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spk18: Hello and welcome to the Federal Realty Investment Trust Third Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Leah Brady. Please go ahead.
spk12: 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 Gee, Jeff Berkus, Wendy Sear, and Melissa Solis. They will be available to take your questions at the conclusion of our prepared remarks. A reminder that certain matters discussed Sets 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 the expectations reflected in such forward-looking statements are based on reasonable assumptions, 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 and results of operations. 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 recue. And with that, I will turn the call over to Don Wood to begin our discussion of our third quarter results. Don?
spk13: Well, thanks, Leah, and hello, everyone. Well, consumer spending remains very strong in the major submarkets where federal operates, particularly in 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 585,000 square feet of space and FFO per share of $1.59 were both above external and internal expectations and continued to signal strong demand for high-quality retail and mixed-use real estate. The future pipeline of deals not yet executed also remains robust, and as such, we'll be raising 2022 guidance again. Demographics matter. especially in times of economic uncertainty. Past cycles have convinced us that families simply have to have money to spend for retail real estate cash flow to grow. 68,000 households with annual average household incomes of $150,000 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. I know of 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 seeing their sales exceed the overage rent threshold in the lease. While not a huge absolute number since we strive for strong fixed rent in our leases, the broad-based overage rent contribution in the quarter, particularly among our restaurants and soft goods tenants, Over and above the fixed rent is notable and contributed an additional two cents 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 through 2019, average third quarter production for comparable properties at Federal meant doing 88 deals for just over 400,000 square feet. In the 2022 third quarter, we did 119 deals for 563,000 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. It's one of the reasons Dan is again raising annual earnings guidance 12 cents at the midpoint. The solid tenant performance also manifests itself in continued occupancy gains as tenant failures remain low. Our current year lease rate is now at 94.3% and occupied rent rate now at 92.1%. Those leased and occupied rates are 150 and 190 basis points, respectively, better than a year ago, and there's 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 and 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. I'm 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 4.3% for a portfolio of this 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 refinance and upsize our term loan and line of credit to be sure that 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 and Rose, $100 million largely for tenants' build-out and commissions at Santana West, and $20 million to complete Darien Commons. By the way, after the quarter just last week, we just signed a 52,000 square foot lease with a credit tenant, bringing that building at Pike and Rose to over 60% pre-lease. 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 flowing. Similar to development, our pro rata share of the acquisitions that we've made since the beginning of COVID through today total $850 million. Those acquisitions, from Grossmont to Cam Back Colonnade to Pembroke Gardens and so forth, are performing well ahead of our expectations in the aggregate and are expected to yield in the mid-sixes in 2023. In that same time period, we generated over $400 million in proceeds from non-core asset sales at a sub-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, though not necessarily at the pace we're seeing. While sure to pressure everybody's earnings to some extent in the years ahead, how much so, and for how long, 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 in supply-constrained, affluent, densely populated markets and sub-markets shine. We're in a cyclical business, no news to anyone, and it's why our business plan has always included multiple ways to counter the rise in 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 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. We look forward to the challenge. Dan?
