Q1 2022 Federal Realty Investment Trust Earnings Call
Greetings and welcome to the Federal Realty Investment Trust first quarter 2022 earnings call.
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I will now turn the conference over to your host Leah Brady. Thank you you may begin.
Good morning, Thank you for joining us today for Realty first quarter 2022 earnings conference call. Joining me on the call are Don Wood, Dan G. Jesper I guess when do you see your dawn Becker yarn sweetener, <unk> and Melissa Solis they'll be available to take your call.
Your questions at the conclusion of our prepared remarks, a reminder, that certain matters discussed on this call may be deemed to be forward looking statements within the meaning of the private Securities Litigation Reform Act.
Anytime.
Forward looking statements include any annualized or projected information as well as statements, referring to expected or anticipated events or results including guidance.
And a real people who used expectations reflected in such forward looking statements are based on reasonable assumptions I don't know if you use your operations and its actual performance may differ materially from the information in our forward looking statements and we can give no assurance that these expectations can be achieved.
The earnings release, and supplemental reporting package that we issued yesterday, our annual report filed on Form 10-K, and our other financial disclosure documents provide a more in depth discussion of risk factors that may affect our financial condition and result operation.
Given the number of participants on the call. We kindly ask you limit yourself to one question and a brief follow up during the Q&A portion of the call.
Do you have additional questions. Please reach out and with that I will turn our call over to Don Wood to begin our discussion of our first quarter results.
Thanks, Lee and good morning, everybody.
What's going right, it's been a real through these days demand for our products has outpaced even our raised expectations and 22 2022 first quarter was no exception.
Yep they reported.
The reported dollars 50 per share beat both the street and our internal forecast and of course last year's Covid impacted quarter by 28%, but it's really the contributions from all parts of this multifaceted business plan. That's at the heart of our optimism starting with the enduring strength of leasing.
You know over the last decade average first quarter production for comparable properties at Federal Realty men doing about 80 deals for roughly 375000 square feet.
In the 20 to first quarter, we did 119 deals for 444000 square feet, 50% more than the average.
We've never come close to doing 119 deals in any quarter never mind, the normally weaker first quarter before last year's record setting COVID-19 recovery demand.
But the fact that that demand has remained this evening with a deal pipelines that looks to stay strong speaks volumes about our properties and the markets, they're in and naturally about future earnings growth.
So one of the reasons, Dan is raising annual earnings guidance and stands at the midpoint in the first quarter something we rarely if ever do.
That leasing demand is broad and has resulted in a 130 basis point increase in small shop lease percentage to 88, 7% sequentially over the fourth quarter well ahead of expectations.
That small shop leased rate is also a remarkable 490 basis points higher than a year ago.
We did lose 40 basis points of anchor occupancy since the fourth quarter. That's just typical first quarter explorations a few boxes portfolio wide.
Portfolio was there for overall 93, 7% leased.
At the end of the first quarter.
Importantly, there's plenty of room to go we expect continued small shop occupancy gains throughout 2022.
Yeah.
So all of this commentary thus far relates to our core portfolio and it doesn't speak to the multiple additional ways that we grow earnings and value.
Selective acquisitions development redevelopment, all add incrementally to our best in class portfolio.
Here's a case in point.
We did 10 deals both new and renewals in the first quarter at the four properties that we bought last year.
Brooke Camelback colonnade Hilton village in gross.
The rent rolled up and every single one of those deals and overall up by 33%.
And even though no redevelopment of storage yet at any of those centers the universal belief during those tenant negotiations was that federal would improve the productivity of those shopping centers, enabling them to afford higher rents.
That reputation and credibility grounded in a long established track record it's critical to all that we do and in my view one of our key Differentiators.
When we tied up Fairfax County, Virginia, Kingstown shopping center for $200 million at a five cap some months back. We similarly expect to improve the productivity of that 410000 square foot destination through better merchandising and operations and finding the inevitable opportunities that always seem to have a company big land.
This one is 45 acres in densely populated and affluent first ring suburbs.
I assume you read in our press release, a couple of weeks back we closed on the first half of that parcel in late April and expect to close on the second half in late July Northern Virginia is important in a growing market for us.
Our stepped up post COVID-19 redevelopment effort is another critical component to future growth. It's no news to anyone on this call. That's a traditional generic and homogenous shopping center business is cyclical in nature and not a high growth business. So you have to stand out to outperform over cycles.
You can do that by picking the right markets and positioning in merchandising in those markets, but you also have to reinvest in those assets consistently find the edge.
Reinvesting is more important post COVID-19 than ever before.
Why we have nearly two dozen active and meaningful development projects in planning or underway totaling over $100 million. This year, and next which will likely yield double digit unlevered yields over the ensuing years through higher customer traffic in rents.
With our historically observed results following redevelopments.
That reinvestment is one of the primary reasons, we can continue to push rents.
No actually our development business at the Citi Conference in March we were able to tour widen in person Coca walk.
Fully leased mixed use development.
