Executive Summary / Key Takeaways

• Necessity-Based Fortress: Phillips Edison's portfolio generates 70% of annualized base rent from grocery-anchored, necessity-based tenants, creating a defensive moat that has proven resilient through the 2008 financial crisis, COVID-19, and now tariff-driven uncertainty, with occupancy holding at 97.6% and anchor occupancy at 99.2%.

• Capital Recycling as Growth Engine: Management's strategy of selling lower-yielding assets and reinvesting in higher-return opportunities—targeting 9-12% unlevered IRRs on acquisitions and developments—has created a self-funding growth model that delivered 10% rental income growth and 3.8% same-center NOI growth without relying on dilutive equity issuance.

• Leasing Power Translates to Pricing: Record-high comparable renewal rent spreads of 23.2% and new leasing spreads of 24.5% in Q3 2025 demonstrate PECO's ability to push through significant rent increases while maintaining 94% tenant retention, indicating that location quality and grocer-driven foot traffic create genuine pricing power.

• Balance Sheet Flexibility Provides Optionality: With $977 million in liquidity, net debt to EBITDA of 5.3x, and no meaningful debt maturities until 2027, PECO has the financial capacity to pursue acquisitions, fund development projects, and weather economic volatility while recently increasing its dividend by 5.7%.

• Joint Ventures Unlock Incremental Growth: PECO's institutional partnerships, including joint ventures with Northwestern Mutual and Lafayette Square, enable the company to pursue unique opportunities—such as centers anchored by strong Hispanic grocers—that don't fit its core balance sheet criteria while generating fee income and maintaining equity upside.

Setting the Scene: The Grocery-Anchored Neighborhood Strategy

Phillips Edison & Company traces its operational roots to 1991, but the current corporate entity, Phillips Edison Company, Inc., was formally established as a Maryland corporation in October 2009, with its primary operations structured through a Delaware limited partnership. From inception, the strategy has centered on a singular focus: owning and operating omni-channel, grocery-anchored neighborhood and community shopping centers across the United States. This isn't a generalist retail REIT that happens to own some grocery centers—it's a vertically integrated platform purpose-built for a specific retail format that has demonstrated remarkable resilience across economic cycles.

The business model is straightforward but powerful: PECO derives the majority of its revenue from operating leases with national, regional, and local retailers selling necessity-based goods and services. As of September 30, 2025, the company wholly-owned 303 properties and held interests in 25 additional centers through three unconsolidated joint ventures, representing 34.0 million square feet across 31 states. What distinguishes PECO within the shopping center REIT landscape is its concentration: management asserts the company has the highest ownership percentage of grocer-anchored neighborhood shopping centers within its peer group, with 70% of annualized base rent generated from necessity-based tenants.

This concentration matters because it fundamentally alters the risk profile. While traditional retail REITs face vulnerability to e-commerce disruption and discretionary spending cycles, grocery-anchored centers serve daily needs that cannot be easily replicated online. The portfolio's top grocery anchors—Kroger (KR) (5.5% of ABR), Publix (5.0%), Albertsons (ACI) (3.7%), and Ahold Delhaize (ADRNY) (3.3%)—represent stable, creditworthy tenants with deep community ties. The 3-mile trade area demographics average 68,000 people with median household income of $92,000, 15% above the U.S. median, providing a fundamentally strong consumer base.

Technology, Integration, and Strategic Differentiation

PECO's competitive advantage extends beyond asset selection to its vertically integrated operating platform. Unlike many REITs that outsource property management and leasing to third parties, PECO maintains direct control over the entire value chain—from acquisition and redevelopment to leasing and asset management. This integration translates into tangible economic benefits: faster decision-making, lower operating costs, and the ability to capture value that would otherwise leak to external service providers.

The company's development and redevelopment pipeline exemplifies this advantage. With 22 projects under active construction representing an estimated $75.9 million investment, PECO targets 9-12% unlevered yields by building on existing parking lots and acquiring adjacent land. The recent acquisition of 34 acres in Ocala, Florida, for a future grocery-anchored development demonstrates the platform's ability to create value from the ground up. Management estimates this project will deliver a 10.5% unlevered return, significantly exceeding the yields available from stabilized acquisitions.

This operational expertise directly impacts leasing performance. PECO's ability to quickly improve occupancy at acquired assets—such as driving River Park Shopping Center from 79% to 99% leased—creates immediate value accretion. The record-high comparable renewal rent spreads of 23.2% and new leasing spreads of 24.5% in Q3 2025 aren't accidental; they reflect the company's deep understanding of tenant economics and its ability to demonstrate value to retailers seeking locations with top-tier grocers. The average annual rent bumps of 2.6% on executed leases provide embedded growth that compounds over time.

