Phillips Edison & Company, Inc. Q4 FY2025 Earnings Call

Good afternoon, and welcome to Phillips Edison & Company's Fourth 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. I'm joined today by our Chairman and CEO, Jeff Edison; President, Bob Myers; and CFO, John Caulfield. Following our prepared remarks, we will open the call to Q&A. After today's call, an archived version will be published on our Investor Relations website. As a reminder, today's discussion may contain forward-looking statements about the company's 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. 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, both of 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. Jeff?

Thank you, Kim, and thank you, everyone, for joining us today. We are pleased to report strong 2025 results, which reflect NAREIT FFO per share growth of 7.2%, core FFO per share growth of 7% and same-center NOI growth of 3.8%. In addition, our strong 2026 guidance growth rates for NAREIT FFO and core FFO per share are in the mid-single digits. While the market may continue to be nervous about the health of the consumer and the impact of tariffs on retailers, our outlook remains unchanged. As it relates to PECO's neighbors and grocers, we continue to feel very good about our portfolio. We are seeing a resilient consumer, and our top grocers and necessity-based retailers continue to drive solid foot traffic to our centers. As it relates to the transactions market, it's no surprise that the strong fundamentals of grocery-anchored shopping centers continue to attract increased attention to the market. We remain confident in our ability to deliver on our gross acquisitions guidance of $400 million to $500 million in 2026 at PECO share. We acquired approximately $400 million in acquisitions at PECO share in 2025. We have demonstrated consistent success in finding core grocer-anchored opportunities, as well as undermanaged and underoccupied Everyday Retail centers. Additionally, we have the joint venture expertise and partnerships to continue to acquire across the investment spectrum of grocery-anchored retail. We continue to be disciplined buyers, investing in acquisitions above our cost of capital. We continue to target an unlevered IRR of 9% for our grocery-anchored acquisitions and above 10% for our Everyday Retail centers. In summary, we are pleased with our results for 2025 and our outlook for 2026. PECO's core business is our grocery-anchored shopping center business. We are the leader in owning rightsized neighboring shopping centers focused on necessity-based retail. Our Locally Smart operating platform is driving strong rent and NOI growth. We remain confident in our ability to execute our plans and deliver solid growth in 2026 and beyond. We believe the quality of our portfolio and the strength of our operating platform give PECO the best opportunity in our space to produce sector-leading FFO per share growth and AFFO growth. We believe an investment in PECO provides significant upside opportunity backed by high-quality cash flows, strong fundamentals and sustained long-term growth. With our shares trading at a discount to our long-term growth profile, we believe PECO represents an attractive opportunity to invest in a leading operator that can deliver mid- to high single-digit annual earnings growth. We will continue to drive more alpha with less beta. With that, I'll now turn it over to Bob. Bob?

Thank you, Jeff, and thank you for joining us, everyone. We continue to see high demand for necessity-based retail with no current signs of slowing. PECO's leasing team remains focused on capturing this demand, driving our in-line occupancy to tie for a record high while pushing very impressive comparable rent spreads. Retailers want to be located at our centers, where top grocers drive consistent and reoccurring foot traffic. PECO continues to deliver strong internal growth. Our leasing activity and occupancy remain at very high levels. The PECO team executed 1,026 leases totaling approximately 6 million square feet in 2025. We believe this activity represents a substantial increase in value at the property level. Portfolio occupancy remained high and ended the year at 97.3% leased. Anchor occupancy remained strong at 98.7%, and in-line leased occupancy ended the year at a record high 95.1%, a sequential increase of 30 basis points. Our portfolio retention rate remained high at 93% at year-end. High retention means less downtime and lower tenant improvement costs, which translates to better economics for PECO. We expect to see consistent retention in the future. PECO delivered comparable renewal rent spreads of 20% in the fourth quarter. Comparable new leasing rent spreads for the quarter remained strong at 34.3%. Our leasing spreads reflect a retail environment, which continues to be extremely positive. We are leveraging PECO's pricing power resulting from the demand of our high-quality portfolio, strong leasing spreads and embedded rent escalators. Leasing deals we executed during 2025, both new and renewal, achieved average annual in-line rent bumps of 2.7%. This is another important contributor to our long-term growth. As it relates to bad debt, we actively monitor the health of our neighbors. We expect bad debt in 2026 to be in line with 2025, which came in at approximately 78 basis points of revenue for the year. Given our current pipeline and visibility, along with strong retailer demand and the lack of new supply, we are comfortable with our guidance range for bad debt. We have a highly diversified neighbor mix with no meaningful rent concentration outside of our grocers. Turning to development and redevelopment. PECO has 20 projects under active construction. Our total investment in these projects is estimated to be approximately $70 million, with average estimated yields between 9% and 12%. 23 projects were stabilized in 2025. This represents over 400,000 square feet of space delivered to our neighbors and incremental NOI of approximately $6.8 million annually. We are focused on growing our pipeline of development and redevelopment projects. This activity remains an important driver of growth. In addition, the PECO team continues to find accretive acquisitions that add long-term value to our portfolio. Our year-to-date activity reflects $77 million, including 2 core grocery-anchored shopping centers. Currently in our pipeline, we have visibility into approximately $150 million in assets that we've been awarded or under contract that we expect to close either by the end of the first quarter or early in the second quarter. Given the strength of the market, the pipeline we are targeting and the team we have at PECO, we believe we can achieve our targets for gross acquisitions in 2026. Our current pipeline reflects a combination of core, grocery-anchored neighborhood shopping centers, Everyday Retail centers, and joint venture opportunities. I will now turn the call over to John. John?

