Q2 2021 Phillips Edison & Co Inc Earnings Call

August 6, 2021

[music].

Good morning, and welcome to Phillips Edison and company second quarter 2021 results presentation. My name is Josh and I will be your conference call. Operator today before we begin I would like to remind our listeners that today's presentation is being recorded and simultaneously webcast. A replay of today's presentation will be.

Available. This afternoon on the investors section of the Phillips Edison and company website at Phillips Edison Dotcom slapped backslash investors E <unk>.

Company's earnings release quarterly financial supplement and 10-Q were issued yesterday August 5th after market close. These documents are available for download on the investors section of the Phillips Edison Company Web site at Phillips Edison Dotcom Backslash investors I would now like to turn on the call over to Michael Taylor.

Phillips Edison and company Sir Please proceed.

Thank you operator, good morning, everyone and thank you for joining us I am Michael Taylor, Vice President of Investor Relations with Phillips Edison <unk> Company. Joining me on today's call are our chairman and Chief Executive Officer, Jeff Edison, Our President Devin Murphy.

<unk> and our Chief Financial Officer, John Caulfield.

This is our first earnings call as a publicly traded company during today's presentation, Jeff will provide some background on Phillips Edison's 30 year history, and our unique and differentiated strategy. Jeff will also discuss our transformative underwritten initial public offering that closed on July 19th 2021.

John will then review, our second quarter operational and financial results, our recent capital markets activity and discuss our guidance.

Jeff will then return to provide an update on acquisitions and recap our long term growth strategy.

Following our prepared remarks, we will answer questions from the institutional analyst community before we begin I would like to remind our audience that statements made during today's call may be considered forward looking which are subject to various risks and uncertainties as described in our SEC filings.

In addition, we will also refer to certain non-GAAP financial measures information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in our earnings release and supplemental disclosure issued yesterday, which are available for download on our website with that it's my pleasure to turn the call over to Jeff Edison, Our Chief Executive Officer.

Jeff.

Thank you Michael and good morning, everyone before we get into our results for the quarter I would like to provide a brief overview of Phillips Edison speak to our differentiated strategy highlighted our portfolio and review our growth plans.

We were 1 of the nation's largest owners and operators of neighborhood grocery anchored omni channel shopping centers.

We've built on a fully integrated operating platform for 30 years. Our team is on 300 associates is experienced engaged and competitive.

Our senior management team has an average of over 27 years experience and 14 years with Pico.

Our bench is broad and deep.

This team has successfully navigated numerous business cycles, we brought our first center in Danville, Virginia, and 1991, which had a net operating income of $260000.

Today, we have 294 properties and an annualized net operating income of over $350 million.

Importantly, this team is also aligned with shareholders every associate who's been with peak over 1 year on stock in the company. They think like owners I personally have never sold a share of Pico and Pico leadership owns approximately 7% of the company, it's hard to find better alignment to having meaningful skin in the game.

Jim.

Our mission is clear and it's been consistent for 30 years, we create great omni channel grocery anchored shopping experiences and we improve our communities 1 center at a time, where grocery centered and community focused.

1 thing that you may hear during this presentation today is that we call our tenants our neighbors.

Why do we call our tenants our neighbors.

Because we work hard to create community at our centers and we treat our retailers as neighbors in that community. We believe in customer service and think it helps to remind the organization to treat our tenants like we would our neighbors.

Our strategy is simple we own and operate grocery anchored neighborhood centers, our centers or temper typically an open air Center. That's 3 miles from your home. It sits at the corner of main and main not exit 15 on Interstate 80.

It has a 45000 square foot grocery store and has opened 24 hours a day you shop, there twice a week.

And then any other retailer you visit.

This is a center you run 2 when you forget ketchup and Youre grilling burgers for dinner.

In addition to groceries you can also get a lager necessity based goods and services from the 65000 square feet on small store shops in our centers take haircuts dry cleaning fast food fitness and medical think Starbucks Chipotle Orange theory, Walgreens and Wells Fargo.

Our centers are not where you go to get your electronics for home improvement goods discount clothing sporting goods are office supplies, those or power centers, they're usually twice the size of our centers.

As you would expect these 2 types of centers are very in very different businesses and have very different economics.

We get 35% of our rent from our grocers on average our customers come to our centers nearly 2 times a week, we have limited exposure to big box retailers, we have pricing power in leasing.

Historically leasing demand has been consistently high for 'twenty 100 square foot average in line spaces.

Our capital requirements are significantly lower for keeping our centers fully occupied as well.

We focus on owning centers with the number 1 or 2 grocer within the market on.

Neighbour base with Omni channel strategy, where the growth rate is both buy online and pickup in store, our focus and home delivery capabilities.

It has high exposure to nabors, selling necessity based goods and services in a trade area with favorable demographics for our neighbors to be successful.

Each of these components are critical to our success.

When it comes to our centers, we believe that format drives results. Our average center is 113000 square feet, which is the smallest in the REIT shopping center universe, we own smaller centers and targeted neighborhood locations.

Our centers creative positive leasing dynamic and align well with retailer demand, we see retailer demand is concentrated in smaller footprint stores, considering the average size of our in line Nabors 'twenty 100 square feet. We believe our centers are best positioned to meet retailer demand.

Our smaller centers allow for better growth because of our high retention rates and high re leasing spreads.

Our retention rates averaged 87% between 2017 and 2020.

High retention rates result, in less downtime and lower Ti cost.

This leads to higher NOI growth.

From 2017 to 2020, our average cash re leasing spreads were 8.8%, providing a meaningful avenue for NOI growth.

Over the past 3 calendar years, our total capex, including development and redevelopment spend as a percentage of our NOI has average just 20%.

Our smaller format centers in lower exposure to secondary anchors require less capex than other retail real estate.

Lower capex leads to higher <unk>.

73% of our ABR comes from neighbors that offer necessity based goods and services. This means that we have limited exposure to high risk retail categories like apparel department stores and home furnishings.

Yeah.

The top markets in our portfolio, our Atlanta, Chicago, Dallas Minneapolis, St. Paul in Denver, but we don't think about markets. This way we don't compete in Msas, we compete at the neighborhood level on the corner of Indian School Road in North 28th Street in Phoenix in the corner Vierling drive and Marcia Road in many.

Hapless.

We target trade areas, where our grocers in our small stores can be successful. Our average population density and median household incomes mirror that of Publix and Kroger are top 2 neighbors, we make money, where our top neighbors make money.

Our 3 mile demographics as you would expect are typically of the average American suburb. We have 61000 people with a median household income of $68000 and our average 3 mile trade area.

Our shopping centers provide necessity based goods and services to the average American.

Our portfolio was bill 1 asset at a time, we purchased 280 centers for over $4.7 billion between 2012 and 2018 on average we bought over $670 million of properties per year. During this timeframe.

More recently, we were the largest acquirer of neighborhood centers, among our peers between 2018 and 2020.

Acquisitions are an important part of our growth story.

The following are pickles key drivers of growth.

Growing rents is the pace of our internal growth strategy over the last 4 years, we have had sector leading leasing spreads.

We lease up vacant space to new neighbors at June 32021, we were at 96% inline occupancy. We believe we can continue to increase this overtime.

We have built in rent bumps from inline neighbors, we've been able to build at least 2% rent bumps into approximately 80% of the new leases. We have written this year. In addition to our strong releasing spreads.

We execute redevelopment opportunities. These are primarily made up about parcel development opportunities, where we can build single tenant or multi tenant space on the existing or acquired land. These are on average $2 million per project.

Our redevelopment opportunities also include tear down and rebuild opportunities with our grocers, we're targeting an average of 9% to 11% incremental underwritten yields on these projects. Our current projects are expected to deliver on average underwritten yield between 9.5% and 10, 5%.

As I noted we have a strong track record of growing through acquisitions, we selectively acquire new assets that fit our focus strategy. Our plan is to purchase over $1 billion of assets over the next 3 years.

Pico has grown consistently for 30 years and we've built a platform scaled for growth. We also have a best in class balance sheet debt positions us for growth.

We believe that there are also macro demographic and economic tailwind in our markets, which will augment the growth.

These include the shift to work from home debt.

Population shifts to the suburbs into the Sunbelt, where approximately 50% of our properties are located and the consumers buying locally.

We believe our strategy generate superior risk adjusted returns our targeted acquisition strategy and lower profile trade areas allows us to purchase properties at initial yields 50 to 100 basis points higher than at coastal markets.

We upgrade and remerchandise centers, we acquire this lowers the risk of our properties and creates income growth and value.

Better going in yields plus better growth plus lower capex leads to superior returns.

Importantly, our portfolio has performed well in up cycles and proven to be resilient in down cycles. This delivers more alpha and less beta to our shareholders.

Throughout our 30 year history, having access to low cash cost of capital has been a key driver to our success.

