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spk05: This one's 45 acres and densely populated in affluent first-ring suburbs. As I assume you read in our press release a couple of weeks back, we closed on the first half of that parcel in late April and expect to close on the second half in late July. Northern Virginia is an important and a growing market for us. Our stepped-up post-COVID redevelopment effort is another critical component of future growth. It's no news to anyone on this call that the traditional, generic, and homogenous shopping center business is cyclical in nature and not a high-growth business. So you have to stand out to outperform over cycles. You 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 are 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. Now, that's our development business. At the Citi Conference in March, we were able to tour live and in person Cocoa Walk, 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 $190 million investment with rents that are already undermarked. Our unlevered IRR is over 8%. Oklahoma's pretty special. That's Santana West. While I don't have any specific announcement to make on this call as to the leasing of our newly constructed office building, interest in the project and negotiations are more active than they've been at any time during the COVID era. I'm hopeful that we'll be able to provide a positive update in the coming months. Office demand is back in earnest in Silicon Valley, given the Google and Apple back-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 in the accompanying 8K based on real negotiations and market conditions. In short, higher costs along with higher rents, thus maintaining yield expectations. With residential-based rents comprising 11% of our total revenue base, the upward pressure on apartment rents in many U.S. markets is also benefiting our bottom line. A meaningful residential income stream in our fully amenitized properties is such a unique incremental benefit to federal. At Assembly Row, lease up of Masella, our 500-unit apartment building, continues faster than forecast and at higher net effective rents. We're currently 70% leased at 10% higher rents than forecast. Our office building, affectionately known as the PUMA building, as you can see the PUMA sign from New Hampshire, is now 88% leased with another 5% at-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 get to lockdown costs, but we are getting close to a go-no-go decision on a life science project here to complement the growing life science demand and adjacent Somerville projects. More to come. Mike and Rose, Gary and construction both continue on time and on budget. You know, one thing that always strikes me about our mixed-use development pipeline is the extent to which we incorporate what we've learned over the years into our core portfolio. While mixed-use development is certainly a different business than operating core 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 placemaking, storefronts, anti-coordination, and environmental considerations, to unseen but impactful operational efficiencies. Our 25-year experience building mixed-use communities has 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 on with assets and a team whose competence is proven and time-tested. Dan?
spk03: Thank you, Don, and good morning, everyone.
spk05: As Don outlined, our $1.50 per share of reported FFO for the first quarter outperformed against every one of our benchmarks. Last quarter, year over year, versus consensus and versus our own forecast. That outperformance was broad-based. All aspects of our business model played a role in the results for drivers, such as better than expected small shop occupancy, stronger residential performance, particularly in Boston and San Jose, better improvement in collections than forecast both in the current and prior periods, 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 forecasted property expenses. Our gap-based comparable portfolio growth metric was exceptionally strong at 14.5% for the quarter, more than 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 1Q21. Prior period rent this quarter was $5 million versus $8 million in 21. with our overall occupied metric growing 170 basis points year-over-year from 89.5 to 91.2, and our leased 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 94 to 95 percent for occupied and 95 to 96 percent for leased. 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 for currently unoccupied spaces will drive another $12 million of incremental total rent, primarily in 2023 and 2024. This totals roughly $55 million of cumulative incremental rent, which will very visibly drive bottom-line results over the next two-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.
spk03: and paying rent due to supply chain issues or labor issues to date, further enhancing the timeliness of that income coming online.
spk05: Rollover for the quarter was solid at 7%, in line with our expectations and our trailing four-quarter average as we continue to take a long-term approach to leasing up our portfolio in the wake of COVID and look to balance thriving occupancy, improving merchandising, enhancing tenant credit quality, increasing starting rents, and importantly, getting strong contractual 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 for leases signed was an exceptional 2.5%. From a pure math perspective, 2.5% compounded over 10 years results in a rent which is 9% higher in year 10 than a lease which compounds at 100 basis points slower growth, or 1.5% annually.
spk03: It's not just about rollover. Contractual rent bumps do matter. Now to the balance sheet and an update on liquidity.