Thank you, Bob, and good morning, and good afternoon, everyone. Our fourth 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. The PECO team continues to operate from a position of strength and stability. Fourth quarter NAREIT FFO increased to $88.8 million or $0.64 per diluted share. Fourth quarter core FFO increased to $91.1 million or $0.66 per diluted share. Turning to our balance sheet, we have a strong liquidity position. Combined with our proven access to the equity and debt markets, we have the ability to execute our growth plans. As a reminder, PECO can acquire $300 million of acquisitions annually and remain within our target leverage range. As of December 31, 2025, we have approximately $925 million of liquidity to support our acquisition plans. Our net debt to trailing 12-month annualized adjusted EBITDA was 5.2x at year-end and was 5.1x on a last quarter annualized basis. As a reminder, our fixed rate debt target is approximately 90%, and we finished the year at 85%. We anticipate addressing our floating rate debt through financing activity in 2026, where we will look to access the debt market opportunistically. We believe fixed income investors appreciate the high-quality cash flows and stability of grocery-anchored, necessity-based retail, and we continue to believe we are an underrated credit relative to our higher rated shopping center peers. Moving on to guidance. We provided strong guidance for 2026 in December. Our outlook reflects continued solid earnings growth. Net income guidance for 2026 is in the range of $0.74 to $0.77 per share. Our same-center NOI growth for 2026 is projected to be in a range of 3% to 4%. Our guidance for NAREIT FFO per share for 2026 reflects a 5.5% increase over 2025 at the midpoint, and our guidance for core FFO per share for 2026 represents 5.4% year-over-year growth at the midpoint. Our guidance for 2026 does not assume any equity issuance. Our growth and investment plans are not dependent on access to the equity capital markets. The PECO team continues to have significant financial capacity to support our long-term growth plans. We have diverse sources of capital that we can use to grow and match fund our investment activity. These sources include additional debt issuance, dispositions, joint ventures and equity issuance when the markets are more favorable. We sold approximately $145 million of assets in 2025 at PECO share, and we plan to sell between $100 million and $200 million in 2026. Similar to our acquisitions, we evaluate our portfolio on an IRR basis and are reinvesting proceeds from these dispositions into assets with higher long-term IRRs. We are focused on maintaining our high-quality portfolio while improving PECO's long-term growth profile. This activity provides PECO the opportunity to realize the gains we've achieved while investing in future growth. We believe this approach helps drive solid NOI growth long term. In summary, PECO delivered outstanding results in 2025, and we are positioned very well to continue that growth for 2026. Looking beyond 2026, we continue to believe that PECO can consistently deliver 3% to 4% same-center NOI growth and achieve mid- to high single-digit core FFO per share growth on a long-term 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 core FFO per share and AFFO growth 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?

Our first question will come from Andrew Reale with Bank of America.

You're expecting to do even more volume externally this year. So as we think about this level of competition for high-quality grocery-anchored assets and how that's sort of intensified over the last year, could you speak to the diversity of opportunities within your pipeline and what looks most attractive to you externally right now?

Sure. Thanks for the question, Andrew. So on the acquisition side, what we're seeing is, as you point out, there's more competition there. But we're also seeing a lot of product on the market. And we think that, that is probably going to balance itself out in a way that creates enough opportunities. And I think that's why we have a high level of confidence that we can reach our targets that we've laid out for the acquisition pace. Bob, any of your thoughts on that?

