Phillips Edison & Co Inc

NASDAQ:PECO

Earnings Call Transcript 2019-Q3

[Operator]

Good morning, and welcome to Phillips Edison & Company's Third Quarter 2019 Earnings Presentation. My name is Ian, and I will be your conference operator today.

Before we begin, I would like to remind our listeners that this live conference call is being recorded and simultaneously webcast. The webcast and accompanying slide presentation containing financial information can be accessed by visiting the Events and Presentations page in the Investors section of the company's website at www.phillipsedison.com/investors. A replay will be available later today on the Investors section of the Phillips Edison website at www.phillipsedison.com under the same Events and Presentations page.

I would now like to turn the call over to Michael Koehler with Phillips Edison & Company. Sir, please proceed.

[Michael Koehler, executive]

Thank you, operator. Good morning, everyone, and thank you for joining us. I'm Michael Koehler, the Director of Investor Relations with Phillips Edison & Company. Joining me on today's call are Chairman and CEO, Jeff Edison; our CFO, John Caulfield; and our Executive Vice President, Mark Addy. During today's presentation, Jeff will touch on our highlights for the quarter and provide an update on our portfolio. Following Jeff's comments, John Caulfield will discuss the financial results, balance sheet and our share repurchase program activity. Finally, Jeff will speak to the progress we have made executing our strategic initiatives. Upon conclusion of our prepared remarks, we will address your question. If you're logged into the webcast and have a question, you can submit it by typing into the webcast's textbox and clicking submit question. We encourage you to submit your questions as soon as possible.

Before we begin, I would like to remind our audience that statements made during our prepared remarks and the question-and-answer session, may contain forward-looking statements, which are subject to various risks and uncertainties. Please refer to Slide 3 for additional disclosure and direction on where you can find information regarding potential risks. In addition, we will also refer to certain non-GAAP financial measures. Information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in our earnings release issued yesterday afternoon as well as in the slide presentation for this webinar which is available for download on our website.

I would now like to turn the call over to Jeff Edison, our Chief Executive Officer. Jeff?

[Jeffrey Edison, executive]

Thank you, Michael. Good morning, everyone and thank you for being on the call today. Before I get into the results, I'd like to review our key initiatives for 2019 as outlined on Slide 4. We believe that these initiatives will create growth for the future, while positioning for a full cycle liquidity event.

Across our organization, we are first and foremost committed to delivering solid operating fundamentals and growing net operating income at our properties. We do this by improving occupancy, increasing revenues to rental increases and driving foot traffic at our properties by focusing on our center's merchandising mix. Our best-in-class, fully integrated management platform delivered a same-store NOI growth of 2.9% record leasing activity and another quarter of proved occupancy, which we'll cover in more detail in a moment.

Our second initiative is to execute on our active disposition plan to fortify the quality of our property and portfolio. We have reviewed our portfolio and are selling assets that no longer meet our growth objectives or quality standards.

We are recycling the sale proceeds into better quality, lower risk and higher growth assets. We are investing in redevelopment projects with attractive yields at our existing centers and we're repaying debt. Our disposition team remains active, as we sold 4 centers during the quarter, bringing our total to 10 for the year. Again, we'll provide more detail on this in a minute. And our third initiative is to grow our investment management business. We provide recurring income streams and allows us to grow without additional capital investment. It can also provide proceeds through a portfolio transaction to de-lever, while maintaining our assets under management and building institutional relationships.

To maximize the potential outcome of future liquidity event, we will need to pay down debt, that'll balance sheet in line with market expectations. So reducing leverage is a priority for PECO, although these 3 initiatives should allow us to improve our operations and leverage ratios, in order to prepare with this liquidity event.

