Good day, and welcome to Phillips Edison & Company's Second 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 Once we conclude our prepared remarks, we will open the call to Q&A. After today's call, an archived version will be published on our website.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. 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 is pleased to deliver another quarter of solid growth. Same-center NOI increased 4.2% and core FFO per share increased 8.5%. Given the continued strength of our business, we are pleased to increase our full year 2025 earnings guidance for same-center NOI, core FFO per share, and NAREIT FFO per share. I'd like to thank our PECO associates for their hard work in maintaining our unique competitive advantages and driving value at the property level. We believe PECO's grocery-anchored strategy and necessity-based focus has helped to create a resilient portfolio that also delivers steady growth. We are driving strong rent spreads, increasing occupancy, and generating dependable, high-quality cash flows. This consistency in performance and growth is attributable to several factors. First and foremost, it takes an experienced and locally smart team to bring the best retailers to our centers. Our neighbors create positive community experiences built around our grocers. Second, it takes decades to build the strong grocer and national neighbor relationships that PECO enjoys. These relationships give us an advantage in working together to optimize our properties. These relationships also are critical to our acquisition strategy. Third, it requires a portfolio focused on rightsized neighborhood centers located in suburban trade areas with compelling demographic trends and continued macroeconomic tailwinds. Strong demand from national retailers continues to fill our pipeline of ground-up outparcel development and repositioning activity. Fourth, it takes a dedicated team to acquire and curate a high-quality grocer-anchored portfolio that is expected to deliver 3% to 4% same-center NOI growth year after year. And lastly, it requires a strong balance sheet with great liquidity to invest in the properties and the portfolio. Our long operating history and track record have built these strengths for PECO that give us both offensive and defensive advantages in the market. Because of these advantages, we believe PECO is able to deliver mid- to high single-digit core FFO per share growth annually on a long-term basis. The market continues to focus on tariffs and U.S. economic stability. As it relates to PECO's grocers and neighbors, we feel very good about our portfolio. As a reminder, 70% of our ABR comes from necessity-based goods and services. This provides predictable, high-quality cash flows and downside protection quarter after quarter. This also limits our exposure to discretionary goods, which are at risk of greater impact from tariffs. We estimate that approximately 85% of our neighbors based on ABR will experience limited impact from tariffs. Supporting that estimate is the strength of our neighbor retention and leasing spreads in the second quarter, which Bob will speak about in a moment. Our neighbors are watching the consumer closely. They continue to benefit from their location in the neighborhood, where our top grocers drive strong foot traffic to our centers. We continue to see leasing demand for our existing spaces along with a healthy development and redevelopment pipeline. We are seeing strong demand from retailers who want to be located at PECO's grocery-anchored neighborhood shopping centers, especially from small shop retailers in categories like quick service restaurants, health and beauty, medical retail and personal services. These are the types of neighbors that perform well because they are part of people's everyday routines. And importantly, the PECO team continues to find smart, accretive acquisitions that add long-term value to our portfolio. Our active acquisitions activity is another differentiator in PECO's strategy. The PECO team is acquiring in the market through all cycles, carefully and deliberately acquiring centers that fit our grocery-anchored strategy and rightsized format while also delivering long-term growth potential. This has been part of our DNA for over 30 years. We're not just maintaining a high-quality portfolio; we're building one. What sets PECO apart is that we know exactly what we're looking for. And we have one of the best operating platforms to act quickly and execute. And that puts PECO in a unique position to grow cash flows in a way that's both disciplined and opportunistic. During the second quarter, we purchased $133 million of assets in PECO's total share. When you include assets acquired subsequent to quarter end, this brings our year-to-date gross acquisitions at PECO's share to $287 million. Despite recent market volatility, we remain confident in our ability to acquire high-quality centers at attractive returns. We are pleased to affirm our guidance range of $350 million to $450 million in gross acquisitions this year. We continue to successfully find attractive acquisition opportunities below replacement costs with strong growth profiles that we believe will exceed our unlevered 9% IRR target. We will acquire more if attractive opportunities materialize. But we are comfortable with our current pace and IRR targets. We will continue to be disciplined buyers as we look forward. In summary, we are very pleased with our results this quarter and our ability to raise guidance for the remainder of the year. While it is still early to understand the full impact tariffs could have on PECO or our neighbors, we continue to see a resilient consumer and we believe our portfolio will outperform as retailer demand remains strong. Our confidence is driven by the stability of our high-quality cash flows and the PECO team's ability to deliver solid growth and create 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 defense and offense. In summary, we believe the quality of our cash flows reduces our beta and the strength of our growth increases our alpha. Less beta, more alpha. I will now turn the call over to Bob. Bob?

