Good day, and welcome to Phillips Edison & Company's First Quarter 2025 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 Once we conclude our prepared remarks, we will open the call to Q&A. After today's call, an archived version will be published on our website.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. In our discussion today, we will reference certain non-GAAP financial measures. Information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in our earnings press release and supplemental information packet, which have been posted 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 delivered another strong quarter of growth with same-center NOI increasing by 3.9%. I'd like to thank the PECO associates for their hard work to maintain our unique competitive advantages and drive value at the property level. As we sit here today, we see an ever-changing macroeconomic environment. It's too early to tell what impact tariffs could have on PECO or our neighbors. That said, we continue to see a resilient consumer. Retailer demand across our portfolio remains strong. This is most evident in our continued high occupancy, strong rent spreads, and high retention. Despite tariff concerns, we continue to be strategic in our decision-making to best position PECO to take advantage of opportunities for growth both internal and external. We are seeing high retailer demand with no current signs of slowing. PECO's leasing team continues to convert this demand into significantly higher rents. Retailers want to be located at centers where top grocers drive consistent and recurring foot traffic. Given the continued strength of our business, we are pleased to affirm our full year guidance. Retail categories that have historically been impacted by a softer economy include necessity-based goods and services. This includes grocery, restaurants, and health and beauty. 71% of our ABR comes from necessity-based goods and services. We believe PECO is relatively more insulated from potential tariff disruption. We have a diversified neighbor mix. We also have limited exposure to big-box bankruptcies and at-risk retailers. We believe that the combination of our unique format and our cycle-tested experience drives high-quality cash flows. Our performance following both the 2008 global financial crisis and the 2020 COVID-induced downturn demonstrates the resiliency of our grocery-anchored portfolio. We continue to find opportunities in the transaction market. During the first quarter, we purchased $146 million in assets at PECO's total share. Despite recent market volatility, we remain confident in our ability to acquire high-quality centers at attractive returns. While it's early in the year, our pipeline remains strong. Given the grocery-anchored pipeline we are targeting, and the team we have at PECO, we are affirming our guidance range of $350 million to $450 million in gross acquisitions this year. We have the capabilities and leverage capacity to acquire more if attractive opportunities materialize. We are also in a great place to pivot if we should see the transaction market tighten. We continue to target an unlevered IRR of 9% for our acquisitions. We will continue to be disciplined buyers as we look forward. Speaking of looking forward, the PECO team remains focused on the long-term. History tells us that grocery-anchored and necessity-based formats have been relative outperformers during periods of economic uncertainty. We don't expect the current cycle to be any different. While the markets may be nervous about the health of the consumer, we are not seeing anything that changes our view on our ability to deliver on our long-term growth plans both internal and external. I want to repeat, we remain confident in this current environment. Our confidence is driven by the stability of our cash flows and the PECO team's ability to deliver solid long-term growth and create long-term value for our shareholders. Given our demonstrated track record through various cycles, we believe an investment in PECO provides shareholders with a favorable balance of quality cash flows, mitigation of downside risk, and strong internal and external growth. In summary, the quality of our cash flows reduces our beta and the strength of our growth increases our alpha; less beta, more alpha. I'll now turn the call over to Bob Myers. Bob?

