Q2 2023 Phillips Edison & Co Inc Earnings Call
Good day and welcome to the Phillips Edison and company's second quarter 2023 earnings Conference call. Please note that this call is being recorded I will now.
Now I'll turn the conference over to Kimberly Greene head of Investor Relations Kimberly you may begin.
Thank you operator I'm joined on this call by our Chairman and Chief Executive Officer, Jeff Anderson, Our President, Kevin 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 Once we conclude our prepared remarks, we will open the call to Q&A. After today's call an archived version will be published on our website.
A reminder, today's discussion may contain forward looking statements about P goes view of future business and financial performance, including forward earnings guidance and future market conditions, either based on management's current beliefs and expectations and are subject to various risks and uncertainties as described in our SEC filings, including in our most recent.
Form 10-K , and 10-Q and 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 or a caution on forward looking statements also applies to these materials.
Now I'd like to turn the call over to Jeff Anderson, Our Chief Executive Officer, Jeff.
Thank you Kim.
Thank you everyone for joining us today.
Before we get into our results for this quarter I would like to acknowledge the recent two year anniversary of <unk> IPO.
I'd also like to highlight the progress the team has made during this period and reiterate our optimism for the future and our long term growth plans.
<unk> strategy remains simple and consistent we exclusively own and operate grocery anchored neighborhood shopping centers.
30% of our rents come from our grocers on average customers visit our grocers nearly two times a week.
We are 98% occupied which gives us strong pricing power.
Leasing demand is at historically high levels for our in line spaces, and we have limited exposure to big box retailers.
We're lowly levered with a great balance sheet and well positioned for accretive acquisitions in a highly fragmented market.
These components have not changed.
We remain focused on owning shopping centers anchored by the number one or two grocer within our market.
Our neighbour base.
Is it an omnichannel strategy and more than 70% of our rents come from neighbors selling necessity goods and services.
Our centers are situated in targeted trade areas with favorable demographics, where our top grocers make money and our neighbors are successful.
Each of these components remain critical to our success.
We continue to believe that format drives results.
<unk> Centre is 115000 square feet, which is the smallest in the shopping center space. This enhances our pricing power.
Our smaller centers allow for better <unk> growth, because they yield higher retention rates and strong leasing spreads are.
Our retention rates averaged 87% between 2017 and 2021 today retention is at 94%, reaching a record high of 95% in the first quarter of 2023.
High retention rates result, in less downtime and lower tenant improvement costs.
Lower capital cost.
Result in better returns.
From 2017 to 2020, our average cash leasing spreads were eight 8%, providing a meaningful avenue for NOI growth.
Combined comparable rent spreads for new and renewal leases were 10, 1% in 2021.
Today.
We are executing record high renewals read rates of 17, 7% new rent spreads north of 25% and 18, 9% rent spreads went all combined.
At the time of the IPO peak goes total portfolio occupancy had exceeded pre COVID-19 levels and was at 96% leased.
De leased portfolio occupancy is at a record high 98%.
Since the IPO, we have pushed annual rent bumps in our new and renewal leases from 2% to nearly 3% on average. Additionally, our smaller format centers in lower exposure to secondary anchors require less capex than other retail real estate formats.
Lower capex leads to higher <unk>.
Over 30 years, we have built a fully integrated operating platform and become one of the nation's largest owners and operators of neighborhood grocery anchored shopping centers.
We continue to deliver on the operating side, which is reflected in our consistently strong financial results since the IPO, we have exceeded market expectations for NOI <unk> and <unk> growth.
<unk> of our performance is an important differentiator.
As a reminder, we define the quality of our performance and our portfolio through the use of the acronym sore. This.
This includes spreads.
Occupancy the advantages of the markets, we're in and retention.
Veeco has a strong track record of external growth through acquisitions, we are selectively acquired new assets that fit our focused strategy at the time of the IPO. We told you our plan was to purchase a $1 billion of assets over the next three years.
Since then the markets have changed we cannot control the markets, but we can control our response to them.
Which remains extremely disciplined and opportunistic.
The transaction market continues to be fragmented and sporadic as we saw with the dramatically lower volume of activity in the first half of the year.
Well, we are currently seeing activity, increasing we believe cap rates are still adjusting slowly in the private markets in response to the higher interest rates.
There are still gaps between buyer and seller expectations.
As we sit here today, we are reiterating our guidance for $200 million to $300 million of.
Net acquisitions this year.
That said if the market remains inconsistent as we saw in the first half of the year, we may be at the low end of that range.
We have a very disciplined acquisition process, we remain focused on accretively growing our shopping center portfolio at the right price, while achieving our acquisition hurdle of a 9% Unlevered IRR.
For the remainder of this year, we remain confident in our business plan as reflected in our guidance increase looking beyond 2023, we believe our portfolio can deliver mid to high single digit <unk> per share growth on a long term basis, given our internal and external growth drivers.