spk14: Thank you, Don. And hello, everyone. For another quarter, strength and resilience of our portfolio has exceeded expectations. With FFO per share of $1.59, we beat a strong comparable from third quarter of 2021 by over 5% and beat consensus by 6 cents. 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 than forecast, although offset by higher property level expenses and higher interest. Let me add some color to these items. Small shop lease occupancy basically hit 90%, up 60 basis points over 2Q, 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, a strong indicator of consumer traffic at our mixed-use assets, continued higher, up 8% sequentially over 2Q and 33% year-over-year. Percentage rent, an indicator of tenant sales strength, was up over 31% sequentially and almost double third quarter 2021's level. Same-store residential POI, 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 OPX grew by 10% over 3Q 2021. However, we estimate that roughly a third of that increase is non-recurring, and it is all predominantly recoverable from tenants. Despite coming off a strong comp in 21, Our comparable growth metric for 3Q was a solid 3.7%, well above forecast. Comparable growth, excluding prior period rent and term fees, was 6.3%. On a cash basis, our same-store metric is 5%. Excluding prior period rent and term fees, our same-store metric is up to 8%. Year-to-date comparable POI growth is a sector-leading 8.8%, and almost 10% on a cash-based same-store metric. For those of you that track it, term fees this quarter were $1.3 million, up from a half a million in 21, 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 it, currently exceeding 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, full banker and small shop lended, and as a result, our rollover on a straight-line basis is 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 2.25% rent bumps and 3% rollover is the equivalent of a portfolio with only 1.25% rent bumps and 12% rollover. Plus, the 2.25% rent bump portfolio collects more along the way. With respect to our balance sheet, we made significant progress during the quarter in 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 a billion dollars, from $1.3 billion previously to $1.85 billion today, and a combined revolving credit facility and term loan, both of which we expanded. 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 transitioned the base rate from LIBOR to SOFR. And we doubled the size of our existing term loan from $300 million to $600 million. This term loan has an April 2024 maturity with two additional one-year extension options, which take us out to 2026 at our option. The interest rate here also transitioned from LIBOR to SOFR. As a result, at closing of the facilities, we had $1.4 billion of total liquidity, including the $1.25 billion available on our undrawn credit facility. With respect to leverage metrics at quarter ends, our net debt EBITDA ratio is roughly six times annualized for the quarter and adjusted for asset activity. Comfortably within the range of our ratings, And we continue to target a ratio in the low to mid five times over time. Our fixed charge coverage ratio rests at four times. And 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 additional asset sales totaling over 350 million in potential proceeds at a blended cap rate that is sub 5%. Having non-core 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. On to the remainder of 2022. Given another quarter of outperformance and a strong outlook for 4Q, we are increasing our guidance from 610 to 625 to a tightened range of $6.27 to $6.32 per share. An increase of 12 cents in the midpoint, or 2%. And this is on top of two other guidance increases earlier this year in the first half, which bring our year-to-date total increases in guidance to 45 cents. Current 2022 guidance implies 13% growth over 21, at the midpoint, despite over 200 basis points of headwinds from prior period rents. We are also bumping up our forecast for comparable POI growth to 7 to 8 percent from the prior range of 5.5 to 7. Excluding prior period rents and term fees, our comparable POI forecast increases to 9 to 10 percent from the prior range of 7.5 to 9. We continue to expect our occupied rate to climb from 92.1% today up to around 92.5% by year end. And 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 FFO 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. Its interest rate is set. The term so far has adjusted plus an 85 basis point spread, which is 4.7% today. Also note, while our only debt maturity in 2023 is $275 million of unsecured notes for the June maturity, it does have a 2.75% interest rate. We again expect prior period rents and term fees not to contribute in 2023 to the level they did this year, although the impact will not be as material as it was this year. And G&A, which is running at $13 million per quarter currently, is expected to increase in 2023, using used 14 million per quarter as a good placeholder for now. As a counter to these trends, our core business continues to show significant strength. Given over two years of above average leasing volumes with relatively little impact from failing retailers over the last year, we expect to see POI in 2023 continue to show strong momentum. Driven by solid comparable growth continuing in 2023 in the existing portfolio, driven by 220 basis points of signed, not occupied, upside, and a robust current portfolio of new leasing, as well as growth in the non-comparable portfolio, particularly at the recently stabilized Assembly Row Phase 3, the 100% leased 909 rows at Pike & Rose, and the 100% leased Cocoa Walk. Despite uncertainty in the economic outlook for 2023, POI growth will be robust and should provide momentum to counter inflationary pressures and higher interest rates. And with that, operator, you can open up the line for questions.
spk18: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are 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 this time, we will pause momentarily to assemble our roster. The first question today comes from Alexander Goldfarb with Piper Sandler. Please go ahead.
