Good day, and welcome to Phillips Edison & Company's Fourth Quarter and Full-Year 2023 Earnings Conference Call. Please note that this call is being recorded. I will now turn the conference over to Kimberly Green, Head of Investor Relations. Kimberly, you may begin.

Thank you, operator. I'm joined on this call by our Chairman and Chief Executive Officer, Jeff Edison; our President, Bob Myers; our Chief Financial Officer, John Caulfield; and our Managing Director of Investment Management, Devin Murphy. Once we conclude our prepared remarks, we will open the call to Q&A. After today's call, an archived version will be published on our website. As a reminder, today's discussion may contain forward-looking statements about the company's view 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'll 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 2023 continued our track record of delivering strong growth. Same center NOI increased 4.2%, the Nareit FFO increased 6.7%, and core FFO increased 5.2%. The continued strong performance of our portfolio is driven by our high occupancy, strong leasing spreads, high retention, and the many advantages of the suburban markets where we operate our neighborhood shopping centers. The operating environment remains strong with a resilient consumer. Retailers want to be located in our centers, where our grocers drive consistent and recurring foot traffic. PECO continues to benefit from several positive macroeconomic trends that create demand for space and tailwinds for NOI growth. The transaction market also improved for us in the latter part of 2023, allowing us to exceed the midpoint of our original guidance for acquisitions. The capital markets have improved. Interest rates have meaningfully changed from when we provided preliminary 2024 guidance during our Investor Day in early December. These factors allow us to increase our 2024 guidance. We accomplished a great deal in 2023 and have a lot to be proud of. At the macroeconomic level, the year presented many challenges with high inflation, volatile and rising interest rates, and global conflict. However, the consistency of our growth is a testament to our differentiated and focused strategy of exclusively owning right-sized, grocery-anchored neighborhood shopping centers, anchored by the number one or two grocer by sales in a market. Our results at the property level are driven by our integrated operating platform and our experienced and cycle-tested team. We could not have accomplished our 2023 results without the hard work of our PECO associates. I'd like to thank the entire PECO team for all of their efforts. PECO has always been a growth company and we are well-positioned to continue to grow. The fourth quarter was no exception with $186 million in acquisitions. For the full year 2023, we acquired 11 shopping centers, two outparcels, and one land parcel for net acquisitions totaling $272 million at a weighted average cap rate of 6.6%. We are particularly excited to add two more Trader Joe's-anchored centers and another H-E-B-anchored center to our portfolio. The transaction market was tight in 2023, as the bid-ask spreads were very wide. Our team has proven its ability to navigate and successfully execute through these tough markets. This result is due to our scale, our ability to buy in many markets across the country, our reputation as a sophisticated all-cash buyer, and our strong relationships. We're confident in our ability to continue to acquire high-quality centers as the transaction market opens up further. While it's early, we continue to successfully find attractive acquisition opportunities. Activity in the first quarter remains strong. Our ability to predict acquisition volume for the rest of the year is less clear. As such, we are reaffirming our guidance for $200 million to $300 million of net acquisitions. We have the capabilities and leverage capacity to acquire much more if attractive opportunities materialize. We continue to target an unlevered IRR of 9% or greater for our acquisitions. The acquisitions that we completed in the second half of 2023 underwrote to over 9.5% on levered IRR. We will maintain our disciplined approach and focus on accretively growing our portfolio. We are hopeful that volumes will increase through the year. It is times like this in an evolving market that we have historically found some of our best opportunities. With the target market of 5,800 identified centers across the U.S., we have a long runway for external growth. Looking beyond 2024 and assuming a more stable interest rate environment and acquisition market, we believe our portfolio can deliver mid-to-high-single-digit core FFO per share growth on a long-term basis. This will be driven by both internal and external growth. We are confident in our ability to sustain growth in the near term despite interest expense headwinds. We anticipate long-term AFFO will be higher than core FFO growth as high occupancy and strong retention should require lower capital expenditures to support growth in the future. Our low leverage gives us the financial capacity to meet our long-term growth objectives. We expect to generate approximately $100 million in free cash flow after dividend distributions in 2024. This level of free cash flow combined with our low-levered balance sheet allows us to acquire $250 million a year while maintaining our targeted leverage ratio without raising any additional equity. PECO continues to be well-positioned to drive strong earnings growth and achieve our capital deployment goals in the years ahead. We remain committed to successfully executing our growth strategies, both internal and external. PECO generates more alpha with less beta given our focused and differentiated strategy. As previously announced by Kroger and Albertsons, the estimated closing date for the proposed merger was recently pushed back. We do remain cautiously optimistic about the impact of this merger on PECO. We continue to believe it is ultimately a positive for PECO, for our centers, and for the communities that our centers serve. While the market still gives the merger a low probability of occurring, should it close, and 413 stores are sold to C&S, we believe the impact on PECO is a net positive. Our Albertson stores will be operated by Kroger, which we invest regularly in their stores and produces higher sales volumes. If the merger does not occur, our Albertsons-anchored centers will continue the strong performance that they have produced to date. With that, I'll now turn the call over to our new President, Bob Myers, to provide more color on the operating environment.

