Phillips Edison & Company, Inc.

Good day and welcome to Phillips Edison and Company's third quarter 2020 for earnings call. Please note that this call is being recorded. I will now turn the call over to Kimberly Greene, head of investor relations. Kimberly, you may begin. Thank you, operator.

I'm joined on this call by our chairman and chief executive officer, Jeff Edison, President Bob Myers, and 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 Once we conclude our prepared remarks, we will open the call to Q&A. After today's call, an archived version will be published on our website. As a reminder, today's discussion may contain forward-looking statements about the company's view 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 your SEC filing. specifically in our most recent Form 10-K and 10-Q. In our discussion today, we'll 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 have been posted 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? Thank you, Kim, and thank you, everyone, for joining us today. The PICO team delivered another solid quarter of growth, with same center NOI increasing by 3.2 percent, NAERI FFO per share growth increased 9.1 percent, and core FFO per share growth increased 6.9 percent. The ongoing strength of our performance is attributable to our differentiated and focused strategy. PICO owns right-sized, high-quality, grocery-anchored neighborhood shopping centers. These centers are anchored by the number one or two grocer by sales in the markets. Our results are generated at the property level. They are driven by our integrated operating platform and our exceptional, locally smart, and cycle-tested team. The entire PICO team continues to drive significant value at the property level. You can see that reflected in our sector-leading operating metrics. The experience and talent on Pico's team is significant. We have experts in every aspect of the grocery anchored real estate industry. We remain committed to successfully executing our growth strategy to deliver long term value to our shareholders. Our high quality portfolio anchored by top grocers in favorable suburban markets provides a long term, steady earnings growth profile. We believe Pico is well positioned to continue to grow and provide market leading returns. PICO has delivered on our core strategy for over 30 years. We have developed a seasoned team that has been together for a long time. Our team is highly engaged, highly focused, and deep. PICO is a growth company. We have consistently delivered on both internal and external growth. We are well positioned to take advantage of growth opportunities. We're acquiring high quality centers with the capacity to buy more. As Bob will highlight in a moment, we are a best in class operator. In addition, we are prudent with our balance sheet management. We have strong liquidity and no meaningful maturities until 2027. We believe these factors will drive solid earnings growth in 2025 and beyond. Year to date, we acquired nine shopping centers and several land parcels for a total of $211 million. We continue to find attractive acquisition opportunities. Activity in the fourth quarter remains strong. Given the current environment, we are updating our acquisitions guidance to $275 to $325 million of debt acquisitions for the year. We continue to have the capabilities and leverage capacity to acquire more as attractive opportunities materialize. Moving to the Kroger Albertsons merger, the market still gives the merger a low probability of occurring. If the merger does not occur, our Albertsons anchored centers will continue the strong performance they have produced to date. Should the merger close, our remaining Albertsons stores would be operated by Kroger, which reinvests regularly in their stores and produces higher sales volumes on average. This would have a positive impact on our portfolio. I'll now turn the call over to Bob to provide more color on the operating environment. Bob? Thank you, Jeff.

