Phillips Edison & Company, Inc. Q2 FY26 Earnings Call | Full Recording | PECO

Good day and welcome to the Phillips Edison & Company's second quarter 2026 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.

Thank you. I'm joined today by our chairman and CEO Jeff Edison, president Bob Meyers, and CFO John Cfield. As a reminder, today's discussion may contain forward-looking statements about the company's view of future business and financial performance, including forward earnings guidance and future market conditions. These are based on management's current beliefs and expectations and are subject to various risks and uncertainties as described in our SEC filings. 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, both of which have been posted to our website. Please note that we have also posted a presentation and our caution on forward-looking statements also applies to these materials. Following our prepared remarks, we will open the call to Q&A. Given the number of participants on the call today, we respectfully ask that you be limited to one question. Please rejoin the queue if you have follow-up questions. With that, I'll turn the call over to Jeff Edison. Jeff,

Thank you, Jeff, and thank you for joining us, everyone. PICO's operating team remains focused on generating more alpha, and I'll let John speak to the beta. Our second quarter results were marked by a record high number of leases and success in growing cash flows. We continue to see high retailer demand with no current signs of slowing. Necessity based categories including quick service and fast casual restaurants, health and wellness, beauty, fitness services, and medtail continue to be excellent drivers of demand. 74% of PICO's rents come from necessity-based goods and services.

Second quarter leased portfolio occupancy remained high at 97.3%. Least anchor occupancy remained strong at 98.4% and least inline occupancy was a record high 95.5%. In addition, economic inline occupancy was a record high 94.8%. During the second quarter, PICO's national leasing activity continued to be outstanding. New deals included 7 Brew, Cold Stone, Firehouse Subs, Wingstop, Jersey Mike's, and Urgent Vet. Retailers growing with PICO during the quarter included new deals with Crispen Green, Happy Lemon, The Peach Cobbler, Sweet Frog, Club Studio, Fit Stop, Cleo, Med Spa, and Escapeology. Our rent spreads continue to reflect an extremely positive retailer environment. During the second quarter, PICO delivered comparable renewal rent spreads of 21.2%. Solid retention during the quarter means less downtime and lower tenant improvement costs, which translates to better economics for PICO. Looking at comparable new rent spreads, they remain strong at 33.7% during the quarter. Inline leasing deals executed during the second quarter were very strong. On renewal activity, PICO averaged record high annual rent bumps of 3.1%. This is another important contributor to our long-term growth. We are also pleased with record high portfolio AVR per square foot during the second quarter, which was driven by respective highs for both anchors and inline retailers.

As it relates to bad debt, we are actively monitoring the health of our neighbors. Bad debt was lower than expected in the second quarter at approximately 70 basis points of revenue. Given the strength we've seen in the first half of 2026, we have lowered our guidance range. We expect bad debt for the year to be in line or slightly better than 2025. Turning to development redevelopment, PICO has 21 projects under active construction. Our total investment in this activity is estimated to be approximately $82 million with average estimated yields between 9 and 12%. Year-to-date, 11 projects have stabilized with over 212,000 square feet of space delivered to our neighbors. This reflects incremental NOI of approximately $3.4 million annually. We are focused on continuing to grow PICO's development and redevelopment pipeline, which is an important driver of growth. In addition, the PICO team continues to find accretive acquisitions that add long-term value to our portfolio. Our year-to-date acquisition activity through this week reflects $278 million at PICO share. This includes eight grocery anchored shopping centers, three everyday retail centers, an out parcel, and land for future development. Currently in our pipeline, we have over $225 million in assets that we've been awarded or under contract that we expect to close in the second half. Our pipeline reflects a combination of grocery anchored neighborhood shopping centers, everyday retail centers, and opportunities for our joint ventures. I will now turn the call over to John. John.

Thank you, Bob, and good morning and good afternoon, everyone. Second quarter 2026 NAREIT FFO increased to $93.7 million or $0.67 per diluted share. Second quarter core FFO increased to $95.5 million or $0.69 per diluted share and same center NOI increased 3.8% in the quarter primarily due to higher revenue which was driven by increases in average rents and economic occupancy. PICO continues to focus on growth while maintaining lower beta. The acquisitions activity Bob mentioned was funded by dispositions, new equity raises, and our revolver. As Jeff mentioned, we remain disciplined about accessing the most efficient capital and match funding our opportunities. PICO continues to have one of the best balance sheets in the sector. This strength was recently recognized by Moody's which revised PICO's outlook to positive reflecting our consistent operating performance, disciplined balance sheet management and strong liquidity position. We believe Moody's positive outlook validates the strength of PICO's operating platform and credit profile. With $857 million in liquidity at the end of the second quarter, we remain well positioned to execute our accelerated growth plans.

