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spk01: Good morning, and welcome to Phillips Edison and Company's Third Quarter 2021 Results Presentation. My name is Livia, 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 in Simultaneously webcast. The company's earnings release quarterly financial supplement and 10Q were issued yesterday, November 4th, after market closed. These documents and a replay of today's presentation can be accessed on the investor section of the Phillips Edison and Company website at phillipsedison.com. I would now like to turn the call over to Michael Kaler with Phillips Edison and Company. Sir, please proceed.
spk02: 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. During today's presentation, Jeff will provide a brief overview of Phillips Edison & Company, discuss our differentiated strategy, and touch on the highlights for the quarter. Devin will discuss our third quarter operational results, and John will review our third quarter financial results, our recent capital markets activity, and discuss our guidance. Lastly, Jeff will provide an update on our investment activity and provide closing comments. 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 on our website. With that, it is my pleasure to turn the call over to Jeff Edison, our Chief Executive Officer. Jeff?
spk04: Thank you, Michael, and good morning, everyone. Before we get into our results for the quarter, I'd like to provide a brief overview of Phillips Edison and speak to our differentiated strategy. PICA was founded in 1991 when we bought our first gross-ranker shopping center in Danville, Virginia. Over 30 years and multiple cycles later, we now operate a national platform of 289 properties. Our strategy has been focused and 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. We are one of the nation's largest owners and operators of neighborhood grocery-anchored shopping centers. As we speak today, you'll notice that we call our tenants our neighbors. We do this 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 this nomenclature reminds our team to treat our tenants like we would our neighbors. Our strategy is simple. We focus on owning shopping centers with the number one or two grocer in a market. Our centers have an omnichannel neighbor base where the grocer has delivery and buying online and picking up in the store are focus capabilities. Our centers have high exposure to neighbors selling necessity-based goods and services. And we focus on owning centers in trade areas with favorable demographics for our neighbors to be successful. Each of these components are critical to our strategy. When it comes to our centers, we believe that format drives results. It provides attractive internal growth. Our average center is 114,000 square feet, which is the smallest in the REIT shopping center universe and gives us a competitive advantage. Our smaller centers allow for better growth because we enjoy higher retention rates, higher leasing spreads, and overall positive leasing dynamics. Higher retention rates result in less downtime and lower TI costs. This leads to steady and consistent cash flow. We see retailer demand concentrated in smaller spaces, as approximately 70 percent of leasing activity in U.S. strip centers has been in spaces 2,500 square feet or less during 2021. Considering the average size of our inline neighbor is 2,200 square feet, we believe our centers are best positioned to meet retailer demand. Our smaller format centers with less exposure to secondary anchors require less CapEx than other retail real estate. Lower CapEx leads to higher AFFO. 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 stockholders. We target trade areas with demographics where our grocers and small stores can be successful. Our average population density and median household incomes mirror that of Kroger and Publix, our top two neighbors. We make money where our top neighbors make money. Our shopping centers provide necessity-based goods and services to the average American consumer. Our portfolio has been built one asset at a time. We purchased 280 centers for over $4.7 billion from 2012 to 2018. We selectively acquired assets that fit our focus strategy, and we continue this focus today. With our improved balance sheet resulting from the capital we raised during our IPO in July, our plan is to execute $1 billion of acquisitions net of dispositions over the next three years. Our goal is to achieve this by June 2024. This marks three years from our IPO. Our targeted acquisition strategy allows us to purchase properties at initial yields 50 to 100 basis points higher than in coastal markets. This external growth will complement our internal growth. Key drivers of our internal growth include growing rents through new and renewal leasing spreads, executing leases with annual fixed rent increases, leasing vacant space to neighbors, and executing redevelopment opportunities, which are primarily out-parcel developments. We bring an experienced in-house operating platform to the centers we acquire. Our team creates a better experience for both neighbors and their customers. This creates income growth and value. We believe our strategy has and will continue to generate superior risk-adjusted returns. Higher initial yields plus higher NOI growth plus lower CapEx leads to superior returns. Now turning to the results. The third quarter of 2021 reflected the strong execution of our differentiated strategy. The key components of our results for the third quarter are as follows. Our portfolio has fully recovered from COVID as rent collections and lease occupancy have both returned to pre-COVID levels. Our results for the quarter were robust. We enjoyed high neighbor retention, strong leasing spreads, and continued high demand for the retail space in our well-located small format centers. These dynamics drove strong financial results for the quarter. And third, we are capitalizing on investment opportunities that meet our external growth requirements, which is 8% unlevered IRRs. Our acquisition activity is trending ahead of our initial guidance. Our strong results for the year to date and the successful execution of our growth strategy have allowed us to raise our core FFO, same center NOI, and acquisitions guidance for 2021, which John will speak about shortly. Now, I would like to turn the call over to Devin, who will speak in more detail about our operating results for the quarter. Devin?