Good afternoon, everyone, and thank you for joining us. We had another quarter of strong operating results and leasing momentum. We continue to see high retailer demand with no current signs of slowing down. PECOS leasing team continues to convert retailer demand into high occupancy with higher rents at our centers. Portfolio occupancy remained high and ended the quarter at 97.8% leased, a sequential increase of 30 basis points. Anchor occupancy of 99.4% increased 60 basis points sequentially as we executed eight anchor leases. Inline occupancy ended the quarter at 95%. New neighbors added in the third quarter included quick service restaurants such as Jersey Mike's, Dunkin' Donuts, and Tropical Smoothie, along with several med tail uses health and beauty retailers and other necessity-based goods and services in terms of new lease activity we continue to have success in driving higher rents comparable new rent spreads for the third quarter were 55 percent our inline new rent spreads remain strong at 28.3 percent in the quarter as it relates to bad debt in the third quarter we actively monitor the health of our neighbors We are not concerned about bad debt in the near term, particularly given the strong retailer demand, and we don't have any meaningful concentrations. From an operations standpoint, we have always taken an aggressive stance to get spaces back. In today's environment, the PICO team is taking an even more aggressive stance on opportunities where we can get higher rent spreads and improve the merchandising at the center. According to Placer AI, Pico's suburban markets offer retailers several advantages in today's environment. Chipotle, Chick-fil-A, Wingstop, and Jersey Mike's are some examples of retailers that have been focusing on suburban markets for the expansion. National retailers continue to raise their long-term store targets in our markets because these locations have proven to deliver the same or better store-level economics as traditional locations. In addition, retailers are increasingly looking to open smaller-sized locations in spaces between 2,000 and 3,000 square feet. PECOS small shop average lease size has remained consistent at 2,300 square feet. For over 30 years, we have excelled in leasing this small shop format, and we continue to see strong demand for these spaces. We continue to capitalize on strong renewal demand and are making the most of the opportunity to improve lease language at renewal and drive rents higher. In the third quarter, we achieved a 19.8% increase in comparable renewal rent spreads. Our inline renewal spreads remained high at 19.6% in the quarter. These increases in spreads reflect the continued strength of the leasing and retention environment. We expect new and renewal spreads to continue to be strong throughout the balance of this year and into the foreseeable future. Our neighbor retention remained high at 92% while growing rents at attractive rates. Higher retention means less downtime and lower TI spend. In the third quarter, we spent only 73 cents per square foot on tenant improvements for renewals. We also remain successful at driving higher contractual rent increases. Our new and renewal inline leases executed in the quarter had average annual contractual rent bumps of 2% and 3%, respectively, another important contributor to our long-term growth. The leasing spreads that we are achieving and the strength of our leasing pipeline are clear evidence of the continued high demand for space in our grocery-anchored neighborhood shopping centers. PECOS pricing power is a reflection of the strength of our focus strategy and the quality of our portfolio. Today, we believe the consumer remains resilient. Our grocers continue to drive strong, reoccurring foot traffic to our centers. Consumers continue to visit grocery stores 1.6 times per week. There are approximately 30,000 average trips per week to each PECOS center. This equates to nearly 500 million total trips to PECOS centers in total during the last 12 months. Strong foot traffic benefits inline neighbor sales and enhances our ability to drive rents higher. PICO's three-mile trade area demographics include an average population of 67,000 people and an average median household income of 87,000, which is 12% higher than the U.S. median. These demographics are in line with the store demographics of Kroger and Publix, which are PICO's top two neighbors. Our centers are situated in trade areas where our top grocers are profitable and our neighbors are successful. The necessity-based focus on our properties is important when demographics are considered. If you are comparing a Publix to an Apple store or high-end fashion, the demographics that each retailer needs to be successful are very different. 70% of our rent comes from necessity-based goods and services, and our demographics are very strong in supporting our neighbors. ECO continues to benefit from a number of positive macroeconomic trends that create strong tailwinds and drive robust neighbor demand. These trends include a resilient consumer, hybrid work, migration to the Sun Belt, population shifts that favor suburban neighborhoods, and the importance of physical locations and last mile delivery. Leasing demand continues to be at historically high levels for our inline spaces. as these macro tailwinds have retailers more focused on having stores in our centers. The impact of these demand factors is further amplified due to limited new supply over the last 10 years, and going forward, given that current economic returns do not justify new construction of shopping centers. In addition to our strong rental growth trends, we continue to expand our pipeline of ground-up out parcel development and repositioning projects. Year to date, through the third quarter, we stabilized 10 projects and delivered over 274,000 square feet of space to our neighbors. These 10 projects add incremental NOI of approximately 4.2 million annually. They provide superior risk-adjusted returns and have a meaningful impact on a long-term NOI growth. We continue to expect to invest 40 to 50 million annually in ground-up development and repositioning opportunities with weighted average cash on cash yields between 9 and 12%. This activity remains a great use of free cash flow and produces attractive returns with less risk. Our team continues to stay focused on growing this pipeline as returns are accretive to the portfolio. The overall demand environment, the stability of our centers, the strength of our grocers, the health of our inline neighbors, and the capabilities of our team give us confidence in our ability to continue to deliver solid operating results. I will now turn the call over to John. John?

Thank you, Bob, and good morning and good afternoon, everyone. I'll start by addressing third quarter results, then provide an update on the balance sheet, and finally, speak to our updated 2024 guidance. Third quarter 2024 NAREIT FFO increased 12.5% to $81.6 million, or $0.60 per diluted share, driven by an increase in rental income from our strong property operations. This quarter was impacted by the write-off of approximately $1.2 million in deferred financing costs related to debt extinguished by our bond offerings this year, which is just under a penny. Third quarter core FSO increased 9.6% to $84.4 million, or $0.62 per diluted share, driven by increased revenue at our properties from higher occupancy levels and strong leasing spreads, partially offset by the higher interest expense. Our same-center NOI growth in the quarter was 3.2%, driven by rental income growth of 4.5% year-over-year, partially offset by lower tenant recovery income and higher property level expenses. Turning to the balance sheet, we have approximately $752 million of liquidity to support our acquisition plans and no meaningful maturities until 2027. Our net debt to adjusted EBITDA remained at 5.1 times. Our debt had a weighted average interest rate of 4.4% and a weighted average maturity of six years when including all extension options. In September, PICO completed a public debt offering of $350 million out of 4.95% senior notes due 2035. Proceeds were used to replenish the liquidity on our line and repay term loans that were due in 2025 and 26. As of September 30th, 2024, 93% of PICO's total debt was fixed rate, which is near our target range of 90%. We expect PICO's fixed rate to be at approximately 90% at year end. FICO continues to have one of the best balance sheets in the sector, which has us well positioned for continued external growth. Turning to our guidance for 2024, we have updated the net income per share range to $0.48 to $0.50. We've updated our guidance for NAREIT FFO to a range of $2.35 to $2.39 per share. This reflects 5.3% growth over 2023 at the midpoint. The updated range was primarily due to the write-off of deferred financing costs related to debt extinguished in connection with our two 10-year bond offerings this year. We've updated our guidance for core FFO to a range of $2.40 to $2.44, increasing the midpoint by a penny. This reflects 3.4% growth over 2023 at the midpoint. In addition, we have reaffirmed the midpoint and narrowed our range for same center NOI growth given the continued strong operating environment. Included in our guidance is the negative impact of uncollectible reserves. We are affirming the range previously provided given the continued strong health of our neighbors. However, we will likely be at the high end of the range for the year. We currently have several acquisitions in our pipeline either under contract or in contract negotiation. This activity allows us to increase our acquisition guidance for the year, as Jeff mentioned earlier. Looking beyond 2024, we believe our internal and external growth opportunities give us a long-term growth outlook in the mid to high single digits for core FFO per share. We expect a comparable or faster growth rate for AFFO because there should be less tenant improvement dollars invested as we continue to increase same center occupancy. I'd like to mention that PICA will be hosting a virtual business update on Thursday, December 19th. We plan to provide an update on the business and our preliminary outlook for 2025. Please save the date, and additional details will be shared by our investor relations team in the coming weeks. With that, we will open the line for questions. Operator?

