020. Further driving the increase was a $0.57 or 4.5% increase in average base rent per square foot. Partially offsetting these improvements was an 80 basis point decrease in average same-center occupancy and reductions in recovery income, primarily related to a lower recovery rate in the aforementioned occupancy decrease. Please note that our same-center NOI includes 268 properties that we have owned and operated since January 2020. As of June 30, 2021, our net debt to adjusted EBITDAre was 7.1x compared to 7.3x at December 31, 2020. Adjusting for the IPO proceeds, including the full allotment of the greenshoe we received this week, our net debt to adjusted EBITDAre was 5.5x. At June 30, 2021, our debt had a weighted average interest rate of 2.9% and a weighted average maturity of 3.7 years. Approximately 69% of our debt was fixed rate. This compares to December 31, 2020, when we had a weighted average interest rate of 3.1%, a weighted average maturity of 4.1 years and approximately 75% fixed rate debt. Subsequent to the quarter end, we closed a new $980 million senior unsecured credit facility comprised of a $500 million revolving credit facility and 2 separate $240 million unsecured variable rate term loans, extending maturities to 2025 and 2026. A portion of our IPO proceeds was used to pay off our $375 million term loan that was set to mature in 2022. We have been preparing for our investment-grade profile by creating a highly unsecured debt structure with 73% of our NOI unencumbered with well-laddered maturities. Post IPO, we have over $600 million of liquidity. We will use this liquidity to fund our robust acquisition strategy, which we will touch on momentarily. Importantly, we have been assigned investment-grade ratings from Moody's and S&P of Baa3 and BBB-, respectively. We now have the ability to access the public debt market, and we plan to extend our maturity profile and diversify our sources of debt capital.

Moving to guidance. Now that we have covered our financial results for the past quarter, we'd like to provide initial guidance today relating to core FFO per share, same-center NOI growth and our acquisition and dispositions. These figures assume no substantial economic impact from future COVID variants. For the 2021 full year, we expect to report core FFO per share between $2.10 and $2.16 per share. This range is impacted by the potential timing of our acquisition and disposition activity for the second half of the year. This also includes the estimated same-center NOI growth between 5.6% and 6.8% for the full year. We expect to acquire between $160 million and $200 million of assets over the remainder of the year. And lastly, we expect to sell between $45 million and $75 million of assets over the remainder of the year, completing our quality improvement disposition program. When we think about growing our portfolio through acquisitions, we've identified over 5,800 grocery-anchored shopping centers in the U.S. that fit our portfolio strategy. These centers are all anchored by the #1 or #2 grocer in their respective markets and meet our demographic targets. We have a very disciplined acquisition process. Together, our long-term relationships with our grocers, our proprietary algorithms and our experienced and dedicated acquisition team drive our ability to buy the right properties at the right price. Year-to-date, we have closed on $40 million of assets and have an additional $70 million under contract. We believe we can hit our unlevered IRR target of over 8% on these assets. As John mentioned, we believe we can acquire an additional $160 million to $200 million of assets during the second half of 2021. Our track record, the market opportunity and current market conditions all give us confidence we can meet our targeted acquisition goals. So in conclusion, PECO has a focused, differentiated strategy of owning and operating small-format neighborhood centers, anchored by the #1 or #2 grocer in the market. Our nearly 300 grocery-anchored shopping centers are located where America's top grocers make money, in the neighborhood at the corner of Main and Main. PECO has an experienced, cycle-tested team and has outperformed the sector over time. Our line management team has meaningful skin in the game, owning 7% of the company, the highest among our peers. We're a growth company positioned to expand our portfolio. Our investment-grade balance sheet and strong cash flow support that growth. Our brick-and-mortar real estate plays a key role in our neighbors' omnichannel strategy and is complementary to e-commerce, including BOPIS and last-mile delivery. And lastly, we believe there are economic tailwinds that will support our strong growth plans over the long term. Thank you for your time today. With that, we will begin the Q&A portion of our call.

