Q4 2022 Phillips Edison & Co Inc Earnings Call
Please standby we're about to begin.
Good day, ladies and gentlemen, and welcome to Phillips Edison, the company's fourth quarter and full year 2022 earnings Conference call. Please note that this call is being recorded.
Now like to turn the call Kimberly Greene head of Investor Relations. Please go ahead. Thank you operator I'm joined on this call by our Chairman and Chief Executive Officer, Jeff Anderson, Our President Devon, Murphy, and our Chief Financial Officer, John Caulfield. Once we conclude our prepared remarks, we will open the call to Q&A after today's call an archived.
Version will be published on our Investor Relations website.
As a reminder, today's discussion may contain forward looking statements about the company's views of future business and financial performance, including forward earnings guidance and future market conditions. These are based on management's current beliefs and expectations and are subject to various risks and uncertainties as described in our SEC filings specifically in our most recent.
Form 10-K and 10-Q.
In our discussion today, we will reference 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 press release, and supplemental information packet, which have been posted to our website. Please note that we have also posted a presentation with additional information our caution on forward looking statements also apply to these materials.
Now I'd like to turn the call over to Jeff Anderson, Our Chief Executive Officer, Jeff.
Thank you Kevin and thank you everyone for joining us today.
The <unk> team in 2022 delivered another year of strong growth with same center NOI, increasing by four 5%. We continue to benefit from a number of positive macroeconomic trends that drive neighbor demand and support our growth, including hybrid work migration to the sunbelt and popular.
Asian shifts that favor suburban markets. These demand factors are further amplified because of limited new supply is being delivered to the market.
We accomplished a great deal in 2022 and have a lot to be proud of.
Macroeconomic level the year presented many challenges with record inflation rising interest rates and global complex.
The sustainability and consistency of our growth is a testament to our differentiated and focused strategy.
So simply owning grocery anchored neighborhood shopping centers and the strength of our integrated and experienced operating platform.
As we assess our business today, we're optimistic about the health of our neighbors and the strength and diversity of our neighbor mix.
<unk> in 2022 delivered record highs and occupancy of 97, 4% and combined leasing spreads of 18, 1%.
Our development activity provides attractive risk adjusted returns on investment and sustainable and meaningful contributions to our same center NOI growth.
Acquisitions are performing very well and our pipeline continues to grow.
We closed on an asset in January with more under contract and in negotiation we.
We observe the market power shifting to the buyer and with our platform experience and capital this should position us well to capture additional opportunities.
Our centers are located in markets that are growing and have a strong competitive advantage with our grocery anchors.
We have grown our cash flows and dividend distributions, we have a great balance sheet low leverage and flexibility to be both patient and opportunistic.
We could not have accomplished these results without the hard work of our Pico associates I'd like to thank the Pico team for all of their efforts.
As we look ahead to 2023, we remain focused on delivering long term growth are grocery anchored neighborhood centers continue to benefit from structural and macroeconomic trends that create strong tailwind and drive strong neighbour demand.
These trends include population shifts from the urban to suburban markets. The increase in hybrid work the renewed importance of physical locations and last mile delivery wait.
Wage growth and low unemployment and low supply and lack of new construction.
The resiliency of our neighbors combined with the aforementioned tailwind position <unk> well for all economic environments due to the following.
Our grocery anchored necessity based neighbor mix <unk>.
Our right sized formats.
Our well positioned locations and growing markets are.
Our record high occupancy and continued strong neighbour demand.
Our strong credit neighbors and diversified mix.
Lack of exposure to distressed retailers.
Our balance sheet, and our talented and cycle tested team when.
When we consider our pricing power created from continued retailer demand at high occupancy combined with these aforementioned tailwind and the resilient necessity based focus of our neighbors, we believe our growth strategy generates more alpha with less beta.
Okay.
Well John will provide details of 2023 guidance later I'd like to spend a few minutes walking you through the components of our long term growth.
We believe our portfolio can deliver organic same store NOI growth of 3% to 4% on a long term basis the.
The components of this growth include continued increases in occupancy, which will contribute 50 to 100 basis points.
Rental growth, which will contribute 100 to 125 basis points through new and renewal leasing spreads and.
And contractual rent increases, which will add 75 to 100 basis points.
And redevelopment and development activity, which will add 75 to 125 basis points. This gets us to our 3% to 4% long term growth.
Beyond the strong internal growth, we remain focused on accretively growing our shopping center portfolio.
These investments are core to <unk> long term external growth strategy, and we continue to be well positioned to capitalize on opportunities as they arise.
We are conservatively guiding to 200 and $300 million and net acquisitions this year.
What are the capabilities and the leverage capacity to acquire more if attractive opportunities materialize.
Previously increased our targeted return for new acquisitions to an unlevered IRR of 9% or above.
Glad to participate in the market when we can achieve this return objective.
<unk> the same diligence we've always exercise.
We are finding those opportunities today.
Therefore, with our combined internal and external growth drivers.
We believe Pico can deliver mid to high single digit <unk> per share growth on a long term basis.
