Good day, ladies and gentlemen, and welcome to Phillips Edison & Company's Fourth Quarter and Full Year 2022 Earnings Conference Call. Please note that this call is being recorded. I would now like to turn the call over to Ms. Kimberly Green, Head of Investor Relations. Please go ahead, ma'am.

Thank you, operator. I'm joined on this call by our Chairman and Chief Executive Officer, Jeff Edison; our President, Devin Murphy; and our Chief Financial Officer, John Caulfield. Once we conclude our prepared remarks, we will open the call to Q&A. After today's call, an archived version will be published on our Investor Relations website. As a reminder, today's discussion may contain forward-looking statements about the company's views of future business and financial performance, including forward earnings guidance and future market conditions. These are based on management's current beliefs and expectations and are subject to various risks and uncertainties as described in our SEC filings, specifically in our most recent Form 10-K and 10-Q. In our discussion today, we will reference 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 press release and supplemental information packet, which have been posted to our website. Please note that we have also posted a presentation with additional information. Our caution on forward-looking statements also applies to these materials. Now I'd like to turn the call over to Jeff Edison, our Chief Executive Officer. Jeff?

Thank you, Kim, and thank you, everyone, for joining us today. The PECO team in 2022 delivered another year of strong growth with same-center NOI increasing by 4.5%. We continue to benefit from a number of positive macroeconomic trends that drive neighbor demand and support our growth, including hybrid work, migration to the Sunbelt, and population shifts that favor suburban markets. These demand factors are further amplified because limited new supply is being delivered to the market. We accomplished a great deal in 2022 and have a lot to be proud of. At the macroeconomic level, the year presented many challenges with record inflation, rising interest rates, and global conflict. However, the sustainability and consistency of our growth is a testament to our differentiated and focused strategy of exclusively owning grocery-anchored neighborhood shopping centers and the strength of our integrated and experienced operating platform. As we assess our business today, we're optimistic about the health of our neighbors and the strength and diversity of our neighbor mix. Our team in 2022 delivered record highs in occupancy of 97.4% and combined leasing spreads of 18.1%. Our development activity provides attractive risk-adjusted returns on investment and sustainable and meaningful contributions to our same-center NOI growth. Our acquisitions are performing very well, and our pipeline continues to grow. We closed on an asset in January with more under contract and in negotiation. We observed the market power shifting to the buyer, and with our platform, experience, and capital, this should position us well to capture additional opportunities. Our centers are located in markets that are growing and have a strong competitive advantage with our grocery anchors. We have grown our cash flows and dividend distributions. We have a great balance sheet, low leverage, and flexibility to be both patient and opportunistic. We could not have accomplished these results without the hard work of our PECO associates. I'd like to thank the PECO team for all of their efforts. As we look ahead to 2023, we remain focused on delivering long-term growth. Our gross-anchored neighborhood centers continue to benefit from structural and macroeconomic trends that create strong tailwinds and drive strong labor demand. These trends include population shifts from urban to suburban markets, the increase in hybrid work, the renewed importance of physical locations in last-mile delivery, wage growth, low unemployment, and low supply with a lack of new construction. The resiliency of our neighbors, combined with the aforementioned tailwinds, positions PECO well for all economic environments due to the following: our necessity-based neighbor mix, our rightsized format, our well-positioned locations in growing markets, our record high occupancy, and continued strong labor demand. Our strong credit neighbors and diversified mix decrease our exposure to distressed retailers, along with our balance sheet and our talented, cycle-tested team. When we consider our pricing power created from continued retailer demand at high occupancy, combined with these aforementioned tailwinds and the resilient necessity-based focus of our neighbors, we believe our growth strategy generates more alpha with less beta. While John will provide details of 2023 guidance later, I'd like to spend a few minutes walking you through the components of our long-term growth. We believe our portfolio can deliver organic same-store NOI growth of 3% to 4% on a long-term basis. The components of this growth include continued increases in occupancy, which will contribute 50 to 100 basis points, rental growth, which will contribute 100 to 125 basis points through new and renewal leasing spreads and contractual rent increases, which will add 75 to 100 basis points, and redevelopment and development activity, which will add 75 to 125 basis points. This gets us to our 3% to 4% long-term growth. Beyond the strong internal growth, we remain focused on accretively growing our shopping center portfolio. These investments are core to PECO's long-term external growth strategy, and we continue to be well positioned to capitalize on opportunities as they arise. We are conservatively guiding to $200 million to $300 million in net acquisitions this year, with the capability and leverage capacity to acquire more if attractive opportunities materialize. We previously increased our targeted return for new acquisitions to an unlevered IRR of 9% or above. We plan to participate in the market when we can achieve this return objective while exercising the same diligence we've always exercised. We are finding those opportunities today. Therefore, with our combined internal and external growth drivers, we believe PECO can deliver mid-to high single-digit FFO per share growth on a long-term basis. I'd now like to provide a quick update on the proposed Kroger and Albertsons merger from PECO's perspective. We continue to believe that the merger is positive for PECO and for our centers and for the communities that our centers serve. We have 33 stores with an overlapping brand within 3 miles that could potentially be impacted. These stores have average store sales of $35 million or $620 per square foot. This compares to PECO's average of $6.42 per square foot. These are all productive grocery locations with strong sales and health ratios. These centers are also vital parts of their communities. We believe all 33 locations will remain productive grocery locations regardless of the ultimate outcome of the merger. This merger process will take time to unfold, but we remain positive on the impact it will have on the assets that we own. I'll now turn the call over to Devin to provide more color on the operating environment.