Thank you, Jeff, and thank you for joining us. As Jeff said, PECO's grocery-anchored focus and necessity-based neighbor mix creates strong leasing momentum. That momentum is clear in our operating results again this quarter. Our long operating history has given us an informed measure of what drives quality and value at the shopping center level. We continue to believe SOAR provides important measures of quality, spreads, occupancy, advantages of the market, and retention. This is most evident in our continued high occupancy, strong rent spreads, and high retention. In terms of leasing activity, we continue to capitalize on elevated renewal demand. The PECO team remains focused on maximizing opportunities to improve lease language at renewal and drive rents higher. In the second quarter, we delivered strong comparable renewal rent spreads of 19.1%. Our in-line renewal rent spreads remained high at 20.7% in the quarter. Comparable new leasing rent spreads for the second quarter were 34.6%, and our in-line new rent spreads were 28.1% 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. Leasing deals we executed during the second quarter, both new and renewal, achieved average annual rent bumps of 2.7%, another important contributor to our long-term growth. Portfolio occupancy remained high and ended the quarter at 97.4% leased. Anchor occupancy remained strong at 98.9%, a sequential increase of 50 basis points. During the quarter, PECO executed leases with Dollar Tree, Planet Fitness, ACE Hardware, and Southeast Pickleball. In-line occupancy ended the quarter at 94.8%, a sequential increase of 20 basis points. Small shop retailers added during the quarter included Cold Stone, Firehouse Subs, H&R Block, and Pacific Dental Services, along with several other Medtail neighbors and health and beauty retailers. Given our robust leasing pipeline, we expect in-line occupancy to remain high throughout the year, which is very positive. As it relates to bad debt in the second quarter, we actively monitor the health of our neighbors. Bad debt in the quarter was up from a year ago, but in line on a year-to-date basis and well within our guidance range. 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 15% above the U.S. median. These demographics are in line with the store demographics of Kroger and Publix, which are PECO's top 2 neighbors. Our markets also benefit from low unemployment rates, which are below the shopping center peer average. We believe the necessity-based focus of our properties is important when demographics are considered. 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 lively trade areas with compelling demographic trends. Our neighbor retention remained high at 94% in the second quarter while growing rents at attractive rates. High retention results in better economics with less downtime and dramatically lower tenant improvement costs. Lower capital spend results in better returns. In the second quarter, we spent only $0.49 per square foot on tenant improvements for renewals. In addition to our strong rental growth and retention trends, we continue to expand our pipeline of ground-up outparcel development and repositioning projects. At the end of the second quarter, we had 21 projects under active construction with an average estimated yield between 9% and 12%. Year-to-date, 9 projects have been stabilized. This activity delivered over 180,000 square feet of space to our neighbors with incremental NOI of approximately $3.7 million annually. The overall demand environment, the balance of PECO's defense and offense, the stability of our high-quality cash flows, and the capabilities of the PECO 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 second quarter results, then provide an update on the balance sheet and finally speak to our increased 2025 guidance. Our second quarter results demonstrate what we've built at PECO, a high-performing grocery-anchored and necessity-based portfolio that generates reliable, high-quality cash flows. Second quarter NAREIT FFO increased to $86 million or $0.62 per diluted share, which reflects year-over-year per share growth of 8.8%. Second quarter core FFO increased to $88.2 million or $0.64 per diluted share, which reflects year-over-year per share growth of 8.5%. Our same-center NOI growth in the quarter was 4.2%. Turning to the balance sheet. We have approximately $972 million of liquidity to support our acquisition plans and no meaningful maturities until 2027. Our net debt to trailing 12-month annualized adjusted EBITDAre was 5.4x as of June 30, 2025. This was 5.3x 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 5.7 years when including all extension options. At the end of the second quarter, 95% of PECO's total debt was fixed rate, which is in line with our target of 90%. During the quarter, PECO completed a bond offering of $350 million in aggregate principal of 5.25% senior notes due 2032. Proceeds from the offering were used to replenish the liquidity on our revolver, effectively match funding the $287 million in properties acquired to date at PECO share. As Jeff mentioned, the PECO team is not just maintaining a high-quality portfolio; we're building one. We continue 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 raise our 2025 guidance. Key drivers of our increased guidance included continued strong operating environment, strong year-to-date acquisition activity and our recent bond offering. We updated our guidance range for 2025 same-center NOI growth to 3.1% to 3.6%. As we continue to enhance our neighbor mix, our actions in 2024 to improve merchandising and capture mark-to-market rent growth with new neighbors are still 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. Our updated guidance for 2025 NAREIT FFO per share reflects a 6.3% increase over 2024 at the midpoint. And our updated guidance for 2025 core FFO per share represents a 6% increase over 2024 at the midpoint. We also affirmed our 2025 full year gross acquisition guidance. 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 activity. 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. Please note that our guidance for the remainder of 2025 does not assume any equity issuance. 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. 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?

