Q1 2025 Phillips Edison & Co Inc Earnings Call
Speaker Change: Good day and welcome to Phillips Edison and company's first quarter 2025 earnings call. Please note that this call is being recorded. I will now turn the call over to Kimberly Green, head of investor relations. Kimberly, you may begin.
Kimberly Green: Thank you, operator. I'm joined on this call by our Chairman and Chief Executive Officer Jeff Edison, President Bob Myers, and Chief Financial Officer John Caulfield.
Kimberly Green: Once we conclude our prepared remarks, we will open the call to Q&A. We will open the call to Q&A.
Kimberly Green: After Today's call, an archive version will be published on our website. As a reminder, today's discussion may contain forward-looking statements about the company's view of future business and financial performance, including forward earning guidance and future market conditions.
Kimberly Green: These are based on management's current beliefs and expectations and are subject to various risks and uncertainties as described in our SEC filing.
Specifically in our most recent form, 10K and 10Q.
Kimberly Green: And our discussion today will reference certain non-GAF financial measures. Information regarding our use of these measures and reconciliations of these measures to our GAF results are available in our earnings press release and supplemental information packet, which have been posted on our website.
Kimberly Green: Please note that we have also posted a presentation with additional information. Our caution on forward-looking statements also applies to these materials. Now, I'd like to turn the call over to Jeff Edison, our Chief Executive Officer. Jeff?
Jeff Edison: Thank you, Kim, and thank you everyone for joining us today.
Jeff Edison: The PICO team delivered another strong quarter of growth with same center NOI, increasing by 3.9 percent. I'd like to thank the PICO Associates for their hard work to maintain our unique competitive advantages and drive value at the property level.
Jeff Edison: As we sit here today, we see an ever changing macro economic environment.
Jeff Edison: It's too early to tell what impact tariffs could have on Pico or our neighbors.
Jeff Edison: That said, we continue to see a resilient consumer. Retailer demand across our portfolio remains strong. This is most evident in our continued high occupancy, strong rent spreads, and high retention.
Jeff Edison: Despite terror concerns, we continue to be strategic in our decision-making to best position PICO to take advantage of opportunities for growth, both internal and external.
Jeff Edison: We are seeing high retailer demand with no current signs of slowing.
Jeff Edison: Retailers want to be located at centers where top-grossers drive consistent and recurring foot traffic. Given the continued strength of our business, we are pleased to affirm our full-year guidance.
Jeff Edison: Retail categories that have historically been impacted by a software economy include necessity-based goods and services. This includes grocery, restaurants, and health and beauty.
Jeff Edison: 71% of our ABR comes from necessity-based goods and services. We believe PICO is relatively more insulated from potential tariff disruption.
Jeff Edison: Our performance following both the 2008 Global Financial Crisis and the 2020 COVID-induced downturn demonstrates the resiliency of our Grocer Anchored Portfolio.
We continue to find opportunities in the transaction market.
Jeff Edison: During the first quarter, we purchased $146 million in assets at Pico's Total Share.
Jeff Edison: Despite recent market volatility, we remain confident in our ability to acquire high quality centers at attractive returns.
While it's early in the year, our pipeline remains strong.
Jeff Edison: Given the Grocer Anchored Pipeline we are targeting and the team we have at Pico, we are affirming our guidance range of 350 to 450 million dollars in gross acquisitions this year.
Jeff Edison: We have the capabilities and leverage capacity to acquire more if attractive opportunities materialize.
Jeff Edison: We are also in a great place to pivot if we should see the transaction market tighten.
Jeff Edison: We continue to target an unlevered IRR of 9% for our acquisitions. We will continue to be disciplined buyers as we look forward.
Jeff Edison: Speaking of looking forward, the Pico team remains focused on the long term.
Jeff Edison: History tells us that Groach-rankered and necessity-based formats have been relative out performers during periods of economic uncertainty. We don't expect the current cycle to be any different.
Jeff Edison: While the markets may be nervous about the health of the consumer, we are not seeing anything that changes our view on our ability to deliver on our long-term growth plans, both internal
Jeff Edison: I want to repeat, we remain confident in this current environment. Our confidence is driven by the stability of our cash flows and the pico team's ability to deliver solid long-term growth and create long-term value for our shareholders.
Jeff Edison: In summary, the quality of our cash flows reduces our beta, and the strength of our growth increases our alpha, less beta, more alpha.
Jeff Edison: I will now turn the call over to Bob Myers, Bob Bob, Bob, Bob,
Bob Myers: Thank you, Jeff, and thank you for joining us. The Pico team delivered another quarter of strong operating results and leasing momentum. The quality of Pico's cash flows is reflected in our market leading operating metrics.
Bob Myers: Our long-operating history has given us an informed measure of what drives quality and value at the shopping center level. We believe SOAR provides important measures of quality.
Spreads, occupancy, advantages of the market and retention.
Bob Myers: In terms of leasing activity, we continue to capitalize on strong renewal demand.
Bob Myers: The PECO team remains focused on maximizing opportunities to improve least language at renewal and drive rents higher, and the first quarter we maintain strong comparable renewal rent spreads.