spk05: We ended the quarter with over $1.3 billion of total available liquidity comprised of an under $1 billion revolver, $160 million of cash, and $175 million remaining on our forward equity contract. Additionally, we have roughly $150 million of non-forged dispositions under consideration with pricing expectations at a blended cap rate below 5%. We have no maturities in 2022, with our only near-term maturity being $275 million of unsecured notes, which mature mid-2023. We've reduced our encumbered pool to just seven 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 six times as adjusted for our forward equities. We fully expect to be back to our pre-COVID target of low to mid-five times by late 2023. Our fixed charge coverage ratio is over four times, already above our targeted level, and 93% of our outstanding debt is fixed rate. Additionally, we are targeting pre-cash flow after dividends and maintenance capital to return to pre-COVID levels by next year. As Cocoa Walk and the Phase 3s at both Assembly Row and Pike and 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 development 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-plus billion of liquidity.
spk03: Now, on to guidance.
spk05: As Don said, even after such a strong start to the year, it is rare that we would raise guidance with 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 up 10 cents to $5.85 to $6.05 from the prior range of $5.75 to $5.95. One to two cents of the 10 cent increase is from our recent purchase of Kingstown and its contribution to 2022. The balance is from the first quarter outperformance and a better than forecast outlook for the rest of the year in both the comparable and non-comparable pools. We are also 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 climb from 91.2% today up into the 92.5% to 93% range by year end.
spk03: as the S&O spread in our operating portfolio of 250 basis points begins to come online.
spk05: In terms of FFO growth in 23 and 24, we are still comfortable with the 5% to 10% growth guideposts we've given previously. The strength of our business model provides us with a diversity of avenues to grow sustainable sector-leading FFO growth. Beyond driving portfolio occupancy levels back to our mid-'90s targets, Federal has additional years for Pell Group. A proven track record and cost of capital to opportunistically acquire assets accretively over the near, middle, and long term. A completed redevelopment and expansion pipeline totaling $700 million. An in-process redevelopment and expansion pipeline totaling $800 million. Together, these redevelopments and expansions will drive an incremental $80 to $85 million of POI growth. 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.
spk03: On a risk-adjusted basis, there is no better, more compelling business plan in the sector today. With that, operator, please open the line for questions.
spk01: Thank you. At this time, we will be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, we ask that you please limit to one question and one follow-up. Our first question comes from the line of Greg Schmidt with Bank of America. Please proceed with your question.
spk11: 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 it's re-merchandising it up front, but the incremental capital investment, is that to take advantage of the 45 acres?
spk06: Hey, Craig, it's Jeff. Yeah, that was a seller requirement that we closed in two phases, something that the seller asked for to be accommodated. You know, just a little bit more color on that acquisition. We're really, really happy with it for a number of reasons. You know, we've talked about this a lot in the past. We, 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 team here has 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. And through that relationship and our credibility, we 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 five cap and kind of a mid six is unlevered IRR. And that IRR does contemplate a lot of upgrading in the way of merchandising and some investments in the assets itself so we can push rents. We're real happy with that. It goes into our Virginia portfolio. We opened an office in Northern Virginia a few years ago that has just been incredibly successful. running our assets and adding value. Chesterbrook, Twinbrook, Fairfax Junction, Kingstown, all added to that portfolio in the last few years. So real happy about it. And finally, and I know you know this, but just as a reminder, buying Kingstown helped us cover a pretty big gain that we created when we sold under threat of condemnation, half of San Antonio is sent around Mountain View, California, for more than double what we paid for it five or six years ago. So all around just a really good deal, and we couldn't be more excited about it.
spk11: Great. And then just as a follow-up, I noticed you mentioned in the call that Northern Virginia is kind of 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 Verdon Plaza.
spk05: Yeah, Greg, you've hit on something that's real important. As you know, we've owned Pan Am and we've owned an awful lot of assets in northern Virginia for a long time, but it really wasn't until we put the office over there, were able to make inroads in the acquisition market, that whether you're Fairfax County or Arlington County, that the leaders of those governments helped recognize federal as a big player there. Accordingly, we've been able to make some strides. We're certainly not all the way there yet, but strides with the entitlement process in Fairfax County at Pan Am. We'll get through the rest of it, but 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 is and local presence is to the portfolio. So don't have a lot to say yet about Pan Am, but I can tell you, you know where it is, right at the Nutley Street exit off 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 stuff happens. on the big pieces of land much more easily. So, you know, that will go on to, I'm hopeful, our redevelopment pipeline list in, I don't want to give you a timeframe, but in the not too distant future, I'm hopeful. So good stuff there. In terms of Mount Vernon, you got it, Lynn?
