Q2 2024 Phillips Edison & Co Inc Earnings Call
Good day, and welcome to Phillips Edison and company second quarter 'twenty 'twenty four earnings call. Please note that this call's being recorded I will now turn the call 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, Joe I'd, just been President, Bob Myers, and 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 Once we conclude our prepared remarks, we will open the call to Q&A. After today's call an archived version will be published on our web.
As a reminder, today's discussion may contain forward looking statements about the companys 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 and our discussion today 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 on 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 Edison, Our Chief Executive Officer, Jeff.
Thank you Kim and thank you everyone for joining us today.
The <unk> team continued to deliver solid growth in the quarter.
The ongoing strength of our operating performance is attributable to our differentiated and focused strategy of owning right sized grocery anchored neighborhood shopping centers anchored by the number one or two grocer by sales in our market.
Our strategy has yielded outstanding results.
Over 30 years, we built a fully integrated operating platform and become one of the nations largest owners and operators of grocery anchored shopping centers. Our management team owns 8% of the company, we have meaningful skin in the game and are committed to driving long term shareholder value.
Our operational and investment decisions continue to position <unk> for growth.
Format drives results and not all space is created equal 97% of our shopping centers are anchored by high foot traffic producing grocery stores, which is the highest concentration in the sector. We have over 30 years' experience merchandising these centers around the grocer and 70% of our.
Our rents come from neighbors offering necessity based goods and services.
This compares to the peer average of 54%.
Our strategy and team have produce market leading results over time, let me share a few examples.
At 98% leased because the highest occupancy among our peers.
During the second quarter peak goes inline leased occupancy increased 30 basis points sequentially to a record high 95, 1%.
<unk> comparable leasing spreads in renewal rent spreads are among the highest in the sector.
Pico is delivered a track record of outperformance in same center NOI growth since the IPO. We have continued to deliver same center NOI growth above 3%, while outperforming the peer average.
We have the highest volume of acquisitions compared to our peers. We're excluding company M&A activity. This ensures that each and every asset we buy is pico quality.
In addition, we are among the lowest Levered shopping center Reits.
We have added some new slides to our investor presentation, which highlights <unk> sector, leading performance be sure to take a look the Pico team is focused on maintaining our market leading position. We believe <unk> physician will drive solid <unk> per share growth going forward.
We remain committed to successfully executing our growth strategy to deliver long term value to our shareholders are.
Our high quality portfolio anchored by top grocers in favorable suburban markets provides a long term steady earnings growth profile.
<unk> is positioned to continue to grow and excel as we look ahead.
We believe we will provide our investors more alpha with less data given our focused and differentiated strategy.
During the second quarter, we acquired two shopping centers and one land parcel for a total of $60 million.
Subsequent to quarter end, we acquired one property and one land parcel for $11 million, we continue to find attractive acquisition opportunities activity in the third quarter remained strong.
Given the current environment, we are reaffirming our guidance of $200 million to $300 million of net acquisitions for the year.
We have the capabilities and leverage capacity to acquire more if attractive opportunities materialize.
We continue to target an unlevered IRR of over 9% for our acquisitions if.
If we look at everything we have acquired over the past three years. We are currently exceeding our underwritten returns by approximately 130 basis points.
We will remain pain, our disciplined approach and focus on accretively growing our portfolio.
We're hopeful that buyers will continue to increase throughout the remainder of the year.
Earlier this week, we announced the acquisition of do pair corners, a grocery anchored shopping center in St. Louis, Missouri a suburb.
The acquisition was made through a new joint venture with covenants steers.
The joint venture is owned 80% by Cohen, <unk> steers and 20% by Pico.
The venture is committed equity of $300 million with a total investment target between 600 $700 million.
The venture will focus on acquiring open air grocery anchored shopping centers and will leverage <unk> deep shopping center expertise.
We are pleased to partner with Cohen <unk> steers on this venture and its first acquisition.
This increases <unk> access to growth capital. It also increases the acquisition universe available to us.
<unk> yield on estimate is a primary focus of this bond.
This venture break together one of the best Real estate fund investors and what are the best operators in the country. We are excited about this partnership we believe this venture will generate attractive returns for both partners.
Now moving to the Kroger Albertsons merger.
Kroger recently disclosed a list of locations on its proposed sale of assets to CNS wholesale grocers.
<unk> has two kroger locations and 10 Albertsons locations included in the proposal <unk>.
Importantly, kroger's divestiture plan continues to ensure no stores will close as a result of the merger.
These 12 stores are well performing locations with average sales per square foot of $630 and an average health ratio of two 1% sale.
Sales growth from 2019 has averaged 34%. The majority of these locations are anchored by the number one or two grocer by sales in their respective markets, notably these stores have been grocery store locations serving their communities for 25 years on average these stores represent approximately.
<unk>, 1% of <unk> ABR.