Thank you, Jeff, and thank you for joining us. The PECO team delivered another quarter of strong operating results and leasing momentum. The quality of PECO's cash flows is reflected in our market-leading operating metrics. Our long operating history has given us an informed measure of what drives quality and value at the shopping center level. We believe SOAR provides important measures of quality, spreads, occupancy, advantages of the market, and retention. In terms of leasing activity, we continue to capitalize on strong renewal demand. The PECO team remains focused on maximizing opportunities to improve lease language at renewal and drive rents higher. In the first quarter, we maintained strong comparable renewal rent spreads of 20.8%. Our in-line renewal rent spreads reached a record high of 21.7% in the quarter. Comparable new leasing rent spreads for the first quarter were 28.1% and our in-line new rent spreads remained strong at 27.5% in the quarter. These 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. During the first quarter, our combined new and renewal average annual rent bumps were 2.7%, another important contributor to our long-term growth. Portfolio occupancy remained high and ended the quarter at 97.1% leased. Anchor occupancy remained strong at 98.4%. We currently have just 15 vacant spaces in our portfolio that are over 10,000 square feet. This includes the anticipated Party City and Big Lots spaces. Activity for these anchored leases currently out for signature is extremely positive. Examples of retailers who are showing interest in these spaces include T.J. Maxx, Sierra Total Wine, MANA Fitness, Ace Hardware, Dollar Tree, Ulta Beauty, and Kula Sports Performance. In-line occupancy ended the quarter at 94.6%. This was in line with internal expectations as we typically see a nominal change during the first quarter. Given our strong leasing pipeline, we expect in-line occupancy to remain high throughout the year at around 95%, which is very strong. As it relates to bad debt in the first quarter, we actively monitor the health of our neighbors. Bad debt was lower than a year ago and we are not concerned about bad debt in the near term, particularly given the strong retailer demand. We continue to have a highly diversified mix with no meaningful rent concentration outside of our grocers. A key advantage of PECO's suburban locations is that our centers are situated in markets where our top grocers are profitable. PECO's 3-mile trade area demographics include an average population of 68,000 people and an average median household income of $92,000. This 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 markets also benefit from low unemployment rates, which are below the shopping center peer average. The necessity-based focus of our properties is important when demographics are considered. If you are comparing a Publix to an Apple store or a high-end fashion retailer, the demographics that each retailer needs to be successful are very different. PECO's demographics are very strong in supporting our grocers and necessity-based neighbors. We continue to enjoy a well-diversified neighbor base. Our top neighbor list is comprised of the best grocers in the country. Our largest non-grocer neighbor T.J. Maxx makes up only 1.4% of our rents. All other non-grocer neighbors are below 1% of ABR. When looking at our very limited exposure to distressed retailers, the top 10 neighbors currently on our watch list represent approximately 2% of ABR. This is not by accident. It is a product of many years of being locally smart and intentionally cultivating our portfolio of grocery-anchored neighborhood centers located in strong suburban markets. Our neighbor retention remained high at 91% in the first quarter while growing rents at attractive rates. And I want to repeat that the PECO team delivered record high in-line renewal rent spreads in the first quarter. High retention rates result in better economics with less downtime and dramatically lower tenant improvement costs. Lower capital spend results in better returns. The IRR on a renewal lease has been meaningfully higher than the return on a new lease. In the first quarter, we spent only $0.61 per square foot on tenant improvements for renewals. We have looked at quality differently over 30 years and we continue to believe that SOAR is the best metric for quality. The overall demand environment, the stability of our cash flows, the strength of our grocers, the health of our in-line neighbors, and the capabilities of our team give us continued confidence in our ability to deliver strong growth in 2025 and in the long term. I will now turn the call over to John. John?