spk15: Hey, good afternoon. So, Dan, just want to go back to the rent spreads, because this is something you guys have talked about over time and certainly looking at your spreads in the quarter. You know, they're not, they're low, but the FFO growth is high and would rather have FFO growth than rent spreads. So can you just sort of give an overview of how we should think about the interaction between rent spreads and FFO? And then I think you said that you're every year the Embedded annual bumps are two and a half percent but one i just want to validate that number and two is that just small shop or is that is that also in like the junior anchors and some of the bigger format retailers um yeah no we'll we'll go to you know rent spreads ffo first uh you know the rent spreads we we announce are for deals that are signed during the quarter they will not start for the next you know year or two
spk14: So there's obviously, and that's just one component of how our company grows, which is what the rent spreads are. As we said, we also grow rents from contractual rent bumps, which we'll hit here. It is 2.25% retail leases only, both anchor and small shop blended, that we see in our portfolio. A little bit higher if you include the office leases, where we get a little bit higher bumps.
spk15: And the second question goes back to the guidance that you gave a few quarters ago on 23 and 24. Obviously, this year has really outperformed, and it's hard to believe that the metrics for 23 and 24 are 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 goalposts that you guys laid out a few quarters ago? Or can we think about 23 and 24, those goalposts moving up as well?
spk14: Look, we provided goalposts or guideposts that got us to 2023. And we've hit that here in 2022. We're going to provide guidance in 2023 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 we'll 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 counter inflation on operating expenses, and we'll look to counter the impact of interest expense.
spk13: And I would just add, Alex, to the implication of your question, which I understand. And let me just say, there are two things. When we gave those goalposts back there, it was obviously based on the timing of the recoveries. As you said, the timing of the recovery has clearly been faster, and that's great news. But also, to your point, not only the timing of the recovery, it's been the strength of the recovery. So I would expect that POI growth from the property level to be even more robust than when we set those guideposts back whenever we set them at 21 or 22. effectively. So at the POI 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. Obviously, we got to deal with the current macroeconomic situation in terms of interest rates at all. But overall, your point is a good one, that not only did we get there faster, we got there in 22 versus 23, but if you were to reset today and look at those POI goals, that those goals are effectively even better with respect to the core portfolio because of the strength in the leasing over this period of time.
spk18: The next question comes from Craig Schmidt with Bank of America. Please go ahead.
spk08: Thank you. You know, we have definitely witnessed your properties and your trade area performing well in an inflationary environment. I'm wondering... how do you think it might perform in a recessionary environment?
spk13: Well, yeah. You know, I don't think there's 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 dot-com crisis of 2000 to 2002, Craig. But 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 the future holds in terms of both inflation and reduced economic activity, I firmly believe 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're so important. When you've 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 environment. So I like this on a relative basis very much.
spk08: And I agree with you. There's 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, you know, what we're seeing is people are more actively pursuing, you know, experiences. You know, travel has held up well. People paying, you know, very high rates of travel. you know, for vacation hotels, it just strikes me the socialization and experience at your shopping centers may also be benefiting from just the consumers wanting to get back to that aspect of their life.
spk13: Craig, it's hard to imagine that that's not the case. We're taking this call today from Santana Road out in the middle of Silicon Valley. You know, there's always confusion. Is Silicon Valley the Bay Area and the stuff that you hear about San Francisco? It couldn't be. Forty miles is, you know, a thousand miles away in terms of markets. I'm looking out on this street right here. If you saw the activity, if you saw the restaurant numbers in particular that are generated here, it goes to validate your point critically. We're seeing the same type of thing in those restaurant numbers at Assembly Row and at Pike and Rose. And so 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.
spk18: The next question comes from Steve Sokwa with Evercore. Please go ahead.
spk06: Yeah, thanks. Good afternoon. I guess, Dan or Don or Wendy, just as 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 you're seeing, if there's any regional variation. And I guess, as you think about the upside in the portfolio, where do you think the lease percentage can ultimately get back to? And when does the, I guess, the gap between leased and occupied close more significantly?
