Phillips Edison's Resilient Retail: Anchoring Alpha in Necessity-Based Centers (NASDAQ:PECO) - PECO Stock Research Report

## Executive Summary / Key Takeaways * Phillips Edison & Company (PECO) continues to demonstrate robust financial and operational performance, driven by its specialized focus on grocery-anchored neighborhood shopping centers and necessity-based retail, which comprises approximately 70% of its Annualized Base Rent (ABR). * The company delivered strong third-quarter 2025 results, with NAREIT FFO per diluted share increasing by 6.7% year-over-year to $0.64 and Core FFO per diluted share growing by 4.8% to $0.65, leading to an upward revision of its full-year 2025 earnings guidance. * PECO's differentiated operating platform, characterized by "locally smart" teams and a vertically-integrated approach, consistently generates market-leading metrics, including record-high comparable renewal rent spreads of 23.2% and new leasing spreads of 24.5% in Q3 2025, alongside high portfolio occupancy of 97.6%. * Strategic capital allocation through accretive acquisitions (targeting $350-$450 million gross in 2025, with $376 million year-to-date) and disciplined dispositions ($50-$100 million planned for 2025) aims to recycle capital into higher Internal Rate of Return (IRR) properties, including selective expansion into unanchored "everyday retail" centers. * With a strong balance sheet, ample liquidity of approximately $977 million, and a long-term target of mid- to high single-digit core FFO per share growth, PECO offers investors a favorable balance of stable cash flows and compelling growth potential, embodying a "less beta, more alpha" investment thesis. ## The Enduring Strength of Necessity: PECO's Foundational Strategy Phillips Edison & Company, Inc. (PECO) has cultivated a formidable presence in the retail real estate sector over its more than thirty-year operating history, formally established as a Maryland corporation in 2009. The company's core investment thesis is deeply rooted in its exclusive focus on omni-channel grocery-anchored neighborhood and community shopping centers across the United States. This strategic specialization targets properties anchored by the #1 or #2 grocer by sales in their respective trade areas, ensuring consistent daily foot traffic and a stable tenant mix centered on necessity-based goods and services. This foundational strategy has proven resilient, enabling PECO to navigate significant economic challenges, including the 2008 global financial crisis and the 2020 COVID-induced downturn, with less disruption and faster recovery than more discretionary retail segments. PECO's competitive positioning is distinct within the retail REIT landscape. While larger, more diversified peers like Realty Income Corporation (TICKER:O) leverage extensive portfolio scale and net lease structures, PECO differentiates itself through a vertically-integrated operating platform and a "locally smart" approach. This allows for tailored shopping experiences and strong community engagement, fostering tenant loyalty and potentially leading to superior operational efficiency in its niche. Compared to Kimco Realty Corporation (TICKER:KIM) and Brixmor Property Group (TICKER:BRX), which also focus on open-air centers, PECO's exclusive grocery-anchored emphasis may provide greater efficiency in tenant management and more robust resilience during economic shifts. Federal Realty Investment Trust (TICKER:FRT), with its focus on mixed-use developments in affluent areas, offers a different market positioning, but PECO's necessity-based retail provides a qualitative edge in revenue stability. The company's operational prowess is a key differentiator, effectively acting as its core technology. This "PECO machine" is designed to optimize property-level value through meticulous leasing, merchandising, and asset management. The tangible benefits are evident in its market-leading operating metrics, often summarized by its "SOAR" framework: Spreads, Occupancy, Advantages of the Market, and Retention. For instance, PECO consistently achieves high occupancy rates, with the portfolio at 97.6% leased as of September 30, 2025, and anchor occupancy at 99.2%. This high occupancy provides significant leverage in lease negotiations, contributing to strong rent growth. PECO's operational differentiation extends to its capital efficiency in leasing. In the second quarter of 2025, the company spent only $0.49 per square foot on tenant improvements for renewals, demonstrating a disciplined approach that maximizes returns on investment. This contrasts with the higher costs typically associated with new leases, highlighting the value of high tenant retention. The company's R&D, in this context, is its continuous refinement of its operating platform and market intelligence to identify and execute on accretive opportunities, whether through acquisitions, redevelopments, or strategic dispositions. The stated goal is to consistently achieve unlevered IRRs of 9% or more on acquisitions and 9-12% on development projects, directly contributing to its competitive moat and long-term financial performance. ## Financial Performance and Strategic Growth Drivers PECO's financial performance in the third quarter of 2025 underscores the effectiveness of its specialized strategy. Rental income, the company's primary revenue driver, increased by a robust 10.2% to $178.29 million for the three months ended September 30, 2025, and by 10.0% to $525.94 million for the nine-month period. This growth was fueled by a combination of same-center portfolio performance, including a 0.48% increase in average minimum rent per square foot, and significant contributions from net acquisition activity. Fees and management income also saw substantial growth, rising 14.6% to $3.27 million in Q3 2025 and 18.0% to $9.37 million for the nine months, primarily due to higher insurance premium income from PECO's captive insurance company and increased fees from its unconsolidated joint ventures. Profitability metrics reflect this strong revenue generation. For the third quarter of 2025, NAREIT FFO increased to $89.3 million, or $0.64 per diluted share, representing a 6.7% year-over-year growth. Core FFO also grew to $90.6 million, or $0.65 per diluted share, a 4.8% increase over the prior year. For the nine months ended September 30, 2025, net income attributable to stockholders was $63.78 million, or $0.51 per diluted share. The company's Same-Center Net Operating Income (NOI) improved by 3.3% in Q3 2025 and 3.8% for the nine-month period, demonstrating consistent operational strength.

