All right, we made it to the end. Welcome, everyone, for the 10:35 A.M. session at Citi's 2023 Global Property Chief Executive Officer Conference. I'm Craig Mailman with Citi Research, and we're pleased to have with us Phillips Edison and Chief Executive Officer Jeff Edison. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and the AV desk. For those in the room or the webcast, you can sign on to liveqa.com and enter code GPC23 to submit any questions if you don't want to raise your hand. Jeff, we'll turn it over to you. You can introduce your company, any members of management that are with you today, provide any opening remarks, then we'll get into Q&A. Great. Well, thank you for having us, and thanks everybody for being here. With me today are our president, Devin Murphy, our Chief Financial Officer, John Caulfield, and our Head of Investor Relations, Kimberly Green. We appreciate everybody being here, and we're looking forward to answering your questions as we go. Perfect. We've been kicking off every session, asking what are the top three reasons an investor should buy your stock today? Our view on that is that, you know, we have a very unique business model, which is to go into markets where we can buy the number one or two grocery anchored center, and with a very defined focus on that what that center looks like. It's 115,000 sq ft, it's got a 50,000 sq ft grocer, and it is in a market where the demographics will support the small store space and the success of the small store space. That strategy, we believe provides us the ability to create more alpha, through growth and also but have a very strong, you know, low beta. That is really what one of the reasons we think, you know, investing in PECO is a great opportunity. Our external growth comes from our acquisition pace and our redevelopment. Then our internal growth is really running, you know, growing our occupancy as well as the leasing spreads that we are, you know, we're able to generate. It's, you know, that, you know, lower beta with the stronger alpha is one of the reasons we believe investing in PECO is very positive. The other is we have a, you know, a very strong balance sheet, which allows us to be opportunistic in an environment where we think there is potential for some really good buying opportunities. The third reason is the alignment. You know, our management team owns about 8% of the company, which is one of the highest ownerships. We are highly aligned with our investors and pushing very hard to get the kind of results that we want, which will help everybody. That's great. You know, I think in the retail space, a lot of time is focused on median income. You guys have a differentiated approach here on the non-discretionary side of things. Can you talk about how your approach, you know, how you take a different holistic view on just purely demographics versus your tenant type, your asset type, and, you know, you were saying the alpha with the beta, kind of how that rolls into that. Well, we look at our business as a differentiated business because we are truly in the grocery anchor shopping center, necessity-based business with where we serve a 3-mi radius around the shopping centers that we buy. Our ability to create that alpha and the is really driven by having the right format centers where we can actually see the kind of growth that we do. We like to say we basically make money where our grocers make money. If you look at our demographics, they basically mirror Publix. They mirror which we're, I think we're Publix's second-largest landlord. We're Kroger's largest landlord. If you look at their demos and they match our demos. If you're in the grocery anchor shopping center business, those are the people that's where your demos are gonna be because that is where these grocers make money. That's been, you know, a focus of ours, you know, for over 30 years as we built the business. We believe very strongly that, you know, our results are an exhibit of what you can do in those markets that, you know, are not necessarily where everybody is, but that's one of the advantages we have. You know, there's just a few crosscurrents going on now in the economy with inflation, Hawkish Fed, consumer spending's kind of held up. The lower end is getting hurt a little bit more. I'm just kind of curious, from your viewpoint, what are the major trends that you're seeing that'll impact your centers over the short and long term? You know, the retail's been in a market where it's had headwinds for, you know, a significant amount of time, and a number of those headwinds have now turned into tailwinds, which we think are very strong and very long-term. What we put into that bucket are suburbanization, the movement from urban environments to the suburbs. Our centers are in the suburbs. That's where we compete. Work from home is bringing more people closer to our centers more of the day, another major trend. The Sun Belt, and the migration to the Sun Belt, as we all see here in Florida, the migration is real and continuing to happen. Over 50% of our portfolio is in the Sun Belt, and we're growing that as well. The other piece is really what's taken time is the resolution of last-mile delivery. It's not totally resolved, but it is much clearer where that is going today. That trend is focused on the store. If it, that trend we don't believe is changing. You hear when you talk to Kroger, when you talk to Publix, the store is the focus of their business and will be on a, on a long-term basis. That's one of those things that's gotten resolved, I think, over the last four or five years. The other piece is buying local. You know, our part of our center delivers that unique shopping experience of having