spk07: Thanks, Jeff, and good morning, everyone. The positive operating results that we enjoyed during the third quarter were the product of our differentiated strategy, our strong operating platform, and the positive overall leasing environment. At the end of the third quarter, lease portfolio occupancy totaled 95.6 percent, compared to 95.3 percent at September 30, 2020. Occupancy has returned to its highest level in four years. Anchor leased occupancy increased to 97.6%. And inline leased occupancy also increased to 91.9%. Our leased occupancy to economic occupancy spread expanded to 90 basis points for the quarter on strong leasing momentum. Our in-line occupancy is now 100 basis points above where we thought it would be at year-end 2021. We believe we can continue to increase our in-line occupancy and increase it to 93 to 94 percent over time, an additional 200 basis points of occupancy from where we currently stand. we were able to execute 140 new leases and 128 renewal leases. This activity totaled 1.4 million square feet of leasing activity. Comparable new lease spreads were 14.1 percent, and comparable renewal rent spreads were 8.9 percent. Our in-house leasing team has been busy executing new leases with neighbors including the UPS Store, Pearl Vision, AT&T, Panera, Humana, Sherwin-Williams, and Starbucks. Demand for our retail space is coming from both national neighbors looking to expand their footprints in our suburban markets, as well as local neighbors bringing their unique offerings to our centers. Additionally, our dedicated renewals team has been actively working with existing neighbors to keep them in our centers, and we enjoyed a retention rate of 91.2% for the quarter. This compares favorably to our year-to-date retention rate of 88.3%, as well as our 2017 to 2020 average retention rate of 87%. We believe that our tenant retention rate is market-leading. These solid retention rates are evidence that our retail space is a great place for our neighbors to successfully operate their businesses. I will now turn the call over to John for a discussion of our financial results, our recent capital markets activity, and guidance. John?
spk08: Thank you, Devin, and good morning, everyone. Collections for the third quarter totaled 99% of our monthly billings. Our portfolio has returned to pre-COVID collection levels, which historically were between 99 and 100%. Collections for the first and second quarter of 2021 increased to 98% and 99%, respectively. As of October 20th, 2021, our outstanding balance of missed billings was approximately $8 million. And of this figure, approximately half is to be collected under executed payment plans, and we're pursuing the remainder. We believe we are appropriately reserved against these uncollected amounts to ensure there's minimal impact to our results if any amounts remain uncollected. Third quarter 2021 may read FFO decreased 90 basis points to $56.9 million, or 46 cents per diluted share. The decrease was primarily driven by a $5 million increase in our earn-out liability. This liability will continue to fluctuate based on the value of our common stock and will be settled entirely in equity during the first quarter of 2022. The current estimate is a minimum of approximately 1.4 million units to be issued in January, with up to an additional 300,000 units, which would increase our total shares outstanding by approximately 1%. our third quarter core FFO increased 11.3% to $66.4 million. The increase in core FFO for the third quarter of 2021 was driven by improved collections and revenue at our properties and lower interest expense. On a per share basis, core FFO was unchanged at 54 cents per diluted share during the third quarter of 2021. Compared to 2020, Our core FFO per share results were negatively impacted by a 10% increase in our weighted average share count as a result of our IPO in July of this year. Our third quarter 2021 same center NOI increased to $89.1 million, up 8.7% from a year ago. This improvement was primarily driven by stronger collections compared to 2020 and a 4.2% increase in average base rent per square foot. we had out-of-period collections and reserve reversals of $1.8 million for the period, which were offset by our Q3 reserves. When comparing our third quarter results to the quarter ended September 30, 2019, our same-year NOI increased 4.3%, illustrating growth since before COVID-19. Notably, during the quarter, we closed our underwritten initial public offering. We issued 19.55 million shares of stock at $28 per share to the public, including the full exercise of the over-allotment option. The gross proceeds from the IPO were $547 million. Also during the quarter, we closed a new $980 million senior unsecured credit facility comprised of a $500 million revolving credit facility and two separate $240 million unsecured variable rate term loans. This new facility lowered our interest rate and extended our maturity profile. The IPO and new credit facility greatly improved the strength of our balance sheet, so that now we have one of the strongest balance sheets in our sector. As of September 30, 