Yes, Jeff, I'll just add that as a comparison in 2025, we saw really over 200% of new potential opportunities. We underwrote about 50% more than the year previous and double the amount of deals we presented to investment committee. So that was in 2025 compared to '24. In '26, and I know it's early time in the year, but we've already seen about a 70% increase in the opportunities that we're looking at and about a 67% increase in the deals that we've underwritten and 10% what we presented to investment committee. You will continue to see us stay disciplined on our unlevered return targets of 9% and 10%. We're going to be very focused on continuing our core strategy of grocery-anchored shopping centers. We will complement it at a very small percentage with our everyday retail category. So both areas are going to be very active for us this year. We feel real good about our acquisitions that we completed year-to-date and our pipeline going forward.

Okay. That's very helpful. And then just any update on the Ocala development parcel, especially as it relates to the timing of that project? And are there any other large-scale strategic land acquisitions currently in your pipeline?

Bob, do you want to take that?

We're really optimistic about the Ocala market and the growth we're witnessing, as it's one of the fastest-growing areas in the country, with 10,000 new homes being constructed within a 5-mile radius. We have acquired land for a grocery store, which we plan to divest around midyear. Additionally, we have 7 outparcels that we're marketing for ground lease opportunities. Overall, we're in a strong position, and recently we've been targeting unlevered returns exceeding 9.5% to 10% for this project, which gives us confidence in further investment in this market. This success is largely due to our grocery partnerships developed over the past 30 years. Regarding new larger grocery development projects, we have a pipeline and are in discussions with our grocery partners. We have a few deals under contract that we're progressing, but nothing imminent for this year.

Our next question is going to come from the line of Michael Griffin with Evercore.

I was on mute, apologies. I wanted to start off and ask just about occupancy in the portfolio. Both leased and economic is pretty meaningfully above the peer set. I guess, number one, do you feel like we're reaching almost a terminal occupancy level, probably more so on the anchors than the in-line neighbors. But number two, just given where your occupancy is, do you think that gives you more leverage when it comes for these renewal negotiations, maybe being able to push more on rent escalators or with an anchor lease, potentially shortening options or building in some kind of internal growth into those?

Yes, thank you for the question, Grif. We believe our higher occupancy is due to more retailers wanting to establish themselves in our grocery-anchored locations. Necessity-based retailers see us as an ideal fit, which has resulted in a stabilized occupancy rate that surpasses that of our competitors. We anticipate this trend will continue and see potential for further improvement from our current position. While the anchor side is already in the high 90s, we think there’s still room for 1 or 2 points of growth in the in-line stores, which is something we're excited about. We are confident that retailers are choosing to lease our spaces, contributing to our standing as the leader among our peers. Bob, would you like to elaborate on the tenant demand and what we're observing in that area?

Yes. I'll continue to give a little bit more color in terms of occupancy. We're currently at 97.3%. And as I look at our anchor occupancy, we're at 98.7%. I do believe that there's anchor demand. We're seeing it with our spaces that are over 10,000 feet and the amount of leases that we have out for signature and letters of intent. I believe that we still have room to move that number to 99.1% to 99.3% this year. I would also tell you that our in-line leased occupancy is a record high 95.1%. I don't see it slowing down. And given the visibility I have in the pipeline, it's very active. There's no new supply, retailer demand and our necessity-based focus has been very positive. I would say that we believe that we have 100 to 150 basis points of continued in-line upside as well. Feel real good about that. In terms of leverage, that was a great question. 93% is our current retention of our occupancy. That's strong. And if you look at our fourth quarter numbers at 93%, we only spent $0.24 a foot in terms of TIs to renew that with over 20% renewal spreads with over a 3% CAGR. So we are driving the CAGR. We're getting exceptional first year increases, and the pipeline I have on that, I probably have 150 renewals out for Signature currently, and the numbers are even more accelerated than what I just shared with you. So again, I think we're in a very good spot given the retailer demand, our focus on having the #1, #2 grocer. We just don't see anything slowing down. The other thing that we're working on as part of the renewal process is renegotiating some of the non-monetary clauses you think about caps and restrictions and no build area. We do have the leverage to negotiate that to give us more flexibility in our pipeline and our existing portfolio to continue to create NOI growth.