Got an impressive group of investors at 10, and our team was proud to showcase the unique approach that we take the real estate development and value creation considered.
Consider that in its first stabilized year.
<unk> will generate in excess of $11 million of NOI on $190 million of investment with rents that are already underway.
Our unlevered IRR is over 8% alcohol, it's pretty special.
That Santana West well I don't have any specific announcements to make on this call instead of leasing over a newly constructed office building interest in the project and the negotiations are more active than they've been at any time during the Covid era.
I'm hopeful that we'll be able to provide a positive update in the coming months.
Office demand is back in earnest in Silicon Valley, given the Google and Apple back the office announcements in the past month or two and we have the only new OEM minutes is state of the art project in the market.
We've updated cost and returns and the accompanying 8-K based on rail negotiations and market conditions and short higher costs, along with higher rents, thus maintaining yield expectations.
With residential base rents comprising 11% of our of our total revenue base the upward pressure on apartment rents in many U S markets is also benefiting our bottom line.
A meaningful residential income stream and are fully monetize properties, such a unique incremental benefit.
At Assembly row, Lisa about Marcellus are 500 unit apartment building continuous faster than forecast the higher net effective rents were currently 70% leased at 10% higher rents than forecast.
Our office building effectually known as the pool of building because you can see the pull them aside from New Hampshire.
Now, 88% leased with another 5% Atlas.
Assembly row has really outperformed all of our expectations coming out of Covid nothing.
Nothing yet to announce with respect to the next phase of expansion here as we get to lock down cost, but we are getting close to a go no go decision on a life science project here to complement the growing life science demand and adjacent some of those projects more to come.
Thank you rose.
In construction, both continue on time and on budget.
You know one thing that always strikes me about our mixed use development pipeline is the extent to which we incorporate what we've learned over the years into our core portfolio.
While mixed use development is certainly a different business been operating for shopping centers much of what makes our big development special can be seen throughout our portfolio.
From a broader array of tenant relationships just state of the art construction techniques relative lacemaking storefronts any coordination and environmental considerations.
Unseen, but impactful operational efficiencies, our 25 year experience building mixed use communities as and continues to benefit our core shopping centers are greater than most people realize and expect to be more see more of our showcasing that in the coming quarters and years.
When you think federal Realty thinking about the multifaceted ways, we've got to grow.
Just as we did between 2010 and 2019 and Jess is we plan to do from 2021 on with asset team, whose competence is proven and time tested.
Yeah.
Thank you Don and good morning, everyone, Don outlined $4 50 per share reported at <unk> first.
First quarter outperformed against every one of our benchmarks last quarter year over year versus consensus and versus our own forecast.
That outperformance was broad based all aspects of our business model later rolled in the results the drivers such as better than expected small shop occupancy.
Stronger residential performance, particularly in Boston and San Jose.
Better improvements in collections forecast both in the current and prior periods.
Rowing parking revenues percentage rent underscoring accelerating traffic and tenant sales, particularly in our large mixed use assets.
But this was offset by higher than forecasted property expenses.
Our GAAP based comparable portfolio growth metric was exceptionally strong at 14, 5% for the quarter.
More than 3% above forecast.
Comparable comparable growth excluding prior period rent and term fees was 18, 5%.
To emphasize the strength of these metrics relative to the broader sector. Our cash basis same store metric is calculated in line with our peers would have been 18% an apples to apples basis, and 18 plus percent excluding prior period rented to tourists.
Term fees this quarter this quarter, $1 5 million versus $2 8 million and <unk> 21.
Prior period rent this quarter was $5 million versus $8 million in 'twenty one.
Year over year occupancy results were also strong.
With our overall occupied metric growing 170 basis points year over year from 89, 5% to 91 point too, but our leased percentage, increasing a 190 basis points from $91 eight to $93 seven.
More upside to come on both of those metrics in the coming years as we realistically target.
94% to 95% per occupied and 95% to 96% released.
Our signed not occupied spread and the comparable pool held steady at 250 basis points, representing over 24 million of incremental total rent, which should come online over the balance of this year and into 2023.
And our non comparable.
<unk> signed not occupied upsides stands at $19 million of total rent.
New lease deals and our leasing pipeline currently unoccupied space will drive another $12 million of incremental total rent primarily in 'twenty three and 'twenty four.
This totals roughly 55 million cumulative incremental rent, which will very visibly drive bottomline results over the next two plus years.
Highlighting the diversity and strength of our.
Our multi faceted business plan.
As a testament to our asset management and coordination teams, we have not seen any material delays in getting tenants open and paying rent due to supply chain issues or labor issues to date.
Further enhancing the timeliness of that.
Online.
Rollover for the quarter was solid at 7% in line with our expectations.
And our trailing four quarter average as we continue to take a long term approach to leasing up our portfolio and the way to go.
And look to balance driving occupancy improving merchandising enhancing tenant credit quality.
Increasing starting rents and importantly, getting strong practical rent bumps.
Contractual rent bumps are an extremely important part of our business plan.