Thank you, Bob, and good morning, and good afternoon, everyone. I'll start by highlighting first quarter results, then provide an update on the balance sheet and finally speak to our affirmed 2025 guidance. First quarter 2025 Nareit FFO increased to $89 million or $0.64 per diluted share, which reflects year-over-year share growth of 8.5%. First quarter Core FFO increased to $90.8 million or $0.65 per diluted share, which reflects year-over-year per share growth of 8.3%. Both Nareit FFO and Core FFO benefited this quarter from a one-time lease termination fee of approximately $0.01 per share. We had a lease for the space lined up at the time of termination, so this capital will help pay for the new neighbors' build-out. Lease terminations are a part of our business, but this termination fee income was larger than normal, which is why we want to highlight this item as non-recurring. We see this activity as a long-term value add for PECO. Our same-center NOI growth in the quarter was 3.9%. Turning to the balance sheet. We have approximately $760 million of liquidity to support our acquisition plan and no meaningful maturity until 2027. Our net debt to adjusted EBITDAR was at 5.3x as of March 31, 2025. This was 5.0x on a last quarter annualized basis, which is also important to track in quarters with elevated acquisition volume. Our debt had a weighted average interest rate of 4.4% and a weighted average maturity of 5.6 years when including all extension options. As a reminder, in January, we amended our revolving credit facility to extend its maturity to January 2029 and increase its size to $1 billion. This gives us additional liquidity and flexibility as we acquire assets and monitor the capital market. At the end of the first quarter, 86% of PECO's total debt was fixed rate, which is in line with our target of 90%. We do not have immediate intentions to execute interest rate swaps on our floating rate debt. PECO continues to have one of the best balance sheets in the sector, which has us well-positioned for continued external growth. As Jeff mentioned, we are pleased to affirm our 2025 guidance. As a reminder, our guidance for 2025 Nareit FFO per share reflects a 5.7% increase over 2024 at the mid-point. And our guidance for 2025 Core FFO per share represents a 5.1% increase over 2024 at the mid-point. We also affirmed our guidance range for 2025 same-center NOI growth of 3% to 3.5%. As we continue to enhance our neighbor mix, our actions to improve merchandising and capture mark-to-market rent growth with new neighbors will be a slight headwind to 2025 growth. As we have said previously, the PECO team is focused on the long-term and our actions to replace neighbors are intentional. We believe our low leverage gives us the financial capacity to meet our growth targets. We also have diverse sources of capital that we can use to grow and match fund our investment activities. These sources include additional debt issuance, dispositions, and equity issuance. Match funding our capital sources with our investments is an important component of our investment strategy. As a reminder, our guidance does not assume equity issuance in 2025, as we believe we will be in our target leverage range of low to mid 5x on a net debt to adjusted EBITDAR basis. We continue to believe this portfolio and this team are well-positioned to deliver mid to high-single digit Core FFO per share growth on an annual basis. This assumes stabilized interest rates which are expected to remain a near-term headwind. However, we're hopeful that we're near stabilization as we are projecting to deliver earnings growth of over 5% in 2025. We also believe that our long-term AFFO growth can be higher as more of our leasing mix is weighted towards renewal activity. We believe our targets for growth in Core FFO and AFFO will allow PECO to outperform the growth of our shopping center peers on a long-term basis. With that, we will open the line for questions. Operator?

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

Hi, good morning, everyone. Maybe starting with leasing, I feel like normal occupancy seasonality is understood, but can you give any color on the seasonality of leasing? And then with that in mind, could you differentiate how March leasing went and then how April leasing has gone and any potential pullback or expectations for the May ICSC?

Sure. Thanks, Caitlin. Bob, do you want to take that? I would say generally, as we've discussed throughout this call, I want to clarify that we shouldn't confuse our current status with our expectations for the year ahead. We're witnessing significant changes, and there's a distinct difference between the circumstances of the first quarter and our forecasts for the rest of the year. As we respond, we'll aim to be very clear about our present situation. If you have questions about what we anticipate for the future, we're open to discussing those as well, but our primary focus is on the current status. So, Bob, do you want to address the leasing and occupancy issue that Caitlin brought up?

Yes, yes, sure. Thanks Jeff, and thank you for the question. It's very normal in doing this for the last 25 years, first quarter; you're typically going to see a little bit of fall off in occupancy. And we're in a very, very good spot at 97.1%, with in-line at 94.6%, anchors at 98.4%. We have a lot of activity on our anchor spaces. And like I mentioned in the call, we only have 15 of those opportunities, but we're seeing some really, really nice mark-to-market opportunities on the spreads. Retention remains high at 91%. And the visibility that we have over the next six, seven months, the activity is very strong. I mean, we have more leases out for signature now than we did last year at this point in time. I'm not seeing a slowdown anywhere. And quite honestly, if you even look at our leasing spreads of 28% and I look at where the pipeline is, it's going to be better than that, and when you look at renewal spreads of 20.8%, I can tell you with the visibility, they're better than that. So I just want to reiterate that the market, the demand, all the calls that we're making for Vegas right now, retailers are wanting to grow. And Jeff hit on this, right? We're cautiously optimistic, and so are the retailers, but they still want to grow and they're still going through our portfolio looking to be aligned with the number one or number two grocer. And that's where we're seeing success. And I don't see it slowing down.

