Executive Summary / Key Takeaways

• Phillips Edison & Company (PECO) maintains a resilient investment thesis centered on its portfolio of necessity-based, grocery-anchored neighborhood shopping centers, strategically located in strong suburban markets.
• The company demonstrated solid performance in Q1 2025, with a 3.9% increase in Same-Center NOI and strong Core FFO per share growth of 8.3%, supported by high occupancy (97.1% leased) and robust leasing spreads (28.1% new, 20.8% renewal).
• PECO leverages a vertically integrated operating platform and technological advancements like its AI initiatives and DashComm software to drive operational efficiency, enhance tenant relationships, and gain a competitive edge.
• Management affirmed full-year 2025 guidance, projecting Core FFO per share growth of over 5% and gross acquisitions between $350 million and $450 million, underpinned by a strong balance sheet and diverse capital sources, including joint ventures.
• While macroeconomic uncertainty, potential tariffs, and interest rate volatility pose risks, PECO's focus on necessity-based retail, disciplined capital allocation, and proactive asset management are expected to provide relative insulation and support long-term growth.

The Foundation of Necessity: PECO's Differentiated Strategy

Phillips Edison & Company, Inc. (PECO) operates as a real estate investment trust primarily focused on owning and managing omni-channel grocery-anchored neighborhood and community shopping centers across the United States. Since its formation in 2009, PECO has honed a differentiated strategy centered on necessity-based retail, anchoring its properties with the number one or two grocer by sales in their respective markets. This focus ensures consistent, recurring foot traffic to its centers, benefiting the diverse mix of national, regional, and local retailers that provide essential goods and services. Approximately 71% of PECO's ABR is derived from necessity-based tenants, with 30% coming directly from its grocery anchors, a concentration noted as among the highest in the shopping center sector.

The company's portfolio, comprising 321 shopping centers as of March 31, 2025, is strategically located in suburban markets characterized by favorable demographics, including average three-mile trade area populations of 68,000 and median household incomes of $92,000, significantly higher than the U.S. median. These markets also benefit from lower unemployment rates compared to the shopping center peer average. PECO's average center size of approximately 113,000 square feet is believed to enhance its pricing power and contribute to long-term FFO and AFFO per share growth. This disciplined, necessity-driven approach, refined over more than 30 years of operating experience, has positioned PECO as one of the nation's largest owners and operators in its niche, demonstrating resilience through various economic cycles, including the 2008 global financial crisis and the 2020 pandemic.

Competitive Positioning and Operational Excellence

In the competitive landscape of retail REITs, PECO distinguishes itself through its focused strategy and operational execution. While larger, more diversified REITs like Realty Income (O) or those focused on higher-end malls like Simon Property Group (SPG) operate across broader retail spectrums, PECO's deep specialization in grocery-anchored centers provides a distinct advantage. Compared to peers like Kimco Realty (KIM) and Federal Realty Investment Trust (FRT), who also own open-air centers, PECO's higher concentration of top-tier grocery anchors and necessity-based tenants contributes to market-leading operating metrics.

PECO consistently reports high portfolio occupancy, standing at 97.1% leased as of March 31, 2025, with anchor occupancy at 98.4% and inline occupancy at 94.6%. These figures are noted as being among the highest in the sector. The company's leasing team has successfully translated strong retailer demand into robust rent growth, achieving comparable new lease spreads of 28.1% and comparable renewal spreads of 20.8% in Q1 2025. Notably, inline renewal spreads reached a record high of 21.7% in the quarter. This pricing power is a direct result of the high foot traffic generated by grocery anchors and the limited new supply of competing centers. PECO's neighbor retention rate, which stood at 91.4% in Q1 2025, is also high relative to peers, leading to lower downtime and reduced tenant improvement costs for renewals ($0.61 per square foot in Q1 2025).

The company's vertically integrated operating platform is a key competitive moat. This platform allows PECO to manage properties efficiently, control costs, and maintain strong relationships with its over 3,500 unique tenants. PECO leverages technology to enhance these operations. Its proprietary DashComm software, developed by the PECO IT team, is a communication system designed to improve tenant experiences and communications. This technology has been recognized externally, with PECO receiving a Digi Award for best use of AI at the 2024 Realcomm conference. While specific quantifiable benefits of AI and DashComm in terms of cost savings or revenue generation are not detailed with precise figures, management highlights that AI advancements foster cross-functional collaboration and are a catalyst for long-term growth, while DashComm delivers "best-in-class customer experiences." These technological tools support PECO's operational efficiency and tenant satisfaction, reinforcing its position as a preferred landlord and contributing to its ability to drive rental income growth and maintain high occupancy.

Financial Performance and Capital Strategy

PECO's focused strategy and operational strengths are reflected in its recent financial performance. For the three months ended March 31, 2025, total revenues increased by 10.5% year-over-year to $178.3 million, primarily driven by a 10.2% increase in rental income to $174.2 million. This growth stemmed from both the same-center portfolio (up $7.8 million) and net acquisition activity (up $8.2 million). Same-Center NOI grew by a solid 3.9% in Q1 2025, demonstrating the underlying health of the existing portfolio.

