Conference Transcript - PECO 2026-03-02

Speaker 4

I'm Craig Mailman with City Research, and we're pleased to have with us Phillips Edison and CEO Jeff Edison. This session is for city clients only, and disclosures have been made available at the Corporate Access Desk. To ask a question, you can raise your hand or go to liveqa.com and enter code GPC26 to submit questions. Jeff, we'll turn over to you to introduce your company and team, provide any opening remarks, tell the audience the top reasons an investor should buy your stock today and then we can get into Q&A.

Jeffrey Edison, CEO

Sounds great. Welcome everybody. Thank you for making it out here early this morning. We hope we're worth your getting up early. With me is Bob Myers, our president, and John Caulfield, our CFO. And the reason we think to invest in PICO is the same reason it's been for a long time. We are a company that has very strong internal growth from our properties, which is a very high-quality portfolio. We also have a strong acquisition and development and redevelopment program, which give us external growth. So that internal growth and external growth are engines of being able to grow our FFO per share. At the same time, we're focused on necessity-based retail. we're focused on that neighborhood shopping center close to your home where you buy your necessity goods so it's a very stable a business and has been stable through multiple cycles and so when you when you put those two together you've got the the alpha of the internal and external growth but you've got a very low beta and we think that's the premise for investing in Pico Second largest landlord for with about 65 centers we have a very strong philosophy and discipline in our acquisition strategy where we believe that format drives results Jeff touched on it but our average shopping center size is 113,000 square feet we're not in the power space we are necessity goods and services our average inline space is 2,500 square feet that's very strategic for us to do that

Speaker 3

because that gives you the most opportunities to lease those spaces. It's a lot easier to lease 2,500 feet or 1,200 feet than it is 25,000 to 30,000 feet. You'll see when you look at our stats that we have the highest occupancy in this space at 97.3% and our in-line occupancy at 95.1%. Our anchor occupancy is currently at 98.7%. So we have a lot of pricing power. We have the best leasing spreads in the space, the best renewal spreads. We're seeing renewal spreads over 20% currently, and we've delivered on that for the last three or four years. And the visibility that our team has looks very favorable, even increases above and beyond that. New leasing spreads have danced between 30% and 35%, depending on the quarter. What's so great about having high retention with the quality of portfolio at 93% is you don't spend much capital at all to retain them. you have the pricing power. I believe last quarter we spent $0.24 a foot, you know, and that's very different than spending $50, $60 a foot to retenant somebody. So we have the benefit of pricing power, and that's the integrity that Jeff spoke about in terms of our portfolio.

Speaker 4

And that's helpful. I mean, your rent spreads are very strong. I guess one of the pushbacks I always get from clients just about the retail backdrop is generally across the board, right, given the supply backdrop, the demand backdrop, clearly you guys feels like outpunching the competition and the ability to capture the value in your centers, but it's still a pretty fragmented industry. Kind of what do you view as the impediments as you talk to tenants about driving that even further? And maybe what are some of the non-monetary considerations you guys are getting in lease negotiations today versus five to ten years ago that we don't necessarily see fall to the bottom line, but inured a value of the center or opportunities you guys have over time to unlock value?

Jeffrey Edison, CEO

I'll take the first one and then Bob jump in. So there has been very little construction in our space for a long time and that has been one of the big drivers for our ability to drive occupancy to record levels for us and we have the highest occupancy in the in the shopping center space primarily driven by the well not all driven by the demand that our retailers have for being in the number one or two grocery anchored center in the markets that that we're in and that That has given us pricing power, and what, as you referenced, what that's allowed us to do is to have the largest leasing spreads both on renewals and, but also new leases as well, and that is a powerful driver of our ability. The reason that they're not, we're not able to do that all at once is because we obviously have lease terms that are staggered and that it's that period of time that we're bringing everyone to market uh but we have uh you know we we anticipate that continuing because of the strong pricing power that we have yeah just to add on to that a little bit you asked a couple different questions there what are some of the non-monetary items that we're seeing so we renew about 600 neighbors every single year through our our cycle and again you know the retention is 93 3%, the renewal spreads have been 20% with above 3% CAGRs.

