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Operator: Good day, and welcome to Phillips Edison & Company’s First Quarter 2023 Earnings Conference Call. Please note that this call is being recorded. I’ll now turn the conference over to Kimberly Green, Head of Investor Relations. Kimberly, you may begin.

Kimberly Green: Thank you, Operator. I’m joined on today’s call by our Chairman and Chief Executive Officer, Jeff Edison; our President, Devin Murphy; and our Chief Financial Officer, John Caulfield. Once we conclude our prepared remarks, we will open the call to Q&A. After today’s call, an archived version will be available on our Investor Relations website. As a reminder, today’s discussion may contain forward-looking statements about the company’s views 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, specifically in our most recent Form 10-K and 10-Q.

In our discussion today, we 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, which are on our website. Please note that we have also posted a presentation with additional information. Our caution on forward-looking statements also applies to these materials. Now, I’d like to turn the call over to Jeff Edison, our Chief Executive Officer. Jeff?

Jeff Edison: Thank you, Kim, and thank you, everyone, for joining us today. The PECO team delivered another solid quarter of growth with same-center NOI increasing by 4.9% and achieving record highs in occupancy, renewal leasing spreads, and retention. The consistent strength of our operating performance is attributed to both our differentiated focus strategy of exclusively owning grocery-anchored neighborhood shopping centers and our team’s ability to drive results at the property level. I know you’ve heard the PECO team say it many times before, but it bears repeating format drives results, and not all space is create equal. We focus on exclusively owning right size neighborhood shopping centers anchored by the number one or two grocer in the market, with over 70% of our rents coming from necessity-based goods and services.

Why? Because we know the average American family visits a grocery store 1.6 times per week. Our grocers draw consistent daily foot traffic to our shopping centers, benefiting our small store spaces. While our right size grocery-anchored format is critical pillar of our long-term success, we believe the quality of our portfolio continues to be another important differentiator. At PECO, we define the quality of our portfolio through the use of the acronym SOAR. This includes spreads, occupancy, the advantages of our markets, and retention. PECO’s high new and renewal leasing spreads are driven by demand from our neighbors. Our retailers provide necessity-based goods and services that serve the essential needs of our communities. We pride ourselves on being locally smart and creating neighborhood centers that have the optimal merchandising mix for the communities they serve.

Our leasing pipeline continues to remain strong, and there are currently no signs of its slowing. The most active categories continue to be medical, quick-serve restaurants, and health and beauty. We’re also seeing consistent strong demand across all geographic regions. PECO’s record occupancy level of 97.5% combined with the leasing spreads I just mentioned are a sign that retailers are successful at our centers. Our neighbors want to be closer to the customers and in the neighborhood of the communities they serve. Our lease portfolio occupancy increased by 10 basis points sequentially from the fourth quarter and by 130 basis points year-over-year reaching an all-time high of 97.5%. We still believe there’s occupancy upside in the portfolio.

When occupancy as a driver of growth is no longer available, we believe our NOI growth will continue as our rent spread growth increases because of our pricing power. In addition, our exposure to at-risk retailers continues to remain limited. This is deliberate and result of our grocery-anchored strategy focused on necessity-based goods and services. PECO’s unique advantages in the market are driven by our focus on the number one or two grocer. Our strategic presence in the Sunbelt and other fast growing suburban markets. Our top neighbors are strong grocers; Kroger and Publix are PECO’s number one and two neighbors, respectively. PECO is Kroger’s largest landlord and Publix’s second largest landlord. PECO’s trade area demographics are in line with Kroger’s and Publix’s store demographics.

Our centers are close to the end consumer where Americans leading grocers make money and in turn, our neighbors make money, which allows PECO to make money. In addition, our portfolio is geographically diverse rather than focusing exclusively on coastal markets, we focus on well-located suburban markets with growing populations and strong demographics. We compete on the corner of Maine and Maine. Our neighbors are healthy and diverse mix of national, regional, and local retailers who run successful businesses and enable us to grow rents at attractive rates over time. We continue to have excellent success retaining our current neighbors as demonstrated by our first quarter retention rate of 95% a record high and well ahead of the historical five-year average of 87%.

Our local neighbors remain resilient and are successful retailers who have been in our centers on average 8.8 years. Importantly, they differentiate and enhance the merchandising mix that our neighborhood centers offer. With more than 30 years’ experience in the grocery-anchored shopping center industry, and an informed perspective on what drives quality and success at the property level, we believe SOAR provides important and sustainable measures of quality, which drive long-term growth, spreads, occupancy, the advantages of our market and retention. If history is any indication, PECO’s right size grocery-anchored neighborhood shopping centers will continue to be resilient in all market cycles. Devin will provide more details on our cycle-tested performance in a moment.

Looking ahead, we continue to benefit from a number of positive structural and macroeconomic trends that create strong tailwinds and drive neighbor demand. These trends include the healthy consumer, hybrid work, migration to the Sunbelt, population shifts that favor suburban communities, and the importance of physical location in last mile delivery. These demand factors are further amplified due to the limited new supply and lack of new retail construction since 2008. When we consider our pricing power indicated by continued strong demand and record high renewal spreads, occupancy and retention, combined with the advantages that of our markets, our necessity-based retailers, and the aforementioned tailwinds, we believe, our growth strategy will continue to generate more alpha with less beta.

With higher interest rates and constrained capital availability in the market, we continue to be patient and use our national platform to be opportunistic. On the transaction front, we’re pleased with our strong acquisition volume in the first quarter, which was largely driven by activity that started last year. These high quality right-sized grocery-anchored neighborhood centers fit well with our PECO portfolio. These properties will drive incremental earnings growth that will allow us to achieve and exceed our acquisition hurdle of a 9% unlevered IRR. We are also pleased with the performance of our acquisitions relative to our underwriting. On average, assets acquired since our IPO are outperforming relative to the underwriting. The transaction market continues to be fragmented and sporadic, and we’re seeing a slower pace in the second quarter.

