Phillips Edison & Co (PECO)

A. Company Overview

Phillips Edison & Company, Inc. (PECO) is a leading real estate investment trust (REIT) that specializes in the ownership and operation of grocery-anchored shopping centers across the United States. Established in 1991 and structured as a Maryland corporation in October 2009, the company has positioned itself as one of the largest entities in the grocery-anchored retail sector. PECO focuses primarily on omni-channel shopping centers, which are defined by their robust retail offerings that support both physical and digital shopping experiences.

As of December 31, 2023, PECO's portfolio comprised 281 wholly-owned shopping centers, alongside interests in joint ventures that include Grocery Retail Partners I LLC (14% stake) and Necessity Retail Partners (20% stake). These properties span approximately 34.4 million square feet and are strategically located across 31 states. The majority of rental income is generated from tenants categorized as “Neighbors,” which include national, regional, and local retailers that provide essential goods and services. At the close of 2023, the company's portfolio achieved an impressive occupancy rate of 97.4%.

B. Business Objectives and Strategies

PECO has delineated a clear business objective centered around owning, operating, and managing well-occupied grocery-anchored shopping centers. The aim is to foster long-term growth and create value for stakeholders while maintaining a commitment to responsible corporate citizenship.

Differentiated and Focused Strategy

PECO’s strategy is characterized by several key components:

• Omni-Channel Grocery-Anchored Neighborhood Shopping Centers: The firm invests primarily in centers anchored by leading grocery retailers, known for generating strong customer traffic and high rental demand. As of December 31, 2023, a significant 85% of PECO's annualized base rent (ABR) was derived from properties anchored by the top grocery retailers in their respective markets. Such centers accommodate various shopper needs, including "Buy Online, Pick-Up in Store" options.
• Neighbor-Base: Approximately 70% of ABR comes from tenants that provide necessity-based goods, safeguarding PECO from the volatility associated with distressed retail sectors. This strategic focus emphasizes long-term stability as necessity-based retailers tend to perform consistently across economic cycles.
• Targeted Portfolio: The company targets markets that exhibit favorable demographic profiles synonymous with successful grocery operations. By concentrating on smaller centers, PECO aims to reduce exposure to risks associated with larger retailers and capitalize on high-demand leasing opportunities.
• Macroeconomic Trends: PECO actively monitors economic trends such as migration to suburban areas and increased demand for last-mile delivery solutions, allowing it to make informed growth decisions. The company leverages its understanding of these trends to enhance occupancy and rental rates in its centers.

Balance Sheet Management

PECO maintains a disciplined approach to balance sheet management, seeking to preserve its investment-grade rating while facilitating external growth. The company has identified a market opportunity of around 5,800 centers and employs various capital-raising strategies, including an effective At-the-Market offering and a robust senior unsecured revolving credit facility. This fiscal prudence allows PECO to remain nimble and responsive to acquisition opportunities.

Internal Growth Through Integrated Operating Platform

The company operates an internal, vertically integrated platform that streamlines its leasing and management processes, ensuring that its grocery-anchored shopping centers remain competitive:

• Leasing: PECO’s team of experienced leasing professionals is tasked with enhancing net operating income by attracting high-quality tenants, optimizing rental rates, and maintaining high occupancy levels.
• Property Management Services: By overseeing all operational aspects, PECO ensures properties remain conducive to tenant success, providing responsive customer service and refined management strategies.
• Development and Redevelopment: The company continuously evaluates opportunities for enhancing property value through redevelopment projects, aimed at both improving the physical presence of its centers and increasing returns on investment.

C. Competition

The competitive landscape for grocery-anchored shopping centers is extensive and fragmented. PECO faces competition from institutional investors, other REITs, and local operators seeking to acquire similar properties, as well as from various retail formats like malls and lifestyle centers. The primary competitive factors influencing tenant attraction and retention include:

• Quality of grocery anchor
• Location and trade area demographics
• Tenant mix
• Physical condition of the shopping center
• Occupancy costs

PECO distinguishes itself through the quality of its property locations and a solid reputation in the market, as well as through its specialization in necessity-based retailers.

D. Compliance with Government Regulation

PECO is cognizant of its obligations under various government regulations, which significantly influence its operational and financial frameworks. The company incurs costs associated with compliance across multiple regulatory categories, including tax laws, environmental regulations, and zoning laws. As of the end of 2023, PECO had not identified any material compliance issues but recognizes that changes in regulations could lead to unforeseen liabilities affecting business operations adversely.

E. Corporate Responsibility and Sustainability

PECO is committed to sustainability through its corporate responsibility and sustainability program, branded as the "PECO-ECO Promise™." This initiative is built on four pillars:

• People and Culture
• Environmental Stewardship
• Community Engagement
• Oversight and Ethics

The program emphasizes positive impacts on communities, stakeholder engagement, and environmental initiatives, aligning with corporate strategy and mission.

Environmental Stewardship Initiatives

PECO undertakes a variety of initiatives aimed at environmental sustainability, including energy-efficient upgrades, water conservation, and waste reduction. Key efforts include:

• Retrofitting lighting to LED solutions, aiming for 100% conversion by 2025.
• Installing solar energy systems and electric vehicle charging stations across eligible properties.
• Participating in the Global Real Estate Sustainability Benchmark (GRESB) and implementing water conservation strategies that have saved significant resources.

Community Engagement

Community involvement is integral to PECO's mission. The company engages in various initiatives to foster relationships with local communities, including organizing community service events and supporting disaster response activities.

F. Corporate Governance

Governance practices at PECO are designed to ensure accountability and ethical conduct. The company’s Board of Directors is comprised predominantly of independent members, who oversee corporate governance policies and regular assessments. With an established system of oversight, PECO is committed to maintaining alignment with stakeholder interests and fostering a culture of transparency.

G. Corporate Headquarters

The company conducts its corporate activities from its headquarters located in Cincinnati, Ohio, complemented by regional offices in Atlanta and Park City. This structure supports a range of operational activities, including management, leasing, and investment functions, facilitating a cohesive approach to business strategy.

Through these comprehensive methods and strategies, Phillips Edison & Company, Inc. continuously seeks to enhance its position in the grocery-anchored retail sector while delivering sustainable value to its stakeholders and the communities it serves.