a local retailer delivering the goods for that 3-mi radius. You know, when you look at those things, all of them are tailwinds to the demand side of our business. Then you lay over that the fact that there really has been no new development in our business for almost 15 years. That's what's giving us the pricing power that's allowed us to have the kind of results we have had over the last, you know, really over the last five- years. We have a couple questions coming in from the audience. Maybe I'll just start with the first one. What differentiates your portfolio of assets from that of your peers? Again, it's our grocery focus. I mean, it's the fact that we have the number one or two grocery in the market that we're in. We have the right size center that's 71% of our income coming from necessity-based retail. We basically serve that 3 mi radius around our center, and that's where we compete. In, you know, 31 states and almost 300 properties, that's what we do, and that's what differentiates us. If you look at the average size of our center, you know, we have the lowest size, and that's because of the nature of our business, which is delivering goods the last 3 mi to people's houses. What that small size does is it has both a offensive and a defensive positioning to it. From an offensive perspective, that's where the leasing demand is. Outside of the grocery store, our average in-line space is 2,500 sq ft That is significant demand from new tenants and new uses. On the defensive side, it minimizes our exposure to some of the credit risks and the credit issues that are out in that in the headlines now. That's not what we do. That's been part of our strategy, and we believe that gives us stability but growth. Another question coming in, your business benefits from inflation. As that comes down, how much of your growth is at risk with CPI eventually declining? you know, most of the retailers in our centers, their sort of sweet spot is that 2%-4% inflation. That way they can pass that on to the consumer, but it's not crushing the consumer in a way that is keeping them from their sales from being able to increase. If you look at our retailers' preference, they do not prefer real high or real low inflation. They like a sort of a moderate amount of inflation, and that's when they can actually grow their margins and be the most profitable. As we look at our business, the environment we're moving towards, we think is a very that our retailers are seeing as very positive. I'm gonna try to combine some of these questions here. You know, you guys guided to a higher NOI growth comp than what we're expecting in this space. Can you walk through maybe a bit about how your SNO pipeline factors into that, where your rent bumps on the blended portfolio basis are versus what else is really helping you achieve that outperformance? Yeah, I'll go sort of on the macro basis. John, maybe we can break it down into the pieces. You know, the macro is we have pricing power, and we have the ability to grow occupancy. We have the ability to get better rent bumps on a contractual basis. We have the ability to get really strong renewal spreads in the, you know, in the high teens kind of numbers and new leasing spreads, you know, in the 30+% range. We are able to drive pricing power because a lot of those tailwinds that I talked about earlier are giving us that ability to get that kind of growth. That's why we, you know, not only believe we can, but have, you know, shown what we've been able to do over the last, you know, several years. Sure. For 2023, we guided to 3%-4% same-store growth. We actually believe that this portfolio can continue to deliver portfolio growth at 3%-4%. I think going back to the inflation piece, a key piece there is that we've been delivering growth of this nature for years now in a 2% inflationary environment. We're delivering real growth, and we believe that inflation is here to stay, that we can actually drive this further because our neighbors are able to pass those through to the consumer, and their sales are growing at a phase faster than our rents are growing, which gives us the opportunity to push. Quickly, the, you know, we believe that even though our occupancy is among the highest in the space, we believe we still have room to drive increases to our, in-line leased occupancy, and we think that'll contribute 50-100 basis points of growth. We're driving spreads. With that high occupancy, we're able to drive higher renewal spreads, and we demonstrated that in 2022, and it's staying with us so far in 2023, and that's gonna drive 100-125 basis points of growth. We have embedded rent bumps, and that is something that is we're getting in more of our leases, and it'll continue to take time to layer those in, but that's gonna be 75-100 basis points of our growth. From redevelopment and development activity, we actually believe that can continue to deliver 75 - 125 basis points of growth. Specifically, we're talking about outparcel developments and tear down rebuilds for outparcels. And the- The signed but not open. This has been an interesting one. Because of the format of our space, where the majority of our leasing is going to be with the in-line neighbors or we call our tenants our neighbors. With our in-line neighbors, that smaller space means we can execute the lease and get them in and up and rent paying faster. Ultimately, our, you know, from time of lease execution until rent commencement, it's usually only about five months. Ours is less because ultimately we're getting them into the spaces and able to do that, whereas, you know, some other larger formats might take a longer time. You had mentioned that 50 - 100 basis points from your in-line shop