Bob Myers: A 20.8% are inline renewal rent spreads reached a record high of 21.7% in the quarter.
Bob Myers: Comparable, new leasing rent spreads for the first quarter were 28.1 percent, and our inline new rent spreads remain strong at 27.5 percent in the quarter.
Bob Myers: These spreads reflect the continued strength of the leasing and retention environment. We expect new and renewal spreads to continue to be sprawled throughout the balance of this year and into the foreseeable future.
Bob Myers: During the first quarter are combined new and renewal average annual rent bonds for 2.7 percent, another important contributor to our long-term growth.
Bob Myers: Fort Folio occupancy remained high and ended the quarter at 97.1% least.
Bob Myers: Anger occupancy remains strong at 98.4%. We currently have just 15 vacant spaces in our portfolio that are over 10,000 square feet. This includes the anticipated party city and big lot spaces.
Bob Myers: Activity for these anchor leases currently out for signature is extremely positive.
Bob Myers: Examples of retailers who are showing interest in these spaces include TJ Maxx, Sierra, Total
Bob Myers: Inline occupancy ended the quarter at 94.6%. This was inline with internal expectations, as we typically see a nominal change during the first quarter.
Bob Myers: Given our strong leasing pipeline, we expect inline occupancy to remain high throughout the year at around 95%, which is very strong.
Bob Myers: As it relates to bad debt in the first quarter, we actively monitor the health of our neighbors. Bad debt was lower than a year ago, and we are not concerned about bad debt in the near term, particularly given the strong retailer demand. We continue to have a highly diversified mix with no meaningful rent concentration outside of our grocers.
Bob Myers: The key advantage of Pico's suburban locations is that our centers are situated in markets where our top roachers are profitable.
Bob Myers: Pico's three-mile trade area demographics include an average population of 68,000 people and an average median household income of 92,000. This is 12% higher than the US median.
Bob Myers: These demographics are in line with the stored demographics of Kroger and Publix, which are Pico's top two neighbors
Bob Myers: Our markets also benefit from low unemployment rates, which are below the shopping center for your average.
Bob Myers: The necessity-based focus of our properties is important when demographics are considered. If you are comparing a public to an Apple store or a high-end fashion retailer, the demographics that each retailer needs to be successful are very different.
Bob Myers: Pico's demographics are very strong in supporting our brochures and necessity-based neighbors.
Bob Myers: We continue to enjoy a well-diversified neighbor base. Our top neighbor list is comprised of the best brochures in the country. Our largest non-groucher neighbor T.J. Max makes up only 1.4% of our rents.
Bob Myers: All other non-growsher neighbors are below 1% of ABR. When looking at our very limited exposure to distressed retailers, the top 10 neighbors currently on our watch list represent approximately 2% of ABR.
Bob Myers: This is not by accident. It is a product of many years of being locally smart and intentionally cultivating our portfolio of grocery anchored neighborless centers located in strong suburban markets.
Bob Myers: Our neighbor retention remained high at 91% in the first quarter, while growing rids at attractive rates.
Bob Myers: I want to repeat that the PICO team delivered record high inline renewal rent spreads in the first quarter. Higher retention rates result in better economics with less time and dramatically lower tentative improvement costs.
Bob Myers: Lower capital spend results in better returns. The IRR on a renewal lease has been meaningfully higher than the return on a new lease. In the first quarter, we spend only 61 cents per square foot on tenet improvements for renewals. [inaudible]
Bob Myers: We have looked at quality differently over 30 years, and we continue to believe that SOAR is the best metric for quality.
Bob Myers: The overall demand environment, the stability of our cash flows, the strength of our brochures, the health of our in-line neighbors, and the capabilities of our team give us continued confidence and our ability to deliver strong growth.
in 2025, and in the long-term.
I will now turn the call over to John [inaudible]
John
Thank you, Bob, and good morning and good afternoon everyone.
Bob Myers: I'll start by highlighting first quarter results then provide an update on the balance sheet and finally speak to our affirms 2025 guidance.
Bob Myers: First quarter, 2025, Navy FFO increased to $89 million or 64 cents per diluted share, which reflect your view per share growth of 8.5%.
Bob Myers: First quarter, core FFO increased to $90.8 million or 65 cents per duty chair, which reflects your over-year per share growth of 8.3 percent.
Bob Myers: Both Navy, FFO, and Core FFO benefited this quarter from a one-time lease termination fee of approximately one penny per share. We had a lease for the space lined up at the time of termination, so this capital will help pay for the new neighbors build out.
Bob Myers: Lee's terminations are a part of our business, but this termination of the income was larger than normal, which is why we want to highlight this item as non-recurrent.
Bob Myers: Our same center and a wide growth in the quarter was 3.9% [inaudible]
Bob Myers: Turning to the balance sheet, we have approximately $760 million of liquidity to support our acquisition plans and no meaningful maturities until 2027.
Bob Myers: Our net debt to adjusted EBITDA was at 5.3 times as of March 31st, 2025.
Bob Myers: This was 5.0 times on a last quarter annualized basis, which is also important to track in quarters with elevated acquisition volume.
