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Robert Myers

Thank you, Jeff, and thank you for joining us. The PICO team delivered another quarter of strong operating results and leasing momentum. The quality of PECO's cash flows is reflected in our market leading operating metrics. Our long operating history has given us an informed measure of what drives quality and value at the shopping center level.
We believe SOR provides important measures of quality.
Spreads, occupancy, advantages of the market, and retention.
In terms of leasing activity, we continue to capitalize on strong renewal demand. The PECO team remains focused on maximizing opportunities to improve lease language at renewal and drive rents higher. In the first quarter, we maintain strong comparable renewal rent spreads of 20.8%. Our inline renewal rent spreads have reached a record high of 21.7% in the quarter.
Comparable new leasing rent spreads for the first quarter were 28.1%, and our inline new rent spreads remain strong at 27.5% in the quarter.
These spreads reflect the continued strength of the leasing and retention environment. We expect new and renewal spreads to continue to be strong throughout the balance of this year and into the foreseeable future. During the first quarter, our combined new and renewal average annual rent bumps for 2.7%, another important contributor to our long-term growth.
Porfolio occupancy remained high and ended the quarter at 97.1% least.
Anchor occupancy remains strong at 98.4%. We currently have just 15 vacant spaces in our portfolio that are over 10,000 square feet. This includes the anticipated party city and big lot spaces.
Activity for these anchor leases currently out for signature is extremely positive.
Examples of retailers who are showing interest in these spaces include TJ Maxx, Sierra, Total Li, Planet Fitness, Ace Hardware, Dollar Tree, Alpha Beauty, and Coolis or Performance.
Inline occupancy ended the quarter at 94.6%. This was in line with internal expectations as we typically see a nominal change during the first quarter.
Given our strong leasing pipeline, we expect inline occupancy to remain high throughout the year at around 95%, which is very strong.
As it relates to bad debt in the 1st quarter, we actively monitor the health of our neighbors. Bad debt was lower than a year ago, and we are not concerned about bad debt in the near term, particularly given the strong retailer demand. We continue to have a highly diversified mix with no meaningful rent concentration outside of our grocers.
The key advantage of Pico's suburban locations is that our centers are situated in markets where our top grocers are profitable.
Pico's 3 mile trade area demographics include an average population of 68,000 people and an average median household income of 92,000. This is 12% higher than the US median.
These demographics are in line with the store demographics of Kroger and Publix, which are Pico's top two neighbors.
Our markets also benefit from low unemployment rates, which are below the shopping center peer average.
The necessity-based focus of our property is important when demographics are considered. If you are comparing a Publix to an Apple store or a high-end fashion retailer, the demographics that each retailer needs to be successful are very different. Pico's demographics are very strong in supporting our grocers and necessity-based neighbors.
We continue to enjoy a well diversified neighbor base. Our top neighbor list is comprised of the best grocers in the country. Our largest non-grocer neighbor, TJ Maxx, makes up only 1.4% of our rents.
All other non-grocer neighbors are below 1% of ABR. When looking at our very limited exposure to distressed retailers, the TOP10 neighbors currently on our watch list represent approximately 2% of ABR.
This is not by accident. It is a product of many years of being locally smart and intentionally cultivating our portfolio of grocery anchored neighborhood centers located in strong suburban markets.
Our neighbor retention remained high at 91% in the first quarter while growing rates at attractive rates. And I want to repeat that the PICO team delivered record high inline renewal rent spreads in the first quarter. High retention rates result in better economics with less downtime and dramatically lower tenant improvement costs. Lower capital spend results in better returns. The IRR on a renewal lease has been meaningfully higher than the return on a new lease. In the first quarter, we spent only $0.61 per square foot on tenant improvements for renewals.
We have looked at quality differently over 30 years, and we continue to believe that soar is the best metric for quality.
The overall demand environment, the stability of our cash flows, the strength of our grocers, the health of our inline neighbors, and the capabilities of our team give us continued confidence in our ability to deliver strong growth in 2025 and in the long term.
I will now turn the call over to John.
John Thank you, Bob.