Now turning to Slide 5. Third quarter of 2019 was the third full quarter since the transformation of merger with Phillips Edison Grocery Center REIT II, which closed on November 16th, 2018. The $1.9 billion merger added 86 high-quality, grocery-anchored shopping centers, totaling 10.3 million square feet to our portfolio. The quarter was highlighted by significant leasing activity, which improved our occupancy to 95% at September 30, 2019, marking a meaningful improvement from 93.2% at the beginning of the year. This is particularly impressive as we also delivered double-digit new leasing spreads for the quarter and the first 9 months of the year.

Our same-center NOI grew 2.9% for the quarter and 2.4% for the first 9 months of the year. Further, our FFO increased to $56.4 million, which fully covered our gross distributions for the quarter. The first 9 months of 2019 were highlighted by the disposition of 10 centers, which produced $90.3 million of gross proceeds, a portion of which we used to acquire an all-the-anchored center in Naperville, Illinois, an affluent suburb outside of Chicago. The area immediately around the center is experiencing surge of development, as more than 800 new residential units are expected to be built, including 58 high-end apartments directly adjacent to the shopping center.

We believe our center will benefit from this development, as it will serve as the local resource for necessity-based goods and services. We were also able to decrease our leverage to 40.4% of total debt to enterprise value or TEV. That was from 42.3% just a year ago. These strong operating results continue the momentum we have seen over the past 3 years and reflect sustained healthy tenant demand for well-located grocery-anchored real estate.

Slide 6 provides some detail on our national portfolio of grocery-anchored shopping centers. As of September 30, 2019, our portfolio consisted of 294 wholly owned properties anchored by 36 leading grocers representing multiple banners. They're located in 32 states and totaling 33.2 million square feet of GLA. This compares to 233 properties as of September 30, 2018, located in 32 states, with 34 leading grocers, totaling $25.9 million, which was before our merger with REIT II. As of September 30, 2019, our lease portfolio occupancy was 95% and our in-line occupancy was 89.2%, both improved from the beginning of the year.

76.6% of our annualized base rent came from grocers and national and regional tenants, illustrating established tenant base and 77% of our total rent came from necessity-based tenants. The average remaining lease term for our portfolio was 4.7 years. Slide 7 provides an overview of our leading grocery anchors. Kroger and its banners are collectively our largest tenant, making 6.9% of our average base rents for the quarter across 68 centers. We are Kroger's largest landlord, Publix and Albertsons/Safeway our second and third largest tenants, marking 5.5% and 4.3% of our ABR respectively, across 58 centers and 30 centers.

We are Publix's second largest landlord. They hold Delhaize, which owns GIANT, Stop & Shop and Food Lion among others, and Walmart round out our top 5 tenants. We strive to own centers anchored by the top 1 or 2 grocery in a given market and our portfolio has excellent anchor diversification. The scale of our relationships with our grocery anchors provides us unique advantages that we believe generate better property level performance. As we look at our leading grocery-anchored tenants, we continue to see brick and mortar as a cornerstone of their business strategies and we remain very positive about the long-term prospects of owning and operating grocery-anchored real estate.

Slide 8 outlines in our occupancy metrics and in-place rents, or ABR, and provides an overview of our necessity-based tenant base. As of September 30, 2019 lease portfolio occupancy totaled 95% which is an increase from 93.9% as of September 2018. Anchor occupancy was 98.1%, which decreased from 98.4% a year ago, although an increase from 97.5% at year-end. In-line occupancy increased to 89.2% from 85.3% a year ago, due to our strong leasing activity we talked about. Overall, our overall annualized base rent or ABR was $12.35 cents per square foot, which is an increase of 6.2% from a year ago. Our in-line ABR was $19.28 per square foot, which was an increase of 5.9% year-over-year.

Many have asked what an in-line tenant is on past calls. The graphic on the top right illustrates an example of one of our centers. The anchor in orange is a grocer, and the other tenant in blue are referred to as our in-line tenant. The in-line tenants use the foot traffic generated by the grocer to create demand and awareness for their businesses. These rents are typically much higher than the rent the grocer pays. Outparcels, as illustrated in green, are typically freestanding buildings like fast food restaurants, bank branches or coffee shops. We identify opportunities to add outparcels throughout the redevelopment which can add value to our portfolio.

