Phillips Edison & Co Inc
NASDAQ:PECO
Earnings Call Analysis
Q4-2023 Analysis
Phillips Edison & Co Inc
PECO is thriving thanks to robust macroeconomic tailwinds, including a resilient consumer base and favorable population shifts. This advantageous backdrop has amplified the demand for tenant space, bolstering net operating income (NOI) which saw a 4.2% increase. Core funds from operations (FFO), a key metric for real estate investment trusts (REITs), climbed by 5.2%. These encouraging figures echo the company's larger narrative of resilient performance in a challenging economic landscape.
In line with its growth strategy, PECO has been active in the acquisition market, adding 11 shopping centers to its portfolio in 2023 at a favorable cap rate of 6.6%. Reflecting a bullish stance, the company is maintaining its target of $200 to $300 million in net acquisitions for the year, demonstrating both optimism in the transaction market and confidence in the quality of potential investments.
PECO's updated forecasts for 2024 reflect a particularly confident outlook, with an anticipated net income per share ranging between $0.53 to $0.58. Furthermore, NAREIT FFO per share is projected to increase by 6% at the midpoint, signaling expectation of solid earnings growth ahead. Notably, PECO envisions the potential for long-term core FFO per share growth in the mid to high single digits, underlining a strong belief in the sustainability of its operational performance.
The company's strategic positioning, including a high-quality portfolio with 97.4% occupancy, has positioned it to generate significant free cash flow. In 2024, the projection stands at approximately $100 million after dividends, affirming PECO's ability to undertake acquisitions without necessitating additional equity and while maintaining a low leverage ratio. The company's effective response to changing interest rates by adjusting its guidance highlights agility in financial management.
PECO's results from the fourth quarter exhibit a robust leasing environment, evidenced by a significant 14.2% surge in comparable renewal rent spreads. These figures reflect high demand for the company's retail spaces and form the basis for strong expectations for continued rent spread increases into the future. Additionally, PECO has been particularly adept at retaining tenants, a factor that contributes to the company's stable and growing income stream.
A key component of PECO's success is its diverse tenant mix, with a focus on local retailers that provide necessary goods and services. This structure reduces exposure to distressed retailers and builds a strong community connection, making these local businesses a critical aspect of PECO's resilient retail ecosystem. The company's ability to retain 85% of local tenants in the fourth quarter demonstrates the strength and stability of its tenant relationships and its broader strategy.
PECO continues to invest in its portfolio, planning to allocate $40 to $50 million annually in development and repositioning opportunities. This proactive approach to portfolio management not only leads to additional net operating income but also drives long-term growth by improving the quality and appeal of the centers, thus attracting strong retailer demand.
PECO's balance sheet remains robust, with a net debt to adjusted EBITDA ratio of 5.1x and a buoyant outlook from rating agencies. Management's initiatives are geared towards achieving a higher rating, with a target leverage level conducive to an upgrade, reflecting prudent financial stewardship and the company's creditworthiness.
The combination of astute capital deployment, strategic acquisitions, and a strong focus on tenant retention meshes well with PECO's overarching goal of long-term value creation. The company's steady same-center NOI growth, the successful issuance of shares, and the strategic use of financial instruments to manage interest rate exposure together underscore this commitment to shareholder value.
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Good day, and welcome to Phillips Edison & Company's Fourth Quarter and Full Year 2023 Earnings Conference Call. Please note that this call is being recorded. I will now turn the conference over to Kimberly Green, 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; our President, Bob Myers; our Chief Financial Officer, John Caulfield; and our Managing Director of Investment Management, Devin Murphy. Once we conclude our prepared remarks, we will open the call to Q&A. After today's call, an archive 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 expectation, and are subject to various risks and uncertainties as described in our SEC filings, specifically in our most recent Form 10-K and 10-Q. And our discussion today will reference certain non-GAAP financial measures. Information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in our earnings press release and supplemental information packet, which have been posted to our website. Please note that we have also posted a presentation with additional information are 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 PECO team in 2023 continued our track record of delivering strong growth. Same-center NOI increased 4.2%. NAREIT FFO increased 6.7% and core FFO increased 5.2%. The continued strong performance of our portfolio is driven by our high occupancy, strong leasing spreads, high retention and the many advantages of the suburban markets where we operate our neighborhood shopping centers. The operating environment remains strong with a resilient consumer. Retailers want to be located in our centers where our grocers drive consistent and recurring foot traffic. PECO continues to benefit from several positive macroeconomic trends that create demand for space and tailwinds for NOI growth. The transaction market also improved for us in the latter part of 2023, allowing us to exceed the midpoint of our original guidance for acquisitions. The capital markets have improved. Interest rates have meaningfully changed from when we provided preliminary 2024 guidance during our Investor Day in early December. These factors allow us to increase our 2024 guidance. We accomplished a great deal in 2023, and I have a lot to be proud of. At the macroeconomic level, the year presented many challenges with high inflation, volatile and rising interest rates and global conflict. However, the consistency of our growth is a testament to our differentiated and focused strategy of exclusively owning rightsized grocer-anchored neighborhood shopping centers anchored by the #1 or #2 grocer by sales in a market. Our results at the property level are driven by our integrated operating platform and our experienced and cycle-tested team. We could not have accomplished our 2023 results without the hard work of our PECO associates. I'd like to thank the entire PECO team for all of their efforts. PECO has always been a growth company, and we are well positioned to continue to grow. The fourth quarter was no exception with $186 million in acquisitions. For the full year 2023, we acquired 11 shopping centers, 2 outparcels and 1 land parcel for net acquisitions totaling $272 million at a weighted average cap rate of 6.6%. We are particularly excited to add two more Trader Joe's anchored centers and another HEB-anchored center to our portfolio. The transaction market was tight in 2023 as the bid-ask spreads were very wide. Our team has proven its ability to navigate and successfully execute through these tough markets. This result is due to our scale, our ability to buy in many markets across the country, our reputation as a sophisticated all-cash buyer and our strong relationships. We're confident in our ability to continue to acquire high-quality centers as the transaction market opens up further. While it's early, we continue to successfully find attractive acquisition opportunities. Activity in the first quarter remained strong. Our ability to predict acquisition volume for the rest of the year is less clear. As such, we are reaffirming our guidance for $200 million to $300 million of net acquisitions. We have the capabilities