In addition, we still have one of the lowest levered balance sheets in the shopping center space, which gives us the financial capacity to meet our acquisition objectives.
The IPO was a major milestone for our company, but it was just the beginning we remained focused motivated and committed to successfully executing our growth strategy, which we believe continues to generate more alpha and less data.
I'll now turn the call over to Devin Devin.
Thank you Jeff good afternoon, everyone.
Thank you for joining us today.
The <unk> team delivered another solid quarter of growth with same center NOI, increasing by five 3%.
And our portfolio, reaching new record highs in both occupancy and renewal rent spreads.
The consistency of our operating performance is attributable to our differentiated and focused strategy of exclusively owning grocery anchored neighborhood shopping centers anchored by the one or two grocer in a market.
And our platform's ability to drive results at the property level for our integrated and cycle tested team.
<unk> leasing team continues to convert strong retailer demand into higher occupancy levels and rents.
The retailer demand we continue to see is driven by the positive impact of the macro trends of hybrid work and suburbanization.
Our anchor occupancy increased 10 basis points sequentially to 99.
4%.
And in line occupancy increased 50 basis points sequentially.
A record high of 94, 8%.
Representing year over year increases of 70, and 160 basis points respectively.
Leasing activity remained strong and our volume of deals executed in the first half of the year increased year over year.
548 leases.
Modeling over two 6 million square feet.
We continue to capitalize on strong renewal demand and are making the most of the opportunity to strengthening key lease terms and drive renewal rents higher.
Specifically for the second quarter, we achieved a 17, 7% increase in renewal rent spreads and all time high.
In terms of new lease activity, we continue to have success driving meaningfully higher rents in our portfolio.
New rent spreads for the second quarter increased.
25, 1%.
We expect that leasing spreads will continue to be strong through the balance of this year and into 2024.
Our pricing power is the driver of these metrics and we do not see this changing in the near term.
Our ongoing success in leasing continues to be driven by the strong demand for space across our grocery anchored portfolio.
Demand that continues to come from necessity and service based neighbors.
Currently we see leasing demand primarily from restaurants.
Health and beauty neighbors and medical neighbors.
Restaurants represent 40% of our leasing pipeline activity today.
Half of which are quick service restaurants, such as Dunkin Donuts, Zach speed and firehouse subs.
Health and beauty services are 11% of current leasing demand.
Medical or med tail as we call it.
Is the fast growing <unk> and P codes neighbor mix and we continue to see strong demand from medical uses.
<unk> currently represents 6% of our ADR, but 20% of our current leasing pipeline.
<unk> retention rate remained strong at 94% in the second quarter.
High retention rates mean, no downtime and less tenant improvement costs, which.
Which leads to higher stabilized yields and our assets.
As a reminder, our ti spend on renewals over the last five years average less than $2 per square foot.
And average just $1 35 per square foot in the second quarter.
On average, our new and renewal inline leases executed in the second quarter had annual contractual rent bumps of two 6%.
Another important contributor to our long term growth rate.
We continue to invest in our value, creating roundup out parcel development and repositioning projects.
Which remain a good use of our free cash flow and deliver attractive returns.
Year to date we.
We have stabilized seven projects delivering over 175000 square feet of space to our neighbors and incremental NOI of approximately $2 $1 million annually.
These projects provide superior risk adjusted returns and have a meaningful impact on our long term NOI growth.
For the full year of 2023, we now expect.
Back to invest $35 million to $45 million in ground up out parcel development and repositioning opportunity with.
With average estimated underwritten cash on cash yields between nine and 12%.
We have delayed construction starts for four projects that were originally planned to commence in the second half of this year that.
That will now be pushed into 2024, lowering our expected spend in 2023 by approximately $15 million.
We continue to enjoy the many benefits of peak goes 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.
<unk> foot traffic to our centers.
Our local neighbor health remains strong.
Local neighbors, which represent 26% of our ADR continue to thrive and <unk> portfolio.
Getting from the continued strong foot traffic created by our grocer anchors and the strength of our neighborhood locations.
The math behind our local neighbors continues to be positive and it is improving.
Our local neighbors have been in our centers and average of nine years.
This link of tenancy compared favorably to the capital investment average payback period of just 10 months.
As of the second quarter, we have retained 78% of our local neighbors, an increase from 76% historically.
Renewal rent spreads for our local neighbors or 23% for the quarter compared to 18% for the overall Pico portfolio.
In addition to the compelling economics behind our local neighbors.
Differentiate our centers and offer a unique merchandising mix for our customers.
We want to emphasize that successful local entrepreneurs.
<unk> in P codes grocery anchored neighborhood centers.
Okay.
We continue to benefit from a number of positive macroeconomic trends that create strong tailwind for us and drive strong neighbor demand.
These trends include a healthy consumer.
Hybrid work migration to the sunbelt population shifts that favor suburban communities.
And the importance of physical locations and last mile delivery.