Thank you, Jeff, good afternoon, everyone, and thank you for joining us. We continue to see strong retailer demand with no current signs of slowing. PECO's leasing team continues to convert this demand into higher rents at our centers. Portfolio occupancy remained strong and ended the year at 97.4% leased. Anchor occupancy remained high at 98.9%. Inline occupancy ended the year at 94.7%, an increase of 90 basis points year-over-year. We believe that we can still push inline occupancy another 100 basis points to 150 basis points given continued strong retailer demand. Our acquisitions in the fourth quarter were 84% leased at closing and provide significant leasing opportunities. Buying centers with some vacancy will continue to allow us to drive growth. In terms of new lease activity, we continue to have success in driving meaningfully higher rents. Comparable new rent spreads for the fourth quarter were 21.9%. We continue to capitalize on strong renewal demand and are making the most of the opportunity to strengthen key lease terms at renewal and drive rents higher. In the fourth quarter, we achieved a 14.2% increase in comparable renewal rent spreads. This increase in renewal spreads is consistent with the 14.6% increase we achieved in 2022 and reflects the continued strength of the leasing environment. Our inline renewal spreads remained high at 17.4% in the fourth quarter, which compares to our trailing 12-month average of 17.7%. We expect leasing spreads will continue to be strong throughout the balance of this year and into the foreseeable future. We continue to have great success retaining our neighbors while growing rents at attractive rates. PECO's retention rate remains strong this quarter at 93%. An important benefit of high retention rates is that we have much lower tenant improvement spend on renewals and in the fourth quarter we spent $1.17 per square foot on tenant improvements for renewals. We also remain successful at driving higher contractual rent increases. Our new and renewal inline leases executed in 2023 had an average annual contractual rent bumps of 2% and 3%, respectively, another important contributor to our long-term growth. The leasing spreads that we are achieving combined with our strong retention rates create pricing power and are clear evidence of the continued high demand for space in our grocery-anchored neighborhood shopping centers. PECO's pricing power is a reflection of the strength of our focused strategy and the quality of our portfolio. PECO continues to benefit from a number of positive macroeconomic trends that create strong tailwinds and drive strong neighbor demand. These trends include a resilient consumer, hybrid work, migration to the sunbelt, population shifts that favor suburban neighborhoods, and the importance of physical locations in last-mile delivery. The impact of these demand factors are further amplified due to the limited new supply over the last ten years, and going forward, given the current economic returns do not justify new construction. We continue to see the many benefits of our grocery-anchored portfolio with a healthy mix of national, regional, and local retailers. 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. PECO's 3-Mile trade area demographics include an average population of 66,000 people and an average median household income of $80,000, which is higher than the U.S. median. These demographics are in line with store demographics of Kroger and Publix, which are PECO's top two neighbors. Our centers are situated in trade areas where our top grocers are profitable and our neighbors are successful. We also enjoy a well-diversified neighbor base. Our top neighbor list is comprised of the best grocers in the country. Our largest non-grocer neighbor makes up only 1.3% of our rents and that neighbor is T.J. Maxx. All other non-grocer neighbors are below 1% of ABR. To put a finer point on neighbor mix, PECO has no exposure to luxury retail and very limited exposure to distressed retailers. The top 10 neighbors currently on our watch list represent just 2.3% of ABR. 27% of our ABR is derived from local neighbors. The majority of local neighbor rents come from retailers offering necessity-based goods and services. If you think about your favorite restaurant in your neighborhood, your physical therapist, chiropractor, or dentist, and your preferred hair salon or barber, there is a high likelihood that they are a local retailer. Our local neighbors are successful businesses run by hardworking entrepreneurs. They have healthy credit and are less susceptible to corporate bankruptcy caused by weaker-performing locations. Local neighbors offer favorable economic returns. A typical local retailer 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 nationals. PECO retained 85% of local neighbors in the fourth quarter, and for inline local neighbors, renewal rent spreads remained strong at 17% in the fourth quarter. Importantly, local retailers meaningfully differentiate the merchandise mix that our neighborhood centers offer our customers. Our local neighbors are resilient and have been in our shopping centers for 9.4 years on average. In addition to our strong rental growth trends, we continue to expand our pipeline of ground-up outparcel development and repositioning projects. In 2023, we stabilized 13 projects and delivered over 230,000 square feet of space to our neighbors. These projects add incremental NOI of approximately $3.4 million annually. These projects provide superior risk-adjusted returns and have a meaningful impact on our long-term NOI growth. We continue to expect to invest $40 million to $50 million annually in ground-up development and repositioning opportunities with a weighted average cash-on-cash yields between 9% and 12%. This activity remains a great use of free cash flow and produces attractive returns with less risk. We continue to make great progress on these properties, and our team is working hard on growing this pipeline. 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. The overall demand environment, the strength of our centers, the strength of our grocers, and the capabilities of our team give us confidence in our ability to continue to deliver strong operating results. I will now turn the call over to John.