John Caulfield

And good morning and good afternoon, everyone.
I'll start by highlighting first quarter results, then provide an update on the balance sheet, and finally speak to our affirmed 2025 guidance.
First quarter, 2025 Nari FFO increased to $89 million or $0.64 per diluted share, which reflects year to year per share growth of 8.5%. First quarter core FFO increased to $90.8 million or $0.65 per share, which reflects year over year per share growth of 8.3%. Both Nari Epifo and core Epifo benefited this quarter from a one-time lease termination fee of approximately 1 penny per share. We had a lease for the space lined up at the time of termination, so this capital will help pay for the new neighbors build out.
These terminations are a part of our business, but this termination fee income was larger than normal, which is why we want to highlight this item as non-recurrent. We see this activity as a long-term value add for PIO.
Our same center NOI growth in the quarter was 3.9%. Turning to the balance sheet, we have approximately $760 million of liquidity to support our acquisition plans and no meaningful maturity until 2027.
Our net debt to adjusted EIA was at 5.3 times as of March 31, 2025.
This was 5.0 times on a last quarter annualized basis, which is also important to track in quarters with elevated acquisition volume.
Our debt had a weighted average interest rate of 4.4% and a weighted average maturity of 5.6 years when including all extensions.
As a reminder, in January, we amended our revolving credit facility to extend its maturity to January 2029 and increased its size to $1 billion. This gives us additional liquidity and flexibility as we acquire assets and monitor the capital market.
At the end of the first quarter, 86% of PIO's total debt was fixed rate, which is in line with our target of 90%.
We do not have the immediate intentions to execute interest rate swaps on our floating rate debt.
PIO continues to have one of the best balance sheets in the sector, which has us well positioned for continued external growth.
As Jeff mentioned, we are pleased to affirm our 2025 guidance.
As a reminder, our guidance for 2025 may read FFO per share reflects a 5.7% increase over 2024 at the midpoint.
And our guidance for 2025 core FFO per share represents a 5.1% increase over 2024 at the midpoint.
We also affirmed our guidance range for 2025 same center NOI growth of 3% to 3.5%. As we continue to enhance our neighbor mix, our actions to improve merchandizing and capture mark to market red growth with new neighbors will be a slight headwind to 2025 growth.
As we have said previously, the PICO team is focused on the long term, and our actions to replace neighbors are intentional.
We believe our low leverage gives us the financial capacity to meet our growth targets. We also have diverse sources of capital that we can use to grow and match fund our investment activity.
These sources include additional debt issuance, dispositions, and equity issuance.
Match funding our capital sources with our investments is an important component of our investment strategy.
As a reminder, our guidance does not assume equity issuance in 2025, as we believe we will be in our target leverage range of low to mid 5 times on a net debt to adjusted even to our basis.
We continue to believe this portfolio and this team are well positioned to deliver mid to high single digit core FFO per share growth on an annual basis. This assumes stabilized interest rates, which are expected to remain a near term headway.
However, we're hopeful that we're near stabilization as we are projecting to deliver earnings growth of over 5% in 2025.
We also believe that our long term AFFO growth can be higher as more of our leasing mix is weighted towards renewal activity.
We believe our targets for growth in core FFO and AFFfo will allow PIO to outperform the growth of our shopping center peers on a long-term basis.
With that, we will open the line for questions.
Operator.

Question and Answer Session

Operator

Thank you. To ask a question, please press one on your telephone keypad to raise your hand and join the queue. And if you'd like to withdraw your question, please press one again.
Your first question comes from the line of Caitlin Burrows with Goldman Sachs. Please go ahead.

Caitlin Burrows

Hi, good morning, everyone. Maybe starting with leasing. I feel like normal occupancy seasonality is understood, but can you give any color on the seasonality of leasing? And then with that in mind, could you differentiate how March leasing went and then how April leasing has gone and any potential pullback or expectations for the May ICSC.

Jeffrey Edison

Sure.
Thanks, Caitlin. Bob, you want to, take that, I would say generally as we've talked about and Throughout this call, guys, when you ask, when you're on your questions, I want to make sure that we don't get confused in terms of where we are today versus where we think we're going to be over the year because we're in a time where there's drama, pretty, dramatic changes happening and there's a different sort of view for what's happened. In the first quarter versus what we all the expectations for the rest of the year. So we'll, as we answer, we'll TRY to be very specific about where we are today. And then if you've got questions about what we think might happen, well, we're happy to talk to those. But for us it's really focused on that. So Bob, you want to take the the leasing and and I the issue that Kaitlin asked about. Yeah.

