Federal Realty Investment Trust. (FRT) — Q1 2022 Transcript

Good morning. Thank you for joining us today for Federal Realty's First Quarter 2022 Earnings Conference Call. Joining me on the call are Don Wood, Dan Guglielmone, Jeff Berkes, Wendy Seher, Dawn Becker, Jan Sweetnam, and Melissa Solis. They will be available to take 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 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 that expectations reflected in such forward-looking statements are based on reasonable assumptions, a future operation 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 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 results of operations. Given the number of participants on the call, we kindly ask you to limit yourself to one question and an appropriate follow-up during the Q&A portion of the call. If you have additional questions, please requeue. And with that, I will turn our call over to Don Wood to begin our discussion of our first quarter results. Don?

Thanks, Leah, and good morning, everybody. There's lots going right in Federal Realty these days. Demand for our products has outpaced even our raised expectations, and the 2022 first quarter was no exception. Yes, the reported $1.50 per share beat both the street and our internal forecast. 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. Over the last decade, average first quarter production for comparable properties at Federal Realty meant doing about 80 deals or roughly 375,000 square feet. In the '22 first quarter, we did 119 deals for 444,000 square feet, 50% more than the average. We've never come close to doing 119 deals in any quarter, let alone the normally weaker first quarter before last year's record-setting COVID recovery demand. The fact that demand has remained this huge, with a deal pipeline that looks to stay strong, speaks volumes about our properties and the markets they're in and naturally about our future earnings growth. One of the reasons Dan is raising annual earnings guidance by $0.10 at the midpoint of 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 lease rate is also a remarkable 490 basis points higher than a year ago. Now we did lose 40 basis points of occupancy since the fourth quarter; that's just typical first quarter expirations of a few boxes portfolio volume. The portfolio was 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. So all of this commentary thus far relates to our core portfolio, and it doesn't speak to the multiple ways that we grow earnings and value. Selective acquisitions, development, redevelopment all add incrementally to our best-in-class core 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, Chesterbrook, Camelback Collonade, Hilton Village, and Grossmont. The rent rolled up in every single one of those deals and overall up by 33%. Even though no redevelopment has started 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 is critical to all that we do and, in my view, one of our key differentiators. When we tied up Fairfax County, Virginia, Kingstowne Shopping Center for $200 million at a five-cap some months back, we similarly expect to improve the productivity of that 410,000 square foot destination through better merchandising and operations, finding the inevitable opportunities that always seem to accompany big land parcels. This one is 45 acres and situated in densely populated, affluent first-ring suburbs. 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 an important and a growing market for us. Our stepped-up post-COVID redevelopment effort is another critical component to future growth. It’s no news to anyone on this call that the traditional generic and homogeneous shopping center business is cyclical in nature and not a high-growth business. So you have to stand out to outperform over cycles. You do that by picking the right markets and positioning and merchandising in those markets. But you also have to reinvest in those assets to continually find the edge. Reinvesting is more important post-COVID than ever before. That’s 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 and rents in line with our historically observed results following redevelopments. That reinvestment is one of the primary reasons we can continue to push rents. At the Citi conference in March, we toured live in person CocoWalk, our fully leased mixed-use development. We had an impressive group of investors attend, and our team was proud to showcase the unique approach that we take to real estate development and value creation. Consider that in its first stabilized year, the project will generate in excess of $11 million of NOI on a $190 million investment, with rents that are already under market. Our unlevered IRR is over 8%. CocoWalk is pretty special. At Santana West, while I don't have any specific announcement to make on this call regarding the leasing of our newly constructed office building, interest in the product and negotiations are more active than they've been at any time during the COVID era. I'm hopeful that we will 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-to-office announcements in the past month or two, and we have the only new fully amenitized state-of-the-art project in the market. We’ve updated costs and returns on the accompanying 8-K based on real negotiations and market conditions to ensure higher costs along with higher rents thus maintaining yield expectations. With residential base rents comprising 11% of our total rented base, the upward pressure on apartment rents in many U.S. markets is also benefiting our bottom line. A meaningful residential income stream in our fully amenitized properties provides such a unique incremental benefit for Federal. At Assembly Row, the lease-up of Miscela, our 500-unit apartment building, continues faster than forecast and at higher net-effective rents. We are currently 70% leased at 10% higher rents than forecast. Our office building, affectionately known as the PUMA building, as you can see the PUMA site from New Hampshire, is now 88% leased with another 5% under lease. Assembly Row has really outperformed all of our expectations coming out of COVID. Nothing yet to announce with respect to the next phase of expansion here as we've yet to lock down costs, but we're getting close to a go/no-go decision on a life science project here that complements the growing life science demand and adjacent Somerville projects. More to come. Pike & Rose, Darien construction continues on time and on budget. 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 than operating four shopping centers, much of what makes our big development special can be seen throughout our portfolio. From a broader array of tenant relationships to state-of-the-art construction techniques relative to place making, storefronts, and environmental considerations to unseen yet impactful operational efficiencies. Our 25-year experience building mixed-use communities adds and continues to benefit our core shopping centers far greater than most people realize. Expect to see more of our showcasing that in the coming quarters and years. When you think Federal Realty, think about the multifaceted ways that we've got to grow. Just as we did between 2010 and 2019, and just as we plan to do from 2021 onward with assets and a team whose confidence is proven and time-tested. Dan?