2021, our net debt to adjusted EBITDA was 5.4 times compared to 7.3 times at December 31, 2020. At September 30, 2021, our debt had a weighted average interest rate of 3.3% and a weighted average maturity of 4.2 years. Approximately 90% of our debt was fixed rate. As of September 30, we had approximately $604 million of total liquidity, comprised of $114 million of cash, tax equivalents, and restricted cash, plus $489 million of borrowing capacity available on our credit facility. Subsequent to the quarter end, we utilized our investment grade rating to complete our debut public debt offering. We upsized our offering of 10-year notes to $350 million with a coupon of 2.625%. These 10-year notes significantly extend our debt maturity profile beyond what was previously available to us prior to becoming a publicly traded company. while also diversifying our capital sources. Proceeds from the IPO and the public debt offering were used to pay down our 2022 and 2023 unsecured term loans. As a result, we have no significant debt maturities due until 2024. As Jeff mentioned, our strong results for the year and our optimism regarding the current environment have led us to raise our guidance. we're increasing our full-year 2021 core FFO guidance to a range of $2.14 to $2.18, and our same-center NOI guidance to a range of 6.5% to 7%. The implied guidance for core FFO per share for the fourth quarter reflects the increase in weighted average share count for the fourth quarter, which is different than it was for the third quarter and year-to-date due to the shares issued in our IPO. Additionally, we anticipate our fourth quarter will have approximately $2 million of higher costs related to timing variances in the year and higher incentive compensation, and approximately $1.5 million in higher interest costs from our bond issuance. We are also raising our acquisition and disposition guidance as we are trending ahead of our previous guidance. We are guiding the second half 2021 acquisition of between $200 to $270 million and second half 2021 disposition of between $95 million and $105 million. With that, I would like to turn the call back over to Jeff to expand our investment activity outlook for the remainder of 2021 and recap our long-term growth strategy. Jeff?
spk04: Thanks, John. From July 1, 2021 through today, we've acquired four properties totaling $139.4 million. Our acquisitions included Fox Ridge Plaza in Centennial, Colorado, a Denver suburb. This center is anchored by King Super, which is a Kroger banner. We bought Valrico Commons in Valrico, Florida, which is a Tampa suburb. This center is anchored by Publix. We purchased Pabst Farms in Oconomowoc, Wisconsin, a Milwaukee suburb. This center is anchored by Metro Market, a Kroger banner, and Fourth, we bought Arapahoe Marketplace in Greenwood Village, Colorado, which is a Denver suburb. This is anchored by Sprouts. Each of these centers is anchored by the number one or two grocer in the market. We believe these acquisitions will meet or exceed our internal unlevered IRR targets of 8%. Our acquisition pipeline remains deep for the fourth quarter of 2021 and into 2022. We currently have three gross-ranked centers under contract for approximately $130 million. We believe we can close between $61 million and $131 million of acquisitions between now and the end of the year. As we discussed on last quarter's call, we have identified 5,800 grocery-anchored shopping centers in the U.S. that fit our strategy. These centers are all anchored by the number one or two grocer in their respective markets, and they meet our demographic requirements. We are focused on the three-mile trade area around each center. We believe this strategy presents a wider and deeper pool of assets to choose from versus a strategy that is strictly focused on a limited number of coastal and gateway markets. To meet our stated goal of $1 billion of net acquisitions by June of 2024, we need to acquire approximately 15 assets per year, which is approximately 2% of the market. This assumes that 10% of the total market trades each year. We are well on our way to meeting our billion-dollar goal. To optimize our internal growth, we will continue to recycle assets. These proceeds will be deployed in higher quality, higher growth assets. From July 1, 2021 through November 3, 2021, we sold seven properties totaling $63 million. Before the end of the year, we expect to sell between $32 and $42 million worth of assets. Before we get to the Q&A section, I'd like to quickly recap our quarter. Our differentiated strategy produced strong operating results for the quarter, which exceeded our expectations. As a result, we have increased our guidance to align with our increased expectations. Collections and occupancy have both returned to pre-COVID levels. Continued high demand for our retail space drove strong internal growth for the quarter. And our acquisition pipeline presents meaningful external growth opportunities. We have the balance sheet to execute a billion dollars of net acquisitions by June of 2024. With that, we will begin the Q&A portion of our call. Operator?
