Conference Transcript - PECO 2026-06-03

Andy Li, Analyst — Wolfe Research

Hey, good morning, everybody. So for those who don't know me, I'm Andy Liu. I'm a CRE in services and REITs analyst at Wolf Research. And it's my pleasure to be joined with CEO of Philips Edison, Jeff here, and as well as CFO John Caulfield. So, Jeff, I want to kick things off by handing the mic over to you. I mean, you've been with PICO for over 35 years. You've built this amazing portfolio, 326 properties, over 37 million square feet. So I want to just let you highlight the value proposition of PICO to investors today.

Jeff Edison, CEO

Well, thank you, and thanks, everybody, for coming in this morning. You made the elevator work. We did have a little more difficulty than most, but we got here. so we started Pico 35 years ago with a focus on necessity based retail we were in a small market in the in the southeast and we bought a grocery anchor shopping center we did it and that was the beginning of what we've continued to do for 35 years which is to find projects where they're driven by necessity-based retail primarily grocer and that that's what we that's what the portfolio we built and that's what an investment is pico is it's an it's having that stable cash flow from our necessity based retailers that sustains over a long period of time so it's we like say we we build a portfolio with less beta and but But we're not—we didn't get to, you know, almost 40 million square feet without a lot of growth. And so what we're trying to do is to combine that strong beta, which—the low beta, so that we've got that dependable income with a lot of alpha. And the alpha we build primarily through our acquisition program, which has been very active. This year we're guiding to between $400 million and I think we're almost at $400 million already this year of acquisitions, so it could be a really good acquisition year. We'll see how that progresses through the year. But that's a big part of our alpha. But we also have really good growth through the portfolio of properties that we built. And so you're combining the ability to grow from the core portfolio and that consistent growth from that, the acquisition growth on the external side, and that can give what we think, what we look at as our long-term consistent target of providing a mid-to-high single-digit FFO per share growth and then adding into that a 3.5% dividend. And so you're in the, you know, 10 to 11 return, but on a consistent basis without a lot of beta in that and without a lot of risk. And that, you know, we built the company around that. We built our balance sheet around that, making sure that we have that solid core, but then with solid growth. And that's what an investment in PICO is. it's it's trying it's finding places where you can have your alpha you you want we want we want that 10% return but but with without taking a huge amount of risk and that that that's what we've done and been able to do for a long period of time and consistently produce that and that's you know that that's not an easy thing to do but we have you know we believe the best team in the in the country to focus on it and that's where how we've been able to get to our our results no it's a great introduction Jeff and I know right you pointed out the portfolio you're predominantly grocery anchor centers with a top one or two grocer you have a great necessity based tenant face in there so can you just walk through sort of you know what are you how has retail kind of transformed over the past decade right because right now I've heard you know you were at ICSC the supply and the van environment is really great could just think a little bit more into that I'm sure the the if you step back retail's gone through a lot of cycles over the last really over the last 20 years and it was highly out of favor ten years ago the internet was going to take it over there were going to be no more shopping centers we went we got through that piece of the pie and and really what that did was it stopped any new development in our space and so for the last 10 to 15 years has been very minimal new development in the garage ranker shopping center business at the same time we've had a very solid growth of a number of the retailers so you've got this retail demand continuing while there's no new development and that's moved us from a position where we there was relatively high vacancy there was relatively low pricing power as you were leasing the space to the place we are today, which we've got very strong pricing power. We've got very strong demand for our space. We're at the lowest, the highest occupancy level that we've been at in the history of the company, and we're able to grow rents substantially on a year-over-year basis. That's a big change in the environment that's happened over the last 10 years and it's not rocket science, it's supply-demand. There has been very little supply while demand has been increasing and robust and we've taken advantage of that in the growth that we've been able to do in our portfolio.