While we’re seeing cap rates move in the private markets in response to higher interest rates, there are still wide gaps between the buyer and the seller’s expectations. That being said, we are affirming our guidance for $200 million to $300 million of net acquisitions this year. We provide a wide delta in our range because it allows us to be strategic based on current market conditions and to still deliver on our expectations. We remain focused on accretively growing our shopping center portfolio, and we will continue to be opportunistic as we always are. There’s no question that record inflation, rising interest rates, global conflict, and bank failures continue to create challenges. Despite these headwinds, we remain focused on investing in our portfolio and driving cash flow growth.

With our combined internal and external growth drivers, we continue to believe our portfolio can deliver mid to high-single-digit FFO per share growth on a long-term basis. In addition, we still have one of the lowest levered balance sheets in the shopping center space. With a fortress balance sheet and ample liquidity, we remain prepared for challenges and opportunities that may arise for the rest of this year. I would like to provide a quick update on the proposed Kroger and Albertsons merger. While there haven’t been any major new developments in the merger, we remain positive on the impact that it will have on our centers. We continue to believe it is ultimately a positive for PECO, for our centers, and for the communities our centers serve if the merger should occur.

If the merger does not occur, our Albertsons anchored centers will continue the strong performance that they have enjoyed to-date. With that, I will now turn it over to Devin. Devin?

Devin Murphy: Thank you, Jeff. Good afternoon, everyone. Thank you for joining us. The operating environment remains strong. Our leasing team continues to convert strong retailer demand into higher rents at our centers. Jeff highlighted earlier the continued strength in leasing, but let me emphasize a few metrics of note. Our anchor occupancy increased to 99.3% and our inline occupancy increased to 94.3% during the first quarter. Year-over-year increases of 120 basis points and 170 basis points respectively. Leasing activity remains strong and our volume of deals executed in the first quarter increased year-over-year to 263 leases executed totaling 1.1 million square feet compared to 244 leases executed and 800,000 square feet lease a year ago.

PECO’s retention rate this quarter was exceptional at a record high 95% driven by increases in our small shop retention rate to 83.3%. High retention means no downtime and lower tenant improvement costs. As a reminder, our tenant improvement spend on renewals over the last five years has averaged below $2 per square foot. We continue to remain optimistic that we can drive favorable lease terms, including attractive re-leasing spreads with solid contractual rent bumps. Comparable new and renewal rent spreads for the first quarter were strong at 27.4% and 16.1% respectively. On average, our new and renewal inline leases executed in Q1 had annual contractual rent bumps of 2.8%, another important contributor to our long-term growth. The leasing spreads that we are continuing to see, combined with our record high retention rates, are clear evidence of the continued high demand per space in our grocery-anchored centers.

Our strong and steady pricing power is a reflection of the strength of our strategy and the quality of our portfolio. Turning now to our redevelopment and development activities. We continue to invest in value creating ground-up outparcel development and repositioning projects. This activity remains a great use of our free cash flow and produces attractive returns with limited risk. We are making great progress on these projects and we are working hard to continue to build our future pipeline. In the first quarter, we stabilize three projects, which delivered over 74,000 square feet of new space to neighbors and add an incremental NOI of approximately $930,000 annually at returns on cost of approximately 10%. These projects provide superior risk adjusted returns and have a meaningful impact on our long-term NOI growth.

For the full-year of 2023, we continue to expect 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 12%. We continue to see the many benefits of our grocery-anchored portfolio with a healthy mix of national, regional, and local retailers. More than 70% of our rents come from neighbors offering necessity-based goods and services. And our top grocers continue to drive strong recurring foot traffic to our centers. Our foot traffic in Q1 remained strong and was in line with the first quarter of 2022 levels. Looking ahead, we and our neighbors believe consumers will continue to visit our centers and spend on necessity-based categories, even if they reduce spending on luxury items and other discretionary purchases.

Our portfolio has proven to be resilient through economic downturns historically. When we look at PECO’s performance following the 2008 global financial crisis, it highlights the resiliency of our grocery-anchored portfolio. We currently own 29 centers that were owned by us in 2008. We went back and reviewed the performance of those assets. By 2010, NOI had decreased by 270 basis points, but recovered to pre-GFC levels by 2011. Occupancy declined 180 basis points to its lowest level in 2009, but fully recovered by 2010. Looking back at 2020 and the COVID induced downturn, PECO lost just 70 basis points of occupancy during the peak of the pandemic, and we fully recovered by the middle of 2021. We lost the weaker operators during 2020 and today our small shop neighbors including our locals are strong and thriving in our centers.

Our neighbors continue to demonstrate their resiliency and ability to manage the many challenges they face, including inflation, supply chain issues, and labor shortages. Despite these many challenges, our neighbors continue to invest in their stores and technology platforms in order to provide high quality customer experiences. We believe PECO’s portfolio continues to be well-positioned given our grocery-anchors, our right size format, and our necessity-based neighbor mix. We enjoy a well-diversified neighbor base. Our top neighbor list is comprised of the best grocers in the country, and our largest non-grocer neighbor makes up only 1.4% of our rents. That neighbor is T.J.Maxx. All other non-grocer neighbors are below 1% of our ABR. To put a finer point on that, PECO has no exposure to luxury retail office or theaters, and very limited exposure to distressed retailers.

The top 10 neighbors currently on our watch list represent just 2% of our ABR. As a reminder, our combined exposure to Bed Bath & Beyond, Party City and Tuesday Morning is minimal at just 40 basis points of ABR. In summary, our differentiated strategy continues to position PECO well for continued steady growth in all economic cycles. Due to our exclusive grocery-anchored focus, our necessity-based neighbor mix, our right size format, our well-positioned locations in growing suburban markets, our record high occupancy with continued strong neighbor demand, our high leasing spreads, and record high retention rates, our strong credit neighbors and diversified neighbor mix, the lack of exposure to distressed retailers, our strong balance sheet and most importantly our well aligned and cycle-tested teams.

I will now turn the call over to John. John?