Thank you. To ask a question, please press star one on your telephone keypad. And if you would like to withdraw that question, again, press star one. We also ask that you limit yourself to one question and one follow-up. Your first question comes from the line of Jeff Spector with Bank of America. Please go ahead.

Great. Good afternoon. Thank you. I guess if I could focus my question follow-up on the transaction market. First, I guess, can you talk about the acquisitions that you made during the quarter, the strategy? I see the occupancy is lower than your occupancy.

Sure, Jeff. Thank you for the question. I'll take the first part about the market, and then, Bob, maybe you can talk a little bit about the specific properties that we did buy. So, you know, the market – I think very similar to what we talked about after the second quarter, which is there was more product on the market, but also more buyers. We found that we did find some, we think, great opportunities in the market. So we're excited about the stuff that we were able to buy. But we think that that's a trend that will continue. You know, as retail has taken on a much more positive look in investors' eyes, there are new entrants who have come into the market on the buying side. And, you know, we anticipate that will continue. But we also are seeing a lot more product in the market, which is allowing us to find some great opportunities to buy. Bob, do you want to talk a little bit about the specifics of the assets that we want?

Yeah, absolutely. Thanks, Jeff. So we acquired six properties in the third quarter, and three of those properties were anchored by King Soopers, Peaks, and Big Y. You mentioned the occupancy being a little bit lower. I think the Big Y deal was 91%, and then Peaks was 96.6%, and then Colorado Springs at 90%. What I liked about the quality of the assets, not only are they solving for above a 9% unlevered return, they also provided some development opportunity. And I think about the property Ridgeview Marketplace, there's a pad out there that we're already working with several national retailers for either a ground lease scenario or a build-to-suit. Last year, as an example, in the fourth quarter, we acquired eight assets that had a blended occupancy of around 84%. So as we're building out the portfolio, part of our acquisition strategy is to find some great properties that are anchored by the number one, number two grocer and continue to give us upside and strong NOI growth year over year. We also acquired three out parcels, which are adjacent to our Publix locations where our national account team has done a great job of identifying properties potential new retailers for those sites. So always looking for some of those development opportunities as well.

Great. Thank you. Very helpful. And actually, Jeff answered my, I was going to have a follow-up on the transactions. Maybe if I could then turn my follow-up to the restaurant category. I know there's a lot of subcategories within restaurants. You talked about a number of, you know, restaurant retailers joining the portfolio. I guess It seems like there's some mixed things on restaurants in different parts of the country. Any views you could share on restaurants and how you're thinking about the various categories? Thank you.

I'll take a little, and Bob, you jump in as well. The restaurant business has obviously, as you point out, multiple segments to it, and What we have found is the formal sit-down restaurants have been more volatile than the quick service, and we're seeing that in our portfolio as well. The majority of our restaurants are quick service and have continued to perform well throughout cycles, and we're certainly seeing strong appetite for new locations from those quick service restaurants. we don't see anything really slowing down there. And we certainly, we're not seeing anything, particularly from the visitations and sales that would indicate that there was a slowdown on the quick service restaurant side. Any additions to that, Bob?

The only thing I would add is, you know, I was down in Atlanta at the Southeast Conference meeting with retailers and I mean, the Starbucks, the Chipotle's, the Wingstop's, they're all very, very busy. Dave's Hot Chicken, Swig, First Watch, Cava. We just have a long list of fast casual concepts that are looking to secure sites in 25, 26, and 27. So I'm not seeing a slowdown in the fast casual aspect. It is the biggest part of our leasing pipeline as I look out. So it's still very strong. So I'm encouraged by the activity that exists and what we'll continue to see.

