Phillips Edison & Company, Inc.

Good morning and welcome to Phillips Edison and Company's second quarter 2021 results presentation. My name is Josh and I will be your conference call operator today. Before we begin, I would like to remind our listeners that today's presentation is being recorded and simultaneously webcast. A replay of today's presentation will be available this afternoon on the investor section of the Phillips Edison and Company website at phillipsedison.com backslash investors. The company's earnings release, quarterly financial supplement, and 10Q were issued yesterday, August 5th, after market closed. These documents are available for download on the investor section of the Phillips Edison & Company website at phillipsedison.com backslash investors. I would now like to turn the call over to Michael Kaler with Phillips Edison & Company. Sir, please proceed.

Thank you, Operator. Good morning, everyone, and thank you for joining us. I am Michael Kaler, Vice President of Investor Relations with Phillips Edison and Company. Joining me on today's call are our Chairman and Chief Executive Officer, Jeff Edison, our President, Devin Murphy, and our Chief Financial Officer, John Caulfield. Because this is our first earnings call as a publicly traded company, during today's presentation, Jeff will provide some background on Phillips Edison's 30-year history and our unique and differentiated strategy. Jeff will also discuss our transformative underwritten initial public offering that closed on July 19th, 2021. John will then review our second quarter operational and financial results, our recent capital markets activity, and discuss our guidance. Jeff will then return to provide an update on acquisitions and recap our long-term growth strategy. Following our prepared remarks, we will answer questions from the institutional analyst community. Before we begin, I would like to remind our audience that statements made during today's call may be considered forward-looking, which are subject to various risks and uncertainties as described in our SEC filings. In addition, we will also refer to 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 release and supplemental disclosure issued yesterday, which are available for download on our website. With that, it's my pleasure to turn the call over to Jeff Edison, our Chief Executive Officer. Jeff?