Bob Myers: Our debt had a weighted average interest rate of 4.4% and a weighted average maturity of 5.6 years when including all extension options.
Bob Myers: As a reminder, in January , we amended our revolving credit facility to extend its maturity to January of 2021 and increase its size to $1 billion.
Bob Myers: This gives us additional liquidity and flexibility as we acquire assets and monitor the capital markets.
Bob Myers: At the end of the first quarter, 86% of Pico's total debt was fixed rate, which is in line with our target of 90%.
Bob Myers: We do not have the immediate intentions to execute interest rate swaps on our floating rate debt.
Bob Myers: Pico continues to have one of the best balance sheets in the sector which has us well positioned for continued external growth.
Jeff Edison: As Jeff mentioned, we are pleased to affirm our 2025 guidance.
Jeff Edison: As a reminder, our guidance for 2025 may read FFO per share reflects a 5.7% increase over 2024 at the midpoint.
Jeff Edison: In our guidance for 2025 core FFO per share, represents a 5.1% increase over 2024 at the midpoint.
Jeff Edison: We also affirmed our guidance range for 2025 same-center NOI growth of 3% to 3.5%.
Jeff Edison: As we continue to enhance our neighbor mix, our actions to improve merchandising and capture marked-to-market red growth with new neighbors will be a slight headwind to 2025 growth.
Jeff Edison: As we have said previously, the Pico team is focused on the long-term and our actions to replace neighbors are intentional.
Jeff Edison: We believe our low leverage gives us the financial capacity to meet our growth targets. We also have diverse sources of capital that we can use to grow and match fund our investment activity.
These sources include additional issuance, dispositions, and equity issuance.
Jeff Edison: Match funding our capital sources with our investments is an important component of our investment strategy.
Jeff Edison: As a reminder, our guidance does not assume equity issuance in 2025, as we believe we will be in our target leverage range of low to made five times on a net deck to adjusted
Jeff Edison: We continue to believe this portfolio and this team are well positioned to deliver mid to high single did you core of a vote for share growth on an annual basis.
Jeff Edison: This assumes the stabilized interest rates which are expected to remain a near-term headwind. However, we're hopeful that we're near stabilization as we are projecting to deliver earnings growth of over 5% in 2025.
Jeff Edison: We believe our targets for growth in core FFO and AFFO will allow Pico to outperform the growth of our shopping center peers on a long-term basis.
With that, we will open the line for questions. Operators?
Speaker Change: Thank you. To ask a question, please press star one on your telephone keypad to raise your hand and join the queue. And if you'd like to withdraw your question, please press star one again. Your first question comes from the line of Caitlin Burrows with Goldman Sachs, please go ahead.
Caitlin Burroughs: Hi, good morning everyone. Maybe starting with Leasing. I feel like normal occupancy seasonality is understood, but can you give any color on the seasonality of Leasing? And then with that in mind, could you differentiate how March Leasing went and then how April Leasing has gone and any potential pullbacker expectations for the May ICFC?
Sure, thanks, Caitlin.
Bob Myers: Bob, you want to take that? I would say generally, as we've talked about. Now, at the end.
Speaker Change: Throughout this call, guys, when you ask, on your questions, I want to make sure that we don't get confused in terms of where we are today versus where we think we're going to be over the year.
because we're in a time where there's dramatic preaches. [inaudible]
You know, dramatic change is happening.
and there's a different... [inaudible]
Speaker Change: Review for what's happened in the first quarter versus what we would...
Speaker Change: All the applications for the rest of the year. So, as we answer, we'll try to be very specific about where we are today. And then, if you've got questions about what we think might happen, we're happy to talk to those. But for us, it's really focused on that. So Bob, you want to take the leasing... [inaudible]
Bob Myers: And I can see the issue that Caitlin asks about. Yeah, sure. Thanks, Jeff, and thank you for the question.
Bob Myers: It's very normal in doing this for the last 25 years.
Bob Myers: You know, we're in a very, very good spot at, you know, 97.1% with inline at 94.6, you know, anchors at 98.4 [inaudible]
Bob Myers: We have a lot of activity on our anchor spaces, and like I mentioned in the call, we only have 15 of those opportunities, but we're seeing some really, really nice mark to market opportunities on the spreads. Retention remains high at 91%.
Bob Myers: and the visibility that we have, you know, over the next six, seven months.
Bob Myers: The activity is very strong. I mean, we have more leases out for signature now than we did last year at this point in time. I'm not seeing a slowdown anywhere.
Bob Myers: And quite honestly, if you look at our leasing spreads of 28% and I look at where the pipeline is, it's going to be better than that.
Bob Myers: And when you look at renewal spreads of the 20.8 percent, I can tell you with the visibility, they're better than that. So I just want to reiterate that the market, the demand, all the calls that we're making for Vegas right now, retailers are wanting to grow. So
Speaker Change: Jeff Head on this, we're cautiously optimistic, and so are the retailers, but they still want to grow and they're still going to our portfolio, looking to be aligned with the number one number two brochure, and that's where we're seeing success and I don't see it slowing down.