CNS has been operating for over 100 years. They are one of the biggest wholesale operators with demonstrated experience in retail operations. In addition, it was recently announced that Albertsons Chief operating officer would move to CNS to become president and CEO of its retail business if the merger closes.
While the market is still geared to the merger a low probability of occurring should it close we believe the impact on Pico is a net positive for our centers and to the overall value of our portfolio.
Our remaining 20 albertson stores will be operated by Kroger, which reinvest regular in their stores and produces higher sales volumes on average.
If the merger does not occur or Albertsons anchored centers will continue the strong performance that they have produced to date.
With that I will now turn it over to Bob provide more color on the operating environment Bob.
Thank you Jeff Good afternoon, everyone and thank you for joining us.
We had another quarter of strong operating results and leasing momentum we continue to see high retailer demand with no current signs of slowing down.
He goes leasing team continues to convert retailer demand and our high occupancy with higher rents at our centers portfolio occupancy remained high and ended the quarter at 97, 5% leased a sequential increase of 30 basis points.
Acre occupancy of 98, 8% increased 40 basis points sequentially as we executed eight anchor leases, including planet fitness Ace hardware dollar tree.
Cooler sport performance.
Inline occupancy ended the quarter at a record high at 95, 1% New neighbors added in the second quarter included a quick service restaurants, such as Mike's Pizza Daves Hot chicken Wingstop and Chipotle, along with several net tail users health and beauty retailers and other.
CD base goods and services.
In terms of new lease activity, we continue to have success in driving higher rents comparable new rent spreads for the second quarter were 34, 4% our inline new rent spreads remained strong at 31, 9% in the quarter, which compares to our trailing 12 month average of <unk>.
99%.
We continue to capitalize on strong renewable demand and are making the most of the opportunity to improve lease language at renewal and drive rents higher in the second quarter, we achieved a 25% increase in comparable renewal rent spreads.
Our in line renewal spreads remained high at 19, 7% in the second quarter, which compares to our trailing 12 month average of 18, 5%.
These increases in spreads reflect the continued strength of the leasing and retention environment, we expect new and renewal spreads to continue to be strong throughout the balance of this year and into the foreseeable future.
Our neighbour retention remained high at 89% while growing branch at attractive rates are in line retention rate remained strong at 85% well ahead of the historical five year average of 78%.
Higher retention means less downtime as lower Ti spend in the second quarter. We spent only 30 per square foot on Ti for renewals.
We also remain successful at driving higher contractual rent increases.
Our new and renewal in line leases executed in the second quarter had average annual contractual rent bumps of two and 3% respectively. Another important contributor to our long term growth.
The leasing spreads that we're achieving and the strength of our leasing pipeline are clear evidence of the continued high demand for space in our grocery anchored shopping centers peco's pricing power as a reflection of the strength of our focused strategy and the quality of our portfolio.
Today, we believe the consumer remains resilient, our groceries continued to drive strong reoccurring foot traffic to our centers.
<unk> continue to visit grocery stores, one six times per week. There are approximately 33000 average total trips per week to each Pico center. This equates to nearly $500 million total trips to Pico centers in the last 12 months strong foot traffic benefits inline neighbor sales.
<unk> and enhances our ability to drive rents higher.
<unk> three mile trade area demographics include an average population of 67000 people and an average median household income of 87000, which is 12% higher than the U S media.
These demographics are in line with the store demographics of Kroger, and Publix, which are <unk> top two neighbors are.
Our centers are situated in trade areas, where our top grocers are profitable.
And our neighbors are successful.
According to placer AI the majority of visits to Pico centers are from customers in the middle or upper class.
Our markets have less poverty higher household incomes and better expected population growth than the national averages.
Unemployment in Pico markets is also 20% lower than the national average at three 2%.
<unk> continues to benefit from a number of positive macroeconomic trends that create strong tailwind and drive robust neighbor demand. These trends include a resilient consumer hybrid work migration to the sunbelt population shifts that favor suburban neighborhoods and the importance of physical locations and.
Last mile delivery.
Leasing demand remains at historically high levels for inline spaces as these macro tailwind have retailers more focused on having stores in our centers.
The impact of these demand factors is further amplified due to limited new supply over the last 10 years and going forward given that current economic returns do not justify new construction of shopping centers.
In addition to our strong rental growth trends, we continue to expand our pipeline a ground up out parcel development and repositioning projects.
We continue to expect to invest $40 million to $50 million annually and ground up development and repositioning opportunities with weighted average cash on cash yields between 9% and 12%.
This activity remains a great use of free cash flow and produces attractive returns with less risk.
Our team continues to stay focused on growing this pipeline as the returns are accretive to the portfolio.
As we shared during our December Investor Day, Pico is leveraging artificial intelligence to creatively at efficiently improve how we operate our business <unk> was recently honored at the 2024 real comp conference with a digital Innovation Award.
Known as the Digi Awards, an inaugural award was given for best use of AI and <unk> won top honors from a field of finalists. This is <unk> third Digi Award.