and leverage capacity to acquire much more if attractive opportunities materialize. We continue to target an unlevered IRR of 9% or greater for our acquisitions. The acquisitions that we completed in the second half of 2023 underwrote to over 9.5% unlevered IRR. We will maintain our disciplined approach and focus on accretively growing our portfolio. We are hopeful that volumes will increase through the year. It is times like this in an evolving market that we have historically found some of our best opportunities. With the target market of 5,800 identified centers across the U.S., we have a long runway for external growth. Looking beyond 2024 and assuming a more stable interest rate environment and acquisition market, we believe our portfolio can deliver mid to high single-digit core FFO per share growth on a long-term basis. This will be driven by both internal and external growth. We are confident in our ability to sustain growth in the near term despite interest expense headwinds. We anticipate long-term AFFO growth will be higher than core FFO growth as high occupancy and strong retention should require lower capital expenditures to support growth in the future. Our low leverage gives us the financial capacity to meet our long-term growth objectives. We expect to generate approximately $100 million in free cash flow after dividend distributions in 2024. This level of free cash flow, combined with our low levered balance sheet, allows us to acquire $250 million a year while maintaining our targeted leverage ratio without raising any additional equity. PECO continues to be well positioned to drive strong earnings growth and achieve our capital deployment goals in the years ahead. We remain committed to successfully executing our growth strategy, both internal and external. PECO generates more alpha with less beta given our focused and differentiated strategy. As previously announced by Kroger and Albertsons, the estimated closing date for the proposed merger was recently pushed back. We do remain cautiously optimistic about the impact of this merger on PECO. We continue to believe it is ultimately a positive for PECO, for our centers, and for the communities that our centers serve. While the market still gives the merger a low probability of occurring, should it close and 413 stores are sold to CNS, we believe the impact on PECO is a net positive. Our Albertsons stores will be operated by Kroger, which we invest regularly in their stores and produces higher sales volumes. If the merger does not occur, our Albertsons anchored centers will continue the strong performance that they have produced to date. With that, I'll now turn the call over to our new President, Bob Myers, to provide more color on the operating environment. Bob?
Thank you, Jeff, and good afternoon, everyone, and thank you for joining us. We continue to see strong retailer demand with no current signs of slowing. PECO's leasing team continues to convert this demand into higher rents at our centers. Portfolio occupancy remained strong and ended the year at 97.4% leased. Anchor occupancy remained high at 98.9%. In-line occupancy ended the year at 94.7%, an increase of 90 basis points year-over-year. We believe that we can still push in-line occupancy another 100 to 150 basis points given continued strong retailer demand. Our acquisitions in the fourth quarter were 84% leased at closing and provide us significant leasing opportunities. Buying centers with some vacancy will continue to allow us to drive growth. In terms of new lease activity, we continue to have success in driving meaningfully higher rents. Comparable new rent spreads for the fourth quarter were 21.9%. We continue to capitalize on strong renewal demand and are making the most of the opportunity to strengthen key lease terms at renewal and drive rents higher. In the fourth quarter, we achieved a 14.2% increase in comparable renewal rent spreads. This increase in renewal spreads is consistent with the 14.6% increase we achieved in 2022 and reflects the continued strength of the leasing environment. Our in-line renewal spreads remained high at 17.4% in the fourth quarter, which compares to our trailing 12-month average of 17.7%. We expect leasing spreads will continue to be strong throughout the balance of this year and into the foreseeable future. We continue to have great success retaining our neighbors while growing rents at attractive rates. PECO's retention rate remained strong this quarter at 93%. An important benefit of high retention rates is that we have much lower TI spend on renewals. And in the fourth quarter, we spent $1.17 per square foot on tenant improvements for renewals. We also remain successful at driving higher contractual rent increases. Our new and renewal in-line leases executed in 2023 had an 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 combined with our strong retention rates create pricing power and are clear evidence of the continued high demand for space in our grocery-anchored neighborhood shopping centers. PECO's pricing power is a reflection of the strength of our focused strategy and the quality of our portfolio. PECO continues to benefit from a number of positive macroeconomic trends that create strong tailwinds and drive strong neighbor demand. These trends include a resilient consumer, hybrid work migration to the Sunbelt, population shifts that favor suburban neighborhoods and the importance of physical locations in the last mile delivery. The impact of these demand factors are further amplified due to the limited new supply over the last 10 years. And going forward, given the current economic returns, do not justify new construction. We continue to see the many benefits of our grocery-anchored portfolio with a healthy mix of national, regional and local retailers. 70% of our rents come from neighbors offering necessity-based goods and services, and our top grocers continue to drive strong reoccurring foot traffic to our centers. PECO's 3-mile trade area demographics include an average population of 66,000 people at an average median household income of 80,000, which is higher than the U.S. median. These demographics are in line with store demographics of Kroger and Publix, which are PECO's top two neighbors. Our centers are situated in trade areas where our top grocers are profitable and our neighbors are successful. We also enjoy a well-diversified neighbor base. Our top neighbor list is comprised of the best grocers in the country. Our largest non-grocery neighbor makes up only 1.3% of our rents, and that neighbor is T.J. Maxx. All other non-grocery neighbors are below 1% of ABR. To put a finer point on neighbor mix, PECO has no exposure to luxury retail and very limited exposure to distressed retailers. The top 10 neighbors currently on our watch list represent just 2.3% of ABR. 27% of our ABR is derived from local neighbors. The majority of local neighbor rents come from retailers offering necessity-based goods and services. If you think about your favorite restaurant in your neighborhood, your physical therapist, chiropractor or dentist and your preferred hair salon or barber, there is a high likelihood that they are a local retailer. Our local neighbors are successful businesses run by hard-working entrepreneurs. They have healthy credit and are less susceptible to corporate bankruptcy caused by weaker performing locations. Local neighbors offer favorable economic returns. A typical local retailer receives less capital at the beginning of their lease, accepts more PECO friendly lease terms, has high retention rates and achieved renewal spreads similar to nationals. PECO retained 85% of local neighbors in the fourth quarter. And for in-line local neighbors, renewal rent spreads remained strong at 17% in the fourth quarter. Importantly, local retailers meaningfully differentiate the merchandise mix that our neighborhood centers offer our customers. Our local neighbors are resilient and have been in our shopping centers for 9.4 years on average. In addition to our strong rental growth trends, we continue to expand our pipeline of ground-up outparcel development and