spk00: So I guess, Steve, I'll take the first part of that question. And, you know, as you've heard in our remarks, the pipeline that I'm seeing 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 380 basis points over a 12-month period is remarkable and proud of the team, of course, and just speaks to the real estate. As I look at what we've been doing, I mean, we've had everything from Athleta to Nike to Dave's Hot Chicken seems to be the big one, to Petco, to very broad-based as it has been, frankly, in the last several quarters. So, again, seeing it. And 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 the landlord side is costs 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 a lease even though some costs can be challenging. And with this transparent approach, we've been not only been 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 the leases that make sense for us. So, again, speaks to the strength of the real estate and that buying power within those markets.
spk13: And I guess, Steve, with respect to the second part of your question, I would very much expect this portfolio to be a 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. We're driven by economics and value creation. And I'll give you a perfect example. What happens with the Bed Bath and Beyonds as we go forward? If I had my way, we'd get them back as soon as we can, and we'd lease 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 or another year or whatever, but I guess occupancy per se, my point is here, is only one consideration in trying to reach a goal. It's not trying to get to 95% no matter who and no matter when. That's an important thing to understand. And I do think that's something that we 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 in a better position 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 leaks at the bottom of the bucket beyond the bed baths and always a few small shops, et cetera. But what the extent that's going to be is going to determine the timing of the question that you're asking. I would hope to be there within a couple of years.
spk05: Hey Steve, it's Jeff, just batting clean up here. We've probably got another 100 basis points to go to get to where we want to be on our assigned not occupied percentage. We're sitting at 220 basis points today, and historically that's been 100 to 125 basis points. And like Wendy 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 rent started. That's really been going well for us the last six, eight quarters. We hope to get that shrunk down in short order exactly when it will happen. Like Don just said, we can't tell you, but that is a primary objective there.
spk14: Yeah, we've made good progress on that. It used to be north of 300 basis point spread. We've got it down to 200 on our way to that targeted 100 to 125 basis point.
spk05: I guess the fourth batter really is the cleanup batter.
spk06: Thanks. Sorry for the long question. Second, just on capital deployment, I guess, Don, how are you thinking or how have you changed kind of your hurdles here? for either new developments, redevelopments, 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?
spk13: Yeah, well, obviously that's 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 is we're still, we always, through periods, want to make sure that the company continues to view capital on a long-term weighted average cost basis, not just yield for a particular project at any one time. Because it's 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 asset, but very accretive. And that puts it, you know, up in those 8%, 9%, 10% ranges to be able to do right now. That won't stay like that forever. We just want more visibility in terms of where that overall cost of capital will end up. And, you know, 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.
spk07: Great. That's it for me. Thanks.
spk18: The next question comes from Derek Johnston with Deutsche Bank. Please go ahead.
spk09: Hi, everybody. Good afternoon. We view renewed office demand as a real potential positive catalyst for federal, especially when it comes to investor sentiment. And I think I'd say what we learned exiting the pandemic era is office location, newness, quality operators, you know, they've all seen and should continue to see outsized demand. So I guess, you know, how are tours progressing and interest progressing, you know, specifically at Santana West and, you know, perhaps touch on some other assets? And, you know, are you more confident on your office component, you know, given what you're seeing on the ground than, you know, maybe a few quarters ago or a year ago?
spk13: Eric, it's a great question. I really appreciate that. Let me start by saying, you know, and I've said it a million times, but I couldn't believe it more. All office is not created equal. The notion of having the type of office product that we do, which is solely at our big mixed-use development, so therefore solely driven by the retail environment effectively, that is the differentiator here, along with new buildings. If There's any demand for office space. How can that not be? Knowing the economy, knowing the proclivities of CEOs and hiring managers, et cetera, how can 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 until I tell their employees, et cetera. Over at the 9-15 meeting at Pike and Rose, in terms of Santana West, We're not there on 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 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've got to be bullish about this over the middle term.