moving that occupancy up. Is that just in 2023's guidance? What's the tailwind maybe for the next year or two beyond 2023? Is that still gonna be a source of growth from that uplift? Craig, we realize that occupancy component of our same-store NOI growth is gonna go away once we get to maximum occupancy, which we believe will occur over the next 12 to 18 months. We think we have another 100 - 200 basis points of in-line occupancy upside from where we are today. Once we hit that 95% in-line occupancy point, where we'll get that component of growth, which today is 50 - 100 basis points of our same-store growth, we'll get that from the other components of our business model: rent spreads, contractual bumps, and our redevelopment pipeline, because the fact that that level of occupancy is gonna give us even more pricing power than we have today. We have a question coming in dovetailing on that. You know, can you please talk a bit about your OCRs among your small shop tenant base, and how does that compare to your pre-pandemic or kind of normalized levels? Our occupancy cost for our in-line tenants today runs at 10%, and that has been consistent in our portfolio going back many years. We believe that as everyone in this room knows, you know, an occupancy cost metric is gonna vary by retailer. You know, some retailers can take occupancy costs of 30%. Our grocers have occupancy costs of 2%. There's a wide band of occupancy cost metrics that apply. In general, in our portfolio, we think that right range is 10%-12%. We're currently at 10%, and that's another reason why we continue to be optimistic about our ability to continue to grow rents at the levels we've been growing them at over the last 6 quarters. Oh, I just, I just blanked on where, oh, where I was going on my question. I'll just move on, come back to it. you know, bad debt's been an area that we've talked about in the retail space. you guys don't have as much exposure to or any exposure to some of these tenants that are in the news. Could you just talk about how you're budgeting bad debt expense in 2023, and how does that compare to normalized levels? Historically, pre-pandemic and through and since, you know, our bad debt has historically been between 60 and 80 basis points, which really speaks to the quality of the centers. In terms of the credit risk, as I said, again, part of our key strategy is we don't have the exposure. We have, you know, 10 basis points of exposure to Bed Bath, 20 basis points to Party City. I mean, it's really very small, and that's the drive behind the strategy is the consistency with which we can deliver results. In 2023, we're showing that we're getting to normal levels. 2022 was a little bit low just because that was the end of payment plans and the like coming from the pandemic. I would also highlight that when we think about the quality and the emphasis of our strategy, we lost 70 basis points of occupancy in the pandemic. We got to pre-COVID levels of NOI and occupancy by the middle of 2021. This is gets to Jeff's point of, you know, we have lower beta with more alpha. Is there a question in the crowd? Yeah. Thanks, Craig. Can you talk a little bit about expansion opportunities in your existing portfolio, if you view that as a source of growth, if joint ventures make sense in your space, and then also, on the right-hand side of the balance sheet, just debt maturities and cost of debt and capital plans going forward? You wanna cover debt, then I'll jump back. We can jump back onto the expansion. Sure. The debt markets they're open, the water is a little cold, but there is financing available. Ultimately, we expanded our line last year to $800 million. We have about $100 million drawn and, you know, we believe that we can fund our acquisitions with that. We've guided it $200 million-$300 million of acquisitions this year. We'll do that. We generate $100 million of cash flow after we pay our distributions annually that we're able to reinvest in the business. From a debt financing perspective, we have 2024 maturities, and using the line, we will find a permanent place for that. I mean, debt costs are certainly higher, but, you know, in terms of 2023, floating rate and e-exposure we have, that is taken account into our guidance and the range that we have there. We'll address, you know, fixing our floating rate debt at the same time as we address the principal maturities for 2024. Yeah. On the expansion side, we're always looking at where we could add something to an existing center. Our primary focus is outlot because there's such high demand for that today that we are, you know, that is where our primary focus has been. You know, we do about $50 million a year of that kind of development, where it's either a single tenant or a small multi-tenant building that we build on the outlot. We get strong rents. We're actually 100% occupied in the development projects we have put in place today. We wish and we're getting, you know, 9%-11% yields on that on those developments. It's a great business for us. We love it. It's difficult because these are $2 million-$3 million deals. They're not, you know, $20 million deals or $100 million deals. They're small, but they're bite-sized, they're very, they're very predictable, but they take a lot of time in terms of getting, you know, the zoning and the other requirements to get them done. We are working with some of our anchors to actually start to use their parking lots in a joint venture manner where they're over-parked or they perceive that they're over-parked. We are just starting that process with a couple of anchors, and that could unlock quite a bit more development potential. In terms of vertical, going vertical with apartments