Speaker Change: Got it. Okay, good to hear. And then maybe switching over to the guidance side. So it does seem like FFO guidance for the year implies that the 2Q to 4Q average will be roughly the same as 1Q even if you take the least termination fee out. So it's wondering if you could give some more detail on what's creating that headwind and what could get you to the higher versus lower end of the FFO range.
Speaker Change: John , before you take it, Caitlin, we want to make sure that we're here, everybody, like this is...
Speaker Change: Our first quarter is very early in the year. We're really happy with the results we had for the first quarter, but as we enter the rest of the year with more confusion out there, we're going to necessarily take a conservative approach to looking at what's going to happen throughout the rest of the year. As I think everyone will, because of just the uncertainty with what's going on.
Speaker Change: John , do you want to answer in terms of the specifics of how they would look quarter by quarter?
Speaker Change: Sure, so as we look forward, I mean, you already called out in the first quarter, the least term wouldn't termination fee wouldn't be annualized. And as we look ahead, I think Bob said it is, we're cautiously optimistic about the year. And I think as we look over the quarters, what would take us to the higher end would be things like improvement in the capital markets. [inaudible]
Speaker Change: I do think that we are firm kind of each of the guidance ranges and we just want to make sure that we are setting expectations that we're in this for the long term and that ultimately we're focused on making the decisions that are going to drive growth not just in 25 but 26, 27, 28.
Speaker Change: More certainty around forward debt costs would be certainly helpful equity markets, but overall from an acquisition standpoint, we're...
Speaker Change: We're feeling really good about both what we've acquired as well as the pipeline and feel good about the year and so I think it's just the first quarter we've reaffirmed I think each quarter that we've been doing this so I think we're just making sure we've got room to operate the business as we feel best [inaudible]
Thanks
Speaker Change: Your next question comes from the line of Haendel St. Juste, with Mizzouho, please go ahead.
and John Adams.
Hey there, guess the...
Speaker Change: Good morning, I'm not sure where you're focused but I had a couple questions, maybe first for you, John , on the variable rate exposure, you're at 14% today, I think you're going up to about 25-26% later this year with the expiration of a swap [inaudible]
Speaker Change: Sound like you said you're comfortable kind of with the level of today, so I'm wanting to get a bit more clarity on your strategy or thinking here and maybe some thoughts on your plans to address some of the upcoming swap explorations. Thanks.
John, do you want to take that?
Thor, so I just love questions about interest rate swaps.
Speaker Change: So, you're right, Haendel, we're about 14% today. I think as we look at it, what we executed in the way we did in 2024 is a great blueprint for what our plans are in 25. Ultimately, we are working towards a laddered maturity ladder that will, you know, keep us as a repeat issuer in the unsecured bond market. We were able to do it twice last year. We've got, you know, we're looking at managing our balance sheet prudently. And so, when we look at those expeditions, our desire is to
Speaker Change: I continue to be an issuer in that market and to replace term loans, which is why those swaps are there and expiring [inaudible]
Replace those term loans with...
Speaker Change: Ficks Bond as we go forward. So I think for us as we are managing both our liquidity as well as a maturity ladder, that's part of it is that the swaps are helpful. I will say that I think broadly people, you know, there's uncertainty as to whether or not interest rates will go down or up, but we're now in a positively sloped rate environment. And so ultimately, you know, we are comfortable with this, you know, this level. I don't see us getting to 25% variable rate because I anticipate that between our
at the table.
Great, appreciate the color there.
Speaker Change: One more for me on transactions. Obviously, there's lots of chatter, deals taken a bit longer, potentially counter parties moving away from the table. So I guess I'm curious more broadly on what you're seeing, are you sensing any deals taking longer, are you seeing any changes in cap rates? And then maybe some color on what you're expecting for the balance of the year between on balance and J.D. Acquisitions. Thanks.
Speaker Change: Great. Well, it's a great question and I think it's very relevant how we kind of open this. There's...
Speaker Change: I think it's too early to project what's going to happen
sort of going forward. We do hear stories about
Speaker Change: Some buyers sort of stepping back. Obviously that would be positive for us in the event that we would have less competition for what we're buying.
Speaker Change: But also, you know, uncertainty tends to slow down and slow the pace of the acquisition market. So that part will probably be a negative going forward. We haven't seen it yet. We continue to think there's going to be a pretty strong ICSC with the amount of product that's coming on the market. But we...
Speaker Change: Generally I think are optimistic that there will be a number of players that will step back in this environment and probably...
Speaker Change: May create some better buying opportunities for us, but it's obviously early days and we will see if that is the impact through the rest of the year. But so far the first quarter was a strong quarter for us.
Speaker Change: We, the projects we bought, we feel really good about, great anchors, great, you know, unrelibert IRRs, well above nine, so all things that, you know, fit sort of the, we're fairway deals for, for Pico, and we have a good backlog going into the second quarter. We're fair, so...
We feel good about the year.
Thank you.
Thank you, No.
Speaker Change: Your next question comes from the line of Sameer Canal with Bank of America, please go ahead.