Got it. Okay, good to hear. And then maybe switching over to the guidance side. So it does seem like FFO guidance for the year implies that the 2Q to 4Q average will be roughly the same as 1Q even if you take the lease termination fee out. So I was wondering, John, if you could give some more detail on what's creating that headwind and what could get you to the higher versus lower end of the FFO range.

Yes. John, before you take it, Caitlin, I want to make sure that we're clear to everybody that this is our first quarter. It's very early in the year. We're really happy with the results we had for the first quarter. But as we enter the rest of the year with more confusion out there, we're going to necessarily take a conservative approach to looking at what's going to happen throughout the rest of the year, as I think everyone will because of just the uncertainty with what's going on. But John, do you want to answer in terms of the specifics of how they would look quarter by quarter?

Sure. As we look forward, you mentioned in the first quarter that the lease termination fee wouldn’t be annualized. Looking ahead, Bob expressed cautious optimism for the year. To reach the higher end of our expectations, improvements in the capital markets would be beneficial. We affirm our guidance ranges and want to set the right expectations, emphasizing our long-term focus on driving growth beyond 2025 and into 2026, 2027, and 2028. More certainty around future debt costs would definitely be helpful for equity markets. Overall, from an acquisition perspective, we feel positive about what we've acquired and our pipeline, and we are optimistic about the year ahead. We have consistently reaffirmed our position each quarter, ensuring that we have the flexibility to manage the business in a way that we believe is best.

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

Hey there, I guess, good morning. I'm not sure where your folks are, but I had a couple questions maybe first for you, John, on the variable rate exposure. You're at 14% today. I think you're going up to about 25%, 26% later this year with the expiration of a swap. Sounded like you said you're comfortable kind of with the level of today. So I'm wanted to get a bit more clarity on your strategy or thinking here and maybe some thoughts on your plans to address some of the upcoming swap expirations. Thanks.

John, do you want to take that?

Sure. I appreciate questions about interest rate swaps. As you mentioned, we are currently at 14%. Looking ahead, I believe what we executed in 2024 serves as a solid plan for 2025. Our goal is to maintain a laddered maturity structure that positions us as a consistent issuer in the unsecured bond market. We successfully accomplished this twice last year. We are focused on managing our balance sheet wisely. Regarding upcoming maturities, we aim to remain an issuer in that market and replace term loans with fixed bonds, which is why we have those swaps set to expire. As we manage our liquidity and maturity structure, these swaps will be beneficial. There's some uncertainty about whether interest rates will rise or fall, but we are currently in a favorable rate environment and are comfortable with where we are. I do not foresee our variable rate exposure reaching 25% since we expect to manage additional debt activities through acquisitions and other financings this year, as outlined in our base case. Our long-term objective is to transition to a more fixed balance sheet, targeting 90%.

Great. Appreciate the color there. One more for me, on transactions, obviously there's lots of chatter, deals taking a bit longer, potentially counterparties moving away from the table. So I guess I'm curious more broadly on kind of what you're seeing. Are you sensing any deals taking longer? Are you seeing any changes in cap rates and then maybe some color on what you're expecting for the balance of the year between on-balance and JV acquisitions? Thanks.

It's a relevant question and ties into how we opened our discussion. In the first quarter, we experienced a robust acquisition market, with a significant number of products available and many buyers participating. However, it's still early to predict future trends. We've heard some reports of buyers pulling back, which could benefit us by reducing competition for purchases. Conversely, uncertainty in the market often slows down acquisition activity, which could be a drawback going forward. We haven't observed that slowing yet. We remain optimistic about a strong ICSC due to the volume of products expected to hit the market. We believe that some players may withdraw in this environment, potentially leading to advantageous buying opportunities for us. That said, it's still early to determine the long-term effects as we progress through the year. So far, the first quarter was solid for us, and we are pleased with the projects we've acquired, which have great anchors and impressive unlevered IRRs exceeding 9%. These projects align well with our objectives at PECO, and we have a promising backlog heading into the second quarter. Overall, we are confident about the year ahead.

