Conference Transcript - PECO 2026-09-15

Operator

All right, everybody. Welcome to the Phillips Edison Roundtable. Happy to have Jeff Edison, CEO of the company, with us here today. And maybe introduce your team. And then opening remarks, please.

Speaker 5

It's John, our CFO, and Kim, our head of IR. And, you know, in terms of opening remarks, it's like great to live in interesting times. We don't need things to be this interesting because it's really trying to figure out what's going on. I mean, we're in one of the best operating environments we've been in. We saw a little run-up over the last 45 days ago, and then all of a sudden it starts going back. And the operating market is as good as it's ever been in terms of leasing, leasing margins, leasing occupancy, all just very, very strong, like record kind of strong, not just like good, but really, you know, as good as they've been. The acquisition market, you know, our volume is going to be as high as it's been, quite a bit higher, actually, than it's been any time since we've been public. And at numbers that we think are, you know, very consistent with what we've been targeting. You have 9% unlevered IRRs on what we're buying. We're buying in at about a 6-7 initial yield. So very strong, you know, dynamic there. So you've got great operating environment. You've got a great acquisition market where we're setting things up. We're selling stuff at, you know, basically a 5.9 yield. So we're buying at a 6.7 and we're selling at a 5.9. We have a really strong ask and buy front on that side. Again, we've increased our disposition numbers as well at those kind of rates. So, like, yeah, if I woke up and I said, this is as good of an environment as you can get, but the market's not trading great. And, you know, there are obviously a lot of explanations for that. What we're focused on is continuing to do the things that we influence, which has put great numbers on the board, which I think we have and will continue to do throughout the year. And then the market will do what the market does. Over time, you know, what we're committed to is growing our FFO per share mid to high single digits, paying a 3.5% plus dividend, and getting a 10% return for investors year in, year out, in a hard-ass, low-leverage business, we think that's a good return. And, you know, our management team owns more of PICA than any other of our peers in terms of percentage of it that's owned by the team. So we're not talking – I mean, we have skin in the game, and we're going to keep skin in the game because we believe in this business and we think that it is – particularly in environments where there's uncertainty, we have a lot less beta in what we do. But we're convinced that we got a really good alpha, and we're putting scores on the board that would say we got good alpha. So that's our opening remarks, what we're feeling. But, you know, as we said, we're going to keep taking advantage of what is a very strong market and growing the business.

Operator

Maybe on the flip side of that, I mean, you know, you look at recent news, grosser earnings, right? They've talked about softer consumer spending. some pressure there on kind of the lower end, lower income consumer, I guess, what are you seeing across your portfolio today?

Speaker 5

So, um, uh, the, the consumer is, um, is, is actually doing really well. And, and the, you know, it was two months ago, we were talking about the K and like, everything's going to be, you know, the lower end of the market's not going to do well. Well, that's sort of gone because the lower end is growing faster. Our market is the top of the K anyway, because we're, you know, if you look at our median household income of our centers, it's, whatever, 17, 18 percent higher than the median. So, like, we're, that's what we service. And that's what, you know, we're in density and incomes that are above what Kroger is and Publix are, which are our two largest tenants. So we're doing well in that. So this concept that the consumer is having trouble is one that, like, I mean, you guys, I mean, the credit card debt and all that, like, those are actually pretty healthy right They're not, you know, you're hearing stories like, oh, the consumer's, like, in trouble and having to, but you're not seeing it. We're not seeing it. And one of the things that we look at really closely is our local neighbors, those are what would be called mom and pop, but they're really the true entrepreneurs, the people who are, like, counting on that business as what they're going to pay their rent with and what they're going to pay for their house. And, like, that's what they live on. they make every time when they renew a lease they come back to us and they have to make a decision like what are they going to do and they can walk from the deal if it's not profitable or if they see the future is not profitable they can extend for a year or two and just kind of see what happens or they can extend their leases for a long term and they come at us negotiating and we keep very close look at that Today, that retailer is looking for longer term, and they're renewing at 90% of their spaces. So you think about that. That means the person who knows the consumer the best, which you can have all the talking heads. You can have all the research you want. There's nobody who knows the consumer better than the entrepreneurial local retailer because they actually know when, you know, somebody's husband or wife got laid off. They know why they're buying something and what's too expensive, what's not. That is their job. They're making the bet on a long-term basis. They want to be there. They're trying to tie up the space for as long as they can. That to me is probably, I mean, it's certainly one of the things we watch really closely and encourages us that We're in a much better position than what you're kind of hearing about from – Maybe taking that, you know, expanding that a little bit as you think about the shopping center space overall, you know, what are the biggest risks facing the industry or the sector over the next 12 to 24 months, you think? So, we're – our stuff is grocery anchor shopping centers, right-sized grocery anchor shopping centers with small stores that provide necessity-based goods to the group. So, my answer to you is based on that. So, because there are a lot of people in the open-air space who are doing more discretionary spending and that stuff. That's not where we spend our time. But in that particular market, the necessity-based side, it's, like, very strong. Like, it is the consumer is not, you know, we're not seeing the consumer react in any sort of dramatic way. As a matter of fact, they're actually spending more. And so that would be, we think, a positive.