Samir Kanal: Good afternoon, everybody. Hey, Jeff, I guess it's nice to see that leasing still remains strong here.
Speaker Change: Doesn't look like there's been a bit of a pullback, but as we just take a step back and look at kind of your approach to dealing with the shop tenants at this point as renewals come up, has there been a sort of a shift in strategy at all?
Speaker Change: I mean, you look at kind of your exposure to some of the soft goods, right? You're roughly 10 percent.
Speaker Change: So clearly their margins are going to get impacted with tariffs and costs, so how are you sort of approaching?
those conversations, even though you might not be seeing anything today.
Speaker Change: Do you think about those conversations and how are you approaching those?
So,
Speaker Change: Up to today, we basically treated it as a very normal discussion we have with all of our neighbors when they come up for renewals, expecting significant increases and limited TI on the renewals and we have good sales information which allows us to have those discussions.
The, the look going forward.
Speaker Change: I think the way we've kind of bucketed it and tried to frame the impact of tariffs is...
Speaker Change: Okay, what is the, and the way I think there's two issues here is the tariff impact. There's also then the recession impact, the potential recession impact. The potential recession impact, I think, is a...
Speaker Change: It's not something we're really talking with retailers on the renewal right now because it's still a percentage number, it's not a reality, so I think that's...
Speaker Change: You know, something that we might see later in the year. The way we look at the tariffs, we said okay, let's let's look at the cat by category, what we think the impact of the tariffs is going to be and I think our feeling is that.
Speaker Change: Probably about 10% of our neighbors are going to have a fairly significant impact from the terrorists if they are being implemented.
Speaker Change: We think about 10% of our neighbors are in that sort of middle care to catch a bucket where there's going to be some impact but it's not going to be crippling as it is in that first 10% and then, but because of the nature of our business being in focus on necessity based goods with that grocery anchor being the number one or two grosser, that almost 80% of our, [inaudible]
Speaker Change: Neighbors are going to be in the service side, they're going to be in…
Speaker Change: They're going to have some impact but pretty limited impact from the tariff discussion.
Speaker Change: When we put that together, we don't see big changes in terms of our approach to leasing and it's very similar in terms of our approach to acquisitions because we're looking
Speaker Change: On the acquisition side, almost the same way as we are on the current leasing side, which is how are we looking at the strength of each of the retailers that we underwrite in our acquisitions and when you're looking and having discussions on the leasing side, it's the same, it's a very similar kind of discussion. Let's go ahead and see what happens.
But...
Speaker Change: As we said, it is, we're basing that on the knowledge as of today and that will continue to evolve over the next.
Speaker Change: 6-12 months. And we may be talking a very different thing, 12 months from now that we are today but right now the demand is strong and we are going to continue to push the way we have over the last 12 months.
Speaker Change: God, it doesn't sound like, at least from your conversations you're having with whether or whether it's your retailers or kind of retailers broadly speaking, nobody, no retailer at this point has sort of pulled back, they're open to buy plans at this point, right? That's what it sounds like.
Speaker Change: Well, we are always having that because for the retail business. So it's like when you're dealing with retail, there's always going to be some of that by category. But what we're finding is that the demand overall is strong enough to allow us to continue to find those kinds of spreads. And so it's...
It's-
Speaker Change: We are not at that point where we're actually changing our leasing strategy because we're seeing a major shifts in the retail demand. Again, remember, we are in the necessity base side of the business and are the impact on us as we saw in both of them.
Speaker Change: The Great Financial Crisis, as well as the pandemic. It's significantly different when you're in the disaster-based retail part of the business versus the more discretionary sides. And we, you know, we will be the last to see impact from major changes because of that focus.
Speaker Change: Does that make sense, sir? You don't know, it does. Thanks so much. Yeah. Thank you.
Speaker Change: Your next question comes from the line of Dori Kesten with Wells Fargo. Please go ahead.
Dory Kustin: Thanks, good morning. We know that the portfolio is pretty defensive leaning but have you seen any sort of flowing in the receipt of rent payments, whether it's for certain retailers or certain categories or just in certain markets in the last month? I know it's a relatively short time frame.
John , do you want to take that?
Dory Kustin: Sure, hi, Dori. Or no, I would say that actually it's pretty consistent. I mean, we saw a decline in bad debt year over year and ultimately even in a shorter term basis. I mean, we continue to monitor the health of our retailers and our discussions. And, you know, while we continue to have dialogue, there hasn't been anything that we have really noted on a regional or use-specific basis, it kind of aligns with our...
Dory Kustin: You know, the distribution I would say of neighbors that we have across, you know, kind of merchandising categories.
Okay. Thanks, John.
Thanks, Dori.
Speaker Change: Our next question comes from the line of Omotayo Okusana from Dodger Bank. Please go ahead.
Speaker Change: Hi, good afternoon, everyone. First one is to start off with acquisitions in the quarter. Again, deals done kind of in the low sixes. The implied cap rate on your. [inaudible]
on your, on your, on your stock is about the mid-sixth [inaudible]
Speaker Change: So, particularly I know again that the investment spread, initial investment spread has been getting tighter, but I don't think I've come across a quarter where it's been negative, so just curious.