On July 19, 2021, we completed our underwritten initial public offering issuing 19.5 million shares of stock at $28 per share generating $547 million of gross proceeds.

This capital gives us the strongest balance sheet in the strip center REIT space with a debt to adjusted EBITDAR.

The ratio of 5.5 times.

With this balance sheet capacity, we can add external growth to the internal growth we generated year after year.

The IPO was a major milestone for our company, but it is the beginning and we remain focused motivated and committed to successfully executing our strategy.

With that I will now turn the call over to our CFO John Caulfield.

John.

Thank you, Jeff and good morning, everyone on.

Our results continued to benefit from the reopening of the economy as 100% of our least ADR is open for business for the second consecutive quarter.

Leaf portfolio occupancy totaled 94, 7% compared to 95, 6% at June 32020.

Currently occupancy totaled $96, 8% inline occupancy totaled 96% leased occupancy to economic occupancy spread was 60 basis points for the quarter.

During the quarter, we executed 124, new leases and 174 renewals and options totaling 1.4 million square feet.

Comparable new lease rent spreads were 18, 5% and comparable renewal rent spreads were 8%.

Combined rent spreads or 10, 4%.

Our in house leasing team has been busy executing new in line leases with neighbors like the EPS door Jersey, Mike's Wingstop, Popeye and Starbucks demand from retailers to be in our well located grocery anchored centers continues to be on illustrated by our strong leasing metrics and our 85, 5% retention rates on the quarter.

We continue to be optimistic about the long term growth prospects.

Collections during the second quarter of 2021, we're 98% of our Mercury government and we're on the cusp of reaching our pre Covid collection levels, which were typically between 9900%.

Covid validated our thesis that our necessity based portfolio performed well in the good times and outperformed in the challenging times.

Our first quarter 2021 collection increased to 98% up from our originally announced and you're at 95% in fourth quarter 2020 collection increased to 97% up from 95%.

As of June 32021 are outstanding balance Sterling was approximately $12 million a day.

Figure approximately $5 million to be collected on your executed payment plans, we continue to work with our neighbors in order to collect on Paypal it.

The $12 million of Pittsburgh represents less than 3% of our total balance since April 1.2020.

Our second quarter core FFL increased 24, 3% to $64.3 million on a per share basis core <unk> increased by <unk> 10 per share to <unk> 50 cents per diluted share during the second quarter of 2021.

The increase in core ex herself in the second quarter was driven by improved collections and lower interest expense.

Core <unk> per share also benefited from fewer shares outstanding as a result of our tender offer which closed in December 2020.

Our second quarter 2021, same center net operating income or NOI increased to $87.7 million up 10, 5% from a year ago.

This improvement was primarily driven by stronger collections compared to 2020.

Further driving the increase with a 57% or 4.5% increase in average base rent per square foot.

Partially offsetting these improvements was an 80 basis point decrease in average same center occupancy and reduction and recovery income primarily related to a low recovery rate and the affirmation occupancy decrease.

Please note that our same center NOI increased 268 properties that we have owned and operated since January 2020.

As of June 32021, our net debt to adjusted EBITDA was 7.1 times compared to 7.3 times at December 31.2020.

Adjusting for the IPO proceeds, including the full allotment of the Green shoots we received this week our net debt to adjusted EBITDA was 5.5 times.

At June 32021, our debt had a weighted average interest rate of 2.9% and a weighted average maturity of 3.7 years, approximately 69% of our debt was fixed rate.

This compares to December 31, 2020, when we had a weighted average interest rate of 3.1% a weighted average maturity of 4.1 years and approximately 75% fixed rate debt.

Subsequent to the quarter end, we closed a new $980 million senior unsecured credit facility comprised of a $500 million revolving credit facility and 2 separate $240 million unsecured variable rate term loan extending maturity to 2000 from 5 in 2026 are poor.

<unk> of our IPO proceeds were used to pay off our $375 million term loan that was set to mature in 2022.

We have been preparing for our investment grade profile by creating a highly unsecured debt structure with 73% of our NOI unencumbered with well ladder maturities.

Post IPO, we have over $600 million of a crazy we.

We'll use this liquidity to fund our robust acquisition strategy, which we will touch on momentarily importantly, we have been assigned investment grade ratings from Moody's and S&P Diablo III and tripled revenue respectively. We now have the ability to access the public debt market and we plan to extend our maturity profile and diversify.

Our sources of debt capital.

Moving to guidance.

Now that we've covered our financial results from the past quarter, we'd like to provide initial guidance today relating to core <unk> per share same center NOI growth and our acquisition and disposition.

These figures assume no substantial economic impact from teacher correct Gary.

For the 2021 full year, we expect to report core <unk> per share between $2.10, and $2.16 per share.

This range is impacted by the potential timing of our acquisition and disposition activity on the second half of the year.

This also includes the estimated same center NOI growth between 5.6% and 6.8% for the full year.

We expect to acquire between $160 million and $200 million of assets over the remainder of the year and lastly, we expect to sell between 45 and $75 million of assets over the remainder of the year completing our quality improvement disposition program.

With that I would like to turn the call back over to Jeff to expand on our acquisition outlook for the remainder of 2021 and recap our long term growth strategy.

Yes.

Thank you John.

When we think about growing our portfolio through acquisitions, we've identified over 5800 grocery anchored shopping centers in the U S that fit our portfolio strategy. These centers are all anchored by the number 1 or 2 grocer in their respective markets and meet our demographic targets.

We have a very disciplined acquisition process together, our long term relationships with our grocers are proprietary algorithms and our experienced and dedicated acquisition team drive our ability to buy the right properties at the right price.

Year to date, we have closed on $40 million of assets and have an additional $70 million under contract. We believe we can hit our unlevered IRR target of over 8% on these assets.

As John mentioned, we believe we can acquire an additional $160 million to $200 million of assets during the second half of 2021.

Our track record the market opportunity and current market conditions, all give us confidence we can meet our targeted acquisition goals.

So in conclusion Pico is a focused differentiated strategy of owning and operating smaller format neighborhood centers anchored by the number 1 or 2 grocer in the market.

Our nearly 300 grocery anchored shopping centers are located where America's top grocers make money in the neighborhood at the corner of main and main.

<unk> is an experienced cycle tested team and has outperformed the sector over time are aligned management team has meaningful skin in the game on a 7% of the company the highest among our peers.

We're a growth company positioned to expand our portfolio.

Our investment grade balance sheet and strong cash flow support that growth.

Our brick and mortar real estate plays a key role in our neighbors Omni channel strategy is complementary to ecommerce, including both this and last mile delivery.

And lastly, we believe their economic tailwind that will support our strong growth plans over the long term.

Thank you for your time today with that we will begin the Q&A portion of our call operator.

Thank you.

Maintaining it on efficient Q&A session. You may ask a question with an additional follow up if you have additional questions you're more than welcome to rejoin the queue cash.

A question you will need to press star 1 on your telephone to withdraw your question on cash the balance sheet. Please stand by we compile the Q&A roster.

Our first question comes from Rich Hill with Morgan Stanley You May proceed with your question.

Hey, good morning, guys.

Wanted to just follow up on the acquisitions.

I appreciate the guidance as to where you're going over the next several years, but but noted that you didn't buy anything.

Of note in 2 Q. So hoping you can move from provide a little bit of detail around why there wasn't any operational QQ was there anything specific as you think about the acquisitions from you.

Or what's your cadence between 3 non core.

Hey, rich it's Jeff. Thank you for the question and so.

So it is important to note that in Q2.

We were.

Actually deleveraging the company at that point in time without a real.

Forward growth plan in place.

And.

So the rationale there was we.

We at that point, we're selling and buying assets sort of balancing that that process as we go as we were going.

So that that that's the reason that Q2 was not we didn't have.

Any acquisitions, we did.

Start the process at that point and as you can see we've we've got $70 million of projects that are in the in the pipeline at this point and sort of moving towards the close so.

We do think that that will accelerate both through.

As we're getting through the third quarter and CAD.

And then in the fourth quarter as well and we.

We do anticipate being able to meet our.

Plan to basically by about $35 million more properties than we sell.

During that process and then to get to the.

300 plus million dollar Act.

Acquisition pace next year, as particularly as the market gets more.

More open.

We all know that there was you know it.

It was a very sort of choppy year last year on into the first half of this year.

You know as we dealt with the virus and as we look for.

We do see there is some.

There has not been a ton of product on the market and we do anticipate that.

Volume, a little bit and we will see some on some more it can be.

As we move forward and in regards to whether it's third quarter on fourth quarter I think I would look at the product we have under contract now as being most of our third quarter on those we've moved to the fourth quarter, you'll you'll see the.

More of the things that we put.

On the contract between now and the end of the third quarter.

Great. Thank you Jose and John to answer your question.

That's exactly what I was looking for thank you very much.

And John just maybe a question for you, but you were plus 10% same store NOI growth from to Q could you remind us or clarify what portion was what.