spk00: Yeah, the parklet, Craig, that you had mentioned. So as Don mentioned in his opening remarks, we have more than two dozen of, investments happening in our existing portfolios to strategically make them better and get them stronger coming out of coven this parklet is a good example of not a full redevelopment but how we continue to invest in our properties to make them better for the communities that they serve so 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 you know make kind of a a center of gravity for Mount Vernon. As you know, it's a very large center and it'll provide some opportunity, not only for the community, but the four or five tenants that circle the parklet. So again, really just kind of doubling down on that outdoor amenity program and outdoor seating that we see was so valuable during COVID.
spk01: Thank you. Our next question comes from the line of Greg McInnis with Scotiabank. Please proceed with your question.
spk03: Hey, good morning.
spk13: So Dan, I can understand your general hesitance to increase guidance with Q1 results, but even so, it feels maybe a bit underwhelming considering the outperformance versus our estimates and maybe even your own internal numbers, especially 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's no more prior period rent contributions?
spk05: Yeah, look, I think that there are massive kind of macro kind of storm clouds out, and I think it's just us being, I think, a little cautious in nature. I think the bump in guidance is, I think, reflective of strong first quarter. um but uh it's it's you know we'll see uh i think we want to be mindful of you know increased inflation uh you know um and all the other things that um you know we worry about every day when we go to sleep uh so i mean that's i don't know don do you have anything more to add oh great you know great gosh i It's hard for us to argue with the premise of your question when over the last six quarters, you know, each time we have outperformed and, you know, and increased guidance and it wasn't enough. And so I certainly understand your question. There is absolutely an inherent conservatism in the way we run this business. There, you know, 22 is looking real good.
spk13: uh to your point we're trying to reflect that in the guidance but uh you know if it comes out better it comes out better okay and then and then uh dan um i forget if you covered this but uh have you talked about what kind of prior period rents are included in the guidance number
spk05: Yeah, we're actually increasing that number. In our original guidance that I mentioned on our last call in February, roughly about $5 to $8 million. Obviously, we did very well in the first quarter, increasing that range up from $5 to $8 to $9 to $11. The pool of potential rent to grab from is shrinking. We're doing a lot better at grabbing it, as evident by a strong first quarter.
spk03: enhanced the increase there over the balance of the year.
spk01: Thank you. Our next question comes from the line of Michael Bilerman with Citi. Please proceed with your question.
spk16: Yeah, thanks for that. Don, in your opening remarks, you talked a little bit about Santana West and how the cost had gone up, but the rents went up as well, which were able to maintain their yields. I was wondering if you can just sort of step back on the entirety of the redevelopment and development pipeline. You know, your commentary on the core portfolio and the leasing environment is so optimistic and strong and clearly the numbers are coming in the leasing environment. Why isn't that translating more into the redevelopment and development pipeline? I would have thought at this point, especially during COVID where you'd mark down a lot of those yields, that those would actually start seeing the other side. Is it all just on construction costs that you're just finding that you're just not able to get those yields up?
spk05: You know, Mike, just let me make sure I have the premise or we agree on the premise of the question. We have not adjusted in any significant way the guidance that we've given kind of pre-COVID because we want to make sure that we've got good numbers and the ability to be accurate when we change it, not do it in a death of a thousand cuts. In terms of the Santana West piece, what this reflects is a real negotiation that gives us a much better window on what rents really are today and what costs really are for the remaining piece in Santana West. It's It's basically just the TIs, which is a big number, but it's that and some other stuff. So we didn't want to change part of it without doing the whole thing. That similarly applies throughout the development portfolio. And as you know, much of our development stuff is baked and done under GMPs. And so, you know, to the extent we're comfortable with that, and we are, that's what you see disclosed. You might have seen I also made a comment that we're not ready yet to talk about or announcing a life science building up at assembly, specifically to your question, specifically because I want to make sure we are locked down on costs before we're able to do that. We're getting close, but we're not there yet. What we do seem to see in all of our markets where we are developing is that the higher costs, which are clearly out there on new money, relative to, you know, a year ago or two years ago, are being offset by higher rent expectations that seem to be able to be met. So there's nothing on the development side yet that we've seen that has stopped as a result of higher costs, but no ability to push those rents to create a decent return on those costs. I don't know if there's a lot in there, and we'd have to go project by project, but that's the... general landscape.