repositioning projects. In 2023, we stabilized 13 projects and delivered over 230,000 square feet of space to our neighbors. These projects add incremental NOI of approximately $3.4 million annually. These projects provide superior risk-adjusted returns and have a meaningful impact on our long-term NOI growth. We continue to expect to invest $40 million to $50 million annually in ground-up development and repositioning opportunities with a 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. We continue to make great progress on these properties, and our team is working hard on growing this pipeline.In summary, the PECO team remains optimistic about the current strong operating environment and the continued positive momentum we are experiencing across leasing, redevelopment and development. In addition, our healthy neighbor mix and grocery-anchored strategy positions PECO well for continued steady growth. The overall demand environment, the strength of our centers, the strength of our grocers and the capabilities of our team give us confidence in our ability to continue to deliver strong 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 the fourth quarter results, then provide an update on the balance sheet and finally speak to our increased 2024 guidance. Fourth quarter 2023 NAREIT FFO increased 6% to $74.8 million or $0.56 per diluted share, driven by an increase in rental income from our strong property operations. Results were partially impacted by a higher year-over-year interest expense of $4.3 million. Fourth quarter core FFO increased 4.9% to $77.9 million or $0.58 per diluted share, driven by increased revenue in our properties from higher occupancy levels and strong leasing spreads, partially offset by the aforementioned higher interest expense. Our same-center NOI growth in the quarter was 3.6%, driven by minimum rent growth of 3.8% year-over-year. Our reserves for un-collectability were slightly elevated in the quarter at 97 basis points. However, they were below the fourth quarter of 2022. We do see an upward trend in reserves in the fourth quarter each year. We monitor the health of our neighbors closely and are not concerned about bad debt in the near term, particularly given the strong retailer demand that shows no signs of slowing. During the fourth quarter, we acquired 6 grocery-anchored shopping centers and 2 out parcels for a total of $186.4 million. We had no dispositions during the quarter. In the fourth quarter, PECO issued 2.2 million shares under our ATM facility, which resulted in net proceeds of $77.5 million at a weighted average gross price of $35.92 per share. For the full year, PECO generated net proceeds of $147.6 million through the issuance of 4.2 million common shares at a weighted average gross price of $35.76 per share. Assets acquired in 2023 and currently in our pipeline are accretive to earnings per share at these levels. We were intentionally match funding our acquisitions with equity at a time when our access to the equity market was favorable, while keeping our leverage low. We will continue to evaluate future equity issuance based on a combination of favorable market conditions, acquisition opportunities and identifying uses of proceeds that are earnings accretive. Turning to the balance sheet, we have approximately $615 million of liquidity to support our acquisition plans with no meaningful maturities until late 2025. Our net debt to adjusted EBITDA was at 5.1x as of December 31, 2023. Our debt had a weighted average interest rate of 4.2% and a weighted average maturity of 4.1 years when including all extension options. Subsequent to quarter end, we entered into an interest rate swap agreement totaling $150 million. The new instrument swapped SOFR to approximately 3.45% effective September 25, 2024, and matures December 31, 2025. This swap will help us manage our floating rate exposure as we have swaps that expire in September and October of 2024. With the execution of this swap and a decrease in the forward rate curve for SOFR, we are revising our 2024 interest expense estimate lower and our FFO estimates higher. In January, S&P revised its rating outlook for PECO to positive from stable. While favorable, we continue to believe we are an underrated credit at BBB- and Baa3, and remain focused on achieving a ratings upgrade. We continue to meet with the agencies as we believe our financial strategies are commensurate with at least a BBB flat or Baa2 rating. Although we cannot specify when an upgrade will occur, we continue to target leverage levels to achieve this goal, which we believe to be approximately 5.5x. We ended the year at 78% fixed rate debt with 22% floating. Several of our peers access the unsecured bond market in January. We continue to monitor this market and look to access it opportunistically. Although we have no meaningful maturities until November 2025, we will consider opportunities to enhance our liquidity and extend our debt maturity profile. Between the significant free cash flow generated by our portfolio and the capacity available on our revolver, we can be strategic in our timing when accessing the debt market. That leads me to our guidance for 2024 and our ability to increase it from the preliminary guidance shared at our Investment Community Day in early December. Our updated net income per share range for 2024 is $0.53 to $0.58 per share. Our increased range for NAREIT FFO per share is $2.34 to $2.41, which is a 6% increase over 2023 at the midpoint of the range. Our increased range for core FFO per share is $2.37 to $2.45, which is a 3% increase over 2023 at the midpoint. We are reaffirming our range for same-center NOI growth of 3.25% to 4.25%, given the continued strong operating environment. Included in our guidance is the negative impact of normalizing our anticipated uncollectible reserves to historical levels of 60 to 80 basis points of revenue, we are reaffirming the range previously provided, given the continued strong health of our neighbors. As of February 8, we have several acquisitions in our pipeline, either under contract or in contract negotiation. This activity provides a strong start for the year. As Jeff mentioned, it is still early, so we are reaffirming our acquisition guidance and expect net volume to be in a range of $200 million to $300 million. If the transaction and capital markets improve, we are hopeful and have the capacity to meaningfully increase this number, and we are comfortable with this guidance range in the current environment. As we outlined at our Investment Community Day, we believe the internal and external growth opportunities for PECO give us a long-term growth outlook in the mid- to high single digits for core FFO per share growth. We expect a comparable or faster growth rate for AFFO per share because there should be less tenant improvement dollars required as occupancy stabilizes. In the near term, we are impacted by interest rate increases as all borrowers are, which is limiting our earnings growth. However, we are pleased to guide to positive per share growth. For 2024, we are updating the range of interest rate expense to $95 million to $105 million. Our decreased guidance range is primarily due to PECO having a lower revolver balance at the end of the year, which was driven by our equity issuance in December, combined with a lower projection for the SOFA curves. While not eliminated, these revisions do lessen the earnings headwind for interest expense. We estimate that higher interest rates could be a headwind of $0.04 to $0.10 for the year. If we added back the per share impact of interest rate variance to our updated 2024 guidance, this would be 6% core FFO growth at the midpoint. 2023 presented many challenges with high inflation, volatile and rising interest rates, and global conflict. However, we were able to exceed our 2023 earnings guidance due to the focus and commitment of PECO's experienced team and the strength of our integrated operating platform. We are excited for the growth opportunities ahead in 2024, both internal and through acquisitions. With that, we will open the line for questions. Operator?