I'd now like to provide a quick update on the proposed program Albertsons merger from <unk> perspective.
We continue to believe that the merger is positive for <unk> and for our centers and for the communities that we that our centers serve.
We have 33 stores with an overlapping brand within three miles that could potentially be impacted.
These stores have average store sales of $35 million or $620 per square foot.
This compares to <unk> average of $6 42 per square foot.
These are all productive grocery locations with strong sales and health ratios.
Centers are also vital parts of their communities.
We believe all 33 locations will remain productive grocery locations, regardless of the ultimate outcome of the merger.
This merger process will take time to unfold, but.
But we remain positive on the impact it will have on the assets that we own.
I'll now turn the call over to Devin to provide more color on the operating environment Devin.
Thank you Jeff.
Good afternoon, everyone and thank you for joining us.
As Jeff mentioned, the Pico team is encouraged by the continued positive trends that we're seeing in our grocery anchored portfolio and in the overall operating environment.
We realized strong internal growth in 2022, which is reflected in our financial results.
Lease portfolio occupancy increased by 30 basis points sequentially from the third quarter.
And by 110 basis points year over year, reaching an all time high of 97, 4%.
We still see some occupancy upside in our portfolio.
And when that driver of growth is no longer available, we believe that it will be replaced by incremental rent growth.
We are seeing that transition today as our rent spreads have increased above historical levels.
Throughout 2022, our neighbors demonstrated resiliency and successfully manage many challenges, including inflation supply chain issues and labor shortages.
Despite these challenges our neighbors continue to invest in their stores their technology platforms and the overall customer experience.
Comparable new and renewal rent spreads for 2022 were strong at 32, 2% and 14, 6% respectively.
Excluding anchors renewal spreads were 17, 7% in the fourth quarter.
Our leasing pipeline remains strong and shows no signs of slowing.
The most active neighbor categories include medical quick serve restaurants, and health and beauty.
We are seeing consistently strong neighbour demand across all geographic regions.
We continue to have excellent success, retaining our neighbors while.
Growing rent at attractive rates.
Our fourth quarter retention rate was 92% ahead.
Ahead of the historical average of 87% over the last five years.
As Jeff mentioned this factor is a large contributor to our rent growth over time.
Our retention mean, no downtime and less tenant improvement costs.
Our ti spend on renewals over the last five years average less than $2 per square foot.
We also have been successful at driving higher contractual rent increases.
Average, our new and renewal in line leases executed in the fourth quarter had annual contractual rent bumps of two 4%.
Another contributor to our long term growth.
In addition to our strong rental growth trends, we continue to focus on and expand our pipeline of ground up out parcel development and repositioning projects.
In 2022, we stabilized the highest number of these projects that the <unk> team has ever delivered in a single year.
These projects delivered over 300000 square feet of space and add incremental NOI of approximately $5 million annually.
These projects provide superior risk adjusted returns and have a meaningful impact on our long term NOI growth.
In 2023, we will invest $50 million to $60 million in ground up out parcel development and repositioning opportunities with average estimated underwritten cash on cash yields between nine and 11%.
We continue to see the many benefits of P codes grocery anchored portfolio with our healthy mix of national regional and local retailers.
More than 70% of our rents come from neighbors offering necessity based goods and services and our top grocers continue to drive strong recurring foot traffic to our centers.
We are currently seeing a resilient consumer despite the tougher macroeconomic backdrop.
We believe our centers are less impacted by an economic downturn, because more than 70% of our rents come from necessity based goods and services.
Our trade areas offer favorable demographics with median household incomes of $77000, which is approximately 9% higher than the U S media.
The demographic strength of our trade areas is reinforced by the continued demand from retailers for space at our centers.
In a recession consumers will continue to frequent the grocery store the barber the local quick serve restaurant and other necessity retailers.
Our single non grocer neighbor is T J maxx at one 4% of ABR.
And all other non growths are neighbors are less than 1% of ABR.
Pico has no exposure to luxury retailers.
Office or theaters and very limited exposure to distressed retailers.
The top 10 Nabors currently on our watch list represent just 2% of our ADR.
As a reminder, our combined exposure to bed Bath <unk> beyond and party city is minimal.
These key retailers represent 10, and 20 basis points of ABR, respectively, 26% of our ABR is derived from local neighbors, 64% of our local nabors rents come from retailers offering necessity based goods and services.
Our local neighbors are successful businesses run by hard working entrepreneurs.
They have healthy credit and are less susceptible to corporate bankruptcy caused by weaker performing locations.
Our local labor typically received less capital at the beginning of their lease.
Except more pico friendly lease terms.
Had high retention rates and achieved renewal spreads similar to national neighbors.
Accordingly, they differentiate the merchandise mix at our centers offer our customers.
Our local neighbors are resilient and have been in our centers for eight eight years on average.
According to Costar as recent global predictions report.
<unk> Street stores and essential retail are among the most resilient retailers during recessions.
During the pandemic.
<unk> stores and the foot traffic to these centers recovered at a faster rate than that of other retail locations.
Since the pandemic the vacancy spread between grocery anchored and non grocery anchored centers has widened.