Your next question comes from the line of Samir Khanal with Bank of America. Please go ahead.

Good afternoon, everybody. Hey, Jeff. I guess, it's nice to see that leasing still remains strong here. It doesn't look like there's been a bit of a pullback, but as we just take a step back and look at kind of your approach to dealing with the shop tenants at this point right as renewals come up. Has there been a sort of a shift in strategy at all? I mean, you look at kind of your exposure to some of the soft goods, right? You're roughly 10%. So clearly their margins are going to get impacted, right, with tariffs and costs. So how are you sort of approaching those conversations? Even though you might not be seeing anything today as you think about those conversations, I mean, how are you approaching those?

Up to now, we have treated discussions with our neighbors regarding renewals as fairly standard, anticipating notable increases and limited tenant improvements. We are equipped with solid sales data that aid these conversations. Looking ahead, we have categorized the impact of tariffs into two main issues: the tariff impact itself and the potential effects of a recession. However, we are not currently discussing the potential recession impact with retailers during renewals because it remains theoretical for now. We might see this concern arise later in the year. Regarding tariffs, we have analyzed the expected impact by category and believe that around 10% of our neighbors will face significant challenges if the tariffs are enacted. Additionally, about 10% will experience some impact but not to the extent that it would be crippling. Most of our neighbors, nearly 80%, are focused on necessity-based goods, anchored by top grocery stores, meaning they will encounter limited effects from tariff discussions. Consequently, we do not anticipate major changes in our leasing approach. Our acquisition strategy mirrors our leasing strategy, where we assess the strength of each retailer involved in our acquisitions in a similar manner to our leasing discussions. This understanding is based on our current information and will adapt over the next 6 to 12 months. The demand remains robust, and we plan to maintain our course as we have over the past year.

Got it. So it doesn't sound like, at least from your conversations you're having with, whether it was your retailers or kind of retailers broadly speaking, no retailer at this point has sort of pulled back? They're open to buy plans at this point, right? That's what it sounds like.

We are always dealing with some level of variability because we operate in the retail sector. When interacting with retailers, there will always be differences by category. However, our findings indicate that the overall demand remains strong, enabling us to continue finding opportunities. We are not at a stage where we need to alter our leasing strategy due to significant changes in retail demand. It's important to note that we focus on necessity-based retail, and our experience during the Great Financial Crisis and the pandemic showed that this segment is less affected than discretionary retail. As a result, we are likely to notice the impact of major shifts later than others due to this focus.

Yes, no, it does. Thanks so much.

Yes, yes.

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

Thanks. Good morning. We know that the portfolio is pretty defensive-leaning, but have you seen any sort of slowing in the receipt of rent payments, whether it's for certain retailers or certain categories or just in certain markets in the last month? I know it's a relatively short time frame.

Yes. John, do you want to take that?

Sure. Hi, Dori. No. I would say that actually it's pretty consistent. I mean, we saw a decline in bad debt year-over-year, and ultimately, even in a shorter-term basis, I mean, we continue to monitor the health of our retailers and have discussions. And while we continue to dialogue, there hasn't been anything that we have really noted on a regional or use specific basis. It kind of aligns with the distribution, I would say, of neighbors that we have across kind of merchandising categories.

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

Hi, good afternoon, everyone. I'd like to start by discussing acquisitions in the quarter. We completed deals in the low-6s range, while the implied cap rate on your stock hovers around the mid-6s. I've noticed that initial investment spreads are tightening, but I haven't seen a quarter where they've turned negative. I'm curious about what's driving this trend, whether there was something unique about these transactions, or if it's simply a reflection of the current market prices and compressing cap rates despite the broader circumstances.