John Caulfield, CFO

I would also add that if you look at the merchandising mix that you've seen in the portfolio that that continues to evolve and change as well. Clearly our you know 95% of our centers are anchored by a grocery store with over 80% of them being the number one or number two grocery in that market. Over the last 10 years, really the part that has, I would say, changed is more service and quick service revenue and med tail or medical retail over soft goods. And so when you look at, we were at ICSC a few weeks ago, and the brands that are coming out, all the coffee concepts, all the chicken concepts, but also you have, you know, the medical uses like Pacific dental and provision veterinarians things people getting services closer to their home that is something that continues to make our shopping centers very relevant in the communities and the neighborhoods that they're in and so i think there's just a to jeff's point the low supply is being complemented with like just in continued increased demand right of course i do get right Of course, the supply and demand environment is really supportive of the industry right now.

Andy Li, Analyst — Wolfe Research

So there are some macro headwinds we hear out there. For example, oil prices being elevated these days. So is there any real-time data that you're seeing that might have been impacting some of your retailers? And perhaps how is the PICO portfolio positioned to mitigate or insulate itself from these macro headwinds?

Jeff Edison, CEO

So, I don't think we've felt the total impact of what's going on in Iran right now. And I don't think there's still a lot of sort of time to take place, what's going to happen But today, I mean, our April traffic numbers were up 2% over last year. So that's not a consumer that is retracting. If you talk to our retailers, they're continuing to see solid growth and solid demand, and that's from the grocer to the fitness store. They're seeing the consumer being a lot more resilient than the press would have you feel about it. But I think it is a risk, and it's something that we've got to keep our eye on, but we're really seeing no impact to date from that. and we you know we went through this this whole tariff um process i mean there was the conversation that that was going to disrupt everything the the consumer stayed strong um and i i think uh what you see on the ground versus what you read in the paper are different or two different things and we're keeping our eye on our shopping centers and we're keeping our ear listening to our retailers and if you listen to the retailers they're as

Andy Li, Analyst — Wolfe Research

optimistic as they were 12 months ago and and 24 months ago I think that's a great rundown and you know given the just the things we've talked about the demand the supply and you know under these things are unabated despite these macrohead headlines that we hear you've put around two years ago you put out the same store NOI growth expectations kind of three to four percent you've been delivering on that 2025 you were at the high end of that for 2026 your guiding kind of consistent to these growth rates you've actually put out two separate breakdowns right you have one where you have the occupancy growth tailwind one even with even if you have hit full occupancy you could still get to this

John Caulfield, CFO

growth rate so I want to you know dig deeper into that and kind of appreciate the growth prospects of our portfolio great yeah so I mean we believe our portfolio can deliver three to four percent same-store NOI growth on a year in year out basis. Last year we were at 3.8 percent this year our initial guide is three to four percent and we're well on our way I think we're at three and a half percent in the first quarter and that is what this steady predictable growing cash flow portfolio that we have that we're going to be able to do. So when you look at it there's really a couple of components. We do actually although we have the highest occupancy of the retail shopping centers we still believe we can push inline occupancy another 100 to 150 basis points over the next 18 to 24 months. That's going to add somewhere between 0 to 50 basis points a year in same store and wide growth. The next piece is the supply part that we're talking about which is you know everywhere is full is allowing us to push rents. In the first quarter our new rent spreads were up 36 percent and on our renewal spreads which 9 out of 10 of our neighbors renew with us we were able to push those rents 21 percent in the first quarter. And this is our third year now of over 20 percent renewal spreads. So when you look at our ability to push those spreads, that's going to be another 100 to 150 basis points per year in NOI growth. And we do not see that slowing down. As we look at our leasing going out from here, which is pretty much the rest of the year, we can see continued strength in the ranges that we're talking about. The other piece that we've been working on is pushing contractual rent bumps. So right now, that's about 100 basis points of annual NOI growth in our portfolio. We actually think that we're going to continue to improve that. So we attribute 100 to 120 basis points of annual growth. We think that can continue to rise, but we're going to stay on the more conservative end right now. In the renewals, we're getting about 3% escalators in those renewal contracts. In the new leasing, that's a little bit closer to 2%. And then the last piece is we have a pretty robust redevelopment and development plan. These are primarily out-parcel, so $2 million to $3 million parking lots in adjacent land or part of the parking lot that's not being used at the center. We get great returns on that, and we're going to do between $70 million and $80 million worth of those projects this year. That delivers 9% to 12% cash-on-cash returns, and that's going to give us about another 100 basis points of growth. and Andy mentioned that we in our materials we actually show kind of one with and without occupancy because we for a number of years have heard you guys can't put any more people in yet we continue to drive occupancy so if we're not able to get any more growth from occupancy we just think that the that spreads will move even higher giving because the pricing power that we have and so spreads will make up for that and we'll get even better rent bumps so overall three to four percent on a year in year out basis in our portfolio no i think that's a really great rundown john so i get that for the occupancy piece right it's not just about getting