spk01: Thank you. To maintain an efficient Q&A session, you may ask a question with an additional follow-up. If you have an additional question, you're more than welcome to rejoin the queue. To ask a question, you will need to press the star then the one key on your touch-tone telephone. Please stand by while we compile the Q&A roster. Now, first question coming from the lineup, Rich Hill with Morgan Stanley. Your line is open.
spk12: Hey, guys. Good morning. Congrats on another good quarter as a public company. That's two in a row. Keep it going. I wanted to just quickly talk about your acquisitions. It looks like you're buying a lot and selling a lot. Can you maybe talk about that optimization and what the right level is as you look forward? And as you think about that, maybe any updates on cap rates? And I won't have any follow-ups to that, but if you can just walk us through that, that would be helpful. Great.
spk04: Thanks, Rich. This is Jeff. Yeah, it's been a pretty interesting acquisition market. What we found, I think, at this point is that our strategy of not being concentrated in five or six markets that we can buy in has given us a bigger platform to look at. What we're finding is I think we're able to find inefficiencies in the market where we can buy properties at that 50, 100 basis point, better starting point, and that unlevered IRR of eight in this market. It is gotten more competitive, and we are – continuing to try and be very disciplined about what we're buying and making sure that we can get to those types of returns. But we have a real strong track record of buying properties over a long period of time. And we were a little bit out of the market from a volume standpoint for three years prior to the IPO. And we're back in that market with the relationships we've had for a long time. And I think that's helped us to be able to get back into realizing our goals and hopefully being able to meet our billion dollars of acquisitions over three years, which at this point, we're very optimistic about. And on the disposition side, I think as we talked about in the IPO, Our strategy is always to be looking at your portfolio and analyzing both the risk and the returns that you're getting on every property and to selectively prune those assets where you think you can get a better, you can use that capital to buy other assets that have lower risk and higher return. It's really that simple. It's a lot, you know, on the ground, it's a really difficult analysis to be doing on a constant basis, but it is part of our process. And as I think we said in the IPO, we'll do somewhere between 75 and 125 million of dispositions, and our billion dollars is a net number. That's what we, so we anticipate, when I say net, we will buy a billion plus whatever we dispose of in that process.
spk00: But it is a
spk04: It's an important part of our business and something that we think is a place where we can, you know, in our portfolio management can truly add a lot of value and hopefully be able to continue to have, you know, outperformance in the market by being able to put the right properties and to continuously, you know, reduce our risk and increase our returns.
spk12: Got it. And just a quick comment on cap rates. Are you seeing any cap rate compression in your markets? Some of your peers have, and I'm just wondering if your differentiated approach leads you to maybe not face as many competitive pressures.
spk04: Well, I would say that there's definitely cap rate compression. Our cap rate compression is probably from, you know, 6.5% down to 6% versus, you know, 5.5% down to 4.5%. And, you know, we are, you know, I would say that in our market today, the stuff that we have purchased is, you know, it's going to be in that five and three quarters to six and a quarter cap rate. But as we've talked about it, it probably bored you to tears with, you know, that's not really our focus. Our focus is on making sure we can get an 8% unlevered IRR in every property we buy and hopefully, you know, well above that. So, But that usually translates into that range. And I would anticipate going forward that we're not seeing incremental pressure and we are seeing more product coming on the market, but it is a competitive market today.
spk12: Thanks, guys. Congrats again.
spk04: Thank you.
spk01: Our next question coming from the lineup, Caitlin Burrows with Goldman Sachs. Your line is open.
spk06: Hi, good morning, everyone. We've heard some peers mention that move-outs this year have been lower than normal, and you also reported the tenant retention of 91% in the quarter. So I was wondering if you could go through what you think high retention means for pricing power and rent growth. It seems like high retention would be a positive, but renewal spreads tend to be less. So just wondering how you're thinking of high retention and the impact of it.
spk04: Thanks, Caitlin.
spk07: Deb, you want to take that one? Sure. Good morning, Caitlin. Caitlin, the way we view the high retention is, first of all, you have to look at the macro retail environment, which, as you know, retail sales in the third quarter are up 15%. So, retailers are doing extremely well. And retail vacancy across the U.S. today is now at a 10-year low at less than 6%. And new development is at a 10-year low as well. So, The macro overlay is extremely positive, and that's what's driving these high retention rates. Our existing tenants are staying longer at attractive spreads. Now, as we noted, our in-line occupancy right now is almost 92 percent. We think we can take that up another 200 basis points over the moderate time frame. And what we believe that will allow us to do is to push harder on rents because we clearly have the demand coming from tenants to stay in our centers. And therefore, we think we're going to be able to continue to push releasing spreads. Now, a releasing spread at almost 9 percent is actually a pretty solid number relative to historical levels. But we believe that in the short term here, given the current environment, that we'll be able to see very attractive releasing spreads, and given the fact that our occupancy is where it's at.
