PECO's Strategic Acquisitions And Retailer Demand Propel Growth Amidst Market Opportunities

Key Takeaways

• Robust property acquisition strategy and retailer demand are expected to drive earnings growth and enhance revenue and occupancy rates.
  
• Market trends and development projects offer substantial opportunities to increase revenue, benefiting from potential merger outcomes and suburban retail shifts.
  
• Reliance on acquisitions and high occupancy rates exposes the company to interest rate and macroeconomic risks, potentially affecting revenue and net margins.

Catalysts

Phillips Edison & Company, Inc. (“PECO”) is one of the nation’s largest owners and operators of omni-channel grocery-anchored shopping centers.

• PECO anticipates strong earnings growth in 2025 and beyond due to their robust property acquisition strategy. The company is increasing its acquisition guidance to $275 million to $325 million for the year, which is expected to enhance future revenue streams from new properties.
  
• The potential impact of the Kroger-Albertsons merger is seen as a positive catalyst, as it could lead to higher sales volumes at Albertsons-anchored centers, thus increasing revenue and potentially net margins if the merger occurs.
  
• PECO’s leasing team is capitalizing on strong retailer demand, achieving high occupancy and strong rent spreads, which are expected to continue. This has the potential to boost revenue through increased rents and occupancy rates.
  
• Existing suburban market trends, such as the shift towards smaller-sized retail spaces, provide significant opportunities for PECO to fill their properties with in-demand retailers, which can lead to increased revenue and net income.
  
• PECO's pipeline of ground-up development and repositioning projects is expected to add substantial value to their portfolio, generating an approximate annual NOI of $4.2 million from stabilized projects and thus contributing to overall net income growth.

Phillips Edison Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Phillips Edison's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.0% today to 12.3% in 3 years time.
• Analysts expect earnings to reach $94.6 million (and earnings per share of $0.78) by about November 2027, up from $58.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $117.3 million in earnings, and the most bearish expecting $66.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 63.7x on those 2027 earnings, down from 82.9x today. This future PE is greater than the current PE for the US Retail REITs industry at 34.7x.
• Analysts expect the number of shares outstanding to decline by 3.86% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.49%, as per the Simply Wall St company report.

Phillips Edison Future Earnings Per Share Growth

Risks

• The company's reliance on net acquisitions to fuel growth, with no significant maturities until 2027, may expose it to interest rate volatility and increased interest expenses, impacting net margins and earnings.
  
• The dependence on high occupancy rates and new lease spreads, particularly from anchor tenants, poses a risk if retailer demand weakens or macroeconomic conditions change, affecting revenue.
  
• Rising credit card delinquencies could signify weakening consumer financial health, potentially leading to reduced spending at PECO’s centers and affecting revenue growth.
  
• The success of acquisition strategy relies on acquiring high-quality centers with a target unlevered IRR of over 9%, which may become challenging if cap rates compress or asset prices increase, impacting earnings.
  
• Any delays or failures in reopening vacated spaces with higher rent leases could lead to short-term revenue losses and affect the predictable growth in net operating income (NOI).

Valuation

• The analysts have a consensus price target of $40.1 for Phillips Edison based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $46.0, and the most bearish reporting a price target of just $35.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $769.8 million, earnings will come to $94.6 million, and it would be trading on a PE ratio of 63.7x, assuming you use a discount rate of 7.5%.
• Given the current share price of $39.25, the analyst's price target of $40.1 is 2.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.