These demand factors are further amplified due to limited new supply given the lack of new construction in our space over the last 10 years and.
Going forward given the economic returns associated with new construction.
I'd now like to turn the call over to John John .
Thank you Devin and good morning, and good afternoon, everyone.
I'll start by addressing second quarter results provide an update on the balance sheet and then speak to our increased 2023 guidance.
Second quarter 2023, NAREIT <unk> increased six 7% to $75 9 million or <unk> 58 per diluted share driven by an increase in rental income and our strong property operations.
Second quarter core <unk> increased eight 2% to $77 7 million or <unk> 59 per diluted share driven by increased revenue at our properties from higher occupancy levels and strong leasing spreads partially offset by higher interest expense.
Our second quarter 2023, same center NOI increased to $99 million up five 3% 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 leasing spreads partially offset by lower collect.
Ability reserve reversals in the current period when compared to 2022.
From a balance sheet perspective, we ended the quarter with approximately $629 million of borrowing capacity available on our $800 million credit facility.
Earlier this week, we extended all of our 2024 term loan maturity into 2026 and 27.
The 2026 term loan has 212 month extension option that allow us to push the maturity into 2028 at our election.
This enhances our already strong liquidity position and maintained our well lettered debt maturity profile.
These term loan extension improve our debt maturity profile, maintaining our financial flexibility and allows for a lower cost of capital as we navigate the current debt capital markets.
We appreciate the continued support of our banking partners.
As we look at our floating rate exposure, 19% of our debt is currently floating and is influenced by our use of the revolver, we plan to limit our floating rate debt to less than 10% of our total debt and we're currently working on alternatives to meet this target.
Our leverage ratio continues to be strong as a result of our solid earnings growth as well as our prudent balance sheet management with our net debt to adjusted EBITDA at five two times as of June 32023 at the end of the second quarter, our debt had a weighted average interest rate of three 9%.
And at a weighted average maturity of four six years, when including the refinancing activity from this week and available extension options, 81% of our debt was fixed rate.
Between the free cash flow generated by our portfolio and the significant capacity available on our revolver, we remain confident in our ability to fund our growth plans.
Turning to our updated guidance based on our performance to date, we are raising our NAREIT <unk> and core <unk> per share guidance, our new core <unk> guidance increased to a range of $2 30 to $2.36 per diluted share were also increasing our same center NOI guidance to a range.
A 375% to four 5% these.
These increases are a result of strong property performance driven by leasing spreads record occupancy and high retention.
With that we look forward to taking your questions operator.
Thank you we will now begin the Q&A session. If you wish to queue up for a question you May press star one on your telephone keypad, if you wish to remove yourself from Q. It is also star one one moment. Please for your first question.
Your first question comes from the line of Caitlin Burrows of Goldman Sachs. Please go ahead.
Hi, good afternoon, everyone.
No addressing your 2024 debt maturities for the goal of yours for this year. So congrats on getting that done.
Now your weighted average maturity of debt is four six years up from four one so maybe you could talk a little bit about your outlook and opportunity from here regarding kind of the ability to extend that further.
Okay.
Sure Hey, good afternoon Caitlin.
So it is it was a big project that we worked on and are very grateful for the support of our lenders and the ability to push that out which just further gives us flexibility with a limited amount that we have on the line.
Small acquisition plan for the remainder of the year, we continue to evaluate additional financing alternatives and that will help us further extend that so I think.
We're looking at we'd like the bond market to see more activity I mean, obviously the base rates are higher but.
That is we want to be a long term unsecured bond issuer, but we also have flexibility in the secured market or other financing.
Vehicles available.
Okay.
And maybe just on the acquisition side.
That's a unique earnings driver for Pico versus peers. So I appreciate color, but the lower transaction volumes year to date for the industry and for Pico has limited that positive drivers. So I guess could you talk about how the transaction opportunities have developed year to date kind of the pace of deals youre seeing what you've worked out and what <unk>.
Passed on and kind of your expectation for finding attractive opportunities in the second half.
Sure sorry about that first question I was on mute.
And I gave a great answer though but.
John John Phil did well.
But.
Yes.
As you know we're in a difficult.
Physician market.
We're happy we bought $80 million worth of properties in the first half of the year.
And as you know we've stayed very disciplined in terms of what our underwriting is on those properties and making sure. We're getting those centers that have the number one or two grocery and where we can really drive rents and occupancy and <unk>.
We were going to continue to have the discipline we've had.
The markets in our in our view are starting to loosen a bit we're seeing a lot more price recognition than we saw during the last quarter.
Quarter and a half.
And so we are generally I would say cautiously optimistic.
About acquisition pace in the second half of the year, but it's early and it's early days.
I'd say that there is a significant data in terms of where we would end up.
Again on a short term basis over the next.
A couple of quarters.
