Phillips Edison & Company, Inc. Q2 FY2024 Earnings Call

Good day, and welcome to Phillips Edison & Company's Second Quarter 2024 Earnings Call. Please note that this call is being recorded. I will now turn the call 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; President, Bob Myers; and 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 Once we conclude our prepared remarks, we will open the call to Q&A. After today's call, an archived version will be published on our website.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. And our discussion today 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 on 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 continued to deliver solid growth in the quarter. The ongoing strength of our operating performance is attributable to our differentiated and focused strategy of owning right-sized, grocery-anchored neighborhood shopping centers anchored by the number one or two grocer by sales in the market. Our strategy has yielded outstanding results. Over 30 years, we built a fully integrated operating platform and become one of the nation's largest owners and operators of grocery-anchored shopping centers. Our management team owns 8% of the company. We have meaningful skin in the game and are committed to driving long-term shareholder value. Our operational and investment decisions continue to position PECO for growth. Format drives results. And not all space is created equal. 97% of our shopping centers are anchored by high foot traffic-producing grocery stores, which is the highest concentration in the sector. We have over 30 years' experience merchandising these centers around the grocer, and 70% of our rents come from neighbors offering necessity-based goods and services. This compares to the peer average of 54%. Our strategy and team have produced market-leading results over time. Let me share a few examples. At 98% leased, PECO has the highest occupancy among our peers. During the second quarter, PECO's inline leased occupancy increased 30 basis points, sequentially, to a record high of 95.1%. PECO's comparable leasing spreads and renewal rent spreads are among the highest in the sector. PECO has delivered a track record of outperformance in same-center NOI growth. Since the IPO, we have continued to deliver same-center NOI growth above 3%, while outperforming the peer average. We have the highest volume of acquisitions compared to our peers when excluding company M&A activity. This ensures that each and every asset we buy is PECO quality. In addition, we're among the lowest-levered shopping center REITs. We have added some new slides to our investor presentation which highlight PECO's sector-leading performance. Be sure to take a look. The PECO team is focused on maintaining our market-leading position. We believe PECO's position will drive solid FFO per share growth going forward. We remain committed to successfully executing our growth strategy to deliver long-term value to our shareholders. Our high-quality portfolio anchored by top grocers in favorable suburban markets provides a long-term, steady earnings growth profile. PECO is positioned to continue to grow and excel as we look ahead. We believe we will provide our investors more alpha with less beta, given our focused and differentiated strategy. During the second quarter, we acquired two shopping centers and one land parcel for a total of $60 million. Subsequent to quarter end, we acquired one property and one land parcel for $11 million. We continue to find attractive acquisition opportunities. Activity in the third quarter remains strong. Given the current environment, we are reaffirming our guidance of $200 million to $300 million of net acquisitions for the year. We have the capabilities and leverage capacity to acquire more if attractive opportunities materialize. We continue to target an unlevered IRR of over 9% for our acquisitions. If we look at everything we have acquired over the past three years, we are currently exceeding our underwritten returns by approximately 130 basis points. We will maintain our disciplined approach and focus on accretively growing our portfolio. We're hopeful that volumes will continue to increase throughout the remainder of the year. Earlier this week, we announced the acquisition of Des Peres Corners, a grocery-anchored shopping center in the St. Louis, Missouri suburb. The acquisition was made through a new joint venture with Cohen & Steers. The joint venture is owned 80% by Cohen & Steers and 20% by PECO. The venture has committed equity of $300 million with a total investment target between $600 million and $700 million. The venture will focus on acquiring open-air grocery-anchored shopping centers and will leverage PECO's deep shopping center expertise. We are pleased to partner with Cohen & Steers on this venture and its first acquisition. This increases PECO's access to growth capital. It also increases the acquisition universe available to us. Stabilized yield on investment is a primary focus of this fund. This venture brings together one of the best real estate fund investors and one of the best operators in the country. We are excited about this partnership. We believe this venture will generate attractive returns for both partners. Now moving to the Kroger, Albertsons merger. Kroger recently disclosed a list of locations on its proposed sale of assets to CNS wholesale grocers. PECO has two Kroger locations and ten Albertsons locations included in the proposal. Importantly, Kroger's divestiture plan continues to ensure no stores will close as a result of the merger. These 12 stores are well-performing locations with average sales per square foot of $630 and an average health ratio of 2.1%. Sales growth from 2019 has averaged 34%. The majority of these locations are anchored by the number one or two grocer by sales in their respective markets. Notably, these stores have been grocery store locations serving their communities for 25 years on average. These stores represent approximately 1% of PECO's ABR. CNS has been operating for over a hundred years. They're one of the biggest wholesale operators with demonstrated experience in retail operations. In addition, it was recently announced that Albertsons Chief Operating Officer would move to CNS to become President and CEO of its retail business if the merger closes. While the market still gives the merger a low probability of occurring, should it close, we believe the impact on PECO is a net positive for our centers and for the overall value of our portfolio. Our remaining 20 Albertsons stores would be operated by Kroger, which regularly reinvests in their stores and produces higher sales volumes on average. If the merger does not occur, our Albertsons-anchored centers will continue the strong performance that they have produced to date. With that, I will now turn it over to Bob to provide more color on the operating environment.