Grocery anchored centers are well positioned to maintain these lower vacancies, which we are experiencing in our portfolio.
We expect these favorable trends to continue to benefit T goes well located grocery anchored neighborhood centers in 2023 and beyond.
We have added slides to our investor presentation on these recent costar insights.
In summary, the Pico team remains optimistic about the current strong operating environment and the continued positive momentum we are experiencing across leasing redevelopment and development.
In addition, our healthy neighbor mix and grocery anchored strategy positions <unk> well for continued steady growth.
I would now like to turn the call over to John Thank you Devin and good morning, and good afternoon, everyone I'll start by addressing fourth quarter results provide an update on the balance sheet and then walk through some highlights of our initial 2023 guidance.
Fourth quarter 2020 to NAREIT, <unk> increased 43% to $71 million.
Or 54 cents per diluted share.
This result benefited from an increase in rental income and reduced general and administrative expenses.
Fourth quarter core <unk> increased 22% to $74 million or <unk> 56 per diluted share driven by increased revenue at our properties from higher occupancy levels and strong leasing spreads as well as lower property operating costs and general and administrative expenses.
Our fourth quarter 2022, same center NOI increased to $91 million up two 8% from a year ago.
This improvement was primarily driven by higher occupancy and an increase in average base rent per square foot driven by our strong renewal and new leasing spreads, which was partially offset by lower Collectability reserve reversals in the current period when compared to 2021.
During the quarter, we acquired two grocery anchored shopping centers and one out parcel for $52 million and we sold one shopping center and went out parcel for $25 million.
Our net acquisitions for the year was $226 $5 million subsequent to quarter end, we acquired one additional grocery anchored shopping center for $27 million.
From a balance sheet perspective, we ended the year with over $700 million in borrowing capacity available on our $800 million credit facility and we have no significant debt maturity until the second quarter of 2024.
Between the cash flow generated by our portfolio and the significant capacity available on our revolver. We are confident in our ability to fund our growth plans, which is an important place to be given the current capital market environment.
Our leverage ratio continues to be strong as a result of our strong earnings growth as well as our prudent balance sheet management with our net debt to adjusted EBITDAR of five three times as of December 31, 2022, compared to five six times at December 31 2021.
Year end 2022, our debt had a weighted average interest rate of three 6% and a weighted average maturity of four four years, approximately 85% of our debt was fixed rate.
Yeah.
We continue to monitor the debt capital markets to the right opportunity to extend our maturity profile our variable rate debt allows us to maintain flexibility such that we can access the bond market or bank market without prepayment penalty and and our low leverage reduces the impact of rate volatility to our earnings.
We anticipate addressing our 2024 maturities along with long term funding for our expected 2023 acquisition volume later this year.
We believe patients as prudent as we continue to gauge the attractiveness of the market.
Turning to guidance.
Please be sure to review the incremental detail added to our press release, which we have also added to our supplemental.
Starting with our same center NOI growth, we are guiding to a range of 3% to 4% growth from our portfolio in 2023.
This growth is aided by our leasing activity in 2022 with increased occupancy and favorable rent spreads and our development and redevelopment activity.
Included in this range as the negative impact of normalizing our anticipated uncollectible reserves to historical levels of 60 to 80 basis points of revenue.
Our initial core <unk> per share guidance range is $2 28 to $2 34.
Our internal growth is aided by an incremental lift from our 2022 and anticipated 2023 acquisitions, partially offset by incremental interest costs.
As we look to 2023, we anticipate approximately $86 million of interest expense at the midpoint.
Our acquisition pipeline is healthy for 2023, we are guiding to acquire between $200 million and $300 million of assets net of disposition activity.
Further optimize our internal growth we plan to continue to selectively recycle assets with proceeds being deployed into high quality higher growth assets.
As Jeff mentioned, we believe we are well positioned for long term growth and we are delivering strong internal and external growth importantly, we have the flexibility to be patient and pursue accretive opportunities as they arise that will provide meaningful NOI contribution in 2023, 2024 and beyond and maybe most.
Importantly, as we consider the economic uncertainties, we continue to have one of the strongest balance sheets in the sector, allowing us the ability to remain on offense and till they quickly and respond to changing market conditions.
We believe our strategy has historically and will continue to prospectively generate excellent risk adjusted returns our results in 2022 are no exception.
With that we look forward to taking your questions operator.
Thank you Mr Caulfield, ladies and gentlemen at this time any questions simply press Star. One on your question has already been addressed you can't remove yourself from the queue by pressing star one again I think our first question today from Craig Schmidt of Bank of America.
Thank you.
We will peak coast total occupancy and small shop occupancy and.
At the end of 2023.
Will it be up John you wanted to.
Sure. Thanks for the question Craig So we still believe that we have room to grow our occupancy currently we were at 99% plus on the anchor so we're down to a few spaces. There. So I think that part holds still but at 93, 8% on the in line, we still believe we.
Have about 150 basis points.
That we can grow that and I would say that's probably over the next 12 to 18 months.
Great and then just on the adjustment for UN Collectability.
Three five to four five versus two.