spk16: Yeah, I guess I was surprised that with all of this commentary and the commentary that you normally don't increase guidance at the beginning of the year and how strong the leasing environment is and record leasing, that that somehow is not translating into better yield on the development and redevelopment and in fact santana west you know if it wasn't for lifting the rents you know that yield would have gone down and you know it's not inconsequentially talking about 130 bucks a foot you know 50 million buck increase that's not small you know no there's a fair that's a fair fair point mike and and maybe like i'll give you a great example right with what's happening up in assembly on the residential building um
spk05: we're going to be at the upper end of that range and we may even increase that guidance going forward based on the actual residential leasing that is happening on there relative to the costs. So, you know, is there an inherent conservatism in the way we try to do things? Absolutely. It kind of ties to the earlier call, but it's a pretty, you know, there are headwinds out there in terms of the marketplace. And so we try to take the most balanced approach we can. I think you guys look at our history and, and can determine whether you believe, you know, we'll get there or we won't get there and act accordingly. But no, there is an inherent conservatism in the way we report.
spk01: Thank you. Our next question comes from the line of Mike Mueller with JP Morgan. Please proceed with your question.
spk02: Yeah, hi. 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?
spk03: Oh, gosh, how do I answer that?
spk05: You know, Mike, I would say it is so hard to answer a question about 23 and 24 as we sit here on May 5th, 22. I mean, the reason we originally gave guideposts going out was because, you'll remember, we had better visibility post-COVID than we did in the middle of COVID. So that's why we started giving those guideposts out. Now, as I sit here and you look at the macro issues affecting the economy, trying to figure out exactly what's going to happen with lease negotiations in 23 and 24, I'm looking at Wendy here, and I'm getting a little bit of a shrug. And that's not an indictment of the portfolio or an indictment of the way we do business. It's simply, you know, the market out there is uncertain. What we know is, what we are seeing really good progress with is where we spend capital to be able to create a better placemaking asset, we get paid. And I don't expect that on a relative basis, to change one bit. But it is on a relative basis, based on what's going on in the more global economy, and that's affecting real estate. So as I sit here today, I am really bullish on all the facets of the way we're growing, including the basic leasing of shopping centers, especially those that have been redeveloped and invested in. But more of a crystal ball than that for 23 and 24, I don't think I can give you that.
spk02: 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 did that cover the office portfolio as well?
spk03: It's the commercial portfolio, including office, yes.
spk01: Thank you. Our next question comes from the line of Derek Johnson with Deutsche Bank. Please proceed with your question.
spk09: Hi, everybody. Thank you. Regarding acquisitions, with local retail cap rates, the spread to the 10-year treasury really 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 driver's seat given rising rates?
spk06: Yeah, Derek, it's Jeff. Let me take a shot at that. I mean, we've been pretty active for the last 12, 18 months coming out of the pandemic and bidding on stuff and being successful in several cases and buying properties. And in the most recent round of deals, we've still seen a very active uh, bitter pool and a very well capitalized bitter pool. Uh, there's at least, you know, in this last round of deals, been a lot of capital in the market. Um, you know, a lot of, a lot of people think big picture that's because the yields and retail are better than they are in multifamily and better than they are in industrial, um, which is why you've seen, uh, a lot of, uh, low to mid for, uh, cap rate purchases, um, by institutions the last couple of quarters. And there's some deals in the market priced like that that are going to close in the next couple of quarters as well. So not every buyer is a leveraged buyer. A lot of institutional capital out there that needs to be placed. And going forward, I think it's not just interest rates that are going to drive cap rates. what are returns on other product types and you know, does that wall of capital stay in the market or, or, or does it not? So, uh, to be, to be determined, but a lot of money for high quality, uh, retail right now, competitive market. So, and, and, you know, as always, there's a big, big spread between, uh, AMD quality property, right. And we're, we're, We're looking at stuff that we think we can add value to over time, really focused on value-add opportunities, identification opportunities, and more of the IRR than the cap rate. So kind of keep that in mind as you think through maybe where pricing might go to.