What portion of that was driven by previously deemed uncollectible rents from past tenants.

Sure absolutely so.

The net impact on the quarter on I'll break it down but the net impact was about $2 million of NOI related to out of period collections and kind of recoveries of reserved amounts and that's about $3 million of on on the collection side and then we had about $1 million reduction in our rig.

Covering debt related reconciliations were also COVID-19 impacted so but to be more specific in the second quarter weighted approximately $4.7 million of income from collections and reserve reversals from prior periods, which was offset by about $1.8 million of new reserves, so that gets to.

That's about $3 million net debt I was talking about as positive income and then they get worried about $1 million of impact to our recoveries related to reconciliations and things we were doing with those neighbors.

Got it and so do you know what that is on on.

The basis point.

On a basis points I am I only ask that because what.

But we don't have a lot of clarity into what look what it looked like a <unk> 21 to do the apples to apples comparison, but so do you you have done on a basis point.

Let me answer it a little differently I'm not sure I get your question right. So when I think about the new reserves, if I took out the <unk>.

Out of period portion and I look at the reserves that we recorded this quarter. It was about 1.4% again and when we look at our I mentioned in the recorded remarks debt in our collections are at 98% plus so I mean, we are we are open and operating on our neighbors are moving forward and on a stabilized basis, our bad debt has historically.

Then between 80 and 100 basis points. So at 1.4%. It is still impacted on a 98% is not quite there yet and the largest portion of that are non credit worthy a cash basis neighbors. So it's about 1.4%. If you do not account for any of the higher pieces, but we would expect to.

Get back to a stabilized level here in Q3 and Q4 at the current rate that we're growing.

That's helpful guys I will jump back in the queue with any further questions.

Thanks Rich.

Thank you. Our next question comes from Todd Thomas with Keybanc Capital markets. You May proceed with your question.

Hi, Thanks, good morning.

Firstly I just wanted to ask about leasing spreads on leasing activity a little bit spreads were solid again. This quarter can you just talk a little bit more about the pricing power that you see with both anchor and in line shops, your neighbors and just discuss how you expect.

Rents to trend moving further throughout the year.

Yeah.

Thanks, Jeff Thanks for the question and Oh, Yes, we are.

We were.

Very excited about the the where we are on the leasing side and Doug do you want to go through some of the results revenue.

We're looking at.

Going forward.

Sure good morning, everyone and thank.

Thank you for being on the call. This morning on it.

Todd we see a number of factors driving leasing demand first there are a number of macro factors that Jeff mentioned in his remarks.

That we're benefiting from which is number 1 the continued growth in population and sunbelt markets as you know 49% of our portfolio by ADR in the Sun belt, and so we're getting that tailwind.

In addition, the continued migration of population from urban to suburban communities.

We're benefiting from as ours is day.

Virtually 100% suburban portfolio.

And then the increase in the work from home dynamic also benefits our suburban portfolio.

And then lastly, the importance of last mile delivery continues to be.

A retailer focus in our centers provide retailers and attractive economic alternative for last mile delivery.

So the retailers are aware of these macro trends and they are therefore looking to locate stores to take advantage of these trends and we're the beneficiary of that and we're seeing is an increased level of leasing demand coming from the national retailers. So for example, <unk>.

<unk>, we had 25 Starbucks at the end of last year, we will have 35 by the end of this year.

We had 1 humana location will have 4 by the end of this year and those are large footprint stores 6 to 8000 square feet with rents in the high <unk> to low 30.

And then another example is ATI physical therapy, we had 6 at the end of last year. We will have 10 by the end of this year. So we're seeing these national retailers dramatically increased their presence in our portfolio and our centers are anchored by top grocers that drive foot traffic and the tenants want to be.

In centers that are anchored by top grocers, because they become the beneficiary of this foot traffic.

And our centers are smaller as Jeff indicated our average tenant size is 'twenty 100 square feet and leasing demand is from.

From tenants in this smaller footprint, 65% of the leasing activity in the U S is in stores less than 2500 square feet.

So these factors lead to the high level of retention that we continue to enjoy we have market leading retention our retention for.

This year year to date was over 87%.

And so we see no slowdown in leasing activity in July.

We signed more leases in July of this year than we had in July of 19 or July of 'twenty, and so with an occupancy rate of 94, 7% and its continued strong leasing demand that we're seeing based on these factors. We believe that the leasing spreads that we have seen.

We will hold.

For the foreseeable future and as we've indicated we believe we can continue to increase occupancy from current levels. We think we can get our inline occupancy up several hundred basis points to 93% to 94% and we believe we can continue to drive spreads at the levels that we've been.

I'm able to do over the last several years.

Okay, Great. That's helpful and then just 1 more.

My second question on following up on the acquisitions, a little bit you talked about the portfolio sunbelt exposure being about 50% today for the portfolio you know as you think about the investment landscape and.

You know, we think about the acquisition.

<unk> and goals that you've debt you've discussed where are you seeing opportunity to add new product. As you know is geography important going forward or is it more about the local submarket in our neighborhood.

Yeah.

Well.

As you know we are very focused on the market.

Directly around each shopping center that we buy and that is our focus on the acquisition side.

Have a proprietary algorithm that actually helps us to evaluate.

How we see the risk of each 1 of these markets that we are.

We look at on the on the acquisition side.

I can tell you that we won't you won't hear us say look we want to have a lot more center.

We're going to just focus on our.

Sunbelt or we're just going to focus on west coast.

Not how we sort of look at the business, but on the other hand the algorithm that we have is driving results and you know there are more centers that can drive those results in a market that has population growth like this.

Southeast and southwest so the Sunbelt will continue I mean, it has been a growing part of our portfolio and we believe it will continue to be but not out of choice to be in Atlanta, or Miami, but out of the fact that we think that our grocers can do really well there and the small stores can do really well as well so.

It will be that debt I think that will drive it but.

But we do anticipate that we will have a higher concentration of sunbelt properties.

5 years from now than what we have.

Upon how our algorithm looks at growth in <unk>.

Both in terms of population and then in the <unk>.

Income.

But also in terms of the success of the grocers in the small stores.

Okay, great. Thank you.

Yeah. Thanks, Bob.

Yeah.

Thank you on your next question comes from Caitlin Burrows with Goldman Sachs. You May proceed with your question.

Hi, Good morning, maybe just another follow up on the acquisitions, Jeff you mentioned, how the market was choppy over the past year on a half or so and that now and I'll have place on that'll support acquisitions picking up just wondering if you can talk about what you're seeing now that makes you confident about the second half acquisition volume targets and even over the next.

3 years as you mentioned a goal of $1 billion of acquisitions.

Yeah. Thanks, Thanks, Colin for the question.

I think what we are seeing is we are seeing some compression in cap rates, we think.

We continue to think that our sort of target of somewhere between a.

5 and 3 quarters into 6 on a quarter going in yield with.

Our focus on the 8% plus.

Unlevered IRR continues to be achievable in the market today and you know we're seeing it with the first.

$70 million that we bought what has historically happened and we were just starting to see it and I think we'll see a lot more of it.

In September of this year is you know as cap rates have gotten a little bit more aggressive we are seeing more people looking at selling properties and we also believe that there's going to be some.

Selling because of the potential.

10, 31 exchange issues the capital gains excuse on on taxes. So we think there are a number of sort of tailwind for people to look very seriously at selling shopping centers.

Over the next year.

Certainly 6 to I mean, they're deferred on an urgency of yearend urgency part of it and then.

I think there's a value issue that will push more volume into the first half of next year as well. So we're optimistic that there will be more product on the market.

We are as you know we've we've targeted 5800 centers that we want to own.

And you know that.

If they sell every 10 years, that's 500 Navy incentives, where we're nowhere near that pace right now, but that is a more normalized pace and when we get to that as well.

Said, you know our $350 million target is is 2.4% of that of that overall size. So we think that there's you know that the market is certainly there. It is a little it's muted right now, but even now we're starting.

If you look at our acquisition committee meetings.

We're seeing more product today than we were certainly 3 to 4 months ago, and we do anticipate that continuing to increase.

Got it Okay, and then maybe just back to your question on rent collections on our uncollectible rent reserve reversals in the quarter. There was some could you just go through kind of what caused it in the quarter and then going forward, where you can reserve level.

Stands today in your outlook on the ability to.

Kind of receive those and then I expect additional potential rent reserve reversals going forward.

Okay, Okay, absolutely stinks, Okay, John do you want to cover that.

Sure Gail and thanks. The question so really what is happening is.

Collecting our neighbors are paying so we're at 98% in the second quarter. We first reported the first quarter at 95% and that's at 98% now and so.

Part of it is adjusted debt there, they're doing very well we are our path of making sure that they were open and making sure that they could start paying us current rent and then working to collect their back balances from there has proven to work very well and so really what's happening is is that both from a cash.