On the slide, the green building is an example of an outparcel, which we include in our in-line ABR and occupancy. When we look at the makeup of our ABR, 77% comes from convenience and service-based businesses, like grocers, restaurants, nail salons, barbershops, healthcare and fitness centers, which we believe offer good services and experiences that are internet-resistant and we'll continue to drive recurring foot traffic to our centers on a regular basis.

Slide 9 provides some examples of leases that our first-class leasing team executed during the quarter. We remain focused on leasing our vacant space to tenants that offer necessity-based products, services and experiences as well as a high level of convenience, which we believe are and will be internet-resilient. Domino's, Smoothie King and 99 Restaurant & Pub are a few examples of national tenants that are expanding in our portfolio from the food and beverage industry.

Other new anchor leases include TJ Maxx and an expansion with one of our grocery-anchors [indiscernible]. Wireless and Verizon are 2 national tenants in the services category, and Workout Anytime and 9round kickboxing are 2 national fitness concepts that will also be added to our portfolio in the near future.

Our leasing activity was an all-time high for the quarter, as we execute a record 246 leases, including new leases, renewals and options totaling 1.4 million square feet, an increase of 22% over our activity in Q3 of 2018. The first 9 months of 2019 was also a record-setting period for the company, as we wrote 775 leases, including new leases, renewals and options, totaling 3.5 million square feet. Our current leasing pipeline is robust and we are very positive about the future.

With that, I will now turn the call over to our CFO, John Caulfield. John?

[John Caulfield, executive]

Thank you, Jeff, and good morning, everyone. As Jeff mentioned earlier, one of our key growth initiatives is to further expand our Investment Management business. As such, Devin Murphy has been promoted to President, where he is focused on growing our investment management business, raising additional equity and overseeing our current joint ventures. As of September 30, 2019, our Investment Management business provided asset and real estate management for 36 properties owned by 5 entities, including 3 joint ventures in which PECO has an ownership interest.

Altogether at quarter end, we had approximately $690 million of third-party assets under management. Slide 10 reviews our year-to-date pro forma same-center NOI. For the purpose of evaluating same-center NOI on a comparative basis, we are presenting pro forma same-center NOI as if the merger with REIT II had occurred on January 1, 2018. As such, our pro forma same-center NOI includes 287 properties that were owned and operational since January 2018.

During the first 9 months of 2019, same-center NOI increased 2.4% when compared to the first 9 months of 2018. Driving our NOI growth was a $4 million increase in base rent, which primarily resulted from a $0.23 increase in average minimum rent per square foot, increased occupancy and increased recovery income. Offsetting this improvement was an accounting presentation change, requiring bad debt expense to be reflected as a reduction to rental income and tenant-paid real estate taxes to be excluded from tenant recovery income. Together, these resulted in a reduction to 2019 revenue, as compared to 2018 revenue and pro forma same-center revenues decreased 0.3%.

This decrease in revenue for accounting presentation was offset by a corresponding decrease in expenses where they were reported in 2018. Beyond the adjustments in the accounting presentation was a reduction in property management expenses, resulting from the merger with REIT II. Additional details on those are available in our Form 10-Q, which will be filed with the SEC later today.

Slide 11 outlines our financial results for the 9 months ended September 30, 2019. The company recorded a net loss of $77.7 million, compared to a net loss of $32.2 million for the same period in 2018. Our net loss was primarily the result of $74.6 million of non-cash real estate impairment charges and non-cash impairment charges of $8.2 million, related to the suspension of the equity raise of Phillips Edison Grocery Center REIT III. We closed on the acquisition of REIT III on October 31. As real estate companies recycle assets, both the recognition of impairment charges and gains on asset sales are regular occurrences.