Andy Li, Analyst — Wolfe Research

the occupancy number up there the more important piece is having the right amount of the right occupancy or having the right merchandise makes the right retailer makes you could get the rents that it's like i get the sales that can support these rents so you can kind of talk about you know as you get as you um lease up some of these probably some of these properties and some of spaces what are some of the retailers that you're excited to have perhaps have at your center or are there any retailers or we kind of tell categories where you know they might be willing to do a deal with you but you're kind of you're kind of thinking well maybe you're not the right you know kind of one we want in our center so I I think the fundamental of that is you can't drive rents unless you can drive sales so if you're if your merchants are not

Jeff Edison, CEO

doing really good sales and growing those sales it's you can't grow the rents because there won't be profitable and they won't be able to survive and things so the the curating of your of the neighbors in your shopping center is is a really important part of our of our job and it is it's difficult because you know we're in you know basically 320 different markets and each center has to be merchandised to its market to its anchor to its demographics to its overall position in India in which state it's in all those pieces do play into how you how you merchandise it and if you don't do that really well you then don't they then don't do well they don't grow their sales we can't grow our rents so we are very meticulous about that process of finding the right merchandising mix for each center that we that we have and and it changes uh you know the the the population is aging um as people age they tend to they tend to shrink the area within which they they move and they want things closer to their home that becomes a big advantage for us because we are close to their home we are in we are within three miles of their home and so so you you start to look at it and say, well, what would be there? Well, if you look at, like, MedTail, the whole medical community is moving their product closer to people's home. That's where they want to be. And our centers are where that really fits because they can get their groceries. It's a place that they're familiar with. And so we're seeing a number of these MedTail uses that are expanding and create sort of a different option for our shopping centers, and that's been really positive. The food business is bifurcating a little bit. Certainly the restaurant part of our business continues to be very strong. It's a little bit surprising that it continues to be as successful as it is. The grocery business, on the other hand, you look at and you say, well, that's kind of an old school thing. They're doing really different things inside the grocery store to bring you in. And if you look at the sales of the good grocers, they're consistently seeing really good growth.

Andy Li, Analyst — Wolfe Research

So I think that merchandising mix is a key part of our job is to get the right mix at every center. and we think that once we get that that will actually is will assure our ability to continue to grow our rents I think that's really great so zooming in on sort of the occupancy costs here I know you guys I know it differs by the retailer category right grocery is kind of in the low single digits you know it could be higher for its more get some more inline tenants so as you push rents and you sign these leases kind of how are you thinking about the occupancy cost, what is the right level, and what are the implications of that to how much further you could push rents?