Speaker 2

I think that when we look at, you know, it's a negative-sided question why we want to try to be positive. But I think if you look at it from a risk perspective, that is kind of how we conservatively approach the business. When you're focused on assessing goods and services, you're focused on the best retailers of the grocer. Ultimately, that's why we often talk about we have less beta. And so when you look at the different things going on, and your first question was talking about, you know, kind of retailer earnings. I mean, there is an adjustment, but they, the large nationals, Jeff highlighted the locals, but nonetheless, they're incredibly adaptable. So Kroger's same store sales were a little softer, but they reaffirmed their profit guide. And so ultimately, as you look at that, they're continuing to grow. They're going to continue to operate. We actually think that, you know, I think some of the things from the headlines that we're hearing is perhaps it's interest rates or inflation. Well, actually, these retailers, they actually like some inflation. That allows them to pass along price increases more easily. And when we look at interest rates, we actually think that's an advantage to us because when we talk about the acquisition market, that has just made it that much more expensive for the levered buyer. And so in our space, maintaining the balance sheet that we have and being lowly levered like we are, then those moves give us an opportunity to play a bit more offense in that market. But ultimately, I mean, I think when we've back-tested and we look at the GFC and we look at the pandemic and things, our real estate has performed exceptionally well because of the resilience of the local retailer of that grocer and the consumer spending for necessity-based goods and services.

Speaker 3

Maybe just on the grocers specifically, any concerns about grocery health or M&A potentially leading to closures? I mean, we had Kroger Giant Eagle announced earlier this year. Any updates on divestitures there or closures?

Speaker 5

So you're going to see any M&A activity is not going to include closures. They can't get it through the government if that is part of the plan. Now, long-term, could that happen?

Operator

Yes.

Speaker 5

It's not going to happen in any kind of short-term merger conversation. That being said, you know, I don't know, as many people know, as there is, like, progress built on mergers. They have, I think they have close to 19 different brands that they keep. they're going to keep the giant eagle brand you know when that when that transaction closes because they they actually use the brand and the brands are really important to the local customer that they don't they don't change it they bring in their product they bring in a lot of things to change the way the business is run but they don't change the name um and that's so like i i think the giant eagle thing is a good example and i think you will continue to see particularly the family-owned, the Schnucks of the world, maybe some, maybe the Cub Foods. You'll see potentially some of the Albertsons brands potentially getting sold. Like, you will see some of that. There'll be some M&A transactions, but that's actually more normal for the grocery business than not having it, which really has been blocked by the government Like, you know, with the Albertsons thing, just basically put a stop on any kind of M&A activity until that was around. That took two and a half years, three years to get resolved in not happening.