Speaker Change: Kind of what's happening along those lines, whether there was something unique with these transactions, whether just that's just where market prices are and caprice keep compressing the fight that we can let's go in on around us.
Yeah, so, um...
First of all, as you know, we are not-
Speaker Change: Caprate Buyers. We are looking at assets on a long-term investment basis, and we're very focused on getting to unlearn IRRs.
Speaker Change: You know, nine plus. And as you go, if you look back historically, we always bounce around a lot, quarter to quarter, on cap rates. Like, they'll be up to be down.
Speaker Change: and it's really not a great indicator. It will be over the year, like what the blended cap rate is over this year, but there's literally a specific story for ever asset we buy every time you know, for...
and always has been. So, I would not take the...
Speaker Change: Caprate of this quarter and annualize and say that's where it's going to be because if you look at our backlog going in it's actually quite a bit higher than that the caprate but again that's not really what we're focused on what we're focused on is
Speaker Change: What we can do with the properties that we're buying to make sure that we can get to that, you know, nine plus unlevered IRR, and we're finding it in this environment, we found, you know, almost 150 million product in the first quarter, and we have this really strong backlog going into the second quarter, so, you know, we're generally optimistic about that, and, you know, if you look at our underwriting, you know, [inaudible]
Speaker Change: We are underwriting a higher chance of recession going forward than we did in the first quarter, but we're still being able to find the product and that will translate into a caprate, but we're not buying caprate.
Speaker Change: It's so much of this has a story to it. I mean one of the projects we bought has a...
One of the anchors, the grocery store has a bump.
in next year that will take it from...
Robert Myers: Jeffrey Edison, Robert Myers, Jeffrey Edison, Robert Myers, Jeffrey Edison, Robert Myers,
Speaker Change: He's walked through our analysis, but you will find that maybe a year by year, it's a good analysis, but quarter by quarter it gets a little bumpy.
Speaker Change: That's super helpful. If I could ask one of John , just again with where the stock is at this point and you kind of think about capital allocation decisions, do stock buyback start to sound a little bit more attractive or not?
Speaker Change: Oh, go ahead. So, thanks for the question. So, we definitely are looking at it and the piece that I would say to, you know, on the former question and on this one is, we're focused on cash flow growth per share. So, we are actively looking at acquiring assets.
We're looking at disposing of assets.
Speaker Change: and you know, still believe that the best place for our capital.
Speaker Change: is continued net acquisitions and so it is in our tool kit of things that we can use but we have not had I've not done anything yet. That end.
Speaker Change: We're looking at things like building a strong investor base, making sure we have adequate float and liquidity and all those pieces that are a bit more qualitative but ultimately would impact quantitative but even at these quantitative levels. We still are believing in our strategy of growing the platform through continued asset acquisition. .
Appreciate it. Thank you guys.
Todd Thomas: Your next question comes from the line of Todd Thomas with Keybank Capital Markets. Please go ahead.
Todd Thomas: Hi, thank you. I just wanted to go back first to …
The sequential decline at occupancy
Todd Thomas: You know, it was described as in line with expectations and I understand the seasonality that you discuss but just curious.
Todd Thomas: where you are in terms of some of the bankruptcy-related activity. I know Pico at relatively less exposure versus some of your peers but just wondering if you could provide an update there and also discuss occupancy trends into the second quarter and the balance of the air. [inaudible]
Todd Thomas: Yeah, Todd, why don't I take this certain, and Bobby, if you could take it, that would be great, but Todd, I do, we should keep in mind...
Todd Thomas: that we have the highest occupancy of any of the people in our space and...
Todd Thomas: We will talk about the popularity and some of the stuff that's happening there, but it's really important to know that we are at very strong occupancy numbers and
Todd Thomas: Small amounts of change can move things a little bit here or there. We're feeling really good about the leasing environment as of today. And we'll see what happens through the rest of the year, but it's...
Speaker Change: It continues to be positive for us. So, again, I don't want to lose the fact that, you know, we do have the highest occupancy of anyone in the space, and it's because neighbors want to be in, you know, the number one or two grosser shopping center, and we think we have the highest quality centers that, you know, cross the portfolio. Yeah.
Speaker Change: and that's a great indicator of that. Bob, do you want to fill it on the leasing time?
Yeah, sure, thanks Jeff, and appreciate the question.
Speaker Change: I think I think the biggest thing that I've seen in our portfolio if I look back at third quarter of last year
Speaker Change: We were able to take 8 spaces over 15,000 square feet.
Speaker Change: and Least Those at New Leasing Spreads of 105% [inaudible]
Weep
Speaker Change: have L.O.Y. is working on about 80% of those that are coming back.
Speaker Change: And, you know, they're with great retailers like TJ Maxx and Sierra and Total Wine, Planet Fitness.
Speaker Change: Dollar Tree, Alta Beauty, just to name a few and the rinser is considerably higher.
Certainly, you know,
Mid-A-High Double Digit
Speaker Change: Leasing Spreads. So we're going to take advantage of that. That'll strengthen our portfolio over a period of time. So yeah, even though there was a decline in occupancy, I'm still very encouraged about. Let's go.