Thank you, Jeff. Good afternoon, everyone, and thank you for joining us. As Jeff mentioned, the PECO team is encouraged by the continued positive trends that we are seeing in our grocery-anchored portfolio and in the overall operating environment. We realized strong internal growth in 2022, which is reflected in our financial results. Lease portfolio occupancy increased by 30 basis points sequentially from the third quarter and by 110 basis points year-over-year, reaching an all-time high of 97.4%. We still see some occupancy upside in our portfolio, and when that driver of growth is no longer available, we believe that it will be replaced by incremental rent growth. We are seeing that transition today as our rent spreads have increased above historical levels. Throughout 2022, our neighbors demonstrated resiliency and successfully managed many challenges, including inflation, supply chain issues, and labor shortages. Despite these challenges, our neighbors continue to invest in their stores, their technology platforms, and the overall customer experience. Comparable new and renewal rent spreads for 2022 were strong at 32.2% and 14.6%, respectively. Excluding anchors, renewal spreads were 17.7% in the fourth quarter. Our leasing pipeline remains strong and shows no signs of slowing. The most active neighbor categories include medical, quick-serve restaurants, and health and beauty. We are seeing consistently strong neighbor demand across all geographic regions. We continue to have excellent success retaining our neighbors while growing rent at attractive rates. Our fourth quarter retention rate was 92%, ahead of the historical average of 87% over the last five years. As Jeff mentioned, this factor is a large contributor to our rent growth over time. Our retention means no downtime and less tenant improvement costs. Our TI spend on renewals over the last five years averaged less than $2 per square foot. We have also been successful at driving higher contractual rent increases. On average, our new and renewal in-line leases executed in the fourth quarter had annual contractual rent bumps of 2.4%, another contributor to our long-term growth. In addition to our strong rental growth trends, we continue to focus on and expand our pipeline of ground-up outparcel development and repositioning projects. In 2022, we stabilized the highest number of these projects that the PECO team has ever delivered in a single year. These projects delivered over 300,000 square feet of space and add incremental NOI of approximately $5 million annually. These projects provide superior risk-adjusted returns and have a meaningful impact on our long-term NOI growth. In 2023, we will invest $50 million to $60 million in ground-up outparcel development and repositioning opportunities with average estimated underwritten cash-on-cash yields between 9% and 11%. We continue to see the many benefits of PECO's grocery anchor portfolio with our healthy mix of national, regional, and local retailers. More than 70% of our rents come from neighbors offering necessity-based goods and services, and our top grocers continue to drive strong recurring foot traffic to our centers. We are currently seeing a resilient consumer despite the tougher macroeconomic backdrop. We believe our incentives are less impacted by an economic downturn because more than 70% of our rents come from necessity-based goods and services. Our trade areas offer favorable demographics with median household incomes of $77,000, which is approximately 9% higher than the U.S. median. The demographic strength of our trade areas is reinforced by the continued demand from retailers for space at our centers. In a recession, consumers will continue to frequent the grocery store, the barber, the local quick-serve restaurant, and other necessity retailers. Our single non-grocery neighbor is T.J. Maxx at 1.4% of ABR. All other non-grocery neighbors are less than 1% of ABR. PECO had no exposure to luxury retailers, office, or theaters, and very limited exposure to distressed retailers. The top 10 neighbors currently on our watch list represent just 2% of our ABR. As a reminder, our combined exposure to Bed Bath & Beyond and Party City is minimal. These two retailers represent 10 and 20 basis points of ABR, respectively. Twenty-six percent of our ABR is derived from local neighbors. Sixty-four percent of our local neighbors' rents come from retailers offering necessity-based goods and services. Our local neighbors are successful businesses run by hardworking entrepreneurs. The acute credit and are less susceptible to corporate bankruptcy caused by weaker-performing locations. A local neighbor typically receives less capital at the beginning of their lease, accepts more PECO-friendly lease terms, has high retention rates, and achieves renewal spreads similar to national neighbors. Importantly, they differentiate the merchandise mix that our centers offer our customers. Our local neighbors are resilient and have been in our centers for 8.8 years on average. According to CoStar's recent global Predictions report, grocery stores and essential retail are among the most resilient retailers during recessions. During the pandemic, grocery stores and the foot traffic to these centers recovered at a faster rate than that of other retail locations. Since the pandemic, the vacancy spread between grocery-anchored and non-grocery-anchored centers has widened. Grocery-anchored centers are well positioned to maintain these lower vacancies, which we are experiencing in our portfolio. We expect these favorable trends to continue to benefit PECO's well-located, grocery-anchored neighborhood centers in 2023 and beyond. We have added slides to our investor presentation on these recent CoStar insights. In summary, the PECO team remains optimistic about the current strong operating environment and the continued positive momentum we are experiencing across leasing, redevelopment, and development. In addition, our healthy neighbor mix and grocery-anchored strategy positions PECO well for continued steady growth. I'd now like to turn the call over to John.