Our first question comes from Rich Hill with Morgan Stanley.

I wanted to just follow up on the acquisitions. I appreciate the guidance as to where you're going over the next several years, but noted that you didn't buy anything of note in 2Q. So I was hoping you can maybe provide a little bit of detail around why there wasn't any acquisition in 2Q. Was there anything specific? And as you think about the acquisitions for the remainder of the year, what's your cadence between 3Q and 4Q?

Thank you for your question, Rich. In Q2, we were focused on reducing our leverage without a clear growth strategy in place at that time. We were involved in a balancing act of selling and buying assets, which is why we didn't make any acquisitions in Q2. However, we did initiate the acquisition process then, and currently, we have $70 million worth of projects lined up and progressing towards closure. We expect this pace to pick up in the third and fourth quarters. Our goal is to purchase around $35 million more in property than we sell, aiming for an acquisition pace of over $300 million next year as the market becomes more favorable. Last year and the first half of this year were quite unpredictable due to the pandemic, and while there hasn't been much product available, we anticipate an increase in market activity moving forward. For our current contracts, most are set for the third quarter, and we expect to see more acquisitions put under contract as we approach the end of Q3. Does that address your question?

Great. John, that's exactly what I was looking for, Jeff. This may be a question for you. Your plus 10% same-store NOI growth in the second quarter, could you remind us or clarify what portion was driven by previously deemed uncollectible rents from past tenants?

Sure, absolutely. The net impact for the quarter was about $2 million of NOI related to out-of-period collections and recoveries of reserved amounts. On the collection side, this was approximately $3 million, while we experienced about a $1 million reduction in recoveries linked to reconciliations affected by COVID. In the second quarter, we had around $4.7 million of income from collections and reserve reversals from prior periods, which was counterbalanced by about $1.8 million of new reserves. This results in about $3 million net, which I mentioned as positive income. Additionally, there was about a $1 million impact on our recoveries concerning reconciliations and related activities with those neighbors.

Got it. Do you know what that is in basis points? I ask because we don't have much clarity on what it looked like in the second quarter of '21 for an apples-to-apples comparison. Do you have that in basis points?

Let me respond in another way. I want to ensure I understand your question correctly. Regarding the new reserves, if I exclude the out-of-period portion and focus on the reserves we recorded this quarter, it was approximately 1.4%. Additionally, I mentioned earlier that our collections are above 98%, indicating that we are functional and our neighbors are progressing. Historically, on a stabilized basis, our bad debt has ranged between 80 and 100 basis points. Therefore, at 1.4%, it is still affected, since 98% is not quite sufficient. The largest share of that issue consists of noncreditworthy or cash-based neighbors. So, it's about 1.4% if you disregard the higher figures, but we anticipate returning to a stabilized level in the third and fourth quarters at the current pace we are maintaining.

First, I just wanted to ask about leasing spreads and leasing activity a little bit. Spreads were solid again this quarter. Can you just talk a little bit more about the pricing power that you see with both anchor and in-line shops, your neighbors? And just discuss how you expect rents to trend moving further throughout the year?

Todd, thanks. This is Jeff. Thanks for the question. And Dev, do you want to go through some of the results we have and how we're looking going forward?