Yes. First of all, we are not cap rate buyers. Our focus is on assets as long-term investments, aiming for unlevered IRRs of 9% or more. Historically, cap rates fluctuate significantly from quarter to quarter, and they aren't reliable indicators. The blended cap rate for the year provides a better perspective. Each asset we acquire has its own unique story. Therefore, we do not take the cap rate for this quarter and assume it will be the same going forward, especially since our current backlog indicates higher cap rates. Our main priority is the potential of the properties we are purchasing to achieve our 9% unlevered IRR. We discovered nearly $150 million of product in the first quarter and have a strong backlog going into the second quarter, which makes us generally optimistic. Our underwriting now considers a higher likelihood of a recession compared to the first quarter, yet we continue to find viable products, affecting the cap rate without being primarily driven by it. For instance, one project we acquired has a grocery store anchor that will increase its cap rate from 6.1% to nearly 6.7% next year, which we've already discussed with them. Therefore, while it seems we bought it for 6.1%, we effectively purchased it with the expectation of a 6.7% cap rate and the potential for growth to reach our 9% unlevered IRR. We can review our analysis property by property, but while year-by-year assessments may be reliable, quarterly evaluations tend to be more erratic.

Got you. That's super helpful. If I could ask one of John. Just again, with where the stock is at this point and you kind of think about capital allocation decisions, I mean, does stock buyback start to sound a little bit more attractive or not?

We are definitely examining our options. In response to the earlier question and this one, I want to emphasize that our focus is on cash flow growth per share. We are actively considering acquiring and disposing of assets. While we have a $250 million stock repurchase plan approved by the Board, we have not yet initiated any buybacks. We are assessing this option, but we still believe that the best use of our capital, even at current levels, is to pursue net acquisitions. We see it as a part of our strategy, although we haven't acted on it so far. Additionally, we are working on strengthening our investor base and ensuring sufficient float and liquidity, which are qualitative factors that can affect our quantitative outcomes. Ultimately, we remain committed to growing the platform through continued asset acquisition.

Your next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please go ahead.

Hi, thank you. I just wanted to go back first to the sequential decline in occupancy. It was described as in line with expectations and I understand the seasonality that you discussed. But just curious where you are in terms of some of the bankruptcy-related activity. I know PECO had relatively less exposure versus some of your peers. Just wondering if you could provide an update there and also discuss occupancy trends into the second quarter and the balance of the year.

Yes. Todd, I'll start and then Bob will follow up. It's important to remember that we have the highest occupancy rates in our industry, and Bob will discuss seasonality and related developments shortly. Our occupancy numbers are robust, and even small fluctuations can impact those figures. Currently, we feel optimistic about the leasing environment. Looking ahead, we anticipate continued positive trends throughout the year. I want to emphasize again that we lead in occupancy, largely because tenants prefer to be in top-rated shopping centers. We believe our portfolio hosts the highest quality centers, which is a strong indicator of our success. Bob, would you like to elaborate on the leasing aspect?

Yes, sure. Thanks, Jeff, and appreciate the question. I think the biggest thing that I've seen in our portfolio, if I look back at the third quarter of last year, we were able to take eight spaces over 15,000 square feet and lease those at new leasing spreads of 105%. And I think what I'm focused on with these bankruptcies is when you look at JOANN, you look at Big Lots, Party City, I mean, these are rents that are in the high-single-digits. So I think the mark-to-market opportunities are very strong. We have LOIs working on about 80% of those that are coming back. And they're with great retailers like T.J. Maxx and Sierra and Total Wine, Planet Fitness, Dollar Tree, Ulta Beauty just to name a few, and the rents are considerably higher, certainly mid to high-double-digit leasing spreads. So I mean, we're going to take advantage of that. That will strengthen our portfolio over a period of time. So yes, even though there was a decline in occupancy, I'm still very encouraged about the, I would say, anchor demand and spaces over 10,000 feet in our portfolio that we can execute and have that rent come online the following year. So it's positive.

Okay. But so do you expect occupancy to stabilize and start to improve throughout the balance of the year as you backfill some of that, that space or is there a little bit more?

