Q3 2022 Federal Realty Investment Trust Earnings Call
Hello, and welcome to the Federal Realty Investment Trust third quarter 2022 earnings conference call.
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I'd now like to turn the conference over to Leah Brady. Please go ahead.
Good afternoon. Thank you for joining us today for Federal Realty's third quarter 2022 earnings Conference call. Joining me on the call are Don Wood, Dan G. Jeff FERC. When do you see are and what they will be available to take your questions at the conclusion of our prepared remarks.
Under 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 of 1995 forward looking statements include any annualized or projected information as well as statements, referring to expected or anticipated events or results, including guidance, although federal Realty believes expectations reflected in such.
We're looking statements are based on reasonable assumption federal realty's future 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 attained.
The earnings release and supplemental reporting package that we issued this afternoon. 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 results of operation.
Given the number of participants on the call. We kindly ask that you limit yourself to one question and an appropriate follow up during the Q&A portion of our call. If you have additional questions. Please re queue and with that I will turn the call over to Don Wood to begin our discussion of our third quarter results Don.
Well, thanks, Leah and Hello, everyone.
Consumer spending remains very strong and the major Submarkets, where federal operates particularly on our mixed use properties and has resulted in another quarter of outperformance in terms of both executing long term leases as well as bottom line earnings.
126 executed long term leases for 585000 square feet of space and that's that's all per share of $1 59 were both above external and internal expectations.
Turning to signal strong demand for high quality retail and mixed use real estate a.
The future pipeline of deals not yet executed also remains robust and as such we will be raising 2022 guidance again.
Demographics matter, especially in times of economic uncertainty.
Cycles have convinced us that family simply have to have money to spend for retail real estate cash flow to grow.
68000 households, with annual average household incomes of $150000 sit within three miles of federal Realty centers.
That's $10.2 billion of family income generated within a three mile radius and more than half of those people have a four year college degree or better.
No other significantly sized retail portfolio that can say that.
It's manifesting itself in a myriad of ways, including a wide variety of tenants who are seeking seeing their sales exceed the overage rent threshold in the lease and.
And while not a huge absolute number since we strive for strong fixed rent and our leases the broad based overdraft contribution in the quarter, particularly among our restaurants and soft goods status over and above the fixed rent is notable and contributed an additional <unk> <unk> per share compared with last year's third quarter.
As I said strong core leasing remains the engine that drives us over the last decade pre Covid. That's 2010 to 2019 average third quarter production for comparable properties. Its federal met doing 88 deals for just over 400000 square feet.
And the 2022 third quarter, we did 119 deals for 563000 square feet, 40% more than the average.
Annual rent bumps of our retail leases average about 2.25% overall and higher when including office leases. That's a powerful advantage over the typical shopping center portfolio.
The fact that demand has remained this heated with a deal pipeline that looks to stay strong speaks volume about our properties and the markets, they're in and naturally about future property level operating income growth.
One of the reasons, Dan is again raising annual earnings guidance 12 cents at the midpoint.
The solid tenant performance also manifest itself and continued occupancy gains as tenants failures remain low.
Current year lease rate is now at 94, 3% and occupied rent right now at 92, 1%.
Those leased and occupied rates are 150, and 190 basis points, respectively, better than a year ago, and Theres, obviously still room to grow there, particularly on the small shop side.
At 89, 9% leased small shop space is a remarkable 640 basis points higher than the Covid low point with further gains expected by year end.
I referred earlier to the outsized demand that we see at our mixed use properties note that the retail component of our four large ones Assembly Pike <unk> Rose Bethesda, and Santana are 98% leased at quarter's end.
In addition, we continue overall to hit or beat targeted delivery dates one of our key corporate goals for 2022, and a real tribute to our tenant coordination and construction teams.
As convinced as I've ever been that we have the right product in the right locations with the right demographics for the inflationary economy that we're in.
And by the way with a well demonstrated 55 year respect for the dividend component of our total return.
A dividend yield of four 3% for a portfolio of this quality quality seems awfully compelling to us.
And against that backdrop, we've also been able to sell a couple of non core assets at good pricing and refinanced and Upsized, our term loan and line of credit to be sure. We have plenty of balance sheet flexibility and dry powder for whatever the economic environment feels like in 2023.
In terms of capital needed for our large development projects, we have less than an incremental $225 million to go.
About $100 million to complete the choice hotel.
Headquarters building at Pike, <unk> rose $100 million largely for tenant build out commissions at Santana West and $20 million to complete Darien comments by the way after the quarter just last week, we just signed a 52000 square foot lease with a credit tenant bringing that building at Pike <unk> rose to over 60 per.
Sent pre leased.
Those projects alone will be contributing an incremental $40 million in operating income in years to come.
Investing in these and other projects, both large and small with fixed rate debt and equity before the recent rise in rates will serve us well in the coming years as these state of the art buildings begin cash flow.
Similar to development, our pro rata share of the acquisitions that we've made since the beginning of Covid through today totaled $850 million those acquisitions from gross margin to Cam back colonnade Pembroke gardens, and so forth are performing well ahead of our expectations in the aggregate and our <unk>.
<unk> to yield in the mid sixes in 2023.
And at the same time period, we generated over $400 million in proceeds from noncore asset sales.
Five cap.
That capital recycling was not only immediately accretive, but the medium and long term growth rates of our acquisitions net of dispositions are clearly superior.