Cash basis, so our cash basis neighbors or about 8% of our outstanding rent roll and 89, we received 89% of their collections in the quarter now why are they still cash basis, because theres actually protocols around how long they need to be current on their balance and that's about 3 to 6 months or if they're going through bankruptcy or things like that.

So I would expect that number to come down.

But really we look at it and we're still appropriately reserved at the end of the quarter, but you know as we look to the remainder of the year. We do anticipate some additional collections if I had to estimate based on the midpoint of our guidance, it's about another $2 million of kind of.

2020, our past period collections in the balance of the year.

And in short what we're seeing is as the leasing strength and what have you is giving us the power.

Power to collect.

Great. Thank you.

Thanks, Kevin.

Thank you. Our next question comes from handles same Joost with Mizuho. You May proceed with your question.

Hey, guys.

Hum.

I wanted to talk about the dispositions for a second you've outlined $45 million to $75 million for this year maybe.

Maybe you could spend a moment or 2 on what about those assets it.

It makes them more disposition candidates and what your sense is on the cap rate given the growing demand and cap rate compression here and then longer term, what's your sense of the portfolio.

Of the 300 ish from basketball IPO, what do you think of that pool might be long from candidates for disposition that some fine tune the portfolio.

Great. Thanks.

Dispositions is I'm, a little bit obviously, the counter side of the of the acquisition and the disposition pricing right now as aggressive so.

We have.

<unk> gotten what we think is relatively strong pricing on the things that we have sold and we sort of plan ongoing selling going forward and our disposition strategy is really pretty simple relative to our acquisition strategy, which is we we we assign a.

Power scores every property in the portfolio.

Which is our sort of risk analysis of the.

The property and then we have a 5 and a southern year model, but our predictions IRR and when something becomes.

A negative drag on the growth of the company.

It is.

Is brought on to our disposition list as a potential thing to sell if we can get the kind of pricing debt that would actually.

The part B consistent with the IRR that we are generating from each property. So.

We will always have some properties that we are selling and some will be.

Most of those at this point, we'll be more opportunistic than they are sort of portfolio.

<unk> because we as you know like the what we've been working on that for the last.

3 years and we.

We have 40 properties less today than we did a 3 and a half years ago. So we've done the major sort of portfolio of surgery now, it's really trying to make sure that we have a portfolio that's constantly being.

Worked on for growth and getting the returns that we expect to be able to achieve and that again is a unlevered.

Above at Unlevered, 8% return that that's where our targets are and then you'll you'll see that across the board in terms of.

How we look at our at our dispositions.

And.

The the the balance with the acquisitions, obviously is always a challenge because you know in the markets, where you can sell stuff really well.

It's more difficult to buy and so we're always in that sort of balancing act and oh, but but that.

That's been.

Sort of where we are today in terms of the.

The 70 million John do you have the cap rate on that I don't have it right here.

Jeff It's a 6.1 cap rate handle on the 7 million of acquisition debt or under contract.

And then on the on the dispose, you'll see higher cap rates than the 6.1 because as Jeff mentioned the assets that we are in the market disposing now our lower quality assets and we're upgrading the portfolio by by selling those assets. The reason I say, they're lower quality is base.

On several factors number 1 and number of them are shadow anchored centers and on several of them have anchors that are not the 1 or 2 grocery in their market. They are anchored by grocers, such as a winn Dixie names like that.

So the cap rate on those dispose is higher than what you're seeing on our acquisitions, but again as Jeff mentioned, you know once we get through.

The the disposed volume that we've articulated we believe that the portfolio upgrade is behind US and then our guests both strategy on a go forward will be purely opportunistic where if the market's willing to pay an unlevered 60 on a half IRR for an asset and we think we can redeploy that cash.

Little at an 8 or better on Levered IRR, we will do that.

Yeah.

Got it got it thank you for that color.

And then if I could a follow up on the billings.

I think you mentioned the balance of $12 million 5 million vendor a payment plan with some form I'm curious what the timeline for that repayment of that 5 million is and then the other 7 million maybe you could talk about the the industry's expectations there. Thanks.

Thanks.

John do you want to cover that yeah, I'll take that so so that's right we were about $12 million of Outstandings.

A good chunk of that includes the cash basis neighbors. So what we would expect as the weighted average over that is basically over the next 4 quarters. So about half of it this year half of it next year.

On that 5 sorry, that's the $5 million of payment plans that we have so we will get a portion of it.

Now that you know about half of it with regards to that to the remaining 7 million we've actually looked at.

On it and we continue to collect it so we do see positive moving at.

At the rate that its going I would expect it to be of a similar timeframe.

On that.

And I think we're right now trying to make the best decisions based on.

Opportunities for the space the leasing at the center and I know our portfolio management and operations team Theyre looking at it and saying is this the best and highest use.

And if so then they're a bit more patient, especially if we're making progress there, but if we've got leasing opportunities in Denver.

We are a bit tougher.

Got it got it all right. Thank you guys.

Thanks, Andrew.

Thank you. Our next question comes from Paulina Rojas Schmidt with Green Street. You May proceed with your question.

What am I on.

You recently of course completed your I P O N.

I'm curious what did you learn in the process of talking to investors and analysts.

Yeah.

What is in your opinion, the most underappreciated aspect of your portfolio and on the opposite side and what aspects.

This investor community Phillips with more skepticism.

Thanks, Thanks Paulino.

It is it's it's it's it's some incredible process.

We.

We're just finishing our board meeting and we did we did we talked at length about the fact that you know that the company in in preparation for this process was at the top of the game that we'll probably ever be in terms of knowing exactly.

Every piece of the company to a you know to a degree because we were we were.

Fully engaged in the conversation and we got tremendous questions from the investment community about their concerns and the things that they they liked the things they didn't like so I would say in terms of the things. We learned it was that you had to be really well prepared and you really had to understand how each investor.

Was kind of looking at.

Your your.

Your company.

And how do you how do you explain to them why what Youre doing and how you think about it and that approach. So I would say that we were but my.

My biggest takeaway is that we.

You have to be you really have to examine every piece of your business. When you get under the eye of the investor because each 1 of them has a little bit different view of what they what they like and what the you know what they don't like and in the end we found that the investors who are.

<unk> believed that there was a strategy of providing necessity based goods and groceries to the average American where the guys who invested they truly believe that that is a segment that is.

It is very relevant it's very it's a very it's a very big segment.

But it's also 1 that is under represented in the in the public markets.

And are they the ones, who who bought into the I'm sorry, I think believe we're big believers in that and obviously, where we're big believers in that and we.

We're telling a story that we've done for 30 years, not 1 that we're kind of making up to get ready to be public maybe net debt that did make it a lot easier for us because we've been doing it for a long time, but but that was I would say those are the my biggest takeaways I don't know.

Devon or.

John if you have any other comments.

Yeah, Jeff what I would just add to that Paul is that our strategy is differentiated and it has a number of factors that are counter to certain perspective that are well established and the investor community and those are you know.

ADR is the is a very important metric demos is a very important metric.

And as you know our ABR is the lowest of any of our peers.

And our demos are at the low end of the range.

And the.

Perspective that we had to successfully communicate to investors was that look we are in the necessity retail business.

And we're providing necessity goods and services to the average American consumer.

And we don't need $40 rent them, because we're not selling high end shoes, and handbags et cetera, where you need those kind of rent them to be successful and so we had to educate investors on the fact that if you look at our historical track record.

And the components that matter, which is same store NOI growth and <unk> per share growth, we have market leading results in those 2 metrics, even though our ABR is in our demos are at the low end of the range.

And so I think we made a lot of progress and the investors that.

Participating in the IPO I think understand our strategy and recognize our strategy.

There are still investors that you know we have to convince.

And we will continue to work hard to convince them that you know you need to focus on same store NOI growth and <unk> per share growth and focus less on some of these other metrics that have.

<unk> taken a priority over time.

And and I would say that that was.

Something that that we learned.

Thank you.

<unk>.

And then data question is about your capital projects you have at least of ground up developments, which are mostly small scale multi tenant out parcel development.

At what pace do you think you can deliver these projects.

I'm trying to understand the impact they could have on on same property NOI growth and going forward.

Yeah. So we have targeted about $50 million of those projects a year, we would love to do a lot more of them because they're very profitable where are incremental cash flow from these properties and between 9% to 11% and we've actually outperformed that in.

In the enterprise, we delivered so far it's you know, it's just that they're very difficult. They are they take time and it takes a lot of work to deliver them. So.

So we think that that's the range that we can.

Deliver on it. It includes 2 things. It includes what you were talking about which is these are individual either single tenant or multi tenant buildings that we build on the peripheral of the.

Shopping center, usually out on the main street, but that are incremental.

To the to the existing property so that that's the main 1 the second piece is the teradata.

Teradata rebuilds that we do for public and.

That is another cash.

I would agree on where we are do.

Do invest money and that's part of the $50 million.

