Grocery-Focused REIT Stays Ahead of Changing Customer Needs

REIT magazine: March/April 2018

Jeff Edison, president and CEO of Phillips Edison & Company, Inc., thinks grocers have the hardest job in the retail industry—and are coming out on top.

“Grocers are the best retailers in the country because of the dynamics they have to operate under. They’re often open 24/7, they have the most SKUs of any retailer and customers are testing them several times a week. That’s a tough place to compete,” Edison says.

Phillips Edison, a public non-listed REIT (PNLR) that Edison co-founded, has invested solely in grocery-anchored shopping centers for the past 25 years. The company’s CEO says he continues to see compelling investment opportunities in the segment as sector fundamentals today are as sound as ever.

“We’re getting growth that’s as strong as it’s been in 25 years. We’re very optimistic about where our business is going,” Edison notes.

Part of that optimism stems from the ability of grocers to stay ahead of changing consumer needs. While the internet is proclaimed as a game-changer in the retail world, grocers have continually faced disruption, according to Edison.

Walmart a Catalyst for Change

Edison cites competition from a retail behemoth as a sign of the durability of grocery-anchored shopping centers.

“Think about the changes when Walmart got into the grocery business. It is so much more influential on the grocery business than anything the internet has come close to doing,” Edison asserts. The best grocers took advantage of technological advances to give their customers improved shopping experiences, such as online ordering and curbside pickup of groceries he says.

Meanwhile, Amazon’s purchase of Whole Foods “was admitting that online grocery doesn’t work unless you’ve got a brick-and-mortar presence,” according to Edison. “To us, this is great news”.

Even so, Edison expects tenants to adapt to whatever success Amazon does have.

“If it’s working (for Amazon), they will shift very quickly. That’s a lot different from what you are seeing in other parts of the retail business,” he says.

Strong Leasing

Phillips Edison’s confidence in the grocery-anchored center segment was reflected in leasing figures for 2017, which looks to be one of its best years ever.

For 2018, the company is anticipating about $500 million in acquisitions, up slightly from 2017’s level of $443 million. The company is active in 34 states. Edison expects many of the property prospects targeted in the next six to 12 months to be opportunistic deals with more upside than projects the company normally undertakes. He notes that the company targets the number one or two grocer in any given market; and sales must exceed the chain’s national average.

“We’ve been one of the largest buyers of grocery-anchored centers in the last three to five years, and that’s something we don’t anticipate changing dramatically going forward,” Edison says.

New Structure

As it contemplates future growth, Phillips Edison is also considering various scenarios for creating liquidity for its shareholders.

At the end of 2017, the company moved to an internal management structure at the end of 2017 upon the acquisition of its former sponsor. The company also discarded its former name, Phillips Edison Grocery Center REIT I, Inc. in favor of Phillips Edison & Company, Inc.

Edison says that entering the listed REIT market today is not an option, given that most comparable stocks are trading at a “fairly significant” discount to their net asset value. “We think that the retail business is being painted with a very broad brush from a valuation standpoint and from an operating standpoint,” he says.

Phillips Edison, however, is not deterred. “We are prepared, we’re ready, we’ll look at that market when it gets better. At the same time, we’ll look at any other alternatives that might be out there,” Edison adds.

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