or going vertical with, you know, some other use than the retail, we haven't been real active in that, and primarily because we stayed really focused on doing retail where we can do retail. You know, our centers, you know, we feel like we can get more growth out of those opportunities. Jay, on the, on the joint venture side, you know, we have had a number of successful JVs over time. We had a value-added JV with TPG Real Estate that we realized last year. You know, we were targeting 15% IRRs. We beat that objective, had a happy partner there. We have an existing venture with Northwestern Mutual, which is a core venture, and we're always looking for other opportunities to joint venture with capital that will allow us to expand our business. We believe that we'll be successful in announcing another joint venture at some point this year. That's a great business for us. The ROEs, to us on our capital are very attractive and, you know, given the kind of results that we delivered to our existing partners, you know, we have a number of opportunities that are available to us. Going back to your comment of JV-ing with some of your anchors. I mean, are these non-owned anchors or is this a way to get those rights that they otherwise control and give them that financial incentive to allow you to do this? They have approval rights on development of their parking. We own the land, but they have approval rights. In order to secure those, they would like a little piece of the deal. That's what we are working through in order to get those agreements set. They, you know, it's a pretty. It can be a very profitable business. It just as we said, it takes a lot of time and they're in small chunks, so you have to keep working. I mean, today we're working really on, you know, 24, 25 opportunities not. I mean, we're booked and our 23 stuff's done. Most of 24 is already on the books of what we're gonna do and we're really looking at 25, in terms of where can we create more opportunities for that. 'Cause Craig Mailman, the economic returns are very attractive on this type of redevelopment. We're getting 9%-11% cash returns on this activity. It's an attractive return, but it's very low risk because when we deliver this space, it's been to date 100% leased. We're getting 9%-11% cash returns unlevered with fairly limited risk. We love the risk-return profile of that activity. As you look through your portfolio, what's the magnitude of this opportunity over time that you can unlock? We look at $50 million a year as a pretty between $50 million and $60 million that we'll have on a ongoing basis. We have a pretty good pipeline and visibility into at least the next 24 months. But we think it'll last well beyond that. We're, you know, we're looking at, you know, buying additional land where we can actually do that as well. The yields are not as good as land we already own, obviously. But it is, there's still some opportunities there. Another question coming in just on the potential Kroger-Albertsons merger. Could you talk about the impact that could potentially have on your portfolio if that were to go through, from a closure perspective or however you guys are looking at it? Well, I'll take a crack at it, Jeff, join in. Our view on that is the chance of closure of stores and the merger actually happening is very, very little. Because if that's going to happen, they're not gonna get it approved. The key here is not if there's a perception that you're reducing the amount of grocer competition and service to the customers, it will not happen. We think that there's very little chance that there's gonna be a major shutdown of stores based upon the merger. There really are three outcomes that we think are that we're looking at. One is, obviously, if it doesn't happen, we're status quo, and that stays the way it is. We've got, you know, a number of Albertsons and, you know, we are Kroger's largest landlord. We will that would stay the same. In the event that the merger goes through, you know, we're generally positive about Kroger as an operator, Kroger in terms of the capital they're putting back into their stores, and their sales are better. So that we think that. Obviously their credit's better too. You put those pieces together, if that happens and the merger happens, that would be a positive for our portfolio. Probably the most likely event, if it, if it does go through, would be some process where they would take certain stores and they would sell certain stores or set certain stores up in a PropCo kind of environment where they keep the level of competition in the market, but under banners that are not united under Kroger. That's probably the most likely, you know. The number of stores has been anywhere in terms of conversations, have been anywhere from 300 stores to, like, 1,000 stores we've heard from some people. It's very wide open there. The key there is that we think that whatever is the remaining, the RemainCo is going to be well capitalized. I mean, even in Kroger's initial response, they said that they would have no debt on PropCo if that was the remaining entity. You know, from our perspective, we've got sort of three different options. Generally, we think they will all be positive for us. We do have, you know, 30 stores that have a sister store within 3 miles, that is really what we're focused on because those would be the ones that would be most vulnerable. If we look at them, you know, the health ratio on those stores is about 2.1 x, it's very, you know, very good pricing for the grocer. Their sales are very strong. We put those two together. These are gonna be grocery locations long term. We will see how that evolves over time. You guys mentioned the $50 million or so