Net income attributable to stockholders rose significantly to $26.3 million, or $0.21 per diluted share, compared to $17.7 million, or $0.14 per diluted share, in Q1 2024. Core FFO, a key metric for REIT performance, increased by 8.3% year-over-year to $90.8 million, or $0.65 per diluted share, benefiting in part from a non-recurring $0.01 per share lease termination fee. This growth occurred despite a 10.0% increase in net interest expense, which rose to $25.7 million due to increased debt outstanding.

PECO maintains a strong balance sheet, which management views as one of the best in the sector. As of March 31, 2025, net debt to Adjusted EBITDAre (annualized) stood at 5.3x, within the company's target leverage range of low to mid 5x. Total debt, net, was $2.28 billion, with a weighted-average interest rate of 4.4% and a weighted-average term of 5.3 years. The company proactively manages its debt maturity profile and interest rate exposure. In January 2025, PECO amended its revolving credit facility, increasing its capacity to $1.0 billion and extending its maturity to January 2029, providing substantial liquidity ($751.8 million available as of March 31, 2025). As of the end of Q1 2025, 86% of PECO's total debt was fixed rate, nearing its 90% target. The company has no meaningful debt maturities until 2027 and aims to be a regular issuer in the unsecured bond market to ladder maturities.

Capital allocation is focused on driving accretive growth. In Q1 2025, PECO invested $139.1 million in real estate acquisitions (5 properties and 12 outparcels) and $26.4 million in capital expenditures (including maintenance, tenant improvements, and redevelopment/development projects). The company also completed one property disposition for $24.9 million, providing $17.4 million in secured financing. PECO targets an unlevered IRR of 9% for acquisitions and 9%-12% weighted-average cash-on-cash yields for development/redevelopment projects, which currently represent an estimated total investment of $46.9 million. Joint ventures, such as the one with Cohen & Steers, are viewed as additive, expanding the acquisition universe without conflicting with the balance sheet strategy.

Outlook, Risks, and Investment Implications

PECO affirmed its full-year 2025 guidance, signaling confidence in its ability to continue delivering growth despite macroeconomic uncertainties. The guidance projects 2025 Core FFO per share growth of over 5% at the midpoint ($2.52 to $2.59 per share) and Same-Center NOI growth between 3% and 3.5%. Gross acquisitions are targeted between $350 million and $450 million for the year, with the capacity to acquire more if opportunities arise. Management anticipates that actions taken in 2024 to enhance the tenant mix, while beneficial long-term, will present a slight headwind to 2025 growth. The guidance does not assume equity issuance, as the company expects to manage within its target leverage range.

The long-term outlook remains positive, with management projecting mid-to-high single-digit Core FFO per share growth annually, assuming stabilized interest rates. They believe long-term AFFO growth could be even higher due to a greater proportion of lower-cost renewal activity.

However, the macroeconomic environment presents notable risks. Slower economic growth or a potential recession could negatively impact consumer spending and tenant health, although PECO's necessity-based focus provides relative insulation. Elevated inflation continues to affect operating and construction costs, while higher interest rates increase borrowing costs. Changes in trade policy and tariffs could disrupt supply chains and impact certain tenants, although PECO estimates that approximately 80% of its tenants providing necessity-based goods and services would experience limited impact. Geographic concentration in Florida, California, and Texas also exposes the portfolio to regional economic or natural events. Tenant bankruptcies remain a risk, though PECO has limited exposure to at-risk retailers and proactively manages this by taking back space to improve merchandising and rents. The Kroger (KR)-Albertsons (ACI) merger outcome also presents uncertainty, though PECO believes the impact would be a net positive if it closes.

For investors, PECO's investment thesis rests on the stability and growth potential inherent in its grocery-anchored, necessity-based retail portfolio. The company's operational efficiency, technological tools, disciplined capital allocation, and strong balance sheet provide a foundation for navigating the current environment and executing on growth initiatives. While interest rate headwinds and macroeconomic uncertainty persist, PECO's focus on resilient retail segments and its track record of performance through cycles suggest a favorable balance of quality cash flows, mitigation of downside risk, and potential for continued internal and external growth.

Conclusion

Phillips Edison & Company's strategic focus on necessity-based, grocery-anchored shopping centers in strong suburban markets forms the bedrock of its investment appeal. The company's Q1 2025 results underscore the effectiveness of this strategy, demonstrating solid Same-Center NOI growth, robust leasing momentum, and strong Core FFO per share performance. Supported by a vertically integrated operating platform, technological advancements, and a disciplined capital allocation approach, PECO is well-positioned to capitalize on opportunities for both internal growth through asset management and development, and external growth through accretive acquisitions.

Despite the prevailing macroeconomic uncertainties, including potential tariff impacts and interest rate volatility, PECO's high occupancy, strong tenant demand, and low exposure to distressed retailers provide a degree of resilience. The affirmation of 2025 guidance and the long-term outlook for mid-to-high single-digit FFO growth reflect management's confidence in the durability of their business model and their ability to execute. For investors seeking exposure to a stable retail real estate segment with a clear growth trajectory and a management team focused on long-term value creation, PECO presents a compelling case, aiming to deliver "less beta, more alpha" through its differentiated strategy and operational excellence.