spk05: Yeah, I mean, setting 915 and 1 Santana West aside, our office portfolio is 97, 98% leased. And the reason why it is is because all of our office locations are amenitized. And we've been saying this for a long time. That is the new standard for having office space. If you can't offer your employees amenities, you can't keep your buildings leased, and we have amenities and space at our properties, and that's why we're 97, 98% leased. Big change out here in Silicon Valley, we talked a little bit about this last quarter, but three, six months ago, the big question here was, when are we gonna get people back to the office? And, you know, I think I said on last quarter's call that Apple, Google, and others had 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 notice it when you turn on the TV in the morning and see the traffic stacked up to get over the Bay Bridge, or you drive down 280 past Apple's headquarters, there's a line of people to get off 280 at the Apple headquarters exit. So the conversation has changed from when to what. And the what is all about, you know, what do we need in the way of space to right-size our requirement and provide our employees what they're 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's really only one building that's state-of-the-art with state-of-the-art amenities, and that's one Santana West. So, you know, I wish we could say when we can, but we remain positive on our prospects to lease that building.
spk09: All right, thank you. Well, we will stay tuned. And I guess, you know, secondly, you know, you mentioned Bed Bath & Beyond. You know, can you talk about the watch list? And, you know, specifically for your portfolio, right? And how your centers and tenant exposures, you know, may differ from peers so that it's, you know, well understood out there. And thanks, guys.
spk14: Thanks, Derek. Yeah, no, look, with the exception of Bed Bath & Beyond, you know, that's probably at the top of our list. We only have about 83 clients. basis points of exposure to them. About 60 basis points of that is to the Bed Bath name. Other than them, nobody else is anywhere close to material in terms of folks we're focused on. They're all single-digit basis points of revenue, and so there's really not anything that's on a near-term concern list for us. Wendy, can you...
spk00: I would say when I think about Bed Bath and Beyond, look at what we've done over the last three, four years or so, which is we've kind of reduced our exposure with them as a company in probably about four or five locations. So material. And as I look at what's left, you know, we have three Bye Bye Babies that are in good, healthy condition in terms of their productivity from the shopping centers, and we have six Bed Bath and Beyonds and one Harman. And I couldn't agree more with Don that although there would be some short-term pain, I would be very comfortable controlling all of that real estate.
spk05: On average, those are low rents. They're $15 or so, which given our centers, again, on average is fairly low.
spk18: The next question comes from Michael Goldsmith with UBS. Please go ahead.
spk19: Good evening. Thanks a lot for taking my questions. Dan, 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 looks like GNA is going to be about $4 million higher. You know, refinancing this 2023 bond is, you know, it looks like it could be about a $5 million headwind. There's also the capitalized interest for First, I'd have a last, you know, and that's offsetting some of these factors 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 in our model before we start to kind of like model the growth upon it?
spk14: Yeah, look, I think you highlighted some of the color I've provided on 2023. We are going to provide more detailed, comprehensive, with underlying assumptions on our February call. We're in the middle of our budgeting process. We're not done with that. We need more visibility, and we'll have more visibility, hopefully in three months, and that's when we'll give you that detailed information, and so stay tuned.
spk13: It's funny, Michael, when... I had a laugh because when we were preparing comments and what Dan was going to say for 2023, I thought he was giving too much at that point. But heck, we'll try to get more of that out of us at this point. Stay tuned.
spk19: And I appreciate that. Are you able to at least provide kind of where prior period rents collected are just so that we can kind of quantify around that?
spk14: Yeah, yeah. Now, I think that prior period rent, what we think about and how we're thinking about it currently is what prior period rent that we expect to collect that's related to COVID modifications to previous deals with tenants. You know, that's about $8 to $10 million this year. It's probably going to be, you know, probably in and around $5 million this Plus or minus, use that as a placeholder for now. We'll have more guidance there. Certainly, you know, a lot less impactful than it was last year in 2021 to 22.
spk18: The next question comes from Greg McGinnis from Scotiabank. Please go ahead.
spk23: Hey, good afternoon, I guess. Just looking at residential, comparable occupancy saw 50 base 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?