John Caulfield: Thank you, Devin, and good morning, and good afternoon, everyone. First quarter 2023 Nareit FFO increased 13.9% to $76.3 million or $0.58 per diluted share driven by an increase in rental income, partially offset by higher property operating expenses. First quarter core FFO increased 7.7% to $78.2 million or $0.59 per diluted share driven by increased revenue at our properties from higher occupancy levels and strong leasing spreads, partially offset by higher property operating expenses. Our first quarter 2023 same-center NOI increased to $98.6 million, up 4.9% from a year ago. This improvement was primarily driven by higher occupancy and an increase in average base rent per square foot, driven by our strong leasing spreads.

In addition, we collected approximately $2 million in overage rent in the first quarter, a 69% increase over last year, reflecting the strong sales performance of our grocers. Overage rent is typically annual and is highest in Q1, so I will note that we do not expect this again until Q1 of next year. During the quarter, we acquired four Publix anchored shopping centers for $78.7 million. These neighborhood centers are located in suburbs of Atlanta, Miami, and Nashville with strong median household income and growing population. We expect to drive growth in these assets through occupancy increases and rent growth. From a balance sheet perspective, we ended the quarter with approximately $622 million of borrowing capacity available on our $800 million credit facility, and we have no significant debt maturities until the second quarter of 2024.

Between annual free cash flow of approximately $100 million generated by our portfolio and the significant capacity available on our revolver, we are confident in our ability to fund our growth plans. We continue to closely monitor the debt capital markets for the right opportunity to extend our maturity profile and this is a high priority for us. In this uncertain market, we are considering all available options in order to obtain the lowest cost of capital for our debt, including the unsecured public bond market, private placements, secured, and bank markets. We anticipate addressing our 2024 maturities along with long-term funding for our acquisition volume later this year. Our low leverage ratio continues as a result of our strong earnings growth, as well as our prudent balance sheet management with our net debt to adjusted EBITDAR remaining at 5.3x as of March 31, 2023 At the end of the first quarter, our debt had a weighted average interest rate of 3.8% and a weighted average maturity of 4.1 years, approximately 82% of our debt was fixed rate.

During the quarter, PECO opportunistically executed a three-year forward-starting swap effective September 15, 2023, with a notional value of $200 million at a rate of 3.36%. We are pleased with the continued strength of our business and are affirming our full-year guidance for Nareit FFO and core FFO per share. We are also affirming our same-center NOI guidance of 3% to 4%. We do anticipate earnings to moderate in the remainder of the year due to the seasonality of our earnings, as well as a result of higher interest expense, which is reflected in our guidance assumptions. As Jeff mentioned, we believe we continue to be well-positioned for long-term growth, and we are delivering strong internal and external growth. Importantly, we have the flexibility to be patient and pursue accretive opportunities as they arise, that we expect to provide meaningful NOI contributions in 2023, 2024 and beyond.

Maybe most importantly, as we consider the current economic uncertainties, we continue to have one of the strongest balance sheets in the sector, allowing us the ability to remain on offense and pivot quickly and respond strategic market conditions. With that, we look forward to taking your questions. Operator?

Operator: . Your first question comes from the line of Craig Schmidt with Bank of America. Your line is open.

Craig Schmidt: Thank you. In looking at PECO’s results and position, it’s hard to see what could derail you in your operating results. I mean the leasing remains strong, and even if the consumer is weaker in the second half of the year, that would be a dynamic that would more likely impact 2024, not 2023. I just — I’m just wondering what you’re seeing out there that, that, that could lead to your downside in terms of the earnings for the year.

Jeff Edison: Craig, thanks. This is Jeff. Thank you for the call — for the question and the call. And the — I think your analysis is accurate. I do think that 2023 is fairly well baked. There are always questions and concerns and that you’ve got out there that — but as you point out, I mean, we don’t have exposure to the big box potential closures that that are out there. And the — obviously the — we are impacted on the interest rate side to an extent, but we are highly fixed. I think we’re fixed at — in the 80% range, but that — those would be the things that we’re looking at. And then obviously a change in the consumer. But as you point out that that’s really an effect 2024, 2025 than it is 20 — in 2023.

Craig Schmidt: Great. And then just I noticed the last four assets were acquired in the suburbs of some more major markets. I just wonder if you’re looking to grow in the larger MSAs, and then what is the current occupancy level of these four assets?

Jeff Edison: I — John, can you get the occupancy — the exact occupancy number of the four assets? I don’t have. But Craig, the one thing I do and we should point out, I mean if you look at the mark — our top 10 markets they’re Atlanta, Dallas, Chicago, Sacramento, Denver, Minneapolis, Washington, D.C., Las Vegas, and Tampa. And the — and 10th is Phoenix. So the — our top markets are not a lot different than where we’re — than our — the two projects that we bought in Florida and the project we’ve bought in Nashville. I mean it — they’re very similar markets where we have extensive experience. The — but again, if you look at it Atlanta, Nashville, and then Florida and the sort of mid to Southern Florida and those are key markets for us that we’ve been in for a long time and will continue to stay focused on. Do you have the — John, can we have the occupancy numbers of the — of the bot.

John Caulfield: I do. I do. So it’s — they’re about 93% occupied across the four of them. And so we have opportunity as Jeff said to grow through both occupancy lists as well as pushing rents.

Jeff Edison: Yes. We also have some land that we’re purchasing — we purchased with those assets that will give us additional opportunity as time goes on, which we’re actually excited about and we’re actually making great progress at those assets already. So it’s — yes, I think we’re well on the way to getting what our underwriting was, which was across the Board. It’s going to be well north of an nine unlevered, and that is we think of a pretty strong return in this market.

Devin Murphy: Jeff, the only thing that I would add, Craig, John gave you the average occupancy of the four, but one of the properties has an occupancy level in the mid-80s, and we see pretty attractive upside in that, that particular asset.

Operator: Your next question comes from the line of Caitlin Burrows with Goldman Sachs. Your line is open.

Caitlin Burrows: Hi, good afternoon, everyone. Jeff, I think you mentioned that a lot or maybe all of the acquisitions that you did in 1Q had been started in 2022. So I was wondering now as you think about the pipeline that you have and your expectations for the year is the guidance that you guys laid out based on activity that you’re already seeing, or to what extent is it just activity you think will come to fruition kind of as the year goes on?