Thank you, Don, and good morning, everyone. As Don outlined, $1.50 per share reported FFO for the first quarter outperformed against all 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 played a role in the results, driven by factors such as better-than-expected small shop occupancy, stronger residential performance, particularly in Boston and San Jose, improvements in collections better than forecast, growing parking revenues, and percentage rent underscoring accelerating traffic and tenant sales, particularly at our large mixed-use assets. However, this was offset by higher-than-forecast property expenses. Our GAAP-based comparable portfolio growth metric was exceptionally strong at 14.5% for the quarter, over 3% above forecast. 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, as calculated in line with our peers, would have been 18% on an apple-to-apple basis and 18-plus percent excluding prior period rent and term fees. Term fees this quarter were $1.5 million versus $2.8 million in 1Q '21. Prior period rent this quarter was $5 million versus $8 million in '21. Year-over-year occupancy results were also strong, with our overall occupied metric growing 170 basis points year-over-year from 89.5% to 91.2%, and our lease percentage increasing 190 basis points from 91.8 to 93.7. More upside to come on both of those metrics in the coming years as we realistically target a 94% to 95% occupancy and 95% to 96% leased rate. Our signed-not-occupied spread in 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. In our non-comparable pool, our signed-not-occupied upside stands at $19 million of total rent. New lease deals and our leasing pipeline are currently unoccupied space that will drive another $12 million of incremental total rent, primarily in '23 and '24. This totals roughly $55 million of cumulative incremental rent, which will visibly drive bottom line results over the next 2-plus years, highlighting the diversity and strength of our multifaceted business plan. As a testament to our asset management and tenant 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 income coming online. Rollover for the quarter was solid at 7%, in line with our expectations and our trailing 4-quarter average as we continue to take a long-term approach to leasing our portfolio in the wake of COVID 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 blended in the 2.25% range given the quality of our portfolio. In this quarter, the blended annual increase released signed with an exceptional 2.5%. From a pure math perspective, 2.5% compounded over 10 years results in rent that is 9% higher in year 10 than a lease that compounds at 100 basis points slower growth or 1.5% annually. It’s not just about rollover; 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 billion-dollar revolver, $160 million of cash, and $175 million remaining on our forward equity contract. Additionally, we have roughly $150 million of non-core dispositions under consideration with pricing expectations that have 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 in mid-2023. We've reduced our encumbered pool to just 7 assets, increasing our unencumbered EBITDA to 93% of total EBITDA or $600 million. With respect to our leverage metrics, our net debt to EBITDA is inside of 6 times as adjusted for our forward equity. We fully expect to be back to our pre-COVID target of low to mid-5 times by late '23. Our fixed charge coverage ratio is over 4 times, already above our targeted level, and 93% of our outstanding debt is fixed rate. Additionally, we are targeting free cash flow after dividends and maintenance capital to return to pre-COVID levels by next year, as CocoWalk and the Phase IIIs at both Assembly Row and Pike & Rose are largely complete from a spending perspective and are 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 million. 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 $1.3 billion of liquidity. Now on to guidance. As Don said, even after such a strong start to the year, it is rare that we would raise guidance for just one quarter in the books. However, the steady momentum we're seeing in the business makes it really difficult not to. As a result, we are pushing our guidance range for FFO from $5.85 to $6.05 from the prior range of $5.75 to $5.95. $0.01 to $0.02 of the $0.10 increase is from our recent purchase of Kingstowne 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 comparable and non-comparable boots. We are also bumping up our guidance for comparable POI growth to 3.5% to 5% from the prior range of 3% to 5%. Excluding prior period rents and term fees, our forecast increases to 6.5% to 8% from a prior range of 6% to 8%. We still expect our occupied rate to decline from 91.2% today to the 92.5% to 93% range by year-end. At the SNO spread, our operating portfolio of 250 basis points begins to come online. In terms of FFO growth in '23 and '24, we are still comfortable with the 5% to 10% growth guidepost we provided previously. The strength of our business model provides us with diverse avenues to grow sustainable sector-leading FFO growth beyond driving portfolio occupancy levels back to our mid-90s targets, Federal has additional years in which to propel growth. A proven track record and cost of capital to opportunistically acquire assets accretively over the year, middle and long term, a completed redevelopment and expansion pipeline totaling $700 million and an in-process redevelopment and expansion pipeline totaling $800 million. Together, these redevelopments and expansions will drive an incremental $80 million to $85 million of POI over the coming years through 2025. As we have highlighted previously, this is not pioneering development in a proven location; this is redevelopment and de-risked expansions at established and highly successful properties that we already own and know extremely well. On a risk-adjusted basis, there is no better, more compelling business plan in the sector today. And with that, operator, please open the line for questions.