Thank you, Jeff. Good afternoon, everyone, and thank you for joining us. We had another quarter of strong operating results and leasing momentum. We continue to see high retailer demand with no current signs of slowing down. PECO's leasing team continues to convert retailer demand into high occupancy with higher rents at our centers. Portfolio occupancy remained high and ended the quarter at 97.5% leased, a sequential increase of 30 basis points. Anchor occupancy of 98.8% increased 40 basis points sequentially as we executed eight anchor leases including Planet Fitness, Ace Hardware, Dollar Tree, and Coola Sport performance. Inline occupancy ended the quarter at a record high of 95.1%. New neighbors added in the second quarter included quick service restaurants such as Mountain Mike's Pizza, Dave's Hot Chicken, Wing Stop, and Chipotle, along with several med tail uses, health and beauty retailers, and other necessity-based goods and services. In terms of new lease activity, we continue to have success in driving higher rents. Comparable new rent spreads for the second quarter were 34.4%. Our inline new rent spreads remain strong at 31.9% in the quarter, which compares to our trailing 12-month average of 29%. We continue to capitalize on strong renewal demand and are making the most of the opportunity to improve lease language at renewal and drive rents higher. In the second quarter, we achieved a 20.5% increase in comparable renewal rent spreads. Our inline renewal spreads remained high at 19.7% in the second quarter, which compares to our trailing 12-month average of 18.5%. These increases in spreads reflect the continued strength of the leasing and retention environment. We expect new and renewal spreads to continue to be strong throughout the balance of this year and into the foreseeable future. Our neighbor retention remained high at 89%, while growing rents at attractive rates. Our inline retention rate remained strong at 85%, well ahead of the historical five-year average of 78%. Higher retention means less downtime and lower TI spend. In the second quarter, we spent only $0.30 per square foot on TI for renewals. We also remained successful at driving higher contractual rent increases. Our new and renewal inline leases executed in the second quarter had 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 and the strength of our leasing pipeline are clear evidence of the continued high demand for space in our grocery-anchored shopping centers. PECO's pricing power is a reflection of the strength of our focused strategy and the quality of our portfolio. Today, we believe the consumer remains resilient. Our grocers continue to drive strong recurring foot traffic to our centers. Consumers continue to visit grocery stores 1.6 times per week. There are approximately 33,000 average total trips per week to each PECO center. This equates to nearly 500 million total trips to PECO centers in the last 12 months. Strong foot traffic benefits inline neighbor sales and enhances our ability to drive rents higher. PECO's three-mile trade area demographics include an average population of 67,000 people and an average median household income of 87,000, which is 12% higher than the U.S. median. These demographics are in line with the 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. According to Placer.ai, the majority of visits to PECO centers are from customers in the middle or upper class. Our markets have less poverty, higher household incomes, and better expected population growth than the national averages. Unemployment in PECO markets is also 20% lower than the national average at 3.2%. PECO continues to benefit from a number of positive macroeconomic trends that create strong tailwinds and drive robust neighbor demand. These trends include a resilient consumer, hybrid work, migration to the Sun Belt, population shifts that favor suburban neighborhoods, and the importance of physical locations and last mile delivery. Leasing demand remains at historically high levels for inline spaces, as these macro tailwinds have retailers more focused on having stores in our centers. The impact of these demand factors is further amplified due to limited new supply over the last 10 years and going forward given that current economic returns do not justify new construction of shopping centers. In addition to our strong rental growth trends, we continue to expand our pipeline of ground-up out-parcel development and repositioning projects. We continue to expect to invest $40 million to $50 million annually in ground-up development and repositioning opportunities with 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. Our team continues to stay focused on growing this pipeline as the returns are accretive to the portfolio. As we shared during our December Investor Day, PECO is leveraging artificial intelligence to creatively and efficiently improve how we operate our business. PECO was recently honored at the 2024 Realcomm conference with a digital innovation award, known as the Digi Awards. An inaugural award was given for best use of