Your first question comes from Caitlin Burrows with Goldman Sachs.

I guess we hear that the transaction market is competitive. But Jeff, like you went through, you did have a strong first half. So what do you think has allowed PECO to win these transactions? And it looks like shadow-anchored centers have been a focus this year? What is driving that?

Yes. Thanks, Caitlin, for the question. Yes, we had a really good first half. I think it kind of goes back to the fact that we buy properties one at a time market by market. And if you step back and you look at it, that's how we were able to actually get this volume. It didn't come in a big chunk of buying something. It came in like being active in a lot of markets. And we've set up our acquisition team to be able to do that over a long period of time, and it's hard. But we've been able to put that in place, and I think that's how we've been able to get to those numbers. And as you know, we're very focused on a very disciplined approach to our acquisitions. And this is, I think, I think we feel really good about that. And we're actually really excited about the opportunities because if you look at the anchors that we were able to expand our exposure to like HEB and Walmart, Target to a small amount, these are really good retailers that we're sort of spreading out a little bit of our exposure to. So we feel great about the first quarter and excited about what we can do, hopefully, in the second half.

I understand. In your prepared remarks, you noted that the tenant turnover you focused on in 2024 is still a challenge for growth in 2025. As you consider tenant retention moving forward and the decisions made in 2024, when do you believe these challenges will subside? To what degree do you expect tenant replacement to remain an ongoing concern versus being resolved for the time being?

Sure. Yes. Thanks for the question. I guess I'll start a little bit on what I would call the junior anchor side. So when our occupancy dropped a little bit in the first quarter on the anchor side, there was just noise there from JOANN, Big Lots, Party City, and some of those neighbors that we knew wasn't a surprise to us. We've actually been able to backfill about 70% of those currently. So specifically, to answer your question, we only have probably 15 spaces over 10,000 feet that are vacant in our portfolio. So a lot of the backfilling and recapturing of some of those specific neighbors, as an example, the rent will come online in 2026. And it will probably be the second half of '26 and maybe some will dribble into '27. The good news is the leasing demand continues to remain very strong for those junior boxes and on the in-line. And we continue to just see from the retailers that they're hungry for sites to open in '26, '27 and '28. And again, we just don't see any new supply coming on. So we're in a very good spot. And you see that retailers are wanting to follow the #1, #2 grocer because you can see it in our spreads with 35% new leasing spreads, 19% renewal spreads and 94% retention is very, very strong. So we're encouraged by the activity. We don't see anything slowing down. And we feel real good about selectively being locally smart and merchandising around those opportunities.

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

I guess, Jeff or John, can you talk about the deceleration in same-store NOI growth that you're expecting in the second half based on the guidance, sort of the puts and takes to get to the sort of the 2.7% on average after having close to 4% in the first half?

Samir, I thought you're going to focus on how great it is that we had all that great growth in the first half. John, do you want to cover the sort of what we're looking at for the second half on same-center growth?

Certainly. Thanks for the question. Definitely one that I was expecting. So first, for this reason, we don't provide quarterly guidance. As we look at our earnings on same-store NOI and FFO, we are projecting more consistent growth for the balance of the year. Our same-center growth last year was weighted to the fourth quarter. The fourth quarter alone was over 6.5%, which skews the quarter-by-quarter growth numbers. So as we look at our Q3 and Q4 forecast, they're actually consistent and growing, improving sequentially from Q2 this year. So I think it's more a function of 2024 than any real deceleration as we look at continued growth from where we stand today. And actually that's for same-center NOI for NAREIT FFO and for core FFO.

Got it. Okay. No, that's helpful. Regarding acquisitions, you've been increasing your focus on shadow-anchored properties over the last two quarters. The market is currently competitive for the core product. Can you discuss what you're observing with core versus shadow and unanchored properties? I'm curious if pricing is becoming excessive or if you're facing challenges in securing some of the core products.

