Phillips Edison & Company, Inc. (PECO) Q3 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary and Q&A reveal positive elements such as increased guidance, strong occupancy and retention rates, and strategic acquisitions. The management's focus on growth and partnerships with top grocers, alongside the balance of rent increases with retention, suggest a positive outlook. However, the cautious approach to acquisitions due to economic risks and the lack of enthusiasm for stock buybacks slightly temper the optimism. Overall, the positive guidance and strategic initiatives outweigh the concerns, leading to a prediction of a positive stock price movement (2% to 8%) in the next two weeks.
Key Financial Performance
NAREIT FFO Third quarter NAREIT FFO increased to $89.3 million or $0.64 per diluted share, reflecting year-over-year per share growth of 6.7%. This growth is attributed to the high-performing grocery-anchored and necessity-based portfolio that generates reliable, high-quality cash flows.
Core FFO Third quarter core FFO increased to $90.6 million or $0.65 per diluted share, reflecting year-over-year per share growth of 4.8%. This growth is driven by both internal and external growth factors.
Comparable Renewal Rent Spreads Record-high comparable renewal rent spreads of 23.2% in the third quarter, attributed to strong leasing activity and the strength of the retail environment.
Comparable New Leasing Rent Spreads Comparable new leasing rent spreads for the quarter remained strong at 24.5%, reflecting the strength of the retail environment.
Portfolio Occupancy Portfolio occupancy ended the quarter at 97.6% leased, with anchor occupancy at 99.2% and same-store in-line occupancy at 95%, a sequential increase of 20 basis points. This is supported by a robust leasing pipeline.
Development and Redevelopment Projects PECO has 22 projects under active construction with a total investment of $75.9 million and average estimated yields between 9% and 12%. Year-to-date, 14 projects were stabilized, delivering over 222,000 square feet of space and an incremental NOI of approximately $4.3 million annually.
Gross Acquisitions Year-to-date gross acquisitions at PECO's share reached $376 million, including $96 million of assets acquired since June 30. These acquisitions include unanchored centers with reliable fundamentals and a stronger long-term growth profile.
Net Debt to Adjusted EBITDA Net debt to trailing 12-month annualized adjusted EBITDA was 5.3x as of September 30, 2025, compared to 5.1x on the last quarter annualized basis.
Same-Center NOI Growth Reaffirmed guidance for 2025 same-center NOI growth at 3.35% at the midpoint. The growth rate for the fourth quarter of 2025 is expected to be between 1% and 2%, influenced by the timing of recoveries in 2024.
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Operating Highlights
Development and Redevelopment Projects: PECO has 22 projects under active construction with a total investment of $75.9 million, yielding between 9% and 12%. Year-to-date, 14 projects were stabilized, delivering 222,000 square feet of space and generating $4.3 million in incremental NOI annually.
New Acquisitions: PECO acquired $96 million of assets since June 30, including two unanchored centers in suburban markets. Year-to-date gross acquisitions total $376 million.
Land Acquisition: Acquired 34 acres in Ocala, Florida, for a grocery-anchored retail development project.
Grocery-Anchored Shopping Centers: PECO continues to focus on grocery-anchored centers, which provide predictable cash flows and downside protection. 70% of ABR comes from necessity-based goods and services.
Joint Ventures: Acquired the Village at Sand Hill, a grocery-anchored shopping center in South Carolina, through a JV with Lafayette Square and Northwestern Mutual. Additional assets are planned for JVs in Q4 2025 and 2026.
Leasing Activity: Neighbor retention remained high at 94%, with record-high comparable renewal rent spreads of 23.2% and new leasing rent spreads of 24.5%. Portfolio occupancy ended at 97.6%.
Financial Performance: Third-quarter NAREIT FFO increased to $89.3 million ($0.64 per share), reflecting 6.7% year-over-year growth. Core FFO increased to $90.6 million ($0.65 per share), reflecting 4.8% growth.
Portfolio Recycling: PECO plans to sell $50 million to $100 million of assets in 2025, with $44 million sold year-to-date. Proceeds will be used to recycle lower IRR properties into higher IRR properties.
Long-Term Growth Strategy: PECO aims to deliver mid to high single-digit core FFO per share growth annually and higher AFFO growth through a focus on renewal activity and strategic acquisitions.
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Risk or Challenges
Tariffs and U.S. economic stability: The market's focus on tariffs and U.S. economic stability could impact discretionary goods, which are at greater risk of being affected by tariffs. This poses a potential challenge to the company's operations and financial performance.
Competitive transactions market: The competitive nature of the grocery-anchored shopping center market may limit acquisition opportunities or increase costs, potentially impacting the company's ability to meet its acquisition guidance and growth targets.