AI and PECO won top honors from a field of finalists. This is PECO's third Digi Award. PECO continues to pioneer AI advancements that foster cross-functional collaboration. We are cultivating a culture where AI is a catalyst for long-term growth. This award is a meaningful and well-deserved recognition for the PECO team as we continue to stay on the cutting edge of technological advancements that help propel new initiatives and reinforce our position as a leader in the shopping center sector. In summary, the PECO team remains optimistic given the current strong operating environment and our continued positive momentum. Our healthy neighbor mix and grocery-anchored strategy positions PECO well for continued growth. The overall demand environment, the stability of our centers, the strength of our grocers, the health of our inline neighbors, and the capabilities of our team give us confidence in our ability to deliver solid 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 second quarter results, then provide an update on the balance sheet and finally speak to our reaffirmed 2024 guidance. Second quarter 2024 Nareit FFO increased 3.3% to $78.4 million or $0.57 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 from higher interest rates. Second quarter core FSO increased 2.9% to $80 million, or $0.59 per diluted share, driven by increased revenue in 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 1.9%, driven by rental income growth of 4.3% year-over-year, partially offset by lower tenant recovery income and higher property level expenses. As in previous quarters, recoveries can be impacted by the mix and timing of spend, which we believe will smooth out over the year. I will note that our reserves for uncollectibility improved in the quarter, as we indicated on the last call. Given the strong operating environment that Bob discussed, we're continuing to be aggressive with wavering neighbors. We expect this will keep us at the high end of our guidance range for this expense, and we believe this will meaningfully improve the rent and merchandising at our centers. Regarding acquisitions during the second quarter, we acquired two shopping centers and one land parcel for a total of $60 million. Subsequent to quarter end, we acquired one shopping center and one land parcel. Year-to-date, acquisitions have totaled $127 million. We have no dispositions during the quarter. We will continue to explore opportunities for dispositions where they make sense. Turning to the balance sheet, we have approximately $743 million of liquidity to support our acquisition plan and no meaningful maturity until 2027. Our net debt to adjusted EBITDA remained at 5.1 times. Our debt had a weighted average interest rate of 4.2% and a weighted average maturity of 4.9 years when including all extension options. During the quarter, we completed a bond offering of $350 million at 5.75% due in 2034. This offering was the next step in our long-term strategy of becoming a regular issuer in the unsecured bond market, which improves our fixed rate percentage of debt and extends our maturity ladder. As of June 30, 2024, 91% of PECO's total debt was fixed rate. We continue to have one of the best balance sheets in the sector, although we believe the rating agencies do not give us the credit that we deserve. Our balance sheet has us well positioned for accretive acquisitions. Turning to our guidance for 2024, we have updated the net income per share range to $0.49 to $0.54. We have reaffirmed our guidance for Nareit and Core FFO, which reflect 6% and 3% growth over 2023 at the midpoints, respectively. In addition, we have reaffirmed our range for same-center and NOI growth of 3.25% to 4.25% given the continued strong operating environment. We currently have several acquisitions in our pipeline, either under contract or in contract negotiations. This activity provides a strong start for the year, and we're 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 have the capacity to meaningfully increase this number, but we are comfortable with this guidance range in the current environment. Looking beyond 2024, we believe our internal and external growth opportunities 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 growth because there should be less tenant improvement dollars invested as we continue to increase same-center occupancy. In the near term, we continue to be impacted by interest rate increases, as all borrowers are, which impacts our earnings growth. That said, we are pleased to guide the positive per share growth. If we added back the per share impact of interest rate increases to our 2024 guidance, this would reflect 7% core FFO per share growth at the midpoint. 2024 is continuing to present challenges with high inflation, high interest rates, and global conflict. However, the strength of our integrated operating platform positions PECO well for long-term, steady earnings growth. We're excited for the additional growth opportunities ahead this year both internal and through acquisitions. With that, we will open the line for questions.