<unk> continues to pioneer AI advancements that foster cross functional collaboration we're cultivating a culture, where AI as a catalyst for long term growth. This award is a meaningful and well deserved recognition for the <unk> team as we continue to stay on the cutting edge of technological advancements that helped.
Pill, new initiatives and reinforce our position as a leader in the shopping center sector.
In summary, the Pico team remains optimistic given the current strong operating environment and our continued positive momentum our healthy neighbor mix and grocery anchored strategy positions <unk> well for continued growth the overall demand environment the stability of our centers the strength of our grocers to Hell.
<unk> of our in line neighbors and the capabilities of our team that give us confidence in our ability to deliver solid operating results.
I'll now turn the call over to John.
John.
Thank you Bob and good morning, and good afternoon, everyone I'll start by addressing our second quarter results, then provide an update on the balance sheet and finally speak to our reaffirmed 2020 for guidance.
Second quarter 2020 for NAREIT <unk> increased three 3% to $78 4 million or <unk> 57 per diluted share driven by an increase in rental income from our strong property operations.
The results were partially impacted by higher year over year interest expense from higher interest rates.
Second quarter, Cora also increased two 9% to $80 million or 59 per diluted share driven by increased revenue in our properties from higher occupancy levels and strong leasing spreads partially offset by the aforementioned higher interest expense.
Our same center NOI growth in the quarter was one 9% driven by rental income growth of four 3% year over year, partially offset by lower tenant recovery income and higher property level expenses.
As in previous quarters recoveries can be impacted by the mix and timing of spend which we believe will smooth out over the year.
I will note that our reserves for uncollectible <unk> improved in the quarter as we indicated on the last call given.
Given the strong operating environment that Bob discussed, we're continuing to be aggressive with wavering neighbors. We expect this will keep us at the high end of our guidance range for this expense and we believe this will meaningfully improve the rents and merchandising at our centers.
Regarding acquisitions during the second quarter, we acquired two shopping centers and one land parcel for a total of $60 million.
Subsequent to quarter end, we acquired one shopping center and one land parcel.
Year to date acquisitions have totaled $127 million with no dispositions during the quarter, we will continue to explore opportunities for dispositions, where they make sense.
Turning to the balance sheet, we have approximately $743 million of liquidity to support our acquisition plans and no meaningful maturities until 2027.
Our net debt to adjusted EBITDA remained at five one times, our debt had a weighted average interest rate of four 2% and a weighted average maturity of four nine years, when including all extension options.
During the quarter, we completed a bond offering of $350 million of 575% due in 2034.
This offering was the next step in our long term strategy of becoming a regular issuer in the unsecured bond market, which improves our fixed rate percentage of debt and extend our maturity ladder.
As of June 32024, 91% of <unk> total debt was fixed rate.
We continue to have one of the best balance sheets in the sector. Although we believe the rating agencies do not give us the credit that we deserve our balance sheet has us well positioned for accretive acquisitions.
Turning to our guidance for 2024, we've updated the net income per share range to <unk> 49 to 54.
We have reaffirmed our guidance for NAREIT and core <unk>, which reflects 6% and 3% growth over 2023 at the mid points respectively.
In addition, we have reaffirmed our range for same center NOI growth of three 5% to four 5% given the continued strong operating environment.
We currently have several acquisitions in our pipeline either under contract or in contract negotiation. This activity provides a strong start to the year and we are reaffirming our acquisition guidance and expect net volumes to be in a range of $200 million to $300 million.
If the transaction and capital markets improve we have the capacity to meaningfully increase this number but we are comfortable with this guidance range in the current environment.
Looking beyond 2024, we believe our internal and external growth opportunities give us a long term growth outlook in the mid to high single digits for core <unk> per share growth.
We expect a comparable our faster growth rate for <unk> per share growth because there should be less tenant improvement dollars invested as we continue to increase same center occupancy.
In the near term, we continue to be impacted by interest rate increases as all borrowers are which impacts our earnings growth that said, we are pleased to guide to positive for share growth.
We added back the per share impact of interest rate increases to our 2020 forward guidance. This would reflect a 7% core <unk> per share growth at the midpoint.
2024 is continuing to present challenges with high inflation high interest rates and global conflict. However, the strength of our integrated operating platform positions <unk> well for long term steady earnings growth. We're excited for the additional growth opportunities ahead. This year, both internal and through acquisitions.
With that we will open the line for questions operator.
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Our first question comes from the line of Handel St. Jude.
With Mizuho. Please go ahead.
Hey, good thanks, good afternoon to you guys.
For taking my question and congrats on a strong quarter.
My first question is on the new joint venture with Cummins series, I guess help us understand why now you have low leverages. You've indicated you have an attractive cost of capital attractive spreads and youre achieving IRR is.
Above your underwriting.
So on your own balance sheet. So why split the economics here on centered you'd be willing to own.
Hey, thanks.
Thanks for the question.
Pure will probably get a couple of those today on that issue.