Thank you, Bob, and good morning and good afternoon, everyone. I'll start by addressing the fourth quarter results, then provide an update on the balance sheet, and finally speak to our increased 2024 guidance. Fourth quarter 2023 Nareit FFO increased 6% to $74.8 million or $0.56 per diluted share, driven by an increase in rental income from our strong property operations. Results were partially impacted by higher year-over-year interest expense of $4.3 million. Fourth quarter core FFO increased 4.9% to $77.9 million or $0.58 per diluted share, driven by increased revenue at our properties, from higher occupancy levels, and strong leasing spreads, partially offset by the aforementioned higher interest expense. Our same-center NOI growth in the quarter was 3.6%, driven by minimum rent growth of 3.8% year-over-year. Our reserves for uncollectability were slightly elevated in the quarter at 97 basis points. However, they were below the fourth quarter of 2022. We do see an upward trend in reserves in the fourth quarter each year. We monitor the health of our neighbors closely and are not concerned about bad debt in the near term, particularly given the strong retailer demand that shows no signs of slowing. During the fourth quarter, we acquired six grocery-anchored shopping centers and two outparcels for a total of $186.4 million. We had no dispositions during the quarter. In the fourth quarter, PECO issued 2.2 million shares under our ATM facility, which resulted in net proceeds of $77.5 million at a weighted average gross price of $35.92 per share. For the full year, PECO generated net proceeds of $147.6 million through the issuance of 4.2 million common shares at a weighted average gross price of $35.76 per share. Assets acquired in 2023 and currently in our pipeline are accretive to earnings per share at these levels. We were intentional in match funding our acquisitions with equity at a time when our access to the equity market was favorable while keeping our leverage low. We will continue to evaluate future equity issuance based on a combination of favorable market conditions, acquisition opportunities, and identifying uses of proceeds that are earnings accretive. Turning to the balance sheet, we have approximately $615 million of liquidity to support our acquisition plans with no meaningful maturities until late 2025. Our net debt to adjusted EBITDAre was at 5.1 times as of December 31, 2023. Our debt had a weighted average interest rate of 4.2% and a weighted average maturity of 4.1 years when including all extension options. Subsequent to quarter end, we entered into an interest rate swap agreement totaling $150 million, the new instrument swap SOFR to approximately 3.45% effective September 25, 2024, and matures December 31, 2025. This swap will help us manage our floating rate exposure as we have swaps that expire in September and October of 2024. With the execution of this swap and a decrease in the forward rate curve for SOFR, we are revising our 2024 interest expense estimate lower and our FFO estimates higher. In January, S&P revised its ratings outlook for PECO to positive from stable. While favorable, we continue to believe we are an underrated credit at BBB- Baa3 and remain focused on achieving a ratings upgrade. We continue to meet with the agencies as we believe our financial strategies are commensurate with at least a BBB flat or Baa2 rating. Although we cannot specify when an upgrade will occur, we continue to target leverage levels to achieve this goal, which we believe to be approximately 5.5 times. We ended the year at 78% fixed rate debt with 22% floating. Several of our peers accessed the unsecured bond market in January. We continue to monitor this market and look to access it opportunistically. Although we have no meaningful maturities until November 2025, we will consider opportunities to enhance our liquidity and extend our debt maturity profile. That leads me to our guidance for 2024 and our ability to increase it from the preliminary guidance shared at our Investment Community Day in early December. Our updated net income per share range for 2024 is $0.53 to $0.58 per share. Our increased range for Nareit FFO per share is $2.34 to $2.41, which is a 6% increase over 2023 at the midpoint of the range. Our increased range for core FFO per share is $2.37 to $2.45, which is a 3% increase over 2023 at the midpoint. We are reaffirming our range for same-center NOI growth of 3.25% to 4.25% given the continued strong operating environment. Included in our guidance is the negative impact of normalizing our anticipated uncollectible reserves to historical levels of 60 basis points to 80 basis points of revenue. We are reaffirming the range previously provided given the continued strong health of our neighbors. As of February 8, we have several acquisitions in our pipeline, either under contract or in contract negotiation. This activity provides a strong start for the year. As Jeff mentioned, it is still early so we are reaffirming our acquisition guidance and expect net volume to be in a range of $200 million to $300 million. If the transaction and capital markets improve, we are hopeful and have the capacity to meaningfully increase this number, but we are comfortable with this guidance range in the current environment. As we outlined at our Investment Community Day, we believe the internal and external growth opportunities for PECO give us a long-term growth outlook in the mid-to-high-single-digits for core FFO per share growth. We expect a comparable or faster growth rate for AFFO per share because there should be less tenant improvement dollars required as occupancy stabilizes. In the near term, we are impacted by interest rate increases as all borrowers are, which is limiting our earnings growth. However, we are pleased to guide to positive per share growth. For 2024, we are updating the range of interest rate expense to $95 million to $105 million. Our decreased guidance range is primarily due to PECO having a lower revolver balance at the end of the year, which was driven by our equity issuance in December combined with a lower projection for the SOFR curve. While not eliminated, these revisions do lessen the earnings headwind for interest expense. We estimate that higher interest rates could be a headwind of $0.04 to $0.10 for the year. If we add it back, the per share impact of interest rate variance to our updated 2024 guidance, this would be 6% Core FFO growth at the midpoint. 2023 presented many challenges with high inflation, volatile and rising interest rates, and global conflict. However, we were able to exceed our 2023 earnings guidance due to the focus and commitment of PECO's experienced team and the strength of our integrated operating platform. We are excited for the growth opportunities ahead in 2024, both internal and through acquisitions. With that, we will open the line for questions.