[Operator Instructions] Our first question comes from the line of Caitlin Burrows with Goldman Sachs.
In the earnings release as it relates to guidance, you guys pretty clearly showed the assumptions driving guidance. And like John you just mentioned, the interest expense was brought down, which I think on a per share basis would be like $0.06, but the midpoint of guidance only increased by $0.01. So I was wondering if you could talk a little bit about what may have made you only increase the midpoint of the core FFO range by $0.01 rather than $0.06?
John, do you want to take that?
Sure. So yes, if you look at the interest rate expense component of our guidance, at the midpoint, it decreased $0.06. But $0.04 of that was because of the equity issuance that we did in the fourth quarter. So the net is actually the interest expense benefit to guidance would be $0.02, and we were happy to increase our guidance range by a penny at the midpoint. And so I think you could also look at it and say, it's early in the year, but there's opportunity for future growth in our earnings than what's presented.
So are you saying that part of it is related to like the underlying leverage and share count assumption then, too?
That's correct. So the interest expense went down because we had a lower revolver balance at the end of the year. Because of the equity, because there's more share count. And so the net between interest is lower, but the share count would be higher. So it's about $0.06 and it's about $0.04, is the impact from the additional shares. So that leaves the $0.02.
Okay. Got it. And then you guys laid out in the Investor Day how you could achieve 3% to 4% same-store NOI growth even without further occupancy growth. I guess, to take the other side of that with occupancy so high, what do you think is the risk that occupancy declines, I guess, this year or in the future? And I guess, yes, how likely is it and what would the impact be?
The one thing that I don't think we really mentioned at Investor Day is that one of the things that we've been doing on the acquisition side is to look for opportunities where there's less occupancy than what we have in our core portfolio and to lease that space up to give additional growth. And if you look at -- from a quarter-to-quarter basis, it gets complicated based upon when we buy what and what kind of occupancy because we're at such a high level of occupancy across the portfolio. So I do think that if you look at -- I mean, I think it was 84% occupied, the projects that we bought, that's going to consistently be a drag separate from what the same-store portfolio occupancy would be. And Bob, I don't know if you have anything to add to that?
Yes, Jeff. The only thing I would add to that is when you look at how we come up with 3% to 4% same-center NOI growth, we said at the Investor Day, we'd have 100 to 125 basis points coming from new and renewal spreads, 75 to 100 basis points and contractual rent bumps, 75 to 125 basis points coming from Redev and our development projects. But we acquired net $272 million. And overall, 14 assets totaled 87% occupied. And in the fourth quarter, it was 84%. So that's going to allow us to continue to drive future growth. So we're excited about those projects.
Yes. No, that definitely makes sense in being able to lease up the acquisition properties. I guess, as you think about those pieces of the same-store NOI growth, I guess, occupancy up or down isn't assumed. So I'm wondering what's the risk occupancy in the same-store portfolio comes down.
I feel right now that we still have another 100 to 150 basis points of occupancy left in our in-line spaces. I believe right now, we're at 94.7%. So we still feel like there's another 150 basis points in our existing portfolio on a same-center basis of occupancy movement. And we continue to see significant demand for the spaces that we have.
Okay. So it sounds like you would think there's more upside potential versus downside?
For sure, absolutely.
Your next question is from the line of Omotayo Okusanya with Deutsche Bank.
On the acquisition front and the acquisition guidance, could you give us a sense if it's going to be more front-weighted, back weighted even throughout the year and give us kind of a general sense of what kind of cap rates you're expecting on transactions?
Sure, Tayo. As you know, acquisitions are bumpy. The last year was probably as difficult a year on the acquisition side as we've had and probably bumpier than any previous year that we had. I would assume it will be bumpy this year, too. And I think we've got good belief that we're going to get into our guidance. In terms of when -- we do have decent activity for the first quarter. But I would -- again, it's hard to say exactly when that will happen.To be conservative, I would say it's going to be -- there'll be more in the back end. But we've had a couple of good weeks of new acquisition opportunities coming in. So that could be a little less back-ended. Certainly, we hope it will be less back ended than last year. But as we've said, we feel good about our guidance. We're cautious about timing and how that will fall out. And in terms of cap rates, as you know, we're IRR buyers. And we continue to underwrite to 9-plus unlevered IRR. In the last year, that translated into like a 6.6% cap rate. I would assume similar visibility into this year. Again, trying to create additional growth opportunity through some of the properties we buy and our ability to expand them and expand the cash flow from them.