And then maybe just circling back on the everyday retail portion of the acquisition pipeline. It seems like in addition to the core grocery-anchored, you could get some real kind of kicker on earnings accretion and external growth through these properties. But I'm curious, maybe Jeff or Bob, if you could comment on how you kind of weigh the potential differences in credit and sort of maybe some tenant health, not concerns, but just a different tenant makeup of these kind of unanchored strips that you might be targeting for everyday retail relative to your core grocery-anchored tenant base?

It's a great question. I'll start and then Bob can join in as well. Looking at everyday retail, we hope to reach $1 billion in assets over the next three years. While it won't be our primary focus— which will remain on grocery-anchored properties— we see a unique opportunity to leverage the PECO machine in specific markets. This tool identifies where residents prefer to be and allows us to bring them to locations that may not have access to our existing centers. We believe this approach will yield significant results in this market niche, and we are excited about the potential for substantial growth beyond what we're currently achieving in our traditional grocery-anchored centers.

Our next question is going to come from the line of Haendel St. Juste with Mizuho.

First question on capital deployment. I appreciate your comments on the acquisition strategy. I guess I'm curious also on the other capital allocation alternatives that you're considering. So maybe some comments on how you're thinking about either ramping up redevelopment, ground-up development and also potentially buying back the stock here, which looks like it's trading somewhere in the low to mid-6s on implied cap rate, which isn't that much different, a little higher than acquisition cap rates, but it's an immediate return. So just curious on how you're thinking about capital deployment beyond acquisitions.

Great question. We spend a lot of time considering this. The areas you're mentioning are regularly discussed in our capital allocation conversations. Ground-up development presents strong opportunities, albeit on a smaller scale. We aim to grow that segment to what we see as an everyday retail size because we believe the potential returns could be significant. This year, we plan to invest around $70 million in redevelopment and capital, which falls within the $50 million to $70 million range we've seen recently, with hopes of reaching that $70 million target again. We genuinely value this segment of our business. We're also looking at allocations between acquisitions, particularly with our grocery-anchored projects and everyday retail, as we believe there are opportunities to pursue unlevered IRRs in this area. We've mentioned before that we can acquire $300 million worth of properties and redevelop another $300 million without needing to tap the market again, maintaining our current leverage levels. We want to seize any growth opportunities that arise. Share buybacks are always on our radar, but currently, we find ourselves in a position where issuing equity isn’t ideal. At the same time, we believe we can achieve better returns for our investors by investing in properties and redevelopment rather than buying back stock. This has led us to establish the vision for this year, which we are excited about, as we see potential for significant developments. Additionally, we're looking into dispositions, which will give us more opportunities to make larger purchases, and we plan to explore that further this year as well.

That's great color. I wanted to ask a question about Amazon. Some headlines out there that they're closing some stores, some Amazon Go Fresh locations. I guess I'm curious, one, if you have much, if any, exposure there and if that's impacting your conversations or impacting grocery demand for space?

Yes. Amazon Fresh is closing their stores, which is not surprising given their struggles in brick-and-mortar retail. They are trying to navigate this issue, and I believe Whole Foods is their focus for expansion. This seems to be part of their strategy to find a successful approach in physical retail, but so far, they have not identified a viable solution. They have announced plans for increased grocery delivery, which we are monitoring closely. Currently, over 80% of grocery delivery comes from physical stores. It will be challenging for them to compete without the store presence that Kroger, Walmart, and other traditional grocers have. We will keep an eye on their developments, as they are a strong company, but to this point, their performance in physical retail has been underwhelming.

Our next question is going to come from the line of Caitlin Burrows with Goldman Sachs.

Maybe as a follow-up to some of the other questions, John, you talked about it a little bit, but how does cost of capital influence PECO's acquisition pace? Do you feel constrained at all? Would a higher share price make you interested in the higher acquisition target for the year?

Great question, Caitlin. Thank you. The answer is yes, a higher stock price would encourage us to be more active in acquisitions. We have the capital and the capability to meet our targets for this year without issuing additional equity, so we are ready for that. We also plan to be active in divestitures to potentially enable even faster growth than what we have outlined in our guidance. We believe that if opportunities arise, we will find the capital to pursue them, ideally at a share price that reflects our expectations. If that doesn't happen, we have several other avenues to achieve growth. There is significant interest from external parties for joint ventures and similar opportunities that could enhance the growth we have forecasted.