Thank you. Our first question comes from Haendel St. Juste with Mizuho. Please go ahead.

Hey, good afternoon to you guys. Thanks for taking my question and congrats on a strong quarter. My first question is on the new joint venture with Cohen & Steers. I guess, help us understand why now? You have low leverage, as you indicated, you have an attractive cost of capital, attractive spreads and you're achieving IRRs above your underwriting doing so on your own balance sheet. So why would the economics here on Cohen & Steers be willing to own? Thanks.

Thank you for your question. We anticipate receiving a few inquiries about that topic today. The reasoning is quite straightforward. We have been in the fund business for a considerable amount of time, and this will be our ninth joint venture. We believe it contributes positively to our growth. As you know, we have a robust and ambitious growth strategy. This approach enables us to expand our reach, which we hope will lead to accelerated growth. For instance, our first acquisition was a project that didn't align with our underwriting criteria for the balance sheet, but it proved beneficial for the Cohen & Steers joint venture. This opportunity allowed us to acquire an additional project that we might not have pursued otherwise. Therefore, as we evaluate this venture, we see it increasing our growth potential and it aligns better with our joint venture financial expectations than it would have as a balance sheet item.

Thank you for that. Now, could you provide more details about the types of assets you are targeting and any information on the return thresholds? It seems that the thresholds are somewhat lower for on-balance sheet investments. Could you elaborate on geographic considerations, asset types, and sizes? Additionally, please give us more insight into the targeted returns you are aiming for. Thank you.

So in terms of the details of what we're buying, we're going to leave that to Cohen & Steers to talk about that it is their process. They've got 80% of the investment. For us, the key thing for us is that we won't be in conflict with our balance sheet stuff. We're expanding our net so that we can buy more and these are things that would not fit in our underwriting on the balance sheet. And that's how we are thinking about it.

Just a follow-up, the timeline for deploying the capital. Any color on that front you could provide?

Sure. We anticipate right now the number is $300 million of equity, and we think that we're using about $100 million of equity a year as a three-year program, and we hopefully can do it much more quickly than that, but that's our plan.

Our next question comes from the line of Caitlin Burrows with Goldman Sachs. Please go ahead.

Hi, everyone. Bob, I think you mentioned that leasing interest is as high as ever. I don't know if you quite used that term, but high. So I guess when you say that, what stats are you looking at to make that statement? Is it a number of deals in the active discussions? Is it square footage based? And it actually feels like those number of deals would have to be lower than in the past given your high occupancy, but maybe not. So just wondering if you can talk about what types of stats could support the statement that leasing is not showing signs of slowdown? Thanks.

Yes. I really think three key points. And I think it's one the retention. So our retention at 89% and our inline retention above 85% is very solid. I'm not seeing any slowdown in that. And really, it comes through with our new leasing spreads of 34%, now renewal spreads of 20.5%. Health ratios for our neighbors continue to be right around 9.5%. And coming out of Las Vegas and our national account program, the demand is at an all-time high and retailers are still looking for sites in 2025, 2026, and 2027. So even though our occupancy is inline at 95.1%, we still feel there's another 100 basis points, 150 basis points there of growth in inline because there's just no new supply out there. And the demand for being in the number one, number two grocery-anchored shopping center is where they want to be. So I don't see any slowdown.

Got it. Okay. And then, John, on the bad debt side, I think you mentioned something along the lines suggesting you're being maybe less flexible with wavering tenants. Can you give some more detail on how that process maybe normally works, for example, when someone isn't paying on time and how PECO is handling it differently today given the high occupancy and new rent spreads potential?