When I look at your portfolio I E.
Little exposure to banks.
Bankruptcies and store closings.
What what's driving you to this higher number.
John sure.
Yeah, Jeff I'll take that one again, so really what you see in 'twenty, two being less and that was the final amount of reversals from previous year's coming through as we look to it. We said that this portfolio has delivered 60 to 80 basis points of uncollectible on each year.
So that's really the guidelines for that I mean, we believe it's going to be consistent from one year to the next but thats on this portfolio. That's what our experience has been.
Thank you.
Yes, Thanks, Craig.
Thank you we'll go next now to handle some juice.
No.
Hi, there. This is Ravi with you on the line for Honeywell Cinches.
Hope you guys are doing well.
Can you discuss your decision to buy an asset with relatively lower occupancy versus the rest of your portfolio what sort of upside do you see there and is this going to be more of a targeted strategy going forward with regard to external growth.
Robert Thanks for the.
The call and I appreciate you being on today so.
So we're.
One of the things we did.
Over the last 30 days is really are really 60 to 90 days is look at our cost of capital and as Thats gone up we've actually adjusted our Unlevered IRR from 8% at the IPO to 9% today.
And one of the things that we're looking for are opportunities, where we can have growth.
And a variety of different ways in the properties that we're buying.
And we.
We see lease up occupancy is one of those opportunities in select.
Locations on select properties, but we're looking at ways that we can find properties with with more growth potential than real stable.
What kind of returns over time, so yeah. I think you can expect us to be more active in that market.
And but.
But as you know.
The markets are.
<unk> got some pretty big bid ask spread today and so we do anticipate that buyer will be a little slower, particularly in the first half of the year.
Got it. Thank you that's helpful. Just just one more here with regards with leasing.
It's been a very you know leasing demand is very strong and it's been very active but how sustainable do you think the current leasing spreads are especially with new spreads over 30% like how healthy are the retailers are from an occupancy cost ratio standpoint to be able to sustain these continued higher leasing spreads.
Yes.
Kevin do you want to take that.
Sure.
Ravi Thanks for the question again, we're not seeing anything that causes us to believe that those spreads are not achievable at least in the near to mid term and I know that number at 30%. When you see it seems shocking the have to realize that these retailers are.
Entering into leases between five and six years and the CAGR were getting is less than 3% and the way. We think about it is when we look at our overall ABR are overall in line ABR increased approximately 5% year over year and when you think about how retail sales.
Are growing particularly in the categories that we have large exposure to so food health et cetera.
Retail sales have been growing at mid single digits.
Low double digits and so the fact that our average ADR is growing at mid single digits makes us comfortable that we can continue to sustain these kinds of spreads and at the end of the day the ultimate <unk>.
The tape is the fact that we don't see any slowdown in the demand coming from the retailers too.
Lease space in our centers.
Yes.
Got it thank you so much Rob.
We also I mean, our retention rates are staying really strong and so that would be needed.
Cater that rents were moving and if anything they're higher than they've been so.
With what Devin said and that we are.
We do feel that there is this is a long term sustainable model to be able to increase rents in that.
4% to 6% range that overall in terms of rental that the retailers will stay healthy and can absorb that kind of cost increase.
Thank you I appreciate it.
Yes.
Thank you. We'll go next now to Tayo Okusanya at credit Suisse.
Hi, Yes. Good afternoon, everyone. Just a quick one on interest rates.
The the swaps that are coming due September 23, just kind of curious about the thoughts on that.
And how that's built into your guidance.
John you want to take that.
Sure. Thanks Pam.
So as we look at it we have positioned ourselves to be patient and with flexibility. So we do have a maturity.
Of swaps and in September we also are looking at that.
The debt maturities that we have in 2024 and as I mentioned in the prepared remarks, we anticipate addressing those 24 maturities later this year with incremental long term funding and we would anticipate that we would sell for it at that time. So we are looking at extending but.
At this time, we don't have we do have assumptions in there that were refinancing the debt related to <unk> 24, as well as taking care of that at that time and that could be in the bank market. It could be in the bond market, it's really going to be dependent upon our cost of capital and maintaining an attractive cost of capital as we can.
Okay. That's helpful. My.
Second question, I mean, you're starting to see some signs of inflation coming down.
I mean, I think there's even a view out there that after a while and maybe like you know food prices.
Could actually to go into a discretionary type scenario, which typically hasn't been really typically has done a very good environment for grocers. Just think are you hearing some of that from your grocer neighbors at this point and how do they kind of prepare for such a scenario that if it does kind of occur in the next nine to 12 months.
Yeah.
So David Thanks, Thanks for the question.
We're not hearing that from our grocers that.
They are still.
Sort of ringing the bell on inflation not on.
Deflationary environment.
They still are.
Having very positive operating results, where theyre actually up have been able to pass those costs onto their.
Their customers so as long as that continues.
That will be positive certainly I think you were saying the deflationary environment is not positive and we would agree I mean for the grocers.
Like a <unk>.
I love that 2% to 3% inflation, it's certainly too high right now from their perspective, and they don't see from what our conversations that that coming down.