Great. On Kingston Town Center, I'm just curious, why is it being purchased in two phases? And then when we think about you being able to increase value here, obviously, remerchandising upfront, but the incremental capital investment, is that to take advantage of the 45 acres?

Hey Craig, it's Jeff. Yes, that was a solar requirement that we closed in 2 phases, something that the seller asked for to be accommodated. Just a little bit more color on that acquisition. We're really, really happy with it for a number of reasons. We've talked about this a lot in the past; we've, for a long time, had a hit list, and we were very proactive about working our hit list, and in this case, that really paid off. Barry Carty and the team here have done a really good job of developing a relationship with the seller. We've been talking to the seller for a long time before the property came to market. Through that relationship and our credibility developed with the seller, we were able to step in and buy that even after it went to market at what we think are pretty good terms, going in at a 5 cap and kind of mid-6s unlevered IRR. That IRR does contemplate a lot of upgrading in the way of merchandising and some investments into the assets themselves so we can push rents but are really pleased with that. It adds to 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— Chesterbrook, Twinbrook, Fairfax Junction, and now Kingstowne added to that portfolio in the last few years. So we are very happy about it. Finally, and I know you know this, but just as a reminder, buying Kingstowne helped us cover a pretty significant gain that we created when we sold a condemnation-threatened half of the San Antonio Center on Mountain View, California for more than double what we paid for it 5 or 6 years ago. So all around, just a really good deal, and we couldn't be more excited about it.

Great. And then just as a follow-up, I noticed you mentioned in the call that Northern Virginia is growing in importance to Federal. Could you talk about Pan Am? I'm understanding you're possibly planning to redevelop a mixed-use there, and then maybe some information also on the new parklet that's coming to Mount Vernon Plaza?