Thank you, Devin, and good morning, and good afternoon, everyone. I'll start by addressing fourth quarter results, provide an update on the balance sheet, and then walk through some highlights of our initial 2023 guidance. Fourth quarter 2022 NAREIT FFO increased 43% to $71 million or $0.54 per diluted share. This result benefited from an increase in rental income and reduced general and administrative expenses. Fourth quarter core FFO increased 22% to $74 million or $0.56 per diluted share driven by increased revenue at our properties from higher occupancy levels and strong leasing spreads as well as lower property operating costs and general and administrative expenses. Our fourth quarter 2022 same-center NOI increased to $91 million, up 2.8% from a year ago. This improvement was primarily driven by higher occupancy and an increase in average base rent per square foot, driven by our strong renewal and new leasing spreads, which was partially offset by lower collectibility reserve reversals in the current period when compared to 2021. During the quarter, we acquired two grocery-anchored shopping centers and one outparcel for $52 million, and we sold one shopping center and one outparcel for $25 million. Our net acquisitions for the year was $226.5 million. Subsequent to quarter end, we acquired one additional grocery-anchored shopping center for $27 million. From a balance sheet perspective, we ended the year with over $700 million of borrowing capacity available on our $800 million credit facility, and we have no significant debt maturity until the second quarter of 2024. Between the free cash flow generated by our portfolio and the significant capacity available on our revolver, we are confident in our ability to fund our growth plans, which is an important place to be given the current capital market environment. Our leverage ratio continues to be strong as a result of our strong earnings growth as well as our prudent balance sheet management with our net debt to adjusted EBITDAR of 5.3 times as of December 31, 2022, compared to 5.6 times at December 31, 2021. At year-end 2022, our debt had a weighted average interest rate of 3.6% and a weighted average maturity of 4.4 years. Approximately 85% of our debt was fixed rate. We continue to monitor the debt capital markets for the right opportunity to extend our maturity profile. Our variable rate debt allows us to maintain flexibility such that we can access the bond market or bank market without prepayment penalties, and our low leverage reduces the impact of rate volatility on our earnings. We anticipate addressing our 2024 maturities along with long-term funding for our expected 2023 acquisition volume later this year. We believe patience is prudent as we continue to gauge the attractiveness of the market. Turning to guidance, please be sure to review the incremental detail added to our press release, which we have also added to our supplemental. Starting with our same-center NOI growth, we are guiding to a range of 3% to 4% growth from our portfolio in 2023. This growth is aided by our leasing activity in 2022 with increased occupancy and favorable rent spreads in our development and redevelopment activity. Included in this range is the negative impact of normalizing our anticipated uncollectible reserves to historical levels of 60 to 80 basis points of revenue. Our initial core FFO per share guidance range is $2.28 to $2.34. Our internal growth is aided by an incremental lift from our 2022 and anticipated 2023 acquisitions, partially offset by incremental interest costs. As we look to 2023, we anticipate approximately $86 million of interest expense at the midpoint. Our acquisition pipeline is healthy; for 2023, we are guiding to acquire between $200 million and $300 million of assets net of disposition activity to further optimize our internal growth. We plan to continue to selectively recycle assets with proceeds being deployed into high-quality, higher-growth assets. As Jeff mentioned, we believe we are well positioned for long-term growth and we are delivering strong internal and external growth. Importantly, we have the flexibility to be patient and pursue accretive opportunities as they arise that will provide meaningful NOI contributions in 2023, 2024, and beyond. And maybe most importantly, as we consider the economic uncertainties, we continue to have one of the strongest balance sheets in the sector allowing us the ability to remain on offense and pivot quickly in response to changing market conditions. We believe our strategy has historically and will continue to prospectively generate excellent risk-adjusted returns. Our results in 2022 are no exception. With that, we look forward to taking your questions.