Thank you. Our first question comes from Caitlin Burrows with Goldman Sachs. Please go ahead.

Hi, I guess, good afternoon, everyone. In the earnings release as it relates to guidance, you guys pretty clearly show the assumptions driving guidance, and like John, you just mentioned, the interest expense was brought down, which I think on a per share basis would be like $0.06, but the midpoint of guidance only increased by $0.01. So I was wondering if you could talk a little bit about what may have made you only increase the midpoint of the core FFO range by $0.01 rather than $0.06. Thanks.

Thanks, Caitlin. John, do you want to take that?

Sure. Thanks, Caitlin. If we examine the interest rate expense aspect of our guidance, at the midpoint it has decreased by $0.06, but $0.04 of that reduction is attributable to the equity issuance we completed in the fourth quarter. Therefore, the actual benefit to our guidance from interest expense is $0.02, and we are pleased to raise our guidance range by a penny at the midpoint. While it's still early in the year, there is potential for future growth in our earnings beyond what we have currently presented.

So, are you saying that part of it is related to, like, the underlying leverage and share count assumption then too?

That's correct. The interest expense decreased because we had a lower revolver balance at the end of the year, due to the equity issuance and the increased share count. The net result is that interest is lower, but the share count is higher. The impact from the additional shares is around $0.04, which leaves us with a benefit of $0.02.

Okay, got it. And then, you guys laid out in the Investor Day how you could achieve 3% to 4% same-store NOI growth even without further occupancy growth. I guess to take the other side of that, with occupancy so high, what do you think is the risk that occupancy declines, I guess, this year or in the future? And I guess, yes, how likely is it, and what would the impact be?

Caitlin, one thing that we may not have discussed at Investor Day is our approach to acquisitions. We're actively seeking opportunities where occupancy is lower than in our core portfolio, allowing us to lease that space and drive additional growth. Analyzing this on a quarterly basis can be complex due to different acquisition timing and occupancy levels, especially since overall occupancy across our portfolio is quite high. For instance, the projects we acquired were around 84% occupied, and this could consistently create a drag compared to our same-store portfolio occupancy. Bob, do you have anything to add?

Yes, Jeff, the only thing I would add to that is when you look at how we come up with 3% to 4% same-center NOI growth, we said at the Investor Day, we'd have 100 basis points to 125 basis points coming from new and renewal spreads, 75 basis points to 100 basis points in contractual rent bumps, 75 basis points to 125 basis points coming from redevelopment and our development projects. But we acquired net $272 million, and overall, 14 assets totaled 87% occupied, and in the fourth quarter it was 84%. So that's going to allow us to continue to drive future growth. So we're excited about those projects.

Yes, no, that definitely makes sense in being able to lease up the acquisition properties. I guess, as you think about those pieces of the same-store NOI growth, occupancy up or down isn't assumed, so I'm wondering, what's the risk occupancy in the same-store portfolio comes down?

I feel right now that we still have another 100 basis points to 150 basis points of occupancy left in our inline spaces. I believe right now we're at 94.7%, so we still feel like there's another 150 basis points in our existing portfolio on the same-center basis of occupancy movement. And we continue to see significant demand for the spaces that we have.

Okay, so it sounds like you would think there's more upside potential versus downside?

For sure, absolutely.

Okay. Thank you.

Thanks, Caitlin.

Your next question is from the line of Tayo Okusanya with Deutsche Bank. Please go ahead.

Hello?

Yes, we can hear you. Please go ahead.

Perfect. On the acquisition front and with the acquisition guidance, could you give us a sense if it's going to be more front-weighted, back-weighted even throughout the year, and give us kind of a general sense of what kind of cap rates you're expecting on transactions?

Sure, Tayo, thank you for your question. As you know, acquisitions can be challenging. Last year was particularly tough in terms of acquisitions, likely more so than in previous years. I expect this year to be similarly challenging. We are confident that we will achieve our guidance regarding activity in the first quarter, but it's difficult to predict exactly when this will occur. To be conservative, I would say it is likely to be more weighted toward the latter part of the year. However, we've had a few promising weeks with new acquisition opportunities, which could mean less of a back-end load. We certainly hope it will be better than last year. Overall, we feel positive about our guidance, but we remain cautious about timing and how it will unfold. Regarding cap rates, we are IRR buyers and continue to aim for a nine plus unlevered IRR. Last year, this corresponded to a cap rate of around 6.6. I expect similar conditions this year as we look to create additional growth opportunities through the properties we acquire and our potential to enhance them and increase cash flow.

Got it. Thank you.

Yes, thanks, Tayo.

Your next question is from the line of Lizzy Doykan with Bank of America. Please go ahead.

Hi, thanks. Maybe like a similar question, but just on redevelopment, just curious if there's more clarity on the timing of spend there throughout 2024 as I know that tends to be lumpy.

Yes. Thanks for the question, Lizzy. Bob, do you want to take sort of that and maybe John as well?