Sure. Thanks, Caitlin. It did improve sequentially as we expected, given the strong environment Bob discussed and the potential for better merchandising and higher rents in our centers. We're focused on quickly recapturing that space rather than discussing payment plans. The time it takes depends on their willingness to cooperate, but we believe it's the right choice considering the demand and the rates Bob mentioned. From an uncollectible standpoint, we feel very optimistic about our tenants. Our latest review indicates that they have a FICO score of 745, so we are cautiously optimistic. We have a diversified portfolio; our largest tenant outside of the grocery store is T.J.Maxx at 3%. Currently, our watch list is around 2%, closer to 1.5%. Overall, we are feeling very positive and continue to enhance the portfolio.

Okay. Thanks.

Thanks, Caitlin.

Our next question comes from the line of Jeff Spector with Bank of America. Please go ahead.

Great. Thank you. Good afternoon. I guess my first question is focused on the same-store NOI guidance. I think year-to-date is 2.8%. The guidance is 3.25% to 4.25%, which would mean there's meaningful acceleration in the back half of the year. Can you talk about the drivers of that acceleration? And is this correct?

Thanks, Jeff, for the question. John, do you want to take that?

In the quarter, we experienced a growth of 1.9%. You are correct that it was influenced by lighter recovery income, which is mainly a timing issue related to the spending mix during both the quarter and year-to-date. We expect an acceleration in the latter half of this year based on the timing of those recoveries. Additionally, we will continue to see growth in minimum rent. I noted that our reserves for uncollectibles have improved, and we achieved over 95% occupancy for the first time, highlighting the ongoing strength of our neighbors. Overall, we are observing these positive trends, but it's important to note that we are discussing relatively small figures. The key takeaway is that we are confident in our reaffirmed guidance range.

Great. Thank you. And then one follow-up on the JV. To confirm, are you leveraging the existing platform? Do you need to hire new teams or open any new offices for these different markets? And can you discuss the fees? Thank you.

On the fee we're going to leave that up to Cohen & Steers to talk about. In terms of resources, we will not be adding any additional resources to put this into work. So it is obviously profitable from a fee perspective for us because we are utilizing the existing infrastructure.

Great to hear. Thank you.

Yes, thanks, Jeff.

Our next question comes from the line of Mike Mueller with JPMorgan. Please go ahead.

Yes, hi. I'm curious, the difference between the $200 million to $300 million of acquisitions that you're comfortable that's baked in to guidance versus where you said you could surpass it if the environment changes. Is it just conversations on product that you're close to, but just not close enough on pricing? Or what could cause you to go above the $200 million to $300 million.

Thank you for the question, Mike. What we're trying to convey is that we have a balance sheet that enables us to grow beyond the $200 million to $300 million range if we can identify products that satisfy our stringent underwriting criteria, which are that the product is a top one or two grocer and achieves over a 9% unlevered IRR. If we can find such products, we would exceed that amount. However, given the current market environment, we believe this is a realistic assumption. Got it. Okay. And then, I guess, as it relates to the land parcels that you've been acquiring, are they adjacent to existing centers? And generally, what's the time frame to start activating some sort of activity on the site?

Yes, absolutely. So yes, the answer is, yes, and they're anywhere from 1.9 to 3 acres in size. They are either adjacent or across the street from public-anchored assets, Kroger-anchored assets, and part of the strategy there is to add fuel for maybe a Harris Teeter down in Chapel Hill when we purchased that. When I look at these sites down in Riverview, Florida, there's strong demand from national retailers that we plan to do $40 million to $50 million of ground-up and value-add redevelopment per year. We're generating 9% to 12% returns on that. And we have a great national platform that's looking to grow with us. So yes. The answer is, yes, they're adjacent to our properties, and we already have most of them pre-leased. So hopefully, when we close, we're under lease within 60 days and then out of the ground and open and paying rent within 12 months.

Got it. Okay. Thank you.

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

Hey, I have two quick questions. Firstly, regarding the acquisitions for guidance, can you clarify if this is for the second half of the year? Is there anything in the pipeline or under contract, or is it still just speculative? Secondly, about the Cohen & Steers announcement, are you considering more of these types of structures in the future? How are you approaching that?