spk06: Got it. Okay. And then maybe following up on a point that Jeff made earlier, we've heard before that net effective rent growth in shopping centers may be limited due to the CapEx needs. But, Jeff, you mentioned how your portfolio has less exposure to the secondary anchors. So I was wondering, following up on the previous question also, what the view is on net effective rent growth for the Phillips Edison portfolio?
spk04: Well, one of our thesis and things that we have believed in for a long time is that our smaller format stores take less capital to be able to renew the leases, and bring in new neighbors into our centers. And that has been one of our core thesis. John, do you want to go through sort of the economics of sort of what we've seen there?
spk07: Hey, Jeff, before John dives into the detail there, Caitlin, this is one place where high retention is an obvious strength because with high retention, you have less downtime and meaningfully less capex. And as you know from the IPO, and as Jeff just mentioned, our strategy on average over time has required meaningfully less CapEx than others in our industry because we have less exposure to that D-Box tenant. So that high retention rate is a real positive in terms of driving net effective rents because of the fact that we enjoy putting less capital back into the center.
spk08: So, hey, Caitlin, this is John. Actually, Devin, that was the part I was going to add, which is absolutely high retention rates mean lower capital and better cash flow. You know, as we look at our leasing, both this quarter, what we've seen this year, and kind of as we look forward, you know, the capital is really pretty consistent with what we've spent on a historical basis. And to the extent it is a little higher, maybe it's because of you know, inflation or what have you, but we're pushing the rents as well as you're seeing. So we're not seeing that diminishment in the net effectives. The one thing is that as we are, as Devin has spoken to in the past, as we attract the larger national neighbors that, you know, are much more, you know, paying higher rents and things, so capital might move a little bit with that, but those are much longer leases that help us on a net effective basis.
spk06: Great. Thanks for that detail.
spk01: Now, next question coming from the line of Craig Smith with Bank of America. Your line is open.
spk03: Thank you. I was wondering, are you guys seeing a similar increase in leasing volumes on the essential retailers as compared to, let's say, the more discretionary retailers?
spk07: Hey, Craig, I'll take that, and then John.
spk04: Go ahead.
spk07: Go ahead, Deb. Craig, as you know, Our business model is focused on essential retail, and almost 75% of our tenants today are what we categorize as necessity retail. And as we look at our leasing pipeline, Craig, the percentage of leases that are coming from necessity retailers is increasing. So we believe over time the percentage of our tenancy or neighbors that is coming from necessity retail will continue to increase.
spk03: That's very positive. Thank you. And then just on the acquisition market, I know you cited it's more competitive. Is it more competitive because there are more people entering the market, or are those people in the market just showing greater appetite?
spk04: That's a great question. I think it's a couple things, Greg, from my perspective. I don't think we have, like, an outsized demand today. I think we're just – I think we're experiencing the gradual increase in volume of things for sale. I think there's – you know, we know during the pandemic that there was really very little transactional volume in the grocery and shopping center business. And that is coming back. And I think the buyers came back before the sellers. And we're in that transition where we're seeing more sellers come to market. But that, as you know, it takes time. the buyers are there and the sellers are slowly getting there. And obviously, the more aggressive pricing is attracting more sellers to come into the market. I mean, over a long history, I don't think there's an excess demand, outsized demand. It's just outsized for the amount of supply that's on the market today. And I think that's what's making the cap rates more more aggressive. And obviously, you know, we are getting some buyers that are transferring out of the, you know, the apartment business and industrial where, you know, they just can't get yields anymore. And so some of them have, you know, instantly become a grocery or shopping center experts. But that is, you know, we are seeing some transformation there. And that would be sort of the excess demand side, if there is any. It's the... Traditionally, apartment and industrial guys coming into the grocery and shopping center side.
spk03: Great. Thank you.
spk04: Yeah. Thanks, Greg.
spk01: Our next question coming from the line of Todd Thomas with KeyBank Capital. Your line is open.
spk11: Hi. Thanks. Good morning. Good morning. So Jeff or Devin, maybe, you indicated that cap rates in the portfolio have decreased or in your markets for acquisitions have decreased maybe 50 or 75 basis points. Is that 8% unlevered IRR target moving around at all? Has that changed at all? And have you changed your NOI growth forecast for new acquisitions that you're underwriting? And then I'd also be curious, how's the NOI growth profile going? of what you're buying relative to the NOI growth potential for the balance of the portfolio.