Yes, thank you. In the first half of the year, we acquired three unanchored centers, which accounted for 14% of our total purchases. We also purchased seven shadow anchors, making up 50% of our acquisitions, and four anchored centers that represent 35% of what we bought. It's challenging to analyze trends on a quarter-by-quarter basis. We were very enthusiastic about these acquisitions, viewing them as significant opportunities. The average sales per square foot for the shadow-anchored centers exceeded $1,000 for grocery stores, indicating that we secured high-quality grocery tenants. These centers are owned by the grocer, benefitting our smaller stores as we avoid the inconsistencies typically associated with grocery anchors. We believe these acquisitions present us with solid growth potential and stable properties. I wouldn't attribute this to market conditions, as these properties aligned well with our strategy to acquire top-tier grocery tenants who drive consistent customer traffic to the centers, allowing us to increase rental income.

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

I was hoping if you could add a bit more color on the transaction market broadly, the opportunities you're looking at. Maybe there's anything under LOI at the moment, but looking at kind of $280 million of acquisitions completed year-to-date, I guess I'm really curious what's holding you back from moving the gut up a bit here. It seems like you're pretty far along and it seems like the remaining delta is pretty achievable here.

Yes, thank you for the question. We're very excited about achieving $290 million in the first half, and we're open to exceeding our guidance if the right opportunities arise. Currently, our overall assessment of the market is fairly stable, with an increase in available products and buyers. We're encountering some buyers who are becoming very aggressive, and it's important for us to maintain our discipline and not get drawn into that competition, staying true to our strategy. I believe we managed that well in the first half, and if we can find similar opportunities in the second half, we'll pursue them. However, we're approaching the second half with some caution, which is why we've decided to keep our guidance.

Got it. I appreciate that. And then one just on variable rate debt, pretty low today, 5%. I think there's some swaps expiring later this year, John. I know it's one of your favorite topics, but I'm curious on the outlook or the plan there and what you feel is a comfortable level of variable rate debt.

Yes, Haendel, I saw your note, and I've been looking forward to this question. I know you have a preference for variable rate debt and swaps. I appreciate the inquiry. Currently, we are at 95% fixed. We continue to monitor the markets and aim to approach the debt and equity capital markets when opportunities arise. The important aspect for us is to be in a position to choose to act based on favorable market conditions, rather than feeling compelled to do so. This mindset guided our actions in June when we issued 5.25% debt and extended our maturity schedule while maintaining our presence in the unsecured bond market. Regarding the swap market, we plan to remain a repeat issuer as the swaps expire in our debt profile, as we believe we have been well received there. We continue discussions with the rating agencies and maintain a BBB rating. Additionally, our balance sheet is quite comparable to that of our peers, many of whom are rated higher. We see further opportunities and intend to leverage those. We will manage our variable rate exposure by extending maturities in that market and continuing our asset acquisition strategy. We don't plan to add more swaps unless they align with our activities in the term loan market. We'll handle it through issuance and are pleased with our recent deal. Our long-term goal remains around 90% fixed, which we will keep as a focus moving forward.

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

I have a couple of quick questions. First, can you provide some insight on occupancy? I see the anchor is nearly 99% and in-line is almost 95%. How do you view the upper limits of occupancy, and what strategies are you implementing to enhance rent spreads or escalators? Specifically, what do you believe is the peak occupancy and how does that impact your pricing power?

Great. Thanks, Ron. So before I turn it over to Bob, we're going to keep saying this, and I know some of you will buy it, some of you won't. But we truly believe that occupancy is our stores making a decision about where they want to be. And if you have the highest occupancy, our view is we have the highest quality assets. And we have consistently been able to do that because our retailers are telling us with their leases that we have the best properties. And so we're really happy about getting to these occupancy levels, and we're very happy to be partnered with our neighbors to be able to get to achieve those goals. So Bob, do you want to talk a little bit about occupancy and where we might be able to take it?

Absolutely. Yes, I appreciate the question. We've done really well in the first half of the year. We moved anchor occupancy up about 50 basis points and in-line about 20 basis points. And that certainly comes as a result of the retailer demand. I think we have another 100 to 150 basis points of in-line occupancy. So I really feel that we can get in the 96s, up from the 94.8%, I believe it is today. I think anchor occupancy will always be 99.2%, 99.3%. We still have some work to do to get that. But I feel good about the leasing demands, the LOIs that we had out for signature. I think one real important strategy in our business, though, is that we run a parallel path of not only growing occupancy in our current portfolio but also on the acquisition side. And I mentioned this over the last year or 2, but in 2023, we bought a great portfolio combination of 14 to 16 assets that were around 87% occupied. And today, those are 98%. In 2024, we acquired $300 million that was at 93.1%. That currently sits at 95%. And we're already making good traction on the assets that we've acquired this year. The demand is as strong as we've seen it in years. And I just feel like we're going to continue to move occupancy up and you see it through the retention. When you're retaining 94% of your neighbors at spreads of 20% and you're only spending $0.49 a foot in tenant improvements to execute that, that is money well spent. So I feel really good about the current environment, our occupancy. And that's a long-winded answer to your question. But yes, I do feel like we still have room in occupancy.