Thank you for being on the call this morning. We see several factors driving leasing demand. First, there are macro factors that we're benefiting from, including the continued growth in population in Sunbelt markets, which makes up 49% of our portfolio by ABR. We also benefit from the migration of population from urban to suburban communities, as our portfolio is nearly 100% suburban. The rise in the work-from-home trend further supports our suburban portfolio. Additionally, the focus on last-mile delivery is important for retailers, and our centers offer them an attractive option for this. Retailers are aware of these macro trends and are looking to locate stores accordingly, which is advantageous for us. We're seeing an uptick in leasing demand from national retailers. For example, we had 25 Starbucks at the end of last year, and we expect to have 35 by the end of this year. Humana locations are increasing from one to four, and they require large spaces, typically between 6,000 to 8,000 square feet, with rents in the high 20s to low 30s. Additionally, ATI Physical Therapy will grow from six locations at the end of last year to ten by this year. National retailers are significantly increasing their presence in our portfolio, which is anchored by top grocers that drive foot traffic. Tenants prefer locations in centers anchored by these grocers to benefit from the customer traffic. Our average tenant size is 2,100 square feet, and much of the leasing activity involves tenants in smaller spaces, as 65% of U.S. leasing activity is for stores less than 2,500 square feet. These trends contribute to our high retention rate, which is over 87% year-to-date. We are not seeing a slowdown in leasing activity; in fact, we signed more leases in July this year than in both July 2019 and July 2020. With an occupancy rate of 94.7% and continued strong leasing demand, we believe that our leasing spreads will be sustainable in the near future. We anticipate being able to improve occupancy rates by several hundred basis points to 93% to 94% and maintain our current levels of leasing spreads, consistent with the last several years.

Okay. That's helpful. I have a follow-up question regarding acquisitions. You mentioned that Sunbelt exposure is about 50% of the portfolio. As you assess the investment landscape and consider the acquisition targets and objectives you've outlined, where do you see opportunities to introduce new products? Is geography a key factor moving forward, or is it more about the local submarket and neighborhood?

We are very focused on the markets surrounding each shopping center we acquire, which is key to our acquisition strategy. We utilize a proprietary algorithm that helps us assess the risk in each of these markets. I want to clarify that we aren't limiting our focus to a specific region, such as the Sunbelt or the West Coast. Rather, our algorithm is yielding positive results, and there are more centers available in markets with population growth, like the Southeast and Southwest. The Sunbelt has become a significant part of our portfolio, and we anticipate this trend will continue. Our interest in markets such as Atlanta or Miami isn’t based on preference, but rather on the potential success of our grocers and small stores in those areas. We expect that our focus on Sunbelt properties will increase over the next five years due to the insights our algorithm provides regarding population growth, income levels, and the performance of retailers.

Maybe just another follow-up on the acquisitions. Jeff, you mentioned how the market was choppy over the past 1.5 years or so, and that now it will hopefully support acquisitions picking up. Just wondering if you can talk about what you're seeing now that makes you confident about the second half acquisition volume targets and even over the next 3 years, as you mentioned, a goal of $1 billion of acquisitions.

Thanks, Caitlin, for the question. We are observing some compression in cap rates. We believe that our target of an initial yield between 5.25% and 6.25%, along with our focus on achieving an 8%-plus unlevered IRR, remains attainable in the current market. This is evident from the first $70 million we acquired. Traditionally, as cap rates become more favorable, we see an increase in the number of property owners considering selling. We also anticipate additional selling activity due to potential 1031 exchange concerns and capital gains tax issues. Therefore, we believe there are several factors encouraging property owners to seriously contemplate selling shopping centers in the coming months, particularly with year-end deadlines approaching. Moreover, we expect valuation considerations will drive more transactions in the first half of next year. We are optimistic about the increase in available products, as we have identified 5,800 centers we aim to acquire. If properties sell approximately every 10 years, that equates to 580 centers. While we are not currently at that pace, it represents a more typical market activity. As we have indicated, our $350 million target represents a small percentage of that overall market size. Although the market is somewhat subdued at the moment, we are already seeing more acquisition opportunities in our recent committee meetings compared to three to four months ago, and we expect this trend to continue.

Got it. Okay. And then maybe just back to a question on rent collections and uncollectible rent reserve reversals. In the quarter, there was some. Could you just go through kind of what caused it in the quarter. And then going forward where your general reserve-level stands today. And your outlook on the ability to kind of receive those and then expect additional potential rent reserve reversals going forward.

Great. Okay, absolutely. Thanks, Caitlin. John, do you want to cover that?