spk04: Great, great question. In terms of the change in the unlevered IRR, we do not understand some of the pricing that's gone on and so on, on sort of the extreme side in the business where there, where, where we, we believe that, that our underwriting would be well below our eight. I mean, it would be, could be in the six to six and a half percent range. So that, that part of the market where there has been some really aggressive pricing, um, you know, that, that, that stuff we can't, you know, we can't buy, um, because it does not meet our 8%, uh, requirement. Um, but, There are some transactions that we believe have priced in that range and some that probably will on a go-forward basis with people who have, I guess, a lower cost of capital than what we believe we do. So, you know, I would say that that's the – That pricing is a little surprising to us. But for our underwriting, we're still finding the properties that we like and that meet our criteria that are meeting that 8%. So we have not had to deviate from that, nor have we had to make any kind of underwriting assumptions that would be a lot more aggressive than what we have had historically. Okay. Now, the CAGR is the way we look at it for the properties. We are still buying 3% to 4% growth properties to get to the kind of numbers that we – to get to that 8% unlevered IRR. So that's sort of how we're thinking about it. I don't know, Devin, if you have any additional thoughts.
spk07: Todd, the only thing I would add to what Jeff just said is that we are not moving off the aid unlevered. And as we look at what we've closed year-to-date and what's in our pipeline, we are underwriting to yields in that range. And historically, as we back-tested our results, we typically outperformed our underwriting in actuality And, you know, so we're confident we can continue to, you know, hit that 8 on levered. And as Jeff mentioned, you know, we're underwriting same-store NOI growth that's been comparable to what we've been able to achieve historically, which is circa 4 percent. So, and in the short term, we believe we're going to see higher same-store NOI growth because, as we mentioned earlier in this call, You know, the leasing environment is such that in the short term, on near-term rollover, you're able to get much better same-store NOI growth in the short term than that 4%. But then over a seven-year period, it begins to regress to the mean.
spk11: Okay, that's great. That's helpful. Is the 75 to 125 million of dispositions, is that an annual number, or is that what you expect to sell during – the three-year period through June 24 to pair against acquisitions?
spk04: Well, we haven't really looked out way beyond the three-year. As you know, we're getting started in this listed market business. But I would assume for the three-year period of time that that's a pretty – that's a solid estimate and again the billion is a net number so we're going to buy if we sell 100 million a year we're going to buy 1.3 billion of assets over that time frame so that is our and if that disposition goes up we will increase our billion three number to whatever that increase if it goes down we would probably reduce that so Again, as you know, we're very strong believers in portfolio management and making sure that you're looking at your properties on a return basis over a timeframe, and you're really trying to manage the risk and the return over time on your disposition strategy. When you have 300 properties, as we do, you've got You've got a lot of properties to make sure that you're consistently managing those to the best return. And I believe that that's a big challenge. But you've got to have – if you're in our business, you've got to have a disposition strategy. that allows you to do that, or you'll find that, you know, you're staying in properties that are very flat without, you know, much growth, and that's, you know, that will, you know, certainly dampen the long-term growth of the company.
spk11: Okay. And then on the guidance, John, you know, I appreciate the – the color, you know, on the bridge to the implied guidance for the fourth quarter. You know, I was just wondering, though, you know, maybe a little more detail. It looks like the additional costs for G&A that you mentioned, the higher interest costs, the $1.8 million of reserve reversals, you know, that's sort of, I guess, about $0.04 to $0.05. Can you just, you know, sort of walk through some of the other drivers in that $0.11? sequential decrease from 54 to, you know, I guess 43 at the midpoint, that would be helpful.
spk08: Sure. So I think a big piece that as we look at both the third quarter, fourth quarter, and going forward is the impact of the share from the IPO that was issued. And so our estimate is that's approximately five cents when you look at just rolling from Q3 to Q4. And so I mentioned what that would be. So we have approximately 126 million, you know, shares outstanding. So that's a portion of it. And then I think in the prepared marks I talked about, we do have the, you know, kind of out-of-period impact on the third quarter that, you know, We're certainly collecting, and there may be something, but we're not expecting it to that volume for the fourth quarter, so there's $2 million there. The G&A piece, we talked about in our IPO, the biggest cost change for us is actually the D&O insurance that was going to go up, and because of other pieces that we moved, we actually had sequential decrease in G&A. So the $2 million of costs that we're highlighting in the fourth quarter is not something that I would say gets annualized. It's more kind of timing, as I had remarked. And then the interest from our bond issuance is impactful as well and very important to us. We were super pleased with that execution and look forward to going into that market again in the future. But that is pushing out our debt term, but at a slightly higher cost than what we paid off.