In the short term.
I don't know if you have any other thoughts on that.
No that makes sense, yeah that makes sense.
Thank you.
Thanks, Jeff.
Thank you well go next now to one Santa Maria at BMO capital markets.
Hi.
Thanks for the time, just just hoping you could provide a little perspective on the acquisition market and pricing and where the bid ask spreads are today and just curious if you could give us the yields for the.
Fourth and first quarter acquisitions, and kind of what is baked into the assumptions for 'twenty three guidance.
Let me give you I'll give you some general I don't think.
We're now putting out there the those yet in terms of last year, but John if we are you can.
Step in but.
What's happening in the market as you know what.
It happens a lot of times when there's a change in the cost of capital and that is it takes time for the buyers and sellers to reduce that spread.
And so.
Volume is down clearly in the second half of last year and we're starting into this year.
Overall volume is down.
And.
So I would and we would anticipate that continuing.
And until that sort of bid ask starts to start scenario that we are finding select opportunities that we are very excited about and we think you know this.
These were.
Our our positions, where we've got a seller with with that that is motivated to sell and is moving to what we think is the the newer market pricing quicker than maybe the overall market is and so we are going to actively look for those opportunities and take advantage of them when they come.
So I.
I would say it's.
Our feeling has been that.
It's about 100 basis points in terms of that of of initial yield and it's probably.
You know at least 100.
Plus on the.
Unlevered IRR so that.
That's a pretty big move.
And it is going to take some time I think to fully realize that and there's probably potentially depending on what happens with rates you know the ability for that too.
Widen even even more so we will see but we're continuing to look at everything that's coming on the market and hopefully we can find some some good opportunities we feel like we've found a couple so far.
And we're going to continue to look at those and take advantage of that if we can if we can find them.
So Jeff I'll I'll jump in there so for the full year, our weighted average cap rate was a 6.1.
But to the point that Jeff's, making there is variability in there because because we focus on the IRR there can be a delta in the going in cap rate based on the amount of growth that we have so if you were to look at our third quarter acquisitions compared to our fourth quarter acquisitions and the fourth quarter was closer to our total year weighted average cap rate, but I would the iron.
<unk> make up for in the growth in that asset relative to the third quarter and I think as we look to 'twenty three.
If you're at 20 261, I can see that we are assuming.
We will have a slightly higher yes.
Cap rate on that assumption, so, let's say you know anywhere from.
15% to 30 basis points, but it could be wider than that again dependent upon the amount of growth in the key element for us is that 9% IRR and exceeding that.
And then just the second follow up question on written.
Retention versus pushing the spreads for the small shop tenants.
I know that retention was very strong for anchors, but just curious on your willingness to maybe have a little short term vacancy.
Drive rates at this point it seems like you are.
Pretty darn full so just curious on how you're strategically thinking about that interplay between rate.
And retention.
It's a great question, it's one that there's a lot more or two then there is science because obviously the numbers can tell you how much ti you're putting in in and what the increase in rent as compared to the lower Ti for retention and that certainly goes into our analysis.
But a lot of the a lot of ours is also making sure we have the right merchant in the center of that matches that that store because if they can continue to generate and increase their sales. They can over time pay us a lot more right and so finding the right retailer for us as a critical part of that sort of does.
<unk> process as we look at filling out our small store space with the with the right merchandising mix for each market that we.
We go into.
Hey, Jeff.
The only thing I would add to that.
One is is that I think our retention rate in the fourth quarter was indicative of our willingness to push rate and.
<unk> <unk>.
The less focused on retention you saw our retention rate in Q4 at 67%, which is lower than the full year average of 77, 5% because the decision. We made in that fourth quarter was we wanted to push rate and we wanted to optimize merchandise mix. So at the end of <unk>.
The day, we're not overly weighting retention.
What we're waiting is our ability to push rate and get the right merchandise mix into the centers and I think you see that with what our retention rate for in line.
Did indeed.
In the fourth quarter.
Thank you.
Thanks, a lot. Thank you.
Thank you we'll go next to Todd Thomas of Keybanc capital markets.
Hi, Thanks.
John first question I, just wanted to go back to the balance sheet.
So the swap expires in September and guidance assumes throughout the balance of this year of 23 that the cost on the $255 million increases by about 325 basis points for the balance of the year and perhaps an early 24 is that right and it looks like the 24 maturities are.
September and October when would you expect to refinance those those maturities.
Sure Hey, Todd.
I would say that yes, the only thing what's your 325 basis point increases in debt.
You're comparing where it is to where kind of spot chauffeur is but if you were to actually term that out over a longer duration than that rate does come down, but I think as it going in yes, you would see that in September .
Look we continue to assess every day different opportunities whether it be in the bank or the bond market you are correct the maturity in 2004.
The $100 million in May and then the remaining 375 is basically September 30th 2024, and we'd be looking to extend those maturities to refinance those maturities in the middle Middle part of this year could be Q2 can be anytime really but we are watching.
And once it actively push that out I would say no later than five.