We'll take our first question today from Craig Schmidt at Bank of America.

Thank you. Where will PECO's total occupancy and small shop occupancy be by the end of 2023?

John, do you want to take that?

Sure. Thanks for the question, Craig. So we still believe that we have room to grow our occupancy. Currently, we're at over 99% on the anchor. So we're down to a few spaces there. So I think that part holds still, but at 93.8% on the in-line, we still believe we have about 150 basis points that we can grow that. And I would say that's probably over the next 12 to 18 months.

Great. And then just on the adjustment for collectibility of 3.5 to 4.5 versus 2. When I look at your portfolio, I see very little exposure to bankruptcies and store closings; what's driving you to this higher number?

Yes, Jeff, I will address that again. The primary reason for the lower figure in '22 was the final amount of reversals from previous years. We have indicated that this portfolio typically experiences uncollectibles between 60 to 80 basis points each year. We anticipate this consistency to continue from year to year, and that has been our experience with this portfolio.

Great. Thank you.

We go next now to Haendel St. Juste at Mizuho.

This is Ravi Vaidya on the line for Haendel St. Juste. Hope you guys are doing well. Can you discuss your decision to buy an asset with relatively lower occupancy versus the rest of your portfolio? What sort of upside do you see there? And is this going to be more of a targeted strategy going forward with regard to external growth?

Ravi, thanks for the call and appreciate you being on today. One of the things we did over the last 30 days, really 60 or 90 days, was look at our cost of capital. As that's going up, we've actually adjusted our unlevered IRR from 8% of the IPO to 9% today. One of the things that we're looking for are opportunities where we can have growth in a variety of different ways in the properties that we're buying. Where we see lease-up occupancy is one of those opportunities in select locations and select properties, but we're looking at ways that we can find properties with more growth potential than real stable flat returns over time. So yes, I think you could expect us to be more active in that market, but as you know, the market has some pretty big bid-ask spreads today. So we do anticipate that volume will be a little slower in the first half of the year.