Great. Thank you. Thanks, Jeff.

Your next question comes from the line of Caitlin Burrows with Goldman Sachs. Please go ahead.

Hi, everyone. Maybe we'll just start on the bad debt side. I know that that metric for PICO is very low versus other REITs. John, you mentioned that it could come in at the high end, which is what you've been saying all year. So is not something new. I know in the first quarter it came up a lot and you pointed out then and now how PICO is being deliberate with tenants that are behind on rent. So I was wondering if you could give some more detail on what this means for PICO and how it plays out. Like, for example, those tenants that impacted the 1Q bad debt, how they ended up leaving the portfolio and the replacements were already part of the 55% new lease spreads or just how that process played out or how will it play out?

Great. Caitlin, thank you. John, you want to take that?

Sure. Thanks for the question, Caitlin. So bad debt was 86 basis points here today. Keep in mind, we're only talking about a few hundred thousand dollars here. As Bob mentioned, we are finding opportunities to enhance the merchandising mix of our centers with 55% new leasing spreads and continued strong retailer demand. We're just we're not concerned about the environment. I would say that those neighbors, as we said, we've been more aggressive in taking those spaces over the year. and i think our releasing of those faces has been really strong which is you can kind of see if you look at our total occupancy and on a lease basis you know it's been very constant um the economics step back a little bit that's what you're seeing there when you think about the process ultimately we're you know we're pleased to be able to reaffirm our same store guide and look at these opportunities to drive further rents and it'll be you know a benefit to 2025 and beyond

And in terms of that benefit, it's just that then you can get back the space and complete new leases, yes?

Yes. And so, I mean, ultimately, we do like a renewal business with 19% renewal spreads and no downtime. But overall, we think this is a great opportunity to improve the merchandising and to drive the rent spreads at the properties.

Got it. Makes sense. And then, Just a quick one on the full year same-store guide. It implies a big pickup. I know you had previously talked about recoveries. Timing could drive that, but just wondering, is that it? Is there anything else? And kind of how much visibility do you have on that to reaffirm the same-store midpoint?

Yeah, sure. I'll take that one as well. I mean, ultimately, it is we do believe that there will be an acceleration here in the fourth quarter. Part of it will be a little bit of the comp to last year. But I mean, I think one of the benefits of Phillips Edison is the overall consistency to our business. And so even though quarter to quarter, the numbers move into fourth quarter, we are expecting to be outsized. Ultimately, the 3% to 4% that we guide to in this year, the 3.5% to 4% is a consistency. I wouldn't say there's anything that's too unusual in that other than the timing of recoveries. I think the biggest piece this year to last year was that our spend was different last year than it was this year in terms of that cadence. When we look to next year, which we're not going to talk about yet, hopefully it either matches or is smoother.

Thanks.

Thanks, Caitlin.

Your next question comes from the line of Hendel St. Just from Mizuho Securities. Please go ahead.

Hi there. This is Ravi Vaidya on the line for Hendel. Hope you guys are doing well. Can you offer some additional color in the 2025 guide? The savings with interest expense and G&A appear to provide about a $0.04 lift, and the same-store midpoint was maintained. Sorry, excuse me. So what are the offsets that resulted in only a one cent increase? Is it a higher bad debt expense or watch list or just, well, what are some of the moving parts there?

John, do you want to take that?

Sure. Hey, Robbie. And I'm going to say, I think you said 25 guide. I think you mean the 24 guide because that was the component. So the 25 guide is a plug. We are planning to talk about that in our December virtual update that I hope you'll join for. With regards to the 2024 guidance, we are very pleased to be able to raise guidance this quarter. When comparing the components to the original guidance, there's about two cents less in lease buyout income than we expected because now we anticipate that those neighbors will actually stay longer than originally anticipated. So we raised guidance for acquisitions, but they're later in the year and don't have a significant impact on core FFO, but that acquisition timing does come through as lower interest costs in our guidance. We did not issue equity in the quarter, which is, I think, something that people have asked about. Net-net after these different pieces, we're comfortable raising guidance by a penny, which we, you know, believe reflects solid growth at the midpoint.

Got it. That's helpful. And, yes, I was talking about 24. I'll be sure to join in for the seminar later. Just one more here. Can you discuss how you're planning on funding acquisitions? I believe that you said that above $250 million in acquisition, you would likely need to raise additional equity. Are you planning on doing so, or you're comfortable with letting leverage take up a bit from the five ones currently?

We don't have any equity plans to increase, but we would consider that with the right pricing. if we were to have more outsized acquisitions. For this year, I think we will be able to meet our targets with very minimal impact on the balance sheet. And we're looking forward to a really good year next year, so that would probably entail a more detailed look at where we'd raise the capital. Got it. Thank you so much. Yep. Thanks, Robbie.

Your next question comes from the line of Dori Keston with Wells Fargo. Please go ahead.