Speaker 2

I think that will – is probably a pretty good go with. I think the other piece is that when we look at the PICO portfolio specifically, this really goes to the importance of having the number one and number two grocery in the market, which over 80% of our shopping centers have the number one or number two grocery in the market because when these pieces come up and there are those questions, we look at it and we're able to say, this is a great grocery anchor location and ultimately gives us confidence in that someone will be there. And you kind of go and you say, okay, Albertsons didn't have the sale. Well, maybe they'll separate certain brands. We know the markets that they're actually very successful in. and then in other places. And that sort of grocery knowledge allows us to curate our portfolio to be quite strong.

Speaker 5

And it's a critical part of understanding. It's not whether you have Albertsons or Kroger. It's what market you have Kroger in. If you have Kroger in Denver, you have the dominant player in Denver. King Super just kills it compared to everyone else. But if you have the Albertsons there, the Safeways are okay, but they're not great. You're going to pay, you know, there'll be 50 to 100 basis points difference in cap rate between a Kroger Center in Denver and a Safeway Center. So that, but, and it's that way in literally every market across the country, which is why, you know, you need to, it's not whether you have Kroger or Albertsons or, but what market you have.

Operator

I just want to stop there to see if there's any questions from the audience. Okay. Really good, John.

Operator

On non-monetary clauses, right, as we think about on renewals, the renegotiation of that, whether it's restrictions, can you quantify the incremental NOI that can be there to get unlocked?

Speaker 5

It's very complicated to get you a hard number on that because it is things like being able development out lot that you couldn't that you couldn't get before there there's also um uh the um and the the the controls are almost all at the grocery level um our small stores have very little control of of what we do um and we don't give them control we never have given them control of how we operate the the shopping center some of the anchors will have disability things so The negotiations with them are more about sight lines and the ability to put outlots into spaces. And then probably the most important, and this is particularly important when you're buying a property, is what restrictions they have on what merchandising makes you can put in the center. That is because that can definitely constrain what you can do in terms of turning around a shopping center and getting the right merchandising mix for that shopping center. And that's really changed a lot in the last three to five years as they still ask for stuff. I mean, the grocer always asks for stuff, and any of the anchors who have some of the exclusives, they ask for stuff in exchange for that. But it used to be no. I mean, the answer was no for a long time. Now you're getting the ability to kind of trade certain pieces for that. And it does unlock outlaws. It unlocks leasing opportunities. Importantly, it allows you to merchandise your center to the right kind of retailers, which allow you to grow rents more. Those are the pieces that we're seeing today than we have for a long, long time.

Operator

Got it. And then maybe switching to external growth, you know, acquisitions, which is a big part of your strategy. Maybe talk about kind of what you're seeing in the transaction market out there. Clearly, you know, you're seeing, you know, from all the meetings we've been in, cap rates continue to compress. Like, talk about kind of the competition that you're facing today in the market.

Speaker 5

Yeah. So, we started the year targeting 400 to 500 million of acquisitions this year. We increased that at mid-year to 500 to 600. Currently, what we bought and have under control is at the very high end of that range. So we've had a very strong acquisition activity so far in the year, and it's been in a wide variety of markets, but nothing that we would – it wasn't sort of where you would think, Florida and Texas being the biggest, California being large, Washington. We bought some stuff in South Carolina. We bought some stuff in Minnesota. So it is, as you'd expect, the PICO, it's spread across the country, which is what our platform is. There are more buyers in the market. Gross ranker shopping centers are in favor. They're in favor among institutional buyers. They're in favor in family offices. So there are more buyers in the market. And each segment probably has a little bit more demand than it has historically. Most people were underweight grocery anchor shopping centers. And I'm going to keep focused on grocery anchor shopping centers, not on power centers and malls and other parts of retail. Because that's a market we know, and I don't really, we don't, we're not in those other markets. But the institutional demand has been high. When there is strong institutional demand, pricing usually gets way beyond something we're willing to get involved in. We've looked at a lot of portfolios this year, and the private equity buyers have been the buyers of that. These are multibillion-dollar portfolios, so they're presisible. and but private equity has has had the biggest bid on the highest bid on on all literally every single major real estate or retail real estate portfolio with with that it's predominantly grocery anchored um so that uh has we we've been participants we have not been winners of any of that because the pricing's gotten to the levels that we're not you know we're not going to go to How far off do you think you were?