spk09: Okay, that's helpful. Thank you. And then kind of where Mike was headed, but not so long-term, Clearly, healthy retail leasing activity this quarter built on strength of last year, which clearly is positive. But investors have focused on the high ABR versus peers in the post-pandemic era as being a possible headwind or perhaps led 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?
spk05: Yeah, this is a perennial question, right, Derek? I mean, no doubt. I want you to focus on something that Dan said in his comments. Check this out. A 7% cash-on-cash rollover. If you did the math, and considered our, what I believe, our superior contractual bumps, if it's 100 basis points, if we're growing at 2.5, somebody else is growing at 1.5, typical shopping center business, right? 7% bumps equals 16% rollovers. Nine more. That's an amazing thing that we have not, frankly, done a good job educating people about. And, you know, look, part of that is we don't know what everybody's bumps are, but you can consider the following things. We have, you know, this portfolio is two-thirds anchors and a third small shop, right? The opportunity for bumps is easier in the small shop, obviously, than convincing TJX or Roth, you know, to have annual bumps, obvious stuff. In our small shop, the notion of being able to have those bumps. I would bet more regularly than others, but I don't know that for sure. I do know that wars are very strong.
spk03: That, you have to consider that when looking at rollovers also.
spk05: Yeah, and you know, at Small Shop, not only, it may be a third of the GLA, but it's half of our rent in total. So think about that, number one. Number two, And I made this, you know, it's such an interesting point, I think, when you look at the acquisitions we made. And even before we do any redevelopment or do investing, we were able on 10 deals, not the smallest, 10 deals this quarter, get 33% more rent than when somebody else owned it on the reputation that we're going to make you more productive. At the end of the day, Eric, it's the productivity, of the retailer, not the ABR.
spk03: And so put those two things together, and that's why we're confident with respect to how we run our business.
spk01: Thank you. Our next question comes from the line of Steve Sackwell with Evercore ISI. Please proceed with your question.
spk12: Thanks. Good morning. Don, I was hoping you could just spend a little time on the potential life science deal up in Boston and Just how are you thinking about pre-leasing and credit underwriting and tenant underwriting for that project?
spk05: Yeah, 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, so there's no question that as we underwrite the risk, as we underwrite the dollars, the cost of capital, we will expect a higher return uh to compensate for the the inability to to the likely inability you never know but the likely inability to pre-lease uh release the building um what what we're thinking about with respect to that uh opportunity is what is pretty demonstrably a a a pocket of much more than one building. Could be more than one building for federal in time. We would expect it to be. Already, as you know, Biomed has begun construction, and Gray Star right there has begun construction. So the notion that assembly is likely to be a cluster of life science has grown dramatically over the past year or two. That's a really important component in terms of who's going to wind up there. Actually, one of the interesting things would be when you look at the number of companies that have been developed on the life science side over the past few years, it's pretty dramatic. And demand is just off the charts relative to the supply, even though there's supply coming on. in other parts of the Boston market. So together, the short answer to your question, Steve, is the return has to be able to compensate for the spec nature of it, as well as the undeterminable at this point of credit quality of the tenants that are coming.
spk12: And as a follow-up, would you contemplate sort of joint venturing with a more established life science player or ground lease it or are you pretty much committed to going it alone and keeping it for yourself?
spk05: We've considered all of those opportunities and we've decided to do it ourselves and we've decided to do it ourselves in large measure based on the team that we were able to compile in terms of not only the general contractor, but the designer, but the operator, and all of the individual components of it, as well as our team up there. So, you know, we've created a lot of value at Assembly, and over 15 years in that project. We want that value fully recognized in our incremental investment.
spk01: Thank you. Our next question comes from the line of Connor Mitchell with Piper Sandler. Please proceed with your question.
spk15: Hi. Thanks for taking my question. So with the depreciation of the strong balance sheet, how can rising rates impact, if at all, the developments going forward?
spk03: With regards to, well, I'm not sure I understand the question. Could you repeat it?
spk15: Yeah, I think a better way to ask the question might be whether you see rising rates within the development and then also or material cost and inflation as a bigger issue for impacting developments.