Jeff Edison: Well, Caitlin, thanks for the question. We — I think we had a strong first quarter and our backlog going into second quarter is much more muted than what we got in the first quarter. So that’s why we’re keeping a pretty wide range on the acquisition target for the year. The — and so I — sort of that’s a roundabout way of answering the question, which is the market is cooler right now than it was in the first quarter and late last year when we put these four projects under contract, they did take a long time to close because there was significant changes in the — through the process on the acquisitions. So I would say that we are less than certain about where the markets going to be between now and the end of the year.

And that’s what’s really going to drive our results in terms of how much we acquire. And again, that we’ve got to feel confident that we’ve got that number one or two grocer and that we’re in markets where we can really grow rents and grow occupancy. And if we can get that and get to that nine unlevered, we will be at the high-end of the range. If we can’t, we’ll be at the lower end of the range and that that’s how we’re sort of thinking about it.

Caitlin Burrows: Got it. Okay. And then maybe switching over to the balance sheet. So you guys have the interest rate swaps expiring in September, and you’ve now addressed $200 million of that. I guess going forward, how are you thinking about the remaining $55 million, but maybe bigger picture, what the right amount of floating rate debt is to have and how that may play into your decisions for addressing the 2024 maturities?

Jeff Edison: Great. John, do you want to take that in terms of our — what our plan is?

John Caulfield: Sure. Good afternoon, Caitlin. The — so the — we are floating, we’re about 81% fixed today, and we did execute that swap opportunistically. I think as I said in the prepared remarks, the — we are trying to keep all of our options open and the different strategies come with either fixed or then we can kind of synthesize it with a swap. And so our target is certainly to be higher. I would say certainly above 90%, 95% would be our long-term target, but at this time, as we are evaluating our opportunities to in the different forms of financing, that we will address it at that time. And so we did opportunistically execute that forward-starting swap. And I would think that as we move forward with our plans for extending 2024 maturities and funding our 2023 acquisitions then we will swap and fix at that time. But part of it was just taking some of the pieces off the table over time as well.

Operator: Your next question is from Tayo Okusanya with Credit Suisse. Your line is open.

Tayo Okusanya: Hi, yes. Good afternoon, everyone. Congrats on another solid quarter. I wanted to talk about just guidance, you guys maintained it, but when you look at your 1Q performance, again, granted maybe there’s some overage rent in there and that’s not going to recur for the rest of the year, but if we should just annualize your first quarter, you kind of are even further ahead than the high-end of your current guidance, and you’re probably going to do more by way of acquisitions in the rest of the year. So just kind of curious how you’re thinking about guidance right now, especially kind of like the low end and the high end relative to your strong performance in 1Q.

Jeff Edison: Yes. Thanks for the question. I will tell you, we’re naturally going to be conservative in the first quarter across the Board as we get more visibility into the rest of the year. And yes, we did have a fairly strong percentage rent paid in the first quarter, which was obviously very positive driven by the really strong sales that we’ve had at our grocers. And that’ll be something that will occur each year, but it will recur in the first quarter. Overall, we’re — we almost I mean that’s part of our thought process is to be relatively conservative in the coming out of the box in terms of what kind of affirmation or acceleration of our guidance would — will happen. And we’re — in this environment, I think we’ll err on the conservative side given the just the uncertainty in the overall economic environment with interest rates and the rest. And we will have — as we have more clarity in that, we will get more certain as the quarters go by.

Tayo Okusanya: That’s helpful. And then just curious again, your kind of some high-level thought heading into ICSC that’s kind of given you confidence about future demand or not and also specifically to kind of see the new kind of retailer categories that trying to take meeting with your leasing team. And just a general sense of heading into ICSC, what’s that’s telling you about kind of the demand environment?

Jeff Edison: Yes. So we have a really strong backlog of meetings on the leasing side. So I would say it is all indications are that the ICS — from the ICSC bookings that the retailers continue to have really strong demand. We’re hearing anecdotally that there’s going to be a fair amount of product coming on the market in the grocery-anchored right size number one or two grocers kind of our target. That there’s — there will be — we understand that there’ll be several if not more of those projects coming on the market at as part of the ICSC. As you remember, I mean, that that’s always been a cycle thing where at the ICSC you get a big — a lot of people coming out with product for sale that, that sort of went away for the last two or three years, and it’s now appearing to be coming back.

And we’ll see how that plays out. And what kind of whether there’s a realistic seller or a more sort of seller from the past who’s trying to get old pricing. We understand through the brokerage that that, that there should be some decent demand coming at ICSC, but we’ll — obviously we’ll see when that comes through. But activity seems good. I think the — they’re talking about 25,000 to 30,000 people coming for it. So that’s — it’s not back to pre-pandemic numbers, but positive and so we’re — I’d say we — we’re optimistic, but we’ll — we’re sort of wait and see in terms of how positive the ICSC comes out.

Devin Murphy: Hey, Jeff, the only thing I would add to that Tayo, in terms of where we are seeing retailer demand by category for your question. So it’s in line with the current portfolio. So quick-serve restaurants continue to have strong demand for our centers. Medical continues to have strong demand and is a growing percentage of the demand; our current pipeline approximately 20% of the pipeline is medical. And then, lastly, health and beauty, so those are the three categories where we’re continuing to see strong retailer demand. Those retailers do not seem to be concerned by about the strength of the consumer and are being very aggressive in their growth plans.

Tayo Okusanya: Great. Thank you.

Jeff Edison: Yes. Did we answer your question, Tayo? Is that — I want to make sure we got it covered.

John Caulfield: All right. I guess we did hopefully.

Operator: Your next question is from the line of Mike Mueller with JP Morgan. Your line is open. Take you off mute there. That would help.

Mike Mueller: So quick question in terms of the small shops, is the mix today any different than it was say, heading into COVID? I mean, has it evolved significantly?