Thank you for the question, Ron. Regarding acquisitions, we've indicated in our prepared remarks that we are currently in price negotiations or have contracts in place that give us strong confidence in achieving the numbers we've discussed. Importantly, there is a good amount of product available in the market, which is more liquid than last year. While competition has increased compared to last year, there is also more product available, leading us to feel comfortable with our guidance of $200 million to $300 million. We are particularly excited about the Cohen & Steers joint venture because it enhances our ability to acquire products with underwriting returns that align with our criteria. If we find other opportunities like this one, allowing us to tap into market segments where we have been successful but that do not meet our current requirements, it would enable us to pursue further growth. We're looking for such opportunities, but for now, aside from the smaller joint venture we have in progress, we don't see many alternatives.

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

Hi. Thanks. Good afternoon. First question, I just wanted to follow up on the joint venture, an asset management platform a little bit more broadly. I think at the December Investor Day, it sounded like you were working towards two funds you discussed one being a core fund, I think, with a two-pronged strategy. So while we were yielding smaller-format strips. And then also, you discussed, I believe, higher-yielding power centers or larger format centers. Is this joint venture with Cohen & Steers, what you were referencing in December? And can you just clarify if this fund will also be looking at some larger format centers as well as the smaller grocery-anchored centers, which is similar to what you acquired outside of St. Louis so far?

Yes, you're right. We will be considering the purchase of potentially larger centers within this pool, as well as products that can align with the needs of that fund, even if they don't meet our balance sheet criteria. This is our approach and perspective on the matter. We also mentioned the social impact fund we are developing, and we will provide more details once we finalize our first acquisition, similar to what we did with the Cohen & Steers deal.

Okay. And in terms of capitalizing the fund, so roughly 50-50 debt and equity Will the venture be looking for secured debt? Is this property-level financing that will be targeted? And what does that look like today in the market?

I would assume that's how this first deal happened, and it's a reasonable assumption going forward. In terms of the structure and pricing, John, do you want to provide any additional insights? We're aiming to allow Cohen & Steers to lead this discussion regarding what they would like to have shared, but John, if you can add any further details?

Sure. Yes. So, as Jeff said, this asset was done that way. I mean, we'll continue to evaluate different capital opportunities. So rather than this asset, maybe I'll just speak a little more broadly, I mean, the capital markets are the secured markets and this venture is definitely open for grocery-anchored real estate. And I would say that that's probably looking at for 10-year money, you're probably still in that 175 over range kind of that's what has been the case, and I think that's still available out there, but we're more focused on the balance sheet at the unsecured markets, but we will evaluate the finance increased opportunities as we move along.

All right. Great. And John, just one last one for you. Can you provide an update as we make our way further through the year here regarding the swap expirations and any potential debt capital raising activity in the back half of the year, just given the current capital markets environment today?

I appreciate your question, Todd. As I mentioned earlier, we have swaps set to expire in September and October totaling $375 million. Additionally, we have a $150 million swap that will begin at the same time to help mitigate the impact. By the end of this quarter, 91% of our debt is fixed rate, which is a significant improvement compared to the first quarter as we work on our long-term strategy. We aim to be a regular issuer in the unsecured bond market, with around 10% of our debt expiring each year. In May, we issued a $350 million bond that was well received by investors, helping us move toward that goal. We are looking to manage our fixed to floating ratio, targeting 90% fixed and 10% floating through future debt issuances. Importantly, we do not have any significant maturities until 2026, which gives us the opportunity to be patient and access the market when the time is right. We plan to utilize our fully replenished revolving credit facility, and while there is a small amount currently outstanding, we have the capacity to support our acquisition strategy. Going forward, we will look to the market for opportunities but won't assume any equity issuance in our guidance.

Okay. So no new swaps or...

Other than the one we currently have.

Okay. Got it. So I guess you're saying you'll take down or you'll put additional funding on the line for now and then look to be in the market issuing notes again similar to what you did a couple of months ago?

That's the playbook.

Our next question comes from the line of Floris Van Dijkum with Compass Point Research and Trading. Please go ahead.

Thanks, guys, for taking my question. Jeff, I had a question on the Cohen & Steers JV. Are there any restrictions on Cohen & Steers owning PECO stock as a result of this JV that you've just entered into?

No, there are no restrictions or conflicts regarding Cohen & Steers owning PECO stock as a result of this joint venture.