The reason is I think it's simple.
We've been in the.
The fund business for a long time I mean this is this will be our ninth JV that we've that we've got and we see it as additive to our growth I mean, we as you know we've got a very strong and aggressive growth strategy.
This allows us to cast our net wider.
And in casting the net wider hopefully be able to to grow.
And an additional pace in.
If you look at our first acquisition as an example, it was a project that didnt meet our underwriting for the balance sheet, but it worked very well for the Cohen <unk> steers JV. So it allowed us to buy an additional project that we wouldn't have bought otherwise and so as we look at that.
<unk>.
That will increase our growth and it does underwrite to our numbers.
The JV, where it didn't as a balance sheet item.
Great Great. Thanks for that leads me to my next question, maybe a bit more color on the type of assets that youre targeting and anything you could tell us about the return hurdles it sounds like they're a bit lower for on balance sheet. So maybe a bit on is there anything geographically type of asset size profile and then maybe some more color on the targeted returns.
Sure.
You're going after here thanks.
So.
In terms of the details of the.
What we're buying we're going to leave that to Cohen <unk> steers to talk about that it is their process they've got 80% of the investment.
For us the.
The key thing for us is that.
We won't be we won't be in conflict with our balance sheet stuff. We are expanding our our net so that we can buy more and these are things that would not fit in our.
Underwriting.
On the balance sheet and that's how we're thinking about it.
Just a follow up the timeline for deploying the capital any color on that front you could provide.
Sure.
We anticipate.
Right now the number is $300 million of equity and we think that that we're using about $100 million of equity a year as a three year program and we hopefully can do it much more quickly than that but that is our that's our plan.
Got it got it thank you.
Our next question comes from the line of Caitlin Burrows with Goldman Sachs. Please go ahead.
Hi, everyone.
I think you mentioned that leasing interest is as high as ever I don't know if you quite used that term, but hi, So I guess when you say that what Scott said Youre looking at to make that statement is it number of deals in the active discussions is it square footage based and it actually feels like those number of deals would have to be lower than in the past given your high occupancy, but maybe not so just wondering if you can talk about what types.
Stats could support this statement that leasing is not showing signs of slowdown thanks, Jamie yeah.
I really think there's three key points and I think it's one of the retention so our retention at 89% and our inline retention above 85% is very solid I'm not seeing any slowdown in that and really it comes through with our new leasing spreads of 34% and our renewal spreads of 25%.
Ratios for our neighbors continue to be right around 95% and coming out of Las Vegas, and our National account program. The demand is at all time high and retailers are still looking for sites in 2025, 26, and 27, so even though our occupancy.
In line is $95, one we still feel theres. Another 100 150 basis points there of growth and in line because there's just no new supply out there and the demand for being in the number one number two grocery anchored shopping centers, where they want to be so I don't see any slowdown.
Got it Okay, and then John on the bad debt side, I think you mentioned something along the lines, suggesting are being maybe less flexible with wavering tenants can you give us some more detail on how that process. Maybe normally work for example, when someone isn't paying on time and how <unk> is handling it differently today, given the high occupancy and new.
Rent spreads.
Sure.
Sure. Thanks, Caylin. So it did improve sequentially as we anticipated that it would.
Really from our position given the strength of the environment that Bob has talked about and the opportunity to improve their merchandising and ultimately the rents in our centers.
We're not in a position where we're talking about payment plans or things. So we're actually trying to do is move more quickly to recapturing that space and then that takes a little bit of time, depending upon their willingness to do so but we do think that that ultimately is the right decision, giving the given the demand and the rates that.
Bob's referencing ultimately from our uncollectible standpoint, we feel really good about our neighbors actually our latest review says that our members have the FICO score of 745, So we feel very positive or at least cautiously positive on our neighbors and we are very diversified again outside.
Our largest individual outside the grocery at the largest individual neighbor as TJ Maxx at one 3% and are on our watch list is actually just inside of 2% now I'd say its closer to one 5%. So we're feeling really positive and continue to improve the portfolio.
Okay. Thanks.
Thanks, Kevin.
Our next question comes from the line of Jeff Spector with Bank of America. Please go ahead.
Great. Thank you good afternoon I.
I guess my first question is focused on the same store NOI guidance.
Year to date is two 8%.
The guidance is three and a quarter to four in a quarter, which would mean, there's meaningful acceleration in the back half of the year can you talk about the drivers of that acceleration and is this correct.
Thanks, Joe for the question, John you want to take that.
Sure. Thanks.
Thanks, Jeff So in the quarter, we grew by one 9% and you're at two 8% and it was really impacted by lighter recovery income, which is it's just a timing variance based on kind of the mix of standing in both the quarter and year to date. So we do anticipate based on the timing of those recoveries for an acceleration in the latter.
Half of this year.
And ultimately we will continue to grow minimum rent I mentioned that reserves for uncollectible is has improved and so.
We were able to exceed 95% inline occupancy for the first time ever just highlighting that continued strength of our neighbors. So.