Loading interactive chart...

Operating expenses, including property operating, real estate taxes, and general and administrative expenses, increased due to factors such as higher common area maintenance, compensation costs, and net acquisition activity. General and administrative expenses, in particular, rose due to growth initiatives, increased headcount, performance-based compensation, and investments in technology-related overhead costs, signaling the company's commitment to scaling its operations. Interest expense, net, also increased by $3.5 million in Q3 2025 and $10 million for the nine months, primarily due to increased debt outstanding.

Loading interactive chart...

PECO's capital allocation strategy is a key driver of its external growth. The company has been highly active in the acquisition market, purchasing $376 million in assets (PECO share) year-to-date through Q3 2025, including 18 properties. These acquisitions are carefully selected, often targeting properties with initial occupancies of 91.5%-92%, providing significant upside potential through PECO's operational expertise. For example, the River Park Shopping Center, acquired in 2023, saw its lease percentage increase to 99%, improving its underwritten return by 123 basis points. The company is also strategically expanding into unanchored "everyday retail" centers, which, while a small portion of the portfolio (3.5% or 11 assets), are located in strong suburban markets and have demonstrated unlevered returns between 10.5% and 12%. Dispositions are another critical component of PECO's capital recycling strategy. The company plans to sell $50 million to $100 million of assets in 2025, with intentions to increase this to $100 million to $200 million in 2026, primarily through one-off transactions. This strategy focuses on trading lower IRR, fully stabilized properties (expected to yield 6.5-7% returns) for higher IRR acquisitions (9-9.5% unlevered returns), aiming to capture a 200-basis-point spread over the long term. This disciplined approach ensures that capital is continuously reallocated to opportunities that maximize long-term earnings growth. ## Liquidity, Capital Structure, and Outlook PECO maintains a robust liquidity position and a well-managed capital structure, providing significant financial flexibility. As of September 30, 2025, the company had approximately $977 million of liquidity, with no meaningful debt maturities until 2027. Its senior unsecured revolving credit facility was amended in January 2025, increasing its capacity to $1 billion and extending its maturity to January 2029. The company's net debt to trailing twelve-month annualized adjusted EBITDAR stood at 5.3x as of September 30, 2025, and 5.1x on a last-quarter annualized basis, well within its long-term target of 5.5x or below.

