Grocery-Anchored Shopping Centers Drive Growth And Resilience For Retail REIT

Key Takeaways

• The strategy of focusing on grocery-anchored shopping centers and necessity-based retail tenants aims to enhance revenue, occupancy rates, and stable income.
  
• Investing in technology and forming strategic partnerships are anticipated to increase operational efficiencies, reduce costs, and facilitate portfolio and capital growth without affecting shareholder value.
  
• Relying on high foot-traffic grocery stores and targeted acquisitions in a rising interest rate environment could threaten earnings 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.

• The targeted acquisitions strategy, with a focus on well-performing, grocery-anchored shopping centers, aims to solidify and potentially expand the high occupancy rates and leasing spreads, positively impacting revenue growth and same-center NOI.
  
• The significant ongoing investment in technology and innovation, as evidenced by the awards for best use of AI, is anticipated to drive operational efficiencies and customer satisfaction, potentially reducing operational costs and improving net margins.
  
• The strategic partnership and joint venture with Cohen & Steers offers an expanded capital pool for acquisitions and growth, indirectly facilitating portfolio expansion without diluting existing shareholders, which could lead to incremental FFO per share growth.
  
• The active management of their portfolio, including acquisitions and dispositions aimed at maintaining a low-leverage balance sheet, supports financial flexibility and the ability to capitalize on accretive growth opportunities, enhancing earnings and shareholder value.
  
• The continued focus on necessity-based retail tenants providing resilience in varied economic conditions may lead to sustained and stable revenue streams, supporting the company's efforts to improve or maintain high occupancy levels, which is critical for FFO growth and stability in dividend payouts.

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 shrink from 9.3% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $102.3 million (and earnings per share of $0.7) by about August 2027, up from $58.7 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 $79.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 67.4x on those 2027 earnings, down from 76.7x today. This future PE is greater than the current PE for the US Retail REITs industry at 34.0x.
• Analysts expect the number of shares outstanding to grow by 3.5% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.29%, as per the Simply Wall St company report.

Risks

• The reliance on high foot-traffic grocery stores as anchors could pose a risk to revenue if consumer behavior shifts significantly due to economic downturns or increased online shopping.
  
• Increasing competition in acquiring grocery-anchored shopping centers, particularly from ventures like the new joint venture with Cohen & Steers, could escalate asset prices, impacting net margins by increasing capital expenditures.
  
• The strategy of targeted acquisitions aiming for an unlevered IRR of over 9% might be compromised by rising interest rates, affecting earnings by increasing finance costs.
  
• The involvement in joint ventures for acquisitions could dilute focus from the core portfolio or lead to conflicts of interest, potentially impacting the company's ability to maintain its differentiated strategy, hence affecting net margins.
  
• The mentioned proactive approach to managing uncollectible rents and lease renegotiations might temporarily lead to higher operational expenses, impacting net margins if recovery from tenants falls short of expectations.

Valuation

• The analysts have a consensus price target of $37.22 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 $41.0, 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 $754.4 million, earnings will come to $102.3 million, and it would be trading on a PE ratio of 67.4x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $36.75, the analyst's price target of $37.22 is 1.3% 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.