Got it. Okay. And then maybe just on the bad debt side, it did pick up a little in 4Q. Can you discuss what led to that? How much visibility you had to it? And then to what extent your expectations for 2026 might have evolved since the business update in December? Or is it kind of all in line with the past couple of months' expectations?

John, do you want to take that?

Sure. They always leave the fun ones for me. Thanks for the question, Caitlin. Look, ultimately, if you're comparing towards the fourth quarter of '24, I would say that was the lower run rate. Overall this year, our bad debt has really actually been pretty consistent. We finished this year around 78 basis points. And as we look forward, that is pretty consistent with where we believe it will be. So when we set the guidance in December, the information and the data points we have from January and February so far are very consistent with that. We're really encouraged by the continued leasing demand that we have and are encouraging our teams to find the best operators, the best merchandising mix for our properties that are going to allow us to drive rent and make our neighbors successful. So we don't see anything on the bad debt side that is concerning. The fourth quarter, it was a little elevated, but ultimately still very consistent with what we've seen this year and what we expect in '26.

Our next question is going to come from the line of Omotayo Okusanya with Deutsche Bank.

John, this one's for you. You had made a comment earlier on about just your overall credit rating and kind of your in-house view that you probably should be at a higher kind of credit rating. Just curious, when you talk to the rating agencies at this point, what's kind of preventing that from happening? And then kind of if and when it does, how do you expect that to kind of impact your cost of debt?

Thanks for the question, Tayo, and thank you for the opportunity to use this as a platform. So we do believe we are an underrated credit when we compare our leverage level compared to our peers. We have the same leverage metrics or better in some cases than they do. The rating agencies at this point are more focused on scale. If you look to those that have achieved A ratings in our space, they are quite a bit larger than us. So as we look at it, we think our continued scale and acquisition activity are going to give us opportunities to increase our debt issuance in the unsecured bond market. It will hopefully give us opportunity to access the equity markets to increase our institutional holdings and our float. Ultimately, we think the run is usually, I have been told 25 basis points per credit notch. But I will say that the fixed income investors are definitely paying attention. And I do think they have compressed that range for us. So while I do believe there is benefit to a ratings increase, the fixed income investors do recognize the strength of our grocery-anchored portfolio, our performance, and our track record. So ultimately, I think right now, if we issue 10-year debt, it would probably be around 5.25% I think that, that could be better if we were in a higher-rated position. It is a conversation that I continue to impress upon the rating agencies. At this point, I think it's going to be around scale. But we're going to continue to fight the fight.

Got you. That's helpful. If I may follow up on the balance sheet, your variable rate debt percentage is a bit higher than most of your peers. How are you approaching that considering the outlook on interest rates? Are you thinking about implementing swaps to reduce it, or how are you planning to address this?

We finished the year at 85% and have a long-term target of 90% fixed rate. In this environment, we are primarily focused on our maturity calendar. We have maturities coming up in January 2027 that we will address this year. When we secure longer-term capital, it will be fixed and help us move toward our target. Currently, the market has uncertainties regarding short-term rates, but I believe there is stability. With the curve being more positively sloped now, we don’t face penalties. Our goal is to ensure we can take advantage of opportunities without feeling pressured to act. We plan to continue acquiring and matching funding for those acquisitions, as well as refining our financial activities, which will help us add duration and fixed-rate coupons to our debt profile.

Our next question is going to come from the line of Ronald Kamdem with Morgan Stanley.

This is Caroline on for Ron. You've mentioned being active on the disposition side. I was just wondering if you could share a little bit more about what you're seeing or anticipating? And overall, just a little more color on what you're seeing in terms of cap rates and unlevered IRRs for those dispositions?

Sure. Caroline, thanks for the question. Bob, do you want to talk a little bit about the disposition side?

Yes. Great question. We ended up selling about $140 million worth in 2025. And that was something that we wanted to be more intentional about in terms of property recycling. And really, our core strategy on the disposition side is trading out assets that we've stabilized where we have unlevered return targets that might be, say, 7% and replacing it with our strategies and the opportunities we're seeing today with unlevered returns between 9% and 10%, 10.5%. In terms of expectations for 2026, we'll continue to do the same thing. We put a budget in place between $100 million and $150 million to execute the same strategy.

Our next question is going to come from the line of Floris Van Dijkum with Ladenburg.

Could you discuss why your everyday or unanchored strategy isn't larger, given that you're achieving higher IRRs? Is there a limited opportunity set, or did you expect it to be more substantial? Also, regarding the dispositions, what do you anticipate for asset sales? Are you looking at a 5.5 or sub-5 cap on some of those assets?