Okay. That's about it for my prepared remarks. This morning, though I'd like to leave you with one final thought before turning it over to Dan.
In our view the recent run up in interest rates was inevitable, but not necessarily at the pace we are seeing.
While short of pressure everybody's earnings to some extent in the years ahead, how much and for how long it remains to be seen.
So the real question is will property level operating income more than compensate.
These are the times, when well leased well located dominant retail and mixed use centers and supply constrained affluent densely populated markets and submarkets shy.
We're in a cyclical business no news to anybody and it's why our business plan has always included multiple ways to counter the horizon money costs and the effects of inflation.
The combination of best in class shopping centers, along with acquisition and development property level income contributions financed with money from an earlier time along.
Along with the potential sale of certain assets, including discrete residential buildings within our portfolio gives us more flexibility and more tools with which to handle cyclical pressures than most.
Forward to the challenge.
Yes.
Thank you Don and Hello, everyone for.
For another quarter, the strength and resilience of our portfolio has exceeded expectations.
With <unk> <unk> per share of $1.59, we beat a strong comparable from third quarter of 2021 by over 5% and beat consensus by <unk> <unk>.
And once again, we saw broad strength across all aspects of our business driving this performance.
Continued gains in small shop occupancy.
Strong tenant sales driving higher percentage rent continued increases in customer traffic, resulting in another uptick in parking revenues.
Strengthen our residential assets and better collections and forecast, although offset by higher property level expenses and higher interest.
Let me add some color to these items.
Small shop leased occupancy basically hit 90% up 60 basis points over to queue up 380 basis points year over year and up to a level not achieved since 2017, but still not back to targeted levels.
Parking revenues are strong indicator of consumer traffic at our mixed use assets continued higher up 8% sequentially over Q at 33% year over year.
Percentage rent and indicator of tenant sales strength was up over 31% sequentially.
And almost double.
Third quarter 2020 one's level.
Same store residential.
Was up over 10% year over year.
On the other side, we did start to see some inflationary impact on operating expenses in the quarter as Opex grew by 10% over <unk> 2021.
However, we estimate that roughly a third of that increase is nonrecurring and it is all predominantly.
Recoverable from tenants.
Yes.
Despite coming off a strong comp in 'twenty, one are comparable growth metric for <unk> was a solid three 7% well above forecast.
Comparable growth excluding prior period rent and term fees was six 3%.
On a cash basis, our same store metric is 5%.
Excluding prior period rent and term fees are same store metric is up to 8%.
Year to date comparable POI growth as a sector, leading eight 8%.
And almost 10% on a cash basis same store metrics.
But those of you that track it.
Term fees this quarter were $1 3 million up from a half a million dollars in 'twenty one.
But down significantly from the second quarter's $5 6 million.
Prior period rent was $2 million.
Decreasing $4 million relative to the third quarter $6 million level again. This is adjusted to reflect only negotiated prior period rent payments relating to COVID-19.
We had another exceptional quarter of leasing a record for any third quarter, giving us nine consecutive quarters of above average leasing activity.
And not by a little bit by over 25% on average over this nine quarter period.
And 40% this quarter.
Furthermore, our pipeline remains as robust as we've seen at <unk>.
Currently achieving both second quarter of 2022 third quarter of 2021 levels at this juncture in the quarter.
Our rent rollover metric was 3% for the quarter.
With rollover gains for deals in our pipeline, indicating a much more robust outlook in future quarters.
We also had another solid quarter achieving sector, leading rent bumps.
As we continue to drive average annual contractual increases of 2.25% for retail leases only.
All banker and small shop blended.
And as a result, our rollover on a straight line basis.
13%.
And I know I'm repeating myself, but for every 100 basis points higher in annual rent bumps, the ending rent will be 9% to 10% higher at the end of a 10 year lease hence a portfolio with 200, a quarter percent rent bumps of 3% rollover is the equivalent of a portfolio.
With only 1.25% rent bumps and 12% rollover.
Plus the 200% to 400% rent bump portfolio collects more along the way.
With respect.
Back to our balance sheet, we made significant progress during the quarter and enhancing our liquidity and financial flexibility.
Just after quarter end, we closed on a comprehensive refinancing which increased our unsecured bank capacity by over a half of $1 billion.
By $1 three from $1 3 billion previously to $1 85 billion today, and a combined revolving credit facility and term loan.
Both of which we extend we increased our previous $1 billion revolving credit facility to $1 25 billion extending the term to April of 2027 with two six month options out to 2028 and transition the base rate from LIBOR to silver.
And we doubled the size of our existing term loan from $300 million to $600 million.
This term loan has an April 2020 for maturity with two additional one year extension options, which take us out to 2026 at our option.
The interest rates here also transition from LIBOR to suffer as a result at closing of the facilities. We had one 4 billion.
Total liquidity, including the $1 $25 billion available on our Undrawn credit facility.
With respect to leverage metrics at quarter end, our net debt EBITDA ratio, which is roughly six times annualized for the quarter and adjusted for asset activity.
To be within the range of our ratings and we continue to target a ratio in the low to mid five.
<unk>.
Overtime.
Our fixed charge coverage ratio rest at four times. Additionally, we sold two assets one retail center and one residential asset during the quarter for a total of $67 million at a blended five and a quarter cap rate.
And we're in process on an additional asset on additional asset sales totaling over $350 million and potential proceeds at a blended cap rate that is sub 5%.