Robert Myers

Yeah, sure. Thanks, Jeff, and thank you for the question. It's very normal in doing this for the last 25 years. First quarter, you're typically going to see a little bit of fall off and occupancy and we're in a very good spot at, 97.1% within line at 94.6%, anchors at 98.4%. We have a lot of activity on our anchor spaces and like I mentioned in the call, we only have 15 of those opportunities, but we're seeing, some really nice mark to market opportunities on the spreads, retention remains high at, 91%.
And the visibility that we have, over the next 67 months, the activity is very strong. I mean, we have more leases out for signature now than we did last year at this point in time. I'm not seeing a slowdown anywhere and quite H1stly, if you even you look at our leasing spreads of 28% and I look at where, the pipeline is, it's going to be better than that. And when you look at renewal spreads of the 20.8%, I can tell you with the visibility, they're better than that. So I just want to reiterate that the market, the demand, all the calls that we're making for Vegas right now, retailers are wanting to grow. And Jeff hit on this, right? We're cautiously optimistic and so are the retailers, but they still want to grow and they're still going through our portfolio looking to be aligned with the #1, #2 grocer, and that's where we're seeing success and I don't see it slowing down.

Caitlin Burrows

Got it. Okay, good to hear. And then, maybe switching over to the guidance side, so it does seem like FFO guidance for the year implies that the 2 to 4Q average will be roughly the same as 11, even if you take the lease termination fee out. So I was wondering, John, if you could give some more detail on what's creating that headwind, and what could get you to the higher versus lower end of the FFO range.

Jeffrey Edison

Yeah, John, before you take it, Caitlin, that we want to make sure that we're clear by that like, this is our first quarter. It's very early in the year. We, we're really happy with the results we had for the first quarter. But as we enter, the rest of the year with more confusion out. There, we're going to necessarily take a conservative approach to looking at what's going to happen throughout the rest of the year, as I think everyone will because of just the uncertainty with with what's going on. But John, do you want to answer in terms of the specifics of how, they would look quarter by quarter?

John Caulfield

Sure, so as we look forward, I mean, you already called out in the first quarter that, the lease term wouldn't, termination fee wouldn't be annualized, and as we look ahead, I think Bob said it is, we're cautiously optimistic about the year, and I think as we look over the quarters, what would take us to the higher end would be, things like improved. In the capital markets, I do think that, we affirm kind of each of the guidance ranges, and we just want to make sure that we are, setting expectations that we're in this for the long term and that ultimately we're focused on making the decisions that are going to drive growth not just in 25 but 26, 27, 28, and so, I think that.
More. Certainty around.
Forward debt costs would be, certainly helpful equity markets, but overall from an acquisition standpoint we're feeling really good about both what we've acquired as well as the pipeline and feel good about the year and so I think it's just the first quarter we've we've reaffirmed, I think each quarter that we've we've been doing this so I think we're just making sure we've got room to operate the business as we feel best.

Caitlin Burrows

Thanks.

Operator

Your next question comes from the line of Handel faint juiced with Mizuho. Please go ahead.

Haendel St. Juste

To.
Hey there, I guess, good morning. I'm not sure where your folks are, but, I had a couple of questions. Maybe first for you, John, on the variable rate exposure. You're 14% today, I think you're going up to around 25, 26% later this year with the expiration of the swap. Sounds like you said you're comfortable kind of with the level of today, so I'm wanting to get a bit more clarity on your strategy or thinking here and maybe some thoughts on your plans to address some of the upcoming swap expirations. Thanks.

Jeffrey Edison

John, do you want to take that?
Sure.

John Caulfield

So, I just love questions about interest rate swaps. So you're right, and we're about 14% today. I think as we look at it, what we executed in the way we did it in 2024 is a great blueprint for what our plans are in 25. Ultimately we are working towards a ladder maturity ladder that will, keep us as a repeat issuer in the. Bond market, we were able to do it twice last year. We've got, we're looking at managing our our balance sheet prudently and so when we look at those expirations, our desire is to continue to be an issuer in that market and to replace term loans, which is why those swaps are there and expiring, replace those term loans with fixed bonds as we go forward. So I think for us as we are managing both our liquidity as well as a maturity ladder. That's part of it is that the swaps are helpful. I will say that I think broadly people, there's uncertainty as to whether or not interest rates will go down or up, but we're now in a positively sloped rate environment. And so ultimately, we are comfortable with this level. I don't see us getting to the 25% variable rate because I anticipate that between our acquisitions and other financing. That ultimately we would be, kind of lattering out additional, debt activity in the year, which is what we're kind of assuming in our base case plan. So we will be managing it to a more fixed balance sheet with a long term, goal of 90%.