Further, as we are selling non-core assets and recycling capital into higher growth opportunities, we may continue to realize these noncash impairments in the coming quarters, although we expect to wind down our non-core disposition program in the first half of 2020. Also contributing to the loss was $45.5 million of additional depreciation expense, primarily due to the additional properties owned after our merger with REIT II when compared to the year-ago period. When we add back these non-cash impairments, depreciation and other items, the company generated FFO of $160.6 million for the 9 months ended September 30, 2019, which was a 37.2% increase from $117.1 million for the same period in 2018.

This increase in total FFO is attributed to income from the merger, including NOI from the acquired properties and year-over-year property-level NOI growth, partially offset by the loss of NOI from properties sold. On a per share basis, FFO decreased by 3.9% to $0.49 per diluted share. This reduction in FFO on a per share basis is the result of our net disposition activity over the past 12 month, starting with the joint venture we created in November 2018 with Northwestern Mutual, as our debt to TEV decreased to 40.4% from 42.3% at September 30, 2018.

During the first 9 months of 2019, the company made gross distributions of $164.4 million, including $51.3 million reinvested through the dividend reinvestment plan, for net cash distributions of $113.1 million, which were fully covered with FFO year-to-date. For the 9 months ended September 30, 2018, the company generated modified funds from operations, or MFFO, of $165.4 million, which was a 34.9% increase from the $122.6 million earned for the same period in 2018. On a per-share basis, MFFO decreased by 3.8% to $0.51 per diluted share during the first 9 months of 2019. The decrease in leverage and our net disposition activity reduced our MFFO, offset by higher earnings from the larger portfolio resulting from the merger with REIT II.

Slide 12 outlines our well-laddered debt profile as of September 30, 2019. Our net debt to total enterprise value was 40.4% as of September 30, 2019. Our debt had a weighted average interest rate of 3.5% and a weighted average maturity of 4.3 years. Approximately 79% of our debt was fixed rate.

This compares to a debt to total enterprise value of 41.1% at December 31, 2018. During the quarter we re-priced the $200 million term loan, lowering the interest rate by 50 basis points from 1.75% over LIBOR to 1.25% over LIBOR, while maintaining the current maturity of September 2024.

Then, shortly after quarter end in October, we re-priced at $175 million term loan, again, lowering the interest rate spread by 50 basis points from 1.7% over LIBOR to 1.25% LIBOR, while maintaining the current maturity of October 2024.

We continue to seek opportunities to refinance certain debt to lower our interest rate or extend the length of our debt maturities, in order to strengthen our balance sheet and maintain a cost of capital that is as low as possible. As we look at our liquidity, we had $491 million of borrowing capacity available on our $500 million revolving credit facility.

Slide 13 outlines the history of our common stock. From the initial public offering price of $10 for PECO, we have increased our estimated value per share 4 times, including most recently in May of 2019, when we increased the estimated value per share to $11.10. The current distribution rate is $0.67 per share per year. Together with REIT II, we have made distributions of over $1.2 billion to our stockholders and our distribution on November 1, 2019 marked our 107th consecutive month of distribution.

Most recently, our Board has again approved our monthly distribution at an annualized rate of $0.67 per share for December, January 2020 and February 2020. We are committed to driving stockholder value and that is illustrated by the strong performance of our common stock.

Depending on the timing of your investment and treatment of your distributions, Phillips Edison & Company common stock has delivered returns between 49% and 102%, which equates to between 7.5% and 8.7% compounded annual performance.

For our former REIT II stockholders, your investment has delivered between 16% and 34%, which equates to a compounded annual performance between 4.2% and 5.2% per year.

Slide 14 provides an update on the activity under our share repurchase program, or SRP. During the 3 months ended September 30, 2019, we repurchased 1.7 million common shares totaling $18.2 million, where debt and disability and incompetence, or DDI, in accordance with the SRP and we executed a standard redemption on a pro rata basis at $11.10 per share.