Probably there is a pretty big data, there where that could end up and that's why we we feel like we'll certainly we're working hard to get to that into the range and whether we're at the high end or the low end of the range is really going to depend a lot on how the market continues to evolve we have.
One project today under contract that will close probably in the next.
A couple of weeks.
Not a big project, a smaller project, but we still have so we have a lot of work to do to get there, but I would say generally we're we feel like the market is moving in a positive direction for us to be able to meet those targeted goals.
Thank you. Your next I don't know if you have anything to add to that.
No nothing to add.
Thank you. Your next question comes from the line of Jeff Spector of Bank of America. Please go ahead.
Great. Thanks for taking the questions.
Just to follow up on the acquisitions I am sorry, if I just missed this but did you.
<unk> provides specifics on I guess, where cap rates are versus again, what youre looking to acquire at like how how is the gap is narrowing.
Jeff. Thanks for the question, we didn't really talk specifically about the narrowing.
Are we think that Theres been 50 to 100 basis points movement in cap rates.
But as you know, we're really focused on getting long term returns and accretive and having our acquisitions be accretive early in their life.
And so were we.
We're more focused on that.
And.
Getting to a 9% Levered is not easy task in today's environment.
<unk>.
As cap rates have moved out and as the <unk>.
Sellers have come to recognition of the new pricing.
We are seeing more product coming onto the market and we think that that will allow us to get into the range that we've talked about on the on the acquisition side.
But I would say 50 to.
50 to 100 basis points movement in cap rate is probably a pretty good APA.
Approximation as we know there is a wide there's widespread in terms of those things, but in terms of just sort of generally an average property I think that's the way.
Good way of Av.
Vectoring in on where where that pricing has changed.
Okay. Thank you.
Then second question is on.
The gap between leased and economic occupancy it narrowed this quarter to about 60 basis points.
How should we think about that for the second half of the year into 'twenty four.
John do you want to take that one.
Sure Hey, Jeff.
So our long term historical average.
At 60 basis points over years and it widens.
I think at one point in the last year. So it's gotten to a 100 basis points, but it really is pretty consistent with the 60 basis points and the reason for that is that because the majority of hardly anything that vast majority is.
Of our new leasing is in line, we're able to get those spaces up and open and.
And rent paying faster than if we had more box activity. So I would say that as we look forward I think that 60 basis points is a good.
Is it a delta.
Thank you. Your next question comes from the line of Ronald Camden of Morgan Stanley . Please go ahead.
Hey, congrats on the quarter just two quick ones from me just back to the the debt extensions that.
That you execute it for.
24, maybe is there a way to quantify once you annualize what.
The interest costs.
So it's gonna be in 24 versus 23 now that you've extended those pieces, how should we think about that.
John you want to take that one.
Sure I'll take that one as well.
It is.
It depends on what Youre, assuming for 24 acquisitions.
But we do think that that we do provide the 23 number but I mean, it will between rate increases and the acquisition that if you assume that those are funded with debt.
Then I would say that it's likely going up about $15 million.
Helpful.
And then just digging into the acquisition question.
I sort of appreciate.
I guess, the acquisition and the development spend going down or going.
<unk> projects post.
So one can you just provide a little bit more color was it just you know the.
Costs were too prohibitive or was there something else.
Why those projects got pushed just would love to hear a little bit more about that and then on the acquisition fraud maybe.
Maybe what what do you think is causing deals to be so hard to come by is it are you getting out bad. Its just is not enough volumes just trying to figure out how you shake the tree.
More deals get more deals through thanks.
Yeah, Debbie you want to take the development I'll cover the deal the deal side on the acquisition.
Sure Hi, Ron.
No Ron outlook on the readout delay.
There's basically four projects that were pushed from 'twenty three into 'twenty four and the reason varies by project, but it comes down to one of several thing either a entitlement delays or be material delays or see the need for the neighbor to.
<unk> delay the start like for example, one of these projects was a publix in the portfolio. They did not want the store to be closed during the holiday season. So they pushed it into early 'twenty four so it's a combination of factors, but it had nothing to do with the kind of returns that we can.
<unk> on the project.
We still continue to believe that we can do $50 million to $60 million of this activity on an annual basis on a go forward and that these projects will deliver cash on cash returns of 9% to 12% on average so it's a very attractive use of capital.
Given the risk reward of these activities.
Activities.
Yeah.
Does that run does that answer your question on the readout stuff.
Thanks.
Yes.
Yes.
Okay.
The Brian so on the on the.
The acquisition side.
The.
I think the difficulty in the in the transaction volume side. It is not anything really kind of out of the normal when you have a sort of repricing going on in the marketplace and sellers are hesitant to sell it at the new pricing and buyers are hesitant to.
The pricing change is going to be wider and we're really just going through that process, which is a very I mean.
Yes.
Tapping a bunch of times in the past and it will happen a bunch more that we're really in that process.
And I don't think its anything more than when interest rates go up and the cost of capital goes up pricing is going to.