Having noncore assets, including residential that we can sell at extremely attractive valuations. Even in this environment is an arrow in our quiver that most retail companies do not have.
Onto the remainder of 2022.
Given another quarter of outperformance and a strong outlook for <unk>, we are increasing our guidance from 6% to 625 to a tightened range of $6 27.
The $6 32 per share.
An increase of 12 cents at the midpoint or 2%.
And this is on top of two other guidance increases earlier this year in the first half which brings our year to date total increases in guidance to <unk> 45.
Current 2022 guidance implies 13% growth over 'twenty, one at the midpoint, despite over 200 basis points of headwinds from prior periods.
We are also bumping up our forecast for comparable POI growth to 7% to 8% from the prior range of five 5%.
Excluding prior period rents in term fees are comparable toi forecast increases to 9% to 10% from the prior range of seven five to nine.
We continue to expect our occupied rate declined from 92, 1% today up to around 92, 5% by year end.
Please note that our recent third quarter acquisitions weighed on our occupancy growth during the quarter.
This guidance assumes a range of $1 53 to $1 58 of <unk> per share for the fourth quarter.
With respect to 2023.
We will be giving formal guidance on our call in February but let me provide some commentary for you to consider.
Our $600 million term loan is floating rate.
We have consciously decided not to hedge the rate to maximize our financial flexibility to be opportunistic in the timing of refinancing on a longer term fixed rate basis.
It's interest rate is set the terms so far as adjusted plus 85 basis point spread which is four 7% today.
Also note, while our only debt maturity in 2023 is $275 million of unsecured notes with the June maturity.
It does have a 275% interest rate.
We again expect prior period rents in term fees not to contribute from 2023 to the level. They did this year all the impact will not be as material as it was this year.
With that operator, you can open up the line for questions.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
As a reminder, please limit yourself to one question and one follow up at.
At this time, we will pause momentarily to assemble our roster.
The first question today comes from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey, good afternoon.
Hi.
No.
Dan just wanted to go back to the rent spreads.
This is something you guys have talked about over time and certainly looking at your spreads in the quarter you know theyre not they are low but the episode growth is high in <unk>.
We'd rather have episode growth in rent spreads. So can you just sort of give an overview of how we should think about the interaction between rent spreads and effort, though and then I think you said that your every year. The embedded annual bumps are two and a half per cent, but wanted to just want to validate that number two is that just small.
Shop or is that is that also with like the junior anchors and some of the bigger format retailers.
Yes no.
We'll go to rent spreads.
Yes.
Rent spreads we announced are for deals that are signed during the quarter. They will not start for the next.
Year or two.
So theres, obviously Ah and Nash.
It's just one component of how our company grows which is what the rent spreads are as we said we we also grow.
Rents from contractual rent bumps, which we'll get we'll hit here it is 2.25%.
Retail leases only both anchor and small shop blended.
That that we see in our portfolio a little bit higher. If you include the office leases, where we get a little bit higher bumps.
And the second.
The question that goes back to the guidance that you gave a few quarters ago on 'twenty three and 'twenty. Four obviously this year has really outperformed and it's hard to believe that the metrics for 'twenty, three and 'twenty four sort of stuck in the ground and that this year has come up but it's just going to flatten growth.
So is that really the case like we should think about it flattening growth versus the goalpost that you guys laid out a few quarters ago or can we think about 23 and 'twenty four those goalposts moving up as well.
Look we provided golf goalposts or guidepost that got us to 2023, and we've hit that year in 2022.
We're going to provide guidance in 2023.
Three on our February call, but one thing I will tell you is we will see really really good and strong robust property operating income at the property level in 2023 and will continue to see growth coming from our non comparable.
Portfolio coming online as well contributing.
And that obviously in this environment.
We'll have to.
<unk>.
Inflation on operating expenses, and we will look to counter the impact of interest expense.
And I would just add Alex to the implication of your question, which which I understand and then yeah.
Let me just say there are two things when we when we gave that those goalposts.
There was obviously based on the timing of the recovery as you said the timing of the recovery has clearly been faster and that's that's great news, but also to your point, it's not only the timing of the recovery. It's been the strength of the recovery. So I would expect that <unk> growth from the property led.
To be even more robust than when we set those guideposts back in.
Whenever we sent them in 'twenty, one or 'twenty.
Secondly, so P&I level, you're darn right. This business is performing as good or better than it ever has and a lot of that's post COVID-19, obviously, we got a.
We got a deal with the current macroeconomic situation in terms of interest rates at all but over overall your point is a good one that not only did we get there faster we got there in 'twenty two versus 23, but if you. If you were to reset today and look at those goals that those goals are effectively even better with respect to the core poor.
At folio because of the strength in the leasing over this period of time.
The next question comes from Craig Schmidt with Bank of America. Please go ahead.
Thank you.
We have definitely witnessed your properties in your trade area.
Well in an inflationary environment I'm wondering how do you think it might perform in a recessionary environment.
Well yeah.
I don't I don't think there is a lot of wondering about that if you take a look at history. Obviously this isn't the same as the great financial crisis, it's not the same as the dotcom crisis of 2000, and 2002 and Craig but it is it is clearly a period or going into a period of reduced.
Economic activity call. It what you will it's why we own the properties we own it's why the demographics. We believe are incredibly important going forward. So what those exact numbers will be and what their what the future holds in terms of <unk> and.
In terms of both inflation and in reduced economic activity.