Financial Performance as Evidence of Strategy

The nine months ended September 30, 2025, demonstrate that PECO's strategy is translating into superior financial results. Total revenues reached $538.7 million, with rental income growing 10.0% year-over-year to $525.9 million. This growth wasn't driven by acquisitions alone—same-center NOI increased 3.8% to $344.8 million, indicating healthy internal growth from rent escalations, expense recovery, and occupancy gains. Net income surged 42.1% to $70.4 million, reflecting both top-line growth and operational leverage.

Segment dynamics reveal the quality of PECO's earnings. The Real Estate Properties segment generated $525.9 million in rental income, while the Third-Party Investment Management business contributed $9.4 million in fees, up 18.0% year-over-year. This fee income, derived from asset management, property management, leasing commissions, and construction management fees for joint ventures, provides incremental returns on the company's intellectual capital without additional balance sheet exposure.

Cash flow generation supports the growth strategy. Net cash from operating activities increased 0.5% to $334.7 million for the nine-month period, while investing activities consumed $115.7 million more than the prior year due to $282 million in real estate acquisitions and $95.7 million in capital expenditures.

This investment activity is deliberate—PECO is recycling capital into higher-return opportunities. The financing activities provided $111.0 million in net cash, primarily from $264.1 million in net borrowings, including the June 2025 issuance of $350 million in 5.25% senior notes due 2032.

The balance sheet provides substantial flexibility. As of September 30, 2025, PECO had approximately $977 million in total liquidity, net debt to adjusted EBITDAre of 5.3x, and weighted-average debt maturity of 5.7 years. With 95% of debt fixed at a weighted-average interest rate of 4.4%, the company has largely insulated itself from near-term rate volatility. Management's target of maintaining leverage in the low-to-mid 5x range provides capacity for opportunistic acquisitions while preserving investment-grade metrics.

Outlook, Guidance, and Execution Risk

Management's guidance for 2025 reflects confidence in the underlying business model while acknowledging macroeconomic uncertainty. The company increased its full-year NAREIT FFO per share guidance to $2.47-$2.54, representing 5.7% growth at the midpoint, and core FFO per share to $2.47-$2.54, representing 6.0% growth. Same-center NOI growth guidance of 3.1%-3.6% at the midpoint demonstrates the durability of internal growth drivers.

These assumptions appear achievable based on current leasing momentum. Management expects new and renewal spreads to remain strong throughout 2025 and into the foreseeable future, supported by a robust leasing pipeline. The company's ability to maintain 97.6% occupancy while pushing through 23%+ rent increases suggests that demand for space in grocery-anchored centers remains healthy despite broader retail headwinds.

The acquisition guidance of $350-$450 million in gross acquisitions for 2025 is supported by a strong pipeline and the company's disciplined underwriting approach. PECO targets unlevered IRRs of 9% or more on acquisitions, and management notes that assets acquired over the past several years are exceeding underwritten returns by an average of 100 basis points. The company is prepared to exceed guidance if attractive opportunities arise, but will remain disciplined rather than chase deals in a competitive market.

A critical execution variable is the capital recycling strategy. Management plans to sell $50-$100 million of assets in 2025, utilizing the private market's more favorable valuation of grocery-anchored centers compared to public markets. This disposition activity, combined with $100+ million in retained free cash flow after dividends, provides match-funded capital for acquisitions without requiring equity issuance—a key differentiator from REITs that regularly tap capital markets.

Risks and Asymmetries

The primary risk to PECO's thesis is a severe economic recession that impacts tenant health and consumer spending. While necessity-based retail has historically outperformed during downturns—PECO's portfolio proved resilient in both 2008 and 2020—a deep recession could still pressure occupancy and rent growth. Management acknowledges underwriting a higher probability of recession than in early 2025, though their base case assumes a flat economy rather than a severe contraction.

Geographic concentration presents a secondary risk. With 11.9% of ABR from Florida, 11.1% from California, and 10.2% from Texas, adverse natural disasters or localized economic weakness could disproportionately impact results. However, this concentration also reflects PECO's strategy of targeting high-growth, high-income markets—Florida and Texas have benefited from population migration, while California assets are in strong demographic corridors.

Tariff impacts create asymmetric risk for the 15% of tenants selling discretionary goods. While management estimates 85% of neighbors will experience limited tariff impact, the remaining 15% could face margin pressure that leads to store closures or rent relief requests. The watch list remains low at approximately 2% of ABR, and bad debt is well within guidance at 70-80 basis points, but sustained trade disruption could test these assumptions.