Our net debt to trailing 12-month annualized adjusted EBITDA was 5.1 times at quarter end and was 5.0 times on a last quarter annualized basis. At the end of the second quarter, PICO's outstanding debt had a weighted average interest rate of 4.4% and a weighted average maturity of 5.6 years when including all extension options. And 95.9% of our total debt was fixed rate debt which includes PICO share of debt for our JVs. Turning to guidance, we are pleased to increase our full year 2026 guidance for NAREIT FFO per share which reflects a 6.3% increase over 2025 at the midpoint. We also increased guidance for 2026 core FFO per share which represents a 6.2% increase over 2025 at the midpoint. We also updated our guidance for same center NOI growth which reflects 3.7% growth at the midpoint. These are very strong growth rates and consistent with our long-term targets for growth. As Jeff mentioned, we also increased our full year 2026 guidance for gross acquisitions to a range of $500 to $600 million. As it relates to dispositions in 2026, we continue to target a range of $100 to $200 million in asset sales. We've provided ranges for the other guidance items used in your models in our earnings materials. In summary, PICO delivered solid results this quarter which allowed us to raise our earnings guidance and gross acquisitions guidance. We continue to see a resilient consumer and we believe our portfolio will outperform as necessity based retailer demand remains strong. As Jeff said, the investments we're making today position us exceptionally well for 2027 and beyond. In an environment where investors continue to see dependable growth and stability, we believe PICO is uniquely positioned to deliver both. With that, we'll open the line for questions. Operator.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. And if you would like to withdraw your question, again, press star one. Thank you. Your first question comes from Andrew Real with Bank of America. Please go ahead.

Good afternoon. Thanks for taking my question. Just on the guidance, you raised the gross acquisition outlook by $100 million. You also improved the same store NOI non-cash and collectibility assumptions. I guess first, John, you just mentioned this, I think, can you just confirm that the net acquisition outlook is also increasing by that $100 million? And second, John, maybe if you could just bridge the moving pieces of the revised FFO guidance and maybe help us understand why the increase was a little bit modest at just a penny given there were a number of positive updates in the quarter. Thank you.

Sure. Good afternoon, Andrew. First question was, yes, it is a net acquisition increase of $100 million. And as we think about the funding for that, we were able to raise a little over $90 million at the end of the quarter and the leverage that we sit at now is at five times on an LQA basis on a debt to EBITDA. When we look at guidance, I think it's important that we're very pleased with our first half performance and our ability to raise that full year guidance really for all of our metrics. The operating fundamentals remain strong as you said, and tenant credit trends are healthy. When I think about the guide for same center, which I would note is now in the upper range of our long-term target of 3% to 4%. This gives us room to move out neighbors where we can drive more rent growth and improve merchandising. So when we look at that, it's better strength, it's economic occupancy growth, and really pushing that has allowed us to raise that guidance at the FFO level. The midpoint of our guidance range is now above 6% for both NAREIT and core. My dispositions are ahead of pace, but we view that as a positive given the strength of our acquisition pipeline that Bob talked about and the opportunity to reinvest that capital at higher spreads. So when we look at the timing, there is a short-term cash flow gap, but this activity positions us really well for 2027. So overall, we're very confident in our increased guidance and remain focused on delivering results at or above that level.

Thank you.

Your next question comes from the line of Handel St. J with Missouo. Please go ahead.

Hey guys, good morning. I guess good afternoon to you. My question is on the acquisitions guide, the uptick here. I'm curious if the new guide is a run rate to think of beyond 2026 or more reflection of your ability to opportunistically sell assets, some non-core assets, and is a strong bid in the market today. And generally speaking, how do you think about using equity to fund incremental acquisitions? Thanks.

Yeah, so Handel, we would look at it and say we've got debt capacity, we raised equity. I will note that, and I should have said this earlier, our guidance for the year does not assume any additional equity issuance from here. And so when we think about what we've been able to buy as well as what we have in front of us, I would say that this is a great market that we can look to even exceed that acquisition guidance we gave. When we think about the years ahead, we still believe that we can buy about $300 million on a net basis every year and remain leverage neutral. And so what we've actually got is that capacity, which is about $250 million. So when you consider what we have to buy this year as well as the future, I think we would like to see that we're able to pursue a higher acquisition guidance as we look forward, but we're really going to look at it on that net basis because we want to preserve that balance sheet capacity and protect the business.