Your next question is from the line of Liz Doykan with Bank of America.
So maybe quite like a similar question, but just on redevelopment. Just curious if there's more clarity on the timing of spend there throughout 2024 as I know that tends to be lumpy.
Yes, Liz. Bob, do you want to take sort of that and maybe John as well?
Sure. John, I'll go ahead and start. I think when I look at the pipeline this year, we are still thinking that we'll do between $40 million and $50 million. And a lot of those projects, just to remind everybody, I mean, these are smaller projects that are $2 million, $3 million in size. They are 4,000 to 5,000, 6,000 square feet in our parking lots and a lot of -- in all our existing shopping centers. So we'll end up doing somewhere between 12 and 15 projects with targeted returns between 9 and 12. Timing is tricky. And as Jeff mentioned, with the acquisition, the same is true, especially when you're doing teardown rebuilds, we're currently doing two teardown rebuilds with Publix, and a lot of it has to do with their timing. So it's always going to be a bit in flux. So it's kind of hard to navigate quarter-by-quarter. But as I look at it on an annual basis, I would feel comfortable that our guidance of $40 million to $50 is in range that we can hit.
I was going to say, Liz, to add to that, our assumptions as we look at it, it is fairly even with a slight weighting towards the second half of the year. But it is, as Bob said, it's pretty even throughout. But if I had to nudge you'd be a little bit more in the back.
I understand. And then maybe following up on Caitlin's question from before just on occupancy as it relates to same-store NOI, it really sounds like that there's no downside scenario to occupancy being factored in. And I'm just curious if maybe you could help us understand the areas of uncertainty that there may be to same-store NOI or that if this past year and this year is a function of just a really strong environment. Yes, if you could provide more color on maybe the nature of your portfolio, limited exposure to big box or if it's the geography kind of explaining the characteristics there would be helpful?
Well, let me take a first step and then Bob, you can jump in as well. Liz, as you know, we have a very differentiated strategy in terms of what we do. And the way I look at it is there continues to be really strong demand for our properties. If that were to change, that would be the biggest risk. We don't think it's going to change in any kind of a shorter time frame with regard to new development where there's a lot of excess supply that just is not happening, and we don't see that happening for some extended period of time. And I think what the advantage of being necessity-based and close to people's homes is the retailers are -- they see that as the place they want to be. And if you come into a market that we're in and you want – you're a national tenant or a regional local and you want to be where the activity of necessity retail is, you're going to want to be near the #1 or #2 grocer. And with that property, we are the preferred location for a lot of the necessity-based retailers. And because of that, this demand that is driving our results and our occupancy seems to be -- to have legs, and we don't see it slowing down. And we do have pretty good visibility into the next 6 months of leasing, and it continues to be strong. Bob, any other add-ons there for Liz?
No, I think the biggest part of our strategy is by having the #1 or #2 grocer in the market. Average footprint of our shopping centers are around 115,000 square feet. Our average in-line space is 2,500 square feet. We just don't have the box exposure. Occupancy is at all-time highs. And to Jeff's point earlier, staying focused on a disciplined merchandising strategy where 70% of your neighbors are necessity-based is key. As Jeff mentioned, demand is there. We still see a resilient consumer. If we were going to see signs of something happen, you would see it in your retention and your spreads. And our retention is the highest it's been in the history of the company. Our spreads are still in the mid to upper teens. We're just not seeing any slowdown in that. And we're in a very, very healthy operational environment today.
Our next question is from the line of Todd Thomas with KeyBanc.
John, just wanted to follow up on the guidance and the adjustments there. The $0.04 offset to the interest expense savings that you mentioned, does that include future equity issuance throughout the year? I guess I'm not sure I'm following on the $0.04 specifically, just given where the company's cost of equity is relative to where pricing was on the revolver and the balance that you paid down and also the cap rates that you're transacting at.
Sure. So the $0.04 really, when you look at the equity that we issued in the fourth quarter, it did tend to be weighted more towards the issuance was higher later in the quarter, but that does not have an assumption with regards to any additional equity issuance in 2024. And so it's not so much that it was dilution. It was more of an offset. So again, we kept leverage low. I should point out again that we're 5.1x levered. We have the opportunity to buy a lot. And we think the key part of our strategy that we're trying to do is match it with our acquisitions. And the acquisitions that we closed on and that we're looking at is accretive at those levels of equity issuance. But when you look at it, so rather than thinking about, it's a headwind, but it really was replacing the interest expense. And so ultimately, it's the $0.02 that is -- so the $0.02 that's left, we've increased guidance by a penny, and then you kind of get into rounding on the last penny, but we wanted to open the year in a position that we've got opportunity for growth in the future.
Okay. And then within the $200 million to $300 million of net investment guidance that you maintained and it sounds like you have better visibility early in the year relative to what the back half of the year might look like. I'm just curious on the disposition side, how we should think about dispositions and how they sort of factor into the mix and that sort of 13% or I think, 14% of the portfolio that's not currently anchored by a #1 or #2 grocer in the market.
Yes. Todd, we have our plan to do that, and we will put product on the market. The $200 million to $300 million is a net number. So we will be balancing dispositions with acquisitions to get to that number. And we continue to look at the market. And if we have the opportunity to get pricing that we find favorable -- I mean we're disciplined, as we've said, we're disciplined on the dispo side as we are on the acquisition side. And that creates a balancing act between pricing returns and what pace we go with the disposition plan. So, I think John, have we just disclosed what we anticipate being the dispo amount for this year. Do we, or not?