Expand and Youre going to.
Youre going to be in a market where you.
As an owner you have to adjust to the new pricing and as a buyer you're thinking it should change more and that's that's a fact, that's sort of the battle that's going on and as we talked about you know that's probably led to somewhere between 50 and 100 basis points difference in spread and as you know we've moved our targeted.
Unlevered IRR from 8% to 9%.
As we go through that process. It will take time, but you know it.
As I said it has changed probably a little quicker than we thought it would.
We thought we would be it.
It would be a slower progress than what we're seeing right now and hopefully that will allow us to meet and exceed what our expectations are for the year on the acquisition side.
Thanks, so much.
Yes, thanks, Rob.
Your next question comes from the line of Juan Sanabria of BMO capital markets. Please go ahead.
Hi, Thanks for the time just a question on the balance sheet you guys have done a good job taking leverage down corporate time, so how should we think about your funding future acquisitions as the attention.
However, operator funded kind of with an equity debt mix to keep leverage closer to where it is today.
And again as part of that John mentioned, reducing our floating rate exposure. So just curious on what the options there.
Okay.
John why don't I, I will talk a little bit about the first part of the question. If you can talk a little bit about the what we're thinking about.
In terms of fixing some of the debt.
But.
As you know, we're very focused on matching.
Our cost of capital with our acquisitions.
So you can expect that.
We have a unlevered bal.
Balance sheet in order to be able to acquire.
Acquire.
Actively when the opportunities are right.
And that's the discipline that we have.
Shown this year and we will continue to show going forward that we will use the balance sheet to do that but only when we can get into a market where we're getting.
Creative with solid growth properties that we can that we can use our machine to create a lot of value and so that's that.
That's sort of a long winded way of saying that we will be looking at the debt markets and.
And at the right time, where.
Where the equity markets are.
Favorable.
As you know, we tapped our ATM last year.
At a time, where we thought we were getting a really good spread between our cost of capital and what we were buying and we thought that was an appropriate thing to do at the time and so we're always looking at that.
Keeping trying to keep that balance.
Between the two John you want to talk a little bit about our strategy on fixing rates.
We look forward to report before we move on to John .
John on fixing rates I, just wanted to remind one that one we generate over $100 million a year in free cash flow after the dividend and we can acquire $250 million a year in assets.
With base with that free cash flow so.
The funding need for us kicks in when we exceed $250 million a year in acquisition. So.
And then as you know our balance sheet is now five two times debt to EBITDA. So we do have leverage capacity and so increment to that $2 50, we would typically.
Take advantage of our leverage capacity to acquire that increment.
Yes.
Yes, and I'll say that the 250 that devins referencing is really to say that we can buy 200 getting without increasing leverage and then increasing we have a long term leverage target of approximately six times, but in this environment.
We are utilizing our low leverage and think this is a place to be but given the opportunities I think to <unk> point, we will definitely increase that.
With regards to the floating versus fixed so yes, we are floating more right now.
And as we look at we have about $168 million on the line at the end of the quarter great liquidity, what the term loan financing really does for US is it gives us flexibility in this timeframe, where we can discuss whether or not the treasuries are higher or lower where theyre going.
But also the spread in those markets do you see an elevated because of that uncertainty and what the term loan too as it gives us flexibility of time to get to a more opportunistic debt capital market until we think about that as we're thinking about fixed instruments and <unk>.
The term loan allowed us to do that we have an $800 million revolver available to us.
We do have a long term.
Goal of being less than 10% fixed I'm, sorry, less than 10% floating sorry less than 10% floating.
And so as I'm thinking about it if as we buy our.
Our acquisition target for the year, and we move forward with a fixed.
Instrument to fund that that will help us move towards that 10% target and hopefully then with a longer term goal of getting even closer to where our peers are where youre at 96 basis. So.
Again, a long winded way, but thinking about it is in terms of the financing opportunity, where we are right now.
And then just one last follow up.
That you reduced the guidance there.
You're maybe running towards the low end of that revised range. So just curious on the <unk>.
<unk> behind the high and low end of the bad debt range and.
What's built in there or is there further is there an assumed degradation of the economy.
The lower end of the weaker end of the range or just curious on that range.
John you want to take that.
Sure. So historically this portfolio has been between 60 to 80 basis points over a long of revenue over a longer period of time, and we are trending lower given the strength of.
The consumer and our neighbors.
As we look to the second half of this year, we do think that there is.
Continued strength I would say that it's in the middle of that I don't we're.
We're not forecasting quite as positive as it was in the first half but in terms of disruption that we would do I would say, that's probably less taken into account in the bad debt number because its a pretty tight number there I would say, it's more considered a need in the in the <unk> range that we provide the base.
On everything that we're seeing whether it be retention leasing.
Collections were not seeing any signs of deterioration and so we're very positive on the second half of the year.
Thanks, guys.
Thanks, Bob.