Jeff Edison: Well, there are two answers to that. One is that, there had been a significant amount of time between the great financial crisis and the pandemic. And so what happens is there’s a natural the thing where you have some weaker retailers that get into the business and are able to survive because of the market. When the pandemic hit, it eliminated a lot of those sort of more marginal players. And so, as we look at it today, we’re not that far out. And so we think we’ve got a strong if not stronger base than we’ve ever had in terms of our small tenant makeup. And — but it’s pretty much over a long period of time maintain that local sort of being somewhere in that 25% range of our — of the small stores and then regionals and nationals being the bigger. I don’t know Devin, if you have any other points in terms of like sort of the mix that we’ve got?

Devin Murphy: Yes, Mike, the only thing that I would add to what Jeff said is that in terms of medical a number of those retailers tend to be more local neighbors. And as we look at our portfolio, what we like about that use and again, as I mentioned in my answer to Tayo’s question, we see medical as a growing percentage of our total rent roll. Right now it’s about 12%, but the pipeline it’s about 20%. And a percentage of our local neighbors are our medical users about 12% of our local neighbors are medical. And what we like about them is this number one, they typically sign longer leases and they’re very resilient on average in our portfolio, the local medical neighbors have been in our centers for 10 years on average. So they sign long leases and they stay in the space.

The other use is that has evolved is health and beauty. Again, we like this because it tends to be e-commerce resistant. You can’t get your hair done and your nails done on the internet. And so as with medical, it’s a e-commerce resistant use. And again, similar to medical, these local tenants tend to sign longer-term leases. And in our portfolio, they’ve been in the space for on average over 11 years, so again, resilient. So that’s been the evolution in the local neighbor base in those particular categories. And we believe that, that, that evolution is highly constructive given the length of time that the tenants are signing up for and then the fact that they’re continuing to be tenants for over 10 years.

Mike Mueller: Got it. And then just a quick follow-up, I think the inline occupancy is 94.3%, if I’m not mistaken. Where do you see the ceiling for that?

Devin Murphy: Mike, as we’ve said consistently, we think we’ve got another 100 basis points to 200 basis points of upside in that metric. And again, as we continue to emphasize, we know that the level of occupancy that we’ve been able to achieve in the portfolio is potentially perceived as a weakness, which is an interesting concept with a strength being highlighted as weakness. But as we’ve continued to state what we are doing given the high level of occupancy that we have is we’re pushing spreads. And as you can see in the first quarter, our spreads were 16%, which is higher than they’ve been at any point over the last five quarters, and is meaningfully higher than that metric has been historically. And that’s how we’ll continue to get NOI growth, which is as we bump up against this ceiling in terms of occupancy; we will continue to push rents. And as you’ve seen from our metrics in the first quarter, we’ve been able to do that.

Operator: Your next question is from the line of Haendel St. Juste with Mizuho. Your line is open.

Haendel St. Juste: Hey there, thanks for taking my questions. My first question’s on the watch list, I think you mentioned in your remarks that it’s about 2% overall, but then you also mentioned that you have about 40 bps of exposure to Bed Bath, Party City and Tuesday Morning. So I guess can you talk about what else is on that, that list, what other categories you’re concerned about? And also remind us what you’ve budgeted in your guide this year for known or anticipated tenant risk and what your bad debt reserve for unanticipated tenant risk is? Thanks.

Jeff Edison: Great. Thanks, Haendel. Thanks for calling in. The — Devin, do you want to take the first and then John you want to talk about the bad debt?

Devin Murphy: Sure.

Jeff Edison: Question?

Devin Murphy: Sure. Hi Haendel, thanks for joining the call. In terms of the three tenants Party City, Tuesday Morning and Bed Bath, Haendel, again, to just remind everyone, we have five party cities in the portfolio and all five of those leases we expect to be assumed. So we will not have any backfill needs on those five stores. On Tuesday Morning, we have three of them, two are already backfilled and one is in negotiation. And the rental metrics on those locations are meaningfully better than the in place rents in the 20% to 25% increase range. On the two Bed Bath that we have in the portfolio, we have not backfilled those locations yet, but we’re optimistic in terms of what the backfill rents will be able to be, on one, we have a $6 rent that we think can go to the low-double-digits, and then on the other, we’ll have a little bit of a backslide in rent from a $11 rent to a $9 rent.

So overall, we’re not concerned about the impact that those three tenants will have on the portfolio. In terms of the other tenants on our watch list and Haendel, those are our top 20 tenants on the watch list. So it’s a large universe of tenants and it ranges from retailers that are in the physical therapy space to the pet space to personal care, et cetera. So it’s a wide range and not one of those tenants represents more than 30 basis points of ABR for us. So again, the diversity in our rent roll continues to benefit us. And so we’re not particularly worried about any one category in our watch list.

John Caulfield: And I will jump in on the bad debt. So we do provide guidance disclosure, and this portfolio has consistently delivered over a long period of time between 60 basis points and 80 basis points of bad debt. That is what our guidance is based off of. And our experience in the first quarter is right down the fairway on that. We do space by space budgeting, but to the — with regards to unexpected fallout or things like that. But to Devin’s point, we just don’t have that volatility. So I think we’re in a good place from a guidance perspective.

Haendel St. Juste: Great. Great. That’s very helpful. I think that’s all I had on my list, so thank you. I’ll yield.

Devin Murphy: Yes. Thanks, Haendel.

Jeff Edison: Thanks, Haendel.

Operator: Your next question is from the line of Ronald Kamdem with Morgan Stanley. Your line is open.

Ronald Kamdem: Hey, just two quick ones. And some of these have been asked already, but just going back to the acquisitions, I see the cap rate. Just remind us how those deals came about, number one, and then number two, after the events of sort of the past month and a half, is you’re thinking that people are still on pause and then activity is going to pick up in the second half of the year? Or just trying to figure out when does this sort of tight lending environment translate into sort of more deal activity, more opportunities for the company and for your pipeline? Thanks.