Speaker Change: that I would say anchor demand in spaces over 10,000 feet in our portfolio that we can execute and have that rent come online the following year.
So it's positive [inaudible]
Speaker Change: Okay, but so do you expect occupancy to stabilize and start to improve throughout the balance of the years? You backfill some of that space or is there a little bit more? Yeah, okay. Absolutely. Got it. It will.
Speaker Change: Ok, and then John , I heard you discuss the lease term fee in the quarter. Sorry if I missed some of the detail, but was that primarily one tenant or one lease? And is there any additional detail that you can provide around that tenant and the center and maybe the decision by that tenant to terminate the lease? What happened there exactly? No, I don't think so.
Doer
So thank you for having me on this call today.
Speaker Change: We terminations are part of our business and I would note that even at this level it was just a few years ago we had similar levels, but it was...
Speaker Change: I appreciate that the buyout were able to execute the lease with the buyout at the same time and then apply the capital to the new neighbor coming in. So I wouldn't say that it's anything unusual. I would say the size of it was unusual, which is why we made a point of pointing it out. But ultimately, the center is going to continue to do very well. I think it's just an example of what we've been talking about for the last year, which is working to improve the center's push-rend [inaudible]
Speaker Change: and work in those opportunities. So I think that was, that was it. I will note that also, I mean, we did have good strong core operations even outside of that least termination fee as we look to the year. And so, you know, but we did want to, you know, for all of my modeling friends, make sure that we did get that accounted for. Thank you very much.
up front.
Speaker Change: Ok, do you see potential in this environment that more tenants, more national tenants that aren't in bankruptcy that aren't necessarily on your watch list or being a little bit more thoughtful or careful around their store fleets and portfolios and that there could be some additional activity along these lines?
Bob, you want to do that?
Yeah, thanks, Sean. I-
Speaker Change: I'm not hearing that concern. I'm not seeing it. And our portfolio with the retailers that we're having discussions with. So again,
Speaker Change: You know, I think there's a lot of focus on growth in 2006, 27, and look, I mean, in our portfolio...
Speaker Change: We're not going to see any new supply coming online anytime soon. If anything, things are getting more expensive. So those retailers that we're aligned with are wanting to grow. So I don't see any cracks or issues on that front.
Ok, thank you.
Sure.
Speaker Change: Thanks, Todd. Your next question comes from the line of Floris Van Dijkum with Compass Point. Please go ahead.
Hey, good afternoon guys, and gals.
Speaker Change: You have in your, you prepared this little deck that talked about, you know, how Pico performed during the last normal, more normalized recession with a great financial crisis and you saw 250 basis point drop in occupancy.
Even though your occupancy back then was...
Speaker Change: a lot lower and I suspect the assets you own today.
Speaker Change: or the average quality of your portfolio is higher as well and plus the fact that there was a lot of development going on in 2009-2010 that's not occurring today.
Speaker Change: How do you think? Is that a worst-case scenario in your view? I guess my question is I'm trying to figure out what the worst-case scenario is if a recession were to hit? Is that sort of the scenario you're trying to point to?
Speaker Change: First of all, Floris, thanks for the question. We are not anticipating a recession, so our base model has basically a flat economy.
Speaker Change: which is kind of a recession anyway but not the dramatic. I mean, we don't anticipate the extent of the GFC or the pandemic. This is, you know,
certainly...
Speaker Change: They don't appear to be fundamentals that would drive a deep recession. So I would say that those are extreme...
Speaker Change: sort of maybe two standard deviations from where what we would expect. They could, obviously, it can happen, but it's not. We don't think that we're going to be into that kind of environment. And as you know, I mean, we had the best.
Speaker Change: We had the lowest loss of occupancy of anyone in the space in both of those occasions and we had our stuff back to normal as, you know, the fastest as well. So, you know, being in the necessity based retail business when there is disruption, we just have a lot less disruption.
Speaker Change: and that is obviously a positive for us. It's not like anybody wants to lose to 2.5% of their occupancy, so we're hoping there is not one, but there's just a lot less beta in necessity-based retail.
Speaker Change: There's uncertainty in the markets, and as rates are volatile.
Speaker Change: What do you think this does to your IR expectations? Are you going to raise them you think or you think they're going to stay around the 99.5% range going forward?
Speaker Change: I think they will stay in the 9. I think that what will happen is that if you get into a more recessionary kind of environment, the underwriting is more, more, uh...
Thank you.
Speaker Change: More Difficult, so you're going to take lower assumptions on rents, right? You could take lower assumptions on market rents like all of the things that happened during a recession are going to be taken into the numbers which will make getting to a nine harder which will probably make it more difficult to buy. Ryan's
Speaker Change: and reduced the price. But the pricing will come down from our expectations on the underwriting of the properties more likely than it will, you know, change in what our unlibert IRR target
Speaker Change: Yeah, and that's another way of saying that you think cap rates could go up, but your IRR is going to stay similar.