Your next question comes from the line of Mike Mueller of Jpmorgan. Please go ahead.
Oh, Hey, My question was answered tried to get out of the queue. Thank you though.
Great. Thanks, Mike.
Your next question comes from the line of Hendel St. Joost of Mizuho. Please go ahead.
Hi, Ravi that'd be on the line, though I hope you guys are doing well.
Wanted to ask here with a portfolio of nearly full and minimal bankruptcies our watch list.
And now removed acquisition volume going forward.
Where do you think the incremental source of growth will be coming from do you think you'll be able to continue to push.
Push renewal rent spreads going forward.
To meet the current mark to market opportunity is within your portfolio.
Rob Thanks for the question.
As you know there are two pillars for our growth.
The internal growth that we get and that's coming from.
The ability to really grow our our rental stream through both contractual rent bumps, but also through.
<unk> strong releasing spreads on those and trying to minimize our capital while we're doing that with a really strong retention rates. So I think that internal engine will be less driven by occupancy increases and more driven by the pricing power we.
To really grow rents and you can see that in our numbers that that we believe that will be ongoing we still think we've got.
Anywhere from 50 to 150 basis points of increase small store occupancy to go in and we're working hard at getting that to go, but but but on a longer term basis, we think that that.
<unk> engines will be there and then we also have the readout stuff, we're doing which is obviously very accretive and work is has been very positive and adding to the growth and then we've got a strong.
The balance sheet, which allows us to have the external growth and when you combine those things.
We still we believe we can grow our core peso on an annual basis in that mid to high single digit.
Range and.
The the operating environment and there is some of the points Devin made in his prepared remarks.
We have some tail winds that are allowing us to really see very solid growth there. So I would.
We're we're very optimistic about our ability to continue to do that and we really one thing we wanted to make sure. We emphasize everyone is that we're not seeing any cracks I mean, its not like were.
We're thinking that.
There is a huge storm.
Happening in and we're just getting into it that doesn't appear to be happening in the in the market as we see it today.
But I don't know David if you want to add anything there that I missed but.
Yeah, I mean, Jeff what I would say Ravi we think that this portfolio on a go forward can generate same store NOI growth of 3% to 4% and we realize that the growth that we've been getting in that same store NOI number from occupancy is going to go down.
And we're getting closer to a an occupancy level, where it will no longer contribute to same store NOI growth.
That will be replaced by the growth, we will get from new and renewal spreads, which in the second quarter was 150 basis points of our NOI growth and over time, we think that it'll be 100 to 125 basis point than contractual rent increases will contribute 75.
100 basis points, and then lastly, readout will contribute 75 to 125, so even without the.
Growth in same store NOI created by occupancy uplift, we still get to that 3% to 4% same store number with those other three elements of growth.
Thank you for that thank you for providing the bridge.
Very helpful.
One more here.
Any update with the Albertsons program merger and any update.
Regarding the potential store closure impact.
We don't really have we don't have anything that would I would say as an update we continue to feel that it would be a really positive thing for us.
And we don't really see any any downside in either of the options that.
Or could happen.
We continue to watch the Albertsons stock as a metric of where.
With the market. Thanks.
The chances of it happening still trading at a 20% discount to the to the strike price in the in the merger. So there's still obviously a lot of uncertainty.
Around it and.
You get bits and pieces, but nothing that we've seen.
Throws us to say.
One way or the other that it's.
Highly likely or less highly likely.
Feels and I think we're hearing that from management.
It's taking its normal course, which doesn't mean, it's absolutely going to happen or not going to happen, but it is it is going through a very normal process for looking at these kind of <unk>.
<unk> mergers in it.
<unk>, where it's.
There is a real big pushback from the government now government lost a big case this week with Microsoft. So you can see that it's not no wind thing for the government. So there is a.
I believe that the both Kroger and Albertsons believe that it is going to go through and they certainly are I continue to say that.
Hey, Jeff, but on Robbie's question regarding closures Ravi what we've been advised is that in order for the merger to be approved there.
There will not be store closings that occurred as part of the merger.
Generally and then specifically to the Pico portfolio, we're confident that there would be no store closures in our portfolio because as we look at the productivity of these banners in our portfolio from a sales per foot and the health ratio they are viable grocery locations.
And so we're confident that it will not be any closures in the Pico portfolio as a result of that merger.
Thank you very much I appreciate it.
Yes, Thanks Ravi.
Your next question comes from the line of Tom Thomas of Keybanc Capital markets. Please go ahead.
Yeah.
Hi, Thanks couple of questions first I just wanted to clarify quickly Jeff your comments about asset pricing.
You mentioned 50 to 100 basis points I think I also heard 150 basis points in response to a question.
Were you speaking to cap rate expansion or the spread that you require for new investments versus your cost of capital or or something else entirely can you just clarify what you were what you're speaking to and I guess I wasn't because I guess it was.