Loading interactive chart...

PECO's debt strategy emphasizes a predominantly fixed-rate profile, with a long-term target of 90% fixed-rate debt. While currently 5% of its debt is variable-rate, with some swaps expiring, the company plans to manage this exposure through opportunistic access to the bond market and additional debt issuance, aiming to be a repeat issuer to ladder its maturities. In June 2025, PECO successfully issued $350 million of 5.25% senior notes due 2032, with proceeds used to replenish its revolving credit facility, effectively match-funding its year-to-date acquisitions.

Loading interactive chart...

The outlook for PECO remains positive, with management raising its full-year 2025 earnings guidance. The midpoints of the increased guidance for NAREIT FFO and Core FFO per share represent 6.8% and 6.6% growth, respectively, over 2024. Same-center NOI growth is reaffirmed at 3.35% at the midpoint for 2025, with a long-term target of 3-4% annually. The company anticipates achieving an additional 125 to 150 basis points of inline occupancy, potentially reaching the 96% range. Furthermore, PECO expects new and renewal leasing spreads to remain strong, with average annual rent bumps of 2.6% achieved in Q3 2025. The company's guidance for 2025 does not assume any equity issuance, reflecting confidence in its existing capital sources and leverage capacity. ## Risks and Competitive Dynamics Despite a generally optimistic outlook, PECO acknowledges several risks. The geographic concentration of its portfolio in Florida, California, and Texas (representing 11.9%, 11.1%, and 10.2% of ABR, respectively) makes it susceptible to adverse natural or economic events in these regions. Broader macroeconomic conditions, including elevated inflation, rising interest rates, and potential for slower economic growth or recession, could impact consumer spending and tenant health. Rapid changes in trade policy and tariffs also pose a risk, potentially increasing costs and disrupting supply chains. However, PECO's business model is inherently designed to mitigate many of these risks. Its focus on necessity-based goods and services limits exposure to discretionary spending, which is more vulnerable to economic downturns. The company's exposure to distressed retailers is minimal, with the top 10 on its watch list representing only approximately 2% of ABR, and major bankruptcies like Party City, Big Lots (TICKER:BIG), and Joanne combined accounting for just 60 basis points of ABR. This low exposure is a result of intentional portfolio cultivation and disciplined underwriting. In the competitive landscape, the transaction market for grocery-anchored shopping centers remains competitive, with a wide range of institutional and private players. PECO's ability to consistently acquire assets at attractive returns, even in a competitive environment, is attributed to its deep market knowledge and disciplined underwriting, which becomes "tougher" with potential economic risks. While the supply-demand dynamic is fairly stabilized, PECO's long-standing relationships with top grocers like Kroger (TICKER:KR) (its #1 landlord) and Publix (its #2 landlord) provide a significant competitive advantage in securing and optimizing properties. The company's operational efficiency and ability to drive strong leasing spreads and high retention rates also position it favorably against peers, contributing to its projected outperformance in core FFO and AFFO growth. ## Conclusion Phillips Edison & Company stands as a compelling investment in the retail REIT sector, distinguished by its unwavering focus on grocery-anchored, necessity-based shopping centers. The company's robust financial performance in Q3 2025, marked by strong revenue growth, increasing FFO, and healthy same-center NOI, is a testament to its resilient business model and effective operational platform. PECO's strategic initiatives, including disciplined acquisitions, proactive capital recycling through dispositions, and targeted development, are designed to continuously enhance its portfolio quality and drive long-term earnings growth. With a strong balance sheet, ample liquidity, and a clear vision for future expansion, PECO is well-positioned to capitalize on opportunities while mitigating inherent market risks. The company's "less beta, more alpha" philosophy, rooted in the stability of its necessity-based cash flows and the strength of its growth strategies, offers investors a favorable blend of downside protection and upside potential. As PECO continues to execute its strategic blueprint, its operational excellence and disciplined capital allocation are expected to deliver sustained value creation for shareholders.