One that is not always visible to our investors.
We believe that we achieved sector, leading average contractual rent bumps anchor and small shop windows and a 2.25% range given the quality of our portfolio.
In this quarter the blended annual increase for leases signed with an exceptional 2.5%.
From a pure math perspective, two 5% compounded over 10 years, resulting in a rent, which is 9% higher than your debt and a lease which compact compounds at a 100 basis points slower growth of one 5% annually.
It's not just about rolled.
Contractual rent bumps do matter.
Now to the balance sheet and an update on liquidity.
We ended the quarter with over $1 3 billion of total available liquidity comprised of an undrawn $1 billion revolver $160 million of cash and $175 million remaining on our forward equity.
Additionally, we have roughly $150 million of noncore dispositions under consideration with pricing expectations at a blended cap rate below 5%.
We have no maturities in 2022, with our only near term maturity being $275 million of unsecured notes, which mature mid.
2023.
We've reduced our encumbered pool.
Seven assets, increasing our unencumbered EBITDA to 93% of total EBITDA was $600 million.
With respect to our leverage metrics, our net debt to EBITDA is inside of six times as adjusted for our forward equity, we fully expect to be back to pre COVID-19 targets of low to mid five times by late 'twenty three.
Our fixed charge coverage ratio is over four times already above our targeted level.
93% of our outstanding debt fixed rate.
Additionally, we are targeting free cash flow after dividends and maintenance capital to return to pre COVID-19 levels by next year.
As cocoa walk in the phase threes at both Assembly row, and Pike <unk> Rose are largely complete from a spending perspective, and a stabilizing $700 million.
Comes out of our in process development pipeline.
These three projects will yield roughly $48 million when stabilized versus their 2021 contribution of 12.
As a result, our in process pipeline of active developments now stands at 800 million with roughly 425 million remaining to spend.
As we always do we sit with significant dry powder against our one three <unk>.
$1 billion of liquidity.
Now onto guidance.
As Don said, even after such a strong start to the year. It is rare that we would raise guidance just one quarter in the books.
Wherever the steady momentum we're seeing in the business, it's a really difficult match it.
As a result, we're pushing guidance our guidance range up to.
585 to 605 from the prior range of $5 75 to 595.
One to two of the 10 cent increase is from our recent purchase of Kingstone and its contribution to 2022.
The balance is from the first quarter outperformance and a better than forecast outlook for the rest of the year in both the comparable and non comparable pools.
We are also are bumping up our guidance for comparable NOI growth to 3.5% to 5% from the prior range of three to five.
Excluding prior period rents in term fees are forecast increases to six 5% to 8% from our prior range of six to eight.
We still expect our occupied rate declined from 91 to.
Today up into the 92.5, the 93% range by year end.
As the S N O spread in our operating portfolio of 250 basis points begins to come online.
In terms of <unk> growth in 'twenty three 'twenty four we're still comfortable with the 5% to 10% growth Guideposts you didn't previously.
The strength of our business model provides us with a diversity of avenues to grow sustainable sector, leading it for poker.
Beyond driving portfolio occupancy levels back toward mid Ninety's targets federal has additional years to propel growth.
Our proven track record and cost of capital to Opportunistically acquire assets Accretively.
Year Middle and long term.
A completed redevelopment and expansion pipeline totaling $700 million and in process redevelopment and expansion pipeline totaling 800 billion.
Together, these redevelopments and expansions will drive an incremental $80 million to $85 million.
Over the coming years through 2025.
As we have highlighted previously this is not pioneering development. We've been lucky this is redevelopment and derisked expansions at established and highly successful properties that we already own and know extremely well.
On a risk adjusted basis, no better more compelling business plan in the sector today.
With that operator, please open the line for questions.
Thank you.
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Our first question comes from the line of Craig Schmidt with Bank of America. Please proceed with your question.
Oh great.
On Kingston Town Center.
I'm just curious why why is it being purchased in two phases and then when we think about your U S. B.
Being able to increase value here, obviously, you re merchandising it upfront, but the incremental capital investment is that to take advantage of the 45 acres.
Hey, Craig its Jeff.
Yeah that was a solar requirement that we are that will be closed in two phases something of a solar asked for.
Common David.
Yeah, just a little bit more color on that acquisition, we're really really happy with it for a number of reasons.
You know when we've talked about this a lot in past we've for a long time had a hit list and we were very proactive about working our hit list.
No in this case it all very Cardiome team here has done a really good job of developing a relationship with the seller.
We've been talking to the solar for a long time before the property came to market and through that relationship and our credibility we were.
Development of the solar we were we were able to step in and buy that even after once market of what we think are pretty good terms, you know going in at a five cap and that kind of a mid sixes unlevered IRR.
But IRR does contemplate a lot of upgrading.
In the way of merchandising at some investments in the assets themselves. So we can sweep.
Bush credits.
But real happy with that.
Goes into our Virginia portfolio.
We opened an office in northern Virginia, a few years ago that has just been incredibly successful.