Ultimately, we are seeing that but I think we're kind of talking about small numbers here and the more important pieces, we feel good about our our reaffirmed guidance range.
Great. Thank you and then one follow up on the JV.
Speaker Change: To confirm are you leveraging the existing platform do you need to hire new teams or open any new offices for these.
Current markets.
And can you discuss the fees. Thank you.
Yes.
On the fees, Jeff, we're going to leave that up to current.
Sears too.
Talk about.
Speaker Change: In terms of resources.
We will not be adding any additional resources to.
Put this into.
<unk> into work so it is.
Obviously.
Speaker Change: Our profitable.
A fee perspective for us.
Because we are utilizing the existing infrastructure.
Great to hear thank you.
Yeah. Thanks, Jeff.
Our next question comes from the line of Mike Mueller with JP Morgan. Please go ahead.
Yes, Hi, I'm curious.
The difference between the $200 million to $300 million of acquisitions that youre comfortable that's baked into guidance versus where you said you.
You could surpass that if the environment changes is it just conversations on product that you are close to but just not close enough on pricing or.
What could cause you to go above the two to 300.
Good.
Speaker Change: <unk>.
Well thanks for the question Mike.
Our.
What I think were trying to say we're trying we're trying to say there is that we do have a balance sheet that allows us to grow beyond the two to 300, if we can find product that meets our pretty strict underwriting criteria and that is number one.
Two grocer above a 9% Unlevered IRR.
And if we can find that product we will we would we would grow beyond that.
But we think that in the given the current market environment, We think that's a reasonable.
<unk>.
Got it Okay, and then I guess as it relates to the land parcels that you've been acquiring are they adjacent to existing centers and generally what's the timeframe to start activating some sort of activity on the site.
Bob do you want to you want to take that one yeah.
Yeah, absolutely. So yes. The answer is yes, and there are anywhere from one 9% to three acres in size they are either adjacent or across the street from publix anchored assets Kroger anchor assets in.
Part of the strategy there is to add fuel for maybe a Harris teeter down in Chapel Hill, when we purchased that when I look at these sites down in Riverview, Florida.
There is strong demand from national retailers that.
We plan to do $40 million to $50 million of ground up in value add redevelopment per year, we're generating $9 to 12% returns on that and we have a great national platform. That's looking to grow with us. So yes. The answer is yes. They are adjacent to our properties and we already have most of them pre leased so hopefully.
When we close we're under lease within 60 days, and then out of the ground and open and paying rent within 12 months.
Got it okay. Thank you.
Our next question comes from the line of Ronald Camden with Morgan Stanley. Please go ahead.
Hey, just two quick ones, so just going back to the acquisitions for the guidance can you talk about it or is it for the second half of the year or is there anything in the pipeline are under contract or is it all sort of speculative at this point and then.
The follow up to that is just on the.
The Cohen <unk> steers announcements as they're thinking to do sort of more of these type of structures going forward.
How are you guys sort of thinking through that.
Thanks for the question.
On the on the acquisition side I think we.
I think the way, we sort of put it in the prepared remarks was.
That we are.
We're seeing acquisitions that were either in price negotiation with ore.
In our contract status that give us some a pretty high level of confidence that we will get to the numbers that we're talking about and importantly, we're seeing a fair amount of product in the market. It certainly is.
A much more liquid market than it was last year.
Still there is increased competition from what we were seeing last year, but there's also quite a bit more products. So that I think thats what gives us the confidence both in terms of what we are actively negotiating under and or have under contract plus the liquidity in the market and the new product Thats.
Coming on so I think we feel.
Speaker Change: That's our rationale for feeling pretty comfortable with our $2 million to $300 million guidance.
On the.
The Cohen <unk> steers.
JV.
The reason, we're really excited about as it expands our ability to byproduct.
And byproduct at underwriting returns that fit with our.
Criteria. So that that's the part that were excited about if we were to find other alternatives like that that were where we could explore parts of the market.
Where we've been successful at but don't underwrite to our current.
Requirements.
That would that would be an opportunity that would allow us to continue strong growth in additional growth. So that we would look for those but at this point.
Other than the the smaller JV that we have under.
Underway, we don't see a lot you see that as a strong potential at this time.
Okay great.
The second one.
I think you talked about the leasing environment a bit in the spreads but that was it.
The initiatives also on the rent bumps.
To try to get sort of higher rent bumps on time. So maybe can you remind us where we are with that and what how the how that's been received by the tenants.
Sure Bob do you want to you want to take that one.
Yeah. Thanks, Jeff So on the new leasing side of things on our new leases were getting annual rent bumps between 2% and 3%.
And then on the renewals when we delivered 25% on a renewal spread our CAGR was right around 3%. So we're continuing to be able to get that we continue to see that given the retailer demand and I really don't see any pull back from that.
Okay.
Great. Thanks, so much.
Thanks, Rob.
Okay.