I prefer to be earlier, but we have the ability to be patient and the line in the liquidity and their relationships to give us gives us that flexibility and timely, but if I were to model I would turn the <unk>.
Middle to the end of this year would be the right way to think about it.
Okay.
And then is there any additional capital raising activity embedded in guidance for 2023, and how should we think about funding acquisition net net investment activity during the year.
So our guidance, yes, so our guidance does not have included any any equity raise I think that is something that as we evaluate our cost of capital it is something that.
We are balancing both on the equity side and the debt side and so when we look at our ability to fund our acquisition plans for the year, we feel very comfortable and confident that we can do that and then in terms of the debt capacity I think again, we have great relationships with our lenders, but also we we looked at the unsecured market.
To the private placement market, we look to the bank market, where we really are focused on cost of capital and as we've discussed internally it may need to be it could be it makes it anything it can be it makes it all so.
Specifically, we don't have that but I also think that when you give the liquidity position that we're at five three times on a debt to EBITDA and you look at the growth that we have planned.
We feel very good that we can manage our funding activities and keep to the guidance range that we stated.
Yeah, Hey, Todd, it's Devin just adding onto what John just said given the amount of free cash flow after dividend that we generate.
We can acquire $250 million a year in acquisitions without ever having to go back to the equity market. So given the fact that $2 50, as the midpoint of our range for the year we.
We have not assumed any additional equity.
Given that given the amount of free cash that the business generates.
Yeah.
Okay. Yeah. That's helpful. Then.
Alright, and then I just had one follow up I guess going back to the bad debt expense commentary.
I hear the comments about you know the forecast for 'twenty three the assumption there in guidance being a more historical average.
Of 60 to 80 basis points, but it did increase a little bit in the fourth quarter. The run rate there is above the full year 'twenty three.
Forecast can you just touch on that uncollectible revenue in the fourth quarter.
Sort of what impacted that what you saw in the portfolio.
Yes, John sure.
Yeah. Thanks, Yeah, So I would say on that the interesting part of this as it has been such a focal point post COVID-19, because theres variability and I would say that actually fundamentally there isn't anything unusual in the fourth quarter. It does tick a little higher but I would also say that historically, our fourth quarter does typically take a little high.
Here, but then we also have experienced in the first quarter, where it can actually be better than expected. So when we think about the 60 to 80.
Fortunately, it's a challenge to do it on a quarter by quarter and it ends up kind of smoothing out because right now we're focused on reversals from one period to the next but in the fourth quarter I had reversals from Q2, and Q1, which is why ultimately we do look at on a smoothed out basis, but I don't want to like we do.
Look at it on a granular naval neighborhood by neighborhood level and including the type of <unk> that they have and the like and so it was higher but I actually if there is nothing fundamentally that actually drill.
And drove us to do that other than a slight seasonality.
Okay, so not seeing anything in the fourth quarter regarding the sort of tenant health maybe from some of the local neighbors or anything like that that you can point to.
Just a little seasonality in the fourth quarter and you'd expect that to sort of just smooth out a little bit during the course of the year.
I do and in fact in the first quarter of boats, both at an <unk> level and even from a health level as the first quarter is actually better than we would have expected otherwise. So we are not seeing any signs that our neighbors are are having difficulties.
Okay. All right helpful. Thank you.
Yeah. Thanks, Thanks, Tom.
Thank you and ladies and gentlemen, just a reminder, star one please for any questions.
Now Q4 stands item at Compass point.
Okay.
Thanks for taking my question guys.
Okay.
Looks pretty good.
Obviously your portfolio has proven to be very resilient something Jeff you've been harping on since you went public here.
Encouraging to see that actually show through into the numbers as well.
<unk>.
I'm curious about your small shop.
You've got a.
Pretty strong leasing spreads 17, 7% for your average spreads for your small shop is it correct to assume that the majority of your signed not open pipeline of around 100 basis points isn't that in that bucket in the small shop, which gives you the confidence in terms of pure.
Your same store NOI growth for 'twenty three.
The answer is yes that is how we.
We're looking at our backlog today, and we feel comfortable in our guidance.
Guidance based upon that but as you know, Florida. So we've been we've been we've been talking about this for a long time.
Continue to be really good.
Uh huh.
Pricing power for us in the on the leasing side and.
I appoint the Devin made earlier some of these numbers strike you as big numbers.
Like 17% or 35%, but when you when you figure that that's coming over a long period of time in over a piece of our portfolio, just basically getting them to market.
It's not.
These are very sustainable numbers in our in our view and.
So we're we do feel like that as.
As long as we stay in this kind of environment, where the you know the demand is very strong for our space that we should be able to see continue to see these kind of of returns I don't know Deb. If you have any additions on that.
No I think that's the that's the point Jeff.
Okay.
Thanks, and then maybe one follow up here on.
Maybe the composition of your small shop.
How that is changing or how that has changed over the last couple of years I mean, we always.
I guess the.
The view on some of your local neighbors as Joe Barbara the nail Salon et cetera.
But are we seeing more coffee shops, or we see how does the composition of your of your small shop changed and how do you expect it to change over the next couple of years.