Sure, John, I'll go ahead and start. I think when I look at the pipeline this year, we are still thinking that we'll do between $40 million and $50 million, and a lot of those projects, just to remind everybody, I mean, these are smaller projects that are $2 million, $3 million in size. They are 4,000 to 5,000, 6,000 square feet in our parking lots and all our existing shopping centers. So we'll end up doing somewhere between 12 and 15 projects with targeted returns between 9% and 12%. Timing is tricky, and as Jeff mentioned with the acquisitions, the same is true, especially when you're doing tear down rebuilds. We're currently doing two tear down rebuilds with Publix and a lot of that has to do with their timing. So it's always going to be a bit in flux. So it's kind of hard to navigate quarter by quarter. But as I look at it on an annual basis, I would feel comfortable that our guidance of $40 million to $50 million is in range that we can hit.

Okay, great.

I wanted to add that our assumptions show a fairly even distribution, with a slight preference for the second half of the year. However, as Bob mentioned, it remains quite balanced overall. If I had to choose, I would slightly lean toward the latter part of the year.

Understand. Thanks. And then, maybe following up on Caitlin's question from before, just on occupancy as it relates to same-store NOI, it really sounds like that there's no downside scenario to occupancy being factored in. And I'm just curious if maybe you could help us understand the areas of uncertainty that there may be to same-store NOI or that if this past year and this year is a function of just a really strong environment. If you could provide more color on, maybe it's the nature of your portfolio, limited exposure to big box, or if it's the geography kind of explaining the characteristics there would be helpful.

Let me start off, Bob can add later. Lizzy, we have a unique strategy in what we do. I see there is still very strong demand for our properties. If that changes, it would pose the biggest risk, but we don't expect it to change in the near term regarding new developments, as there is currently excess supply, which is not a concern for an extended period. Being necessity-based and located close to homes is an advantage, and retailers recognize that as the ideal location. If you're a national, regional, or local tenant wanting to be in a market where necessity retail thrives, you would want to be near the top grocers, and our properties fulfill that need for many necessity-based retailers. This demand is driving our results and occupancy, and it appears sustainable without signs of slowing down. We have good visibility for leasing over the next six months, and it remains strong. Bob, do you have anything to add for Lizzy?

No. I think the biggest part of our strategy is by having the number one or two grocer in the market. Average footprint of our shopping centers are around 115,000 square feet. Our average inline space is 2,500 square feet. We just don't have the box exposure. Occupancy is at all-time highs. And to Jeff's point earlier, staying focused on a disciplined merchandising strategy, where 70% of your neighbors are necessity-based is key. As Jeff mentioned, demand is there. We still see a resilient consumer. If we were going to see signs of something happen, you would see it in your retention and your spreads. And our retention is the highest it's been in the history of the company. Our spreads are still in the mid to upper teens. We're just not seeing any slowdown in that, and we're in a very, very healthy operational environment today.

That's helpful. Thank you.

Thanks, Lizzy.

Our next question is from the line of Todd Thomas with KeyBanc. Please go ahead.

Hi, thanks, good morning. John, I wanted to follow up on the guidance and the adjustments. Does the $0.04 offset to the interest expense savings you mentioned account for future equity issuance throughout the year? I'm not quite following the specifics on the $0.04, especially considering the company's cost of equity in relation to the revolver pricing and the balance that was paid down, along with the cap rates you're currently transacting at.

The $0.04 reflects the equity we issued in the fourth quarter, which was primarily concentrated toward the end of the quarter. However, this does not imply any assumptions about further equity issuance in 2024. It wasn't a case of dilution; instead, it was more of an offset. We maintained low leverage, currently at 5.1 times. We have significant acquisition opportunities, and our strategy is to align these with our acquisitions, which we believe are accretive at the equity issuance levels we reached. Instead of seeing this as a headwind, consider it a replacement for interest expense. Ultimately, the $0.02 remaining represents our increased guidance, reflecting a penny increase and some rounding on that last penny. We aimed to start the year with a solid foundation for future growth opportunities.

Okay. And then, within the $200 million to $300 million of net investment guidance that you maintained, it sounds like you have better visibility early in the year relative to what the back half of the year might look like. I'm just curious on the disposition side, how we should think about dispositions and how they sort of factor into the mix and that sort of 13% or I think 14% of the port portfolio that's not currently anchored by a number one or number two grocer in the market?

Yes, we have a plan in place and will be putting products on the market. The $200 million to $300 million figure is a net number. We will balance our dispositions with acquisitions to reach that target. We are continuously monitoring the market and will seize any favorable pricing opportunities while maintaining our discipline on both the disposal and acquisition fronts. This creates a balancing act between pricing returns and the pace of our disposition plans. I believe we shared what we expect the disposition amount to be for this year.

We haven't made changes because of the flexibility you're seeking. Ultimately, we're focused on finding a total solution and we are confident in our portfolio. We approach things strategically, so if we decide to act, it will be based on opportunities. We consider risk management, but we only sold $6 million last year, and if we believed there was a greater necessity, we would have sold more. We're just providing guidance on a net total figure.

Okay. All right, thank you.

Thanks, Todd.

Your next question comes from the line of Ronald Kamdem with Morgan Stanley. Please go ahead.

Thanks for your time here.

Hi, Ronald. Yes, please go ahead.

Kramer here for Ron. I would like to ask about the guidance. Looking at the full year core FFO number for 2023, it's $2.34, which is a $0.07 increase to the midpoint of the guidance. Can you explain how much of that $0.07 is attributed to the same-store NOI and the same-store portfolio compared to how much comes from other factors? Additionally, I'm curious about the acquisitions you made late in the year, as I assume they are not included in the $2.34 run rate. I'm trying to evaluate if there might be any positive impact on the 2024 numbers from those late-year acquisitions.