We believe we will outperform and I believe that just as we have in past cycles, because the affluence the density and the barriers to entry of where we are I go back to those numbers because they are so important when you have got $10 billion of income power.
Within three miles of a shopping center, it's very hard to imagine that that's not going to be a significant advantage in both an inflationary environment and.
A lower economic activity in buyer environment, So I'd like us on a relative basis is very much.
And I agree with you that.
Definitely a tale of two cities when you look at different income cohorts and how they're spending but I'm wondering if your centers have also benefited from what we're seeing is people are more actively pursuing.
Experiences.
Travel is held up well.
People paying very high rates.
Vocation hotels.
It just strikes me the socialization and an experience that.
At your shopping centers may also be benefiting from the consumers wanting to get back to that aspect of their life.
Craig it's hard to imagine that that's not the case, where we're taking this call today from Santana row.
Out in the middle of Silicon Valley.
Always confusion as Silicon Valley, the Bay area and the stuff that you hear about San Francisco It couldnt be.
40 miles is.
<unk> thousand miles away in terms of markets I'm looking at on the Street right here. If you saw the activity. If you saw the restaurant numbers in particular.
That that are generated here it goes to validate your point critically we're seeing the same type of thing and those restaurant numbers at assembly row, and at Pike, <unk> Rose and so the the notion of the combination of those type of properties along with a very substantial grocery anchored shopping center portfolio together.
I think makes your point crystal clear.
The next question comes from Steve Sochua with Evercore. Please go ahead.
Yeah. Thanks, good afternoon.
Sure.
Yes, Dan or Don or Wendy just if you talk about the leasing pipeline I was just wondering if you could add a little bit of color on the types of tenants that youre seeing if theres any regional variation and I guess as you think about the upside in the portfolio you know where do you think the lease percentage.
<unk> can ultimately get back to and when does the I guess the gap between leased and occupied close more significantly.
So I guess, Steve I'll take the first part of that question and.
As you've heard in our remarks that the.
Pipeline that I'm seeing is is really strong what we've just accomplished in the quarter and frankly, the last 12 months by taking our small shop and increasing it by 300.
80 basis points over a 12 month period is remarkable and proud of the team of course, and just speaks to the real estate.
And as I look at what we've been doing I mean, we've had everything from Atlanta to Nike too.
Daves Hot chicken seems to be the big one to pepco to very broad rate base as it had been frankly in the last several quarters. So again seeing it and the other the other piece of this that is really positive is the activity that we're seeing and the challenges that we're having both on the retail side and on.
Yeah.
The landlord side cost of construction with the relationships that we have and the amount of tenants that we're dealing with over a period of time and the credibility that we have in the market to do what we say we're going to do we've kind of been able to put our heads together and figure out how to move forward on our lease even though some cost can be challenging.
And.
With this transparent approach, we've been not only being able to get the rents that we need to have it make economic sense, but we've been able to grow the annual embedded increases in that and the leases that makes sense for us. So again speaks to the strength of the real estate and that buying power within those markets.
And I guess, Steve with respect to the second part of your question I would very much expect this portfolio to be at 95% plus leased portfolio now the notion of the timing of getting there is dependent on a number of things first of all we're not solely driven by occupancy were driven by driven by economics and value.
And I'll give you a perfect example, what happens with the bed Bath and beyond as we go forward. If I had my way, we get them back as soon as we can and we've leased them to more productive tenants at higher rents, that's what we'd like to be able to do now.
That doesn't mean, we won't extend one for a year another year or whatever but I guess occupancy per say my point is here is only one <unk>.
Consideration.
And trying to reach a goal, it's not trying to get to 95% no matter, who no matter where that's.
That's an important thing to understand and I do think that that's something that we.
We take a we'd put a lot of weight on the balance necessary to be able to get there. The second thing is obviously the leaks in the bottom of the bucket what are we going to see over the next couple of years in terms of tenant failures et cetera, obviously, we've gotten into this period of time post COVID-19 in a in a better position.
And the industry has because of the loss of weak tenants at the beginning of Covid and you know at this point, it's still looking really strong and I don't see a lot of leases at the bottom of the bucket beyond the bed baths and.
As always a few small shops et cetera, but how what's the extent that's going to be is going to determine the timing of what the question that you're asking I would hope to be there within a couple of years.
Hey, Steve It's Jeff just batting cleanup here, we've probably got another 100 basis points to go to get to where we want to be on our signed not occupied percentage, we're sitting at 220 basis points today and historically, that's been a 100 to 125 basis points.
When he said we are doing everything we can working our relationships with not only the tenants.
But also the people that do the work both inside the company and outside the company to build out space as fast as possible and get run started that's really been going well.
For us the last.
Six to eight quarters, and we hope to get that shrunk down.
In short order exactly when that will happen like Don just said, we can't tell you, but that is a <unk>.
Primary objective there yes.
Yes, we've made good progress on that it used to be north of 300 basis points spread we've got it down to 200 on our way to that targeted 100 to 125 basis points and I guess the fourth about it really is a cleanup battery.
Thanks, sorry for the long question, a second just on capital deployment I guess, Don how are you thinking or how do you change kind of your hurdles for either new development redevelopment and ground up or acquisitions. It sounds like you have a pretty robust disposition pipeline at 5%, but just how are you thinking about unlevered yields for.
New investments yes.
Well, obviously thats all.