John Caulfield, CFO

So in our portfolio, the grocers are actually between 2% and 2.5%, so I think our average right now is 2.3%. The strong grocer maintaining that low occupancy cost ratio for them is extremely important for their commitment to the center because they bring in the foot traffic that feeds all of our in-line neighbors. When we look at the neighbors that are not in grocery, that is closer to 10%, and that has actually held really constant over the last several years as we've been pushing rents meaningfully, which goes to Jeff's point, which is finding the right merchandise mix and the right neighbors that can continue to drive their sales where we're able to push 20% renewal increases and 30-plus percent new leasing spreads. And so we actually think that we still have more room to go. We're around 10% today. We think that can get to 12% and still be very successful. And Andy's totally right. It does vary based on the use. Some can have higher than others. But as a generalization, we still think that there is a long runway to go as we have new operators and new ideas that come in and can really increase that productivity. But our retailers are doing really well.

Andy Li, Analyst — Wolfe Research

Right. So it sounds like the occupancy side, the merchandising mix and spreads are trending really great. But to take a step back, kind of, you know, thinking about what could be some of the negatives in there, you know, for retail, it's always been credit, right? We have cycles of, you know, credit loss issues. Although when I look through your top tenant list, I usually don't find the typical names that I look out for. So kind of looking at your credit loss expectations for the year, five to eight million, And you're actually trending quite below that for the first quarter. So we kind of just want to talk through what are some of the names you're looking at or any retailer categories that you're monitoring currently.

John Caulfield, CFO

When we look at our portfolio, our first and biggest credit decision is really around the grocer, making sure that they are incredibly healthy and committed to their space. And so that is a great part of our business. And then when we look at the remainder of it, we are so highly diversified. So our concentration, if you look at our disclosures, are all around the grocers. If you look at the largest non-grocer concentration, it's the TJ Maxx brands, and that's only 1.4% of our revenue. So that's why when Andy's looking for troubled names and things, we just don't have that concentration. So we would say that on a national level, our watch list is close to 2%, but they're going to be all the names that you're familiar with, but are add up to little things. So you might have a Kohl's in there and Michael's, you know, some of the pet stores. Those are just things we're watching, but actually they're doing quite well. So for us, our bad debt, our guidance range is around 60 to 100 basis points. Last year it was 78, right in the middle. Our first quarter was at the low end, which is part of the question where you're going, well, you know, isn't there an oil shock? And as Jeff said, we're not seeing it yet. Credit continues to be incredibly strong in our portfolio. And we actually see those as opportunities for new leasing because we are so highly occupied that our new leasing agents are basically trying to lease 100% occupied centers. And that's where our acquisition and our growth strategy comes in in trying to buy centers with additional vacancy or things like that. But, I mean, our credit watch list is incredibly tight even in today's environment.

Andy Li, Analyst — Wolfe Research

No, no, I think that's really great because, you know, that 2%, I've heard it before, right? It's been 2% for many quarters now, to your credit, right? You know, you're watching, you're monitoring it, but ultimately there's no real fallout there, so I think that's trending really well. I was going to move over to sort of the external growth piece of the business, but I want to see if there's any questions out there in the audience for internal growth.

Jeff Edison, CEO

Total property, placer information, placer AI. That's where we got that. Anyone else for anything before I move on to the external growth piece? it's a combination of a couple things the biggest driver being the construction costs the cost of building a shopping center when when development was at its peak which was really the power center kind of time frame probably 10 to 15 years ago probably in the 250 a foot kind of range maybe maybe maybe 300 with land and everything in it today that number is five five hundred to six hundred dollars a foot and that that cost means that the rents we've got to basically double to get the same return right and the the a big chunk of the development in that is is what the grocery is willing to pay and what the the big box the the box guys are willing to pay and they're just not willing to they haven't gotten to that kind of a price level so the only new development that when you when you dig through like what developments actually happening is is development for almost a cause either a city wants to have that represented and they give large tax breaks and they can make things kind of get get there from that or it's a situation where the grocer is driving in our in our space where the grocer is driving the development and they basically are buying the land themselves and building it and and not so it's not really a landlord position the landlord might might be able to build some small source rates about it around that and make that work you know better but it's So it's the cost and then the retailers, the inability to drive retail rents to that kind of a level. Because you're talking about big dollar rents and that means the sales got to be, you know, even bigger, right? And the retailers are just like, we can't get there. And so until that gap changes, and, you know, I think that's, it's years. I mean, if you look at most projections, we will be at very low new development numbers for at least the next five years. Does that answer your question?