John, do you want to take that?

Sure, Adam, thank you for the question. We observed a growth range of 3.25% to 4.25% in our same-store portfolio, contributing positively to our FFO. While our acquisitions are beneficial, the market dynamics changed towards the latter half of the year compared to 2022. The gap between private market cap rates and public market costs of capital, both debt and equity, hasn’t narrowed as much as those costs have improved. Thus, while there is some benefit and accretion from our acquisitions, it isn’t as significant as it could be. We are targeting acquisitions that offer immediate accretive value, and we aim for a 9% unlevered return along with continued portfolio growth. However, we are also facing interest rate challenges, which represent a $0.07 headwind at our projected midpoint. Overall, I believe our acquisitions will keep contributing positively and help us achieve future growth, although they provide less immediate impact.

Just maybe switching gears, I wanted to ask a little bit about kind of small shop, local tenants health, but also kind of demand for those types of formats, kind of given some of the credit card data, some of the other kind of economic data that we've seen of late, so maybe just kind of walk us through just kind of the kind of demand for those types of businesses right now.

Sure. Bob, you want to take that?

Yes, for sure. So appreciate the question. Right now, when we look at our portfolio and specific to our inline spaces, 27% of our ABR comes from local tenants. We think local tenants are great. One, they're strong, they have good credit. Two, they're economically friendly for the landlord, doesn't cost us as much money to put in. They're sticky. They're honestly true entrepreneurs. You think about your chiropractor, your dentist office, your local hair salon as examples, their average tenure has been 9.4 years in our portfolio. Again, I want a direct correlation to our overall merchandising strategy about being around necessity-based goods and services. So I'm very focused on not only the grocery store but also quick service restaurants, health and beauty, Medtail, and service providers. And I mean, our healthy neighbor mix has never been stronger. And there's a lot of demand for our size shopping centers and having the grocer there that drives the foot traffic, they're just getting the benefit of that, and it's very, very strong. I think our local renewal spreads in the fourth quarter were 17.2%. So again, very, very healthy, very, very strong, so very important piece to our overall merchandising.

Adam, I would just add that there are always questions about the consumer and their direction. When retailers consider staying in one of our centers and the potential increase in rent they will offer us, that's a significant decision and a key indicator of the current situation. Record retention and record spreads are excellent signs that retailers are not seeing the consumer retreating. There may be some credit card issues, but if that were the case, they wouldn't be renewing at this rate. We would begin to observe declines in both the spreads and the retention rate. As we analyze this closely, we are not seeing any signs of that at this time.

Your next question is from the line of Juan Sanabria with BMO Capital Markets. Please go ahead.

Hi, thanks for the time. Just a question on the funds management initiative noted or opportunity noted at the Investor Day. Just curious on latest thoughts or comments there. And is any of the enthusiasm on recent acquisition opportunities, is that related to funds opportunities or more on balance sheet?

Sure. Juan, thanks for the question. As we mentioned at the Investor Day, the Investment Management business is a business that we've been in since the company's founding. We have this platform because it allows us to access incremental capital. It expands our acquisition opportunity set and it generates attractive ROIs for us. The ROIs in this business for us are in the high-teens to high 20s, depending upon the strategy that we're executing. We did mention at the Investor Day two new initiatives. One is the core partnership. The other is a social impact fund targeting grocery-anchored centers in majority, minority communities. The capital in both of these ventures has been committed by our partners, and our partners have requested that we do not disclose any additional information until we invest in a center in each venture. We are currently pursuing acquisition opportunities for each venture, and our hope and expectation is that we will be able to give additional detail about these ventures in the first half of the year as we mentioned in December. And so our enthusiasm for the acquisition volume translates into opportunities for both of these ventures, but for also our on-balance-sheet acquisition opportunities, because, as we've said, we expect to generate acquisition volume comparable to what we've done over the last number of years on balance sheet and then the acquisition volume that we do in these new ventures is incremental to what we do on balance sheet.

Thank you. And good to hear from you. Just a follow-up question on the acquisitions and how it relates to occupancy. So, what would have the same-store occupancy been? The reported company-wide decrease quarter-over-quarter, I'm assuming there was some modest impact from buying assets that weren't fully occupied. So maybe if you could just give the same-store occupancy delta sequentially. And just as a follow-up on that, are the acquisition yields that are quoted, are those going in or are those assuming some sort of stabilization in the occupancy, if in fact, they're kind of below-stabilized levels?

Yes, we'll answer the first one, and then, John, you can step in on the occupancy. It is the in-place income that we're talking about when we talk about cap rate on what we acquired. John, do you want to take this?

Yes. And on occupancy, Juan, it was our third quarter; it was consistent, was 97.8 to 97.8.

Thank you very much.

Your next question is from the line of Haendel St. Juste with Mizuho. Please go ahead.

Hey, guys, good afternoon I think. So, you mentioned the top 10 neighbors in your watch list, which represent, I think, 2.7% of ABR, can you talk a bit more about who or what categories on this list and what's embedded in your guide this year for credit loss and what you actually realized for full year '23? Thanks.