Haendel St. Juste

Great, appreciate the color there. One more for me on, transactions. Obviously there's, lots of chatter deals taking a little bit longer, potentially counterparties moving away from the table. So I guess I'm curious more broadly on, kind of what you're seeing. Are you seeing sensing any deals taking longer? Are you seeing any changes in cap rates, and then maybe some color on what you're expecting for the balance of the year between on balance and JD acquisitions. Thanks.

Jeffrey Edison

Great. Well, it's a great question, and I think it's very relevant to how we kind of open this, there's the first quarter and our experience in the first quarter, we did see, I mean, that was a very healthy acquisition market. There were quite there's quite a bit of product on the market. There was also quite a A few buyers.
I think it's too early to project what's going to happen, sort of going forward. We do hear stories about some buyers, sort of stepping back.
Obviously that would be positive for us in the event that we would have less competition for for what we're buying, but also, But, uncertainty tends to slow down and slow the pace of the acquisition market. So that part will probably be a negative going forward.
We haven't seen it yet. We continue to think there's going to be a pretty strong ICSC with with the amount of product that's coming on the market.
We Generally, I think they are optimistic that there will be a number of players that will step back in this environment and probably may may create some better buying opportunities for us, but it's obviously early days and we will see if there, if that is the the impact through the rest of the year. But so far, the first quarter was a strong quarter for us. We, the projects we bought, we feel really good about great anchors, great, I unlevered IRR is well above 9, so all things that, fit sort of the fairway deals for for Pico and we have a good backlog going into the 2nd quarter, so we feel we feel good about the year.
Thank you.
Thanks.

Operator

Your next question comes from the line of Samir Kanal with Bank of America. Please go ahead.

Samir Kanal

Good afternoon everybody. Hey, Jeff, I guess it's nice to see that leasing still remains strong here.
Doesn't look like there's been a bit of a pullback. But as we just take a step back and and look at kind of your approach to dealing with the shop tenants at this point, right, as as renewals come up, has there been a shift, sort of a shift in strategy at all? I mean, you look at kind of your exposure to some of the soft goods, right? You're roughly 10%.
So clearly, their margins are going to get impacted, right, with tariffs and costs. So how are you sort of approaching those conversations, even though you might not be seeing anything today.
But as you think about those conversations, I mean, how are you approaching those?

Jeffrey Edison

So, Up to today, we basically treated as a very normal discussion we have with all of our neighbors when they come up for renewals, expecting, significant increases and limited TI on the renewals and we have, good sales information which allows us to have those discussions. . The the look going forward, I think the way we kind of bucketed it and tried to to frame the the impact of tariffs is, okay, what is the and the way, I think there's two issues here is the tariff impact. There's also then the recession impact, the potential recession impact, but the potential recession impact, I think was is a It's not something we're really talking with retailers on the renewal right now because it, it's still a percentage number. It's not a reality. So I think that's, something that we might see later in the year. The way we looked at the tariffs, we said, okay, let's look at the by category, what we think the impact of the tariffs is going to be. And I think our feeling is that Probably about 10% of our neighbors are going to have a fairly significant impact from the tariffs that they are being implemented. We think about 10% of our neighbors are in that sort of middle to cap bucket where there's going to be some impact, but it's not going to be crippling as as it is in that 1st 10%. And then, but because of the nature of our business being in, focused on necessity-based goods, with that grocery anchor being the number one or two grocer, that that almost 80% of our neighbors are going to be in the service side. They're going to be in, they're going to have Some impact but but pretty limited impact from the tariff discussions. So when we put that together, we don't see big changes in terms of our approach to leasing and it's very similar in terms of our approach to acquisitions because we're looking.
On the acquisition side, almost the same way as we are in the current leasing side, which is how are we looking at the strength of each of the retailers that we underwrite in our acquisitions and, when you're looking and having discussions on the leasing side, it's the same, it's a very similar kind of discussion and But as we said, I, it is, we're basing that on the knowledge as of today, and that will continue to evolve over the next, 6 to 12 months. And, we may be talking a very different thing, 12 months from now that we are today, but right now, the demand is strong and we're going to continue to to push the way we have over the last 12 months.

Samir Kanal

Got it. So it doesn't sound like, at least from your conversations you're having with, whether whether it's your retailers or kind of retailers, broadly speaking, nobody, no retailer at this point is sort of pulled back. They're open to buy plans at this point, right? That's what it sounds like.