Hey, and pulling out I'll jump in here. So in our supplement we do provide kind of targeted stabilization for for the projects that are currently underway and many of which are delivering here now.

Debt are delivering here in the third and fourth quarter of 'twenty, 1 as well as in the first quarter 'twenty..2 so we have a an additional pipeline of projects debt.

We're getting ready to will begin and then from there and a lot of those have I would say generally like 12 months timelines, especially including the tear down rebuild from public since basically from start to finish a lot of these projects by the time you get through design permits and what have you it.

It takes about a year. So it's it is it's pretty evenly on.

Over the quarters, but that might give you a help on the timing.

Thank you.

Yeah.

Thank you. This concludes our question and answer session I would like to turn it back to Mr. Edison for some closing comments.

Right.

Well, thank you everybody for being on the call today, we really appreciate it.

As you know we've been jamon on the the the IPO where.

You really are very excited to have that accomplished the team. There has performed on this has been incredible.

Look at every associate of Pico they were touched by this process and are they all contributed and we couldn't get it done without a full team effort and the.

On the obviously, we were able to accomplish it and we know that a team that is focused in and but also deliver it and so this is <unk>.

Mainly as a testament to everyone on the company Who's really put there.

On the shoulder intuitive and gotten gotten us over the edge there, but at the same time, while we produced really well on the operating side and that's that.

Doing all that at 1 time is difficult, but the team.

<unk> really pulled it together so I know this is a testament to them and we appreciate all of your debt spending the time with US today and obviously there are additional questions. Please call. So have a great day, everybody and thanks for being on the call.

Thank you you may now disconnect.

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Good morning, and welcome to Phillips Edison <unk> company's second quarter 2021 results presentation. My name is Josh and I will be your conference call. Operator today before we begin I would like to remind our listeners that today's presentation is being recorded and simultaneously webcast. A replay of today's presentation will be.

Available. This afternoon on the investors section of the Phillips Edison and company website at Phillips Edison Dotcom Backslash investors. The company's earnings release quarterly financial supplement and 10-Q were issued yesterday August after market close. These documents are available for download on the investors.

Section on the Phillips Edison on company Web site at Phillips Edison Dotcom Backslash investors I would now like to turn on the call over to Michael Lou Taylor with Phillips Edison and company. Sir. Please proceed.

Thank you operator, good morning, everyone and thank you for joining us on Michael Taylor, Vice President of Investor Relations with Phillips Edison and company. Joining me on today's call are our chairman and Chief Executive Officer, Jeff Edison, Our President Devon Murphy.

Chief Financial Officer, John Caulfield.

Because this is our first earnings call as a publicly traded company during today's presentation, Jeff will provide some background on Phillips Edison's 30 year history, and our unique and differentiated strategy. Jeff will also discuss our transformative underwritten initial public offering that closed on July 19th 2021.

John will then review, our second quarter operational and financial results, our recent capital markets activity and discuss our guidance.

Jeff will then return to provide an update on acquisitions and recap our long term growth strategy.

Following our prepared remarks, we will answer questions from the institutional analyst community before we begin I would like to remind our audience that statements made during today's call maybe considered forward looking which are subject to various risks and uncertainties as described on our SEC filings.

Jeff.

Thank you Michael and good morning, everyone.

Before we get into our results for the quarter I would like to provide a brief overview of Phillips Edison speak to our differentiated strategy highlighted our portfolio and review of our growth plans.

We were 1 of the nation's largest owners and operators of neighborhood grocery anchored omni channel shopping centers.

We've built on our fully integrated operating platform for 30 years. Our team has over 300 associates has experienced engaged and competitive.

Our senior management team has an average of over 27 years experience and 14 years with Pico.

Our bench is broad and deep.

This team has successfully navigated numerous business cycles, we brought our first center in Danville, Virginia in 1991, which had a net operating income of $260000.

Today, we have 294 properties and an annualized net operating income of over $350 million.

Importantly, this team is also aligned with shareholders every associate who's been with peak over 1 year on stock in the company. They think like owners I personally I've never sold a share of Pico and Pico leadership owns approximately 7% of the company, it's hard to find better alignment and having meaningful skin in the game.

Jim.

1 thing that you may hear during this presentation today is that we call our tenants our neighbors.

Why do we call our tenants our neighbors.

Because we work hard to create community at our centers and we treat our retailers as neighbors in that community we.

We believe.

On customer service and think it helps to remind the organization to treat our tenants like we would our neighbors.

Our strategy is simple we own and operate grocery anchored neighborhood centers. Our centers are typically typically an open air Center. That's 3 miles from your home. It sits at the corner of main and main non exited 15 on Interstate 80.

It has a 45000 square foot grocery store and has opened 24 hours a day you shop, there twice a week more than any other retailer you visit.

This is a center you run 2 when you forget ketchup and your grilling burgers for dinner.

In addition to groceries you can also get a lot of your necessity based goods and services from the 65000 square feet on small store shops in our centers take haircuts dry cleaning fast food fitness and medical fixed Starbucks Chipotle Orange theory, Walgreens and Wells Fargo.

Our centers are not where you go to get your electronics or home improvement goods discount clothing sporting goods are office supplies, those or power centers, they're usually twice the size of our centers.

As you would expect these 2 types of centers are very in very different businesses and they're very different economics.

We get 35% of our rent from our grocers on average our customers come to our centers nearly 2 times a week, we have limited exposure to big box retailers, we have pricing power in leasing.

Historically leasing demand has been consistently high for 'twenty 100 square foot average in line spaces.

Our capital requirements are significantly lower for keeping our centers fully occupied as well.

We focus on owning centers with a number 1 or 2 grocer within the market on.

Neighbour base with Omni channel strategy, where the growth is both buy online and pick up in store, our purpose and home delivery capabilities.

It has high exposure to nabors, selling necessity based goods and services and a trade area with favorable demographics for our neighbors to be successful.

Each of these components are critical to our success.

Our centers create a positive leasing dynamic and align well with retailer demand. We see retailer demand is concentrated in smaller footprint stores, considering the average size of our inline neighbors 'twenty 100 square feet. We believe our centers are best positioned to meet retailer demand.

Our smaller centers allow for better growth because of our high retention rates and high re leasing spreads.

Our retention rates averaged 87% between 2017 and 2020.

High retention rates result, in less downtime and lower Ti cost.

This leads to higher NOI growth.

From 2017 to 2020, our average cash re leasing spreads were 8.8%, providing a meaningful avenue for NOI growth.

Over the past 3 calendar years, our total capex, including development and redevelopment spend as a percentage of our NOI has average just 20% are smaller format centers in lower exposure to secondary anchors require less capex than other retail real estate lower capex.

Leads to higher <unk>.

On the corner of Indian School Road in North 28th Street in Phoenix, and the corner Vierling drive and Marcia Road in Minneapolis.

We target trade areas, where our grocers in our small stores can be successful.

Average population density and median household incomes mirrored that of Publix and Kroger are top 2 neighbors, we make money, where our top neighbors make money.

On a 3 mile demographics as you would expect are typically of the average American suburb, where 61000 people with a median household income of $68000 and our average 3 mile trade area.

Our shopping centers provide necessity based goods and services to the average American.

Our portfolio was built 1 asset at a time, we purchased 280 centers for over $4.7 billion between 2012 and 2018 on average we bought over $670 million of properties per year. During this time frame.

More recently, we were the largest acquirer of neighborhood centers, among our peers between 2018 and 2020.

Acquisitions are an important part of our growth story.

The following are key drivers of growth.

Growing rents is the pace of our internal growth strategy over the last 4 years, we had sector leading leasing spreads.

We lease up vacant space to new neighbors at June 32021, we were at 96% in line occupancy. We believe we can continue to increase this over time.

We have built in rent bumps from inline neighbors, we've been able to build at least 2% rent bumps into approximately 80% on the new leases. We have written this year. In addition to our strong releasing spreads.

We execute redevelopment opportunities. These are primarily made up of out parcel development opportunities, where we can build single tenant or multi tenant space on the existing or acquired land.

Or on average $2 million per project.

Our redevelopment opportunities also include tear down and rebuild opportunities with our grocers, we're targeting an average.

9% to 11% incremental underwritten yields on these projects. Our current projects are expected to deliver on average underwritten yield between 9.5% and 10, 5%.

Pico has grown consistently for 30 years and we've built a platform scaled for growth. We also have a best in class balance sheet debt positions us for growth.

We believe that there are also macro demographic and economic tailwind in our markets, which will augment the growth.

These include the shift to work from home.

Population shifts to the suburbs into the Sunbelt, where approximately 50% of our properties are located and the consumers buying locally.

We upgrade and remerchandise centers, we acquire this lowers the risk of our properties and creates income growth and value.

Better going in yields plus better growth plus lower capex leads to superior returns.

Importantly, our portfolio has performed well in up cycles and proven to be resilient in down cycles.

It delivers more alpha and less beta to our shareholders.