Jeff Edison: Thanks, Ronald. The — if you look at the four projects each one has a very specific story to it. And that story at its core is about a seller that is motivated because in this environment, where you’re seeing a transition, we’re really trying to find motivated sellers who will accept the new pricing. And one of the ways we were able to do that is we found assets that had significant upside to them. And a lot of that was in new leasing spreads, a lot of it was in new outlaw development opportunities and then contractual ramp up. So these were things that were very specific to the property, but they allowed us to have a — what could be perceived as a more aggressive cap rate, but with a tremendous — with a lot more upside.

And that was really where we were — how we’re able to bridge the gap between the seller and where — what our pricing expectations were. And that, that those would be things like the last asset in a fund. They would be institutional owners with alternative, needs for portfolio management in terms of what they were selling. So it was a variety of different pieces, but all sort of had the similar story, which was a motivated seller. In terms of pace, we’re — we’ll see a lot from FDIC , I think that will tell us a lot about what type of pace we can anticipate for the second part of the year. I do think it’ll be muted this year. I think across the Board it will be the — it’ll be difficult to find the appropriately motivated sellers. But it’s a big market.

I mean, we’ve got 5,800 centers across the country that we’d like to buy and with the number one or two grocer and the demographics that we want. So it’s a big market. And there is always volume in it. But obviously it’s a lot more muted today as pricing gets recognized. Does that answer your question, Ronald?

Ronald Kamdem: Yes, that was perfect. And then just my second question was just going back to the swaps. I’m just looking at the debt page on the supplemental. I guess I’m trying to figure out, so when I look at 2024 and I see those three term loans coming due, so what’s going to happen to those? Like what’s the mark-to-market on the interest cost there? So basically, where do you think you can issue today and how should we think about when those come due? What are you guys planning for that? Thanks.

Jeff Edison: John, do you want to take that one?

John Caulfield: Sure. Yes. So Ron, we are very focused on those 2024 maturities, and as we look at the various options we have, they come with different rates. But I would say from a swapped in rate perspective, there can be some variability, but it goes anywhere from the low-5s to the low-6s. In terms of when you look at where those interest rate swaps are at close to 2%, depending on what you’re looking at their that’s probably in the 3.25%, 3.5% is what you’re looking at. And I’m — and that could be based on the 10-year, it could be based on a five-year, it could be based on where SOFR is. I mean, the swaps we just executed were at 3.36%. And so I think if you look at what those swaps are fixing on there is that headwind, but I think the growth of the operating performance of the portfolio is allowing us to kind of continue to grow at a full level.

But it is something we’re very focused on because it does play into funding our acquisition plans and the like. So the reason that I’m less exact on that is because as I mentioned, we are examining various forms and durations of maturities. But hopefully that gives you a sense for the rates that we’re looking at.

Operator: Your next question is from the line of Juan Sanabria with BMO Capital Markets. Your line is open.

Juan Sanabria: I just wanted to follow-up on the earnings trajectory off a strong first quarter again. So I guess if you could just break down, I guess first, what’s assumed in the sequential drop-off from the percent renter overage rents from the grocers that was a one kind of annual event in the first quarter. And then secondly, anything that you’re budgeting from an occupancy perspective, there was a two Bed Bath stores and a little bit on Tuesday Morning, but how should we think about occupancy trending throughout the year? Just thinking about your first quarter performance relative to the bottom end of your guidance range for earnings.

Jeff Edison: Great. Hey, Juan, thanks for calling in. John, do you want to take that one?

John Caulfield: Sure. So in the first quarter, I would say, I think Devin mentioned it was in my prepared remarks. I would say that there was about $0.01 of increased overage rent over the call out even a year ago, that we would expect to repeat in 2024 as our grocers continue to increase their sales volumes. But it is not likely to repeat at that scale as we go-forward. So I would say that’s the starting piece. The second is in the second quarter you get a little bit of seasonality around certain expenses that are seemingly small a dollar amount, but probably give you at another — not a full $0.01, but a little bit there. And then from there you’ve got better growth that that gives us kind of the range that we’re looking at.

So I do think that normalizing off of Q1 gives you a little bit of a different result than a full-year. With regards to occupancy for us, it’s really stability in terms of as Devin mentioned, he talked about those leasing plans. But when you give the diversity of our base, we do expect that we will continue to grow our occupancy levels. I will note that the economic increased and tightened the spread between our economic and our leased occupancy, which really again underscores the ability for us to execute a leasing and move our neighbors in as quickly as we can. And so that is something that we compress this quarter on a long-term basis. That’s usually been about 60 basis points. I believe it’s 80 basis points this quarter. So there’s some compression there, but we do not foresee any major adjustments or swings in that.

It’s just more those — the few items I just mentioned.

Operator: Your next question is from the line of Todd Thomas with KeyBanc Capital Markets. Your line is open.

Todd Thomas: Yes. Hi, thanks. I just had two questions. One, John, so in terms of just following-up I guess on that the guidance a little bit more, you mentioned the seasonality that you anticipate. So what exactly are you referring to in terms of seasonality outside of the overage rent that you just discussed? What sort of seasonality are you pointing to in the second, third and fourth quarters?

John Caulfield: It was really my comment was more specific, I would say to the second quarter. And as we look at it Tayo brought up ICSC. So there’s a cost and then you’ve also got kind of proxy costs, so not big dollar amount, but then in terms of the sequencing, so I mean again the stability of our base, it’s just that the $0.59 that we had, had those items that would just be something difficult to annualize off of. But then as you get to later quarters, then you can see that that increase there, there’s nothing more than that that I’m — that I was referencing.

Todd Thomas: Okay. Got it. And then in terms of the portfolio is well leased, it’s well occupied and the spreads — your leasing spreads have been strong to-date. Jeff, you mentioned that you expect pricing power to improve further. How do you know if you’re pushing too hard driving rents too high, particularly around I’m sort of thinking around the 25%, 26% of the portfolio that that’s sort of local tenants. Is that a concern at all just given some of the uncertainty around the consumer and in the economy, which you’ve sort of cited and how do you measure the portfolio’s health?