Jeffrey Edison

Well, we are always having that because we're in the retail business. So it's like when you're dealing with retailers are always going to be some of that by category, but we, what we're finding is that there's the demand overall is strong enough to allow us to continue to find those kinds of spreads and so it's, we're not at that point where we're actually changing our leasing strategy because we're seeing a major shifts in the retail demand. Again, remember, like we are in the necessity-based side of the business and the impact on us as we saw in In both of, the great financial crisis as well as the pandemic, it's significantly different when you're in the necessity-based retail part of the business versus the more discretionary sides, and we will be the last to see impact from major changes because of that focus.
Does that make sense? Yeah, no, it.

Samir Kanal

Does.
Thank you so much.

Operator

Yeah.
Your next question comes from the line of Dori Kesten with Wells Fargo. Please go ahead.

Dori Kesten

Thanks. Good morning. We know that the portfolio is pretty defensive leaning, but have you seen any sort of slowing in the receipt of rent payments, whether it's for certain retailers or certain categories or just in certain markets, in the last month? I know it's a relatively short time frame.

Jeffrey Edison

Yeah. John, do you want to take that?
Sure hi.

John Caulfield

Dori or no, I would say that actually it's pretty consistent. I mean we saw a decline in bad debt year over year and ultimately even in a shorter term basis I mean we continue to monitor the health of our retailers and have discussions and you know. While we continue to dialogue there hasn't been anything that we have really noted on a on a regional or or use specific basis it kind of aligns with our you know the the distribution I would say of of neighbors that we have across, kind of merchandizing categories.

Dori Kesten

Okay. Thanks.

Jeffrey Edison

John.
Thanks, Jo.

Operator

Our next question comes from the line of Ometeu Akisana from Deutsche Bank. Please go ahead.

Omotayo Okusanya

Hi, yes, good afternoon, everyone. First one is to start off with acquisitions in the quarter again, deals done kind of in the low 6s. You, the implied cap rate on your, on your stock is about the mid 6. So typically I know again the investment spread initial investment spreads have been getting tighter, but I don't think I've come across a quarter where it's been negative. So just curious kind of what's happening along those lines, whether there was something unique with these transactions, whether they just that's just where market prices are and capital rates keep compressing despite everything that's going on around us.

Jeffrey Edison

Yeah, so, first of all, as we are not. Rate buyers, we are looking at assets on a long-term investment basis, and we're very focused on getting to unlevered IRR's, 9+.
And as you go, if you look back historically, we always bounce around a lot quarter to quarter on cap rates like they'll be up, they'll be down and it's really not a great indicator. It will be over the year, like what the blended cap rate is. Over this year, but there's literally a specific story for every asset we buy every time, for and always has been. So, I would not take the cap rate of this quarter and annualize and say that's where we're going to be because if you look at our backlog going in, it's it's actually quite a bit higher than that, the cap rate, but again, it's not really what we're focused on. And what we're focused on is what what we can do with the properties that we're buying to make sure that we can get to that, 9+ unlevered IRR and we're finding it in this environment, we found, almost 150 million products in the first quarter, and we have really strong backlog going into the second quarter. So, we're generally optimistic about that. And, If you look at our underwriting, we, we're, we are underwriting, a higher chance of a recession going forward than we did in the first quarter, but we're still, being able to find the product and that will translate into a cap rate, but we're not buying cap rate and because it's so much of this has a story to it. I mean, one of the projects we bought has a 11 of the anchors, the the grocery store has a bump in next year, that will take it from a 61 cap rate to almost a 6-7 cap rate, and they're already, we've already had discussion with them and they're anticipating doing it. So you look at that property, you're like, oh, it looks like they bought it for 61, not really, we really bought it for 6-7 with the ability to grow it so that we were going to get to our 9 unlevered IRR. So it it we can go through with your property by property, and walk through the, our analysis, but you will find, that, we, maybe year by year, it's a good analysis, but quarter by quarter, it gets a little bumpy.

Omotayo Okusanya

Gotcha. That's super helpful. If I could ask one of John, just again with where the stock is at this point and you kind of think about capital allocation decisions. I mean, the stock buybacks start to sound a little bit more attractive or not?