Got it. Thank you. That's helpful. Just one more here. Regarding leasing, it's been very active, but how sustainable do you think the current leasing spreads are, especially with spreads over 30%? How healthy are the retailers from an occupancy cost ratio standpoint to sustain these continued higher leasing spreads?

Devin, do you want to take that?

Sure. Ravi, thanks for the question. Again, we're not seeing anything that causes us to believe that those spreads are not achievable, at least in the near to mid-term. I know that number at 30% seems shocking, but you have to realize that these retailers are entering into leases between five and six years, and the CAGR we're getting is less than 3%. The way we think about it is, when we look at our overall ABR, our overall in-line ABR increased approximately 5% year-over-year. When you think about how retail sales are growing, particularly in the categories that we have large exposure to, food, health, et cetera, those retail sales have been growing at mid-single digits to low double digits. The fact that our average ABR is growing at mid-single digits makes us comfortable that we can continue to sustain these kinds of spreads. At the end of the day, the ultimate test is the fact that we don't see any slowdown in the demand coming from the retailers to lease space in our centers.

Got it. Thank you. Thanks so much.

In addition to that, our retention rates are remaining very strong. This indicates that rents are increasing, and if anything, they are higher than they have been. Based on what Devin mentioned, we believe this is a long-term sustainable model that will allow us to raise rents in the 4% to 6% range, enabling retailers to remain healthy and manage that kind of cost increase.

Thank you. Appreciated.

We go next now to Tayo Okusanya at Credit Suisse.

Hi, good afternoon everyone. Just a quick one on interest rates. The swaps that are coming due September '23. Just curious what your thoughts are on that and how that's built into your guidance?

John, do you want to take that?

Sure. Thanks, Tayo. As we look at the situation, we have positioned ourselves to be patient and flexible. We have swaps maturing in September and are considering our debt maturities in 2024. As mentioned in the prepared remarks, we plan to address those 2024 maturities later this year with additional long-term funding, and we expect to settle matters then. We're exploring options to extend, but currently, we have assumptions in place for refinancing the 2024 debt and addressing that at that time. This could involve the bank market or the bond market, depending on our cost of capital and our goal of maintaining an attractive cost of capital.

That's helpful. The second question is about inflation. There’s a view that after a while, food prices might actually become discretionary, which typically isn’t a good environment for grocers. Are you hearing any of that from your grocery neighbors? How do they prepare for such a scenario in the current market conditions?

Yes. So Tayo, thanks for the question. We are not hearing that from our grocers; they still are ringing the bell on inflation, not a deflationary environment. They still have very positive operating results where they are actually able to pass those costs onto their customers. As long as that continues, it will be positive. Certainly, the deflationary environment is not positive. We would agree. The grocers, they love that 2% to 3% inflation. It’s certainly too high right now from their perspective, and they don’t see from our conversations that coming down in the short term. I don’t know if Devin has any other thoughts on that.

No, that makes sense, Jeff. That makes sense.

We'll go next now to Juan Sanabria at BMO Capital Markets.

Hi, good morning. Thanks for the time. Just hoping you could provide a little perspective on the acquisition market and pricing and where the bid-ask spreads are today. Can you give us the yields for the fourth and first quarter acquisitions, and what is baked into the assumptions for '23 guidance?

Let me share some general thoughts. Currently, I don’t believe we're comparing those figures to last year. However, if we are, John can provide input. The market is experiencing what often happens when there's a change in the cost of capital; it takes time for buyers and sellers to adjust to the new conditions. As a result, volume has clearly declined in the second half of last year, and that trend is continuing into this year. Overall, volume is down, and we expect this to persist until the bid-ask spread narrows. We have identified a few select opportunities that we're enthusiastic about; these involve sellers who are eager to sell and are adjusting to what we perceive as the new market pricing more quickly than the wider market. We believe this adjustment reflects about a 100 basis point shift in initial yield and likely over 100 basis points in unlevered internal rate of return. This represents a significant change, and it will take some time for the full impact to be realized. Depending on future rate changes, there is potential for further widening. We are examining everything available on the market and have already found a couple of promising opportunities that we plan to pursue further.