spk05: Look, there's no, we expect and I think before we go forward, we lock in prices to the extent we can with a GMP before we start I think what we've seen is because of the strength of the markets that we're in, we've benefited from increasing rents, which have kind of offset kind of costs as it relates to rising PIs, tenant improvement dollars. And that's why we've been able to maintain the yields and deliver the yields that we set out to achieve. And we won't start something unless we've got those costs locked down you know, to a large extent. And there's an important follow-up in that. It is while you kind of globally talk about, we kind of globally talk about our development pipeline, every project has to stand on its own. If the rents are not, certainly a higher cost of capital, to your question, right, and long-term cost of capital is the way we look at it. A higher cost of capital has to be supported by costs that work in there and rents that we're confident we can achieve. And, you know, when you think about the primary markets where we're doing that, Boston, Massachusetts, San Jose, California, Montgomery County, Maryland, you're talking about markets that heretofore, and I don't expect it to change based on job projections and economic projections in those markets were able to push the rents to be able 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 rent will compensate for the higher costs.
spk03: All right. That's helpful. Thank you.
spk01: Our next question comes from the line of Juan Sanabria with BMO Capital Markets. Please proceed with your question.
spk14: Hi, thank you. Just wanted to touch on the funding side of the equation for acquisitions and how you guys are contemplating that given your cost of capital and if you can give us a sense of where debt costs are today relative to still the strong pricing for acquisitions and how you think about kind of your mixed cost of funding or weighted average cost of capital?
spk05: Yeah, look, I think in the last, you know, certainly in the last 90 days, you know, cost of debt capital has kind of gone up. So obviously that pushes up our weighted average cost of capital.
spk03: You know, I think with regards to, well, the, Can you repeat the question? We're struggling with the last part of it there. Yeah.
spk14: Sure. Just curious on how you plan to fund what seems like a still very active acquisition pipeline, given where leverage is today, and just get a sense of how you're thinking about where you could raise debt out today. We think about match funding.
spk05: Yeah. Look, I don't think debt is a big component of what we're looking to fund growth going forward. We've got $175 million of forward equity still ready to be taken down. We've got in process and under consideration 150 million of dispositions that were sub five cap and on deck after that, another 100 to 150 million of dispositions. We are thinking about to take advantage of a strong environment So I think that, yeah, that balance with a higher cost of debt capital currently is something we will take into consideration.
spk06: Jeff, do you want to add? Yeah, and one other thing to keep in mind here, too, whether it's, you know, an acquisition or redevelopment or a development, you know, we've never been a spot capital pricer of our investment opportunities. We've always looked at our long-term weighted average cost of capital. So when interest rates were really low, we weren't chasing acquisitions, for example, down into a low four-cap range simply because they were still accretive. And with increasing interest rates and increasing debt costs, we don't really expect that to impact our ability to perform in the market for that reason. We always have maintained a very strong discipline on I'm looking at kind of the long-term cost, not the spot cost.
spk14: And then just as a follow-up question, just curious on the small shop side, as you're thinking about merchandising space in the centers, but also thinking about maybe we see a potential recession, we'll see, does your strategy change about the types of tenants, maybe more national with regards to the small shop space?
spk00: I would say that the short answer is no. We really take a balanced approach, sort of like what we were talking about before. Our overall business plan is growth in various areas from our core to developments to redevelopments to acquisitions. And I like to apply that same philosophy to our leasing, where we're talking about growth whether it's through merchandising, whether it's through investing in the properties, whether it's through electing tenants that also want to invest in themselves. We're seeing a huge amount of investment with tenants and us together, and that creates a better result. And we like the balance, again, intertwining with the community, that local player, mom and pop, best in class, as well as the regional and national as well. So I think we'll continue to take that balanced approach.
spk06: And we're sticklers too on working through a tenant's business plan and looking at their credit and also securing the lease in the right way regardless of what's going on in the economy. So we don't relax our standards when things are good. So I wouldn't expect us to do anything any differently like Wendy just said.
spk01: Thank you. Our next question comes from the line of Handel St. Just with Mizuho. Please proceed with your question.