Yes. Absolutely. It will.

Okay, got it. And then John, I heard you discuss the lease term fee in the quarter. Sorry if I missed some of the detail but was that primarily one tenant or one lease? And is there any additional detail that you can provide around that, that tenant and the center and maybe the decision by that tenant to terminate the lease, what happened there exactly?

Lease terminations are a normal part of our business. I want to mention that a few years ago, we experienced similar termination levels, but those were outliers in size. The significant year-over-year increase was mainly due to one specific location. This retailer operates nationally, but the termination was based on a specific location and was not related to bankruptcy. They completed their obligations, and there was no bad debt; they have continued to pay. This gave us the opportunity to replace them. We had a new lease ready and negotiated the buyout simultaneously while applying the cap for the new tenant. While the situation was unusual in size, we wanted to point it out specifically. Overall, the center is expected to perform very well. This case illustrates our ongoing efforts to enhance the center's rent performance and capitalize on opportunities. Additionally, we had strong core operations outside of this lease termination fee as we look ahead in the year. We aimed to ensure that this situation was accounted for from the start for those involved in modeling.

Okay. Do you see potential in this environment that, that more tenants, more national tenants that aren't in bankruptcy, that aren't necessarily on your watch list are being a little bit more thoughtful or careful around their store fleets and portfolios and that there could be some additional activity along these lines?

Bob, do you want to do that?

Yes. Thanks, John. I'm not hearing that concern. I'm not seeing it in our portfolio with the retailers that we're having discussions with. So again, I think there's a lot of focus on growth in 2026, 2027. And look, I mean, in our portfolio, we're not going to see any new supply coming online anytime soon. If anything, things are getting more expensive. So those retailers that we're aligned with are wanting to grow. So I don't see any cracks or issues on that front.

Your next question comes from the line of Floris van Dijkum with Compass Point. Please go ahead.

Good afternoon, everyone. You shared a presentation discussing how PECO fared during the last typical recession, specifically during the Great Financial Crisis. There was a 250 basis point decline in occupancy. Although occupancy was significantly lower back then, I believe the quality of the assets you hold now is better and there was considerable development happening in 2009 and 2010 that isn't taking place today. How do you perceive this situation? Do you consider it a worst-case scenario? I'm trying to understand what you view as the worst-case scenario if another recession occurs. Is this the situation you are referencing?

First of all, thanks for the question. We are not anticipating a recession. Our base model suggests a flat economy, which resembles a recession but not as severe. We do not expect the extent of the global financial crisis or the pandemic. This situation is more of a self-imposed recession that is not expected to have deep underlying fundamentals driving it. I would consider these extreme situations, perhaps two standard deviations from what we expect. While anything is possible, we do not think we will enter that type of environment. As you know, we experienced the lowest loss of occupancy among our competitors during both prior downturns, and we were the fastest to return to normal. Being in the necessity-based retail business minimizes disruption during challenging times, which is a clear advantage for us. While no one wants to lose 2.5% of their occupancy, we hope there won't be a significant decline, and necessity-based retail generally experiences less volatility.

Yes. Sorry, that your answer is a lot more well-spoken than my question was. Thank you, Jeff. My second question is, there is uncertainty in the markets and as rates are volatile. What do you think this does to your IRR expectations? Are you going to raise them, you think? Or you think you're going to stay around the 9%, 9.5% range going forward?

I believe they will remain around 9%. In a more recessionary environment, underwriting becomes more challenging. This means we will likely have to assume lower rent spreads and market rents. All the factors that come into play during a recession will impact the numbers, making it harder to achieve a 9%, which could complicate purchases and lower prices. However, any pricing adjustments will stem more from the underwriting of the properties than from a shift in our unlevered IRR target.

Yes. It does. And that's another way of saying that you think cap rates could go up but your IRR is going to stay similar?

Yes. And because you're going to have less in the recessionary, probably you can have less growth and that would obviously impact the IRR.

Your next question comes from the line of Mike Mueller with JP Morgan. Please go ahead.