Speaker 3

What's been very helpful in that, in the renegotiations, you now have flexibility where you can go back in and you can renegotiate either options, can caps, restrictions, exclusives, no-build You're able to free up a lot of that as part of the leverage and negotiation. So we're very focused on doing that. that will allow us to continue to move our overall occupancy our inline occupancy another 100 to 150 basis points and what we're finding in terms of having leverage sure there's no new supply coming on the market that's really competing with us but our necessity-based focus with fast casual health and beauty services med tail is really where those neighbors want to be with the number one, number two brochure. And what we've been very focused on is making sure that our neighbors are profitable. And one thing about profitability is you got to make sure that the rents aren't crazy high. So our rents on average for in-line are $27, $28 a foot compared to some of our peers that are $40 to $50. It's easier to take an increase from $27 up 20% over every three or five year cycle versus starting at 40 or 50. Our average health ratio for in-line neighbors is 10%. We feel that we can gradually move that up to 11, 12, and 13 while keeping our neighbors very profitable.

Speaker 4

So what does that imply on the breakout between the grocery tenant versus your in-line to get to that and bring that 10 up to maybe 11, 12, or 13?

Speaker 3

Yeah, so our grocer's health ratios are approximately 2.3%. Yeah, so my comm is very specific on our in-line neighbors. Yep, that would be right around the 10%.

Speaker 4

Okay, that wasn't a blend. That was the in-line guys. You got it. Thank you for clarifying. And on the option side of things, what are you guys doing with the grocery-type tenants versus in-line? because I know this has been one of the issues is everyone's got this huge mark-to-market, but when you have multiple extension options, we might not be here to see that mark-to-market realized one day. So as these kind of anchor boxes are rolling, what are you guys doing?

Jeffrey Edison, CEO

And how does that negotiation go with some of these tenants that are used to controlling that box for 20 years with minimal kind of bumps as they go along we when you look at the layout about 28% of our income comes from the grocer and we consider that effectively a flat rent and it will be flat with their full control for you know 10 to 30 years depending on the least term so we're not going none of our projections anticipate getting that space back or getting that space and and be able to do dramatic rents bumps. Our focus is on the small store space outside of that grocery anchor and that's where we get our growth and that's what we're when we talk about the rent spreads that's where we're able to get and move those those rents which you know allow us to have you know what we what's our target which is we want to be able to deliver mid to high single-digit FFO per share growth, pay a 3% to 4% dividend, and, you know, have, you know, a 10% to 12% annual increase in value year in, year out with, you know, a relatively low beta investment. That's our thought process through that, and all of that includes that anchor structure that we have today. And then just kind of shifting gears a little bit, you talked about on your business update you know being able to buy 300 million dollars with no additional equity stock in the group have been kind of trading strong here would you issue equity today at these levels we're a lot closer than we were let's say four weeks ago five weeks ago it's still a little little early for us but it certainly is an option um the the beauty is it's it is the way we think about it is not can we raise the capital it's where can we uh match fund the capital we raise with really good investments that will give us that long-term growth and and give us the the a wider breadth of uh of a portfolio that's what we're looking for so it's it's it's they're all the you know as you know they're They're all the pieces that are part of where you get your capital, but they're really driven by the acquisition market and what we can find that really will make our portfolio better. And that's what we're looking for. And we'll continue to have that be the driver of our capital. But it's a little nicer to be closer to where you'd be interested in raising capital than we were shortly, a little short time ago.

Speaker 4

And the market's pretty competitive, right? The private guys are back in looking to buy. And so, you know, you earmarked $300 million. What's the visibility on that? And I guess that dovetails back to, like, you would seemingly issue equity if you're going to outpace that significantly, right? And it gives you more runway. So what do you feel like the visibility is on that 300 you talked about? Are you finding more that fits the buy box that would maybe have you guys look at equity today? Even maybe just walk through the opportunity set.

Jeffrey Edison, CEO

Yeah, so we've targeted $400 million to $500 million of acquisitions this year. So $450 million at the midpoint, let's say. We can do 300 of it without going back to the markets using just free cash flow and the growth in the rest of the cash flow. So I would say that we feel good about the guidance. Whether we can outpace the guidance will be driven by the market and what comes to market and what we see as opportunities there. So it's a, the market will drive our, the acquisition market will drive our decision. But as you point out, the private markets have been, are very aggressive on pricing right now in terms of what they're buying. And we're not, we've been doing this for 35 years. We're very disciplined in terms of what we buy. And if we can buy it, we'll buy as much of it as we can. And if the pricing gets outside of where we, we won't buy it. It's been kind of that simple over a long period of time. But it takes a very disciplined plan to do that. And these other pieces, like when we're raising equity and debt and all the rest, they're really driven by the acquisition machine we have, but also what the market is.