Operator

Yeah, we were probably 20%.

Speaker 5

I mean, 15% to 20%, so sizable.

Operator

I mean, not a little.

Speaker 5

It wasn't, it was not, you know, 25%. And, but in most cases, it's been a private equity firm that was sort of buying on a thesis as opposed to, they were going to buy it. Like, they decided they were going to buy it, and whatever they had to pay for it, they're going to buy it. And that included Blackstone and Clujon Aries as the two sort of biggest, buying the biggest portfolios. There are some, there are a couple of others, the Slate portfolio and one other that where it's going to be sort of private equity, but it's going to be there to be high return private equity, you know, more opportunistic kind of stuff. But that's what, you know, is playing out in the market. So we're, I mean, we continue to do what we do really well, which is buy asset by asset, market by market. And our markets are a three-mile radius around where the center is with the number one or two grocer. And in that market, we can, you know, we've had tremendous success in performance and performance better even than what we underwrite to. So that's been what we will continue to keep focused on.

Speaker 2

And if I can, I'd like to tie this question into the kind of the first bit of the questions, because I actually think there's a real opportunity here, because we review several hundred million dollars worth of properties every week in investment committee. So we have a great pulse on the private market values and where shopping centers are pricing. And if we look over the last 45 days, two months, I think the retail stocks in Pico, our stock, has retreated on headline concerns about the consumer. And I think the continued strength is a real buying opportunity in the public space because institutions are buying, we know where this is valued. And I think ultimately as that consumer remains strong, you know, the hope will be that there will be improvement there.

Speaker 5

Yeah, if you think about the stuff we sold this year, I think we've announced it's about 159, but we're going to be somewhere between 100 and 200 in terms of guidance. That product sold at a 5.9 yield, initial yield. We bought at a 6-6 yield. That is, I mean, you can make a lot of money doing that. And then when you add on to that, that what we're selling is stuff that, and these are transactions. It's not like where we think the market is. It's where the market is. And our ability to sell at those, at that kind of a spread, I think gives us confidence that we're not only going to get spread, but we also – the growth is – the stuff we're selling is probably, in our mind, a 7% yield or 7% unlevered IRR that the buyer is going to get, and we're buying at a nine. So we're not only spread investing at the beginning, we're also adding a really strong growth opportunity to the company on a long-term basis. And that's a seven-year underwriting for the stuff we're buying, so that gives you, as well as what we're selling, I think it's a great trade, and I think it will provide outsized growth for the company over a long period of time.

Operator

And with rates that, you know, you look at where 10-year treasury is above 5%, does that sort of hinder your ability to continue to acquire?

Speaker 5

Well, we'll see.

Operator

I mean, it's kind of early on the rate changes.

Speaker 5

We haven't seen any sort of major changes yet, but we would anticipate there being some. We'll have, you know, we kind of got to, I think we kind of got to wait and see if it does have any kind of major impact on volume and what our competitors are one thing?