On the capital allocation front, we've set a goal to reach $1 billion in everyday retail over the next three years, and we aim to achieve this even sooner if opportunities arise. We maintain a disciplined approach in this business, ensuring that when we utilize the PECO machine, we can expect accelerated and significant returns. This discipline may mean we won't move as quickly as if we were purchasing straightforward triple-net deals that are more uniform, but we believe this is where the opportunity lies. We expect to find suitable products, and if we do, we will acquire more. Our ability to do so hinges on the availability of these opportunities, which is our main consideration for allocation. Regarding asset sales, we typically categorize them into two groups. The first involves projects with limited upside where we've already stabilized the product and believe we can achieve favorable pricing, targeting an unlevered IRR in the range of 7% to 7.5%. Last year, we sold a project in California that fell into this category at a cap rate of approximately 5.7% to 5.8%. The second category consists of sales aimed at reducing risk, where we also see potential for good pricing, but we expect the IRR to fall between 6.5% and 7%. This approach helps us reduce risk in our portfolio. We prefer to sell when we believe the pricing is right, holding onto solid assets for the long term otherwise. This strategy contributes to effectively managing our balance sheet as well. Does that address your question?

It helps. Thanks, Jeff. No, again, the spread between the unanchored and the noncore sales is pretty wide. So...

Yes.

My follow-up...

Yes. The answer is yes. Bob, do you want to talk a little bit about sort of option strategy on the leasing side?

Yes, Floris, that's an excellent question. We're highly focused on this. With a 93% retention rate and our leverage in renewals, we're achieving significant outcomes in negotiations, including 20% increases and 3.25% compound annual growth rates as examples. On the new deal front, our new leasing spread is approximately 34%, and we're observing compound annual growth rates between 2% and 3% for new agreements. In terms of our current portfolio, our negotiation approach for new deals typically involves starting with a no when tenants seek options. While options may not favor landlords, our strong portfolio, which includes many national and regional tenants, leads them to invest significantly alongside us, prompting a desire for additional security beyond their 5- or 10-year primary terms. Consequently, we've been advocating for 20% increases during each option period, in addition to a 3% compound annual growth rate, though achieving this can be challenging. I have encouraged my leasing team to pursue this direction, and while it is tough, you're correct that we need to continuously explore methods to limit options and secure higher compound annual growth rates.

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

I wanted to ask a couple of questions around acquisitions and JV activity, in particular, where you've seen a measured pace of activity. Bob, you mentioned that you're seeing a pickup in offerings. And I guess, 2 questions here. Should we expect to see JV activity ramp up a little bit more meaningfully in 2026? And then second, Jeff, I think you commented that you're having discussions with some other potential sources of capital. Are there other potential JV partners that you are having discussions with for another vehicle, perhaps?

I'll take the second question. Bob, would you like to share some insights on the joint venture activity for this year? Todd, we are constantly engaging with potential joint venture partners whose specific requirements align with our grocery-anchored shopping center focus. This situation is consistent with our approach, and we will keep these discussions ongoing. In the right circumstances, this could lead to opportunities similar to the two joint ventures we already have. Additionally, when your stock isn't performing as desired, it's essential to closely evaluate joint venture opportunities. Bob, could you provide some updates on the activity this year?

Yes. We continue to see increased opportunity. We have a weekly meeting for Investment Committee with our partners. And we're typically presenting anywhere between 2 and 4 new sites weekly to the team. So I do think that we'll see more activity this year than we have in the past. I think we're going to see more product. And things are heading in the right direction behind the opportunity set, the pricing opportunities that we're seeing. I think we'll close out our 1 fund. We need 1 or 2 more deals that we currently have under contract. So that will close out one. And then our Cohen & Steers joint venture has not only been very successful early days, but is well equipped with capital to continue to take advantage of market opportunities which we're seeing. So I'm encouraged by the activity in the joint ventures.

Okay. Regarding your discussion about targeting internal rates of return above 9% for core grocery-anchored acquisitions and above 10% for Everyday Retail, could you explain the basic framework and underwriting assumptions you're using to achieve those IRR goals?

Sure. Bob, do you want to explain how we approach our underwriting? The straightforward answer is that we follow a very standard underwriting process that is consistent across all our evaluations. We have refined this process over 30 years in the business, achieving a high level of accuracy. Annually, we revisit all our underwriting decisions and compare them to the actual performance. Over the past decade, our performance has exceeded our underwriting by about 1%. This indicates that we have confidence in our system to accurately project outcomes for our portfolio, and our results confirm this.