You know in that state of flux as the capital markets are in that state of flux. So within the context of that Steve the bottom line. The bottom line is we're still we always through periods want to make sure that the company continues to.
View capital on the long term weighted average cost basis, not just yield for a particular project at any one time because its as.
Uncertain in terms of where it's going to end up at this point, we have clearly put the brakes on.
Some of that capital deployment for new projects unless the.
Project that we're working on is very clearly.
Not only needed for the for the asset, but very accretive and.
And that puts it.
Up up in those.
Eight 910.
Per cent range is to be able to do it right now that wont stay like that forever. We just want more visibility in terms of where that overall cost of capital will end up.
I think you would probably agree somewhere by the middle of next year, we'll have an awful lot more visibility than we do today.
Great that's it for me thanks.
The next question comes from Derek Johnston with Deutsche Bank. Please go ahead.
Hi, everybody good.
Afternoon.
We view renewed office demand as a real potential positive catalysts for federal and especially when it comes to investor sentiment and I think I'd say you know what we learned exiting the pandemic era. It was office location newness quality operators, they've all seen and should.
<unk> to see outsized demand.
So I guess, how Howard tours progressing.
Interest progressing specifically at Santana West and perhaps touch on some other assets and are you more confident on your office component given what youre seeing on the ground than maybe a few quarters ago or a year ago.
Eric It's a great question I really appreciate that let me let me, let me start by saying.
And I've said, it a million times, but I Couldnt believe it more office is not created equal the notion of having to type of office product that we do which is solely at our big mixed use developments. So therefore solely driven by the in the retail environment effectively that is the differentiator here along with <unk>.
New buildings.
If there is any demand for office space, how can that not be <unk>.
Knowing the economy, knowing the proclivities of Ceos, and hiring managers et cetera, how can not that not be the best product available we remain as confident as we've ever been as I said, we just signed a lease I can't disclose who it is.
At this point, so they tell their employees et cetera.
Over at 915 meeting at Pike <unk> Rose in terms of Santana West we're not there on anybody anybody yet, but we remain as positive as we ever have with respect to the product. The reason I'm out here at Santana row.
ROE and why we held our board meeting out here over the last couple of days was to make sure. Our board saw what we see in terms of the product that we are delivering here and heard from Jeff.
Who you'll hear from here in a second in terms of this environment you got to be bullish about this over the middle term.
I mean, setting 915, and one Santana West side, our office portfolio is 90, 798% leased.
Reason why it is because.
All of our office locations that are monetized.
Sam it's for a long time that is the new standard for having office space. If you can offer your employees amenities.
You can't keep your buildings leased and we have amenities in spades at our properties.
That's why we're 90, 798% waste.
Big change out here in Silicon Valley, and we talked a little bit about this last quarter.
Three six months ago.
Big question here was what are we going to get people back to the office.
And I think.
I said on last quarter's call that Apple, Google and others have made the decision to get people back right. After labor day and that has in fact happened.
If you live or work out here you'd notice that when you turn on the TV in the morning, and see the traffic stack up to get over the Bay bridge or to drive down to 80 past Apple's headquarters, there's a line of people to get off too.
The Apple headquarters exit so the conversation has changed from when to what.
And what is all about what do we need in the way of space.
To rightsize, our requirement and provide our employees what they are demanding which is state of the art space with state of the art systems and amenities. So the confidence that Don just mentioned is because of that and if you look around Silicon Valley. There is really only one building that's state of the art with state of the art.
And that's one Santana West So you know I wish we could say wind.
Can but we remain positive on our prospects to lease that building.
Alright. Thank you we will stay tuned.
And I guess secondly.
You mentioned bed Bath and beyond can you talk about the watch list and specifically for your portfolio right and.
And how your centers and tenant exposures may differ from peers. So so that it's well understood out there and thanks guys.
Okay.
Okay. Thanks Derek.
Now look with the with the exception of bed Bath <unk> beyond.
Yes.
That's probably at the top of our list.
We only have about 83.
Basis points.
<unk> to them.
About 60 basis points of that is to the bad debt name.
Other than that nobody else has is anywhere close to material in terms of folks were focused on.
They're all single digit.
The basis points of revenue and so there's really not anything that's on a near term concern list for us.
Wendy.
I would say when I think about bed bath and beyond and look at what we've done over the last three or four years or so which is we've kind of reduced our exposure in that with them as a company probably about four or five locations.
Not material.
And as I look at what's left we have three bye bye babies that are in good healthy condition in terms of their productivity come up.
The shopping centers and we have six bed bath and beyond one Harman and as and I Couldnt, Ukraine, Malawi Ghana.
There would be some short term pain I would be very comfortable controlling all of that really.
Average those are lower rents, there 15 bucks or so.
Which given our centers.
And on average is fairly well.
The next question comes from Michael Goldsmith with UBS. Please go ahead.
Good evening, Thanks, a lot for taking my questions.
And your commentary about 2023 was really helpful. I was wondering if you could provide a little bit more color about the puts and takes it it looks like.
G&A is going to be about $4 million higher.
Or refinancing the 2023 bond is.
It looks like it could be about a $5 million headwind.
There was also.
The capitalized interest for.
Pursuing kind of a less.
And that's offsetting some of these factors on.
Of the growth of the portfolio. So can you just provide a little bit more detail on some of the puts and takes of 2023. So that we know kind of like where the starting point is.
And our model before research kind of like model the growth upon it.