Thank you, Michael, and good morning, everyone. Before we get into our results for the quarter, I would like to provide a brief overview of Phillips Edison, speak to our differentiated strategy, highlight our portfolio, and review our growth plans. We are one of the nation's largest owners and operators of neighborhood grocery-anchored omni-channel shopping centers. We've built our fully integrated operating platform for 30 years. Our team of 300 associates is experienced, engaged, and competitive. Our senior management team has an average of over 27 years experience and 14 years with PICO. Our bench is broad and deep. This team has successfully navigated numerous business cycles. We brought our first center in Danville, Virginia in 1991, which had a net operating income of $260,000. Today, we have 294 properties and an annualized net operating income of over $350 million. Importantly, this team is also aligned with shareholders. Every associate who's been with PICO over one year owns stock in the company. They think like owners. I personally have never sold a share of PICO, and PICO leadership owns approximately 7% of the company. It's hard to find better alignment than having meaningful skin in the game. Our mission is clear and has been consistent for 30 years. We create great omnichannel grocery anchored shopping experiences, and we improve our communities one center at a time. We are grocery centered and community focused. One thing that you may hear during this presentation today is that we call our tenants our neighbors. Why do we call our tenants our neighbors? because we work hard to create community at our centers and we treat our retailers as neighbors in that community. We believe in customer service and think it helps to remind the organization to treat our tenants like we would our neighbors. Our strategy is simple. We own and operate Grocer Anchored Neighborhood Centers. Our centers are typically an open-air center that's three miles from your home. It sits at the corner of Main and Main. not exit 15 on Interstate 80. It has a 45,000 square foot grocery store and is open 24 hours a day. You shop there twice a week, more than any other retailer you visit. This is the center you run to when you forget ketchup and you're grilling burgers for dinner. In addition to groceries, you can also get a lot of your necessity-based goods and services from the 65,000 square feet of small store shops at our centers. Think haircuts, dry cleaning, fast food, fitness, and medical. Think Starbucks, Chipotle, Orange Theory, Walgreens, and Wells Fargo. Our centers are not where you go to get your electronics or home improvement goods, discount clothing, sporting goods, or office supplies. Those are power centers. They're usually twice the size of our centers. As you'd expect, these two types of centers are in very different businesses and have very different economics. We get 35 percent of our rent from our grocers. On average, our customers come to our centers nearly two times a week. We have limited exposure to big box retailers. We have pricing power in leasing. Historically, leasing demand has been consistently high for 2,100 square foot average inline spaces. Our capital requirements are significantly lower for keeping our centers fully occupied as well. We focus on owning centers with the number one or two grocer within the market, a neighbor base with omni-channel strategy, where the grocer has both buy online and pick up in store, or BOPUS, and home delivery capabilities. It has high exposure to neighbors selling necessity-based goods and services, and a trade area with favorable demographics for our neighbors to be successful. Each of these components are critical to our success. When it comes to our centers, we believe that format drives results. Our average center is 113,000 square feet, which is the smallest in the REIT shopping center universe. We own smaller centers in targeted neighborhood locations. Our centers create a positive leasing dynamic and align well with retailer demand. We see retailer demand is concentrated in smaller footprint stores. Considering the average size of our in-line neighbor is 2,100 square feet, we believe our centers are best positioned to meet retailer demand. Our smaller centers allow for better growth because of our high retention rates and high releasing spreads. Our retention rates averaged 87% between 2017 and 2020. High retention rates result in less downtime and lower TI costs. This leads to higher NOI growth. From 2017 to 2020, our average cash releasing spreads were 8.8%, providing a meaningful avenue for NOI growth. Over the past three calendar years, our total CapEx, including development and redevelopment spend, as a percentage of our NOI, has averaged just 20%. Our smaller format centers and lower exposure to secondary anchors require less CapEx than other retail real estate. Lower CapEx leads to higher AFFO. Seventy-three percent of our ABR comes from neighbors that offer necessity-based goods and services. This means that we have limited exposure to high-risk retail categories like apparel, department stores, and home furnishings. The top markets in our portfolio are Atlanta, Chicago, Dallas, Minneapolis, St. Paul, and Denver. But we don't think about markets this way. We don't compete in MSAs. We compete at the neighborhood level. On the corner of Indian School Road and North 28th Street in Phoenix, and the corner of Bearling Drive and Marshall Road in Minneapolis. We target trade areas where our grocers and our small stores can be successful. Our average population density and median household incomes mirror that of Publix and Kroger, our top two neighbors. We make money where our top neighbors make money. Our three-mile demographics, as you'd expect, are typically of the average American suburb. We have 61,000 people with a median household income of $68,000 in our average three-mile trade area. Our shopping centers provide necessity-based goods and services to the average American. Our portfolio was built one asset at a time. We purchased 280 centers for over $4.7 billion between 2012 and 2018. On average, we bought over $670 million of properties per year during this timeframe. More recently, we were the largest acquirer of neighborhood centers among our peers between 2018 and 2020. Acquisitions are an important part of our growth story. The following are PICO's key drivers of growth. Growing rents is the base of our internal growth strategy. Over the last four years, we have had sector-leading leasing spreads. We lease up vacant space to new neighbors. At June 30, 2021, we were at 90.6% inline occupancy. We believe we can continue to increase this over time. We have built in rent bumps from inline neighbors. We've been able to build at least 2% rent bumps into approximately 80% of the new leases we have written this year. in addition to our strong releasing spreads. We execute redevelopment opportunities. These are primarily made up of out parcel development opportunities where we can build single tenant or multi-tenant space on the existing or acquired land. These are on average $2 million per project. Our redevelopment opportunities also include teardown and rebuild opportunities with our grocers. We're targeting an average of 9 to 11 percent incremental underwritten yields on these projects. Our current projects are expected to deliver an average underwritten yield between 9.5 percent and 10.5 percent. As I noted, we have a strong track record of growing through acquisitions. We selectively acquire new assets that fit our focus strategy. Our plan is to purchase over a billion dollars of assets over the next three years. PICO has grown consistently for 30 years, and we've built a platform scaled for growth. We also have a best-in-class balance sheet that positions us for growth. We believe that there are also macro, demographic, and economic tailwinds in our markets, which will augment the growth. These include the shift to work from home, the population shift to the suburbs and to the Sun Belt, where approximately 50 percent of our properties are located, and the consumers buying locally. We believe our strategy generates superior risk-adjusted returns. Our targeted acquisition strategy in lower-profile trade areas allows us to purchase properties at initial yields 50 to 100 basis points higher than in coastal markets. We upgrade and re-merchandise centers we acquire. This lowers the risk of our properties and creates income growth and value. Better going in yields plus better growth plus lower CapEx leads to superior returns. Importantly, our portfolio has performed well in up cycles and proven to be resilient in down cycles. This delivers more alpha and less beta to our shareholders. Throughout our 30-year history, having access to low cost of capital has been a key driver to our success. On July 19, 2021, we completed our underwritten initial public offering. issuing 19.5 million shares of stock at $28 per share, generating $547 million of gross proceeds. This capital gives us the strongest balance sheet in the strip center REIT space, with a debt to adjusted EBITDA ratio of 5.5 times. With this balance sheet capacity, we can add external growth to the internal growth we've generated year after year. The IPO is a major milestone for our company, but it is a beginning, and we remain focused, motivated, and committed to successfully executing our strategy. With that, I will now turn the call over to our CFO, John Caulfield. John?