Okay.

Our 30 year history, having access to low cash cost of capital has been a key driver to our success.

On July 19, 2021, we completed our underwritten initial public offering issuing 19.5 million shares of stock at $28 per share generating $547 million of gross proceeds.

This capital gives us the strongest balance sheet in the strip center REIT space with a debt to adjusted EBITDAR.

Ratio of 5.5 times with.

With this balance sheet capacity, we can add external growth to the internal growth we've generated year after year.

The IPO was a major milestone for our company, but it is the beginning and we remain focused motivated and committed to successfully executing our strategy.

With that I will now turn the call over to our CFO John Caulfield.

John.

Thank you, Jeff and good morning, everyone.

Our results continued to benefit from the reopening of the economy as 100% of our least ABR is open for business for the second consecutive quarter.

Lease portfolio occupancy totaled 94, 7% compared to 95, 6% at June 32020 anchor.

Anchor leased occupancy until the 96, 8% and inline occupancy totaled 96% leased occupancy to economic occupancy spread was 60 basis points for the quarter.

During the quarter, we executed 124, new leases and 174 renewals and options totaling 1.4 million square feet.

Comparable new lease rent spreads were 18, 5% and comparable renewal rent spreads were 8%.

Combined rent spreads were 10, 4%.

Our in house leasing team has been busy executing new in line leases with neighbors like the EPS store Jersey, Mike's Wingstop, Popeye and Starbucks demand from retailers to be in our well located grocery anchored centers continues to be high illustrated by our strong leasing metrics and our 85, 5% retention rate for the quarter.

We continue to be optimistic about our long term growth prospects.

Collections during the second quarter of 2021, we're 98% of our monthly government and we're on the cusp of reaching our pre Covid collection levels, which were typically between 99 and 100% Covid validated our thesis that our necessity based portfolio performed as well on the good times and outperforms in the challenging times.

Our first quarter 2021 collections increased to 98% up from our originally announced figure at 95% and fourth quarter 2020 collection increased to 97% up from 95%.

As of June 32021 are outstanding balance on net daily.

It was approximately $12 million of this figure approximately $5 million is to be collected on your executed payment plans. We continue to work with our neighbors in order to collect unpaid balance.

The 12 million of net seller represents less than 3% of our total balance since April 1.2020.

Our second quarter core <unk> increased 24, 3% to $64.3 million on a per share basis core <unk> increased by <unk> 13 per share to <unk> 50 per.

Our diluted share during the second quarter of 2021.

Increase in core <unk> from the second quarter was driven by improved collections and lower interest expense.

Core <unk> per share also benefited from fewer shares outstanding as a result of our tender offer which closed in December 2020.

Our second quarter 2021, same center net operating income or NOI increased to $87.7 million up 10, 5% from a year ago.

This improvement was primarily driven by stronger collections compared to 2020.

Further driving the increase was a 67 or 4.5% increase in average base rent per square foot.

Partially offsetting these improvements were going to.

80 basis point decrease in average same center occupancy and reductions in recovery income primarily related to a lower recovery rate and the affirmation occupancy decrease please.

Please note that our same center NOI increased 268 properties that we have owned and operated since January 2020.

As of June 32021, our net debt to adjusted EBITDA was 7.1 times compared to 7.3 times at December 31.2020.

Adjusting for the IPO proceeds, including the full allotment of the Green shoots we received this week our net debt to adjusted EBITDA was 5.5 times.

At June 32021, our debt had a weighted average interest rate of 2.9% and a weighted average maturity of 3.7 years.

Approximately 69% of our debt was fixed rate.

This compares to December 31, 2020, when we had a weighted average interest rate of 3.1% a weighted average maturity of 4.1 years and approximately 75% fixed rate debt.

Subsequent to the quarter end, we closed a new $980 million senior unsecured credit facility comprised of a $500 million revolving credit facility and 2 separate $240 million unsecured variable rate term growth extending maturities to 2005 and 2026 are poor.

<unk> of our IPO proceeds was used to pay off our $375 million term loan that was set to mature in 2022.

We have been preparing for an investment grade profile by creating a highly unsecured debt structure with 73% of our NOI unencumbered with well ladder maturities.

Post IPO, we have over $600 million of accretive.

We'll use this liquidity to fund our robust acquisition strategy, which we will touch on flow materially importantly, we had been assigned investment grade ratings from Moody's and S&P Diablo III and Triple B minus respectively. We now have the ability to access the public debt market and we plan to extend our maturity profile and diversify.

Our sources of debt capital.

Moving to guidance.

Now that we've covered our financial results for the past quarter, we'd like to provide initial guidance today relating to core <unk> per share same center NOI growth and our acquisition and disposition.

These figures assume no substantial economic impact from teacher correct Gary.

For the 2021 full year, we expect to report core <unk> per share between $2.10, and $2.16 per share.

This range is impacted by the potential timing of our acquisition and disposition activity for the second half of the year.

This also includes the estimated same center NOI growth between 5.6% and 6.8% for the full year.

With that I would like to turn the call back over to Jeff to expand on our acquisition outlook for the remainder of 2021 and recap our long term growth strategy.

Net.

Thank you John.

When we think about growing our portfolio through acquisitions, we've identified over 5800 grocery anchored shopping centers in the U S that fit our portfolio strategy.

These centers are all anchored by the number 1 or 2 grocer in their respective markets and meet our demographic targets.

Year to date, we have closed on $40 million of assets and have an additional $70 million under contract. We believe we can hit our unlevered IRR target of over 8% on these assets.

As John mentioned, we believe we can acquire an additional $160 million to $200 million of assets during the second half of 2021.

Our track record the market opportunity and current market conditions, all give us confidence we can meet our targeted acquisition goals.

So in conclusion Pico is a focused differentiated strategy of owning and operating smaller format neighborhood centers anchored by the number 1 or 2 grocer in the market.

Nearly 300 grocery anchored shopping centers are located where America's top grocers make money in the neighborhood at the corner of main and main.

Pico is an experienced cycle tested team and has outperformed the sector over time are aligned management team has meaningful skin in the game on a 7% of the company the highest among our peers.

We're a growth company positioned to expand our portfolio.

Our investment grade balance sheet and strong cash flow support that growth.

Our brick and mortar real estate plays a key role in our neighbors Omni channel strategy is complementary to ecommerce, including both this and last mile delivery and lastly, we believe their economic tailwind that will support our strong growth plans over the long term.

Thank you for your time today with that we will begin the Q&A portion of our call operator.

Thank you.

Maintaining an unofficial Q&A session you may ask a question with an additional follow up if you have additional questions you're more than welcome to rejoin the queue to ask a question you will need to press star 1 on your telephone to withdraw your question on personal balance sheet. Please stand by while we compile the Q&A roster.

Our first question comes from Rich Hill with Morgan Stanley You May proceed with your question.

Hey, good morning, guys.

Want to just follow up on the acquisitions.

I appreciate the guidance as to where you're going over the next several years, but but noted that you didn't buy anything.

Note into Q. So I hope he can move from provide a little bit of detail.

Around why there wasn't any operational from <unk> was there anything specific as you think about the acquisitions from the remainder of the year, what's your cadence between 3 Q on forward.

Hey, rich it's Jeff. Thank you for the question and.

So it's important to note that in Q2.

We were.

Actually deleveraging the company at that point in time without a real.

Forward growth plan in place.

And.

So the rationale there was we we at that point, we're selling and buying assets sort of balancing that that process. As we go as we were going.

So that that that's the reason that Q2 was not we didn't have.

Any acquisitions, we did.

Start the process at that point and as you can see we've we've got.

$70 million of projects that are in the in the pipeline at this point.

And sort of moving towards the close so.

And we do think that that will accelerate.

Both through as we're getting through the third quarter and and then on.

On the fourth quarter as well and.

We do anticipate.

Being able to meet our.

Plan to basically by about $35 million more properties than we sell.

During that process and then to get to the.

300 plus million dollar Act.

Acquisition pace next year, as particularly as the market gets more.

More open.

We all know that there was it was.

A very sort of choppy year last year and into the first half of this year.

As we dealt with the VI.

Iris and as we look.

We do see there is some.

There has not been a ton of product on the market and we do anticipate debt.

Volume, a little bit and we will see some more activity.

As we move forward and in regards to whether its third quarter or fourth quarter.

I think I would look at the product we have under contract now as being most of our third quarter on those we've lived through the fourth quarter, you'll you'll see the.

More of the things that we put.

In under contract.

Now and the end of the third quarter.

Great. Thank you is that in John's answer your question.

That's exactly what I was looking for thank you very much.

And John This maybe a question for you, but your plus 10% same store NOI growth from QQ could you remind us or clarify.

What portion was.

A portion of it was driven by previously deemed uncollectible rents cash tenants.

Sure absolutely so.

