Phillips Edison & Company Q2 2025 Earnings Call | Q2 2025 Earnings Conference Call | Q2 2025 Results

Thank you Kim and thank you everyone for joining us today. The PECO team is pleased to deliver another quarter of solid growth. Same center NOI increased 4.2% and core FFO per share increased 8.5%. Given the continued strength of our business, we are pleased to increase our full year 2025 earnings guidance for same center NOI, core FFO per share, and NAREIT FFO per share. I'd like to thank our PECO associates for their hard work in maintaining our unique competitive advantages and driving value at the property level. We believe PECO's grocery-anchored strategy and necessity-based focus have helped to create a resilient portfolio that also delivers steady growth. We are driving strong rent spreads, increasing occupancy, and generating dependable high quality cash flows. This consistency in performance and growth is attributable to several factors. First and foremost, it takes an experienced and locally smart team to bring the best retailers to our centers. Our neighbors create positive community experiences built around our grocers. Second, it takes decades to build the strong grocer and national neighbor relationships that PECO enjoys. These relationships give us an advantage in working together to optimize our properties and are critical to our acquisition strategy. Third, it requires a portfolio focused on right-sized neighborhood centers located in suburban trade areas with compelling demographic trends and continued macroeconomic tailwinds. Strong demand from national retailers continues to fill our pipeline of ground-up outparcel development and repositioning activity. Fourth, it takes a dedicated team to acquire and curate a high quality grocery-anchored portfolio that is expected to deliver 3% to 4% same center NOI growth year after year. And lastly, it requires a strong balance sheet with great liquidity to invest in the properties and the portfolio. Our long operating history and track record have built these strengths for PECO that give us both offensive and defensive advantages in the market. Because of these advantages, we believe PECO is able to deliver mid to high single-digit core FFO per share growth annually on a long-term basis. The market continues to focus on tariffs and U.S. economic stability. As it relates to PECO's grocers and neighbors, we feel very good about our portfolio. As a reminder, 70% of our ABR comes from necessity-based goods and services. This provides predictable, high quality cash flows and downside protection quarter after quarter. This also limits our exposure to discretionary goods, which are at risk of greater impact from tariffs. We estimate that approximately 85% of our neighbors, based on ABR, will experience limited impact from tariffs. Supporting that estimate is the strength of our neighbor retention and leasing spreads in the second quarter, which Bob will speak about in a moment. Our neighbors are watching the consumer closely. They continue to benefit from their location in the neighborhood where our top grocers drive strong foot traffic to our centers. We continue to see leasing demand for our existing spaces along with a healthy development and redevelopment pipeline. We are seeing strong demand from retailers who want to be located at PECO's grocery-anchored neighborhood shopping centers, especially from small shop retailers in categories like quick-service restaurants, health and beauty, medical retail, and personal services. These are the types of neighbors that perform well because they are part of people's everyday routines. And importantly, the PECO team continues to find smart accretive acquisitions that add long-term value to our portfolio. Our active acquisition activity is another differentiator in PECO's strategy. The PECO team is acquiring in the market through all cycles, carefully and deliberately acquiring centers that fit our grocery-anchored strategy and right-sized format while also delivering long-term growth potential. This has been part of our DNA for over 30 years. We're not just maintaining a high quality portfolio, we're building one. What sets PECO apart is that we know exactly what we're looking for and we have one of the best operating platforms to act quickly and execute. During the second quarter, we purchased $133 million of assets at PECO's total share. When you include assets acquired subsequent to quarter end, this brings our year-to-date gross acquisitions at PECO share to $287 million. Despite recent market volatility, we remain confident in our ability to acquire high quality centers at attractive returns. We are pleased to affirm our guidance range of $350 to $450 million in gross acquisitions this year. We continue to successfully find attractive acquisition opportunities below replacement costs with strong growth profiles that we believe will exceed our unlevered 9% IRR target. In summary, we are very pleased with our results this quarter and our ability to raise guidance for the remainder of the year. While it is still early to understand the full impact tariffs could have on PECO or our neighbors, we continue to see a resilient consumer and we believe our portfolio will outperform as retailer demand remains strong. Our confidence is driven by the stability of our high quality cash flows and the PECO team's ability to deliver solid growth and create value for our shareholders. Given our demonstrated track record through various cycles, we believe an investment in PECO provides shareholders with a favorable balance of defense and offense. In summary, we believe the quality of our cash flows reduces our beta and the strength of our growth increases our alpha. Less beta, more alpha. I will now turn the call over to Bob.

Yeah, thanks Caitlyn for the question. We had a really good first half. I think it kind of goes back to the fact that we buy properties one at a time, market by market. And if you step back and you look at it, that's how we were able to actually get this volume. It didn't come in a big chunk of buying something. It came in being active in a lot of markets and we've set up our acquisition team to be able to do that over a long period of time and it's hard. But we've been able to put that in place and I think that's how we've been able to get to those numbers. We're very focused on a very disciplined approach to our acquisitions. We feel really good about that. We're actually really excited about the opportunities because if you look at the anchors that we were able to expand our exposure to, like H-E-B and Walmart, Target a little to a small amount. These are really good retailers that we're sort of spreading out a little bit of our exposure to. So we feel great about the first half and excited about what we can do hopefully in the second half.

Bob, you want to talk a little bit about the leasing activity and how we're sort of looking at that as opportunity and as well as headwind.

Samir, I thought you were going to focus on how great it is that we had all that great growth in the first half. John, do you want to cover the sort of what we're looking at for the second half on same center growth?

Yeah, thanks. So through the first half of the year, we will have bought three unanchored centers. That's 14% of what we bought. Seven shadow anchors, which is 50% of what we bought, and four anchored centers that represent 35% of what we bought. It's really hard to look quarter by quarter and have a view of a change. These were actually stores that we were very excited about getting and we saw these as great opportunities. If you think about it, the average sales of the shadow-anchored centers we did is over $1,000 a foot on the grocer. So we've got a quality grocer, these are all centers where the grocer actually owns their store in the shadows. And so our small stores get the full benefit. We don't have that sort of flat part of our cash flow, which is the grocer. We saw these as great opportunities for us to get increased growth and really stable, strong properties. I wouldn't say that this is caused by the market, other than these are the properties that came on the market and that sort of fit with what we were trying to get, which is that number one or two grocer driving the customer to the center day in, day out, because that's what allows us to really grow rents.

Yeah, thanks for the question. Yeah, we are very excited about having put $200 million to $290 million on the board for the first half. And we are prepared to do more than guidance if we find the opportunities. I would say that our macro look at the market right now is that it's actually fairly stable. There is more product on the market and there are more buyers and we are finding certain buyers that are getting very aggressive, which is where we've got to keep our discipline and stay out of that competition or the desire to be in that, and stay true to what we do. And I think we did that in the first half. If we can find the same amount in the second half, we'll do it. We're a little bit, I think, cautious there in terms of what the second half is going to look like. So that's why we maintained our guidance.

Great. Thanks, Ron. So before I turn it over to Bob, we're going to keep saying this and I know some of you will buy it, some of you won't, but we truly believe that occupancy is the — it's our stores making a decision about where they want to be. And if you have the highest occupancy, our view is you have the highest quality assets. And we have consistently been able to do that because the retailers are telling us with their leases that we have the best properties. And so we're really happy about getting to these occupancy levels. And we're very happy to be partners with our neighbors to be able to achieve those goals. So Bob, you want to talk a little bit about occupancy and where we might be able to take it?

Yeah, we're probably not the best ones to ask about it because the necessity-based side which is...