Thanks. Good morning. Since you announced the JV with Cohen Steers, have you seen an increase in the number or maybe a variety of deals that is being put before you?

Dori, thanks for the question. You know, we... We've been the largest buyer of shopping centers now for 10 years. And we see everything that comes onto the market. So I wouldn't say we're seeing more than we saw before because we saw these all before. There was a time where we just would not buy them. We wouldn't look at them because they didn't fit into the box. Our box is a So, you know, we're actually able to look more seriously at more properties because of the JV. But I wouldn't say that we're seeing a lot more deals than we did before because we had seen these before and had discarded those. Does that make sense?

Yeah, that makes sense. If you had to choose, you know, high end or low end of your net acquisitions guide for where you're most likely to end the year, At this point, which side would you lean into?

We're optimistic, Dori. We have some great activity and some good activity looking like in the fourth quarter. So, yeah, we're generally positive about the acquisition market.

Okay. Thank you.

Yep.

Your next question comes from the line of Otamayo Okasana with Deutsche Bank. Please go ahead.

Good afternoon. Could you please talk a little bit about your inline occupancy? It looked like it went down a little bit this quarter. I don't know whether that's kind of just from some of the planned take back of space that you guys have been doing, or we're just going to talk about that a little bit.

Sure. I don't know, Bob, do you want to take the occupancy, just talk a little bit about where we are? And I think you were talking about the inline occupancy, right, or total?

Inline occupancy. I think anchor went up this quarter, but I think inline went down a little bit.

Yeah, I'll touch on that, Jeff. So, no, I appreciate the question. Our overall occupancy increased from 97.5% to 97.8% for the quarter. And as you mentioned, we have seen nice movement in our anchor occupancy that moved from 98.8% to 99.4%. Our inline occupancy went from 95.1% to 95%. So, again, not much movement in the inline, and I do believe the 95%. is certainly leading our space, consistent with our 92% retention demand that we're seeing from our retailers. I'm not seeing any cracks. I also believe that we can move that inline occupancy number another 100 to 150 basis points over the next 24 months. So there's still a nice upside in that number, but I'm very confident and comfortable with our current occupancy numbers. They're very strong.

Thank you.

Your next question comes from the line of Todd Thomas with KeyBank. Please go ahead.

Hi, thanks. Good afternoon. Just, Jeff, you know, it sounds like the acquisition pipeline's pretty active. Do you think 2025 could be a more active year than 24, just given what you're seeing and where your current cost of capital is? And then, you know, are some of the acquisitions you're eyeing in the pipeline in the new fund, you know, or do you see, you know, the majority of the activity right now on balance sheet?

I would say, Todd, we are optimistic that it will be a better, it's been a solid acquisition market this year. We are optimistic that it could be stronger next year. primarily just there will be more product on the market. We will have more buyers, but I think it will be a more stable market. You know, interest rates are going to obviously create the turmoil of how strong that market is. But I would say generally today, from what we see, we're optimistic that there will be strong activity. And obviously, we've prepared ourselves with a balance sheet that allows us to take advantage of that if the opportunities were to come. And you said there was one other question you had, Todd. What was the other?

Yeah, I was just wondering, you know, with what you're seeing in the pipeline today, is some of that, you know, sort of earmarked for the new fund with Cohen and Steers or is, you know, the majority of that or, you know, a good amount of that on balance sheet at this point?

Yeah, the vast majority will be on balance sheet. We are hopeful that we'll get some great, really good opportunities with Cohen and Steers as well. But, you know, as you look at it this year, I think we bought one property into the Cohen and Steers and we bought, you know, over $200 million on the balance sheet. So that would, you know, I think that we anticipate that probably being, you know, continuing.

Okay. And then my other question, I wanted to follow up on, you know, Caitlin's question and the new lease spreads, the activity in this quarter. You know, how much of the new lease spreads you know, 55% big number for the company. You know, how much of that included some of that recapturing activity that you mentioned earlier in the year when you talked about taking back some space and sort of, you know, cleaning out, you know, some potential bad debt or credits and any visibility on whether we might expect new lease spreads to maintain at an elevated level in the fourth quarter and into 2025? Yeah.

Well, Bob, I'll let you take that. I would like to believe that we're going to have 50% rent spreads for a long time. We all know that's not totally realistic, but we're in a strong market and we will continue to see strong lease spreads, you know, 50%. that's a bigger number than is long-term sustainable. But still, it is showing the strength of the portfolio and our ability to have pricing power in the right situations. But in terms of sort of going forward, new leases, Bob, anything you want to add there?

Yeah, what I would add is, you know, at the 55%, obviously that's an increase up from 34.4%. We did have the benefit of leasing eight anchor spaces in the third quarter. Our leasing spreads on those were over 100%. So it was a combination of both recapturing some inline space and some anchor leases. To Jeff's point, you know, we're really pleased with 55%, but the visibility that I see is going out, I would say, over the next several months, they're not going to be at 55%. But if you look at our history around 25% to 35%, I think they're still going to be elevated, but they won't be at the 55% mark. The other thing I will mention is we expect retention to stay high. But in addition to that, I mean, our renewal spreads, and given the visibility that I see, have the potential to be elevated. So we're encouraged by not only retention, but the retailer demand and the health of our neighbors. So we're seeing good things.