spk10: Hey, good morning. I've got another question on redevelopment here. Don, the enthusiasm and your tone, it's clear. Demand is strong, rents are rising, and you're adding to the redevelopment pipeline. I guess I'm curious, how close are you to maybe getting back to the pre-COVID game plan of know three to four hundred million of annual redev spend funded by free cash flow as well as incremental debt and opportunistic sales here and what's the right way to think about uh redev spending as we move into this higher cost and higher interest rate but higher rent uh backdrop yeah yeah yeah no i know i i love the question it's it is the answer is driven by opportunity
spk05: And one of the things that has become pretty clear to us post-COVID, and I think Wendy talks about this all the time to me, and so it's kind of stuck in my head, the demand and the conversations with tenants has, in our view, what we've seen is they are more important in terms of who the landlord is than ever before. So to the extent that landlord is best investing, not only in the asset, alongside that tenant, to be able to create a better, and placemaking is a big part of it, no question. Convenience is a big part of it, no question. To create a better environment, that's a here to stay. And you know what will stop that end up? If we can't get paid for it. But effectively, everywhere we've seen so far, where we are laying out an aggressive redevelopment plan improvements to the property, the impact on the leasing has been very clear. And when I say the impact on the leasing, I'm talking if you're interviewing leasing agents and understanding from their point of view what the deals look like, what those bumps look like. You know, when Dan talked about higher bumps, that's not an accident. That has to happen commensurate with a a tenant conversation where they are confident they're going to be able to afford that and continue to pay that. And a key part of that is what are you doing, landlord, to the shopping center post-COVID? So I don't – you know, the days of kind of milking your – just kind of milking the shopping center or milking the cash flow from the shopping center without a significant investment, I'm not sure this industry goes back to that. And to the extent you do do that, The differentiation between great properties and not so great properties gets wider and wider. So as you think about the next few years and, you know, a return to normalcy from a demand and a supply perspective, ask yourself where you're likely to be able to push rents and get paid if your shopping center is materially better than the competition. And that's kind of the way we think about it.
spk10: Okay, fair enough. Any desire to perhaps provide some guideposts on how we should think about re-debt spend here as we move into the next few years? And then can you remind us what estimated value of the assets in your portfolio that can be sold on a maybe tax-neutral basis to fund acquisitions development? I think a few years back that number was close to $400 million. Obviously, you've sold some. I'm just curious on where you think that is today.
spk05: I think that the last part of your question, that's about the same. I wouldn't see that very differently.
spk03: Yeah, no, that's kind of all I got to say on it.
spk01: Thank you. Our next question comes from the line of Chris Lucas with Capital One. Please proceed with your question.
spk04: Hey, good morning, guys. Just one quick one for me. Dan, on the percentage rent number for the quarter, it was roughly almost 2x what it was, you know, pre-COVID in the first quarter. Just curious as to whether that growth came from more leases running into the, you know, over the breakpoint and generating more percentage rent or those that have been in percentage rent continuing to sort of just add to the contribution to percentage rent? Just trying to understand where that increase is coming from.
spk05: Yeah, look, the increase is partially being driven by just better tenant sales across the portfolio. And there's two different parts. We have the leases that were restructured where we're collecting And that shows up in the collectability adjustment. The percentage rent that's in that line item that outperformed pretty significantly is really just, I think, a combination of a few more deals that are leases that are percentage rent deals, as well as just higher performance from those leases over time. I would expect that first quarter number You know, not to be, typically we're around one to one and a quarter percent. We're at one and a half percent today of revenues.
spk03: You know, I think that it's in that one to one and a half percent over time.
spk01: Thank you. Our next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.
spk08: Hi. 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 at all materially?
spk03: Yeah, there's really been no material change to those figures.
spk08: Got it. And then you have a few tenants that have chosen your assets, 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 product, byproduct of having, you know, new and desirable amenities?
spk05: Yeah, well, I mean, look, we always hope that, you know, we have the best credit tenant take the entire building and we're done in five minutes. And so that's always the hope of the strategy. The more likely, you know, result is what has happened. Now, those are great companies. All of those companies, all of them, look to the amenitized base, look to the ability to retain the track workers as critical to their decisions. That's not a surprise. That's been in the strategy from the beginning. That will continue to be, and I think you'll see that that's where we'll end up with the other stuff that's not least up yet today. Thank you.
spk01: Ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to Leah Brady for closing remarks.
spk08: We look forward to seeing many of you at NAVRE. Please reach out with any meeting requests, and thank you for joining us today.
spk01: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
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