Yes, I guess, so it's clear as mud right sorry about that.
What I was talking about 50 to 100 basis points was the increase in the cap rate. The 100 basis points was the increase in the Unlevered IRR that.
<unk>.
It has done to our our underwriting as we look at new opportunities. So those will I think the two numbers I don't know what the 100, what I said about 150, because I don't know where that where that would come from but but we did add 100 basis points to our levered IRR and believe that there is 50 to 100 basis point increase in the.
And the cap rates.
Okay got it.
Are you still seeing cap rates expand a bit.
You know today or.
<unk>.
Stabilized.
A bit more recently.
I would say that.
Sure.
We believe that there probably is some more expansion in the cap rates.
But its minor compared to what what's happened so far in our opinion now.
If rates stay higher for longer.
That could change.
But our belief is that we've seen them the major change.
From here it will be more adjustments than it will be any kind of major change in cap rates.
Okay.
Then you talked about the high retention across the portfolio almost 94% again this quarter do you expect that to hold in 'twenty, four and particularly.
With regard to the 71 anchor lease explorations.
And any thoughts there any early indications on on what you might expect.
Around the anchor exploration specifically.
I don't know Devin or John you want to take that one on those specifics.
Yeah, I mean, I would just say Todd in terms of retention.
We have seen fairly consistent retention rates over the last year.
Varying from a low of 89 to a high of 95.
So the 94 is at the higher end of the range, but we believe that our retention rates are going to be fairly stable.
Because we continue to see very strong retailer demand for our product type and.
And so we're not expecting to see a material move in that retention rate relative to what we've seen historically.
And then on.
I think that we can overall retention rate card and then on the anchors.
It's very between a low of 98, seven and a high of 100%. So again, it's between 99 and 100%. So we're pretty confident that that rate will be consistent in on.
On a go forward again, given the productivity that we're seeing out of our anchors and the kind of health ratios that we're seeing from them. The combination of those factors lead us to be confident that.
They will all exercise renewals or options that they may have.
Okay.
And then.
Lastly, there was a.
In an article out this morning.
[noise] discussing Amazon and they are there.
Growth growth from them in grocery.
They've tested various formats.
Growth in there their grocery footprint has been somewhat limited maybe a little unclear over the last few years, just curious any thoughts on that.
The potential for them to expand their footprint and what that might look like and how that could impact the <unk>.
The grocery landscape and maybe your portfolio, specifically as you think about that potential expansion.
Yeah. So it's.
It's a great question, it's one that we actually looked at have looked at it consistently since they opened their first new grocery.
Concept.
They have a lot of work to do I mean, they've got to prove that I mean, you never underestimate Amazon.
I take that as given.
But on the grocery side, they have not been able to really find a differentiated strategy that allows them to be a lot more productive than a traditional grocery store and.
It's nice to have a new store and all that but when you go into their stores. They just are very similar with very little sort of.
Anything you would say to you and saying Wow. This is.
It's really going to get every customer to want to be there. So there.
They've got a lot of work to prove that they actually can develop a.
Format that the consumer is willing to say look I'm not going to go to my program anymore I'm going to go to Amazon and.
So far they have been able to do that and until they do that.
Really not a serious threat to it.
And any kind of scale and they and they certainly aren't going to scale it.
At the current.
Format, because the current format is not making money and it's not only not making money.
We're we're hearing sales numbers that are.
Very mediocre so they I mean, they've got to find something where they can really differentiate themselves and to date. They haven't been able to do that so well until they do that.
We're gonna kit, you always watch Amazon because they can do a lot of stuff I mean, there've been rumors that they were going to buy a bunch of the overlapping kroger.
And Albertsons deals.
There've been rumors forever about them.
They don't seem to be opening the stores that they've got obligations to open up even so they are there.
<unk>.
They've got a lot of work to do to prove they can they can successfully get into that into that market.
Okay alright. Thanks.
Yes, Thanks, Tom.
Your next question comes from the line of Dori Kesten of Wells Fargo. Please go ahead.
Hi, Thanks, good morning.
When you look at your watch list.
Relatively small at this point, but would you imagine your 24 that that looks close to your long term average and you say that the 16 basis points.
Yes.
We do believe that that it will I mean, that's what we are projecting we don't see anything there that obviously, we don't as you know.
We don't have a lot of big box exposure so are our.
<unk> to any particular.
Brand other than our grocers is very limited.
And so we.
And we don't see anything there that would push us outside of sort of a normal category. Obviously, you have a major recession and then yeah.
We'll see what happens, but as you know we did we've done really well in the last two recessions on AR.
Relative basis, losing.
The I think the least in terms of occupancy of anybody in our space and again thats the focus on necessity based goods and our grocery focus.
Great. Okay. Thank you.
Yes, thanks Mark.
Your next question comes from the line of Floris Van.
Dicom.
MS. <unk>. Please go ahead.
Yeah, Hey, guys. Thanks for taking my question.