Great. Thank you.

Your next question comes from the line of Caitlyn Burroughs with Goldman Sachs. Please go ahead.

Hi everyone. Congrats on a great quarter. Maybe as we look at the acquisitions that you did in the quarter, you mentioned earlier how they are great for '26, but they set the stage for continued growth in '27. So maybe not going through all of them in the interest of time, but maybe if you guys could talk about the largest two or three deals or maybe most interesting two or three deals from the quarter, and what you see as the real upside potential for them.

Yeah, thank you Jeff and thank you for the question, Kaitlin. I think you know, in April we purchased an asset in Renton, Washington that's anchored by a Safeway that really had a lot of, I would say, misleasing opportunities. Had some pretty good vacancy. The current occupancy is 82.8%. We feel like we can make an immediate impact to that. So we're excited on that one. That particular asset, as we underwrote it, would certainly solve for well above a 10% unlevered return. There's another asset that I like, a lot of the mark-to-market opportunities that we're seeing with what we're buying. It doesn't matter if it's Sprouts or Kroger or Cub Foods. A lot of the assets that we're acquiring really have some nice 20%, 30%, 40% mark-to-market opportunities. And we've been very focused on buying acquisitions that are still solving between 9.5% and 10% or better. We're seeing that certainly in our everyday retail category as well where we're generating over 5% cash yields. Even in the 12 assets that we've acquired in everyday retail, we've already moved occupancy 450 basis points. So you'll continue to see us lean in to where we stay disciplined on our unlevered returns, but it's an assortment. We're going to stay focused on the core grocery anchored centers and complement it, and I think we've always said this, less than 10% of our overall portfolio in everyday retail to give us that extra squeeze.

Thanks.

Your next question comes from the line of Flores Van Ditchkum with Leadenberg Zelman. Please go ahead.

Hey guys, thanks for taking the question. I guess this is more of a follow-up to Caitlyn. I think she was on the same train of thought as I was. But obviously to get to 10% of the portfolio in everyday retail requires you to buy more of that product today. How do you think about... centers? Are you also looking at the same time thinking about acquiring some of the everyday retail centers adjacent to those properties?

Yeah, thanks Jeff and Flores. Thanks for the question. We're really excited about the everyday retail category. I'm going to kind of dissect your question here a little bit. The first question was about Prairie View Center in Minneapolis, the Lunds and Byerlys. That asset happens to be a great asset in a market that we've done really well with in terms of our overall results. We like Lunds and Byerlys. They're a little bit more of a specialty grocer. It's well occupied, but we really feel like there's an opportunity to push rents from the low $20s into the high $30s, maybe even low $40s. To answer your question specifically on everyday retail around some of those core markets where we have the incomes and the demos and the education, we're leaning into that. We've identified over 50,000 of these opportunities across the country that are close to the number one and number two grocers, which is obviously our core business. And so we're going to continue to lean into opportunities that solve for that high single digit to 10% unlevered return. And we'll do that through acquisitions, we'll do that through development, and we'll also do it selectively through joint ventures. So overall, very positive on the everyday retail category, but staying disciplined.

Thanks.

Your next question comes from the line of Michael Griffin with Evercore ISI. Please go ahead.

Great. Thanks, Jeff. I think you started off in your prepared remarks. You maybe making some commentary around, you know, sort of consumer sentiment. You know, obviously we saw, I think, a large tenant of yours reported earnings earlier this week, took down their outlook, kind of made some comments around the cautious consumer. So I mean I understand that you know it's asset and center specific but is there any read through that you know whether folks are trading down at the grocery store you know whether it's going to people are getting kind of squeezed at the sticker shock when they're out there buying food. Like is it just a canary in the coal mine of what could be a worry in terms of you know ultimately translating to leasing demand for PICO as it relates to grocers?

Great.

Your next question comes from the line of Jamie Feldman with Wells Fargo. Please go ahead.

Great. Thank you for taking the question. So, new and renewal spreads remain strong. Can you talk about the composition of the spreads between the embedded mark-to-market versus just strong incremental demand? And as you think about those two levers, how should we think about your expectations heading into the back half of the year and even into 2027?

