Release Date: July 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Phillips Edison & Co Inc (PECO, Financial) achieved a record high inline leased occupancy of 95.1% during the second quarter.
- The company reported strong leasing spreads, with new lease spreads at 34.4% and renewal rent spreads at 20.5%.
- PECO's portfolio occupancy remained high at 97.5%, with anchor occupancy increasing to 98.8%.
- The company reaffirmed its guidance for $200 million to $300 million of net acquisitions for the year, with a targeted unlevered IRR of over 9%.
- PECO's balance sheet remains strong with approximately $743 million of liquidity and no meaningful debt maturities until 2027.
Negative Points
- Higher year-over-year interest expenses impacted the company's financial results.
- Same-center NOI growth was 1.9% for the quarter, partially offset by lower tenant recovery income and higher property level expenses.
- The company faces challenges from high inflation, high interest rates, and global conflict.
- PECO's reserves for uncollectibility remain at the high end of their guidance range, indicating potential issues with tenant payments.
- The market still gives a low probability of the Kroger-Albertsons merger occurring, which could impact PECO's portfolio.
Q & A Highlights
Q: Hey, good afternoon to you guys. Thanks for taking my question and congrats on a strong quarter. My first question is on the new joint venture with Cohen & Steers. I guess help us understand why now. You have low leverage as you indicated, you have an attractive cost of capital, attractive spreads, and you're achieving IRRs above your underwriting doing so on your own balance sheet. So why would the economics here on Cohen & Steers be willing to own? Thanks.
A: Hey, thanks for the question. I'm sure we'll probably get a couple of those today on that issue. The reason is, I think, it's simple. We've been in the fund business for a long time. I mean this will be our ninth JV that we've got, and we see it as additive to our growth. As you know, we've got a very strong and aggressive growth strategy. This allows us to cast our net wider. And in casting the net wider, hopefully, we'll be able to grow at an additional pace. And if you look at our first acquisition as an example, it was a project that didn't meet our underwriting for the balance sheet. But it worked very well for the Cohen & Steers JV. So it allowed us to buy an additional project that we wouldn't have bought otherwise. And so as we look at that, that will increase our growth, and it does underwrite to our numbers in the JV where it didn't as a balance sheet item.
Q: Great. Great. Thanks for that. And that leads me to my next question. Maybe a bit more color on the type of assets that you're targeting and anything you could tell us about the return hurdles. It sounds like they're a bit lower for on balance sheet. So maybe a bit on -- is there anything geographically type of asset size, profile? And then maybe some more color on the targeted returns you're going after here. Thanks.
A: So in terms of the details of what we're buying, we're going to leave that to Cohen & Steers to talk about that. It is their process. They've got 80% of the investment. For us, the key thing for us is that we won't be in conflict with our balance sheet stuff. We're expanding our net so that we can buy more. And these are things that would not fit in our underwriting on the balance sheet. And that's how we are thinking about it.
Q: Hi, everyone. Bob, I think you mentioned that leasing interest is as high as ever. I don't know if you quite used that term, but high. So I guess when you say that, what stats are you looking at to make that statement? Is it a number of deals in the active discussions? Is it square footage based? And it actually feels like those number of deals would have to be lower than in the past given your high occupancy, but maybe not. So just wondering if you can talk about what types of stats could support the statement that leasing is not showing signs of slowdown? Thanks.
A: Yes. I really think three key points. And I think it's, one, the retention. So our retention at 89% and our inline retention above 85% is very solid. I'm not seeing any slowdown in that. And really, it comes through with our new leasing spreads of 34%, our renewal spreads of 20.5%. Health ratios for our neighbors continue to be right around 9.5%. And coming out of Las Vegas and our national account program, the demand is at all-time high, and retailers are still looking for sites in 2025, 2026, and 2027. So even though our occupancy in line 95.1%, we still feel there's another 100 basis points, 150 basis points there of growth and inline because there's just no new supply out there. And the demand for being in the number one, number two grocery-anchored shopping center is where they want to be. So I don't see any slowdown.
Q: Got it. Okay. And then, John, on the bad debt side, I think you mentioned something along the lines suggesting you're being maybe less flexible with wavering tenants. Can you give some more detail on how that process maybe normally works, for example, when someone isn't paying on time and how PECO is handling it differently today given the high occupancy and new rent spreads potential?
A: Sure. Thanks, Caitlin. So it did improve sequentially as we anticipated that it would really from our position, given the strength of the environment that Bob has talked about and the opportunity to improve the merchandising and ultimately, the rents in our centers. We're not in a position where we're talking about payment plans or things to what we're actually trying to do is move more quickly to recapturing that space. And then that takes a little bit of time depending upon their willingness to do so. But we do think that, that ultimately is the right decision given the demand and the rates that Bob is referencing. Ultimately, from an uncollectible standpoint, we feel really good about our neighbors. Actually, our latest review says that our neighbors have a FICO score of 745. So we feel very positive. We're at least cautiously positive on our neighbors. And we are very diversified, again, outside of our largest individual -- outside the grocer, the largest individual neighbor is T.J.Maxx at 3%. And our watch list is actually just inside of 2% now, I'd say it's closer to 1.5%. So we're feeling really positive and continue to improve the portfolio.
Q: Great. Thank you. Good afternoon. I guess my first question is focused on the same-store NOI guidance. I think year-to-date is 2.8%. The guidance is 3.25% to 4.25%, which would mean there's meaningful acceleration in the back half of the year. Can you talk about the drivers of that acceleration? And is this correct?
A: Thanks, Jeff, for the question. John, do you want to take that? Sure. Thanks, Jeff. So in the quarter, we grew by 1.9% and you're right, 2.8%. And it was really impacted by a later recovery income, which is it's just a timing variance based on the mix of spend in both the quarter and year to date. So we do anticipate based on the time of those recoveries for an acceleration in the latter half of this year. And ultimately, we will continue to grow minimum rent. I mentioned that reserve for uncollectibles has improved and so we were able to exceed 95% in-line occupancy for the first time ever just highlighting that continued strength of our neighbors. So ultimately, we are seeing that. But I think we're talking about small numbers here in the more important pieces, we feel good about our reaffirmed guidance range.
Q: Great. Thank you. And then one follow-up on the JV. To confirm, are you leveraging the existing platform? Do you
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