Yeah, Hey, look I think you highlighted some of the color I provided on 2023, we are going to provide more detailed comprehensive with underlying assumptions on our February call. We.
We're in the middle of our budgeting process, we're not done with that that we need more visibility and we'll have more visibility hopefully in three months and thats. When we will give you that detailed information and so stay tuned.
Funny.
And I had to laugh because when when we were preparing comments and what we're what Dan was going to say for 2023 I thought he was given too much.
At that point, but it's a heck of a try to get more of Adam.
At this point stay tuned.
And I can appreciate that or are you able to at least provide kind of where prior period rents collected and ours. Just so that we can kind of.
We can kind of quantify around that.
Yeah, Yeah, no I think that prior period rent, what we think about and how we're thinking about it currently is what prior period, Brent that we expect to collect that's related to <unk>.
Covid modifications to.
Sure.
Previous deals with tenants.
That's about $8 million to $10 million. This year, it's probably going to be probably are in and around 5 million plus or minus.
Use that as a placeholder for now we'll have more guidance there.
Yes, a lot less impactful than it was last year in 2021 to 'twenty two.
The next question comes from Greg Mcginniss from Scotiabank. Please go ahead.
Hey.
Good afternoon, I guess I'm.
Just looking at residential comparable occupancy saw 50 basis point decline year over year is there anything to point to there and then also what level of spreads are you seeing in.
The residential assets.
Yes, that's a great it's a <unk>.
Great question. So you know what Thats about Greg is about pushing rents hard.
Particularly up in assembly and so we were we lease that up so fast.
As the tern happened, we wanted to we wanted to push rents to find the equilibrium lost a basis point or two of occupancy.
Which is just fine.
It's funny when you.
And I'm going back even to <unk> question earlier, what should this portfolio be leased at I'm always I always say 95, or so because it's not just about leasing it up and getting the building filled it's about making the most money with it and so the notion of AV testing, where the rates are where they can be where they are.
Should be relative to occupancy always makes me more comfortable in the 95 to 95, 5% range of $4 90 to 798, it feels like we're leaving money on the table. So there is nothing more to look into that into it than that extremely strong.
Growth I don't have those numbers actually had either santana or at the pad assembly, but theyre strong yes.
The year over year revenue growth.
Our stabilized property to assembly montage of our stabilized buildings here at Santana row.
Low to mid double digits Greg.
We do have one hand tied behind their back a bit in Montgomery County, because of the.
Restrictions there that were just recently lifted and we're starting to work through.
The rent roll and the Montgomery County assets.
We haven't been restricted the lease trade out from an incredible year.
Year over year revenue growth has been incredible.
Also done a good job managing expenses over the past 12 months.
Residential has been a great contributor of the company.
Okay. Thank you and then just thing.
Thing about tenant retention and the potential for increasing occupancy.
Okay. This quarter, new leases represented 90 basis points of occupancy lease Street was only up 20 basis points. So so.
70 basis points to move out during Q3, how is that tenant retention comparing to prior years, Matt as we look towards a.
More challenged economic environment thinking in that context, you know whats driving move outs today.
Yeah.
There's a push to unload in that question.
I heard something that you said that kind of that I'm not sure. The premise is right.
Part of the reason that you don't see occupancy going up as fast as the overall lease volume that we have is because often we lease space for which there is already a tenant.
Still there and the way we think you should show it is as if it was occupied before yes, youre showing it in your lease rollover, but it's still occupied so it's not going to change that occupancy number that's a much bigger component than any move outs if.
If you will that are diluting the.
Occupancy numbers, so I kind of got caught when you said that that got stuck in my head is the part of your question that I wanted to argue about.
And I'm not sure there was anything else in there for me to answer it.
The next question comes from Craig Mailman of Citi. Please go ahead.
Hi, This is Seth on for Craig I, just wanted to go back to your 2022 guidance and the 12% increase.
What were kind of the moving pieces in that guidance and is there any type of one time thing.
One time pieces to that.
Yes with regards to.
No.
We kind of feel as though our 2022.
Guidance for just a stronger outlook for the fourth quarter significant outperformance in the third quarter I don't think there's necessarily one time.
Items in there except for prior periods rent and term fees.
Really third quarter over third quarter were roughly.
Modest.
<unk>.
And I don't see that it's a stronger continued expectation that the trends that occurred in our performance in the third quarter will continue into the fourth quarter with regards to continued strong percentage rent continued strength in occupancy.
Buildup.
And our pipeline of tenants taking possession of space.
And then obviously with some offset too.
A higher interest rate environment.
Growing base.
Thanks for the color and then just another quick question on page 25 in the Sop.
Comparable new lease summary.
The cash rent spreads were zero percent, but the straight line with 10% is that due to like the type of tenants you are leasing too or is there anything specific driving that.
But.
The difference between zero.
Cash basis, and 10% on a straight line the rent bumps were getting.
And.
And that's an important components to consider when you think about rollover is not only what is the rent you are getting at least maturity to the new market rents, but what are you collecting along the way and so the rent bumps that you get are reflected in that straight line.
Rent rollover number and we think that is important.
The rent bumps you get as the rollover you get at least <unk>.
The next question comes from Hong Zhang with J P. Morgan. Please go ahead.
Yeah, Hey, I think you talked about how your typical lease to occupied spread is around 100 to 125 basis points. As we think about commencement next year I was wondering where you think that spread could trend to by year end.