We continue to make DDI repurchases in full at the end of each month. However, we are not currently accepting standard repurchase requests. We plan to have an update on our standard repurchase program in the spring of 2020.

I would now like to turn the call back over to Jeff for a closing summary and some commentary on liquidity. Jeff?

[Jeffrey Edison, executive]

Thanks, John. As we have stated on past calls, one of the possible ways we can achieve a full cycle liquidity event is though the listing of our shares on a National Stock Exchange, the New York Stock Exchange or the NASDAQ.

In preparation for a listing, I discussed 3 important strategies at the beginning of this call that we feel will position the company for a successful listing and long-term growth. We executed on these strategies during the quarter, but we need to continue to execute our growth plans and reduce our debt to achieve this successful listing.

Retail shopping centers have performed very well in 2019, overcoming the losses they experienced in the fourth quarter of 2018. That said, we are not completely in the clear yet, as our peers still trade at an average discount to their net asset value of about 10%, with the discount as high as 39% for one of our competitors.

To be clear, we're very encouraged with the improvement in the retail shopping center environment and we continue to evaluate the market for the appropriate timing. We maintain our belief that a patient approach to liquidity is necessary and believe executing on our strategic initiatives will position us to achieve a full cycle liquidity event at a more attractive valuation. In closing, we are pleased with our results for the first 9 months of the year, but no, we have to be laser-focused on execution, in order to achieve our goals and successfully provide liquidity for our investors.

With that, I would now like to turn the call over to Michael Koehler, our Director of Investor Relations. Michael?

[Michael Koehler, executive]

Thank you, Jeff, this concludes our prepared remarks. Our webcast listeners are able to submit a question via the webcast portal. Please type your question in and click submit question, as illustrated on Slide 16.

[Operator]

Our first question comes from [indiscernible], an individual investor, whose question is as follows. We would like to hear the reason why the SRP was dropped. Does this mean that there are no new investment plans? Also, when do you plan to turn on the share repurchase program again or provide any company-sponsored liquidity? Mike, do you want to take that one?

[Robert Addy, executive]

Yes, sure. As John indicated in August, our Board suspended the standard portion of our share repurchase program. I would note that the program is still open for debt and disability repurchases, which we do on a monthly basis, and we intend to have an update on the overall share purchase program in spring of 2020. All this messaging, as many of you know recently we brought the shareholder services back into Phillips Edison. So we'll continue to communicate and push that information out to all of you. The question with regard to why do we suspend as far as voluntary. We believe those changes were really in the best interest of all of our shareholders and will help to improve our overall leverage ratios and it really to maximize the overall stock value, when and if we do have that liquidity event which Jeff outlined, which will provide benefits to all of our shareholders.

And as we look at really the dollars that we'll be saving from that, it's about $40 million in cash flow that we'll be saving through that and what we're doing is really using those funds to invest back into better quality, lower risk, higher growth assets and we'll also continue to invest back into redevelopment projects as well as to continue and further our deleveraging efforts. Michael?

[Michael Koehler, executive]

Great. Thanks, Mark. Our next question comes from Matthew Wright, from Wright Financial. It's a 2-part question. Why did PECO shareholders not have a say in the acquisition of REIT III? Was there any opportunity for current shareholders to provide feedback to PECO management? Second part of his question is, why PECO paid such a large premium for III? Over the past few years, PECO has consistently told us that REITs are trading at a discount to NAV. That's accurate, wide data premium for another REIT. John, you want to take that?

[John Caulfield, executive]

Sure, Michael. Thank you for the question, Matthew. The acquisition of REID III, which closed last week, was an acquisition of 3 assets with an interest in another 3 for about $71 million. This was not a significant acquisition relative to our total size of about 300 assets or $6 billion in total value, which is why they didn't require us to go to the shareholders. With regards to the question of the premium paid, the additional consideration was primarily a return of asset management fees and acquisition fees that we earned as well as our invested offering costs, which we invested to support the launch of the fund, in combination with our co-sponsor Griffin. And we view this as the best result for PECO and the REIT III shareholders to come to a quick resolution of a failed fund. So ultimately, it was not a very large acquisition for us and we were just seeking to do the best we could for their shareholders and for PECO, it was not significant.