Our next question comes from the line of Todd Thomas with Keybanc. Please go ahead.
Hi, Thanks. Good afternoon first question I, just wanted to follow up on the joint venture.
In asset management platform, a little bit more broadly I think at the December Investor day, It sounded like your.
Working towards two funds.
You discussed one being a core fund I think with a two pronged strategy, so lower yielding smaller format strips and then also you discussed I believe higher yielding.
Our centers are larger format centers is this joint venture with Cohen <unk> Steers, what you were referencing in December and can you just clarify if this fund will also be looking at some larger format centers as well as.
The smaller.
Grocery anchor centers, which is similar to what you acquired outside of St. Louis So far.
Yes.
Yes, Youre right on I mean that is the.
We will be buying.
Potentially larger centers in this pool.
And.
Hum.
So.
As well as sort of a product that can underwrite to the needs of that fund, but that would not meet our balance sheet requirements. So that is.
How we're thinking about it looking at it.
Did mentioned I think the social impact bond that we have.
We're working on and we're going to talk we'll talk about that more once we have our first acquisition similar to what we did here with the Cohen <unk> steers deal.
Okay and in terms of capitalizing the.
Speaker Change: So roughly.
50, 50 debt and equity.
Will the venture would be looking for secured debt as this property level financing that will be targeted and what does that look like today in the market.
I would assume that that is the debt that's others.
This first deal happened and that is a good assumption going forward in.
In terms of the.
The structure and the pricing John do you want to give any.
Again, we're trying to let Gordon steers sort of lead this discussion in terms of what they would like to have released so.
But John if you can give any any any additional color.
Sure yes so.
As Jeff said this asset was done that way and it will continue to evaluate different capital opportunities. So rather than this asset maybe I'll just speak a little more broadly I mean, the capital markets are.
The secured markets and that debenture.
Is definitely open for grocery anchored real estate.
And I would say that thats, probably looking at for 10 year money Youre, probably still in that 175 over a range kind of what has been the case and I think thats still.
Speaker Change: Still available out there, but we're more focused on the balance sheet at the unsecured markets, but we will evaluate the finance increased opportunities as we move along.
Alright, great and John just one last one for you can you provide an update.
As we make our way further through the year here regarding the swap expirations.
Any potential debt capital raising activity.
In the back half of the year, just given the current capital markets environment today.
Speaker Change: Todd I really appreciate that question and you heard me kind of leaning that way with my last answer you gave me an opportunity to talk about it so.
Yes, so we.
We have swaps that are due to expire in September October and $375 million, we have $150 million swap that will take effect at the same time to help mitigate some of that impact.
But at the end of this quarter, we are 91% of our debt is fixed rate, which is a meaningful improvement from the first quarter as we execute on our long term strategy and again a reminder of that is we want to be a repeat issuer in the unsecured bond market with a target of approximately 10% of our debt expiring each year.
May we issued the $350 million bonds with great support from the bond market investors and it is putting us towards that goal. So as we look to manage this fixed floating ratio and again our target for that is to be 90%, 10% clothing, we want to do that really through future debt issuances.
But the most important element for us is that we no longer have any meaningful maturities until really 2026, which gives us timely patient and access the market opportunistically.
So we will look to utilize our fully replenish revolver.
A little bit outstanding here currently, but we have the ability to buy our acquisition plan and so in terms of future. We will look to access that opportunistically, but the guide would say that we're just going to fund that kind of the way that we have and look to the market.
As they become available.
And there is no just there also there is no equity issuance assumed in the guide.
Okay. So no no new swaps.
Other than the ones that arent.
Yeah, Okay. So I guess.
Youre, saying Youll take down.
Our you'll put additional funding on the line for now and then look to be in the market issuing.
Notes again similar to what you did a couple of months ago.
That's the playbook.
Got it thank you.
Yeah.
Thanks to the next.
Our next question comes from the line of Floris Van <unk> come with Compass point research and trading. Please go ahead.
Speaker Change: Thanks, guys for taking my question Hey.
Jeff I had a question on the Cohen <unk> steers JV.
Are there any restrictions on Cohen <unk> steers owning <unk> stock as a result of this this JV that you've.
Just entered into.
No.
<unk>.
No the answer no and we.
They're very different areas that work on that so there is there is no.
Conflict, there and there is no restrictions.
Restrictions there.
Great great. Thanks.
Next question I had was.
And maybe this is more on the leasing side, but.
You've talked about obviously the the the <unk>.
Improved terms you're getting.
Renewal rates by the way are near 90% are just off the charts it's great.
But maybe talk about one of the things that that sort of impeded some of your growth over last.
Quarters has been the fact that you still have a fair amount of option.
From tenants, where they can obviously renew it at below market rents can you talk about some of the the new terms that youre negotiating with tenants on options going forward as well and is that going to.
Slow down your growth going forward or are you getting more favorable terms on your options with free market rent sets or fewer options from the from our perspective.