Good afternoon. We maintain a watch list at every center, but the one we're discussing here is from a national perspective, and it's 2.3%. You mentioned 2.7%, but it is actually 2.3%, and the entities on this list are not specifically named. It includes companies like Joan or Big Lots, among others. While we don't anticipate any immediate concerns, we are monitoring these situations. The diversification of our portfolio is advantageous in this regard. The entities I'm mentioning individually represent 20 to 50 basis points, assuming all were to be affected. We are confident in our locations and overall strategy. Regarding our guidance for 2024, this portfolio has consistently ranged between 60 and 80 basis points over time, which we've factored into our assumptions. We feel positive about our locations, and our strategy emphasizes that format drives results, so we are deliberately limiting our exposure to larger non-grocery anchors.

That's very helpful. Could you actually mention what the actual credit loss was for last year?

Yes, for the total year 2023, it was 62 basis points.

Great. Thanks. And just to follow-up on I think your comments early on redevelopment, you talked about the $40 million to $50 million of capital spend this year and healthy 9% plus returns. I guess I'm curious what is keeping that pipeline so small. I know you're working on smaller projects, but I'm curious if perhaps there's a greater opportunity to expand that where that pipeline could grow to over time and how we should think about that. Thanks.

It's really challenging to achieve the volume we'd like. Ideally, we would want to double that amount. The process involves buying specific pieces of land, securing zoning and other permits, constructing and leasing the stores, and doing this in segments of $1 million to $5 million. It's a complex endeavor, which is why the projects we're currently working on are two to three years out, and we focus on maintaining a full pipeline. We believe this approach is essential for finding additional growth opportunities for our centers. If you have any ideas on how to increase our volume, we are very interested. We're putting in significant effort to reach our current volume and feel optimistic about our ability to sustain it. However, it's a lengthy process to get these projects off the ground. Fortunately, we've successfully filled all the projects we've completed so far, but it's difficult to significantly increase our volume beyond what we've achieved.

I'll just add a couple of things too, Jeff, because not only do we think the portfolio can generate the $40 million to $50 million per year, and you touched on, I mean, we're doing a lot of Starbucks, Chipotle. Chipotle, we're repositioning some of the boxes with EoS Fitness, Ross, Five Below as an example, but one thing that we're very focused on is finding development opportunities or redevelopment opportunities as part of our acquisition strategy. And as we mentioned earlier, we've closed on 14 assets in 2023, eight of those 14 assets had some sort of development or redevelopment capability, which is also why you see the 87% occupancy level, is that we're very intentional about wanting to continue to drive this portion of our business and we are getting really good returns, to Jeff's point, between 9% and 12%. So you'll see that we're going to run a parallel path between the existing portfolio and our acquisition strategy.

Got it. That's helpful. That makes sense. I was also trying to ascertain, really if there's anything different about your portfolio than perhaps your peers. A lot of your peers have pipelines that are far larger, but it sounds like as part of the opportunities on the acquisition side that you're sourcing today, that could lead to perhaps more redevelopment opportunities overall in the portfolio. Okay, guys, I think that was it for me. Appreciate the time.

Thanks, Haendel.

Your next question is from the line of Dori Kesten with Wells Fargo. Please go ahead.

Hi. Thank you. I apologize if I missed this, John, but did you say what your intentions were regarding the swap maturing later in '24? And is that assumed in guidance now?

Hi, Dori. No, actually didn't speak to that, so thank you for that. So, look, we are focused on flexibility. We did after quarter end, we did execute a forward starting swap for $150 million, locking in the SOFR curve at 3.45%. We still are above or have more floating rate debt than we would like. We've mentioned that we want a target of 90% fixed. And as we look at those maturities, and part of it is going to be whether it be fixing SOFR or ultimately, we want to be a long-term issuer in the unsecured bond market, and so if we're able to opportunistically issue in that market, that'll also improve that. So I will say this with regards to our fixing activity, there are refinancing or financing around fixing and other things in our guidance for '24 already assumed. The one clarifying piece going back to the question, I think it was from Todd, was, we do not have incremental equity issuance in our guidance, but we do have activity related to our interest in our debt, in our guidance.

Where do you think that you would price today in the unsecured market?

Sure. So, we do watch that debt market very closely. The most important thing we did was manage our maturity ladder last year. We don't have pressing maturities in '24, and we do have meaningful liquidity to pursue the acquisition strategy we've been talking about. So one of our goals is to become a long-term seasoned issuer in that unsecured bond market. And so it is a little tough to specifically pinpoint because it's going to be dependent upon where the tenure is at the time. We believe that it would be in the five and three quarters to 6% range. We think our reception will be similar to that of our peers because we believe we have a better business model, lower leverage. Ultimately, just this, in the month of January, we received a positive outlook from S&P, which is a step in the right direction, but we continue to believe we're an underrated credit. So we will look to access that market opportunistically.

Okay. And congratulations on that outlook. One last question. If your net acquisitions did exceed $250 million this year, within your IRR expectations, would you feel comfortable issuing equity where you're trading today?