So, Jeff, I'll jump in. For the full year, our weighted average cap rate was 6.1, but to the points that Jeff is making, there is variability in there because we focus on the IRR; there can be a delta in the going-in cap rate based on the amount of growth that we have. If you look at our third-quarter acquisitions compared to our fourth-quarter acquisitions, the fourth quarter was closer to our total year weighted average cap rate. But the IRRs make up for the growth in that asset relative to the third quarter. If we look to '23, if '22 is at 6.1, I can see that we’re assuming we’ll have a slightly higher cap rate on that assumption. Let's say anywhere from 15 to 30 basis points, but it could be wider than that again, depending upon the amount of growth. The key element for us is that 9% IRR and we expect to exceed that.

And then just a second follow-up question on retention versus pushing the spreads for the small shop tenants. I know the retention is very strong for anchors, but I'm just curious about your willingness to have a little short-term vacancy to drive rates at this point. It seems like you're pretty full. So just curious how strategically you're thinking about that interplay between rate and retention.

It's a great question. There’s a lot more art to it than there is science. The numbers can tell you how much TI you're putting in and what the increase in rent is compared to the lower TI for retention. That certainly goes into our analysis, but making sure we have the right merchant in the center that matches that store is critical because if they can continue to generate and increase their sales, they can, over time, pay us a lot more rent. Finding the right retailer for us is a critical part of that decision process as we look at filling out our small store space with the right merchandising mix for each market.

Jeff, the only thing I would add is that our retention rate in the fourth quarter was indicative of our willingness to push rate and potentially be less focused on retention. You saw our retention rate in Q4 at 67%, which is lower than the full-year average of 77.5%. The decision we made in that fourth quarter was to push rate and optimize merchandise mix. At the end of the day, we’re not overly weighting retention; we’re prioritizing our ability to push rates and get the right merchandise mix into the centers. I think you see that with our retention rate for in-line did in the fourth quarter.

We go next now to Todd Thomas of KeyBanc Capital Markets.

Thanks. John, first question; I just wanted to go back to the balance sheet. The swap expires in September, and guidance assumes throughout the balance of this year, '23, the cost on the $255 million increases by about 325 basis points for the balance of the year, perhaps in early '24. Is that right? It looks like the '24 maturities are in September and October. When would you expect to refinance those maturities?

Sure, Todd. I would say, yes, your 325 basis point increases compare where it currently is to where spot SOFR is. However, if you were to turn that out over a longer duration, that rate does come down. As for maturities in '24, I mentioned we have a $100 million maturation in May and the remaining $375 million basically on September 30, 2024. We’d be looking to extend those maturities, refinance them in the middle part of this year; could be Q2, it could be at any time. We have the ability to be patient in our relationships to give us that flexibility. I'd prefer it to be earlier, but if I were to model it, I’d say the middle to the end of the year would be the right way to think about it.

Okay. And then is there any additional capital raising activity embedded in guidance for 2023? How should we think about funding acquisition, net investment activity during the year?

Our guidance does not include any equity raise. That is something that we are balancing both on the equity side and debt side as we evaluate our cost of capital. We feel very comfortable and confident that we can manage our funding activities and stick to the guidance range that we've stated. In terms of debt capacity, we maintain solid relationships with our lenders; we also look at the unsecured market, private placement market, and the bank market, all the while focusing on cost of capital. It could be a mix of anything, but we have not made any assumptions on that yet.

Todd, just to add on; given the amount of free cash flow after dividends we generate, we can acquire $250 million a year in acquisitions without going back to the equity market. Given that $250 million is the midpoint of our range for the year, we have not assumed any additional equity to fund this given the amount of free cash the business generates.

Okay, that's helpful. Just one more follow-up. I guess going back to the bad debt expense commentary. The guidance for '23 assumes a more historical average of 60 to 80 basis points for uncollectibles. It did increase a little bit in the fourth quarter. The run rate there is above the full year '23 forecast. Can you touch on collectibility in the fourth quarter and what impacted that? What did you see in the portfolio?