Oh, that's a tough one to guide because one it's hard to really predict where the lease rate will go.
We can get a sense of when leases will commence and tenants will take possession. So we think our occupied rate should get up towards the up into the 93% up towards into the mid 93% range.
By the end of the year.
Where the how much leasing we can continue to do from a leased percentage and what is the.
The holes at the bottom of the bucket, where that goes is a little bit more difficult for us.
Forecast, but we should get back to a more normalized.
Level over time, and I think our goal is to have.
Both both.
Components the metrics the occupied in the lease metric continue upwards, but narrowing narrowing it overtime into 90 and entered.
2024, and 2025, probably in that timeframe I do want to make that another point and make sure you're getting the specific.
This is all about the difference between signing a lease and getting rent started is all based on the tenant construction and the tenant the permitting process for tenant coordination process. That's been one of the things that has really dogged. This industry for the past three years since COVID-19 is a supply constrained environment.
<unk> did logistical problems etcetera, so really what you want is to get that tight because what that means is the time between a signed lease and the time.
Is that a rent starts.
The most important thing, yes over COVID-19 that was going to be exaggerated because you were doing leases.
In such volume that it took time to get that rent started but the objective should be to get that number lower and lower not necessarily to have it as wide as it can it can be because that to me suggests that we're not getting tenants open and that's really important so dan answered it absolutely correctly, but I just want to make sure that you kind of.
What that metric means on an overall basis and how and why it's so important for us to get it down to a 100 to 100 in a quarter basis points.
Yeah agreed and it looks like you have an option to purchase the remaining interest that Escondido, that's kind of curious if you could talk about the decision to get that auction and what cap rate you would think you could purchase of that right now.
Yeah.
It's Jeff.
We pedal a partner of that asset for a very long time approaching 30 years that needed some flexibility on.
On.
There are exit from the asset so we structured a deal that gave us the options should we decide to exercise of next year to go ahead and take them out.
I think the cap rate that we used to value the asset was in the upper fives.
<unk> got a great property for us over the years, one of the stronger growers in our west coast portfolio. So.
But of a win win for everybody there.
The next question comes from Juan Sanabria with BMO capital markets. Please go ahead.
Hi, Thanks.
Thanks for the time, just curious on the guidance for same store NOI.
And what has been delivered year to date and kind of what the exit implied.
Implied is.
For the X any term fees noise that cause there and I know you raised the guidance, but just curious on what the fourth quarter implied expectation is with the upwardly revised guidance.
Think about it and then look to 'twenty correct.
Yes.
Uh huh.
The number that we report which is.
Now includes the headwinds from term fees.
And in prior periods Brent.
In the fourth quarter should be in that call it 3% to 5%.
In line with what we did this quarter a three 7%.
Our year to date number.
Is eight 8% as I mentioned, when we provided 7% to 8%.
For the year. So the three to five is what is implied.
In the fourth quarter is what is implied.
With the overall guidance.
Obviously that will be higher.
We expect.
Because of prior period rent are continuing to be higher last year than we expect it to be this year.
It should be higher in the <unk>.
Fourth quarter, then that 3% to 5% range probably more in the.
Something of around 5%.
Great. Thank you and then just this has been asked a couple of different ways I guess Brett.
For the small shop tenants.
Basically at 90%.
Could you just remind us what the prior peak was how high that could go in and out of that small shop tenants space, what is kind of local versus national or regional tenants.
And then any color on that more local tenants.
Confidence in the credit behind that.
Look I think we've taken advantage of the opportunity on that note. We've taken advantage of the opportunity to improve the credit of our small shop tenant base.
And so forth.
And I'll, let Wendy answer that in a second but let me answer the first part of your question the peak, which was back you know.
Pre financial crisis was up around 94% I think that 92 is kind of a reasonable targeted level that we will try and achieve overtime on the small shop side.
When I think about the small shops.
Certainly had like everyone did failures throughout the pandemic.
And what we what the result is post pandemic.
A pretty savvy.
<unk> experienced a small shop that knows how to get through a difficult time. So I think our small shops are pretty are on.
On stable ground many of them have better balance sheets than they've had before.
They are quite active in making sure that they are maintaining their locations with us and growing and certainly we've always felt that that local.
That logo tenant really brings the color and the vibrancy to the community that we need so I'm I'm bullish on the on the small shops.
I got to add something to this as I sit and listen.
It's a notion of the question means that theres a premise here that local tenants are poor credits than regional tenants and and.
I have a problem with the premise because what we have found is local tenants by and large do whatever they have to do to not lose their space. They had they borrow money from families. They borrow money from other places that they have to do and they keep it going.
If history is any indication here, we would expect to win these point as to why.
The small small shops, including and maybe especially the local tenants.
Outperform here it is.
Because of those reasons, they're in places that they don't want to lose those shops. So they do whatever they can to not lose that spot, particularly coming out of Covid, where where there has been a complete influx in new money in new tenancy and effectively.
Robust and solidified small shop based control.
The next question comes from Handel St Juste with Mizuho. Please go ahead.
Hey, good good evening.
Hum.
I wanted to go back to some of the earlier comments you made on capital allocation, but I understand your.
Being somewhat opportunistic selling some assets here, which it looks like you'll effectively fund you're accurate read them, but looking ahead and I know the macro uncertainty you have a future pipeline you alluded to and there's some probably some there was some pretty good return potential can you talk a bit about some of those key signals you're looking for before you start on some of those and should we expect dispositions to be the source of funding.