Yeah, absolutely, Jeff. So I would start by just simply saying if you look at our overall results, you think about occupancy being 97.3% and anchor occupancy at 98.4% and our inline occupancy is an all-time high of 95.5%. We continue just to see very strong retailer demand. We're also retaining 90% of all of our neighbors and we're spending less than a dollar a foot to keep those. I always look at our pipeline reports, leases out for signature, renewals out for signature, and I would certainly say that there is a tremendous amount of demand. We have a great pipeline and the spreads are consistent. You have new leasing spreads at 34-35%, you have renewal spreads at 21-22% and we just don't see anything slowing down. Our main focus is still on necessity-based goods and services. 74% of our rent rolls reflect necessity-based goods and services. Fast casual, restaurants, health and wellness, beauty, fitness, services, medtail, all those uses make up the majority of our deals that we've executed and the pipeline going forward. We attend all these ICSC events and all the retailers continue to look for growth opportunities in our portfolio and we're trying to create some of those. So there will be some mark-to-market opportunities. We're going to try to keep health ratios around 10.5%. We believe that we can continue to move inline occupancy another 100 basis points. I do think we'll move anchor occupancy up another 50 to 60 basis points by year end. We're in a very good spot and I don't see anything slowing down. Jeff already spoke to the 2% traffic and the foot traffic that we're seeing. We have momentum. We feel very good about where we're at.

I think the piece is the answer is it's both because the mark-to-market is also being driven by the demand because if I think about the renewal spreads that have been over 20% now for many quarters, that's really because we have demand from other neighbors looking for that space. So we're able to drive that and we do have leasing agents that are locally smart that only focus on our centers, but actually watch the market comps in the space. It's because of our presence with the best asset in our area that is able to drive that. So when we think about it, Bob talks about what we see going ahead and it's very consistent with what we've been delivering. So I could say that that is the mark-to-market, but it's hand in hand with the demand.

And if you would like to ask a question, please press star one on your telephone keypad. Your next question comes from Todd Thomas with Key Bank. Please go ahead.

Yeah, hi, thanks. I wanted to follow up on the core FFO guidance and the results in the quarter. As we're kind of working through some of the updated assumptions and moving pieces, it also looked like there was a positive variance in other non-property income in that line. There was about 2 cents comprised of some investment income and some other income. Can you just speak to that whether that was contemplated in the guidance and if any of that income is expected to be recurring?

Yep. Thanks, Todd. So I'll say the first piece is yes, there was income related to an easement on a non-operating piece of land and that was about a little less than a million dollars in the quarter and that I do not anticipate is recurring. The other piece that you're referring to is we do have investment income. So we have an insurance captive that is continuing to grow and it does have marketable securities. So the growth there, which we've actually seen, is the participation in the market and so that was contemplated and we do include that in our numbers and anticipate that that is going to continue to grow with time as the assets in that business increase. But it's a core component of our business and growth, but overall in the FFO it's delivering the same sort of growth. I got to go back to Handel. And man, I have one swap left and I'm 96% fixed. So I appreciate that. Go through, chuckling at that. So from a fixed standpoint, really when we look at the remainder of the year, the pieces that remain in our guide is really going to be around the acquisitions that we close and that's just going to lead into better growth in '27.

Okay. Is the investment income that piece good to consider as sort of a run rate at that $1.1 million? Is that how we should think about that or is there a way to quantify what distribution might look like?

It's a marketable securities portfolio in an insurance captive. So it's participating in a balanced strategy between equity and fixed income. So some of it's going to be cash incoming, some of it's equity. But for the most part, I do think that we look at that as sort of durable income and if you needed a run rate, that's probably the best I've got.

Okay, great. Thank you.

Your next question comes from the line of Michael Goldsmith with UBS. Please go ahead.

Good afternoon. Thanks a lot for taking my question. Jeff, you mentioned that the building blocks for 2027 are becoming increasingly visible. Would you be willing to share some of those building blocks and how you're seeing here with the growth beyond this year? But if it's still too early to provide that level of detail, do you believe same store NOI and FFO growth can accelerate from current levels just given where occupancy stands today and the potential for transaction cap rate compression?

Got it. Thank you very much. Good luck in the back.

Your next question comes from the line of Rich Hightower with Barclays. Please go ahead.