We haven't because of the flexibility that you're looking for there. I mean, ultimately, we're looking to solve for a total, and we're feeling very confident about the portfolio that we have. And we look at things strategically. And so that's where if we're looking at it, it'll be opportunistic. We look at risk management, but we only sold $6 million last year. And if we felt that there was a greater need, we would have done more. So we're just guiding to kind of a net total number.
Your next question comes from the line of Ronald Kamden with Morgan Stanley. The time here.
Richard here on for Ron. Just wanted to ask -- and apologies, one more about the guide. So first of all, just look at kind of the full year core FFO number for 2023, I think it was $2.34. Maybe it's like a $0.07 increase to the midpoint or to the new midpoint of the guide. Maybe just if you could walk us through how much of that $0.07 is from kind of the same-store NOI and sort the same-store portfolio versus how much of it is, I guess, from other stuff, right? I really want to kind of understand, you develop kind of a good amount of acquisition very late in the year, presumably, it's not in your kind of $2.34 run rate. So just trying to think if there's any upside for maybe the kind of late in the year acquisition activity, any upside to kind of 2024 numbers?
John, do you want to take that?
Sure. So we are guiding to 3.25% to 4.25% on the same-store, which is adding growth to the portfolio on an FFO basis. And our acquisitions, while accretive, again, the market was in a position where the cost of capital, it certainly improved in the latter half of the year and even relative to '22. But the private market cap rate didn't move to the same extent that the public market cost of capital, whether that be on the debt side or the equity side moved. So the spread between that cost and those acquisitions, is closer than it would historically be. So we do have benefit and accretion, but it's going to -- we needed to deliver the growth in these assets. And so there is some, but it is not as much. And again, on those acquisitions, one, we look at them, and we're buying assets that are accretive out of the gate, but also to the point that Jeff has made, we're focusing on a 9% unlevered return and the continued growth in the portfolio. So that's another piece. I will say that going against that in the other direction is that I spoke to the interest rate headwind that persists. So ultimately, even though right around our Investment Community Day and kind of forward, there has been an improvement in the debt cost of capital. It's still the rate piece, it's still a $0.07 headwind at the midpoint of what we're estimating in that. So it's a combination of those pieces. I think the acquisitions will continue to deliver and position us very well to deliver growth and support our growth progress for the future, but they are less early.
Just maybe switching gears, I wanted to ask a little bit about kind of small shop, local tenants, health but also kind of demand for those types of those types of formats kind of given some of the credit card data, some of the other kind of economic data that we've seen of late. So maybe just kind of walk us through just kind of the kind of demand for those types of businesses right now.
Sure. Bob, do you want to take that?
Yes, for sure. So I appreciate the question. Right now, when we look at our portfolio and specific to our in-line spaces, 27% of our ABR comes from local tenants. We think local tenants are great. One, they're strong. They have good credit too. They're economically friendly for the landlord. It doesn't cost us as much money to put in. They're sticky. They're honestly true entrepreneurs. You think about your car factor, your dentist office, your local hair salon as examples, their average tenure has been 9.4 years in our portfolio. Again, I want to direct correlation to our overall merchandising strategy about being around necessity-based goods and services. So I'm very focused on not only the grocery store, but also quick service restaurants, health and beauty, Med tail and service providers. And I mean our healthy neighbor book has never been stronger. And there's a lot of demand for our size of shopping centers and having the grocer there that drives the foot traffic, they're just getting the benefit of that, and it's very, very strong. I think our local renewal spreads in the fourth quarter were 17.2%. So again, very, very healthy, very, very strong. So a very important piece to our overall merchandising.
Yes. I would just add that when -- if there's always questions about the consumer and where they're going. The retailer when they're looking at staying in one of our centers and how much rent increase on rents are going to give us, that's a real decision that's really, I think, the leading indicator of what's going on. And when you have sort of record retention and record spreads, it's a great indicator that the retailers are not seeing the consumer pulling back. There may be some credit card issues, but they are not or they wouldn't be renewing at this rate. You'd start to see some reduction in those -- in both the spreads and in the amount of retention. And as we look very closely at, we are not seeing that at this point in time.
Your next question is from the line of Juan Sanabria with BMO Capital Markets.
Just a question on the funds management initiatives noted or opportunity noted at the Investor Day. Just curious on latest thoughts or comments there? And is any of the enthusiasm on recent acquisition opportunities? Is that related to funds opportunities or more on balance sheet?
Devin, do you want to take that?
Sure. Juan, as we mentioned at the Investor Day, the investment management business is a business that we've been in since the company's founding. We have this platform because it allows us to access incremental capital. It expands our acquisition opportunity set and it generates attractive ROIs for us. The ROIs in this business for us are in the high teens to high 20s depending upon the strategy that we're executing. We did mention at the Investor Day two new initiatives, one is a core partnership, the other is a social impact fund targeting grocery-anchored centers and majority minority communities. The capital in both of these ventures has been committed by our partners, and our partners have requested that we do not disclose any additional information until we invest in a center in each venture. We are currently pursuing acquisition opportunities for each venture and our hope and expectation is that we will be able to give additional detail about these ventures in the first half of the year, as we mentioned in December. And so our enthusiasm for the acquisition volume translates into opportunities for both of these ventures, but for also our on-balance sheet acquisition opportunities because as we've said, we expect to generate acquisition volume comparable to what we've done over the last number of years on balance sheet. And then the acquisition volume that we do in these new ventures is incremental to what we do on balance sheet.
And good to hear from you. Just a follow-up question on the acquisitions and how it relates to occupancy. So what would have the same-store occupancy been -- the reported company-wide decrease quarter-over-quarter, I'm assuming there was some modest impact from buying assets that weren't fully occupied. So maybe if you could just give the same-store occupancy delta sequentially? And just as a follow-up on that, are the acquisition yields that are quoted, are those going in, or are those assuming some sort of stabilization in the occupancy if, in fact, they're kind of below stabilized levels?