Speaker Change: Why don't I just take it first Bob and then you can you can cover on.
Do it better than I do.
<unk>.
The.
We are always pushing for less options, obviously in it and in this environment, we have some more strength there.
To get the right merchandising in your centers Youre, making you got to make sure you're bringing in the right people they tend to want to control the space over a longer period of time.
And options are their preferred method.
We're extending leases a little bit you know year or two.
<unk> reduced the option.
Side of it but it is a.
As you're looking at a shopping center, it's very important that you have the right merchandising mix for each center that you have and so.
Youre compromises or not on a macro level there on a very specific property and if we need to bring that neighbor in to get the merchandising mix that we want.
Will we give them options or not and that is where that's where the really hard hard decisions are made we obviously you can do.
Got more strength than we've had in an awfully long time, but it still is a.
A property by property decision about any other.
Further.
Add to that.
Yes, Thanks, Jeff.
The only other thing I would add on that is.
We are seeing improved deal terms when it comes to options certainly the national tenants that are investing a lot of capital in this space is want to have options and they are typically five years on average, but we are seeing options increased anywhere between 15 and 25% so.
We've made it known internally that options are something that we we think about lightly. We obviously, we don't want to give them, but if we do then we want to make sure that we're getting somewhere between 15 and 25% on the options and we are having success in that strategy. So youll continue to see that number improve.
Great.
Thanks, guys.
Thanks, Laura.
Yeah.
Our next question comes from the line of almost Tayo Okusanya with Deutsche Bank. Please go ahead.
Hi, yes, good afternoon, everyone.
Going back to <unk> question around the corner and spares.
Could you also talk a little bit about how decisions.
Decisions are made in regards to you know.
Assets you are looking at what could potentially go into the JV versus oil considering our balance sheet like how was that potential conflict of interest is going to be managed.
No. Thanks for the question.
What we we have a.
As I as I as I said earlier.
This is our ninth JV.
Over the last 30 years that we've had.
Picking your partner in these things is really important.
And which partner you have and making sure that your you are both aligned with what Youre trying to do is critical and it's one of the reasons. It takes so long to get these things in place.
We have a very strong alignment with Cohen <unk> steers in terms of what is going to go into their portfolio and what's going to be on our balance sheet and that is what.
That gives us a high level of confidence that like we've done in our other eight JV, we're going to successfully place this capital and.
It's not going to be there's not going to be a lot of confusion about that and.
So if you if you.
That's the way we're thinking about it.
Sure.
We're very comfortable that we are expanding the net not taking stuff off of our balance sheet and as we reaffirmed our guidance on the balance sheet, we're going to continue to have a.
Strong growth on the balance sheet and.
This this will.
Expand our growth, but it will not it will not conflict with our with our balance sheet.
That's helpful. Thank you.
And then.
Going back to some of the earlier commentary around the same store NOI on some of the kind of timing related issues on Opex again.
Speaker Change: John.
Find out a little bit more of how we kind of think about what that means for the back half of 'twenty 'twenty, four and kind of same store opex growth and same store NOI growth.
Sure sure.
So as we look at it a little bit some of the more recoverable spend that we would have in the second quarter is delayed this year and then it is the next piece and ultimately you can see our same store margin was about 50 base, Aaron well, yes, 50 basis points less than 72% compared to 72, 5%.
Last year and actually based on what we're seeing in our kind of like currently with our property manager Youre doing we believe that that spend will.
Improved so youll have a sequential increase you'll have it improved over last year because last year was more Q2 and Q3. So ultimately we're just seeing a better recovery rate.
But even though on a consistent spend I mean and I think this is also kind of underscores why we don't provide quarterly guidance, we try to have a.
Really stable projection period, we'd like to just have constant steady, but ultimately we very much don't want to get in a way of running these centers and operating the best way that we can so we do feel good about recovery improving.
Uncollectable, holding or improving and then ultimately continuing to grow minimum rent growth that is going to get us to that $3. According to four in a quarter percent.
Thank you.
Our next question comes from the line of one Santa <unk> with BMO capital markets. Please go ahead.
Speaker Change: Hi, just wanted to follow up on <unk> question there.
Can you give us any sense of is the comfort level still fully at the mid point or maybe more at the low end just given the implied second half acceleration in your same store NOI guidance.
Sure.
We are looking to the mid point on these they are ranges ultimately.
Things that would would go above that would be kind of continuing strong retention, although it's quite high already.
Yes.
And then I would say to the lower end would be same thing weaker retention or weaker.
Weakness around Collectability, but right now to that point, we are definitely looking at I'd say the middle of that range.
Thanks, and then.
Not to belabor the point on the Corona scares JV, but just curious with the you said theres clearly siloed boxes of where assets bigger underwriting would go to either on balance sheet or the JV, but just curious.
Or is it more of the initial yield not meeting your 9% Unlevered IRR target or is there maybe not.
<unk>.
Higher level of standards on number one or two grocer I guess would you want to ultimately on those assets on balance sheet.