My second question is about tariffs. You've shared some insights on your potential tariff risk and reiterated credit loss while raising same-store metrics. It seems that nothing in your portfolio is affected, but as you engage with tenants, I'm interested in which categories are experiencing the most impact. What’s happening on the ground in terms of who is absorbing the increased costs due to tariffs? Is it the tenants or the consumers? I’d like to understand how this situation is developing and what feedback you’re receiving from your tenants.

We're not the best source for insights on this matter since we primarily operate in the necessity-based sector, which has limited exposure to tariffs. However, we believe that the small portion, about 15%, will have some impact. So far, our suppliers have indicated that they are largely able to pass on most of the costs. If the situation remains within the low teens percentage, they feel confident in absorbing it through a combination of slightly reduced profits and support from the suppliers, with only moderate effects on the buyers. We believe this explains where the impact will occur, its duration, and how we will experience it. As Bob mentioned, we're not observing any issues on the ground from a leasing perspective, so we don't see any signs of distress there. Overall, we're cautious but maintain some optimism that the impact won't be as significant as we anticipated just three months ago.

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

Just first question, I wanted to follow up on Samir's question around the same-store growth and growth outlook. Bob, you talked about some of the things that you've completed on recent acquisitions and certainly some upside on some of those more recent deals. Just curious, the methodology for your quarterly pool. Is that different than the full year pool the way that you calculate that?

I'll jump in on this one, Todd. It is the same. So we disclosed the quarter and the year on the same basis. So the same-store pool was calculated as all assets acquired before 1/1 of 2025.

Okay. Before '25 or 2024?

Sorry, 1/1/24. Sorry, man.

Okay, 1/1/24. Got it.

So the assets acquired last year and the assets acquired this year are not in the same center pool.

Right. Okay. That's helpful. And then, John, just sticking with you. So you talked about some of the funding sources for acquisitions going forward. Obviously, you have a lot of options, equity debt. You've talked about retained earnings and free cash flow. Does the stock price where it is today and the company's cost of equity, does that limit the amount of acquisition volume that you can achieve? And how do dispositions factor into the equation today?

Thank you for the overview. We are pleased with our liquidity and our ability to engage in the transaction market. The current equity issuance does not restrict us, nor does the equity price. We believe our stock is undervalued compared to private market values and our competitors in the grocery-anchored shopping center sector. Our focus remains on match funding, and we are looking for strategic acquisitions. I noted in the prepared remarks that we do not plan any equity issuance for our 2025 guidance and are satisfied that we can pursue our growth objectives without tapping into the equity markets. We are committed to maintaining a mid 5x leverage ratio and will evaluate great transactions as well as take advantage of the positive disposition market to capitalize on gains we've achieved over the years. We plan to consider selling some assets in the latter half of the year, but if attractive acquisition opportunities arise, we will seize those as well.

Okay. What's the pricing? I realize you're targeting a 9% levered IRR on new deals. But how should we consider the cap rate spread between your purchases and potential sales?

Sure. We haven't been selling as much as we aimed for this year. Initially, some items we are selling will be in the 7% to 7.5% range as we move forward on a weighted basis, still resulting in strong returns for PECO. This is in relation to what we've been purchasing, so the difference isn't significant. Additionally, we are exploring opportunities to monetize other assets at significantly lower rates. I believe this provides some perspective, and all of this will be reflected in the guidance numbers we've shared.

Your next question comes from the line of Mike Mueller with JPMorgan.

I guess is there a max percentage of the portfolio that you'd want to have in shadow anchored or unanchored centers?

Thank you for the question, Mike. We currently estimate that around 10% is the target for our unanchored centers. The shadow anchored centers are very similar to our core anchored properties. These projects are essentially the same, with a slightly different ownership structure, where we hold the smaller store space, offering us more potential upside. Currently, these account for 7% of our portfolio, so it's not a major focus in terms of impact. However, we see a solid opportunity in acquiring centers that we believe have significant upside due to the strength and market dominance of the grocers involved. I remain optimistic that we can exceed that 7%, which includes purchases made in the first half of the year, but this will depend on the opportunities available in the marketplace.

If you're considering a traditional shopping center that is grocery-anchored, where you own the grocery store, what do you think is the difference in cap rates between that center and one that is shadow-anchored? How significant is the difference?