Okay, but it sounds like the anchor deals really moved the needle this quarter. It wasn't so much about some of the recapturings that took place a little bit earlier in the year. Is that right?

We certainly got the benefit of some of the anchor deals.

Okay. And some of the anchor deals were actually part of the recapture that we talked about too. They do come together a little bit in kind of a messy way to get a real detailed thing, but they obviously create great results.

Well, and to your point, Jeff, just to add on that, in the first quarter, our anchor occupancy was 98.4%. So we've moved at 100 basis points over two quarters. So to Jeff's point, yes, we did recapture some of those anchor space and have released them at over 100% spreads.

All right. That's helpful. Thank you.

Todd, one thing I would add, you know, a lot of our acquisitions, you'll notice, have higher occupancy. of vacancy than what our portfolio does. And we have also had really strong performance on the acquisitions we've had and been able to find pretty good opportunity in those properties, including both some moderate sized boxes, but also the inline stuff. We've been very, very happy with the progress we've been able to make there.

Your next question comes from the line of Floris Van Digicom with Compass Point. Please go ahead.

Hey, guys. Good day. Thanks for taking my question. So I want to delve into the acquisition market a little bit more. You know, if I look at you, you're trading at a premium to consensus NAV, you know, a premium to our NAV, like a 6.5% implied cap rate. Maybe if you could talk about what are the cap rates that you would consider for, you know, for acquisitions. Talk about, you know, the cap rates a little bit on the deals that just closed, and are cap rates seeing upward pressure or downward pressure, or are they relatively stable in your view? And then I guess the other question is maybe also, again, on the acquisitions front, maybe if you could comment on larger portfolio transactions. I know there was a big public portfolio that was in the market, probably still in the market today. If you can talk a little bit about, obviously, you're looking at everything. Talk about your appetite for doing potential larger transactions as well, portfolio transactions.

Well, Floris, thank you for the question. What we'd like your help on is finding those properties where you could buy our properties as six and a half cap because you can't. Our NAB, you know, we believe is a lot better than six and a half and should be priced that way. But that being said, you know, and I hope most of our analysts who are on the phone know, we're not a cap rate buyer. What we're trying to buy is return to the overall company and And we use the unlevered IRR as that target. That target, you know, north of 9% for our drug-shrinkered shopping centers. And that can start at a lot of different cap rates and get to the 9 in a lot of different ways. I would say that this quarter, we found some really great opportunities that we believe are going to be well north of a 9. But they probably were a little bit more aggressive cap rates than we would have liked. But we are... we've got a lot of growth opportunities in them. And that's one of the things that we're trying to find as we look at it. And getting the right returns, given the risk profile of the properties, what we're really looking at really hard. So I would say that we are not seeing big movement in cap rates. We are seeing some anomalies that are out there where Certain properties get very aggressively priced. But that's more the exception than the rule. The core market, it's got this increased demand from people who are getting into the grocery shopping center and into retail that hasn't been there. So there's more violence there. There's also, as I said earlier, there's more supply coming in. So people who have kind of been out of the market for a couple of years are looking and they're saying, okay, well, am I going to wait another cycle until I sell? And a lot of people are pulling the trigger to do that. At the same time, the recent volatility in interest rates kind of creates another issue that sort of is on top of that. So it's a complicated market right now, but overall we're generally really positive about it. And we think that there's gonna be significant product both in the fourth quarter, but also next year. On portfolio question, we look at everything that comes on the market. Our criteria is then really consistent. And it is, we want to maintain a very strong discipline that we're buying number one or two grocery in a market that we can get to that nine unlevered IRR in the portfolio. So the problem that we've seen and the reason we haven't bought more portfolios is we feel like they've been trading portfolio premiums instead of portfolio discounts. If you can help us find some portfolios that are trading at a discount, we'd love to buy them. And we set our balance sheet up so that we can do that if the opportunity arises. But To date, we have not seen many portfolios that meet our criteria, and therefore, you know, we have not been really active in that market. Thanks, Jeff. Yeah, thanks, Laura.

Your next question comes from the line of Juan Sanabria with BMO Capital Markets. Please go ahead.

Hi, just hoping to follow up on the balance sheet on a questioning from earlier. I think, John, you said that the fixed floating ratio would stay relatively stable into year end, but yet you have acquisitions assumed in the fourth quarter. So just curious on what we should be assuming for funding for those incremental deals.

John, do you want to take that one? Do it.