Interest rate risk is partially mitigated but not eliminated. With 95% fixed-rate debt and weighted-average maturity of 5.7 years, PECO has limited near-term refinancing exposure. However, higher rates increase the cost of new debt for acquisitions and could pressure cap rates on asset values, potentially making it more difficult to achieve 9%+ IRRs on new investments.

Execution risk on the development pipeline represents another variable. The $75.9 million in active projects targets 9-12% yields, but actual results may vary based on cost overruns or stabilization timing. While PECO's track record is strong—stabilizing 15 projects in 2024 adding $5.3 million in annual NOI—development inherently carries more risk than stabilized acquisitions.

Competitive Context and Positioning

PECO competes directly with grocery-anchored REITs including Federal Realty (FRT), Kimco (KIM), Regency Centers (REG), and Brixmor (BRX). Relative to these peers, PECO's 70% necessity-based ABR concentration is the highest in the group, providing superior defensive characteristics. While FRT and REG focus on affluent coastal markets commanding higher rents, PECO's national diversification across 31 states reduces regional concentration risk.

From a growth perspective, PECO's 10.4% rental income growth in Q3 2025 exceeds the 1.9%-4.8% NOI growth rates reported by peers, reflecting its more active acquisition strategy. However, this comes with lower absolute scale—PECO's $4.8 billion market cap compares to $8.5 billion for FRT, $13.8 billion for KIM, and $12.9 billion for REG. The smaller size provides greater growth potential but less bargaining power with national tenants.

Operationally, PECO's vertically integrated platform provides a cost advantage over peers that outsource property management. This is reflected in the company's ability to drive 23%+ leasing spreads while maintaining 94% retention—metrics that match or exceed larger competitors. The joint venture strategy also differentiates PECO, providing fee income and access to deals that don't fit peer criteria, such as centers anchored by strong regional grocers.

Balance sheet comparisons show PECO's 5.3x net debt/EBITDA is in line with or slightly below peers' leverage ratios, while its 95% fixed-rate debt profile is more conservative than the 86-93% reported by competitors. This financial conservatism provides flexibility but may limit near-term returns compared to more leveraged peers in a stable rate environment.

Valuation Context

Trading at $34.87 per share, PECO's valuation appears reasonable relative to its growth profile and defensive characteristics. Based on 2025 core FFO guidance of $2.47-$2.54 per share, the stock trades at approximately 13.8x the midpoint—below the 14-18x multiples typical for higher-growth retail REITs and in line with more mature peers.

Cash flow metrics support this assessment. The price-to-operating cash flow ratio of 14.4x and price-to-free cash flow of 24.1x reflect the company's substantial reinvestment in development and acquisitions. The 3.8% dividend yield, recently increased by 5.7%, provides attractive income with room for growth, as the payout ratio of 187% on net income is more than covered by FFO and AFFO.

Relative to peers, PECO's valuation appears modest. FRT trades at 16.5x EBITDA, KIM at 16.9x, and REG at 17.9x, compared to PECO's 16.3x. While PECO's smaller scale justifies some discount, its superior growth rate and necessity-based focus suggest the valuation gap may narrow as the company executes its capital recycling strategy.

The balance sheet strength—$977 million in liquidity and net debt/EBITDA of 5.3x—provides downside protection that isn't fully reflected in the valuation. In an environment where many REITs face refinancing risk and limited acquisition capacity, PECO's financial flexibility represents a meaningful competitive advantage that should command a premium over time.

Conclusion

Phillips Edison has built a defensible, growing business by focusing exclusively on grocery-anchored necessity retail and operating it through a vertically integrated platform. The company's ability to generate 23%+ leasing spreads while maintaining 97.6% occupancy demonstrates that its locations are not commodities—they are scarce, high-demand assets that retailers need to access daily shoppers. This pricing power, combined with a capital recycling strategy that consistently upgrades portfolio quality, creates a self-reinforcing growth model that doesn't depend on fickle equity markets.

The investment thesis hinges on two variables: management's ability to continue sourcing 9%+ IRR acquisitions in a competitive market, and the durability of consumer demand for necessity-based retail through potential economic turbulence. The former is supported by PECO's institutional relationships and deal-sourcing capabilities; the latter is backed by decades of recession-resistant performance. With a strong balance sheet, disciplined capital allocation, and a clearly differentiated strategy, PECO is positioned to deliver mid-to-high single-digit core FFO growth while providing downside protection that few retail REITs can match. The current valuation appears to underappreciate both the quality of the cash flows and the optionality embedded in the development pipeline and joint venture platform.