[Michael Koehler, executive]

Thank you, John. Our next question comes from John Osborne, a financial advisor. In our second quarter call, you stated that you haven't gone full cycle yet, due in part to a weak marketplace where your publicly traded peers are trading at a meaningful discount to NAV. In the third quarter of 2019, these states that 34 of the top 50 mutual funds were real estate funds. Can you provide some commentary on that? Jeff, do you want to take that?

[Jeffrey Edison, executive]

Sure. John, thanks for the call. I don't think you're the only one with that question out there. We are, as you know, focused on trying to get a liquidity event. And the market has definitely improved. We've seen good improvement. It still continues to be trading at about a 10% discount to NAV, of that spread is meaningful for us if we were to go and list the company. So what we're doing is the same things we have been doing, which is continue to focus on the operating platform. Make sure we are out prepared, so that when the market gets towards trading at now or above, that we will be in a good position to be able to take advantage of that. And we are a lot more optimistic today than we were in our last call. We still have a little ways to go and hopefully, that will happen over the shorter timeframe. So thank you.

[Michael Koehler, executive]

Thanks, Jeff. A related question to liquidity. You said you need to de-lever in order for the company to invest pursue a listing. How much debt do you need to pay down? How long do you anticipate that taking? And what's your target and what are the peer's target ratios in terms of debt? John, do you want to take that?

[John Caulfield, executive]

Sure, Michael. Thanks for the question. So we are about 40% debt to total enterprise value today. Based on where the peers have taken their leverage points, 2 or 3 years ago 40% would have been in line, but over the last few years, they've all de-levered and moved to lower. So I would say our target on a total debt to total enterprise value is probably closer to 30%. This is certainly not a high leverage point. I mean, we have the ability to go significantly higher in a private setting, but in a public setting as we prepare for liquidity, our target would be closer to 30% and our disposition activity is something that we continue to lean into. We sold several assets and have been able to pay down debt this year, but we also view our Investment Management business as an opportunity to de-lever at an attractive price in a meaningful way. We did that with Northwestern Mutual in November 2018 and that's something that definitely is focused on. It's something that we would hope to do in the future.

[Michael Koehler, executive]

Great. Thanks, John. Another question. This is another quarter with a substantial net loss. Can you provide some more detail on the impairments? It's a very high number, when will impairment stop and when do you expect to turn a net profit? John, you want to take that?

[John Caulfield, executive]

Sure. So we did have additional impairment losses this quarter for about $75 million on the full-year, $35 million this quarter. These are non-cash charges that do not affect our cash flows. As Jeff articulated, one of our initiatives this year as the disposition program, we've sold a few assets at aggressive cap rates and have been able to record gains on those and are using that to de-lever, but we're also taking this opportunity to come in the portfolio. Lower growth non-core assets are the ones that are creating those impairments. And as we indicated, I believe in the press release and even the today's commentary, we're striving to complete that program of the non-core disposition program by the first half of 2020.

[Michael Koehler, executive]

Great. Thanks, John. A related question, how does the company continued to make distributions with the net losses every quarter?

[John Caulfield, executive]

I'll take that one as well. So again, the net loss for the quarter is primarily non-cash impairment charges, our actual cash earnings continue to improve the FFO, or Funds from Operations, is a real estate metric that adds back depreciation, because that doesn't actually impact the fair value of our assets, but it is an accounting charge. I would note that our FFO and our MFFO, or the modified Funds From Operations, both exceeded 100% of the distributions we made during the quarter. So again, from a cash position, we continue to generate solid cash flow to pay the distribution and are using those additional proceeds then to de-lever and to invest in redevelopment, in addition to buying new assets.