John Caulfield

Oh, go ahead, so thanks for the question. So we definitely are looking at it and the piece that I would say to, on the former question and on this one is we're focused on cash flow growth per per share, so we are actively looking at, acquiring assets we're looking at disposing of assets, while we do, we have a $250 million dollar, open plan. Approved by the board for stock repurchases we have not done anything yet. It is something that we have considered, but ultimately we, even at these levels, still believe that the best, place for our capital.
Is continued, net acquisitions and so it is, in our tool kit of things that we can use, but we have not had, have not done anything yet and. We're looking at things like building a strong investor base, making sure we have adequate float liquidity, and all those pieces that are a bit more qualitative but ultimately would impact quantitative. But even at these quantitative levels we still are, believing in our strategy of growing the platform through continued asset acquisition.

Omotayo Okusanya

Appreciate it thank you guys.

Operator

Your next question comes from the line of Todd Thomas with KeyBank Capital Markets. Please go ahead.

Todd Thomas

Hi, thank you. I just wanted to go back first to the sequential decline in occupancy.
It was described as in line with expectations, and I understand the seasonality that you discussed, but just curious where you are in terms of some of the bankruptcy related activity. I know Pico had relatively less exposure, versus some of your peers, but just wondering if you could provide. An update there and also discuss occupancy trends into the 2nd quarter and the balance of the year.

Jeffrey Edison

Yeah, Tod, why don't take this start and Bobby, if you could take it, that'd be great. But Todd, I do, we should keep in mind. That we have the highest occupancy of any of the people in our space, and we will talk about, we'll talk a little, about seasonality and some of the stuff that's that's happening there, but it's really important to know that we are at, very strong occupancy numbers and small amounts of change can move things a little bit here and there. We're we're. Really good. We're feeling really good about the leasing environment as of today, and we'll see what happens to the rest of the year, but it continues to be positive for us. So again, we, I don't want to lose the fact that, we do have the highest occupancy of anyone in the space and it's because neighbors want to be in the #1 or 2 grocer, shopping center, and we think we have the highest quality centers that, across the portfolio, and that's a great indicator of that. Do you want to fill it on the leasing time?

Robert Myers

Yeah, sure, thanks, Jeff, and I appreciate the question.
I think the biggest thing that I've seen in our portfolio, if I look back at 3rd quarter of last year, we were able to take 8 spaces over 15,000 square feet and lease those at new leasing spreads of 105%. And I think what I, what I'm focused on with these bankruptcies is when you look at Joanne, you look at Big Lot's Party City, I mean, these are rents that are in the high single digits. So I think the mark to market opportunities are very strong.
We have LOIs working on about 80% of those that are coming back and they're with great retailers like TJ Maxx and Sierra and Total Wine, Planet Fitness, Dollar Tree, Alta Beauty, just to name a few. The rents are considerably higher, certainly, mid to high double digit leasing spreads. So I mean we're going to take advantage of that. That'll strengthen our portfolio over a period of time. So yeah, even though there was a decline in occupancy, I'm still very encouraged about that that I would say anchor demand and space is over 10,000 ft in our portfolio that we can execute and have that rent come online the following year.
So it's positive.

Todd Thomas

Okay, but so do you expect occupancy to stabilize and and start to improve throughout the balance of the year as you backfill some of that space or is there a little bit more, okay.

Robert Myers

Got it will.

Todd Thomas

Okay, and then, John, I heard you discussed the lease term fee in the quarter. I'm sorry if I missed some of the detail, but was that primarily one tenant or or one lease? And is there any additional detail that you can provide around that that tenant and and the center and and maybe the decision by that tenant to terminate the lease? What happened there exactly?

John Caulfield

Sure, so, determinations are part of our business, and, I would note that even at this level, it was just a few years ago we had similar levels, but it was, outlier in the size, but the large increase every year was prima primarily related to one location. It is a retailer that is national but they they made it on a location specific basis. It was not bankruptcy related and ultimately they were earn. There was no bad debt they continued to pay, but ultimately, we had an opportunity to replace them and so. Ultimately we had a lease in hand. We negotiated the buyout. We're able to, execute the lease with the buyout at the same time and then apply the capital to the new neighbor coming in. So I wouldn't say that it's, anything, that unusual. I would say the size of it was unusual, which is why we made a point of pointing it out. But ultimately, the center, is going to continue to do very well. I think it's just an example of what we've been talking about for the last year, which is working to, improve the centers, push rents and work in those opportunities. So I think that. Was, that was it. I will note that also I mean we did have good strong core operations even outside of that lease termination fee as we look to the year and so you know but we did want to, for all of all of my modeling friends, make sure that that we did get that accounted for.
Up front.

Todd Thomas

Okay. Do you see potential in this environment that that more tenants, more national tenants, that aren't in bankruptcy, that aren't necessarily, on your watch list, are being a little bit more thoughtful or careful around their their store fleets and portfolios and that there could be, some additional activity along these lines.

