Phillips Edison & Company, Inc. (NASDAQ:PECO) Has a Plan for Retail Mall Domination that These Two Professional Equity Analysts Can Confirm

April 20, 2023
Jeffrey S. Edison co-founded Phillips Edison & Company (NASDAQ:PECO) and has served as a Principal since 1995. He currently serves as Chairman and Chief Executive Officer.

Jeffrey S. Edison, CEO, Phillips Edison & Company (NASDAQ:PECO)

Jeffrey S. Edison co-founded Phillips Edison & Company (NASDAQ:PECO) and has served as a Principal since 1995.

He currently serves as Chairman and Chief Executive Officer. From 1991 to 1995 he was employed by NationsBank’s South Charles Realty Corporation, serving as a Senior Vice President from 1993 until 1995 and as a Vice President from 1991 until 1993.

Mr. Edison was employed by Morgan Stanley Realty Incorporated from 1987 until 1990, and The Taubman Company from 1984 until 1987.

He serves on the Board of Trustees for the International Council of Shopping Centers (ICSC) and is also a board member of the Utah Chapter of The Nature Conservancy.

Mr. Edison received his bachelor’s degree in mathematics and economics from Colgate University in 1982, and a master’s degree in business administration from Harvard Business School in 1984.

His exclusive 2,512 word interview with the Wall Street Transcript reveals the strategic focus and discipline behind Phillips Edison & Company (NASDAQ:PECO).

“…We have approximately 300 shopping centers, and today we’re Kroger’s largest landlord and Publix’s second-largest landlord.

As you’d expect, our top 10 tenants — we refer to them as our neighbors — are grocers, and that is how we feel like we are in a very different niche than other players in retail real estate.

The average size of our centers is 115,000 square feet, so it’s typically made up of a grocery store of approximately 60,000 square feet, and the balance is smaller stores.

Those smaller stores are all focused on necessity-based goods and services with more than 70% of our rents coming from those retailers, which we think is a differentiator from other parts of the retail business…

What we’ve done over time, using the data that we have, is identified 5,800 shopping centers that have the number one or two grocer, are approximately 115,000 square feet, are necessity-based — and that’s what our acquisition target is.

That’s a really big market. If you think about that as about $30 million per property, you’re talking about an $18 billion market. In order to meet our goals, we only have to buy a very small piece of that pie.

So, we’ve identified a big market, but it represents a very specific niche within the overall retail business.”

Operating results are resilient in the face of economic uncertainty according to the Phillips Edison & Company, Inc. (NASDAQ:PECO) CEO:

“…We’re in about as good of an operating environment as we’ve ever been in.

We’re at the highest level of occupancy in our shopping centers that we’ve been in in the history of the company.

We’ve got market-leading leasing spreads, both on new leases and renewals, and we have a renewal rate that is the highest among our peers.

So we’re at a place where the operating side is really strong, which, obviously, is a really nice place to be.

We believe that there are some things happening that have given us the ability to be at this kind of operating level.

It starts with some tailwinds that are helping us, and that’s the suburbanization and movement out of the cities and into the suburbs, which brings more people out to our properties.

Working from home, people are closer to our properties more of the day than they have been historically.

There’s a buying local pattern that really supports our kind of shopping center, because 25% of our small stores are local, so we’re able to bring that local flair to the shopping centers near your home, and that has been a positive.

That’s all stuff that’s driven demand and driven retailers to want to be in our centers, and then there has just been very little new construction over the last 15 years in the shopping center business.

And so, when you combine those two — really good demand with very limited supply —that’s what has allowed us to have the kind of operating results that we’ve had.”

Floris van Dijkum joined Compass Point Research and Trading, LLC in June 2019, bringing 30+ years of real estate investment, research and banking experience.

Floris van Dijkum, REIT equity analyst, Compass Point

Floris van Dijkum joined Compass Point Research and Trading, LLC in June 2019, bringing 30+ years of real estate investment, research and banking experience.

In his 4,407 word interview, Mr. van Dijkum reveals a real estate investment experience curve that completely justifies his decisions.

Prior to joining Compass Point, he started the REIT research effort at Boenning & Scattergood.

Before that, he started the global REIT investment platform at BlackRock (NYSE:BLK), where he served as COO and was responsible for a quarter of the U.S. portfolio.

Prior to BlackRock, Mr. van Dijkum worked in Europe where he served as Chief Investment Officer for Speymill Property in London, head of real estate banking at NIBC in the Netherlands, partner at Forum Partners, head of Lehman Brothers European real estate banking in London, and Senior European Real Estate Research Analyst at Morgan Stanley (NYSE:MS) in London.

Shopping center mall REITs such as Phillips Edison & Company, Inc. (NASDAQ:PECO) is one of the sweet spots for Compass Point.

“…We tend to be quality snobs when it comes to real estate and balance sheets.

The three specific REIT segments that we cover are the mall, shopping center, and hotel sectors, with 22 REIT names.