Speaker 1

Maybe I'll jump in here. I think part of it is the market is extremely large, and that ultimately in the grocery anchor number one or number two, there's approximately 5,800 centers that would fit our primary criteria, you know, valuation notwithstanding. And then we have everyday retail centers, which we've begun talking about as well, which have over 50,000 opportunities in markets that we already are in. And so, yes, there is greater volume in the private transaction market, which also tells us that we believe there continues to be opportunities in the public markets for improvement and closer to where we believe the value of our portfolio is. And so as we look at these opportunities, we do think we feel very confident in our ability to hit our acquisition targets and exceed those. But we are disciplined buyers. We buy our grocery-anchored product to a 9% unlevered IRR. Every asset we buy clears that 9. On the everyday retail, it clears a 10% IRR. And we're very successful at that. We've bought over a billion dollars in the last five years, and all of those are above those numbers and actually exceeding their underwriting. So we feel very good about the opportunity set there. And as Jeff was saying, we look to match it to the best cost of capital that we can.

Speaker 4

And to get that nine or ten, depending on the asset you're hitting, um what's kind of the going in cap rate you need given your underwriting on rents and your platform's ability to lease things up maybe better than some other one um kind of where where's that going in versus maybe where you estimate your cost of capital is today blended either debt or equity or or straight up debt i'll go ahead and take that one so we've to what jeff and John has already discussed I was going back through our numbers we looked at 600 deals last year that and we ended up underwriting about 300 so yeah the

Speaker 3

the markets a little bit more competitive now but we're also seeing a lot more opportunity the 600 last year in the 300 we under wrote was double what we saw in 2024 what's interesting about what we've seen so far in 26 is we've closed on 77 million I believe through January and we have another pipeline that we've been awarded of another 150 to 200 million that will close by the early second quarter. So we're off and running. With that being said, even though we underwrote 300 deals last year and saw all over 600 opportunities, I've seen a 70% increase in the opportunities this year. So we're going to continue to see opportunities. John touched on our return thresholds. We've seen a lot of success in what we've acquired year-to-date. We are disciplined buyers we stay in our box in terms of delivering the nine percent the ten percent unlevered returns so we do feel like we're a very good spot to be between four and five hundred million we're seeing all the opportunities and we're well positioned in terms of cap rates if you look at what we've acquired you know in 2000 I believe it was 23 we averaged about six six we were six seven and 25 and 24 and then our everyday retail has been dancing right around a six nine now we look at deals all the time there's some that are five and a halves five seven fives there's some of their seven seven and a half so it all depends on the amount of vacancy and the occupancy lift and whether or not we feel like our team can execute to get it you know above a nine or a ten I will share in our everyday retail category we own about 180 million it's early days for us we have nine so far and over the last two years we've already moved the needle from 92 percent occupancy to about 96 percent we're also seeing exceptional new leasing spreads at 45 percent and renewal spreads of 27 percent our average cost per center to around 320 dollars a foot we like that space those opportunities have serious alpha associated with them, and in some cases the centers that we're acquiring are 80 percent occupied, some are 90, and some you're even a hundred that have mark-to-market opportunities. Those assets will generate in some cases between four and a half upwards to nine percent in OI growth over the period.

Speaker 4

So when you blend that with our other existing portfolio, which we delivered 3.8 on last year, it's a really nice recipe for a lot of growth in alpha in our organization and I guess that you know since the financial crisis the read industry's been very focused on bringing debt to EBITDA down running at a lower leverage balance sheet but you guys had a extensive history in the private market right and so you've seen both sides of things I guess from a high level the debate internally maybe about what the right leverage number to run at given you know you guys are going in close to a seven so the LTV at a five times debt EBITDA is different than if you're a five or six cap buyer right and just as you compete with the private guys who run at higher leverage I'm just kind of curious about the intellectual debates about where the right leverage number is versus maybe where public investors feel like you should be trading and it you know I know it's a little bit dogmatic on our side since the GFC but I don't know any any thoughts on that yeah I think it's a it's it's a great question it's a little frustrating right now to see some of the private equity firms looking for 18 to

Jeffrey Edison, CEO

20 percent returns on their equity using 65 70 percent leverage and competing with us. They love our product because it does have growth, but it's also very stable so they can leverage up quite a bit. That adds some competition, particularly for the portfolio deals that are out there. They don't tend to mess with our markets that much. We're individual buyers of assets. That gives us a ton of power in these markets. So I don't think that's a big problem. But I do think that our view on leverage is, you know, it's part of our low beta thing. So whether it is 30% or 40% debt, does that change the risk profile? Probably not. But, you know, it is where the market is today. And I think it's very important to make sure that you were in that part of the market so that you so that there's a relatively even comparison because we all know it's really expensive to deliver and and those that have done it has it's you know in have gotten out of whack that that's been a real problem so unless the investors say look we want more leverage we're we are where we're going to be in in that you know mid to although there are 5% to 5.5% debt to EBITDA.