spk11: Okay, great. All right, that's helpful. Thank you. Thanks, Devin.
spk01: Our next question coming from the lineup, Tammy Fitt with Wells Fargo. Your line is open.
spk05: Thank you. Good morning. I'm just curious on the new leasing demand. Is that still largely local tenants, or are you seeing an increased number of regional and national tenants leasing your in-line space?
spk07: Yep. Tammy, good morning. It's Devin. So, we're seeing strong demand coming from both nationals and locals. If you look at our nationals, I mean, our national accounts team is in meaningful dialogue with national tenants across the board, names like Starbucks, Chipotle, Ubreak, iFix, Great Clips, UPF, Humana, et cetera. And to show you the increased demand coming from national tenants in 2020, we signed 87 deals with national tenants. Year-to-date 2021, we've signed over 100, 102 to be exact. And if we extrapolate for the full year, we think we'll actually sign 125. So that's a 40% increase in terms of deals. If you translate that into square footage, in 19 and 20, we signed approximately 300,000 square feet of nationals. This year, year to date, we're already over 400,000, and we think that that number will get to a half a million square feet. So, again, a meaningful increase in the demand coming from the nationals. So it's a combination of both. You'll note that in the supplemental breakdown between the categories, but the nationals are looking to take advantage of some of these macro trends in the environment, you know, which is suburbanization, the southeast, work from home, et cetera. All of those macro trends are portfolio benefits from, and you're seeing the results in the kind of demand that we're getting both from the nationals and the locals.
spk05: Great. Thank you. And then maybe as a follow-up discussion on the recent, on the rent discussion, apologies, what are you getting today in terms of rent bumps for your new leases?
spk07: You're saying built-in CAGR, Tammy? Is that the question?
spk05: Yes, that's the question.
spk07: Yeah, so we're targeting CAGRs between 2% and 3%. In the third quarter, the CAGR was 2.6%, which was 2.3% on new leases and 3% on renewals. And we were able to affect that on 90% of the leases. So we're getting built in, you know, the average CAGR on the leases signed in the quarter was 2.6%.
spk05: Okay, great. Thank you. And then maybe last question for John. Where do you see your cash balance and credit facility balance at year end?
spk08: Sure. Thanks, Tammy. You know, we will have, my estimate is a little over $100 million of tax bill based on, you know, kind of puts and takes is where our forecast is. So, you know, with the acquisition plans that we have, you know, that could swing depending on the guidance numbers that we're providing. So, you know, from an acquisition standpoint, if we find the right opportunity, you know, we've got that plus a completely unused revolver that will give us the capacity to execute those plans.
spk05: Great. Thank you.
spk01: Our next question coming from the lineup, and they'll say just with Missoula Security. You want to self in?
spk10: Hey, guys. Good morning.
spk04: Hey, Jeff.
spk10: So first question, how much APR is tied to the 90 bps of the spread between leased and physical occupancy? When is that going to hit? Is that more of a 2022 event? And how should we think about that spread overall in the near term?
spk08: John, do you want to take that? Sure, I'll take that. So in our – we actually added a new page to our supplement this quarter that And so if we look at that, we actually have now an ABR from leases signed but not yet rent-paying, and that's, as of September 30th, is about $1.1 million. And so that, my estimate would be, you know, you might get a little bit in the fourth quarter here, but I think that's really going to come online, you know, ratably and be more impactful relative to the $22 million.
spk10: And the spread overall near term, that 90 vips is something we should expect.
spk08: Oh, sorry about that. You know, I think that it's the strength of what we've seen from a velocity standpoint. I would think that, you know, with our neighbors coming online, I would think that that might get back to 60, but, you know, the leasing velocity continues and we continue to raise occupancy. So, you know, we view that as opportunity, but I would expect that, you know, as we get into next year, that would probably compress back to the 60 that we've had on a historical basis.
spk10: Got it. Thanks. Thanks. So I guess a question on just your cost of capital funding. You guys have had a nice run since your IPO. I'm wondering if you're – and I guess you've laid out, you know, acquisition outlooks the next several years, dispositions funding, a good portion of that. But I'm wondering if your improved cost of capital is causing maybe – not a rethink, but maybe an evolution on how you're thinking about sourcing some of that growth, if equity is now perhaps more on the forefront of your mind, given the improved cost of capital you have?