Our recoveries debt related reconciliations were also COVID-19 impacted so but to be more specific in the second quarter, we had approximately $4.7 million of income from collections and reserve reversals from prior periods, which was offset by about $1.8 million of new reserves, so that gets to.

There's about $3 million net debt I was talking about as positive income and then the day rate of about $1 million.

Impact of our recoveries related to reconciliations and things we were doing with those neighbors.

Got it and so do you know what that is on a on a basis point.

On a basis points I and I only ask that because.

But we don't have a lot of clarity into what look what it looked like a <unk> 21 to do the apples to apples comparison, but so do you do you have that on a basis point.

Let me answer it a little differently I'm not sure I get your question right. So when I think about the new reserves, if I took out the.

Out of period portion and I look at the reserves that we recorded this quarter. It was about 1.4% again and when we look at our I mentioned in the recorded remarks debt in our collections are at 98% plus so I mean, we are we are open and operating in our neighbors are moving forward and on a stabilized basis, our bad debt has historically.

Then between 80 and 100 basis points. So at 1.4%. It is still impacted I mean, 98% is not quite there yet and the largest portion of that on a non credit worthy a cash basis neighbors.

It's about 1.4% if you do not account for any of the higher pieces, but we would expect to get back to a stabilized level here in Q3 and Q4 at the current rate that we're going.

That's helpful guys.

I'll jump back in the queue with any further questions.

Thanks Rich.

Thank you. Our next question comes from Todd Thomas with Keybanc Capital markets. You May proceed with your question.

Hi, Thanks, good morning.

Firstly I just wanted to ask about leasing spreads on leasing activity all debt spreads were solid again. This quarter can you just talk a little bit more about the pricing power that you see with both anchor and in line shops. Your neighbors and just discuss how you expect rents to trend moving further throughout the year.

Yeah.

Thanks, Jeff.

The question and.

Yes, we are.

Well.

Very excited about the.

Where we are on the leasing side and Debbie.

We want to go through some of the <unk>.

I'll go ahead, and how we are we're looking at.

Going forward.

Sure Good morning, Tom and everyone.

Thank you for being on the call. This morning, I mean, Todd we see a number of factors driving leasing demand first there are a number of macro factors that Jeff mentioned in his remarks.

That we're benefiting from which is number 1 the continued growth in population in Sun belt markets. As you know 49% of our portfolio by ABR is in the sunbelt and so we're getting that tailwind.

In addition, the continued migration of population from urban to suburban communities.

We're benefiting from as ours is a.

Virtually 100% suburban portfolio.

And then the increase in the work from home dynamic also benefits our suburban portfolio.

And then lastly, the importance of last mile delivery continues to be.

A retailer focus in our centers provide retailers and attractive economic alternative for last mile delivery.

<unk>, we had 25 Starbucks at the end of last year, we will have 35 by the end of this year.

We had 1 humana location, we will have 4 by the end of this year and those are large footprint stores 6 to 8000 square feet with rents in the high 20 to low 30.

In centers that are anchored by the top grocers because they become the beneficiary of this foot traffic.

And our centers are smaller as Jeff indicated our average tenant size is 'twenty 100 square feet and leasing demand from.

From tenants in this smaller footprint, 65% of the leasing activity in the U S is in stores less than 2500 square feet.

So these factors lead to the high level of retention that we continue to enjoy we have market leading retention our retention for.

This year year to date was over 87%.

And so we see no slowdown in leasing activity in July we signed more leases.

July of this year than we had in July of 19 or July of 'twenty, and so with an occupancy rate of 94, 7% and its continued strong leasing demand that we're seeing based on these factors. We believe that the leasing spreads that we have seen.

We'll hold.

I'm able to do over the last several years.

Okay, Great. That's helpful and then just 1.

You know, we think about the acquisition targets.

<unk> targets and goals that you've debt you've discussed where are you seeing opportunity to add new product. As you know is geography important going forward or is it more about the local submarket in our neighborhood.

Yeah.

Well Scott as you know we are very focused on the market.

Directly around each shopping center that we buy and that is our focus on the acquisition side.

We have a proprietary algorithm that actually helps us to evaluate.

How we see the risk of each 1 of these markets that we are.

Debt, we'd look at on the on the acquisition side.

I can tell you that we won't you won't hear us say look we want to have a lot more center.

We're going to just focus on.

Sunbelt or we're just going to focus on west coast.

Not how we sort of look at the business, but on the other hand, the algorithm that we have is driving results and.

There are more centers that can drive those results in a market that has population growth like this.

It will be that that I think that will drive it.

But we do anticipate that we will have a higher concentration of sunbelt properties.

5 years from now than what we have.

Upon how our algorithm looks at growth in <unk>.

Both in terms of population and then in <unk>.

Income.

But also in terms of the success of the grocers in the small stores.

Okay, great. Thank you.

Yeah, Thanks, a lot.

Yeah.

Thank you on your next question comes from Caitlin Burrows with Goldman Sachs. You May proceed with your question.

Hi, Good morning, maybe just another follow up on the acquisitions, Jeff you mentioned, how the market was choppy over the past year on a half or so and that now and I'll have place on that will support acquisitions picking up just wondering if you can talk about what you're seeing now that makes you confident about the second half acquisition volume targets and even over the next.

3 years as you mentioned a goal of $1 billion of acquisitions.

Yeah. Thanks, Thanks, Caitlin for the question.

I think what we are seeing is we are seeing some compression on cap rates, we think.

We continue to think that our sort of target.

Somewhere between up.

5 and 3 quarters into 6 on a quarter going in yield with.

Our focus on the.

The 8% plus Unlevered IRR continues to be achievable in the market today.

And we're seeing it with the first.

$70 million that we bought what has historically happened and we were just starting to see it and I think we'll see a lot more of it.

In September of this year is you know as cap rates have gotten a little bit more aggressive we are seeing more people looking at selling properties and we also believe that there's going to be some.

Selling because of the potential.

10, 31 exchange issues the capital gains excuse on on taxes. So we think there are a number of sort of tailwind for people to look very seriously at selling shopping centers.

Over the next.

Certainly 6 to.

I mean, they're referred on an urgency of yearend urgency part of it and then.

I think there is a value issue that will push more volume into the first half of next year as well. So we're optimistic that there will be more product on the market.

We as you know we've we've targeted 5800 centers that we want to own.

And you know that.

If they sell every 10 years, that's 500 Navy incentives, we're nowhere near that pace right now, but that is a more normalized pace and when we get to that is as we've said you know our $350 million target is 2.4% of that of that overall size. So we think that there's the market certainly there it is.

On the little it's muted right now, but even now we're starting.

If you look at our acquisition committee meetings, we're seeing more product today than we were certainly 3 to 4 months ago and.

We do anticipate that continuing to increase.

Got it Okay, and then maybe just back to a question on rent.

Brent questions in on Uncollectible rent reserve reversals in the quarter. There was some could you just go through kind of what caused it in the quarter and then going forward, where you can reserve level.

Since today in your outlook on the ability to.

Kind of receive those and then I.

I expect additional potential rent reserve reversals going forward.

Okay, Okay, absolutely stinks, Okay John.

John do you want to cover that.

Sure Gail and thanks. The question so really what is happening is.

We're collecting our neighbors are paying so we're at 98% in the second quarter.

We first reported the first quarter at 95% and that's at 98% now and Joe.

Part of it is adjusted debt.

They're doing very well, we are our path of making sure that they were open and making sure that they could start paying us current rent and then working to collect their back balances from there has proven to work very well and so really what's happening is that both from a cash basis. So our cash basis neighbors are about 8 per.

<unk> of.

Our outstanding rent roll.

And 89, we received 89% of their collections in the quarter now why are they still cash basis, because theres actually protocols around how long they need to be current on their balance and that's about 3 to 6 months or if theyre going through bankruptcy or things like that so I would expect that number to come down.

But really we look at it and we're still appropriately reserved at the end of the quarter, but as we look to the remainder of the year. We do anticipate some additional collections if I had to estimate based on the midpoint of our guidance, it's about another $2 million of kind.

2020, our past period collections in the balance of the year.

Sure. What we're seeing is just the leasing strength and what have you is giving us the.

Power to collect.

Great. Thank you.

Thanks, Kevin.

Thank you. Our next question comes from Handy on same juice with Mizuho. You May proceed with your question.

Hey, guys.

But I wanted to talk about the dispositions for a second you've outlined $45 million to $75 million for this year.

Maybe you could spend a moment or 2 on what about those assets.

It makes them more disposition candidates and what your sense is on the cap rate given the growing demand and cap rate compression here and then longer term, what's your sense of the portfolio.

Of the 300 ish I think assets on IPO, what do you think of that pool might be long term candidates for disposition assets and fine tune the portfolio.

Great. Thank you Sundar.

The.

Dispositions is.

A little bit obviously, the counter side of the of the acquisition and the disposition pricing right now as aggressive so.

We have.