That's a very complicated question, and it involves a lot of generalizations since each property varies significantly in terms of risk, tenant makeup, occupancy, and other factors. Generally, we believe we can achieve about 50 to 100 basis points wider unlevered IRR from our shadow-anchored properties compared to our core grocery ones. This is one way to assess it. From a pricing perspective, while it’s more complex, we estimate there would be a 50 to 75 basis points difference in cap rates between shadow-anchored properties and those that we own.

Your next question comes from the line of Paulina Rojas with Green Street.

Some metrics suggest the consumer is very pessimistic and showing a lot of caution, while others point to a more constructive outlook. From your perspective, how are consumers that shop in your centers behaving today? Are you seeing any trend in terms of them trading down, changes in visit frequency, or other shifts that are worth highlighting?

Yes, thank you, Paulina, for your question. There is an interesting contrast in the market right now; while consumer sentiment is negative, sales are still growing. Consumers seem to express one view while acting differently. Our data shows strong foot traffic in our centers, with metrics from the past 15 to 20 days indicating this trend. If we look at employment statistics, we've found that our properties have an unemployment rate that is 30% lower than the national average. Employment significantly influences consumer behavior, more so than perceptions regarding political events or changes. We continue to see solid employment figures historically, so unless there is a significant shift in this trend, we anticipate consumer behavior will remain stable. Our retailers echo this sentiment, indicating that their renewal rates and the rents they are willing to accept suggest they believe consumer strength is intact.

And then a second question. We saw that Kroger recently announced a series of store closures. So first question is, are you aware of any locations within your portfolio that may be impacted? And then second part is, we're also seeing a number of grocers pursuing expansion strategies. So I'm intrigued, which grocers are you seeing most actively expanding in your markets?

So I want to ensure I understood your questions correctly. One question was regarding which grocers are expanding in our markets, and the other was about the impact of Kroger's announcement to close 60 stores. Did I capture that accurately?

Thank you, Jeff. Regarding the Kroger announcement about the closure of 60 stores, we were aware of one location on the list, which is our only exposure. This wasn’t unexpected as we have been collaborating with Kroger on that specific site for around five years. The positive aspect is that we anticipate them to finalize the closure this month, and we already have another grocer lined up to take over the space. Therefore, it's still a favorable location for grocery. So that’s the extent of what we understand from Kroger. We had a meeting at their corporate headquarters last week, and at this time, they had paused all store closings during their merger process with Albertsons over the past three years, making the recent announcement not surprising. As for your second question regarding which markets and grocers are expanding, they are indeed very selective. Active grocers include Sprouts, Kroger, Publix, Whole Foods, and Walmart. All these grocers are investing in remodels, and Publix remains particularly driven regarding their teardown and rebuild initiatives. Kroger is also looking to expand into new markets. Given that we are Kroger's top landlord and Publix's second, we are working closely with them to provide any support we can.

I would like to emphasize that these changes are not significant. They involve only a small amount of space. Additionally, I would like to mention HEB and ALDI, both of which are pursuing growth strategies. While ALDI doesn't significantly affect our business, it has the most ambitious expansion plan among grocers. However, its impact is limited due to lower sales per store. It's comparable to the presence of a dollar store rather than a traditional grocer. Despite this, ALDI has been performing well, and we will keep monitoring them.

Your next question comes from the line of Juan Sanabria with BMO Capital.

I just wanted to follow up on the prior line of questioning around same-store NOI. The guidance implies, like was mentioned before, a second half slowdown. I noticed expenses year-to-date on the same-store side are running very, very low. So just curious if the implied deceleration is in part related to maybe timing on expenses? And if you could just elaborate on kind of what the range of expectations are there for same-store NOI or if there's just the level of conservatism assumed?

Great. Thanks, Juan. John, do you want to take that?

Sure, I will. So thanks for the question. As I mentioned before, I think as we look at same-store NOI and if I think about it in an absolute dollar rather than a relative from last year, we see growth from Q2 to Q3 to Q4. I would again point out that last year, it was the timing of expensing and the spend and the recoveries associated with that, that moved that to the fourth quarter. And so I think we see a bit smoother this year just related to some of our spend in the mix that I had referenced last year. I would say that from an expense standpoint, there may be some more expenses. But overall, we see NOI growth in the portfolio sequentially from here. And again, it's tough to provide quarterly guidance because of some of these factors. But that's the part I would say is if we just focus on this year forward, we do see growth. And last year at 6.5% in the fourth quarter was more timing related.

Got you. And then just on the dispositions that you mentioned. So what's the kind of the numbers, dollar values we're talking about for dispositions that are assumed in guidance, just to think of as an offset versus the gross acquisition guidance?