Andy Li, Analyst — Wolfe Research

Anyone else on internal growth? All right. So I'm going to switch gears now to the external growth prospects of the business. So you guys have been very active in the transactions market, right?

Jeff Edison, CEO

You guys guided to kind of $400 million to $500 million of gross acquisitions this year. in your right you're you're predominantly grocery anchor now but you look at a lot of things you look at shadow anchored you look at unanchored assets as well just want to see you want you to talk a little bit more about how owning these different types of assets in the portfolio could synergize yeah so our our basic market that we go after is necessity based retail it is the type of retail that's closer home that you that you wait when you drive by it you're like you remembering oh I got I got to get that I got to get that done I got to get that done you're getting your necessity based things done at our shopping centers and it is that market that we look at to capture and to use our market knowledge to give us a competitive advantage over everyone else and to be able to do better and to be able to lease better to have higher occupancy and to be able to buy by product better that's what we focus on and it's not it's it includes all of those pieces but at our core we we are a grocery anchor shopping center business we are we believe in the core view that grocery anchor shopping centers with the number one or two grocer and right-sized will draw is the is the optimum structure for the person when they wake up on Saturday and they've got to get stuff done the groceries they want to get a workout they want to you know they want to get something to eat they they've got they got to get their nails done or the haircut like all that stuff that we think which kind of is kind of mundane we want to be the place that everybody thinks about in their community when they do it and we want to add to that community and and in providing the the best of each of those alternatives so you're getting the best you're you're and you don't do that it doesn't happen randomly it happens intentionally when you can take your your your team and you can then get them focused on finding the very best retailers in each one of those categories and then there's a synergy there that is created because they, you know, the hairstylist and the nail salon are, like, talking to each other and, oh, what are you doing? And all of a sudden you start to say, oh, well, I'm going to do that on Saturday and then I'm going to, you know, go to the grocery store. Those pieces are really important. And that is the, that's what is really hard to do in our business, but it's really rewarding, too, because you are actually bringing to the community the very best shopping opportunity in a really safe, clean, you know, interesting environment. And that's what we do, and we love it.

John Caulfield, CFO

I would add that this is really a huge opportunity for us. In the last five years, we've acquired $1.4 billion in assets. Year-to-date, we're at about $200 million on a full-year guide of $400 to $500, and we actually have a pipeline of about $200 million in assets that we'll expect to close in the next 60 to 90 days. The interesting thing about this is that when you look at that, our core focus around necessity-based retail, we estimate there's about 6,000 grocery-anchored shopping centers in the country that Pico would own. When we think about everyday retail, which we're very excited about, we own about 12 of them today and expect to own about a billion dollars over the next three years. If we only look around shopping centers that we are already locally smart, where we have a presence in the market, those are 50,000 opportunities. And so we think there's a great growth opportunity set where we can take the PICO platform that buys well, that operates well, that leases well and supports all of that. That's a huge opportunity for us, and we're well on our way here in 26.

Jeff Edison, CEO

Can I ask one question? We have a young group over here. Where are you guys from? What are you? Oh, great. That's awesome.

Andy Li, Analyst — Wolfe Research

No, that is great. And as I look at, you know, even the stuff that you've bought over the past year, right? You've bought some stuff, you've targeted some of these value-add opportunities, and you've bought assets that kind of when I looked at it last year, it was like in the 80s, right? Now I look at it, again, you're supplemental, and these are 95-plus percent occupied. So what is kind of, you know, the secret here for PICO where, you know, because obviously someone sold it at the center to you, right?