Running our assets and adding value trust from Brooks Twinbrook Fairfax Junction Kingstone, who added to that portfolio in the last few years, so real happy about it and finally.
I know you know this but just as a reminder.
Buying kingstone helped us cover a pretty big game that we created when we sold.
Under the threat of condemnation half of San Antonio Center out in Mountain view, California more than double what we paid for it five or six years ago. So all around just a really good deal and we couldnt be more excited about it.
Great and then just on the Pollo up but I noticed you mentioned in the call that Northern Virginia is kind of growing in importance to federal could you talk about 10 am I misunderstanding, you, possibly planning to redevelop a mixed use there and then maybe some information also on the New Park, let that's coming to Mount burdens.
Plus.
Yes, Craig.
You have hit on something that's that's real important you know when yet.
As you know we've owned Pan am and we've owned an awful lot of assets in northern Virginia for a long time, but it really wasn't until we put the office over there we're able to make.
Inroads in the acquisition market that whether Youre Fairfax County, our Arlington County that the leaders of of.
Those governments.
Helped recognized federal is a big player. There accordingly, we've been able to make some strides were certainly not all the way there yet, but strides with our with the entitlement process in Fairfax County, with a N N will get through.
The rest of it but we paid already more inroads than we would have I believe if we were still operating the portfolio somewhat remote it just proves again, how important local knowledge and local presence.
So the portfolio. So don't have a lot to say yet about pan am but I can tell you that you know where it is rather than Nutley Street exit off route 66.
In the middle of Fairfax County on a again, a big piece of land. There really is a common common thread there with us because stuff happens on the big pieces of land much more easily.
So you know that will go onto I'm hopeful our redevelopment pipeline.
Listen I.
I don't want to give you a timeframe, but in the not too distant future I'm hopeful so good stuff there in terms of Mount Vernon you got a blend of.
Parkland Craig. Thank you had mentioned so as Don mentioned in his in his opening remarks, we have more than two dozen investments happening in our existing portfolio strategically make them better and get them stronger coming out of Covid. It's parkland is analytics.
Example of not a full redevelopment and how we continue to invest in our properties to make them better for the communities that they serve so there's this pack that we've been working on for a while it's going to open. Shortly we just got the building permits and it's Glenn you make kind of a center of gravity for Mt. Brian You announced you know like for very long.
Large center and it'll provide some opportunity not only for that community, but that four or five tenants that circle. The parkland. So again really just kind of doubling down on that outdoor amenity program and outdoor seating that we see it's still valuable during COVID-19.
Thank you.
Our next question comes from the line of Greg Mcginniss with Scotiabank. Please proceed with your question.
Alright.
Hey, good morning.
So Dan I can understand in general Hesitance to increase guidance on Q1 results, but even so it feels that maybe a bit underwhelmed and considering the outperformance.
Versus our estimates and maybe even your or your own internal numbers, especially monkey I'm looking at percent rent reimbursement and other revenue contributions. So yeah, I guess I'm just trying to understand what can even push you to the lower end of the guidance range, even assuming that there's.
No more prior period rent contributions.
Yeah look I think that.
They're a massive kind of macro kind of storm clouds out.
And I think it's just yeah.
US being you know.
I think a little cautious in nature.
Yeah, well the bumping guidance is I think reflective of a strong first quarter.
But it's still well see I think we want to be mindful of increased inflation.
And all the other things that.
We worry about every day when we go to sleep a so I mean, that's I don't know Dan do you have any more to add.
Great.
Gosh I.
Yes.
It's hard for us to argue with the premise of your question when over the last six quarters.
Each time, we have outperformed in and.
And increased guidance and it wasn't enough and so I certainly understand I understand your question there.
There is absolutely an inherent conservatism in the way we run this business. There you know 22 is looking real good.
To your point, we're trying to reflect that in the guidance but.
If it comes out better it comes out better.
Okay, and then and then.
Dan.
I forget if you covered this but.
Have you talked about what kind of prior period rents are included in the <unk>.
Guidance number.
Yeah, No. We had had that we're actually increasing that number we had in our original guidance that I mentioned on our last call in February roughly.
Roughly about $5 million to $8 million, obviously, you did very well in the first quarter, increasing that the that range up from five to eight to nine to 11.
You know the pool of potential rent ramp from is shrinking a we're doing a lot better at grabbing it as evidenced by our strong first quarter.
Hence the.
The increase there over the balance of the year.
Thank you.
Our next question comes from the line of Michael Bilerman with Citi. Please proceed with your question.
Yeah, Thanks for that.
Tom in your opening remarks, you talked a little bit about Santana west and how are you.
We.
So the costs have gone up but the rents went up as well, which we were able to maintain your yield I was wondering if you can just sort of step back on the entirety of the redevelopment and development pipeline.
Your commentary on the core portfolio and the leasing environment is too optimistic and strong and clearly the numbers are coming in the leasing environment why isn't that translate into more into the redevelopment and development pipeline I would have thought at this point, especially during Covid, where you marked down a lot of appeal that those would actually start to see the other side.