Great. Great. Thanks. Next question I had was, maybe it's more on the leasing side. But you've talked about, obviously, the improved terms you're getting renewal rates, by the way, are near 90% are just off the charts. It's great. But maybe talk about one of the things that sort of impeded some of your growth over the last quarters has been the fact that you still have a fair amount of options from tenants where they can obviously renew at below-market rents. Maybe talk about some of the new terms that you're negotiating with tenants on options going forward as well? And is that going to slow down your growth going forward? Or are you getting more favorable terms on your options with free market rent sets or fewer options from a tenant perspective?

I'll start, Bob, and then you can add your thoughts. Floris, we are continuously aiming for fewer options. In the current environment, we have more leverage. To ensure the right merchandising in your centers, it’s crucial to bring in the right tenants. They generally prefer to control the space for an extended period, with options being their favored approach. We are extending leases by a year or two to help reduce the number of options, but when evaluating a shopping center, it's essential to have the appropriate merchandising mix specific to each property. The trade-offs are not on a macro scale but rather tied to individual properties. If we need to introduce a tenant to achieve our desired merchandising mix, we must decide whether to grant them options or not. This is where the significant decisions take place. We have more strength than we've had in a long time, but it remains a decision made on a property-by-property basis. Bob, do you have anything to add?

Yes. Thanks, Jeff. The only other thing I would add on that is, we are seeing improved deal terms when it comes to options. Certainly, the national tenants that are investing a lot of capital in the space want to have options. And they're typically five years on average. But we are seeing options increase anywhere between 15% and 25%. So we've made it known internally that options aren't something that we think about lightly. Obviously, we don't want to give them. But if we do, then we want to make sure that we're getting somewhere between 15% and 25% on the options. And we are having success in that strategy. So you'll continue to see that number improve.

Great. Thanks, guys.

Our next question comes from the line of Omotayo Okusanya with Deutsche Bank. Please go ahead.

Yes. Good afternoon, everyone. Going back to Floris' question around the Cohen & Steers JV. Could you also talk a little bit about how, again, decisions are made in regards to assets you're looking at and what could potentially go into the JV versus what can you see on your balance sheet? Like how has that potential conflict of interest going to be managed?

Thank you for the question. As I mentioned earlier, this is our ninth joint venture over the past 30 years. Choosing the right partner is crucial, and ensuring that both parties are aligned in their objectives is essential. This alignment is one reason why these arrangements can take time to finalize. We have a strong partnership with Cohen & Steers concerning their portfolio and our balance sheet, which gives us confidence that, like our previous joint ventures, we will effectively allocate this capital without any confusion. We believe we are expanding our opportunities rather than reducing what is on the balance sheet. We have reaffirmed our guidance related to the balance sheet and will continue to experience solid growth. This new venture will further enhance our growth without conflicting with our balance sheet.

That's helpful. Thank you. And then going back to some of the earlier commentary around the same-store NOI and some of the kind of timing-related issues on OpEx. Again, John, could you again clarify that a little bit for us of how we kind of think about what that means for the back half of 2024 and kind of same-store OpEx growth and same-store NOI growth?

As we assess the situation, some of the recoverable expenses we expected in the second quarter are delayed this year due to a mix of factors. Our same-store margin is down about 50 basis points, now at 72%, compared to 72.5% last year. However, given the actions of our property managers and current observations, we believe there will be an improvement in spending. We anticipate a sequential increase, and it should improve compared to last year, as last year's stronger performance was in Q2 rather than Q3. Therefore, we're seeing a better recovery rate. Despite the consistent spending, this highlights why we refrain from providing quarterly guidance. We prefer to maintain a stable projection period and focus on running our centers effectively. Overall, we feel optimistic about recovery, reducing uncollectibles, and continuing to achieve minimum rent growth in the range of 3.25% to 4.25%.

Thank you.

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

Hi. Just wanted to follow up on Omotayo's question there. Can you give us any sense is the comfort level still fully at the midpoint or maybe more at the low end just given the implied second half acceleration in your same-store NOI guidance.

Sure. We are looking to the midpoint on these. They are ranges. Ultimately, things that would go above that would be kind of continued strong retention, although it's quite high already. And then I would say, to go to the lower end would be the same thing weaker retention or weaker weakness around collectibility. But right now, to that point, we are definitely looking at, I would say, the middle of that range.

