Phillips Edison & Company(PECO) - 2022 Q4 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported a 22% increase in fourth quarter core FFO to $74 million or $0.56 per diluted share, driven by increased revenue from higher occupancy levels and strong leasing spreads [130] - Same-center NOI increased by 4.5% in 2022, with fourth quarter same-center NOI reaching $91 million, up 2.8% from a year ago [107][134] - The company ended the year with over $700 million of borrowing capacity available on its $800 million credit facility, with no significant debt maturity until the second quarter of 2024 [135] Business Line Data and Key Metrics Changes - The leasing portfolio occupancy increased by 30 basis points sequentially from the third quarter and by 110 basis points year-over-year, reaching an all-time high of 97.4% [112] - The fourth quarter retention rate was 92%, ahead of the historical average of 87% over the last five years [113] - Rental growth is expected to contribute 100 to 125 basis points through new and renewal leasing spreads and contractual rent increases, with redevelopment and development activity adding 75 to 125 basis points [110] Market Data and Key Metrics Changes - The company observed strong demand across all geographic regions, particularly in medical, quick-serve restaurants, and health and beauty sectors [113] - The demographic strength of trade areas is reinforced by continued demand from retailers for space at the centers, with median household incomes of $77,000, approximately 9% higher than the U.S. median [127] - The company has minimal exposure to distressed retailers, with the top 10 neighbors on the watch list representing just 2% of ABR [116] Company Strategy and Development Direction - The company is conservatively guiding to $200 million to $300 million in net acquisitions for the year, with the capability to acquire more if attractive opportunities arise [102] - The company plans to invest $50 million to $60 million in ground-up outparcel development and repositioning opportunities, with average estimated cash-on-cash yields between 9% and 11% [114][120] - The company has increased its targeted return for new acquisitions to an unlevered IRR of 9% or above, focusing on finding opportunities that meet this return objective [122] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the health of neighbors and the strength and diversity of the neighbor mix, highlighting the necessity-based focus of the portfolio [99] - The company believes it can deliver mid-to-high single-digit FFO per share growth on a long-term basis, supported by strong internal and external growth drivers [111] - Management noted that the current strong operating environment and positive momentum across leasing, redevelopment, and development are expected to continue [133] Other Important Information - The company continues to benefit from positive macroeconomic trends, including hybrid work, migration to the Sunbelt, and population shifts favoring suburban markets [107] - The company has a strong credit neighbor mix, with over 70% of rents coming from necessity-based goods and services [115] - The proposed Kroger and Albertsons merger is viewed positively by the company, with potential impacts on 33 stores within 3 miles of its centers [103] Q&A Session Summary Question: Can you discuss your decision to buy an asset with relatively lower occupancy? - The company is looking for properties with more growth potential and has adjusted its unlevered IRR from 8% to 9% as the cost of capital increases [8] Question: What are your thoughts on interest rates and swaps coming due? - Management is addressing debt maturities in 2024 and anticipates refinancing those maturities later this year with incremental long-term funding [18] Question: How do you view the acquisition market and pricing? - The company noted that volume is down due to a shift in the cost of capital, but they are finding select opportunities and are excited about potential acquisitions [32] Question: How is the composition of your small shop changing? - The company is seeing growth in medical retail, health and wellness, and quick-service restaurant concepts, indicating a shift in demand [70] Question: What is the outlook for 2023 given the macroeconomic environment? - Management believes that 98% of 2023 is already baked in based on historical renewal rates, providing confidence in their guidance [71][74]