Yes. I'll answer the first one and then John, you can step in on the occupancy. It is the in-place income that we're talking about when we talk about cap rate on what we acquired.
And on occupancy, Juan, it was -- our third quarter, it was consistent, it was 97.8% to 97.8%.
Your next question is from the line of Haendel St. Juste with Mizuho.
So you mentioned the top 10 neighbors in your watch list represent, I think, 2.7% of ABR. Can you talk a bit more about who or what categories on this list? And what's embedded in your guidance year for credit loss and what you actually realized for full year '23?
Great. John, I think maybe that's probably best if you can cover that.
Absolutely. So the watch list that we have, I mean, we ultimately have watch list at every center. But the watch list that we're referring to here are really from a national standpoint. And I'll clarify it was 2.3%. I think you said 2.7%. So it's 2.3%. And they're not named. So included in there would be someone like a Joan or a Big Lot. It's things like that where we don't think there's anything imminent, but it is something that we are watching. And I would just -- this is where the diversification of our portfolio is really beneficial. So I mean, even the names that I'm talking about there are 20 and 50 basis points individually, assuming that they all [ wind ]. And so we feel very good about our locations and everything. So in terms of the guidance and what we're looking at in '24, this portfolio has been between 60 and 80 basis points over a long period of time, and that is what we have assumed. We feel good about our locations that we have. And our strategy specifically is that format drives results. So we are intentionally limiting our exposure to some of these larger non-grocery anchors.
That's very helpful. Could you actually mention what the actual credit loss was for last year?
Oh, yes. Okay. Sure. So for the year, for total year '23, it was 62 basis points.
Great. And just to follow up on, I think, your commentary on redevelopment. You talked about the $40 million to $50 million of capital spend this year, a healthy 9% plus returns. I guess I'm curious what is keeping that pipeline so small? I know you're working on smaller projects, but I'm curious if perhaps there's a great opportunity to expand that, where that pipeline can grow to over time? And how we should think about that?
Well, Bob, you want to walk through sort of -- I mean, and the answer is it's really hard to get the volume that we would like to. I mean we'd love to do twice that amount. This is sort of hand-to-hand combat of taking -- buying specific piece of land, getting the zoning and the other entitlements, getting the store built and leased and doing that in $1 million to $5 million chunks. It's a difficult process. And that's why the stuff we're working on today is 2, 3 years out and keeping the pipeline full and going. That's how we think about it. But the returns are really good. And therefore, it's an important part of what we're trying to do with our centers and in terms of being able to find additional growth opportunities for them. And if you can help us figure out how to get more volume, we're all for it. We're working really hard to get the volume that we are. And I think we feel good about being able to continue that, but it's not an easy process getting those out of the ground and going through the full process. It takes time. I mean, we're lucky in all of them that we've done have been our full basically at this point. So we've done a really good job with them. It's hard to do a lot more volume than what we've been able to put on the board.
I'll just add a couple of things, too, Jeff, because not only do we think the portfolio can generate the $40 million to $50 million per year. And you touched on, I mean, we're doing a lot of Starbucks, Chipotle's, Chick-fil-A's. We're repositioning some of the boxes with EOS Fitness, Ross, Five Below as an example. But one thing that we're very focused on is finding development opportunities or redevelopment opportunities as part of our acquisition strategy. And as we mentioned earlier, we've closed on 14 assets in 2023, 8 of those 14 assets have some sort of development or redevelopment capability, which is also why you see the 87% occupancy level is that we're very intentional about wanting to continue to drive this portion of our business, and we are getting really good returns to Jeff's point between 9 and 12. So you'll see that we're going to run a parallel path between the existing portfolio and our acquisition strategy.
Got it. That's helpful. It makes sense. I was also trying to ascertain really if there's anything different about your portfolio that perhaps your peers and a lot of your peers have pipelines that are far larger, but it sounds like as part of the opportunities on the acquisition side that you're sourcing today that could lead to perhaps more redevelopment opportunities over on the portfolio? Okay, guys. I think that was it for me. I appreciate the time to talk.
Your next question is from the line of Dori Kesten with Wells Fargo.
I apologize if I missed this, John, but did you say what your intentions were regarding the swaps maturing later in '24? And is that assumed in guidance now?
Dori, no. I actually didn't speak to that. So thank you for that. So look, we are focused on flexibility. We did, after quarter end, we did execute a for starting swap for $150 million locking in the silver curve at 3.45%. I mean, we still are above or have more floating rate debt than we would like. We've mentioned that we want a target of 90% fixed. And as we look at those maturities and part of it is going to be whether it be fixing SOFR or ultimately, we want to be a long-term issuer in the unsecured bond market. And so if we're able to opportunistically issue in that market, that will also improve that. So I will say this, with regards to our fixing activity, there are refinancing or financing around fixing and other things in our guidance for '24 already assumed. The one clarifying piece going back to the question, I think, it was from Todd was we do not have incremental equity issuance in our guidance. But we do have activity related to our interest in our debt in our guidance.
Where do you think that you would price today in the unsecured market?
Sure. So we do watch that market very closely. The most important thing we did was manage our maturity ladder last year. We don't have pressing maturities in '24, and we do have meaningful liquidity to pursue the acquisition strategy we've been talking about. So one of our goals is to become a long-term seasoned issuer in that unsecured bond market. And so it is a little tough to specifically pinpoint because it's going to be dependent upon where the tenure is at the time. We believe that it would be in the 5.75% to 6% range. We think our reception will be similar to that of our peers because we believe we have a better business model, lower leverage. Ultimately, just in the month of January, we received a positive outlook from S&P, which is a step in the right direction, but we continue to believe we're an underrated credit. So we will look to access that market opportunistically.