Whenever the fund decides to exit and do you have <unk>.
The other Reits to buy those assets overtime.
Yeah.
So the.
I would assume these these assets will generally be larger or they will be open air grocery anchored.
Speaker Change: That's a critical part for for the for.
The JV, but I would assume that they will be.
Larger in terms of square footage.
That are typical.
<unk> store.
Our center that we that we purchase.
But but that I mean that that would probably be the only thing that I would say will be.
Or a big deviation from R. R.
Current.
Balance sheet buys and again the balance sheet underwriting.
Underwriting to a nine unlevered IRR.
The fund has different return.
Requirements than that so that is and as I I think I pointed out earlier.
We would we wouldn't have bought the project in St. Louis because it didn't meet our underwriting requirements. When we when we underwrote. It. So this with the fees, we were able to exceed our our underwriting return requirements and meet the requirements of the.
The Cohen <unk> steers JV so that's.
This is an additive.
As we had expected this is an additive.
Growth vehicle for Pico, where we can get very strong returns and we're excited about that.
Do you have rights to acquire those assets.
Built into the.
The partnership.
The.
Sure.
Again.
That's the Cohen <unk> steers issue that we will let him answer the answer the question on <unk>.
We we have a really good relationship with them and anything that would be resolved will be resolved.
No.
<unk>.
At the right time in a way that that's good for everybody and so.
If it's us buying it at them buying it.
We're a long way from that we want to get we want to get the $300 million of equity out and then we can talk about some of the other things and we are comfortable that that will happen over overtime.
Speaker Change: Got it thank you.
Yeah. Thanks, Bob.
Our next question comes from the line of Dori Kesten with Wells Fargo. Please go ahead.
Thanks, Good afternoon.
Just wanted to put out a 25 earlier today would you assume a higher bad debt as a percentage of revenue as compared to this year or is there reason to believe you may be a bit less aggressive with respect.
And then you are currently.
Speaker Change: Hey, Dori I didn't I'm, sorry, I didn't quite hear what you. What the question was can you just repeat it for me.
Yeah, I just said if you will if you're looking out to next year.
Speaker Change: Do you assume a higher bad debt as a percentage of revenue as compared to this year or would you imagine.
Kind of in line or lower and then you commented earlier that you've been a little bit more aggressive this year.
Yeah.
I would assume.
Speaker Change: We are as we.
<unk> talked about will be at the higher end of our range on bad debt this year.
And.
Next year, assuming that we are in the similar environment, we're able to take a very aggressive role of getting properties back and growing rents.
That it would be at the at the higher end of that of the range that we've targeted as well.
Again that is to be seen but.
So and still.
Really good I mean, it at 80 basis points is still a really good place to be.
Yeah, absolutely okay. Thank you.
Thanks Dara.
This concludes our question and answer session I will now turn the conference back to Jeff Edison for some closing remarks, Jeff.
Yes. Thank you operator, so in closing the Pico team continued our strong operating performance in the first half of 2024, we delivered record high in line leasing occupancy, we executed high record high renewal rent spreads and our new leasing spreads are among the highest in the peer group.
We are among the highest retention in this space.
We are on track to acquire $200 million to $300 million of net acquisitions for the year.
Our targeted unlevered IRR exceeding 9% for our acquisitions, we completed $350 million bond offering we continue to have one of the lowest levered balance sheets in the shopping center space and despite.
Meaningful interest rate expense headwinds, we delivered strong earnings growth.
At Pico, we cultivate a culture in which our associates think and act like owners every day in every decision.
Since our founding Pico is focused on developing the best culture and team in the business.
You can see that reflected in our associate engagement results and in the average number of years that our leaders and associates have been part of the <unk> team.
Pico Associates are focused on operational excellence and innovation.
A few recent examples include the following.
The Cincinnati Enquirer, each year ranked companies further in their work environment.
Pico has been voted the top place to work in Cincinnati for eight years in a row.
As Bob highlighted this year <unk> won the <unk> Award.
For the best use of AI at the real Com conference again getting recognition for the innovation that we do.
Speaker Change: <unk> Com, our communication software system developed by the <unk> team has been one of <unk> greatest innovations desk Com continues to deliver best in class customer experiences and communications to our more than 5800 neighbors.
This technology is now being used by the plans in their Tennant portal.
And peak goes internship program was recently recognized by the ICSC.
We posted that article on our IR website, and hope you will check it out.
Our differentiated and focused strategy and our talented and innovative team combine to create a market leader in the shopping center business. We're confident that the Pico team will continue to deliver market leading results for the remainder of the year.
Looking beyond 2020 for Pico is well positioned to continue to successfully grow as we look forward.
We believe we provide our investors more alpha and less data.
On behalf of the management team I'd like to thank our shareholders Pico associates and our neighbors for their continued support.
Thank you all for your time today and enjoy your weekend.
This concludes today's conference you may now disconnect.
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Okay.
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