Speaker Change: Yeah. And, you know, you could you're going to have less, in the recession, you're going to have less growth and that would obviously, you know, impact the, the, the era.
Yep.
Thanks, Chef. Yeah, thanks for us.
Speaker Change: Your next question comes from the line of Mike Mueller with JP Morgan, please go ahead.
Speaker Change: Yeah, hi. I guess, you know, sticking some macro stuff here. It's the economic environment does get worse, so recession scenario. I mean, what is your gut tell you are the categories in your portfolio where you could see the pullback in demand happen first?
for joining us.
Speaker Change: You know it's a great question and we've looked at it a couple of times in our two in the two last recessions that we had or the you know the
Speaker Change: The areas where you see the most impact is, and it sort of trickles based upon the depth of the recession.
Speaker Change: It starts clearly with discretionary and those choices are made.
Speaker Change: It also, the brand loyalty sometimes evaporates in recession, so you start to see people trading down in product. We see that and the other thing you see is you see movement towards the groceries. The people are eating at home more and actually when you...
Speaker Change: It's a little counterintuitive, but the grouchers actually do better in the recessions because people are not eating out. And as they compete with restaurants in a tangential way, but that's been a reality in the last two recessions, each being very different, but still having some commonalities in terms of consumer behavior. And so we never want to say one recessions like another.
Speaker Change: because they all have similarities, but they also have a lot of differences.
Speaker Change: You know, this one where you're starting at a relatively low unemployment rate has complications in terms of understanding how it's going to play out. I mean there have certainly been discussions of a...
Speaker Change: You know, you're going to have to see major change in employment to find it to be a deep recession and we just don't anticipate that.
Speaker Change: That makes sense, Michael. Obviously, we are talking about from today going forward because it's really good operating environments today. And we're...
Speaker Change: Kind of just trying to look out and anticipate how we will react if those things, if those situations happen, though we don't, we actually don't believe they are going to happen
Speaker Change: Yeah, now I got it, but it does seem like one of the areas you flagged where, if it does happen, is probably more in the dining.
Speaker Change: Yeah, I mean, there have been certainly been articles about that. We did go back to the last two recessions and you continue to see growth in on
Speaker Change: Not on the higher end dining, but on the fast guys who will like that, that actually continue to grow through the last two recessions, so it's sort of a hit...
Speaker Change: It's almost like eating out is become an necessity, and I think that's kind of a reality of the country at this point, you know, that it is a, it's more an necessity in, you know
I think it has been historically. [inaudible]
Ok, thank you. Yep, thanks, man.
Speaker Change: As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Your next question comes from the line of Daniel Purpora with Green Street, please go ahead.
Daniel Perpora: Good morning, public is in pretty active recently buying centers and it also looks like you have two redevelopments with publics in your portfolio on your portfolio.
Daniel Perpora: Is this just something that's public specific or do you expect to see other grocers more acted in the market or pushing to rebuild their stores?
Daniel Perpora: I would say it's very public-centric and less across the board. Most of the grocers, most of our major grocers,
Daniel Perpora: Do more remodeling, upgrading the thing, but public has a very specific strategy of modernizing
By a full turn on and rebuild, and weep.
done that for them. [inaudible]
Daniel Perpora: for a long time, and it's been a great business for us, and I think it's been a great business for them. We sign a new lease, we get upgraded rents to pay for the cost.
Daniel Perpora: and you have a new 20-year lease, and that is a powerful value creator for us and it's...
Part of their course strategy. Thank you.
Todd, thank you.
Daniel Perpora: Yes, thank you. This concludes our question and answer session and I will now turn the conference back over to Jeff Edison for some closing remarks.
Jeff Edison: Thank you, operator, and thank you everyone for being on the call today. We tried to shorten our opening remarks a little bit to give more time for questions in this environment. So, in closing, the peak of team continue to strong performance in the first quarter. Despite our care of concerns, we continue to be strategic in our decision making to best position PICO to take advantage of the opportunities for growth, both internal and external.
Jeff Edison: We're seeing a high retailer demand with no real current signs of slowing. Peacock's leasing team continues to convert this demand into significantly higher rents. Retailers want to be located in our centers and they want to be near the number one or two grosser in the market.
Jeff Edison: 71% of our ABR comes in Cessity-based goods and services, 30% of which comes from our grocers.
Jeff Edison: We believe Pico is relatively more insulated from potential tariff disruption than many. We also have limited exposure to big box bankruptcies and at risk retailers.
Jeff Edison: We believe that the combination of our unique format and our psycho-tested experience drives high quality craft cash flows.
Jeff Edison: Given our demonstrated track record through various cycles, we believe an investment in Pico provides shareholders with a favorable balance of quality casulos, mitigation of downside risk, and strong internal and external growth.
Jeff Edison: The quality of our capsule reduces our beta, and the strength of our growth increases our alpha, less beta and more alpha.
Jeff Edison: We think it's a great reason to invest in BICO. So on behalf of the management team I'd like to thank our shareholders, our associates and our neighbors for their continued support and for a great quarter of results. So thank you all everyone for being on the call today and have a great weekend.
Speaker Change: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation and you may now disconnect.