John Caulfield

Bob, you want to do.
That?

Robert Myers

Yeah, thanks, Sean. I, I'm not hearing that concern. I'm not seeing it in our portfolio with the retailers that we're just, we're having discussions with. So again.
I think there's a lot of focus on growth in 2026, 27, and look, I mean, in our portfolio, we're not going to see any new supply coming online anytime soon. If anything, things are getting more expensive, so those retailers that we're aligned with are wanting to grow. So I don't, I don't see any cracks or issues on that front.

Todd Thomas

Okay, thank you.

Jeffrey Edison

Sure.
Thanks.

Operator

Your next question comes from the line of Flores vanitchum with Compass Point. Please go ahead.

Floris van Dijkum

Hey, good afternoon guys, and gals.
You have in your prepared this little deck that talked about, how people performed during the last normal, more normalized recession with the great financial crisis, and you saw 250 basis point drop in occupancy, even though your occupancy back then was a lot lower and I suspect the assets you own today. Or the average quality of your portfolio is higher as well, and plus the fact that there was a lot of development going on in in 2009, 2010 that's not occurring today.
How do you think, is that a worst case scenario in your view? I guess my question is I'm trying to figure out what the worst case scenario is if a recession were to hit.
Is that is that sort of the scenario you're trying to point to?

Jeffrey Edison

We're first of all, we, we're, thanks for the question. We're, we are not anticipating a recession. So our base model, has basically a flat economy, which is kind of a recession anyway, but it's not the dramatic. I mean, we don't anticipate the extent of the GFC or the pandemic. This is, relatively a self-imposed recession, which probably is going to have certainly there don't appear to be fundamentals that would drive a deep recession. So I would say that those are extreme, sort of maybe two standard deviations from where what we would expect. They could obviously it can happen, but it's not, we don't think that it's we're we're going to be into that kind of environment and as I mean, we had the best, we had the lowest loss of occupancy of anyone in the space in both of those occasions, and we had our stuff back to normal, as, the fastest as well. So, being in the necessity-based retail business when there is disruption, we just have a lot less disruption, and that is obviously a positive for us. It's not like anybody wants to lose 2.5% of their occupancy, so we're not, we're hoping there is not one, but we are, there's just a lot less data in necessity-based retail.

Floris van Dijkum

Yeah, sorry, that you, your answer is a lot more well spoken than my question was.
Thank you, Jeff. My second question is, as there's uncertainty in the markets and, as rates are volatile.
What do you think this does to your IR expectations?
Are you going to raise them, you think, or you think they're going to stay around the 99.5% range going forward?

Jeffrey Edison

I think they will stay in the 9. I think that what will happen, is that the, if you get into a more recessionary kind of environment, the underwriting is more.
More difficult. So you're you're you're going to take lower assumptions on rent price. You could take lower assumptions on market rents, like all of the things that happened during a recession are going to be taken into the numbers, which will make getting to a 9 harder, which will probably make it more difficult to buy and reduce the price, but the pricing will come down from our expectations on the underwriting of the properties, more likely than it will, change in the what our unlevered IRR target is. Does that make sense?

Floris van Dijkum

Yeah, it does, yeah, and that's another way of saying that you think cap rates could go up, but your IRR is similar.

Jeffrey Edison

That, yeah, and you're going to have less in a recession, you have less growth and that would obviously, impact the IRR.
Yeah.

Floris van Dijkum

Thanks sir.

Jeffrey Edison

Yeah, thanks.

Operator

Your next question comes from the line of Mike Mueller with JP Morgan. Please go ahead.

Mike Mueller

Yeah, hi, I guess, sticking to some macro stuff here. If the economic environment does get worse, so a recession scenario, I mean, what does your gut tell you are the categories in your portfolio where you could see the pullback in demand happen first?