You guys continue to Amaze me, because I think your anchor occupancy.
I believe is the highest in the sector I don't know how many.
Empty boxes, you have in your portfolio, but it's got to be a handful less than a handful and your shop occupancy I think is also.
The highest in the in the sector.
You know, obviously that that impacts your ability to grow occupancy, particularly on the anchor side, but but.
Maybe if you can give us how.
How much more can you push shop occupancy in your opinion realistically.
And then the follow up on that is.
The underlying.
<unk> fundamentals certainly appear very positive for <unk> for retail right now.
There's almost no new supply.
But as you know.
Jeff the landscape evolves continually.
What how much more do you think rents need to rise in your markets in order for new construction to be justified.
Yes.
Debbie you want to take the Florida. Thanks for your question, Doug you want to take the occupancy growth and then I'll talk about the what we think sort of the.
The retail opportunity is.
On the growth on the growth side for new development.
Sure.
Morris.
We continue to surprise you because you continue to underestimate us and <unk>.
We need to be surprisingly so.
So in terms of small shop occupancy, we think we have another as Jeff said 50 to 150 basis points of occupancy uptick there.
We realize that that then impacts our same store NOI growth, which we continue to believe will be 3% to 4% going forward because.
The loss of.
Same store NOI growth created by occupancy will be replaced by our ability to continue to push rents.
And so we think the components of our same store NOI growth going forward, our new and renewal spread at 100 to 125 basis points in the second quarter that metric was 150 basis points.
Trachsel rent increases of 75 to 100 basis points of growth and then the contribution of our rehab activity at 75 to 125 basis points, which gets you to that 3% to 4% same store metric.
And again, we continue to believe that these growth profiles are reasonable on a go forward because as.
As we look at the marketplace. If you look at the centers. We acquired in Q1, we paid on average 220 Bucks a square foot for those assets.
Think replacement costs for those assets is circa.
$425 a square foot, so rents would need to almost double in order for new development to generate an acceptable return on investment so our.
Our view of this market is theres been limited supply over the last 10 years.
And there will not be incremental supply on a go forward until we see rents move meaningfully from where they are today.
Yes.
And Florida is just to add to that there are specific markets, where some of the regional grocers are expanding.
It <unk> look at Publix, you look at <unk>.
B.
So there they are doing some new stores in very specific markets, but it's in those areas that you've got to be cautious about in terms of where where where that competition is coming in because as you know more than anybody we compete in a three mile radius around our centers and each one is its own.
Market with its own comp.
Competition, and we have to win it you got to win it though in those levels. So development as is.
Not happening in the vast majority of the markets, we're in and but we're always we're always watching because you don't you know it is very specific to the specific stores that.
Where we have locations and one of the things that we.
We look at is the.
The rents that you need to get for new development.
If you look at some of the more urban a major major markets. The rents are closer to where you could actually do development than some of the markets, where we're in and you know that that will.
The first new development as you see it happen is more likely to happen in those markets and it has to happen.
In.
The markets where it is.
Youre not going to see that happening, we believe in Atlanta, and Tampa, and Orlando, where we where we where our centers are you more likely to see it in more dense urban areas, where they can they can get the kind of rents that justify new construction.
Thanks, So maybe just my follow up is I noticed your your NOI margins dropped marginally.
During the quarter, obviously, they were relatively consistent through the first six months, but.
Anything that you can is it some expense growth or anything.
Anything else as it is this part of.
The.
Previously uncollected rent that you got last year that caused that drop.
John do you want to take that one.
Yeah.
Sure.
For us, we're talking about 30 basis points here.
So.
77.
72, 4% in the quarter of 72% on the six months.
I think.
At that point, it's really the 72% margin is where we are.
Where we see it I mean expenses are going to move, but I mean, I think that's a good run rate and still very strong.
Yeah. That's it thanks, guys and then by the way that also is a testament to your to your ability to run your business.
Both.
So we appreciate it.
Yeah.
Again, if you would like to ask a question. Please press the star followed by one on your telephone keypad.
Okay.
Yeah.
This concludes our question and answer session I would like to turn the call back to Jeff Edison Jeff.
Well first of all thanks, everybody for being on the call today, we did have a really solid quarter.
When you are getting same store NOI growth of five 3%. When you were at record occupancy for your anchors and you're in line stores and Youre seeing very little if any it really no cracks in terms of our leasing ability.
When you are able to purchase $80 million.
In the first half of a really tough year.
Top adjusting market and we were able to improve our balance sheet, increasing our debt to EBITDA.
Extending our loan maturities until 'twenty, five and really on a material basis to 2027, giving us the flexibility that we want we're going to we're going to continue to drive we think strong results through 'twenty, three and 'twenty four and we're going to focus on really good internal and external growth. So again, thank you for being on the call today.
Day and have great day.
Thank you. This concludes today's call you may noticed.
Yes.
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