Sure, I'll take that. Thanks, Juan. And I do hope you heard, we worked in our prepared remarks to talk a little bit about your analysis and in the dialogue that grocery anchored shopping centers, you know, require different demographics across different types. I think it was very thoughtful, but, you know, certainly understanding that we make money where our groceries make money. To your question on the balance sheet, as we look at it, you know, we have over $750 million of liquidity available to us, and our leverage is at 5.1 times. So we're very comfortable of funding the upcoming acquisitions. But as we continue to see more, and as Jeff is talking about the acquisition market and our, you know, optimism towards that, you know, equity is something that we will consider so long as we can do it on an accretive basis. So I think we have, you know, we have, we're now triple B flat and B double A2 from the rating agencies with a long-term leverage target of five and a half times. So we do have room to work with that, but we're not, I wouldn't say that at this moment we're saying, hey, we're going up to that target. So I think you'll see us in this range, but we are very comfortable in doing that and utilizing equity so long as we can do so in an accretive manner.

Okay. Have you issued equity post-quarter end?

We have not.

Okay. And then just curious if you could make any comments on the kind of the mid- to high-teens earnings growth as we think about 25, any puts and takes that we should be aware of? Does the being more aggressive on re-merchandising or re-tenanting, does that impact that prospective growth, or that's kind of par for the course, so to speak?

Yeah, we want to encourage you to come to our December call where we will give you a lot more detail on what we're seeing and projecting for next year. So I, you know, we're really, there's not a lot to add to that, but we do hope that you'll be there so we can give you the more detail of the growth that we're anticipating. going into next year. I mean, the only thing we would say is, you know, we continue to have price and power on the leasing side. We continue to have strong demand. And, you know, we're seeing an acquisition market where there's, you know, solid opportunities. So we're, you know, we're optimistic about what next year will look like. I'll dial in. Thanks.

Your next question comes from the line of Michael Muller with JP Morgan. Please go ahead.

Yeah, hi. I know you have the 25 event coming up, but John, can you share any early thoughts you have on the swaps expiring next year and how you're thinking about the term loans coming due in 26? Sure, Mike.

So I would I would say that so far we have followed the balance sheet strategy that we've communicated and what our long term plan is. We want to be a long term issuer in the unsecured bond market. We've done it twice this year, extending our maturity so that they're now at six years and we're using that market and would look to use the equity market if necessary. to both fund our acquisitions as well as to transition our balance sheet in this way and so when we look at those swaps they are related to the terminal maturities that are fully prepayable and so we will look to access the bond market opportunistically and and we we did that in september um ultimately at a time where i think you know the tenure was it you know just under three seven so We will look to do that. And in terms of the swaps, it's really related to the term loans. And we will look to fund that. I would like to get to a point where I get to a well-laddered maturity. I think we have that and are working towards that. If you notice in the September deal, it's a 35 maturity to go with a 34 maturity. And so that's, I think, how you will see us looking to do that so that I have approximately 10% a year on a on an ongoing basis would be our plans. But, you know, we're very pleased to say that, you know, we only have $100 million of term loan left in 26. And then, you know, we'll look to, you know, to finance that out as we, you know, finance our acquisitions.

Got it. Okay. Thank you.

Thanks, Michael.

Your next question comes from the line of Ronald Camden with Morgan Stanley. Please go ahead.

Hey, just two quick ones because a lot has been asked. Just going back to sort of the same story and why I remember back in December, you talked about pricing power and being able to put sort of rent escalators for more favorable lease contracts. Just as we sit here today, just any sort of causative commentary on the rent escalators and any other favorable lease contracts that you guys have been able to get that we may not see just in a releasing threat.

Bob, you want to take that one? Yeah, thanks for the question. In terms of lease escalators, I'll start with the renewals. So on the renewal side, our renewal spread for the quarter was 19.8%, and we are getting annual escalators on top of that right around 3%. And as I have visibility out on our renewal piece, you're going to continue to see annual escalators between 3% and 4% on top of a very healthy first quarter. first year increase as well. On new deals, we're getting annual increases between 2% and 3%. So I'm encouraged by that number as well. Our strong retention has allowed us flexibility in, I would say, our lease negotiations around removing restrictions, exclusives, caps, those sort of things that strengthen our ability to not only drive renewal spreads and new leasing spreads, but also enhance our merchandising ability at the property. So that's what we're seeing.

Great. And if I could just follow up on the acquisitions, I think I heard you say that cap rates maybe was a little bit tighter. You're still going to hit the IRR. So just curious, are you seeing more cap rate compression? And should we sort of expect that as we're rolling the calendar? Thanks.

Yeah, I would say... We're not really seeing significant compression on cap rates. So, no, we really aren't seeing that. There's, you know, obviously a lot of variability in cap rates based upon, you know, occupancy and where you can take the unlevered IRR, which is obviously what we're focused on. So, we do get some variability from that regard and why we don't just focus on cap rate. Um, uh, but there, you know, I, I think there is some stability in the market, um, where we're getting to a place where, uh, uh, you know, supply and demand is, is more stable than, than it was, you know, over the last couple of years, um, where it was a little bit, uh, there, there, there just wasn't much supply coming on the market and, uh, uh, There was very little demand, so that was much more complicated. I think we're getting to a place where it is more stable. Great. That's it for me.