It all just on construction cost that Youre, just finding that you're just not able to predict.
Get those you woke up.
You know Mike just just let me make sure I have the premise or are we agree on the premise of the question.
We have not adjusted in any significant way the guidance that we've given kind of pre COVID-19, because where we'd want to make sure that we've got.
Good numbers and the ability to be accurate when we change it and not do it in a death of a thousand cuts when it in terms of the Santana West piece.
That's what this reflects is is it a real negotiation.
That gives us a much better window wasn't what.
What rents really are today and what what costs really are where the remaining piece in Santana West. It's basically just the tea ice which is a big number but is that in some other stuff. So we didn't want to change part of it without without doing the whole thing that's similarly.
<unk> throughout the development portfolio and as you know much of our development stuff is baked and done under GMP and so you know to the extent, we're comfortable with that and we are that's what you see disclose you might have seen I also made a comment that we're we're not ready yet.
Let's talk about Oh, we're announcing a life science building a bit up at assembly specifically to your question, specifically because I want to make sure we are locked down on costs.
Before we're able to do that we're getting close but we're not there yet, but we do seem to see in all of our markets, where we aren't developed is there.
There are higher costs, which are literally out there on new money relative to a year.
A year ago or two years ago are being offset by higher rent expectations that seem to be able to be met.
There's nothing on the development side.
Yet that we've seen that has stopped as a result of.
Higher costs, but no ability to push those rents to create a decent return on those costs I don't know there's a lot in there and we'd have to go project by project, but that's that's the general landscape.
Yeah, I guess I was just I guess I was surprised that you know with all of this commentary in the commentary that you normally don't include increased guidance with beginning of the year and how strong the leasing environment is record leasing.
That somehow was not translating into better yields on the development and redevelopment and in fact Santana west if it wasn't for lifting and the rents that yield would have gone down and it's.
It's not inconsequential he talked about 130 Bucks a foot 50 million Bucks increase the soft small.
No Theres a fair that's a fair fair point, Mike and maybe like I'll give you a great example.
With what's happening up in assembly on the residential.
And we're gonna be at the upper end of that range and we may even increase that guidance going forward based on the actual residential leasing that is happening on there relative to the cost. So you know is.
Is there an inherent conservatism in the way, we try to do things absolutely it kind of ties to the earlier call.
But it's a pretty good even though there are headwinds out there in terms of the marketplace and so we tried to take the most balanced approach. We can I think you guys look at our history and can determine whether you believe we'll get there we won't get there and act accordingly.
But no there isn't inherent conservatism in the way we report.
Thank you.
Our next question comes from the line of Mike Mueller with Jpmorgan. Please proceed with your question.
Yeah, Hi, I guess, given the commentary on strong demand and leasing volumes is it your expectation that once we move into 'twenty three and 'twenty four.
See rent spreads tick up notable step up.
Yeah.
Oh gosh, how do I, how do I answer that.
You know Mike I would say it is so hard to answer a question about 'twenty three 'twenty four as we sit here on may 5th 22.
Right I mean, the reason we originally gave guidepost going out was because you'll remember you had better visibility post COVID-19 than we did in the middle of Covid. So that's why we started giving those those guideposts out now as I sit here and you look at the you know you look at the macro.
Issues affecting the economy trying to figure out exactly what's going to happen with lease negotiations in 'twenty three 'twenty four I'm looking at Wendy here and you know I've got a little bit of a struggle and their there that that's not an indictment of the portfolio or an indictment of the way we do business it's simply.
No the market out there is uncertain, what we know is.
What we are seeing really good progress with is where we spend capital.
To be able to create a better <unk>.
Place, making asset.
We get paid.
And and I don't expect that on a relative basis to change one bit.
But it is on a relative basis based on what's going on in the more global economy.
That's a that's affecting affecting real estate so.
As I sit here today I am really bullish on all the facets of the way we're growing clothing, the basic leasing of shopping centers, especially those that have been redeveloped and invested in but more of a crystal ball than that for 'twenty. Three 'twenty four I don't think I can give you.
Got it and then just just a quick follow up here on the comments about rent rent bumps escalators was that a comment just on the retail portfolio or just that cover the office portfolio as well.
It's it's the commercial portfolio, including loans, yes.
Thank you.
Our next question comes from the line of Derek Johnston with Deutsche Bank. Please proceed with your question.
Hi, everybody. Thank you regarding acquisitions with local retail cap rates the spread to the 10 year Treasury really historically tight right. Now you know what kind of cap rates are you seeing for quality assets or I guess more importantly, expecting to see in private market trends.
Actions in the next quarter or two are there currently fewer bidders for assets or.
Our cash buyers now really in the driving driver's seat given rising rates.
Yeah.
Eric It's Jeff Let me, let me take a shot at that I mean, you know we.
We've been pretty active.
For the last 12 to 18 months.
You know coming out of the pandemic.
Bidding on stuff and being successful and in several cases.
Our properties.