Speaker 2

I do think that it brings in a point that we talk about internally a lot, which is match funding. And so ultimately, the ability of where we've been able to sell assets, to buy assets on the, as Jeff was talking about, that difference in IRR, you know, we have been the largest individual asset buyer of grocery anchor shopping centers, the largest one in the country for the past 15 years. I mean, we have bought throughout all cycles over 35 years that Jeff's been running this business. And so there will be opportunities. Interest rates definitely will have an impact, but it takes a little bit longer. But that match funding is really important. We raised equity in the second quarter, and we're able to deploy that accretively and then add to our growth. And that's kind of what we're looking at. And so the first piece with interest rates going up, it's actually helpful because now the levered buyer, it just got a lot more expensive for them. So ultimately, all cash buyers, and when you're 30% levered, those moves have a lesser impact on us. That said, it should have an impact on the gap rates. That actually should improve the yield and the returns, and that will come about. But that's where I think, well, we're kind of doing both sides. And I should say, we have the ability internally to acquire $300 million of asset. And the leverage target is loaded at five times because we retained over $120 million of cash flow to the dividend, which we just raised 6%. And so, between the retained cash flow, the growth, and the EBITDA of the overall business, it gives us that capital to deploy. And depending on the environment, it could be more in-apport development and redevelopment where we're building out parcels. I've not done it yet, but But certainly, stock repurchases would be something to consider. But at the same time, we're not going to go back and forth. I just issued it last month and then buy it back this month. It disconnected. We're focused on long-term growth. Jeff mentioned being owners and operators. Today's acquisitions are driving NOI growth in 27, 28, 29, and beyond. And we're really focused on that long-term growth.

Operator

Maybe on the platform, I mean, you know, with investors that look at, you know, your company or stock, I mean, what would you want investors to better understand about sort of your strategy, the differentiation, your strategy versus other shopping center REITs?

Speaker 5

Yeah. One, product differentiation. I mean, we are grocery anchor shopping center buyers. We buy centers at the corner of Maine and Maine that deliver necessity-based goods to the consumer. That is what we do. You'll see in terms of, like, who our leading neighbors are. I mean, we're Kroger's largest landlord. We're Publix's second largest landlord. We're one of Sprout's top five landlords. We are in the Grocery Anchor Shopping Center business. You know, our top list is not Power Center tenants. It's grocers, and that, I think, is unique in the business, and part of what we think that combined with our necessity-based focus on the small store space provides a really good foundation which fundamentally has less data than other retail. If you just think of in your own life experience, there's stuff you do discretionary wise and there's stuff you do necessity-based. Food is probably your number one necessity-based thing. Now, you may buy at a restaurant instead of buying it at the grocery store, but food is not one of the things you say, yeah, maybe I'll eat next week. I mean, it's, but, you know, the shirt you might buy next week, right? You might, or buy later. Like, that is, that's the beauty of our product. So, there is less beta naturally in buying necessity-based things. That's, But what we've combined that with is the ability to have two really strong channels of growth. One is internally being able to grow this cash flow on a property-by-property basis. And then the second is to use our expansion both on the redevelopment side but also on the acquisition side to give us more alpha. And that is what we love about the business. And as a large shareholder, that's what I love about this. And we've been doing it for a long time. And we went back, actually, and looked at, okay, what returns have we gotten for our investors over 35 years? And if you look at it, and they're different sort of segments, the first segment did extremely well, like 40% IRR over 35 years. We don't have a lot of those investments in our lives, but that one was great. As you move out, it's... ends up kind of circling around 12% to 13% unlevered IR, or less unlevered IR. So these are numbers that we've proven we can sustain over extended periods of time, not just in – and so if you think about 35 years, we think everything's happening now. We've had a lot of these experiences over time that have – that this necessity-based retail has actually survived through.

Operator

And not only survived, but delivered really strong returns to the investors. Okay, we've got a couple minutes here. Time for rapid-fire questions, yeah. Oh, no. All right, number one. If long-term rates stay higher for longer, which has the biggest impact on your sector? Is it higher refinancing costs? Is it lower transaction activity or less new supply? Leslie's spot.

Operator

Okay.

Operator

Over the next three years, will third-party capital become a more important source of growth for public REITs than balance sheet capital? Yes or no?

Operator

Yes.

Operator

And finally, for your sector, will next year's Samestra NOI growth be higher, the same, or lower versus this year? For what? For your sector, same story, NOI growth next year. Is it higher, same, or lower? I think it will be similar.

Speaker 5

All right. Thank you, everybody.