Thanks so much. Thank you.

Your next question comes from the line of Paulina Rojas with Green Street. Please go ahead. Hello, everyone.

We talk about supply, new supply, not penciling in general. And I find interesting, we see you doing these pad developments and acquiring more pad developments. I think all of them are adjacent to your centers. So related to that, two questions. One, are you seeing more of these type of small scale developments in your markets as a mean to capitalize on the strong retailer demands? And two, can you share a little more color on them in terms of the rents you achieve in these projects and why you think they make economic sense but larger centers don't?

Sure. Paulina, thank you for the question. You know, we have always had an active outlaw development program at PECOW for literally forever. We were a Walgreens developer for a long time and have been very active in that business. And it is a demand-driven business where the retailers looking for visibility and looking for access, you know, drive-through, et cetera, they want to be out on the main road. And they cycle through that over time, how urgent that is. And those are great opportunities for us, where we can take parking lots, where we can take vacant land, and we can turn them into these smaller pad developments. The interesting part is how much they're willing to spend on rent in those locations. And it is a select group of retailers who will pay enough to actually make ground up development work. Um, and that, you know, Starbucks is Chipotle. It's the, it's the names that the regular names that you see on those outlaws, um, that are willing to step up and pay, uh, rents that are doubled to triple what we are getting in line, uh, in the existing shopping center. So these are, these are a very aggressive, um, expansion-oriented retailers that believe that having drive-through, having visibility is worth the additional cost of new construction and then having the benefits of drive-through and the visibility. So that's what is driving that. We would love to do more of it because it is a very profitable business for us with really solid returns. Unfortunately, it's difficult because even if those kind of rents, and this gets back to the fact of why there's so little development going on in our business, it's really hard to make the numbers work from a rent standpoint and a cost standpoint. Because when you look at paying two to three times inline space, it's got to be really valuable to you as a retailer to be willing to step into those situations. And it's really hard for us to find those locations that you can even make work at two to three times existing rent. And that says something about how long it's going to be before any kind of major new development on the retail side is going to happen. Does that answer your question?

Yeah, it does. Thank you. And I have a second one, if I can. So from a broader perspective, employment is still low. Retail sales have shown resilience overall. However, one concerning trend has been the rise in credit card delinquencies. So delinquencies have increased materially to levels that I think We have not seen since, I don't know, 2010, more or less. So what do you think about this trend? And do you think there are any direct implications for your business?

Yeah, it's a great question. And one that, you know, what we have found historically drives our our retail shoppers demand has been really driven by employment because basically you will see fluctuations in credit card usage and delinquencies, but when people have the ability to leave a job and find another job, that tends to... They tend to continue to spend. And so that could be a forecaster of a more complicated customer. Probably does. I mean, it has historically been sort of one of those leading indicators of when the customer is going to start to pull back. So, I mean, it's certainly something that, you know, everyone is kind of watching. But when normally that goes with a time where you've got employment issues as well, and we just aren't having those right now. I mean, the most, the biggest employment issues are really at a higher level of income than where a lot of the credit card issues are.

Okay. Thank you very much.

Okay. Thank you.

That concludes our question and answer session, and I will now turn the call back over to Jeff Edison for some closing remarks. Jeff?

Well, great. Thank you, everyone, for being on the call today. In closing, you know, during the third quarter, the PICO team continued our strong operating performance. We delivered strong inline lease occupancy. We executed outstanding renewal rent spreads. We had record high new rent spreads, which were among the highest in the peer group. We have among the highest retention in our space. We're on track to acquire between $275 and $325 million of net acquisitions for the year, which is an increase. Our targeted unlevered IRRs continue to exceed 9% for our acquisitions. We completed two 10-year bond offerings totaling $700 million, which lengthens, again, our maturities. We continue to have one of the lowest-leveraged balance sheets in the shopping center space, and despite the interest expense headwinds that everyone's facing, we delivered strong earnings growth. We believe our differentiated and focused strategy, our high-quality portfolio, and our talented and innovative team combine to create a market leader in the shopping center space. We're confident that the FICO team will continue to deliver market-leading results for the Pico's experienced and aligned management team owns 8% of the company. We have meaningful skin in the game, and we are committed to driving shareholder value. At Pico, we cultivate a culture in which our leadership team and our associates, they think and they act like owners every day for every decision. But looking beyond 2024, Pico is well-positioned to continue to successfully grow as we look forward. We believe we provide our investors more alpha and less beta. We look forward to providing an update on our strategy and long-term growth drivers during the December event that we have discussed. So on behalf of the management team, we want to thank our shareholders, our PICO associates, and our neighbors for their continued support. And again, thank you for your time today. Have a great weekend.

This concludes today's conference call, and you may now disconnect.