I'm interested in your comments about the Cohen & Steer joint venture. You mentioned there are distinct categories for the assets that your underwriting would allocate to the JV's balance sheet. I'm curious if the asset performance is falling short of your 9% unleveraged internal rate of return target due to initial yields, or is it possible that the standards for top-tier grocery properties aren't as high? Additionally, will you ultimately want to retain ownership of those assets on your balance sheet when the fund decides to exit? Do you have rights of first offer or any other options to acquire those assets over time?

I expect these assets will generally be larger and open-air grocery-anchored, which is essential for the joint venture. They are likely to have a greater square footage compared to our typical store. The center we acquired represents a significant deviation from our usual balance sheet purchases. The balance sheet targets a 9% unlevered internal rate of return, while the fund has different return requirements. As I mentioned earlier, we chose not to buy the project in St. Louis because it did not align with our underwriting criteria. However, through fees, we managed to surpass our underwriting return expectations and fulfill the requirements of the Cohen & Steers joint venture. This venture is, as we anticipated, a growth opportunity for PECO, allowing us to achieve strong returns, and we are enthusiastic about it.

And do you have rights to acquire those assets built into the partnership?

That's an issue for Cohen & Steers to address. We maintain a strong relationship with them, and any resolutions will be approached at the appropriate time in a manner beneficial for everyone involved. Whether it's us or them making the acquisition, we have not reached that point yet. Our goal is to reach $300 million of equity out, and only then will we discuss other matters. We are confident that this will occur over time. Yes. Thanks, Juan.

Our next question comes from the line of Dori Kesten with Wells Fargo. Please go ahead.

Thanks. Good afternoon. If you were to put out a 2025 early look today, would you assume a higher bad debt as a percentage of revenue as compared to this year? Or is there a reason to believe you may be a bit less aggressive with your space and in your currently?

Hey, Dori, I'm sorry, I didn't quite hear what you said. Could you please repeat it for me?

Yes. I just said, if you're looking out to next year, would you assume a higher bad debt as a percentage of revenue as compared to this year? Or would you imagine kind of in line or lower? I know you commented earlier that you've been a little bit more aggressive this year?

Yes. I would assume that we will be at the higher end of our range for bad debt this year. Next year, if the environment remains similar and we take an aggressive approach to reclaiming properties and increasing rents, it could also be at the higher end of the targeted range. However, that remains to be seen, and currently, being at 80 basis points is still a strong position.

Yes, absolutely. Okay. Thank you.

Thanks, Dori.

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

Thank you, operator. In closing, the PECO team maintained strong operating performance in the first half of 2024. We achieved record high leasing occupancy and high renewal rent spreads, with new leasing spreads ranking among the best in our peer group. Our retention rates are also among the highest in the industry. We are on track to acquire between $200 million and $300 million in net acquisitions this year, with targeted unlevered IRRs exceeding 9%. We completed a $350 million bond offering and continue to maintain one of the lowest leverage levels in the shopping center sector. Despite significant interest rate pressures, we posted strong earnings growth. At PECO, we foster a culture that encourages our associates to think and act like owners in every decision. Since our founding, we have prioritized creating the best culture and team in the business, which is evident in our associate engagement results and the longevity of our team members. Our associates are committed to operational excellence and innovation. For instance, the Cincinnati Inquirer has ranked us as a top place to work for eight consecutive years. Additionally, we received the Digie Award for the best use of AI at the RealComm Conference, showcasing our innovative edge. DashComm, our communication software developed by the IT team, has significantly enhanced customer experiences for over 5,800 neighbors and is now utilized by ID Plans in their tenant portal. Our internship program was recently acknowledged by the ICSC, and we have shared that article on our investor relations website for your review. Our focused strategy, along with our talented and innovative team, positions us as a market leader in the shopping center industry. We are confident that the PECO team will continue to achieve market-leading results for the rest of the year. Looking beyond 2024, PECO is well positioned for continued growth. We believe we offer our investors more alpha with less beta. On behalf of the management team, I want to express gratitude to our shareholders, PECO associates, and neighbors for their ongoing support. Thank you for your time today, and enjoy your weekend.

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