Speaker 4

We did have a question come in from the audience. Do you have any interest in the out-parcel, on-street, slash convenience asset type, multi-tenant, not single-tenant, as a potential growth to your acquisition pipeline buy box, similar to curb strategy?

Speaker 1

That is the everyday retail that we talk about.

Jeffrey Edison, CEO

And so, yes, we do have interest in it. we we actually spoke quite a bit about it on our business update and we think that there's a great opportunity there we can buy a billion dollars over the next three to five years it is a different product I wouldn't put it directly in curbs basket we don't compete with them very often in terms of product on we we're we look to buy properties where we can use that are close to existing properties where we can use the pico machine to create value not just buy assets that will have a certain cash flow, but actually be able to take it, re-merchandise it, add capital. You know, we're spending capital on these properties. We're trying to, you know, to get to a 10, you've got to be working the properties. And, you know, if that market's more of a 7%, 8% unlevered IRR business from what we've seen than, you know, than where we are. So that's our, we have a slightly different strategy there.

Speaker 4

I know we've hit the acquisition side a lot. Maybe on the dispo side, what you guys are seeing there, kind of what your focus has been on and some of the cap rates you're getting to kind of redeploy into new investments.

Speaker 3

So last year we sold about a hundred and forty five million every year we've always sold a handful of assets either risk-adverse assets or what I would consider flat assets that were a hundred percent stabilized when you look at what we're selling that's exactly the profile it's going to have a little bit of both in it some of the assets that we've already stabilized that are generating a forward-looking IRR of a six and a half seven you know we're looking for more growth than that that's why we're focused on recycling that capital into buying new acquisitions that will deliver the 9 to 10 percent I think this year it's likely to think that we would sell between a hundred and two hundred million there's a lot of demand out there so we're testing the market cap rates that we're seeing on the product we're taking range from five to up to 6869 just depends on the market the anchor and so forth you guys have as you kind of said the beta with some of the alphas you guys kind of look at the model um you have the strong underlying sustainable growth but where's the upside maybe as you guys look at the algorithm i know external

Jeffrey Edison, CEO

growth is one of them but where is the kind of the real opportunity to push for investors Well, I think the real opportunity is really the macro dynamics of our business, which is there's very little growth anchor, shopping center space being built. We own some of the best, and we're buying other parts of it. And we've been able to sort of redefine a little bit of the REIT markets in terms of where you can go to create really strong returns. and that will but with with limited risk and that's where you know when when you when you can go into Cincinnati and buy the number one or two grocer in the market and and and pay significantly less than what you'd have to pay in you know LA or here or here yeah or here the there are you know we've been able to sort of expand that and that gives us the the opportunity to find better returns with still with very with very low risk and not all businesses can can apply to that because they are different in different markets the number one or two grocer is is sort of a if you have the number one or two grocery you have a basically a monopolistic position on the on the on the market where if a national retailers coming into that market that's where they want to be they want to be next to the one or two anchor or grocery anchor and that has been a sort of the we think that's what's allowed us to get the kind of returns we have and we and it's you start to you're starting to see some of our peers sort of step into some of that a little bit who have who have sworn it off as the end of the world if you ever have to do that it's what we've done for 35 years we know those markets we know how to how to actually make a lot of money in those markets and with with less competition and that's what that's one of the things that is I think gives pico that ability to have outsized growth while maintaining that low beta good job not naming names on the those companies pivoting well we've been we've been getting abused by it for a while so it's kind of like all right well maybe you know can't be enjoyed yeah exactly as you guys look