Are you referring to today in terms of our trading over the last several months? Right now, I don't feel positive about that. Generally, we see the ATM as a tool for when we have a clear acquisition volume and we understand the specific uses, ensuring they are beneficial at our current stock price and debt costs. This way, we can align those elements as we grow, focusing on long-term growth for our properties while maintaining a strong balance sheet. We want to ensure we can grow faster when opportunities arise. Does that address your question, Dori?

Yes, it does. Thanks.

Okay.

Your next question is from the line of Hong Zhang with J.P Morgan. Please go ahead.

Yes, hey, I had a quick question about your Riverpark and Apache Shoppes acquisitions, I guess, are those representative of the acquisitions of a lease-up nature you were talking about? And what are your expectations on timing to lease them up to your average portfolio rate?

That's a great question. These are examples of strong grocery centers with potential. I believe we will see progress in both of those over the next 12 to 18 months, but it won't happen overnight. One advantage of our small store portfolio is that changes can occur much more rapidly. These two have some larger issues along with many small-store opportunities. I would say we will see the small-store potential in about 12 months, and it may take slightly longer for the larger opportunities. That's how we view these aspects. When we analyze H-E-B and Trader Joe's, we have performed very well in the centers where they act as anchors, and we expect similar results with these two acquisitions. Bob, do you have anything else to add?

No, I would already say that since we've acquired the assets, we're already working letters of intent on Riverpark as an example. And to your point, we usually will strike on our small shop spaces within the first six months, and then the chunkier-sized boxes that are a little bit larger could take, to Jeff's point earlier, 12 to 18 months. But when you have two of the dominant, number one, number two grocers in these markets doing the type of sales volumes they're doing, H-E-B is doing over $1,000 a foot. Trader Joe's is doing over $2,200 a foot. They just are significant traffic drivers to lease up the redevelopment opportunity. So I'm encouraged by the activity we've seen so far, and we just recently acquired these in the fourth quarter, so, good.

Got it. If I could ask a follow-up question. As you evaluate the current potential acquisitions, how many of these properties have a leased rate below 80% compared to those with more stabilized occupancy rates?

Yes, we wish we had more of the 80%. I believe we're targeting around 90%, which is likely where the market will settle. Regarding total acquisitions, we expect to be closer to 90% than the mid-80% range. We aim to replicate our performance from the fourth quarter, depending on the opportunities that arise throughout the year. We are enthusiastic about these projects and believe our team has executed them very well. If those opportunities come up, we will be ready, but I anticipate it will be more likely that occupancy will be in the 90% range, referring to total occupancy for the center.

Thank you.

Yes, thanks.

Your next question is from the line of Paulina Rojas with Green Street. Please go ahead.

Hello, everyone.

Hey, Paulina.

I have two brief questions. First, regarding the asset you acquired, Glenbrook Marketplace, I've noticed it is not anchored by a grocer and mostly consists of small shops with a shadow Walgreens. This seems to be a shift from the traditional centers you typically acquire. I'm curious about whether you plan to engage in more of these types of acquisitions and if there's a limit on how much these assets could make up within your overall portfolio.

Yes, Paulina, that’s an excellent question, and I’m glad you brought it up. That project is located directly across from one of the most productive areas in Chicagoland, where we have a significant presence and concentration. We saw an opportunity to leverage the machine we've developed across the country, particularly in this market, to achieve attractive returns and strong growth. We will continue to seek such opportunities, even though they will represent a smaller segment of our portfolio. We believe there are specific chances to capitalize on our team and local presence, along with the traffic generators nearby, which can lead to long-term success for these centers. However, we anticipate needing a higher return on these projects compared to our traditional grocery-anchored centers. For context, our expected returns for these centers would be around 10% to 10.5% on levered IRRs, in contrast to the 9% we aim for on our traditional grocery-anchored sites. Ultimately, this niche will remain a small part of our portfolio, but we see potential for growth in select opportunities.

Thank you. And then the last one is, I'm curious to where you think asset-level financing is for the type of grocery-anchored centers that you are acquiring. And I'm asking from an industry perspective, not necessarily you; I know you have issued equity, you have free cash flow, and other sources of capital.

Yes, we're not the best people to provide that information. We can share insights from our banks, but we're not currently borrowing in the secured market. So we would be making educated guesses instead of providing specifics, but perhaps Devin can share some details about our activities on the fund side and where we're seeing that capital.

Sure. Paulina, the perspective we have on the secured financing is from our venture activity because those assets will be financed in that market. And what we're hearing right now is 50% to 55% LTV at 180 over. So just inside of 6% today, Paulina, given where the treasury is.

Thank you very much.

Yes.

This concludes our question-and-answer session. I will now turn the conference back to Jeff Edison for some closing remarks.

Great. Thank you, operator. In closing, we're extremely proud of what the PECO team accomplished in 2023. Our differentiated and focused strategy and our talented team combined to create a market leader in the shopping center business. We're confident that the PECO team will continue to deliver market-leading results in 2024. We still have one of the lowest-levered balance sheets in the shopping center space, and with a fortress balance sheet and ample liquidity, we remain prepared for the challenges and opportunities that may arise this year. PECO is positioned to continue to successfully grow as we look forward. We believe we will provide our investors with more alpha and less beta. On behalf of the management team, I'd like to thank our shareholders, PECO associates, and our neighbors for their continued support. Thank you all for your time today and have a great weekend.

This concludes today's conference. You may now disconnect.