Jeff Edison, CEO

Why were they operating in the 80s, and then you step in, and then, you know, you were able to push occupancy to 95-plus. what is what is the secret here it's its relationships I mean we when we step into any center that we buy the first thing we do is work on becoming locally smart and a lot a lot of times it's because we're locally smart because we already own something close to it and we understand what retailers want to be in there we understand where where it is that this what we see this center as in terms of its contribution to its community and that it's that look that and when we buy us like when we buy a center we have a merchandising plan for that center of what we want it to look like we don't buy it unless we have that and when you and then we and then we work really hard to get to that and when you get to that what you do is you you you change the that entire center because is you are starting to think of it as a merchant, not as just a piece of real estate. You're trying to drive traffic to that center. You're trying to get the best retailers into that center. And that changes it. And that's where we have been successful. And yes, it translates into going from 80% occupied to 100% occupied, which we love. And we make more money on it, and all that's great. But the more interesting part is it drives sales. and it drives the view of that center relative to the community retail experience, and we become that. And then all of a sudden, yeah, you go from 80 to 100, but it happens naturally because we are the place you want to be if you're a retailer. And mostly it's because they can drive the best sales, But they also bring the best product, and they work together.

Andy Li, Analyst — Wolfe Research

Yep, your local knowledge definitely stands out and definitely observed in the earnings prints that you guys put out.

Jeff Edison, CEO

And by the way, you don't get locally smart without a heavy use of technology. I mean, we have leveraged technology from the very start of the company to be able to be in multiple markets. you know we're basically in 30 states and that you can't do that with six thousand neighbors without really well without a heavy understanding of where where can you leverage technology to get the best results and we've done that consistently really from the very start of the company as we're pushing up on time.

Andy Li, Analyst — Wolfe Research

There's 30 standing questions from the audience here.

Jeff Edison, CEO

So the strategy, let me start with the strategy. The strategy is different in that our typical shopping center is a grocery anchor center that is 115,000 square feet. Our target for Cone and Steers is somewhere between 200 and 300,000 square feet so the Conan Sears JV includes some big box bigger box kind of participation which we don't put on our balance sheet and right now it's I think it's 250 yeah we just closed on a new asset yeah but it's around say 250 million and we're hoping to get that seven and 750 over the next 12 to 18 months as we continue to buy. And they've been a great partner, and we're excited about the venture. It does, it sort of widens the scope of what we can buy or what we're willing to buy, and we've so far found, you know, we basically have five centers that we wouldn't have had without the JV, so we consider that, you know, kind of a good win. any other questions all right with that Jeff I know we've gone through a lot today is there any closing remarks that you know the audience should take away when they walk out of this room well I think I think it's the you know it's it's it's a really simple thing to say that you know you're you're creating more alpha and with low beta and but but we have built a platform that can do that And we can do it day in, day out, and that is what we think is special about PECO in terms of a financial return basis. But what actually I think is really special about PECO is the fact that we take our center, we create a community, and we change the community. When we own a center, it changes the community around it. we we upgrade we upgrade it you know consistently and we we create a better environment which then helps communities that that were that we go into and that is a part of our story that is not looked at you know because because we're in a financial way the financial analysis part um so i think that's part and then the other part is when you know we we build a team over you know 30 years when when our president retired the person replacing him had worked for us for 25 years the person and we we have a really strong team that has this this more alpha part creates opportunity because we're constantly you know buying property turning properties around creating new new centers out of kind of not-so-good centers and that that creates you know an excitement and it it it it challenges people and that we think is is part of what the success that the companies had because it yes we we do really good numbers we have the best numbers in the thing but that's not why we're doing it we're doing it because we have the best team in the market we're going to continue to grow that and I think that's going to continue to to create that alpha that what we're talking about.

Andy Li, Analyst — Wolfe Research

All right, awesome, I appreciate it.

Jeff Edison, CEO

Thank you so much, Don and Jeff. Yeah, thank you for doing it. Thank you.