Yes, Jeff.
Yeah, great Yeah, Yeah, Floris, I mean, where we are seeing.
Grow as a percentage of.
Demand, it's primarily in a in a couple of categories one of them is medical retail or.
What we call med tail and this is across a number of different verticals. So urgent care primary care physical therapy.
Et cetera, and the depth of demand and the depth of the tenant.
That are in that category is meaningful and we've seen dramatic growth.
And in in the demand from those types of retailers and the other is what we characterize as health and wellness.
And these are uses like med spa like a dry bar would be an example of a tenant in that regard massage.
Sure.
Stretch, which is a retailer named stretch lab, and then fitness club Pilates pure Barre, Orange theory et cetera.
And then lastly, there continues to be very strong demand from quick service restaurant concepts.
And those are names that you're very familiar with like Chick Fil, a shake shack Buffalo Wild wings.
But dan emerging concepts like Dave Hot Chicken first watch et cetera, and the depth of demand coming from these various verticals is is very strong and that's where we're seeing the growth.
Okay.
Thanks, Tom.
Yes.
Thanks, Laura.
Thank you we'll take our next question now from Paulina Rojas at Green Street.
Hi, good morning.
This is <unk>.
To say hi.
Is it fair to say that the midpoint of our guidance assumes your portfolio really navigate this year with solid any sort of softness.
Later today to the macro headwinds that we're seeing because in a way I find interesting that your assumptions I think based on what I have.
<unk> heard are really largely in line with an average year.
And even though this year may not be really odd routes from macroeconomic perspective.
Okay.
That that is a great question I mean, the reason we give a range is so that we can.
Take where we are today and look at it and say okay well this.
If things are.
Get worse, there is some downside in the range and there is and if they if they go great. Then there is some upside in the range.
I think that if you look at the mid point of our range our assumption.
It's an informed assumption.
The assumption Polina, because we have we have a lot of what's going to happen. This year has is already in the leasing and the management and the cost in that contracts. So we have a pretty good vision of this year. So.
It does assume that we don't have a dramatic change from the way it is today, but.
It would be hard for us in the environment. We are right now to see a to go to or.
Really negative scenario now if you get to 'twenty for that that's a different that's a different story because there could be.
More more than a 24 kind of timeframe, but 23 type timeframe, we feel pretty good about these assumptions I don't know John you guys have any other things.
Yes, I was just going to add to that Pauline and good morning.
Pauline as we look at 'twenty three I mean the reason.
We are giving the guidance, we're giving and your perspective on it as we look at 'twenty, 398% of 'twenty three is baked if we assume historical renewal rates. So the the factor that.
We are.
Thinking about renewal rates and given what we're seeing and the continued strength of demand we're very comfortable.
Making the assumption that we're making given how comp what what a high percentage of 'twenty three is already in place and that's the reason why we're confident that we can hit these metrics.
And one additional piece that I would add that gives us confidence is that when you look at the diversification of our portfolio. Both in terms of geography, and we do not have exposure to those large big box retailers that are experiencing that disruption and so.
That gives us.
Confidence because we have a granularity and broad diversity of Naver type.
Neighbour brand.
That gives us a comfort and so that is more consistent.
Yes.
Thank you very good color and then I have another question regarding your redevelopment activity impact. So you talked about the contribution in the long term I think you said 75 to <unk>.
Grid and such.
<unk> and <unk>.
Positive contribution.
Hi.
How should we think about that they can better so that contribution is it because.
Because I would assume really about it.
That could trend down overtime.
After New York sauce, the low hanging fruit.
Opportunities that you have in your portfolio.
Because I would assume part of these is <unk>.
Bringing Suntrust 20 standard and doing some pad developments and there seems to be a limit to that shortly.
Could provide more color around how you're thinking about that contribution for next year for this year and over time it would be.
Great.
Yeah.
Yeah.
Well I'll take a crack at it Doug jump in that.
The way I think about it.
Is that.
These are opportunities that we create at the center basis. So they.
There are places, where we can continue to find these opportunities to buy adjacent land to develop parking lots in partnership with some of the grocers to be able to create some more density in specific locations.
And.
But these are small deals and therefore, they happened in very bite size basis. So.
If you look at the in.
Our plan of <unk>.
$50 million to $60 million a year of this product.
Again, most of this I mean, there is nothing that we're going to get done this year, that's going to create revenue if its not already in the books. So we are looking out on a longer term basis on this and but I will tell you we continue to push and find these opportunities.
And I.
I will give also a credit to our acquisition program because in the acquisition program, where oftentimes, but oftentimes buying into opportunities, where we can find additional value through specific ground up development. So that's.
That's how we're looking at it.
But we believe its a very sustainable business.
And we wish we could do more of it but it takes a lot of time and it takes a lot you know that it happens in small increments, which we love from a risk standpoint, but from a we it would be a lot easier. If we were doing it on one or two big developments, which is not what we're doing so.
Did you have any additions.
Yeah, the only the only thing that I would add colina is.
What we're articulating is that 75 to 125 basis points of our same store growth will come from this activity.
And Youre right. We are currently harvest skiing.