And you know in this most recent round of deals we've still seen a very active.
Bitter pool, and a very well capitalized bidder pool.
There is at least.
And in this last round of deals has been a lot of capital in the market.
You know a lot of a lot of people think big picture, that's because the yields and retail are better than they are in multifamily and better than they are in industrial.
Which is why you've seen a lot of a low to mid four cap rate purchases.
By institutions last last couple of quarters and there is there are some deals in the market price like that that are going to close in the next couple of quarters as well.
So you know that not every buyer is a leverage buyer.
A lot of institutional capital out there that needs to be placed and going forward I think it's not just interest interest rates that are going to drive cap rates. It's what our returns on other product types and does a wall of capital and stay on the market or does it not.
So to be to be determined, but a lot of money for high quality retail right.
That is a market.
So and.
Yeah as always there's a big big spreads between A&P quality property, right and where were we.
We're looking at stuff that we think we can add value to over time and are really focused on our value add.
All of the opportunities the densification opportunities.
You know more of the IRR than the cap rate so I'm.
Kind of keep that in mind as you think through maybe where pricing might go to.
Okay. Okay. That's helpful. Thank you and then kind of you know where Mike was headed but not so long term you know clearly healthy retail leasing activity. This quarter built on on strength of last year, which which clearly is positive but you know investors have focus on the high.
A b R versus peers in the post pandemic era.
As being a possible headwind or perhaps led to year to date under performance you know what when.
You look at it cash basis rollover. This quarter was again positive at 7%. So I guess the question is what what many investors be missing when focused on federal's, a b R and how do you view the in place rents versus market rents at your centers and the opportunity set.
Yeah. This is the perennial question right dark I mean, no doubt I want you to focus on something that Dan said in his comments.
Check this out a 7% cash on cash rollover.
If you did the math.
Considered our what.
What I believe are superior contractual bumps.
If it's a 100 basis points, if we're growing at two and a half somebody else's growing at one and a half chemicals.
Typical shopping center business right, 7% bumps equaled, 16% rollovers nine more.
That's an amazing thing that we have not.
Frankly done a good job of educating people about.
And you know part of that is we don't know what everybody's bumps sorry, but you can you can you can consider the following things.
We have this portfolio is two thirds anchors.
A third small shop right.
The opportunity for bumps is easier in the small shop, obviously isn't convincing P. J extra Ross you know to have annual bumps obvious stuff.
In our small shop, the notion of being able to have those bumps I would bet more Greg the leap, but I than others, but I don't know that for sure I do know that wars are very strong.
That you have to consider that when looking at rollovers also.
Yeah, and you know its small shop, not only maybe a third of the G. L. A but it's half of our reps in total so think about that number one number two is and I made this you know what it was.
It's such an interesting point I think when you look at the acquisitions we were.
We made.
And even before we do any redevelop or do invest we're able on 10 deals that's not the smallest they 10 deals this quarter get 33% more rent than when somebody else owned it on the reputation that we're gonna make you more productive at the end of the day right. It's the productivity.
Of the retailer not the ABR.
And so put those two things together and that's why we're confident with respect to how we run our business.
Thank you.
Our next question comes from the line of Steve <unk> with Evercore ISI. Please proceed with your question.
Hi, Thanks, Good morning, Don I was hoping you could just spend a little time on the a potential life science deal up in Boston and just how are you thinking about pre leasing and credit underwriting in tenant underwriting for that project.
Yeah, It's it's it's very fair.
Steve There there are a couple of things to think about there the business is not.
A pre leasable a business in and in large measure so theres no question that as we underwrite the risk as we underwrite the.
You know the dollars the cost of capital we have.
We'll expect a higher return to compensate for it it would be the inability to two they'll likely an ability as you never know, but theyre likely inability to pre lease as it relates to building what what we're thinking about with respect to that.
Opportunity is what is pretty demonstrably hey, a.
Yeah.
A pocket of much more than than one building.
It would be more than one building for federal in time, we would expect it to be already as you know biomed has begun construction and gray star right. There because of insurance construction. So the notion that assembly is likely to be a cluster.
Of life Science has grown dramatically over the past year or two that's a really important component.
And in terms of who's going to wind up there.
Actually one of the interesting things would be.
When you look at the number of companies that have been Ben.
Developed on the life Sciences side over the net opened over the past few years, it's pretty dramatic and demand is just.
Demand is off the charts relative to the supply even though there's supply coming on in <unk> and other parts of the Boston market. So together the short answer to your question. Steve is that the return has to be able.
To compensate for the spec nature of it.
As well as the undetermined at this point, our credit quality of the tenants.
And as a follow up would you would you contemplate sort of joint venturing with a more established life science player or you or ground lease it or are you pretty much committed to going it alone and keeping it for yourself.
We've considered all of those opportunities and we've decided that.
To do it ourselves and we've decided to do it ourselves in large measure based on the team that we were able to compile in terms of of not only the general contractor.
The designer, but the operator and all of the individual components of it as well as our team up there. So you know we've created a whole lot of value add assembly.