[Michael Koehler, executive]

Great, thanks John. We've got a question submitted on the webcast from Val Vogel. The question is, do we anticipate growth of value in the property sale? Jeff, do you want to take that?

[Jeffrey Edison, executive]

The answer is yes. And the assets where we don't believe we can see growth, we will be selling and the assets we're buying will have, we believe, outsized growth compared to the existing portfolio. So that is a big part of our strategy and that's going to be done through the day-to-day grind of leasing our properties, getting the spreads on the new tenants that we put in and get an increase in our occupancy. Those will be the pieces that will be the biggest movers in that growth and, if you look at our same-center growth, you can see that have done well in that and relative to our peers have done very strong job. So yes, it's a great, great question, one that we -- obviously, that's what the operating platform is all about is being able to create that value.

[Michael Koehler, executive]

Great, thanks, Jeff. The next question comes from Michael Kirk from Kirk Financial. Number one is, when will the REIT revalue? And number two, any indication of whether the share price would increase or decrease?

[Jeffrey Edison, executive]

John, you want to take that?

[John Caulfield, executive]

Sure. So the next schedule we revalue the net asset value with a third-party as of March 31 each year, so our next anticipated would be March 31 of 2020. As Jeff just indicated, the portfolio continues to grow from an NOI perspective. When you look at valuations, it's a combination of both the cash flow from those properties and then kind of market sales activities. It's hard for me to this say whether or not it will go up or down, but I would say that our NOI growth for the year, that we believe will continue, will certainly be very supportive of the valuation.

[Michael Koehler, executive]

Great. I got a question submitted from Jay McClellan. He asked, what is the plan for maturing debt? John, you want to take that?

[John Caulfield, executive]

Sure. Thank you, Jay. So we have an upcoming debt maturity in 2020 and we're currently looking at different plans to refinance that, in addition, taking into account where the long-term interest rates are and looking at options there. I would expect that between now and the next quarter, we'll have a plan and come back to the shareholders with our plans to refinance that debt or as I indicated we're looking at opportunities to repay different debt as well.

[Michael Koehler, executive]

Our final question for the morning comes from [ Will ] from National Securities. He asked, with the 10-year rates getting closer to 2%, have we missed the liquidity window? He finds it hard to believe grocery-anchored tenant REIT are going to trade at par, when the tenure was down below 1.5%. Can you provide some commentary on that?

[Jeffrey Edison, executive]

Sure. I'll take it and John can add in to it as we go. So it's a great question. Obviously, interest rates were yield-driven stock that historically has traded relative to yield. And if I knew where interest rates were going, I'd be in a different position today and now because it's really hard to know where they're going from where we are. The biggest damper on our segment has not been interest rates, interest rates have been very supportive of it, it's really been the discussion about where retail is going over a longer period of time. And I think is going to drive our pricing more than interest rates, although obviously we keep a very close call. It's important to note almost 80% to 85% of our debt is fixed.

So we do not go up and down with the change in rates. But obviously the investor demand for yield, as the yield come down does obviously make our stock more favorable. That is something that -- we're hopeful that interest rates do stay low. But what we're really most looking at is, the perception of retail and the perception of online and the impact it's going to have on our product. You can see from our operating results, it's not having immediate results other than really positive. And we were about a good operating environment, as we've been in the history of the company. But a retail itself is a volatile concept and investment right now.

[Michael Koehler, executive]

All right, thank you, Jeff. This now concludes our question-and-answer session. And I'd like to turn the call back to Jeff for some closing comments.

[Jeffrey Edison, executive]

Thank you, Michael. On behalf of the entire management team, I'd like to express our appreciation for the continued support we received from our shareholders, our associates, our agents and importantly, our tenants. So we look forward to updating you with our fourth quarter results for 2019 in March of 2020, and thank you all for being on the call today.

[Michael Koehler, executive]

Thank you for joining us. You may now disconnect.