from these outparcel or activation of the parking fields. What's a good run rate just generally of capital deployment for those type of opportunities, redevelopment, maybe other development opportunities? Just how, John, maybe are you thinking about financing these opportunities kind of longer term? How do you guys think about leverage, cost of capital? Sure. The $50 million that Jeff was speaking to is we believe we can continue to invest $50 million-$60 million a year into these projects. Because they are small, we completed 17 last year. We'll deliver a similar number this year. These are not, like, individually large in scale, so they're kind of coming on all the time in terms of a cadence standpoint. From a funding perspective, I would say again, we generate $100 million a year after the dividend that we're able to reinvest in the platform. I appreciate the question 'cause I did wanna go back and say we're 5.3 x levered on a debt-to-EBITDA basis. We've positioned the balance sheet in a place that we can grow externally. We can grow by reinvesting in our assets. We can grow through acquisition. That 5.3 x gives us meaningful acquisition power and investment power. In terms of cost of capital, we are very focused on that, which is why as we're evaluating our financing options, we're very focused on that and maintaining our, you know, investment-grade balance sheet and our, you know. We feel very comfortable in our ability to fund these projects. Craig, given the amount of free cash flow we're generating on an annual basis, we can acquire $250 million of assets a year and maintain that 5.3x debt-to-EBITDA level. The only time we lever up is if we are buying more than $250 million a year. The midpoint of our guidance for this year on acquisitions was $250 million. If we look at our balance sheet today. Given the fact that we have the ability within our credit rating to take our debt-to-EBITDA level up, our view is we would potentially take it up to six times. That would give us $1 billion of buying power before we have to come back to the equity markets to delever back to an acceptable level. We have plenty of firepower to take advantage of acquisition opportunities that are attractive as they come to light. We've raised the bar on the unlevered IRR that acquisitions need to generate for us from 8% a year ago to 9% now. That's what we're looking for. If we can find acquisitions that clear that nine unlevered IRR hurdle, you know, we will execute accordingly, and that's the swing in our guidance, if you will. If those opportunities are there, we'll do more than our $200 million-$300 million. If they're not, you know, we would come in below that. Given our run rate at the moment, we're confident that we'll hit our guidance for acquisitions in 2023. John, maybe this is another one for you. Just kind of in your guidance, are you assuming any refinancings, and what about the treatment of the expiring swap in 2023? What's the plan there? Sure. Our 2023 guidance does take into account the floating rate debt and the expiration of the swaps that we have. As I mentioned, we will take into account both our, the acquisition funding that we need for this year. We've got the line, but then we've also got maturities next year. Our plan is we'll fix the rate at the time that we address the maturities. You know, we've got great support from our lenders. We've also, you know, got a track record in the unsecured bond market. Hopefully, if we stop getting commentary like this week, then perhaps we'll get some stability. Right now we think, you know, spreads are somewhat wide and the Treasury is moving quite a bit. We have experience in various capital markets that allow us to fund attractively. The acquisitions to Devon's point, are still accretive to our debt cost of capital and hopefully, you know, soon the equity cost of capital. That's helpful. Maybe moving on to our rapid-fire questions here. What will same-store NOI growth be for the strip center overall, not PECO in particular, in 2024? 2%. What's the best real estate decision today for your company, buy, sell, build, redevelop, or hold? Buy in a disciplined way. Lastly, will there be more, fewer, or the same number of public companies in the strip space a year from now? Same. We have an extra minute here. Can you just talk about, you guys went public in 2021, kind of the advantages and disadvantages of being public versus operating, all those years as a private company? Well, you know, we built this company over 30 years, with a very strong growth ethic almost all through external. We built what we think is the best team to operate in our specific niche. One of the keys to continuing growth is to have the best cost of capital, and that's what we're working on in the public markets and at times allow us to do that. We will, you know, we think that the ability to show this really strong internal growth that we are, but also have access to capital to continue really strong external growth will be very positive. It is very positive for us. It allows us to continue to meet our goals of, you know, strong growth, both external and internal, and also, you know, gives us the ability to be opportunistic. I mean, we did spend a lot of money to get levered to where we are. We think that we like being at that level. When we look at it, you know, we also wanna take advantage of the opportunities when they arise. We're in a position to be able to do that if they arise. We're in an environment that is interesting. It could be, we could have some really good, strong opportunities over the next, you know, 12 months. Great. One of the clear benefits, Craig, is participating in an event like this. Thank you. Yeah. Thanks, guys.