Yes. I would say the interesting part of this is it has been such a focal point post-COVID because there’s variability. However, fundamentally, there was nothing unusual in the fourth quarter. It does tick a little higher, but historically, our fourth quarter typically takes a little higher. We also have experience in the first quarter where it can actually be better than expected. So when we think about the 60 to 80 uncollectibles, unfortunately, it's a challenge to do it on a quarter-by-quarter basis, and it smooths out over time. But we look at it on a granular neighbor level and the type of accounts receivable they have. There was nothing fundamentally that drove us to that; it was slight seasonality.

Okay. So not seeing anything in the fourth quarter regarding tenant health from local neighbors or anything like that. It’s just a little seasonality, and you expect it to smooth out during the course of the year.

I do. In the first quarter, both at an accounts receivable level and from a health level, the first quarter is actually better than we would have expected otherwise. We're not seeing any signs that our neighbors are having difficulties.

We go next to Floris Van Dijkum at Compass Point.

Thanks for taking my question, guys. It looks pretty good. Obviously, your portfolio has proven to be very resilient. Something, Jeff, you've emphasized since you went public here. Encouraging to see that actually show through into the numbers as well. Curious about your small shop. You have pretty strong leasing spreads, 17.7 for your average spreads for your small shop. Should we assume that the majority of your sign that open pipeline of around 100 basis points is in that bucket in the small shop, which gives you the confidence in terms of your same-store NOI growth for '23?

The answer is yes. That is how we're looking at our backlog today, and we feel comfortable in our guidance based upon that. As you know, Floris, we've been discussing this for a long time. There continue to be really good pricing power for us on the leasing side. Some of these numbers strike you as large, like 17% or 35%. When you consider that this is coming over a long period, we believe these numbers are very sustainable. We feel that as long as we stay in this strong demand for space, we should continue to see these types of returns. I don't know, Dev, if you have any additional thoughts.

No, I think that's the point, Jeff.

Maybe one follow-up here on the composition of your small shop. Has that changed over the last couple of years? I mean, we typically think of local neighbors being barber shops, nail salons, etc. But are we seeing more coffee shops? How has the composition of your small shop changed, and how do you expect it to change over the next couple of years?

Yes. Jeff, I'm happy to take that. Where we’re seeing growth as a percentage of demand is primarily in a couple of categories. One of them is medical retail, or what we call Medtail, across various verticals. So urgent care, primary care, physical therapy, etc. The depth of demand and the depth of the tenants in that category is meaningful. We've seen dramatic growth in the demand from those types of retailers. The other area is characterized as health and wellness, which includes uses like a med spa, dry bar, and fitness such as club Pilates, Pure Bar, and Orange Theory. Additionally, there's strong demand from quick-service restaurant concepts. Those are names you're familiar with, such as Chick-fil-A, Shake Shack, Buffalo Wild Wings, alongside emerging concepts like Dave's Hot Chicken and First Watch. The demand from these various verticals underscores significant growth.

We take the next question now from Paulina Rojas at Green Street.

Hi, good morning. Is it fair to say that the midpoint of your guidance assumes your portfolio navigates this year without any kind of softness from the macro headwinds that we are seeing? I find it interesting that your assumptions appear largely in line with an average year, even though this may not be a typical year from an economic perspective.

That is a great question. The reason we give a range is so that we can express where we are today, acknowledging that if things get worse, there’s downside potential in the range and if they exceed expectations, then there's upside potential. The midpoint of our range assumes we don’t experience a dramatic change. It’s difficult for us to foresee a very negative scenario given the current environment. This may differ for 2024, but for '23, we feel confident about our assumptions. I don’t know if Dev or John have anything to add here.

Yes. I would just add that for '23, 98% of the anticipated outcomes are already factored in. We assume historical renewal rates, and given the sustained strength of demand, we’re very comfortable with our assumptions, considering that a high percentage of '23 is already in place. That confidence is reflected in our guidance.

One additional point is that our diversification in portfolio geography allows us to avoid exposure to large distressed retailers. This geographical granularity provides consistency and comfort.