Gotten what we think is relatively strong pricing on the things that we have sold in debt, we sort of plan on going selling going forward.

<unk> strategy is really pretty simple relative to our acquisition strategy, which is we we we assign a power score to every property in the portfolio.

Which is our sort of risk analysis of the of the.

The property and then we have a 5 and a southern year model, but predicts it's IRR and when something becomes.

A negative drag on the growth of the company.

Is brought on to our disposition list as a potential thing to sell if we can get the kind of pricing debt that would actually be part it will be consistent with the IRR that we are generating from each property. So you.

We will always have some properties that we are selling.

And some will be.

Most of those at this point, we'll be more opportunistic than they are sort of portfolio.

Transition because we as you know like the what we've been working on that for the last.

3 years and.

We have 40 properties less today than we did 3 and a half years ago. So.

We've done the major sort of portfolio of surgery knowledge, it's really trying to make sure that we have a portfolio that's constantly being.

<unk> worked on for growth and getting the returns that we expect to be able to achieve and that again is a unlevered.

But unlevered, 8% return on that that's where our targets are and then you'll you'll see that across the board in terms of.

How we look at our at our dispositions.

<unk>.

Uh huh.

On the balance with the acquisitions, obviously is always a challenge because you know in the markets, where you can sell stuff really well.

It's more difficult to buy.

And so we're always in that sort of balancing act and.

But that that's.

That's been a.

Sort of where we are today in terms of the.

On the 70 million John do you have the cap rate on that I don't have it right here.

Yeah, Jeff it's a 6.1 cap rate handle on.

<unk> 7 million of acquisition debt or under contract.

And then on the on the dispose, you'll see higher cap rates than the 6.1 because as Jeff mentioned the assets that we are in the market disposing now our lower quality assets.

And we're upgrading the portfolio by by selling those assets. The reason I say, they're lower quality is based on several factors number 1 the number of them are shadow anchored centers.

And on several of them have anchors that are not the 1 or 2 grocery in their market.

Anchored by grocers, such as a winn Dixie names like that and so the cap rate on those dispose is higher than what youre seeing on our acquisitions, but again as Jeff mentioned once we get through.

The disposal volume that we've articulated we believe that the portfolio upgrade is behind US and then our guests both strategy on a go forward will be purely opportunistic where if the market's willing to pay an unlevered <unk> on a half IRR for an asset and we think we can redeploy that capital.

At an 8 or better on Levered IRR, we will do that.

Got it got it thank you for that color.

And then if I could a follow up on the billings.

You mentioned the balance of $12 million 5 million vendor a payment plan on some form I'm curious what the timeline for that repayment of debt 5 million is and then the other $7 million, maybe you could talk about the industry's expectations. There. Thanks great.

Great. Thanks.

John do you want to cover that yeah, I'll take that so so that's right we were about $12 million of Outstandings.

On a good chunk of that includes the cash basis neighbors. So what we would expect is the weighted average over that is basically over the next 4 quarters. So about half of it this year half of it next year.

On that 5 sorry, that's the $5 million of payment plans that we have so we'll get a portion of that.

About half of it with regards to the remaining $7 million, we've actually looked at it and we continue to collect it so we do see positive moving.

At the rate that its going I would expect it to be of a similar timeframe.

On that.

And I think we're right now trying to make the best decisions based on.

Opportunities for the space the leasing at the center and I know our portfolio management and operations team Theyre looking at it and saying is this the best and highest use.

And if so then they're a bit more patient, especially if we're making progress there, but if we've got leasing opportunities.

We're a bit tougher.

Got it got it all right. Thank you guys.

Thanks, Andrew.

Thank you. Our next question comes from Paulina Ross Smith with Green Street, You May proceed with your question.

Good morning.

You recently of course completed your I P O N.

Curious what did you learn in the process of talking to investors and analysts.

Yeah.

What is in your opinion, the most underappreciated aspect of your portfolio.

On the opposite side and what aspects.

This investor community Phillips with more skepticism.

Thanks, Thanks, Paul.

You know.

It is it's it's it's it's there's some incredible process.

We.

We're just finishing our board meeting and we did we did we talked at length about the fact that the.

The company.

In preparation for this process.

Was at the top of the game that we'll probably ever be in terms of knowing exactly.

Every piece of the company to a to a degree because we were.

We will.

Fully engaged in the conversation and we got tremendous questions from the investment community about their concerns and the things that they they liked the things they didn't like.

I would say in terms of the things we learned it was that you had to be really well prepared and you really have to understand how each investor was kind of looking at.

Your your.

Your company.

And how do you how do you explain to them, what what Youre doing and how you think about it and that approach. So I would say that we were.

But my biggest takeaways, but we.

<unk> believed that there was a strategy.

Providing necessity based goods and groceries to the average American.

We're the guys who invested they truly believe that that is a <unk>.

Segment that is meeting is very relevant.

It's a very very big segment.

But it's also 1 that is under represented in the in the public markets.

And are they the ones who who.

Bought into the stock I think believe we're big believers in that and obviously, we're big believers in that and we.

We're telling a story that we've done for 30 years, not 1 that we're kind of making up to get ready to be public maybe net debt.

It did make it a lot easier for us because we've been doing it for a long time, but but that was I would say those would be my biggest takeaways I don't know.

Devin.

Uh huh.

John if you have any other comment.

ABR is the is a very important metric demos is a very important metric.

And.

And as you know on.

Our ABR is the lowest of any of our peers.

And our demos are at the low end of the range.

And the.

Perspective that we had to successfully communicate to investors was that look we are in the necessity retail business.

And we're providing necessity goods and services to the average American consumer.

And we don't need $40 rent, because we're not selling high end shoes, and handbags et cetera.

Where you need those kind of rents to be successful and so we had to educate investors on the fact that if you look at our historical track record and the components that matter, which is same store NOI growth and <unk> per share growth, we have market leading results in those 2.

<unk>, even though our ABR is in our demos are at the low end of the range.

And so I think we made a lot of progress and the investors that.

Participating in the IPO I think understand our strategy and recognize our strategy.

There are still in basket that we have to convince and we will continue to work hard to convince them that you know.

You need to focus on same store NOI growth and <unk> per share growth and focus less on some of these other metrics that have taken.

<unk> taken a priority over time.

And I would say that that was.

Something that that we learned.

Thank you.

<unk>.

And then data question yourself on your capital projects.

He is just ground up developments, which are mostly small scale. Once you kind of know parcel developments.

At what pace do you think you could believer these projects.

I'm trying to understand the impact they could have on same property NOI growth and thoughtful way.

Yeah, So we have targeted about.

About $50 million of those projects a year.

We would love to do a lot more of them because they're very profitable.

Our incremental cash.

Cash flow from these properties and between 9% to 11% and we've actually outperformed that in the price. We delivered so far. It's you know, it's just that they're very difficult, but you know they take time and it takes a lot of work to deliver them.

So we think that that's the range that we can deliver.

To deliver on it. It includes 2 things. It includes what you were talking about which is these.

Individual either single tenant or multi tenant buildings that we build on the peripheral of the.

Shopping center, usually out on the main street.

But that are incremental.

To the to the existing properties.

That's the main 1 the second piece is the.

Teradata rebuilds that we do for public and.

That is another cash.

I'd agree where we do.

Do invest money and that's part of the $50 million.

Hey, and pulling out I'll jump in here. So in our supplement we do provide kind of targeted stabilization for for the projects that are currently underway and many of which are delivering here now.

Debt are delivering here in the third and fourth quarter of 'twenty, 1 as well as in the first quarter 'twenty..2 so we have an additional pipeline of projects debt.

We're getting ready to will begin and then from there and a lot of those have I would say generally like 12 months timelines, especially including the tear down rebuild from publishers basically from start to finish a lot of these projects by the time you get through design permits and what have you it.

It takes about a year. So it's it is it's pretty evenly on.

Over the quarters, but that might give you a help on the timing.

Thank you.

Yeah.

Thank you. This concludes our question and answer session I would like to turn it back to Mr. Edison for some closing comments.

Right.

Thank you everybody for being on the call today, we really appreciate it.

As you know we've been.

Salmon on.

The the IPO.

Really very excited to have that accomplished that.

The team has performed on this has been incredible.

If you look at every associate of Pico they were touched by this process and.

They all contributed and we Couldnt get it done without a full team effort and.

Obviously it.

We were able to accomplish it.

We know that a team that is focused in but also deliver it and so this is.

Mainly as a testament to everyone on the company Who's really put there.

Yes on the shoulder into it and gotten gotten us over the edge there, but at the same time, while we produced really well on the operating side and it's that doing all that at 1 time is difficult but.

<unk> really pulled it together. So you know this is a testament to them and we appreciate all of your spend on the time with US today and obviously there are additional questions. Please call. So have a great day, everybody and thanks for being on the call.

Thank you you may now disconnect.

Q2 2021 Phillips Edison & Co Inc Earnings Call

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