Development and redevelopment timelines: The long timelines required for development and redevelopment projects, such as the grocery-anchored retail development in Ocala, Florida, could delay revenue generation and impact financial performance.
Bad debt monitoring: Although bad debt is currently within guidance, the company actively monitors the health of its tenants. Any deterioration in tenant health could lead to increased bad debt, impacting financial stability.
Portfolio recycling risks: The company's strategy to sell lower IRR properties and acquire higher IRR properties depends on favorable market conditions. Any adverse changes in private market valuations could hinder this strategy and affect earnings growth.
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Guidance & Outlook
2025 NAREIT and core FFO per share guidance: The midpoints of the increased full-year 2025 NAREIT and core FFO per share guidance represent a 6.8% and 6.6% growth, respectively, over 2024.
Same-center NOI growth for 2025: Reaffirmed guidance range reflects solid full-year growth of 3.35% at the midpoint. Fourth quarter 2025 same-center NOI growth is expected to be between 1% and 2%, with long-term annual growth projected between 3% and 4%.
2025 asset dispositions: Plans to sell $50 million to $100 million of assets in 2025, with $44 million sold year-to-date.
2025 gross acquisition guidance: Reaffirmed full-year guidance with a focus on grocery-anchored shopping centers and unanchored centers in growing suburban markets.
Development and redevelopment pipeline: Actively expanding with 22 projects under construction, representing a total investment of $75.9 million and average estimated yields between 9% and 12%. Additional projects are planned for 2026.
Long-term growth expectations: Believes the portfolio can deliver mid to high single-digit core FFO per share growth annually, with AFFO growth potentially higher due to a leasing mix weighted towards renewals.
2026 preliminary guidance: Preliminary guidance and new insights related to unanchored investments will be shared during the December 17 business update.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:Can you share more on your thinking around acquiring development land at this point in the cycle? Why is now the right time to pursue opportunities like this? Are you evaluating other ground-up development sites?
A:The company is excited about a specific project in Southern Ocala, which involves a 34-acre site with a national grocer partnership. The area is experiencing significant growth with 10,000 new homes expected in the next 5 years. The project will deliver a 10.5% unlevered return. While this is a one-off scenario, the company will continue to look for similar opportunities if they make sense.
Q:Could you provide more detail on the makeup of your current acquisition pipeline and how much more incremental volume could you potentially close before year-end?
A:The company is confident in meeting the bottom end of its guidance range, having already surpassed it by $25 million. They have acquired 18 assets for $376 million this year and have deals under contract to close before year-end. They expect to achieve unlevered returns above 9% and see continued leasing momentum. The midpoint of their acquisition guidance is $400 million, up from $300 million last year.
Q:What is your view on leverage, and are you willing to increase it? What is the upper-level limit on leverage?
A:The company aims to maintain a long-term debt-to-EBITDA ratio of 5.5x or below. They are willing to move around this range if they have a clear plan to bring it back down. They are comfortable with their current leverage of 5.1x and have capacity to grow their acquisition program.
Q:Are you leaning more into dispositions as a source of funds? How do you think about acquisition versus disposition cap rates and the types of properties you'd sell?
A:The company is focused on recycling assets to improve earnings per share over time. They aim to trade out of lower-growth properties for higher-growth ones. Dispositions are expected to be accretive, depending on the mix of assets sold and acquired. They have already sold some properties this year and plan to continue this strategy.
Q:What is your target size for redevelopment, and how will it be funded?
A:The company has generated $40 million to $55 million annually in redevelopment over the past 3-4 years, targeting returns of 9% to 12%. They aim to maintain a pipeline of $50 million to $60 million per year for the next 3 years. Funding will primarily come from free cash flow and possibly further dispositions.
Q:Is the current bad debt expense a reasonable run rate going forward?
A:Yes, the company expects bad debt expense to remain in the range of 70 to 80 basis points, consistent with historical levels. They do not foresee a material change in the tenant credit landscape.
Q:What is the outlook for occupancy and rent growth? How are you balancing rent increases with retention rates?
A:The company is at 94.7% occupancy and believes there is room for another 125 to 150 basis points of in-line occupancy growth. Retention rates are strong at 94%, and they are achieving renewal spreads of 23.3%. They are balancing rent increases with tenant retention effectively.
Q:What is the update on the unanchored centers strategy?
A:The company has acquired 8 unanchored properties for $155 million, achieving unlevered returns between 10.5% and 12%. They see strong leasing spreads and believe this strategy complements their overall growth. More details will be provided in December.
Q:What does being more selective in the second half mean for acquisitions?
A:The company is applying tougher underwriting standards due to potential economic risks. They are being more disciplined on rent spreads and leasing pace, which has slowed their acquisition pace slightly. They still expect to acquire $400 million in assets this year, up from $300 million last year.