I want to emphasize that in our Everyday Retail segment, with the nine centers totaling around $180 million, one significant opportunity for exceeding the 10% unlevered return lies in the current occupancy rates, vacancies, and marking to market. Because of the limited new supply in the market, we have effectively increased rents. For instance, within that property portfolio, we achieved over 45% in new leasing spreads and more than 27% in renewal spreads, with attractive compound annual growth rates. Our strategy is focused on key markets where we can leverage our national accounts team and adjust our merchandising. We are particularly concentrating on necessity-based goods and services such as fast casual dining, health and beauty, and medical services, areas where we see strong demand and validation in our merchandising approach. Currently, in this strategy, we typically acquire properties yielding between 6.7% and 7%, but may adjust to 6.5% if there is more vacancy potential for growth. Importantly, as mentioned, we do not compress cap rates during our underwriting process, allowing us to capitalize on pure growth. We expect these properties to maintain NOI compound annual growth rates between 4.3% and 6%. Over the past year, on the nine properties, we have successfully increased occupancy from 91.6% to 94.7%, a 310 basis point gain, and we're seeing unlevered returns rise above our underwriting, now exceeding 11% by 100 basis points. This is the advantage of our strategy as we continue to leverage our operational expertise to create long-term value. We are also optimistic about the potential to grow this segment of our business to between $700 million and $1 billion over the next three to four years, following the Phillips Edison approach.

Okay. That's really helpful color. I appreciate that. One last one, John, a quick one on the guidance. It includes gross acquisitions. $400 million to $500 million, but it seems like there's this $100 million to $200 million of dispositions that's also contemplated for the year. Is that embedded in the range? Or is the disposition activity not currently factored into the guidance specifically?

It is in our guidance. The dispositions are considered in the guidance that we provided. Yes.

Our next question is going to come from the line of Cooper Clark with Wells Fargo.

Great. I guess, just to stay on the disposition pipeline, curious as you think about marketing deals today, what the depth of the bidder pools looks like and the buyer profiles you're seeing?

Cooper, thank you for the question. The buyer profile is quite varied, with a solid breadth to it that has remained consistent. It was solid last year, and we are observing a similar level and diversity of buyers this year. This trend of variety has not changed so far, and we continue to find enough product to achieve our objectives. The market is broader, with increased interest, and each property carries its unique characteristics. Each of these characteristics appeals to different buyers, whether they are family offices or institutional investors, and we focus on identifying those specific opportunities that align with the right buyers for our offerings.

Our next question is going to come from the line of Hong Zhang with JPMorgan.

I guess my first question, you've talked in the past about the potential to proactively take back space in order to push rents higher in the long term. Where you sit today, do you see any opportunities this year that could potentially be a little bit of a headwind to occupancy, but ultimately push rents higher in the longer term?

Bob, do you want to talk about that?

Yes. I appreciate the question. I don't believe we're going to see any headwinds in terms of occupancy. What I'm encouraged by, we will be very selective from a merchandising standpoint on recapturing spaces where either a neighbor doesn't choose to step up to the current market rent or we're not seeing the renewal increases or viability in the profitability of the neighbor. So that will be a case-by-case decision asset by asset. Given the 93% retention and what we saw in the fourth quarter as a trend, only spending $0.24 a foot, it's just a lot better economic decision than replacing a new neighbor and pushing the rents. The rents have to be extremely high on that first year renewal spread when you're investing somewhere, say, between $22 and $28 a foot in tenant improvement. So the good news is we'll continue to have flexibility to remerchandise the way we can be just given the lack of supply and the leverage we have in our existing portfolio. I don't see any signs of occupancy weakening. Again, it will just be case by case and market-to-market opportunities so we can maximize the value of the portfolio.

Your next question is going to come from the line of Michael Goldsmith with UBS.

Earlier, you talked about maybe having 100 basis points of upside for the shop occupancy. It seems like the demand is there. So what needs to change in order for you to realize that upside?

Bob, do you want to talk about the upside?