Yes, we aren’t providing guidance on that. However, we estimate that the disposals for the year could range from $50 million to $100 million, which we anticipate may be consistent year after year, provided we can achieve suitable market pricing. It's essential to maintain the same level of discipline in our disposals as we do in our acquisitions. They are essentially two sides of the same coin. As we manage our portfolio both for growth and risk, we expect to be more active than we have been in the past three years, though perhaps slightly less active than in the previous ten. Nonetheless, we will continue to pursue those opportunities.

Your next question comes from the line of Rich Hightower from Barclays.

Forgive the ignorance, but back to the Kroger question for a second. Are there any co-tenancy issues that arise that need to be addressed? How should we think about those situations in general, especially since they occur sporadically? I have one follow-up after that.

Bob, do you want to take that one?

Yes, in this situation regarding the site that is closing, there are no co-tenancies. Typically, co-tenancies occur in power centers. For example, Ross usually has co-tenancy agreements with two or three other smaller stores or possibly a larger anchor store. However, in our portfolio, which focuses on grocery-anchored properties, our grocery stores serve as the anchor. Generally, it is the co-tenants who seek these agreements to ensure that a retailer like Kroger will remain. In our case, we are managing fine without it, and we don't encounter this issue often in our area. This approach aligns more with a different strategy that I observe frequently in power centers.

Okay. That's very helpful. And then just quickly on the modeling side. I know guidance does not foresee equity issuance. But is there any incremental debt issuance baked into the guide? Or is that not the case?

Sure. From an incremental debt issuance, I would say that we talked about the sources and uses. We don't explicitly have another bond offering planned this year. But as we look ahead in addressing variable rate interest, it's a possibility. I think the key piece that I would highlight from my previous answer is we want to access the market opportunistically and very thoughtfully. So we will look to manage the maturity calendar as well as any debt that we are getting related to acquisitions to match fund the acquisitions and to term that out. So I think I'll stay with that.

Your next question comes from the line of Cooper Clark with Wells Fargo.

Just wanted to touch on the updated bad debt guidance held at the midpoint, but tightened the range. Just wondering if there's any more visibility into the back half of the year and what outcomes could get you to the high or low end? Anything to call out there?

I think John gets to get that one. That's fine.

Thank you for your question, Cooper. For us, things have been consistent. In the second quarter, it mirrored the first quarter of '25, and looking at the first half of '25, it's also in line with '24. Overall, we are not worried about our current levels, which gives us the confidence to narrow our range. Given the strong demand for leasing and the spreads that Bob mentioned, we are seeing 35% on new leases and 19% on renewals, while still achieving a 4% growth in same-store NOI. As we look ahead for the rest of the year, we have strong discussions and relationships with our retailers. We believe our positioning will stay consistent. We purposely set a wider range at the start of the year and are pleased with our portfolio's performance, allowing us to tighten it. Additionally, because our neighborhood grocery-anchored shopping centers consist of smaller units, we are less affected by big anchor bankruptcies. Therefore, while we may see minor fluctuations, we feel optimistic about our centers in the long term.

Great. And just a quick follow-up. Anything specifically that led you to tighten it on the low end or really just kind of tightening the range more generally?

I think for us, it was just tightening the range more generally consistent with what we've been experiencing.

Your next question comes from the line of Ken Billingsley with Compass Point Research & Trading.

I have a question that's a little more granular. It's about option leases. For the second quarter, it was 7.1%. And looking on an annual basis, it was 4.8%. Anything that's unique about the second quarter? I know last year, it was a little bit higher than the rest of the quarters. Anything unique about the second quarter that drives that?

So Ken, can you clarify that again? What were the option leases?

The rent spread for option leases in the second quarter was 7.1%, while the total was 4.8%. I'm curious if there's something unique about why the second quarter tends to show these numbers. It's higher than last year, but it also appears elevated in prior years.

So Ken, I wish I had a better answer for you, but it kind of depends on whether or not it's grocers that are rolling or other leases in the case because as grocers roll, those tend to be lower if we have options with other neighbors that can tend to be higher. So unfortunately, doing 40 options in the quarter, it's just unfortunately mix.

Okay. Can you share the cap rate spread for the acquisitions during the quarter and year-to-date?

Sure. So I'll take that one. No, go ahead, Jeff.

No, no. I mean, are you asking what the cap rate is year-to-date? Is that...

What you're acquiring is clear. I understand you mentioned a target range of 7% to 7.5%. Can you provide specific details? If you already covered this, I might have missed it.

Well, year-to-date, the cap rate is 6.3%, which is what we purchased at. That's based on the overall market value of what we acquired.