Jeff Edison: Yes. So Todd, it’s a great question. And we do talk about it a lot and it — at the end of the day when a retailer is deciding to stay in our shopping center, so in our negotiations on retention that is the direct decision on their part about profitability. Because — and when you see that we’re able to retain not only retain a high percentage at a 95%, but we were also able to get 16.1% growth on it. That means that that they’re not doing this for philanthropic reasons. They’re doing it because they can make money at these locations. And when you see those two kind of numbers, it means that we are nowhere near the kind of issue that you’re talking about where we’re getting to too high of a number that they can’t be profitable.

So we — and in addition to that, we’re getting close to a 3% annual bump on those as well. So it — the retailers are telling us with their actions that they’re profitable at our centers. And when they — when that number — when those numbers start to change dramatically, you’re going to be probably asking the question that you’ve got more often, but right now we’re not seeing that at all.

Todd Thomas: Okay. And if we look at —

Jeff Edison: Does that make sense to you?

Todd Thomas: Yes. That’s helpful. And if we look at anchor and inline expiring rents in 2024 and 2025 compared to the rents that you’ve been achieving on new and renewal leases, is there anything that you see today or anything in those two years specifically that would prevent you from seeing similar rents and similar rent spreads moving forward?

Jeff Edison: Yes. I don’t — we don’t have a crystal ball, so you never know what can happen. But there’s nothing on our radar screen right now that’s indicating anything but our ability to continue to grow those. And to — as we look at it, when at — we have less space to lease and we’ve got more demand. We would anticipate a very — being able to be very strong in that — in that position. And you look at just the supply/demand dynamics and they’re very positive for us right now. And that we don’t see anything out there, Todd, that would say, okay, well, that’s going to change dramatically one way or the other. I mean there’s certainly nothing being developed, so there’s no new construction that’s going to change the amount of supply.

And so we basically it’s a demand issue. And the only thing that would drive demand negative from where it is and we’re certainly not seeing that now is a major recession. And we’re not — we don’t anticipate that, we’re planning for in our stuff or slowdown with interest rates increasing. But we’re certainly not any kind of major recession. And that that would be the thing that would be sort of an outlier to current thinking that we’d have to plan on. But again, this as well as anyway, our necessity-based focus, it gives us a lot of stability and that, that we think is in these kind of environments are real positive.

Todd Thomas: And a similar distribution of leases expiring that that have stated option rents and are you doing away with stated option rents at all, a little bit more at the margin as you renew or sign new leases?

Jeff Edison: Yes. At the margin, yes. But it is still a part of a lot of retailers’ demand. I mean, they want — they’re building a business. They want it for long-term, on average our small stores have been with us nine years. They want the — they want to control the space on a long-term basis. And so it’s a fight for us on a day-to-day basis getting rid of options and where we get — where they get options making sure that we get commensurate bumps that accommodate where the market could be. It does help to have contractual rent bumps during the term, which has become much more consistent I would say, of our pricing power. That’s one of the things that we have been able to accelerate and feel really good about our ability to get that.

So you’re — if you’re getting 3% bumps each year for the five-year term of the small store space, and then you’re getting a bump at the time of the option. You — we feel okay about being able to stay at market rents in that way, in that regard. Does that make sense?

Todd Thomas: Yes, absolutely. Thank you.

Jeff Edison: Okay. Yes. Thanks. Thanks, Todd.

Operator: Your next question is from the line of Floris van Dijkum with Compass Point. Your line is open.

Floris van Dijkum: Hey, sorry about that. I was on mute. So I look at a couple of things and I think we sort of touched on it a little bit before your shop space would appear to have the greatest upside opportunity here, and clearly in terms of occupancy, but also in terms of rents, and you get that space back a lot more quickly. If I look you say that your average lease term for your shop space is 4.1% remaining, but 8.2%, including options, and you were just talking about this before Jeff, but remind — I mean do all of your shop tenants essentially have an option for another, it sounds like they look like a four-year term or 4.1-year term, or how does that work? And then maybe, I look at your — if your stated expiry of 13% of your rents next year, that’s a massive opportunity, potentially, particularly as the rents are seem pretty low at 13.58%. Maybe if you can touch on the opportunity there and the ability to drive earnings going forward.

Jeff Edison: Floris, thanks for the call. Devin, do you want take that or and John, maybe you can walk into the sort of where our mark-to-market I think kind of feeling is for the leases are coming due next year.

Devin Murphy: Sure. I’ll take a crack at it. Floris, the simple answer is not every small shop lease has an option. As Jeff indicated, so the national retailers push hard for options in order to sign new leases, and that’s where the option comes in. John, what’s percentage of our tenants have options based of the inline guide? Do you know the number off the top of your head?

John Caulfield: I don’t know that off the top of my head, but they do. I mean it is a mix but I think the 8.2 is a blend of multiple options. So again, the percentage that have them versus someone that has say two options versus one option is what factors into that 8.2.

Devin Murphy: Yes. So Floris, we’ll follow-up with you on that and give you the exact specifics. This is something as Jeff indicated, that our leasing team is pushing back on to the extent they can. But it is a meaningful negotiating point for the national retailers where when they’re signing leases, they are looking for options in that lease. And as Jeff mentioned, what we are trying to do is given the annual increases that we’re seeing in our market rent, fill that into the option rent that we’re willing to agree to with that retailer. So we’re — it’s a multi-variable equation that we’re taking all the factors into account when agreeing to that. However, your thesis is spot on, which is with 13% of our rent expiring in 2024 and in place rent that there is meaningful upside in the portfolio that will be able to capture on a go-forward basis.

Floris van Dijkum: Yes. Thanks, Devin. Yes, sorry.

Jeff Edison: Yes. Of course, if you look at — you just look at the renewal spreads that we’ve got and the fact that we did get 95% renewals. I mean, you’re — that’s a 16% spread on 13% of your income. I mean, that, that’s obviously a real positive impact maybe slightly overstated depending upon market conditions, but there is certainly opportunity there.

Floris van Dijkum: Great, great. Thanks, guys. And maybe Devin, you mentioned something else which sort of caught my attention as well. You said, is it 19 assets that you’ve owned since 2008? And you talked about the — how they had limited downside in terms of the — in terms of occupancy during the great financial crisis. I’d be curious, have you guys looked at what the long-term same-store NOI CAGR on those assets that you’ve owned since 2008 has been, I’m just curious to see if you’d be willing to share that with us.