Yes. Hi, I guess sticking to some macro stuff here. If the economic environment does get worse so a recession scenario, I mean, what does your gut tell you are the categories in your portfolio where you could see the pullback in demand happen first?

It's a great question, and we've examined it several times during the last two recessions, including the global financial crisis and the pandemic. The areas that experience the most impact typically start with discretionary spending, and decisions in this area are influenced by the severity of the recession. Additionally, brand loyalty can diminish during a recession, leading consumers to opt for less expensive products. We observe this trend. Furthermore, there tends to be an increase in grocery shopping as people dine at home more often. Interestingly, grocery stores often perform better during recessions since fewer people are eating out, competing indirectly with restaurants. This dynamic has been evident in the last two recessions, each of which has its unique characteristics but also shares common patterns in consumer behavior. We always caution against equating one recession with another because, while they may share similarities, they also have many differences. The current situation, starting from a relatively low unemployment rate, adds complexity to predicting outcomes. There has been talk of a so-called higher-end recession where job losses occur at higher income levels as opposed to lower and moderate incomes. It's still too early to forecast the future, and we do not believe a recession is imminent. However, if one were to occur, it would require significant changes in employment for it to qualify as a deep recession, and we do not expect that to happen.

Got it…

Does that make sense, Michael? We are focusing on the future from today because the operating environment is quite favorable. We're just trying to anticipate how we would respond if certain situations arise. However, we actually don't believe those situations will occur.

Yes. No, got it. But it does seem like one of the areas you flagged where if it does happen; it's probably more in the dining?

Yes, there have certainly been articles about that. We looked back at the last two recessions, and we saw continued growth in fast and fast casual dining, not in higher-end dining. This suggests that eating out has become more of a necessity. I believe this is a reality in our country now; dining out is more essential than it has been in the past.

Your next question comes from the line of Daniel Purpura with Green Street. Please go ahead.

Good morning. Publix has been pretty active recently buying centers and it also looks like you have two redevelopments with Publix in your portfolio. Is this just something that's Publix-specific or do you expect to see other grocers more active in the market or pushing to rebuild their stores?

I would say it's very focused on Publix and less on other grocery chains. Most major grocers typically engage in more remodeling and upgrades. However, Publix has a specific strategy of modernizing their stores through complete teardowns and rebuilds. We have been working with them on this for a long time, and it has been beneficial for both parties. When we sign a new lease, we are able to secure upgraded rents to cover the costs. A new 20-year lease is a strong value creator for us and ensures they have a long-term location. We appreciate this business and would like to expand it. We would welcome more similar projects if other grocers choose to pursue them, but I don’t see it as a key part of our core strategy.

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

Thank you, operator, and thank you, everyone, for being on the call today. We tried to shorten our opening remarks a little bit to give more time for questions in this environment. So in closing, the PECO team continued a strong performance in the first quarter. Despite our tariff concerns, we continue to be strategic in our decision-making to best position PECO to take advantage of the opportunities for growth, both internal and external. We're seeing a high retailer demand with no real current signs of slowing. PECO's leasing team continues to convert this demand into significantly higher rents. Retailers want to be located in our centers, and they want to be near the number one or two grocer in the market. 71% of our ABR comes from necessity-based goods and services, 30% of which comes from our grocers. We believe PECO is relatively more insulated from potential tariff disruption than many. We also have limited exposure to big-box bankruptcies and at-risk retailers. We believe that the combination of our unique format and our cycle-tested experience drives high-quality cash flows. Given our demonstrated track record through various cycles, we believe an investment in PECO provides shareholders with a favorable balance of quality cash flows, mitigation of downside risk, and strong internal and external growth. The quality of our cash flow reduces our beta and the strength of our growth increases our alpha; less beta, more alpha. We think it's a great reason to invest in PECO. So on behalf of the management team, I'd like to thank our shareholders, our associates, and our neighbors for their continued support and for a great quarter of results. So thank you, everyone, for being on the call today, and have a great weekend.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. And you may now disconnect.