Thanks.
Yeah, It's a great question and yes I do.
<unk>.
Specced dispositions to be a key funding source of it.
One of the things, we're talking about and looking now at the end. It's premature is it's pretty incredible the value that we've created some of the residential product that we have.
And it is it is such a unique.
Funding source and again, that's at our big mixed use properties that that.
Such a critical part to getting these places established and moving them along announced their established we'll look hard at Ed does harvesting that make any sense.
And so that'll that'll be a component that's in the consideration of how to fund it.
Secondly, the when it gets to where to deploy the capital that deploying our capital.
Is very much dependent on a very localized look at demand.
And you know make.
Making the case for the Assembly of life Science development building, obviously, we want to see venture capital funding in a in a better place than it is today, obviously, we want to understand what the cost.
Requirements of that.
Building that are and so building by building redevelopment Bayou redevelopment.
Very localized in terms of that decision, making process, but but again the capital.
Sale of particular assets I, just think we have more flexibility and more arrows in our quiver if you will to.
Decide how to get that done than most.
Okay, Great I appreciate that follow up on Readouts, but with a focus on assembly row, where you utilize the life sciences projects any update to share. There. So you have some additional entitlements for more ready could.
Could we see you.
Perhaps would you consider prioritizing that over a life sciences or anything or office there.
Given the growth in supply in the life Sciences market in Boston.
No no update to talk about there at this point I can tell you, it's very important to us that the entitlement process.
Just for that one building, but for the.
<unk> to that is completed.
We're working hard on that.
During this this pause period that could give us a whole.
Leg up if you will when we are ready to move.
Move forward again, I also very much want to see what happens.
Next to us with with the with the Blackstone financed life Science project to the extent they who they land is obviously very important to what's happening there. So the one thing I know that you can get comfortable with US is that we're not formulaic in terms of those decisions. They are very very much.
Revenue based.
And based on.
What's happening around us at that particular time, so bit more time to go to see what the.
What and when they're if you will.
The next question comes from Linda Tsai with Jefferies. Please go ahead.
Hi, how much leasing has concluded.
You cut out there Linda.
Oh, sorry, I said, how much leasing is completed for 2023 and what's that usually like this time of the year.
We're just simply saying you know.
Of the million six or so million seven that we've done. This this year much of that will start.
In 2023, I'm not sure how to give an estimate effectively in that but that's the nature as of today.
Got.
About.
881000.
Still expiring.
And anchor a million 6 million seven in total.
And obviously, we've got the leasing that we got done I don't have specifically that number probably makes sense. We could follow back up with you with regards to us specifically how much of that specifically.
<unk>.
Got it and then how much growth should we expect in property operating expenses like insurance maintenance costs utilities and repairs for next year.
Yes, I think we need to kind of spend some time getting through the budgeting process fine tuning that.
That's a tough question today for us to assess where in the problem, we'll have that ready and done in January and hopefully will provide some of that guidance when we provide more formal guidance.
On the February call.
Keep in mind most of it is about sort of the tenants.
The next question comes from Tayo Okusanya with Credit Suisse. Please go ahead.
Hi, yes, good afternoon, everyone.
Just kind of given the overall content of moving into a slower economic cycle wondering if you could give us any color in regards to what you were seeing.
In regards to how your customer base is behaving specifically like office are they asking for shorter leases are they asking for more flexibility in the leases are you starting to see more price sensitivity on the apartment side.
Curious if you can just kind of give us some color about.
Tenant behavior at this point versus say six to 12 months ago.
So that's it.
It's all good stuff that Youre, asking about and let me go for a few things that ive noticed along the way. They are there on the retail side very little difference in behavior in terms of.
Getting those leases.
The desirability of getting the space and that's why the pipeline looks as strong as it does beg. The question. There is it always comes down to whats the construction of the space going to cost.
And because that's uncertain now and in a period of inflation that slows down the process a little bit and so so from a behavioral perspective.
Will it take longer to get leases done that's a potential.
Effect of of of trying to underwrite construction costs, primarily but not.
<unk> got nothing to do with demand, it's got everything to do with the massive of getting that done in terms of the apartment side man.
You're in a period of time here in the markets were at where.
Interest rates and home mortgages going to where they are make apartments look awfully awfully.
Attractive, it's why you're seeing the demand that we're seeing.
I just went through the numbers here at Santana row.
Right.
In terms of the strength of the consumer here.
As it relates to apartment spending and again the same thing over.
In Boston with respect to the product that we're offering there so.
For me it always it always comes down to does that consumer.
The means to consume.
I can tell you we've got a couple of shopping centers that are you know.
Where the demographics are below $75000 of household income there is no doubt in our mind at those shopping centers struggled more than the ones that have 115 to $160000 of.
Of consumer health.
Household income so from our standpoint.
This is a portfolio that's very high quality, we certainly have a couple of shopping center load a few shopping centers at the lower end and there was a demonstrable difference. So that's how I kind of look at the consumer.
Okay.
On the apartment side.
Yes, the whole last six minutes of the conversation.
No no.
Very strong demand.
Okay alright, thank you.
Thanks Sam.
This concludes our question and answer session I would like to turn the conference back over to Leah Brady for closing remarks.
We look forward to seeing many of you at NAREIT. Please reach out to me with any meeting request. Thanks for joining us today.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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