Sure. Caitlin, thanks for the question. We're currently at a 98% rent collection rate in the second quarter, up from 95% in the first quarter. Our neighbors are doing very well, and our approach of ensuring they remain open and can pay current rent, along with collecting their back balances, has been effective. Cash basis neighbors make up about 8% of our outstanding rent, and we collected 89% of their dues this quarter. They remain on cash basis due to protocols about how long they need to be current, typically about 3 to 6 months, especially if they’re facing bankruptcy. I expect that percentage to decrease. We believe we’re still adequately reserved at the end of the quarter, but we anticipate further collections as the year progresses. Based on the midpoint of our guidance, I estimate an additional $2 million from earlier periods by year-end. Overall, our leasing strength is facilitating our ability to collect.

So I wanted to talk about the dispositions for a second. You've outlined $45 million to $75 million for this year. Maybe you could spend a moment or 2 on what about those assets makes them more disposition candidates and what your sense is of the cap rates given the growing demand and cap rate compression here. And then longer term, what's your sense of the portfolio of the 300-ish, I think, assets at IPO? What do you think that pool might be long-term candidates for disposition as you fine-tune the portfolio?

Thank you, Haendel. The dispositions are essentially the counterpart to our acquisitions. Currently, the pricing for dispositions is quite aggressive, and we believe we are achieving strong pricing for the assets we have sold and those we plan to sell moving forward. Our disposition strategy is straightforward compared to our acquisition strategy. We evaluate each property in our portfolio using a power score, which reflects our risk analysis, and we have 5- and 7-year models to forecast their internal rate of return. When a property starts to hinder the company's growth, it gets added to our list of potential sales. We aim to achieve pricing that aligns with the IRR generated from each asset. We will always have properties on the market, and at this point, many of these sales will be opportunistic rather than part of a significant portfolio transition, especially considering we have reduced our property count by 40 over the past 3.5 years. We have already undergone significant portfolio changes, and now our focus is on maintaining a portfolio that is continually optimized for growth and the returns we expect, targeting an unlevered return above 8%. This approach is consistent across our disposition strategy. Balancing this with our acquisitions remains challenging, as it is easier to sell in thriving markets than to buy. This is the current state of our operations. John, do you have the cap rate for the $70 million? I don't have that information right now.

Yes, Jeff, it's a 6.1% cap rate, Haendel, on the $70 million of acquisitions that are under contract. And then on the dispos, you'll see higher cap rates than the 6.1% because, as Jeff mentioned, the assets that we are in the market disposing now are lower quality assets and we're upgrading the portfolio by selling those assets. The reason I say they're lower quality is based on several factors. Number one, a number of them are shadow-anchored centers, and several of them have anchors that are not the #1 or #2 grocer in their market. They're anchored by grocers, such as a Winn-Dixie, names like that. And so the cap rate on those dispos is higher than what you're seeing on our acquisitions. But again, as Jeff mentioned, once we get through the dispo volume that we've articulated, we believe that the portfolio upgrade is behind us. And then our dispo strategy on a go forward will be purely opportunistic, where if the market's willing to pay an unlevered 6.5% IRR for an asset and we think we can redeploy that capital at an 8% or better unlevered IRR, we will do that.

Got it. Got it. And then if I could follow up on the missed billings. I think you mentioned the balance of $12 million, $5 million is under a payment plan of some form. Curious what the timeline for that repayment of that $5 million is. And then the other $7 million, maybe you could talk about the industry, the expectations there.

Great. Thanks, Haendel. John, do you want to cover that?

Sure. Yes, I'll take that. So that's right. We have about $12 million of outstanding, a good chunk of that includes the cash-basis neighbors. So what we would expect is the weighted average over that is, basically over the next 4 quarters, about half of it this year, half of it next year, on that $5 million. Sorry, that's the $5 million of payment plans that we have. So we'll get a portion of that, about half of it. With regards to the remaining $7 million, we've actually looked at it and we continue to collect it. So we do see positive movement. At the rate that it's going, I would expect it to be of a similar timeframe on that. And I think we're right now trying to make the best decisions based on opportunities for the space, the leasing at the center. And I know our portfolio management and operations teams are looking at it and saying, is this the best and highest use? And if so, then they're a bit more patient, especially if we're making progress there. But if we've got leasing opportunities, then we're a bit tougher.