And well over 15 years and in that project.
We want that value.
Fully recognized in our in our incremental investment.
Thank you.
Our next question comes from the line of Conor Mitchell with Piper Sandler. Please proceed with your question.
Hi, Thanks for taking my question.
So with the depreciation of the strong balance sheet.
How can the pricing rates impact if at all of the developments going forward.
So with regard to well.
I'm not sure I understand the question could you repeat it.
Yeah, I think a better way to ask the question might be.
Whether you see rising rates within the development and then also or a material cost inflation as a bigger issue for impacting developments.
Well look I think there's no.
Yeah, we we we expect in and I think before we go forward, we lock in prices to the extent, we can with the GMT. We start I think what we've seen is because of the strength of the markets that we're in you benefited from increasing rents, which has kind of offset a kind of cost as it relates to <unk>.
<unk> T is.
Tenant improvement dollars and that's why we've been able to maintain.
The yields are and deliver the yields that we set out.
With cheap.
And we won't start something unless we got those costs locked down.
To a large extent and there's an important follow up on that and it is it is while you you kind of globally talk about we kind of globally talk about our development pipeline every project has to stand on its own.
If the if the rents are not certainly a higher cost of capital to your question.
Right.
Long term cost of capital is the way we look at a higher cost of capital has to be supported by by costs that work in there and rent that we're confident we can achieve.
And now that you know when you think about the primary markets, where we're doing that Boston, Massachusetts, San Jose, California, Oh, I'm, Rick County, Maryland, you're talking about markets that that.
Heretofore and I don't expect it to change based on job projections and in economic projections in those markets, we're able to push the rents to be able to compensate.
Does that continue forever Youre guess is as good as mine because we make those decisions on a one off basis.
But right now everything we see in those markets suggest that rent will compensate for the higher comps.
Alright, that's helpful. Thank you.
Okay.
Our next question comes from the line of Juan Sanabria with BMO capital markets. Please proceed with your question.
Alright. Thank you just wanted to touch on the funding side of the equation for acquisitions and how you guys are contemplating back given your cost of capital and if you can give us a sense of where.
Our debt costs are today relative to its still a strong pricing for acquisitions and how you think about kind of your your fixed cost to kind of your weighted average cost of capital.
Yeah look I think in the last Ah Yeah, certainly in the last 90 days.
Cost of debt capital is there's kind of gone up so obviously that pushes up our weighted average cost of capital.
Yeah, I think with regards to <unk>.
Hum.
One could you repeat the question, we're starting with the last part of it there yeah.
Sure just curious on how you plan to find what seems like a still very active acquisition pipeline.
Given where leverage is today and just get a sense of how you're thinking about where your color you set out to do we think about match funding.
Yeah, well look I don't think that is a big component of what we're looking to fun.
<unk> growth going forward, we've got $175 million of forward equity still ready to be taken down we've got in our assessment under consideration are 150 million of dispositions.
There were a sub five cap.
And on deck after that another $100 million to $150 million dispositions, we are thinking about to take advantage of a strong.
Environment so.
So I think that yeah that balanced with a higher cost of debt capital. Currently is something we will take into consideration, Jeff do you want to add.
One other thing to keep in mind here too, whether it's an acquisition and redevelopment or development.
We've never been a <unk>.
<unk> capital price or of our investment opportunities. We've always looked at our long term weighted average cost of capital. So yeah when interest rates were really low.
Werent chasing.
Acquisitions for example down into the low four cap range.
Simply because they were so accretive.
With increasing interest rates and increasing that cost, we don't really expect that to impact our ability to perform in the market for that reason yeah. We always have always maintained a very strong discipline on I'm looking at kind of a long term.
Cost of the spot cost.
Okay.
And then just as a follow up question just curious on the small shop side of.
He is your thinking about merchandising.
Space and the centers.
But also thinking about maybe we see a potential recession, we'll see.
Does your does your strategy change about the types of tenants, maybe more national with regards to the small shop space.
Yeah.
I would just say that the short answer is no.
We really take a balanced approach sort of like what we were talking about this for our overall business plan is growth in various areas from Mark for a true developments to read it all just the acquisition now.
Like to apply that same philosophy to maintain where we were talking about well whether its two merchandising whether it's investing in the properties whether its to selecting tenants that also want to invest in themselves, we're seeing a huge amount.
Indefinitely tenants and us together and that creates a better result, and we like the balance again intertwining with a community of that local flair mom and pop best in class as well as the regional and national as well so.
I think we'll continue to take that balanced approach and we're we're sticklers too.
Working through kind of a business plan in order to get their crowded and also securing the waves are.
And the right way, regardless, who wants to come on all of their holiday. So we don't relax our standards when things were good.
So I wouldn't expect us to do anything differently.
I went into some.
Yeah.
Thank you.
Our next question comes from the line of handheld. Thank you with Mizuho. Please proceed with your question.
Hey, good morning.