We tend to be differentiated, I believe, in our research approach. We’re more property specific, as each company owns real estate assets.

People forget that real estate actually is relatively simple.

Real estate is ultimately about supply and demand.

If you look at the mall sector, for example, we’re out of consensus in recommending A-rated mall owners.

We currently like the mall sector because of negative supply growth and rising tenant demand.

There were approximately 1,200 malls in the U.S. and we estimate 800 will ultimately survive.

The demise of the lower-quality malls tends to be slow due to the longer lease terms for larger tenants.

Ownership is highly concentrated as the top 350 malls are 80% owned by the four listed companies: Simon Property (NYSE:SPG)Macerich (NYSE:MAC)Brookfield (NYSE:BN) and Westfield, part of Unibail-Rodamco-Westfield (OTCMKTS:UNBLF).

Many people still believe that all malls are dead, but they are referring to the lower 400 malls that are largely irrelevant to the public companies.

Think about what the malls went through starting essentially in 2015, with the “retail Armageddon.”

When the cost of capital was near zero and retailers chased sales, as opposed to profits, investors worried e-commerce was going to put all physical retail stores out of business.

Malls got disproportionately impacted as there were too many lower-quality malls in the U.S.

Bearish investors cited that retail per capita in the U.S. is twice levels in Europe. Mall space is just a fraction of total retail space, as the vast majority of retail is open air.

Due to the discretionary nature and concentrated ownership by the public companies, mall stocks got punished as investors fretted about tenant demand.

Obviously during COVID, because malls were deemed non-essential by the government, mall tenants and owners got hit much harder than the open-air shopping center space which were deemed largely essential.

During the “retail Armageddon” and COVID, the retail and mall sectors experienced bifurcation between the good and the bad — this is where our property quality differentiation helped.

Post COVID, retailers realized they made their highest margins selling in the store and refocused their business to expanding their footprint in the locations where they achieved their highest sales density, the A-rated malls.

We were focused on better-quality malls and shopping center owners, particularly those with stronger balance sheets.

We’ve always had a very strong preference for the higher-quality assets, and those mall owners that survived are in fact thriving now due to the strong tenant demand growth and negative supply growth.

Mall owners experienced an approximate 30% NOI drop during COVID.

We expect that Simon, which is the largest mall owner in the world, and Tanger (NYSE:SKT), which is the pure-play outlet owner, will both reach 2019 levels of NOI by the end of 2023.

For open-air shopping center owners, NOI dropped as well because select tenants weren’t paying and restaurants were closed, but the decline wasn’t as severe as in the mall space.

Every shopping center REIT that we cover, and we cover 12 of them, had recovered to 2019 levels of NOI in 2022.

The sector was helped by grocery-anchored centers that proved resilient as consumers continued to buy their groceries.

Grocery-anchored shopping centers were deemed essential, so they were never shut.

Likewise, drugstores, banks, and quick service restaurants continued to operate during COVID. So that made it a lot easier for those tenants and those segments to survive.

Today, shopping center REITs are continuing to grow NOI as additional tenants take occupancy of their leased space and owners have above-average signed not open — SNO — pipelines.”

This confirmation by the Phillips Edison & Company (NASDAQ:PECO) is echoed by Alexander D. Goldfarb, a Managing Director and Senior Research Analyst at Piper Sandler (NYSE:PIPR).

Alexander D. Goldfarb is a Managing Director and Senior Research Analyst at Piper Sandler.

Alexander D. Goldfarb, Managing Director, Senior Research Analyst, Piper Sandler.

Mr. Goldfarb’s 3,888 word interview also reveals a bias to the shopping center thesis.

Previously, he was a Managing Director and the Senior REIT Analyst in the research department of Sandler O’Neill + Partners, L.P.

Mr. Goldfarb joined the firm in 2009 following two years as a Director and Senior REIT Analyst at UBS.

The Piper Sandler REIT analyst also confirms the Phillips Edison & Company (NASDAQ:PECO) thesis.

“My point is, all of these businesses want space, and if you’re Starbucks you want any end cap you can get, because you want drive-thrus.

Drive-thrus are incredibly valuable right now.

It’s like when you have a birthday cake, everyone wants a corner.

In a shopping center, everyone wants an end cap, but there are only so many end caps to go around.

So what are the landlords doing? The landlords get creative and say, how can we create more drive-thrus? Is there space to build out in the parking lot? Can we reconfigure some of the buildings to allow for more drive-thrus?

The point is, those are more in demand.

What I’ve just described is a scenario where landlords are not short for demand, and they’re not long excess inventory of space, and that’s a wonderful position to be in.”

Get the complete interviews on all of these REIT specialists including the full Phillips Edison & Company (NASDAQ:PECO) interview with founder and CEO Jeffrey S. Edison, only in the Wall Street Transcript.

Jeffrey S. Edison, Chairman & CEO

Phillips Edison & Company, Inc.

11501 Northlake Drive, Cincinnati, OH 45249

(513) 554-1110