Yes, Craig, you've hit on something that's really important. As you know, we've owned Pan Am, and we have owned a whole lot of assets in Northern Virginia for a long time. But it really wasn't until we put the office over there that we were able to make inroads in the acquisition market. Whether you're in Fairfax County or Arlington County, the leaders of those governments have recognized Federal as a big player there. Accordingly, we've been able to make strides. We're certainly not all the way there yet, but we've made strides with the entitlement process in Fairfax County regarding Pan Am. We'll get through the rest of it. We've made already more inroads than we would have, I believe, if we were still operating the portfolio somewhat remotely. It just proves again how important local knowledge and presence are to the portfolio. So I don't have much to say yet about Pan Am, but I can tell you it is at the Nutley Street exit of route 66 in the middle of Fairfax County on, again, a big piece of land. There really is a common thread there with us because development happens on the big pieces of land much more easily. So that will go onto our redevelopment pipeline list. I don't want to give you a time frame, but in the not-too-distant future, more updates are to come. In terms of Mount Vernon, you got it, Leah?

Yes. The parklet, Craig, that you mentioned. So as Don mentioned in his opening remarks, we have more than two dozen investments happening in our existing portfolios to strategically make them better and stronger coming out of COVID. This parklet is a good example of not a full redevelopment, but how we continue to invest in our properties to enhance them for the communities that they serve. This parklet we've been working on for a while. It’s going to open shortly; we just got the building permit, and it’s going to serve as a center of gravity for Mount Vernon. It’s a very large center, and it will provide opportunities not only to the community but to the 4 or 5 tenants that surround the parklet. So again, we’re really just doubling down on that outdoor amenity program and outdoor seating that we see was so valuable during COVID.

Hey, good morning. So Dan, I can understand your general hesitance to increase guidance on Q1 results, but even so, it feels a bit underwhelming considering the outperformance versus our estimates, and maybe even your internal numbers, especially when looking at percent rent reimbursement and other revenue contributions. So 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 are no more prior period rent contributions?

Look, I think we see massive macro storm clouds on the horizon. I think it’s just us being a little cautious in nature. I think the bump in guidance is reflective of strong first quarter results, but we will see. I think we want to be mindful of increased inflation and all the other things that we worry about every day. Don, do you have anything more to add?

Greg, it's hard for us to argue with the premise of your question when over the last 6 quarters each time we have outperformed and increased guidance and it wasn't enough. I certainly understand your question. There is absolutely an inherent conservatism in the way we run this business. '22 is looking 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 Dan, I forget if you covered this, but have you talked about what kind of prior period rents are included in the guidance number?

Yes. No, we are actually increasing that number. In our original guidance, as I mentioned on our last call in February, it was roughly about $5 million to $8 million. Obviously, with our strong first quarter, we're increasing that range from $5 million to $8 million to $9 million to $11 million. Although the pool of potential rent is shrinking, we're doing much better at collecting it, as evidenced by a strong first quarter, which enhances the increase there over the balance of the year.

Yes. Don, in your opening remarks, you talked a little bit about Santana West and how you sort of the costs had gone up, but the rents went up as well, which enabled you to maintain your yield. I was wondering if you could just sort of step back on the entirety of the redevelopment and development pipeline. Your commentary on the core portfolio and leasing environment seems so optimistic and strong. Clearly, the numbers are coming in regarding leasing activity. Why isn't that translating more into the redevelopment and development pipeline? I would have thought at this point, especially during COVID, where we thought down a lot of those yields that those would actually start seeing the other side. Is it all just on construction costs, or are you just finding that you're simply not able to get those yields up?

Mike, let me make sure I have the premise of the question. We have not significantly adjusted the guidance that we've given pre-COVID because we want to ensure that we have good numbers and the ability to be accurate when we change it. In terms of the Santana West piece, this reflects a real negotiation that gives us a much better window on what rents are today. What we do seem to see in all our markets where we are developing is that higher costs are being offset by higher rent expectations that seem to be achievable. There is nothing on the development side yet that we've seen that has stalled as a result of higher costs but no ability to push those rents to create decent returns on those costs. I don't know if there's a lot in there, and we'd have to go project by project, but that’s the general landscape.