Q:Has competition for acquisitions increased, and who are you competing with?
A:Competition has stabilized and includes REIT peers, institutional players, and private buyers. The company continues to find opportunities due to its broad market reach and focus on top grocers.
Q:What is the outlook for grocers, and how is the company positioned?
A:Grocers are seeing resilient customers and are generally positive about the environment. The company has strong partnerships with top grocers like Publix and Trader Joe's, which are actively growing.
Q:How do stock buybacks fit into your capital allocation strategy?
A:Stock buybacks are considered a tool to be used when it is the best investment for free cash flow. The company is not eager to use buybacks currently, as they have other strong uses for their capital.
Q:What is the outlook for acquisitions in the fourth quarter and next year?
A:The company expects to acquire $400 million in assets this year, with $100 million per quarter being a reasonable pace. They are confident in their ability to find good opportunities next year as well.
Q:What is the plan for dispositions next year, and how will they be executed?
A:The company plans to sell $100 million to $200 million in assets next year, primarily on a one-off basis. They aim to recycle capital into higher-growth properties, targeting a 200 basis point spread in returns.
Q:What is driving the decrease in interest expense guidance, and what is the update on swap expirations?
A:The decrease in interest expense guidance is due to conservatism and acquisition timing. The company is comfortable with its current floating rate exposure and is considering accessing the bond market for long-term debt.
Q:What is the long-term upside to NOI growth on an occupancy-neutral basis?
A:The company targets 3% to 4% NOI growth, driven by 110 basis points from rent bumps, strong leasing spreads, and development of outparcels. They also see opportunities in acquiring assets with occupancy upside.
Q:How will acquisitions be funded next year, and what is the cost of capital?
A:Acquisitions will be funded through $100 million in free cash flow, debt capacity, and dispositions. The company is focused on maintaining a strong balance sheet and leveraging opportunities prudently.
Q:What is the impact of options on lease renewals, and how is the company addressing this?
A:Options can limit rent growth, but the company is negotiating to minimize them or include significant rent increases in option periods. They are focused on structuring leases to maximize long-term value.
Q:What is the outlook for grocery-anchored cap rates, and is the company considering joint ventures?
A:Cap rates for grocery-anchored centers have stabilized. The company is open to joint ventures as a way to grow and improve returns, but it is not a major focus.
Q:What is the strategy for unanchored centers, and how does it fit into long-term plans?
A:The company plans to expand its unanchored centers strategy, targeting above 10% unlevered returns. This complements their overall growth and leverages their operational expertise.
Q:Review of Unclear Management Responses
A:Management avoided directly answering the question about the potential IRR difference if they retained ownership of the grocer store in the new development project. They deferred the response to a future update in December.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Activity grocery
Carolina suburb
Caulfield remark
Columbia South
Florida detail
Hill grocery
JV Lafayette
JVs development
Lafayette Square
Mutual Village
NAREIT core
NOI development
Neighbors center
Northwestern Mutual
Ocala Florida
Officer Caulfield
PECO ownership
PECO project
PECO share
PECO strength
Relations Vice
Relations today
Relations website
Sand Hill
South Carolina
Square Northwestern
Today discussion
center necessity
core FFO
date
detail project
development redevelopment
grocery shopping
land
neighbor mix
neighborhood center
tariff
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Phillips Edison & Company, Inc. (PECO) Presents at Citi's Miami Global Property CEO Conference 2026 Transcript
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Phillips Edison & Company, Inc. (PECO) Q4 2025 Earnings Call Transcript
Positive2-6
The company has a positive outlook with increased guidance for 2025, stable bad debt levels, and strategic asset dispositions. They focus on high-return acquisitions, disciplined growth in everyday retail, and proactive leasing strategies. Despite some unclear responses, the company's strong financial metrics, optimistic guidance, and strategic plans suggest a positive sentiment. The market cap indicates moderate volatility, likely resulting in a positive stock price movement (2% to 8%) over the next two weeks.
Phillips Edison & Company, Inc. (PECO) Q3 2025 Earnings Call Transcript
Positive10-24
The earnings call summary and Q&A reveal positive elements such as increased guidance, strong occupancy and retention rates, and strategic acquisitions. The management's focus on growth and partnerships with top grocers, alongside the balance of rent increases with retention, suggest a positive outlook. However, the cautious approach to acquisitions due to economic risks and the lack of enthusiasm for stock buybacks slightly temper the optimism. Overall, the positive guidance and strategic initiatives outweigh the concerns, leading to a prediction of a positive stock price movement (2% to 8%) in the next two weeks.
Phillips Edison & Company, Inc. (PECO) Presents At BofA Securities 2025 Global Real Estate Conference Transcript
Neutral9-10
PECO Slides
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