I have a question on redevelopment here bond enthusiasm your tone. It's clearer demand is strong rents are rising and you're adding to the read about the pipeline I guess I'm curious how close are you to maybe getting back to the pre Covid game plan of the three to 400 million of annual read that's been funded by free cash flow as well as incremental debt.
Mystic sales here.
What's the right way to think about Readouts spending as we move into this higher cost higher interest rate, but higher rent background, yeah, Yeah, Yeah, no no I.
I Love. The question. It's it is the answer is driven by opportunity.
And one of the things that has become pretty clear to us post Covid I think Wendy talks talks about this all the time to me and so it's kind of stuck in my head.
<unk>.
The demand and the conversations with tenants has in our view what we've seen is they are more important in terms of who the landlord is than ever before so to the extent that landlord is best investing not only in the asset alongside that tenant to be able to create a better.
And place, making is a big part of it no question.
<unk> is a big part of it no question chip to create a better environment. That's that's a that's here to stay and and you know what it'll stop that and if.
If we can't get paid for it.
But effectively everywhere, we've seen so far.
We are laying out an aggressive redevelopment plan our improvements to the property the impact on the leasing.
Has been very clear.
And when I say the impact on the leasing I'm talking if you're interviewing leasing agents and an understanding from their point of view what the deals look like what those bumps look like you know when Dan talked about higher bumps, that's not an accurate that's not an accident that has to happen commensurate with its attendant conversation.
That that where they are confident theyre going to be able to afford that and continue to pay that a key part of that is what do you do with landlords to the shopping center.
So I don't.
The days of kind of milking your just kind of milking the shopping center and you're milking the cash flow from the shopping center without.
It's a significant investment I'm not sure I'm not sure. This industry goes back to that and to the extent you do do that the differentiation between great properties and not so great properties gets wider and wider.
As you think about the next few years and you know a a return to normalcy from a demand and a supply perspective.
Ask yourself, where you're likely to be able to push rents and get paid if you're shopping center is materially better.
Then than the competition and that's that's kind of the way we think about.
Okay fair enough and any desire to perhaps provide some guidepost for how we should think about rediff spend here.
We move into the next few years and then can you remind us what.
Estimated value of the assets and you're right in your portfolio that can be sold on a maybe tax neutral basis to fund acquisitions developments I think a few years back that number was close to 400 million. Obviously you've sold some just curious on where you think that is today I think that's I think that's the last part of your strategy.
To your question, it's about the same I wouldn't say that I wouldn't see that very differently.
Yeah, No that's kind of it's kind of we got to stay on it.
Thank you. Our next question comes from the line of Chris Lucas with capital. One. Please proceed with your question.
Oh, Hey, good morning, guys, just one quick one for me.
Dan on the percentage rents a number for the quarter.
It was roughly almost two weeks what it was pre COVID-19 in the first quarter.
Just curious as to whether that growth.
Growth came from more leases running into the you know over the breakpoint in generating.
Percentage rent or those that have been in percentage rent continuing to sort of just add to that to the contribution to percentage rent just trying to understand where that's where where that increase is coming from.
Yeah, Hey look the increase is partially being driven.
Driven by just better tenant sales.
Across the portfolio.
And it's there's two different parts we have the.
Yeah. The the leases that were restructured where we're collecting percentage rent and that shows up in the flexibility adjustment the percentage rent that's in that line item that outperformed pretty significantly.
Is it is it really just I think a combination of.
A few more deals that are leases that are percentage rent deals as well as just higher performance from those those leases are overtime I would expect.
So yeah that first quarter number.
Not to be typically were around 1% to 1.25%. We're at one 5% today revenues, Yeah, I think that it's in that one to one 5% overtime.
Thank you.
Our next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.
Hi in past presentations, you've shown retail format by the percent of 2019 P. O I contribution just wondering as you know as this trend line has normalized and demand is higher now have those contributions changed at all materially.
Yeah, there's really been no material change to.
Those so those are those figures.
Got it.
Then you'll have a few tenants that have chosen your assets your office assets like Netapp Spunk and Puma is.
Is there a headquarters was this the strategy you had in mind. When you develop these office spaces or was it just more product by product of having you know new and desirable amenities.
Yeah, well I mean look we always hope that.
You know we have the best credit tenant to take the entire building and we're done in five minutes and so that's always been that's always thought the hope and the strategy the more rehab.
More likely.
Result is what has happened now those are great companies all of those companies all of them are looked to the amount of times base look to the ability.
Ability to retain and attract workers as critical to their decisions. That's not a surprise that's been in the strategy from the beginning that will continue to be in and I think you'll see that that's where we'll end up.
But the other stuff, that's not not least I'll get back.
Thank you.
Ladies and gentlemen, we have reached the end of our question and answer session. I will now turn the call over to Leah Brady for closing remarks.
What are you seeing many of you at NAREIT. Please reach out with any meeting us and thank you for joining us today.
Yeah.
This concludes today's conference and you may disconnect your lines at this time thank.
Thank you for your participation and have a wonderful day.
Okay.
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