Thank you. Very good color. I have another question regarding your redevelopment activity impact. You mentioned the contribution in the long term, which was 75 to 100 basis points of positive contribution. How should we think about the cadence of that contribution? I assume it could trend down after you harvest low-hanging fruit opportunities. Beyond that, doing expansions seems limited. Can you provide more color on your thinking around that contribution for this year and over time?

I'll attempt to address that, and then Dev can jump in. We see these opportunities addressing each center individually. We can continue to identify ways like buying adjacent land or developing parking lots in partnership with grocers to create density in specific locations, though these deals tend to be small. Our planned investment of $50 million to $60 million per year in this area reflects that. We won’t realize revenue from this year’s efforts if it isn't already factored in, so we’re looking at this from a long-term outlook. However, we'll continue to push to find these opportunities.

To add to that, we believe that the contribution range of 75 to 125 basis points is attainable in the medium term as we look to identify and add opportunities within our growing portfolio. We’re strategic with our searches for contiguous land to develop and redevelop effectively.

We go next now to Michael Mueller of JPMorgan.

I was trying to get out of the queue. The prior question was mine. So thanks.

We'll go next now to Ronald Kamdem at Morgan Stanley.

Just a couple quick ones. Looking through the occupancy, I see the economic occupancy is down 20 basis points quarter-over-quarter for the in-line. I'm curious what drove that and what happened there?

John, do you have that from an economic perspective?

I do. Actually, Devin has some commentary on that. It’s worth noting that we made intentional choices around merchandising and in instances where leasing demand is so strong, we chose to vacate a neighbor to put in a new one. Devin, did you have anything you wanted to add?

No. That’s the answer, John.

Great. And my second question is about competition and technology—looking at the foot traffic data you provided, which is helpful. The centers are 2% to 10% above pre-COVID levels. When considering acquisitions, do you utilize foot traffic data? And does the competition leverage it as well? What gives you an advantage in sourcing these deals?

It’s the reality that it’s all part of our approach. We apply our proprietary algorithm to evaluate properties, both for acquisition and disposition, with foot traffic being a significant part of it. Our “secret sauce” is our focus on specific centers—we’ve identified 5,800 centers we'd like to own. Thus, when they come on the market, we evaluate a center regarding its price and the trade area's potential to support the grocer and surrounding small stores. We operate in a targeted way, which allows us to find properties that we believe will thrive.

Great. Helpful. Thank you.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the call back over to the Phillips Edison team.

Thank you, Bo. Before some closing comments from Jeff, I would like to quickly mention that Phillips Edison's team plans to attend the Wells Fargo Real Estate Securities Conference on February 22, the Wolfe Research Virtual Real Estate Conference on March 2, and Citi's Global Property CEO Conference, March 6th to the 8th. The PECO team looks forward to seeing you at an upcoming investor conference. Also in May, we will host our next PECO Grow webcast for financial advisers and retail investors. With that, I'll turn the call over to Jeff. Jeff?

Thanks, Kim. Our results continue to highlight the strength of PECO's focused and differentiated strategy of exclusively owning and operating small-format, well-located neighborhood centers anchored by the number 1 or number 2 grocer in the market. With high recurring foot traffic that drives neighbor demand and results in superior financial and operating performance, PECO has over 30 years of experience in the grocery-anchored shopping center industry, along with an informed perspective on what drives quality and success at the property level. The way we think about quality, we call SOAR, which includes spreads, occupancy, advantages in the market, and retention. SOAR provides important and sustainable measures of quality in PECO's grocer-anchored centers. We continue to benefit from various positive macroeconomic trends that drive neighbor demand and support our growth plans. Our experienced and cycle-tested team, integrated operating platform, and grocer-anchored strategy place PECO in a great position. Our fortress balance sheet and liquidity will allow us to take advantage of opportunities as they arise. We remain committed to delivering long-term growth and value for our shareholders. On behalf of the management team, I'd like to thank our shareholders, our associates, and importantly, our neighbors for their continued support. Thank you for your time today. Everyone, have a great weekend.

Thank you, Mr. Edison. Ladies and gentlemen, this concludes the Phillips Edison Company's Fourth Quarter and Full Year Earnings Conference call. But again, I’d like to thank you all so much for joining us and wish you all a great day. Goodbye.