Yes. I guess I was surprised that with all of this commentary and the commentary you normally give that you don’t increase guidance at the beginning of the year and how strong the leasing environment is and record leasing that somehow this is not translating into better yield on the development and redevelopment. And in fact, Santana West, if it wasn't for lifting the rents, that yield would have gone down. And it’s not inconsequential. You’re addressing a $130-a-foot, $50 million increase. The stocks are small.

That's a fair point, Mike. And let me give you a great example. Right now what's happening up in assembly on the residential business will likely put us at the upper end of that range. We may even increase that guidance going forward based on the actual residential leasing that's occurring relative to the costs. So yes, there is inherent conservatism in how we do things.

I guess given the commentary on strong demand and leasing volumes, is it your expectation that once we move into '23 and '24, we're going to see rent spreads take a notable step up?

Oh, gosh, how do I answer that? Mike, I would say it's so hard to answer your question about '23 and '24 as we sit here on May 5, '22, right? The reason we originally gave guideposts was because we had better visibility post-COVID than we did in the middle of COVID. Now as I sit here, the macro issues affecting the economy make it tough to predict lease negotiations in '23 and '24. I’m looking at Wendy here, and I get a little bit of a shrug. That’s not an indictment of the portfolio or how we do business; it’s simply a reflection of the uncertain market out there. What we know is that where we spend capital to create better place-making assets, we get paid. I don't expect that on a relative basis to change, but the global economy is affecting real estate.

Got it. And then just a quick follow-up here. On the comments about rent bumps and escalators. Was that a comment just on the retail portfolio or does that cover the office portfolio as well?

It’s the commercial portfolio, including office. Yes.

Hi, everybody. Thank you. Regarding acquisitions, with local retail cap rates, the spread to the 10-year treasury is historically tight right now. What kind of cap rates are you seeing for quality assets, or, I guess, more importantly, expecting to see in private market transactions in the next quarter or two? Are there currently fewer bidders for assets, or are cash buyers now really in the driving seat given rising rates?

Yes, Derek, it's Jeff. Let me take a shot at that. We've been pretty active for the last 12 to 18 months, coming out of the pandemic, bidding on stuff and being successful in several cases and buying properties. In the most recent round of deals, we’ve still seen a very active bidder pool and a well-capitalized buyer pool. In this last round of deals, there has been a lot of capital in the market. A lot of people think big picture. That’s because the yields on retail are better than they are in multifamily and better than they are in industrial, which is why you've seen a lot of low to mid-4 cap rate purchases by institutions in the last couple of quarters. There are some deals in the market priced like that set to close in the next couple of quarters as well. Not every buyer is a leveraged buyer; there’s a lot of institutional capital out there that needs to be placed. Going forward, whether it’s interest rates that drive cap rates or the returns on other product types will also factor into that. So it's to be determined, but there’s a lot of money for high-quality retail right now in a competitive market. And as always, there’s a big spread between A and B quality property, and we are looking at opportunities where we think we can add value over time, really focusing on value-add opportunities, densification opportunities, and more of the IRR than the cap rate.

Okay. That's helpful. Thank you. And then kind of where Mike was headed but not so long-term. Clearly, the healthy retail leasing activity this quarter, built on the strength of last year, is positive. But investors have focused on the high ABR versus peers and the post-pandemic era has been a possible headwind, perhaps leading to year-to-date underperformance. But when you look at it, cash basis rollover this quarter was again positive at 7%. So I guess the question is, what may investors be missing when focused on Federal's ABR? And how do you view the in-place rents versus market rents at your centers and the opportunity set?