The low hanging fruit in the portfolio, but I think the thing you need to consider is one this is a 280 asset portfolio and the projects that we delivered in the last year represent a very small percentage of that portfolio are number one and then number two we are growing the portfolio.
<unk> over time, and we're finding pinpoint Jeff just need these opportunities and then we're aggressively looking to acquire contiguous land, where we can successfully develop and redevelop so we believe that.
This $50 million to $60 million number is the number that we're comfortable with in the medium term as we continue to look at our existing portfolio and we continue to add opportunities to the portfolio.
Yes.
Thank you.
Thanks William.
Thank you well go next to Mike Mueller of Jpmorgan.
Okay.
Oh, Hey, I was trying to get out of the queue. The prior question was mined so.
Thanks.
Thanks, Mike.
Thank you Mr. Mueller, we'll go next now to Ronald Camden at Morgan Stanley .
Hey, just a couple quick ones just looking through the occupancy and apologies. If you hit on this already but I see the economic occupancy is down 20 basis points quarter over quarter for the inline and just curious what what sort of drove that what happened there.
Thanks.
Okay.
John do you have that.
Just on the I do I was going to say actually I think Devon has add some commentary on that and I think it was what we were talking about is intentional.
He says around merchandising and instances now where because the leasing demand is so strong that we actually choose to vacate in the neighbor and put in our new neighbors to Devin did you have anything you wanted to add to that.
No.
That's the that's the answer John Thank you.
Great.
Then my second question is a little bit of a sort of a competition in a technology question sort of mixed and that was sort of looking at the foot traffic data that you've put in the deck, which is really helpful. I mean, clearly the centers or you know, 2% to 10% above pre COVID-19 levels. That's really good when you guys are thinking about sort of <unk>.
We're saying acquisition and so forth getting a little bit into the secret sauce or do you use some of that foot traffic data number one and number two does the competition.
Whoever that may be do they use it as well I'm just trying to figure out what the what.
What's the secret sauce in the alpha to sourcing some of these deals.
Yes.
Hum.
The reality is our it's all of the above.
It is it is the <unk> of the data.
And as you know, we do use our own proprietary algorithm to actually evaluate every property that we look at both on the acquisition and disposition side and.
Foot traffic is a big part of it.
They're the.
For Us I think the special sauces that we've identified 5800 centers, we want to own and when they come on the market.
No that it is a center at the right price that we would be interested in and we know that the trade area will not only support the grocer, but smart support the small stores that are around it and so we have a very targeted I mean, although it's a very big market. It's very targeted and we we have a very specific niche in the market that.
We are attracted to and we want to we want to buy so that I mean to us that is the the the the <unk>.
Secret sauce is the ability to to look at those centers and be able to find the ones that will be that we believe will be successful and then to bring them into the portfolio. So you know that.
The other thing I would add to that is when you have been doing that.
The sort of continuous learning we have over the last 30 years on this business, we've set up our machine to handle this kind of property, where you have a largely a small store space you have a very strong, but a very defined three mile market.
That's what I think is at the end of the day really the special sauces that.
We have a very specific market and we've built a team that knows how to maximize the value of the properties in those very specific markets.
Great helpful. Thank you.
Yes. Thanks.
Thank you Alicia gentlemen, this does conclude our question and answer session I would like to turn the call back over to the Phillips Edison team.
Yeah.
Thank you Bo before some closing comments from Jack I would like to quickly mention that Phillips Edison team plans to attend the Wells Fargo Real estate Securities Conference on February 22nd the Wolfe Research Virtual real estate conference on March 2nd and cities Global property CEO Conference March 630.
Eight.
Our team looks forward to seeing you, adding him coming Investor Conference also in May we will host our next Pico grow webcast for financial advisors and retail investors with that I'll turn the call over to Jeff Jeff.
Thanks Kim.
Our results continue to highlight the strength of pickles focused and differentiated strategy of exclusive exclusively owning and operating small format well located neighborhood centers anchored by the number one or two gross or in a market with high recurring foot traffic that drives neighbor demand and results in superior financial and.
<unk> performance.
<unk> has over 30 years of experience in the grocery anchored shopping center industry and an informed perspective of what drives quality and success of the property level. The way, we think about quality, we call soar, which includes spreads occupancy advantages in the market and retention saw provides important and sustain.
Double measures of quality and <unk> grocery anchored centers.
We continue to benefit from a number of positive macro economic trends that drive neighbor demand and support our growth plans are experienced and cycle tested team integrated operating platform and grocery anchored strategy placed pico in a great position.
Our fortress balance sheet and liquidity will allow us to take advantage of opportunities as they arise.
We remain committed to delivering long term growth and value for our shareholders.
On behalf of the management team I'd like to thank our shareholders, our associates and importantly, our neighbors for their continued support.
Thank you for your time today and hope everyone has a great weekend.
Okay.
Thank you, Mr. Ed and again, ladies and gentlemen that will conclude the Phillips Edison company's fourth quarter and full year earnings conference call, but again like to thank you all so much for joining us and wish you all a great day Goodbye.
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