You recently, of course, completed your IPO. I'm curious, what did you learn in the process of talking to investors and analysts? What is, in your opinion, the most underappreciated aspect of your portfolio? And on the opposite side, what aspects do you think the investor community looks with more skepticism?

Thank you, Paulina. The process has been remarkable. We just concluded our Board meeting where we discussed extensively how well-prepared the company was for this process. We approached it with a complete understanding of every aspect of our business, as we fully engaged in discussions. We received valuable feedback from the investment community regarding their concerns and preferences. One key realization was the importance of thorough preparation and understanding how different investors perceive our company. It's essential to communicate effectively about our strategy and how we think about our business. My main takeaway is that you need to scrutinize every part of your business when under investors' scrutiny, as each has unique preferences. Ultimately, we found that investors who recognized the strategy of offering essential goods and groceries to the typical American were the ones who invested. They believe this is a significant and relevant market, despite its underrepresentation in public markets. Those who bought our stock are strong advocates of this belief, and we share the same conviction. We've been telling this story for 30 years, not just preparing it for the IPO, which likely made it easier for us. Those are my key insights. Devin or John, do you have any additional thoughts?

Yes, Jeff. I would add that our strategy is unique and has several elements that contradict certain established viewpoints in the investment community. ABR and demos are critical metrics for us. Our ABR is the lowest among our peers, and our demos fall at the lower end of the spectrum. We needed to clearly communicate to investors that we operate in the necessity retail sector, providing essential goods and services to the average American consumer, which means we don't require high rents like those in high-end markets. We had to inform investors that despite our lower ABRs and demos, our historical performance in same-store NOI growth and FFO per share growth shows we lead the market in those areas. I believe we've made significant strides, and the investors from the IPO now grasp and appreciate our strategy. However, there are still some investors we need to persuade. We will keep working to emphasize the importance of same-store NOI and FFO per share growth while downplaying some other metrics that have gained undue prominence over time. That was a key insight we gained.

Yes. So we have targeted about $50 million of those projects a year. We would love to do a lot more of them because they're very profitable, where our incremental cash flow from these properties is between 9% and 11%, and we've actually outperformed that in the products we've delivered so far. It's just they're very difficult, they take time and it takes a lot of work to deliver them. So we think that, that's the range that we can deliver on. It includes 2 things. It includes what you were talking about, which is these individual, either single-tenant or multitenant buildings that we build on the peripheral of the shopping center, usually out on the main street but that are incremental to the existing properties. So that's the main one. The second piece is the teardown or rebuilds that we do for Publix, and that is another category where we do invest money, and that's part of the $50 million.

Paulina, I'll take this opportunity to add some information. In our supplement, we outline target stabilization timelines for the projects currently in progress, many of which are set to deliver in the third and fourth quarters of 2021 and the first quarter of 2022. We also have a pipeline of additional projects that will start afterward, most of which typically have timelines of around 12 months. This includes the teardown and rebuilds for Publix, which generally span from beginning to end. Given the time needed for design, permits, and other preparations, the overall process takes about a year. Consequently, the deliveries are spread evenly across the quarters, which should provide some clarity regarding the timing.

Thank you all for joining the call today. We truly appreciate your presence. As you know, we have been focusing on the IPO, and we are thrilled to have successfully completed it. The team that worked on this has been outstanding. Every associate at PECO was involved in this process and contributed in some way. We could not have achieved this without a collective team effort. It is evident that we have accomplished our goals, thanks to a dedicated team that delivered results. This is a reflection of everyone in the company who has worked hard to make this happen. At the same time, we have performed well on the operational side. Managing everything concurrently is challenging, but the team really came together. We appreciate you taking the time to be with us today, and if you have any further questions, please feel free to reach out. Have a great day, everyone, and thank you for being on the call.

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