This is the perennial question, right Derek? I want you to focus on something that Dan said in his comments: a cash-on-cash rollover of 7%. If you do the math and consider our superior contractual bumps, if it's 100 basis points, we’re growing at 2.5%, and someone else is growing at 1.5%, which is typical shopping center business, 7% bumps equal 16% rollovers—9% more. That's an amazing thing that we have not done a good job of educating people about. Yes, part of that is we don't know what everybody's bumps are, but consider the following: This portfolio is two-thirds anchors and one-third small shop. The opportunity for bumps is easier in the small shop than it is convincing TJX or Ross to have annual bumps, which is obvious stuff. In our small shop, the notion of being able to have those bumps more regularly is not just the small shops, but it also constitutes half of our rent in total. So think about that as well. It's interesting. I think you’ll find that the acquisitions we made—on 10 deals, we were able to get 33% more rent compared to when somebody else owned it on the reputation that we are going to make you more productive. So the end of the day, is the productivity of the retailer—not the ABR—and put those two things together, that's why we’re confident in how we run our business.

Yes, thanks. Good morning. Don, I was hoping you could just spend a little time on the potential life science deal up in Boston. Just how are you thinking about pre-leasing, credit underwriting, and tenant underwriting for that project?

Yes. It’s very fair, Steve. There are a couple of things to think about there. The business is not a pre-leasable business in large measure. There’s no question that as we underwrite the risk, as we underwrite the dollars and costs of capital, we will expect a higher return to compensate for the likely inability to re-lease the building. What we’re thinking about with respect to that opportunity is that it’s a pocket of much more than one building. We would expect it to be part of a cluster, as you know, BioMed has begun construction and Greystar right there has begun the construction. So the notion that Assembly is likely to be a cluster of life sciences has grown dramatically over the past year or two. That’s a really important component in terms of who's going to wind up there. One of the interesting things about the number of companies that have developed on the life science side over the past few years is quite dramatic, and demand is just off the charts relative to supply, even though there's supply coming on in other parts of the Boston market. The short answer to your question, Steve, is the return has to be able to compensate for the spec nature of it and the undeterminable tenant credit quality.

Hi, thanks for taking my question. So with regard to the strength of the balance sheet, how can rising rates impact, if at all, the developments going forward?

With regard to what? I'm not sure I understand the question. Could you repeat it?

Yes. I think a better way to ask the question might be whether you see rising rates within the development and also material cost and inflation as a bigger issue for impacting developments?

Look, we expect to lock in prices to the extent we can with the GMP before we start. We have seen, and I think before we go forward, rising costs have affected the markets to an extent. What we've also seen is because of the strength of the markets that we are in, we benefit from increasing rents, which offset costs relating to rising tenant improvement dollars. That's why we've been able to maintain yields and deliver yields that we set out to achieve. We won't start something unless we've got those costs locked down to a large extent. While we kind of globally talk about our development pipeline, every project has to stand on its own. If the rents are not there, I mean certainly a higher cost of capital has to be supported by the rents we can achieve. We're in primary markets—Boston, Massachusetts, San Jose, California, Montgomery County, Maryland—and we're able to push the rents to compensate. Does that continue forever? Your 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 suggests that rents will support higher costs.

Hi, thank you. Just wanted to touch on the funding side of the equation for acquisitions and how you are contemplating that, given your cost of capital? If you could provide a sense of where debt costs are today relative to the strong pricing for acquisitions, how you think about the mix of funding your weighted average cost of capital?

Yes. Look, certainly in the last 90 days, cost of debt capital has gone up, which has raised our weighted average cost of capital. With regards to the current opportunities we are looking at, we have $175 million of forward equity still ready to be taken down. We also have in process and under consideration $150 million of dispositions priced sub-5 cap, and we are looking at another $100 million to $150 million of dispositions. We will take all that into consideration relative to the current higher cost of debt capital. Jeff, do you want to add?

Yes. One other thing to keep in mind is that whether it’s an acquisition, a redevelopment, or a development, we’ve never been a spot capital price for investment opportunities. We always look at our long-term weighted average cost of capital. So when interest rates are low, we’re not chasing acquisitions down into the low-4 cap range simply because they’re still accretive, and with increasing interest rates and debt costs, we don’t expect that to impact our ability to perform in the market for that reason. We maintain a very strong discipline on looking at kind of the long-term cost, not the spot cost.