Devin Murphy: Well, a couple of points, Floris, it’s 29 assets that we —

Floris van Dijkum: 29, sorry.

Devin Murphy: We owned in 2008. And the point we were making is there’s a perspective held by some think including you Floris, that where our ABRs are that our portfolio has more potential risk in a downturn. And so what we did was we went back and looked at how those 29 assets performed during the GFC and NOI decreased by 270 basis points, but it recovered by 2011. And then we lost that was NOI — and we lost 180 basis points of occupancy. So those assets performed well during that. And there was one other point I wanted to make Floris. I’m sorry. Remind me of your — then your point was we’ve not gone back and looked at what the portfolio — those assets, same-store NOI was over that period of time, that 15-year period, but we can do that.

But what I do know is if you look at the PECO portfolio from 2017 to 2022, we had same-store NOI that was in the mid-3s for the portfolio. And so a lot of the questions we’re continually getting is how do you guys think you’re going to continue to be able to put up market leading same-store NOI growth? The reason is we’ve done it historically, and if you look at the last five years, our same-store NOI growth was in the mid-3s, which was 160 basis points higher than our peers. So we continue to believe that our strategy is differentiated and therefore we’ll be able to realize better growth than maybe is perceived that the sector can deliver.

Operator: Your next question is from the line of Paulina Rojas with Green Street. Your line is open.

Paulina Rojas: Good morning. In your presentation —

Jeff Edison: Good morning, Paulina.

Paulina Rojas: Hi, in your presentation you show foot traffic by region and you have the West lagging other regions. It’s not by a huge margin, but the spread has been sticky. So what do we make of this? And are there any implications for the way you are thinking about your asset or portfolio management?

Jeff Edison: Can — can you repeat that Paulina because I wasn’t totally fine. You’re saying that the — that our traffic, our placer numbers are saying that the traffic in the Western states was higher or I didn’t — I wasn’t exactly following, which — which segment you were talking about.

Paulina Rojas: Yes. Yes. You showed the West lagging, so your assets in the West lagging in terms of foot traffic. And I think you’re indexing everything against 2019, if I remember well.

Jeff Edison: Yes.

Paulina Rojas: So and again, it’s not a huge margin, but it’s sticky. So I wonder, are you may be seeing this kind of lag in other metrics as well not just foot traffic and yes. How do you read this?

Jeff Edison: Yes. It’s kind of — it doesn’t make total sense because if you look at where we’ve been able to grow rents and occupancy the West has actually been one of our strongest regions. So I — my gut is when I — we just don’t trust the placer numbers to be accurate to that degree. We look at general trends with that. We look at the sort of pieces, but we just haven’t found it to be accurate enough to say, okay, 3% is a real number. We’re looking at more directionally how it is. And the — if you look at our grocery sales, you look at our occupancy and you look at our rent spreads the West is still performing very well. So it would — I don’t know how to answer that other than we’re not seeing in terms of operating results, what placers seeing like in the — on the traffic side.

Paulina Rojas: Okay. That makes sense.

Jeff Edison: Devin, I don’t know if you have anything add there, but that, that’s been our experience.

Devin Murphy: Yes. I mean, Paulina, the only thing that I would add is we are benchmarking it to pre-COVID to give people perspective on what foot traffic looks like today relative to what it was like pre-COVID. And if you look at our 2022 foot traffic, it was 8% higher than 2019 again, the pre-COVID metric and then our foot traffic in Q1 of 2023 relative to Q1 of 2022 was comparable. It was a slight tick lower. So again, our view on foot traffic is that it continues to be strong. And again the leasing and sales metrics that we’ve touched on, we think support that. But the bottom line point is as we dug into the placer data in detail, to Jeff’s point, it can be relied on directionally, but it can’t be relied on to give you a actual meaningful pinpoint accuracy.

Jeff Edison: Yes.

Paulina Rojas: Okay. That makes sense. And my other question is so you have — you fully own almost all of your properties except for 20 assets that you have in a JV. Do you see a scenario where you would buy the remaining interest in those assets or so when would you be interested and two, do you have at all — do you envision having at all a willing seller there?

Jeff Edison: Well, I think first part Devin, you can add it. Go ahead, Devin.

Devin Murphy: Yes. I was going to say Jeff is, Paulina, our partner on that venture is Northwestern Mutual. It’s a 10-year joint venture. We’re in year five of the 10-year venture. It’s a high quality portfolio that we would love to own all of at some point in time if that were available to us. But our partner is very happy with the performance of that venture. They benchmark us to Nareit and in 2022 we outperformed Nareit by over a 1,000 basis points. So that’s a very strong performing portfolio with a happy partner. So our view is that venture will stay in place at least through its 10 years.

Jeff Edison: Yes.

Operator: This concludes our question-and-answer session. I would like to turn the call back to Jeff Edison.

Jeff Edison: Great. Well, I want to thank everybody for being on the call. This is a great quarter for us. When you have 95% retention, 16% spreads, and then you got 4.9% same-center NOI growth, your record occupancy numbers, we’d be consensus on our FFO per share. We’re ahead of pace on our acquisitions at returns that are above what we underwrite and we — our balance sheet very disciplined and in great shape. So we’re very excited about the quarter. We think we will — we hope that we can continue this positive motion and through the rest of the year. And we think our strong results continue to highlight the strengths of our focus and differentiated strategy. Getting that number one or two grocer in there, driving the traffic, making it the right demographic so our small stores can be successful.

And we give a lot of credit to the team. This team has been doing this for a long time. We’re — we’ve got a fully integrated platform. We are focused on a very specific niche of our business. And that we think is going to not only get results for this last quarter, but get results for the next five years or 10 years as we continue to grow this business. So on behalf of the management team, I want to thank our shareholders, our associates, and importantly our neighbors for their continued support, and thanks to everybody for being on the call today.

Operator: Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.