Hey, good afternoon guys. I wanted to get your perspective on the Kroger Giant Eagle merger which I think you referenced in the prepared comments and specifically I know Kroger is increasingly using the storefront as a fulfillment center for online shopping which keeps growing. How do you sort of think about that as a landlord? How do you position the portfolio for that sort of dynamic in the grocery industry? What should we be looking out for sitting in our seats out here?

Thank you.

Your next question comes from the line of Ronald Camden with Morgan Stanley. Please go ahead.

Great. Thanks so much. Just want to follow up on the comments on the inline occupancy. Obviously hitting a record high here and you talked about maybe another 100 basis points to go. Which would be like 96.5, 97. I guess I'd love to hear what's different this time around versus history. What categories are really active this cycle? And maybe what are you sort of staying away from? Thanks.

Yeah, absolutely. Thanks, Ron. Appreciate the question. We were really excited. We saw a very nice increase in occupancy this last quarter. It's interesting when I look at our overall leasing results and the demand that we've seen. We've had a 25% increase in overall leases completed second quarter over first quarter, which shows momentum. I've hit the categories, but it's still consistent with fast casual, health and wellness, beauty, fitness, services, and medtail. One of the biggest strategies that we've incorporated in the company is when you're 97.3% and 95.5% and I do think there's another 100 basis points of occupancy lift, may take us 24 months to get there selectively because we are recycling and being very specific about our merchandising approach and our everyday retail approach. We want there to be longevity and truly we are partners with all of our neighbors. So we want them to be highly successful. But one of the incentives I put in place for our leasing team was this targeted approach where we went out and identified a hundred different spaces that were the largest NOI generators and ABR generators that we had left to lease. And we put bounties on them. We put additional incentives on them and we're getting it done. We're seeing that the retailer demand in those categories are supporting our lease up scenarios and I believe as of about a week ago, out of those hundred spaces, we've leased about 65 of them already. And I think as I look at setting incentives in place for next year, we'll do the same thing. We'll go through the portfolio. We'll see what vacant spaces that we have. What do we want to lease? And the success in all this is leasing the vacancies that quite frankly have been vacant for a few years. So we're investing capital. We're cleaning them up. The demand is there. And that's why we're seeing all the success, not only in spreads, but demand and some of the incentives that we have in place. It's really all about focus and accountability, Ron.

Thank you.

Your next question comes from the line of Mike Mueller with JP Morgan. Please go ahead.

Yeah. Hi. Rates and are you seeing notable fluctuation just given how the 10-year is around and it's backed up closer to 4.7%?

Yeah, it was very soft. Mike, we could it was very...

Yeah. Sorry about that.

Yeah. Okay. Yeah. I was just saying, have you seen any notable fluctuations with cap rates this year just given how the 10-year has bounced around and we bounced back up to close to 4.7%?

Thanks.

Your next question comes from the line of Caitlyn Burroughs with Goldman Sachs. Please go ahead.

Hi again. I feel like a topic across the industry is that a lot of peers want to be inquisitive, but it's very competitive and I don't think we've talked about that yet today. So I was wondering as you guys think about the deals you've done year to date or in Q2, I imagine it was quite competitive. So wondering is it just that you guys are looking in markets or submarkets that others aren't, some prior relationship or something else? What do you think has given you these edges because again I'm imagining that it was a competitive market.

So maybe it's like opening up the top of your own funnel some?

Yeah, the only thing I would add is we're seeing a lot of product as I mentioned earlier. I think when I look at our stats, we've seen a 33% increase in the amount of deals coming through the pipeline. And even what we presented to our investment committee, we've seen an increase of about 25%. The other thing that we did, Caitlyn, was we added resources at our acquisitions department. We ended up hiring an acquisition officer out west by the name of Dan Sutherland who comes with a tremendous amount of experience. So we have four highly qualified acquisition officers really focused on each of their markets and that's opening up opportunities. It's also giving us opportunities to find off-market situations. So a handful of the deals that we were able to acquire this year have been off-market. We continue to look at those opportunities as well. So as Jeff mentioned, between everyday retail and our core grocery strategy, I think we're well positioned. We have the right resources. We're staffed appropriately to really win in the space. And we do want to take advantage of what I would say are the inefficiencies in the market. We've stayed disciplined buying between 6.4 and 7.12 cap rates. So Jeff mentioned it at 6.7. Our pipeline is still real close to 6.5 for the second half and we're still solving for the returns that we wanted between 9 and 11% on levered.

Thank you.

Thank you. I will now turn the conference back over to Mr. Jeff Edison for closing comments.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation and you may now disconnect.