spk04: You know, it's a great question. I will tell you, we are laser-focused on meeting our growth plans, both internal and external. We've got a balance sheet right now that I think is market-leading, if not certainly in the top percentile. And so, you know, when the time comes, we certainly will be looking at that. But for right now, we are, you know, really laser focused on making sure that we get, you know, we meet our acquisition goals, we meet our leasing and occupancy goals and the rent spreads that we think we can get in this market. So we are not, you know, I can't say we don't look at it, but beyond that, you know, we're really focused on executing the strategy and getting it, you know, getting it worked. And hopefully at the time where, you know, we get to, you know, we've got a billion dollars more assets, whether that's, you know, maybe it'll be a shorter time than three years. But, you know, right now that's our plan and to stay focused on that.
spk07: Yeah, Handel, I would just... despite the strong performance that the stock's had since IPO, we still believe the stock's trading below NAB. And our balance sheet allows us to make the acquisition targets that we've articulated because, in addition to the balance sheet, we do generate a fair amount of free cash flow on an annual basis between our balance sheet capacity, the free cash flow we're generating, and our... and our sales proceeds, we can acquire the billion dollars of assets without having to tap the equity market. And in addition to being disciplined on all our other metrics, we're also going to be disciplined on when we issue equity. And, you know, until our shares are trading more in line with NAV, it's, you know, we will be very disciplined in terms of issuing equity.
spk10: Got it. Got to appreciate those comments, Devin. So one more if I could. I think, Jeff, you mentioned there are 58 centers that you guys have underwritten that meet your investment criteria from, I guess, a market selection, gross repositioning perspective. I'm curious, are all 58 still meeting your 8% IRR hurdles today? And how that list, I don't know if you mentioned if that's changed at all over the last, you know, three, six months, but maybe the composition or number of that list, if that's changed at all. Thanks.
spk04: Yeah, great question. Unfortunately, we don't have information on the 5800 until they come to market or we have a conversation with them. So we don't have underwritten models on them in terms of the 8%. So once they come onto the market, you know, they fit into our plan, and they fit into our plan, you know, that's when we're able to actually get the information to be able to fully underwrite them and to see if they can meet it. And obviously, at a price, they always meet it. But that also is, you know, obviously going to be a big driver in terms of how we, you know, how many of those 58 are actually being traded at prices that allow you to get your 8% on levered IRR. Got it. Okay. Thank you, guys. Yeah. Okay. Thanks, Adep.
spk01: Our next question coming from the line of Hong Zhang with J.P. Morgan. Your line is open.
spk09: Yeah, hey, guys. I guess you talked about potentially growing small shop occupancy by another 100 to 200 basis points. Over what timeframe do you think you can achieve that and what kind of an earnings impact would that be?
spk07: So the timeframe in which we believe we can accomplish that is over the next two to three years. But as I, in my remarks, you know, we're already 100 basis points ahead of where we thought we would be. So we continue to outperform our expectations. So as of today, we're saying two to three years in terms of timing. And then the impact would be, you know, we'll be able to pick up, you know, another 2% of occupancy which we would believe would take the revenue coming from our in-line tenants up from where it is today to north of 2% because those leases will be signed at higher levels than the portfolio average today.
spk09: Got it. And I guess you've touched on cap rate compression a lot on this call, but as you're looking at new deals, have you found yourself, for lack of better words, having to throw out more deals than you have in the past because of this?
spk04: I would say that more deals do not meet our 8% return or 8% IRR hurdle today than before. The answer is absolutely yes. It's obviously harder for us to get where we need to be at more aggressive cap rates, but the Fortunately, we're still able to find the right properties, we hope, that will meet that and get them under contract and bought. So we'll hopefully be able to continue that. Thank you. Yep. Thanks.
spk01: I'm showing up for the questions. This concludes our question and answer session. I would now like to turn it back to Mr. Edison for some closing comments.
spk04: Well, thanks, everybody, for being on the call today. You know, on behalf of the entire management team, I want to express our appreciation for your continued support, and particularly the support we've received from our stockholders, our associates, our agents, and, importantly, our neighbors. And we believe the best is yet to come for PECO, and we're excited about what lies ahead of us. So we look forward to updating you again in the not-too-distant future. Have a great day, everybody.
spk01: Ladies and gentlemen, that's all from God Conference for today. Thank you for your participation. You may now disconnect.
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