Great question. So that is a topic that we continue to discuss on what we can do. One initiative that we put in place is getting ahead of the curve, whether we discuss supply chain or making improvements to the space where we can turn them faster. In every portfolio, you'll have some spaces that are located in unique spots or spaces that are tired. And I think that will be a new strategy as we see where our portfolio is today, not only identifying spaces where we should invest capital earlier. But the other thing that I've done with our leasing team is I put incentives in place on our top 100 vacant opportunities that generate the highest NOI for the center. And I'm compensating it like a bounty program if we can get those leased. One thing we've seen a lot of success at Phillips Edison is when you have incentive pay and commissions to drive a behavior, it works. That's part of the reason why you're seeing new leasing spreads, renewal spreads and the integrity of our portfolio. This is something I'm excited about. This is going to help move the needle another 100, 150 basis points with a targeted space leasing approach.

Your next question is going to come from the line of Sidney Rome with Barclays.

With regards to the $400 million to $500 million acquisition guide alongside higher interest expense, I know you commented on $100 million to $150 million of disposition budget. But I was hoping you could help us bridge how much of the remaining funding comes from incremental debt versus free cash flow generation?

Thank you for the question, Sidney. John, would you like to discuss the allocation between the two?

Thanks for the question. We generate over $100 million. Actually, this year, we think it will be closer to over $120 million of cash flow available to us after distributions. As we said earlier, about $70 million of that will likely go towards our development and redevelopment activity. And then you consider the proceeds from the disposition activity. So as we look to the debt market share, we will utilize incremental debt capital but also to refinance it. So the math there, I think I kind of pointed to the pieces that could do it. But ultimately, we would be looking at 1 to 2 bond offerings this year or other debt offerings that we would look at, depending upon pricing at the time. So we're going to, again, work too on those January maturities, but I would say we have over $900 million of liquidity available to us between our revolver. And at the end of the year, we had some dollars available in 1031 proceeds that have been invested in the acquisitions we've already closed. So we feel really good about the availability of debt capital in the markets across types in addition to the free cash flow generation that we have.

Our next question is going to come from the line of Paulina Rojas with Green Street.

Good afternoon. Can you please share some rough numerical guidelines on how CapEx has deferred between your Everyday Retail and typical grocery-anchored centers?

Thank you for the question, Paulina. I want to ensure I understand correctly. Are you asking about the capital we are allocating to our core grocery operations compared to what we're spending on Everyday Retail? Is that the comparison you’re referring to?

Yes, correct. Ideally, as a percent of NOI or something like that.

Absolutely. As we look at it, we are targeting over 10% on levered IRRs. And to Bob's point earlier, actually, even 100 basis points or higher above that. For us at this point in the strategy, I would say that the capital as a percentage of NOI actually looks a lot like our grocery-anchored centers because of the growth that we're generating. As we stabilize these assets, we do believe they will be very efficient from a CapEx perspective as you get to renewing neighbors and just pushing rents, that because of the character of how we are evaluating these everyday centers and opportunities to push rents that are in place, but more so change the merchandising mix. We talk about it because we also have similarly that there's market data that suggests the capital for these centers should be more efficient. I think that is a data point to look at. I'm looking at it as an opportunity to get above a 10% unlevered when you include the impact of this capital. So when we look at the Everyday Retail in its current state, it actually looks a lot like the 12% to 13% of AFFO CapEx that we're spending at these centers generally because they're smaller, not as many opportunities to build out parcels given the footprint. But we think that it has the capability. But right now, we're focused on remerchandising, releasing, pushing rents, and that will ultimately get to that capital efficiency.

Yes. And Paulina, we're programming that in our underwriting. So we oftentimes, when we're buying some of the Everyday Retail, we have significant capital that we're putting in upfront to redo the centers to bring in the merchandising that we want to have at that center. And then you get to what John is talking about, which is on a stabilized basis, we think it will be less of a cost. But if you truly want to turn around the capital we think is necessary.

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

Yes. Thank you, operator. In closing, I want to reiterate that PECO performed very well in 2025. Our grocery-anchored, necessity-based portfolio provided both growth and stability. We're carrying that momentum into 2026. Our high-quality, reliable cash flows continue to grow as a result of our solid operational metrics and disciplined investment strategy. We remain confident in our ability to execute on our acquisition plans and are focused on generating attractive long-term IRRs. With our shares trading at a discount to our long-term growth profile, we believe PECO represents an attractive opportunity to invest in a leading operator that can deliver mid- to high single-digit annual earnings growth. We will continue to drive more alpha with less beta. In conclusion, I want to thank our PECO associates for their continued hard work, and I'd like to thank our shareholders and our neighbors for their continued support. With that, we'll end our conversation. And thank you, and have a great day, everyone.

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