Speaker 1

at kind of guidance for the year kind of what gets you to the low end and high end so I'll take that so ultimately I would say continue to strengthen the consumer you know getting to our economic occupancy faster moving neighbors in in sooner continued strengthen our spread as Bob said we've We've seen renewal spreads over 20% in our pipeline, which looks out for, you know, another six months. It continues to be that strong along with new leases out. I would say strengthen the acquisition market and really, you know, perhaps better going in yields relative to that cost of capital. I would say all of that is going to, would help us to get to the higher end. Lower end, it would be, you know, more disruption from the consumer, perhaps slightly higher bad debt. but again even on bad debt i mean it was just under 80 basis points last year this is a very low beta profile i would also say when you were talking about with leverage and things like that going back to the gfc and the pandemic the occupancy loss is meaningfully less than anyone realized so ultimately we lost 60 basis points of occupancy in in the pandemic we lost close to a point and a half like one and a half percent in the gfc that's all and it was both of those were recovered within 12 months so I think that's part of what everyone realizes about the strength of grocery anchored shopping centers is that that lower beta profile so we actually feel really good about our guidance numbers for the year and actually you know each year we understand the the opportunities to exceed expectations and that's what we're on our path to do and on the watch list you know how does that look this year and as you think about too as you guys kind of blend more towards everyday retail without the anchor kind of do you feel like that conversation becomes less important for you guys or at least on the margin right versus some others i think the watch list is always something that has been we kind of you know entertain the question but i mean we just don't have concentration outside the grocers our job is to make sure that that grocer is present and healthy and happy um and but ultimately we just don't have concentration Our largest non-grocery concentration are the TJ Maxx brands at 1.3% of our rent. So ultimately, we don't have exposure to those large pieces. As we bring in everyday retail, ultimately, part of the beauty of that is that it is where we know our business. It's ultimately... That'll wake us up, right? Ultimately, it's more neighbors to our platform. And we believe that you know our guidance is 60 to 100 base points of bad debt And we think it'll be right in there But ultimately giving us a chance where we know this portfolio can deliver three to four percent same store growth on it on an annual and long-term Basis we think that if you increase the everyday result there's an opportunity to actually increase that And that's all even with the you know the bad debt profile. So that is a part of the strategy is to to avoid having a large watch list.

Speaker 4

I'm going to pivot a little bit to AI. Hopefully it's smooth. You guys have, as you said, a more defensive portfolio. One of the big topics in retail has been agentic commerce and the impact on brick and mortar from that. What's your views on that?

Jeffrey Edison, CEO

How do you feel your assets are positioned if that shift continues to happen well the there has been a consistent sort of headwind for retail for a long time and and you know starting with the sort of internet and and and shopping online and and that piece uh the i think i think it's kind of been it's a lot of that conversation has been eliminated because of the real realization that uh customer acquisition um is very expensive uh online um that is one of the reasons that the grocers have moved to both this one of the reasons the the that they moved to they'd much rather have you shopping in their store and the consumer's kind of gone along with it saying that is actually what i want i do want options i want to be able to get my stuff i'll order my stuff online i want to be able to pick it up to the store but i also really want to be able to shop in line so that that's sort of taken that part away um uh what what what is what's ai going to do on top of that um we the there'll be a lot of you know sort of uh supply chain issues that will be that AI will become a very important part of we hope that will drive down costs drive up margins for the retailers which would be you know which would allow them to pay more rent which would be a very positive thing the but the you know disruption that you're we're going to see and I think a number of other areas is probably going to be less there in the uh on on the retail side from from our from our view and uh um you know and then from a pico perspective uh you know we we have we've had a data analyst for i think seven or eight years in inside pico helping us to use our data to make better decisions and um for us ai is just sort of taking that and stepping it up a you know a notch and we're we have 21 ai projects going right now inside the inside the company uh we are uh you know we're we're committed to using it as an important part of of the of running the company part of it um not not the retailers uh part of it but there are there are tremendous um opportunities we think there to make the company more efficient and better in areas using AI. And that's why we've committed to it. That's why we've committed, you know, literally for as long as PICO's been around, we've been heavy investors in technology, and this for us is the next step. And it's a very promising step. I mean, I think there's some really interesting things that we're pretty excited about that will help us to be even better than we are.

Speaker 4

And we're excited about that. perfect and then just on on our rapid fires here what do you think same store for the retail group will be next year 4% and then M&A more fewer the same amount of companies this time next year here and quit one more quick one who do you got do you have one particular kind of platform of AI that you prefer over Where are the others, like Google, OpenAI, Anthropik?

Jeffrey Edison, CEO

We're using Microsoft. Microsoft? Awesome. And it's a bet that a lot of people, you're having to think through the bet on who's going to be the survivor. Our bet is that Microsoft will be one of the survivors.

Speaker 4

Thank you guys so much.

Jeffrey Edison, CEO

Thanks, everybody. Thanks, everybody, for coming.