Okay. And congratulations on that outlook. One last question. If your net acquisition did exceed $250 million this year within your IRR expectations, would you feel comfortable issuing equity when you're trading today?
Today, you mean like today or today in terms of generally where we've been trading over the last several months? Today, no, I don't feel great about that. But over -- generally, to me, we -- for us, where we would look to use the ATM is when we have an acquisition volume that we know what the specific uses will be, and we feel comfortable that it's very accretive at the stock price that we're at and at the debt cost that we're at. So we're match-funding those two pieces as we grow and trying to take a longer-term growth perspective to the properties and matching them while at the same time, keeping -- I mean, we're certainly a market-leading balance sheet today, and we would like to continue to have a strong balance sheet and have the ability to grow faster if the opportunities arise. Does that answer your question, Dori?
Yes, it does.
Your next question is from the line of Hongliang Zhang with JPMorgan.
I had a question about your River Park and [ attaches ] Shops acquisitions. I guess, are those representative of the acquisitions of the lease-up nature you were talking about? And what are your expectations on timing to lease them up to your average portfolio rate?
That's a great question. they are examples of, I think, strong grocer centers with opportunity. And we -- I mean, I believe that we will see progress in both of those over the next 12 to 18 months, but they will take -- I mean, it won't happen tomorrow. One of the beauties of our small store portfolio is that things can happen much more quickly. These two have some two bigger box issues, along with a lot of small store opportunity. So I would say we'll see the small store opportunity within 12 months and maybe slightly longer on the box opportunity. So that's the way we kind of look at those. But when we look at H-E-B and Trader Joe's, the two, we performed very strongly in our centers that have them as anchors, and we anticipate doing the same with those two acquisitions. Bob, I don't know if you have anything else you want to add.
No, I would already say that since we've acquired the assets, we're already working letters of intent on River Park as an example. And to your point, we usually will strike on our small shop spaces within the first 6 months and then the chunkier-sized boxes that are a little bit larger could take to Jeff's point earlier, 12 to 18 months. But when you have two of the dominant #1, #2 grocers in these markets doing the type of sales volumes they're doing, H-E-B's doing over $1,000 a foot, Trader Joe's is doing over $2,200 a foot. They just are significant traffic drivers to lease up the redevelopment opportunity. So I'm encouraged by the activity we've seen so far, and we just recently acquired these in the fourth quarter. So, good.
Got it. If I can ask a follow-up question. I guess as you look at the potential pool of acquisitions today, how many of those potential acquisitions are properties with 80% leased rate versus, I guess, more stabilized occupancies?
Yes. We wish we had more of the 80%. I would say that -- I think, I would say we're targeting probably 90% is probably where the market will end up in terms of the total acquisitions. We'll probably be closer to 90% than sort of mid-80s, but we'd love to manage what we did in the fourth quarter, and it will be really based upon the opportunities that arise during the year. But we love those projects, and we think our team has been able to execute on them really well. So if those opportunities arise, we'll be there, but I would guess that it's more likely to be in the 90% occupied range. And that's total occupancy for the center.
Your next question is from the line of Paulina Rojas with Green Street.
I have two follow-up questions. One is about one of the assets that you acquired the book Marketplace. I see it's not anchored by a grocer. And it's mostly small shop with a shallow Walgreens, I think. So it's a little bit of a departure to the traditional centers that you would acquire and then intrigued by how much you, I don't know, if you would do more of this and if you have a limit for how much these type of assets could represent in the context of your entire portfolio?
Yes. Paulina, great question and one that I'm glad you asked. That particular project is directly across the street from one of the most productive jewels into Chicago and Chicagoland. And we have a strong presence in Chicago and with a good concentration. And this was an opportunity we saw where we could actually use the machine that we have built across the country, but particularly in this market to get outside returns and very strong growth. So in those opportunities, we are looking for those and it will continue to be a small part of our portfolio, but we believe that there are specific opportunities where we can take advantage of the team that we have and the boots we have on the ground as well as having the traffic generators in the immediate vicinity that will allow these centers to be long-term successful. But as we underwrite them, we believe we need a bigger return on those projects than we do on our gross anchorage. So if you would think of those, those would be 10%, 10.5% unlevered IRRs versus where we are at 9% on our traditional grocery-anchored centers. So it's a small part of our portfolio and will continue to be a small part of our portfolio. But we do believe that there are select opportunities where this could be a good growth area for the company.
And then the last one is, I'm curious to where you think asset level financing is for the type of grocery-anchored centers that you are acquiring. And I'm asking from an industry perspective, not necessarily you. I know you have issued equity; you have free cash flow and other sources of capital.
Yes. Paulina, we're just not the best people to tell you that. I mean we can give you what our banks are talking with us about. But we have not -- we're not actively borrowing in the secured market right now. So we would be inferring versus specific. But maybe, Devin, you want to talk a little bit about what we're doing on the fund side and where we're seeing that capital?
Sure. Paulina, the perspective we have on the secured financing is from our venture activity because those assets will be financed in that market. And what we're hearing right now is 50% to 55% LTV at 18 over. So just inside of 6% today come given where the treasury is.
This concludes our question-and-answer session. I will now turn the conference back to Jeff Edison for some closing remarks.
Great. Thank you, operator. In closing, we're extremely proud of what the PECO team accomplished in 2023. Our differentiated and focused strategy and our talented team, combined to create a market leader in the shopping center business. We're confident that the PECO team will continue to deliver market-leading results in 2024. We still have one of the lowest levered balance sheets in the shopping center space. And with the fortress balance sheet and ample liquidity, we remain prepared for the challenges and opportunities that may arise this year. PECO is positioned to continue to successfully grow as we look forward. We believe we will provide our investors with more alpha and less beta. On behalf of the management team, I'd like to thank our shareholders, eco associates and our neighbors for their continued support. Thank you all for your time today, and have a great weekend.
This concludes today's conference. You may now disconnect.