Jeffrey Edison

It's a great question, and we've looked at it a couple times in our two, in the two, last recessions that we had or the GFC and the and the pandemic. The areas where you see the most impact is it it it it sort of trickles based upon the depth of the recession.
It starts clearly with discretionary and, those choices are made. It also the brand brand loyalty sometimes evaporates in a recession, so you start to see people trading down in product. We see that and the other thing you see is you see movement towards the groceries, the, people are eating at home more and actually when you, it's a little Counterintuitive, but the grocers actually do better in the recessions because people are not eating out and as they compete with restaurants in a tangential way, but that that that's been a reality in the last two recessions, each, being very different, but still having some commonalities in terms of consumer behavior. And so we keep, We never want to say one recessions like another, because, they all have similarities, but they also have a lot of differences. This one where you're starting at a relatively low unemployment rate has complications in terms of understanding how it's going to play out. I mean, there have been certainly been discussions of a sort of a higher end recession where the where you're losing employment at the higher level of of of incomes versus the the lower and moderate incomes, it's again, early to predict what will happen, we still don't believe there will be one, but if there is, it's going to be you, you're going to have to see major change in employment to find it could be a deep recession, and we just don't anticipate that.
Got it.
Does that make sense, Michael? I mean, we're, we obviously, we are talking about from today going forward because there's, it's really good operating environments today, and we're kind of just trying to look out and anticipate how we will react if those things, if those situations happen, though we don't, we actually don't believe they are going to happen.

Mike Mueller

Yeah, now I got it, but it does seem like one of the areas you flagged where if it does happen, it's probably more in the dining.

Jeffrey Edison

Yeah, I mean, there's been certainly been articles about that. It, we did go back to the last two recessions and we, you continue to see growth in on not on the higher end dining, but on the fast and fast casual like that actually continued to grow through the last two recessions. So it's it's sort of a It it's almost like eating out has become a necessity. And I, I think that's, it is kind of a reality of the country at this point, that it is a, it's more necessity in, that then.
I think it has been, historically.

Mike Mueller

Okay, thank you.

Jeffrey Edison

Yeah, thanks, mate.

Operator

As a reminder, if you would like to ask a question, please press one on your telephone keypad. Your next question comes from the line of Daniel Purpora with Green Street. Please go ahead.

John Caulfield

Good morning. Publix has been.
Pretty active recently buying.

Jeffrey Edison

Centers.

Mike Mueller

And it also looks like you have two redevelopments with Publix in your portfolio.

John Caulfield

Is this just something.

Floris van Dijkum

That's public specific or do you.

Jeffrey Edison

Expect to see other.

Floris van Dijkum

Grocers.
More active in the market.

Jeffrey Edison

Or pushing to rebuild their stores?
I would say it's very public centric, and, less across the board. The most of the grocers, most of our major grocers, do more remodeling, upgrading the thing, but Publix has a very specific strategy, of modernizing their pool stores by a full tear down and rebuild and we Done that for them for a long time and it's been a great business for us, and I think it's been a great business for them. It, we signed a new lease, we get upgraded rents to pay for the cost. I mean you have a, new 20 year lease and that is a very, it's a powerful value creator for for us. And it secures a location for them that they want to be in for a long time. And that, so that's been great. So we're, we love that business, we'd love to do more of it. We'd love if more of the grocers decide they want to do the same thing, but I don't see that as part of their core strategy.
Got it.
Thank you.
Yeah, thank you.

Operator

This concludes our question and answer session, and I will now turn the conference back over to Jeff Edison for some closing remarks. Jeff.

Jeffrey Edison

Thank you, operator, and thank you everyone for being on, the call today. We tried to shorten our opening remarks a little bit to, give more time for questions in the, in this environment. So, in closing, the Pico team continued a strong performance in the first quarter.
Despite our tariff concerns, we continue to be strategic in our decision making to best position PEO to take advantage of the opportunities for growth, both internal and external. We're seeing a high retailer demand with no real current signs of slowing.
Peo's leasing team continues to convert this demand into significantly higher rents. Retailers want to be located in our centers and they want to be near the #1 or 2 grocer in the market. 71% of our ABR comes necessity-based goods and services, 30% of which comes from our grocers. We believe PIO is relatively more insulated from potential tariff disruption than many.
We also have limited exposure to big box bankruptcies and at-risk retailers. We believe that the combination of our unique format and our cycle tested experience drives high quality craft cash flows.
Given our demonstrated track record through various cycles, we believe an investment in PEO provides shareholders with a favorable balance of quality cash flows, mitigation of downside risk, and strong internal and external growth.
The quality of our cash flow reduces our beta, and the strength of our growth increases our alpha, less beta and more alpha.
We think it's a great reason to invest in PEO. So on behalf of the management team, I'd like to thank our shareholders, our associates, and our neighbors for their continued support and for a great quarter of results. So thank you everyone for being on the call today and have a great weekend.

Operator

Ladies and gentlemen, this does conclude today's conference call.
Thank you for your participation and you may now disconnect.