And then just as a follow-up question, just curious regarding small shop leasing and merchandising space in the centers. Are you planning to maybe see a shift towards more national tenants with regards to the small shop space?

I would say that the short answer is no. We really take a balanced approach, just as we discussed; our overall business plan is growth in various areas from our core through developments to redevelopments to acquisitions. I like to apply that same philosophy to our leasing, emphasizing growth through merchandising, investing in the properties, and selecting tenants that also want to invest in themselves. We’re seeing a huge amount of investment from tenants and us together, and that creates a better result. We like the balance, again, intertwining local flair, mom-and-pop shops, best-in-class as well as regional and national tenants. So I think we will continue to take that balanced approach.

We're sticklers too when working through a tenants’ business plan, looking at their credit, and securing leases in the right way regardless of what's happening in the economy. So we don't relax our standards when times are good. I wouldn't expect any different moving forward.

Hey, good morning. A couple of questions on redevelopment here. Don, the enthusiasm in your comments is clear; demand is strong, rents are rising, and you’re adding to the redevelopment pipeline. I guess I’m curious how close you are to getting back to the pre-COVID game plan of $300 million to $400 million of annual redevelopment funded by free cash flow, as well as incremental debt and opportunistic sales here? What’s the right way to think about redevelopment spending as we move into this higher-cost and higher-interest-rate environment?

Haendel, I love the question. The answer is driven by opportunities. What has become clear to us post-COVID—Wendy talks about this all the time—the demand and our conversations with tenants have become increasingly important regarding who the landlord is. To the extent that a landlord invests not only in the asset but alongside that tenant to create a better place-making environment, that’s a big part of it. Convenience is key. What will stop that process is if we can’t get paid for it. But in all of our aggressive redevelopment plans, the impact on leasing has been clear. You might hear leasing agents say, for example, that the deals came with good bumps. Remember that Dan mentioned rising bumps; that’s no accident. That has to happen alongside tenant conversations where they’re confident they can afford the rent increases. The return to normalcy concerning demand and supply is crucial. Considering your options on where you can effectively push rents and get paid for that improvements is a key perspective we have in mind.

Okay. Fair enough. Any desire to provide some guideposts on how we should think about redevelopment spending in the next few years? Can you remind us of the estimated value of assets in your portfolio that could be sold on a tax-neutral basis to fund acquisitions and development? I think a few years back, that number was close to $400 million. Curious where you think that is today?

I think the last part of your question is about the same value, and I wouldn't see that very differently.

Just one quick one for me. Dan, on the percentage rent number for the quarter, it was roughly almost 2x what it was pre-COVID in the first quarter. Just curious whether that growth came from more leases running into the over-the-break-point and generating percentage rent or those that have been in percentage rent continuing to add to the contribution? Just trying to understand where that increase is coming from.

Yes. Look, the increase is partially driven by just better tenant sales across the portfolio. There are two different parts: the leases that were restructured with a percent of rent that show up in the collectability adjustment, and the percentage rent that outperformed is really driven by a combination of more deals that are percentage rent leases as well as just higher performance from those leases over time. I would expect that first quarter number will be typically around 1% to 1.25%; we're at 1.5% today of revenues. That's in that range.

In past presentations, you've shown retail format by the percent of 2019 POI contribution. Just wondering, as this trend line has normalized and demand is higher now, have those contributions changed materially?

Yes, there’s really been no material change to those figures.

Got it. And then you have a few tenants that have chosen your office assets, like NetApp, Splunk, and PUMA, as their headquarters. Was this the strategy you had in mind when you developed these office spaces, or was it just more a byproduct of having new and desirable amenities?

Yes. Well, I mean, look, we always hope we have the best credit tenants take the entire building. That’s always the hope of the strategy. In practice, the more likely result is what has happened. Those are all great companies, and they all look at our amenitized space and the ability to retain their workers as critical to their decisions. That should not be a surprise; it’s been part of our strategy from the beginning and will continue.

Looking forward to seeing many of you at NAREIT. Please reach out with any meeting requests, and thank you for joining us today.