Your next question comes from the line of Floris Van Dijkum with Ladenburg Thalmann.

Jeff, you mentioned something interesting earlier. You noted that about 10% of your total acquisition volume is expected to be in these unanchored centers. Could you elaborate on the cap rates and the reasoning behind purchasing some of those assets? Where are they located? What is the strategic rationale?

Thank you for the question. I'll elaborate on this new initiative that we've been working on for about the last year and a half. We're focusing on centers we own in markets where we have a strong local presence. We find certain unanchored centers appealing due to their initial yield and growth potential for rents. Our knowledge of these markets provides us with valuable insights, prompting us to gradually acquire a few of these centers to evaluate the risks, returns, and our ability to increase rents. The results have been positive, indicating an opportunity for growth. While we anticipate this could represent about 10% to potentially 15% of our total portfolio, it will likely stay below 10%. However, we believe this will contribute to our growth without significantly altering our risk profile, as these locations are in strong markets with good traffic, often near grocery stores that attract additional customers. We can purchase these centers at yields that promise returns at least 100 basis points higher than those from our grocery-anchored centers, which is why we're enthusiastic about this opportunity. Bob, do you have anything to add?

Yes. The only thing I would add, Jeff, is that we've acquired 11, all right? So it's about 3.5% of our entire portfolio. It's a small part of our business. Markets like Minneapolis, Chicago, Houston, Dallas, Atlanta, South Florida, Denver, as an example. It's early indications, early days, but I'm super excited about the opportunity set. We have a very strict criteria in terms of how we operate, can we get consistent spreads, can we still get 20% renewal spreads, 30% new leasing spreads. And when I went through all the numbers on the activity so far, our new leasing spreads on our unanchored piece is right around 43%, and our renewal spreads were in the mid-30s with CAGRs above 3%. So again, as Jeff mentioned, we're going to be very opportunistic about the space. It is a natural complement to what we do well day in and day out. So early indications are very positive. And if we can be selective over the next 2 or 3 years and continue to acquire this type of product type, I think we'll do very well. These assets have a CAGR above 5.5%. So a great complement to growing same-center NOI.

And maybe just a follow-up, just because I noticed the 1 asset that you listed unanchored, it's 84% leased. How quickly are you able to ramp up occupancy in those assets as well?

Yes. So a great example is the assets that we bought in Denver. And I believe that one trying to see what the occupancy. It was in the low 80s, and we've already leased 13,000 feet. So we're in the upper 90s on that within 2 months of acquiring the asset. So that's not uncommon. As I mentioned, when we acquired in 2023, a portfolio that was 87% occupied. Within a year, we were 98%. So we're seeing, again, retailer demand as long as you're buying with the right criteria in mind, it happens quickly.

Maybe my follow-up is related to the acquisitions for joint ventures. You have a couple of joint venture partnerships. How do you support those? Is there more demand from your joint venture partners to acquire more assets in this environment? Have their return expectations changed over the last 12 to 18 months?

Yes, we currently have two joint ventures that we are investing in. We have established targets for each fund that are separate from PECO's balance sheet. So far, we have acquired four properties between the two ventures, and we expect to see even better progress in the second half of this year. We view this positively, as we own four centers today that we wouldn't have without these joint ventures, and we anticipate strong returns on our equity investment from these properties. This presents another growth opportunity for us. Regarding potential acquisitions, our decisions will depend on market conditions and how well new opportunities align with the funds. However, we expect one of the funds to be fully deployed by the end of this year, while the second fund will have a longer timeframe for investments.

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

Yes. Great. Thank you, everyone, for being on today. We appreciate it, and thank you, operator, for helping us. In closing, the PECO team continued our solid performance in the second quarter. Given our strong leasing momentum, year-to-date acquisitions activity, and recent bond offering, we're pleased to increase our full year 2025 earnings guidance for same-center NOI, NAREIT FFO per share, and core FFO per share. The balance of PECO's defense and offense, the stability of our high-quality cash flows and the capabilities of the PECO team give us continued confidence in our ability to deliver strong growth in 2025 and over the long term. Because of our unique format and competitive advantages, we believe PECO is able to deliver mid- to high single-digit core FFO per share growth annually on a long-term basis. The PECO team remains focused on delivering on this expectation and driving value at the property level. 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, and I think you've heard this before, we believe the quality of our cash flows reduces our beta and the strength of our growth increases our alpha. Less beta, more alpha. On behalf of the management team, I'd like to thank our shareholders, PECO associates, and our neighbors for their continued support. And thank you all for being on the call today. Have a great weekend.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.