spk13: Yeah, that's a great question. So you know what that's about, Greg, is about pushing rents hard, particularly up at assembly. And so we leased that up so fast. that as the turns happened, we wanted to push rents to find the equilibrium, lost a point or two of occupancy, which is just fine. You know, it's funny, going back even to Steve's question earlier, what should this portfolio be leased at? 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 testing where the rates are, where they can be, where they should be relative to occupancy always makes me more comfortable in the 95, 95.5% range. If we're at 97, 98, I feel like we're leaving money on the table. So there's nothing more to look into it than that. Extremely strong growth. I don't have those numbers, actually, at either Santana or at... at assembly, but they're strong.
spk05: Yeah, the year-over-year revenue growth at our stabilized property assembly montage and our stabilized buildings here at Santana Road is kind of low to mid-double digits, Greg. We do have one hand tied behind our back a bit in Montgomery County because of the rent restrictions there that were just recently lifted and we're starting to work through the rent roll and the Montgomery County assets, but where we haven't been restricted, the lease trade-outs have been incredible and the year-over-year revenue growth has been incredible.
spk04: We've also done a good job managing expenses over the past 12 months, so residential has been a great contributor in the company.
spk23: Okay, thank you. I'm just thinking about tenant retention and the potential for increasing occupancy. Looking at this quarter, new leases represented 90 basis points of occupancy. Least rate was only up 20 basis points though, so 70 basis points to move out during Q3. How's that tenant retention comparing to prior years? And as we look towards a potentially more challenged economic environment, I'm thinking in that context, what's driving move outs today?
spk10: Well, you know, there's a bunch to unload in that question.
spk13: And 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 if it was occupied before, Yes, you're 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 you will, that are diluting the occupancy number. So I kind of got caught when you said that. That got stuck in my head as 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 to.
spk18: The next question comes from Craig Mailman of Citi. Please go ahead.
spk17: Hi, this is Seth Hahn for Craig. I just wanted to go back to your 2022 guidance and the 12 cent increase. Where are kind of the moving pieces in that guidance, and is there any type of one-time pieces to that? Yeah, with regards to...
spk14: we kind of feel as though our 2022 guidance for, you know, it was just a stronger outlet for the fourth quarter, significant outperformance in the third quarter. I don't think there's necessarily one-time items in there except for, you know, prior period rent and term fees, which really third quarter over third quarter were roughly modest. 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 in our pipeline, tenants taking possession of space, and then obviously with some offset to a higher interest rate environment.
spk17: Thanks for the color. And then just another quick question. On page 25 in the SEP on the comparable new lease summary, it looked like the cash rent spreads were 0%, but the straight line was 10%. Is that due to the type of tenants you're leasing to, or is there anything specific driving that?
spk14: Well, the difference between zero on a cash basis and 10% on a straight line are the rent bumps we're getting. And that's an important component to consider when you think about rollover, is not only what is the rent you're getting at least maturity to the new market rent, 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's as important, the rent bumps you get, as the rollover you get at lease end.
spk18: The next question comes from Hong Zhang with JP Morgan. Please go ahead.
spk22: 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.
spk14: That's a tough one to guide because one, it's hard to really predict where the lease rate will go. I mean, 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 up into the 93% up towards into the mid 93% range. By the end of the year. By the end of the year. How much leasing we can continue to do from a leased percentage and what is the holes at the bottom of the bucket, where that goes is a little bit more difficult for us to forecast. But we should get back to a more normalized level over time. And I think our goal is to have both components, the metrics, the occupied and the leased metric, continue upwards. but narrowing it over time into 2024 and 2025 probably in that time frame.
spk13: I do want to make one other point and make sure you're getting the specific, you know, what 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, tenant coordination process. That's been one of the things that has really dogged this industry for the past three years since COVID, the supply-constrained environment, the logistical problems, et cetera. So really what you want is to get that tight because what that means is the time between a signed lease and the time that a rent starts is the most important thing. Yes, over COVID, 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 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 get what that metric means on an overall basis and how why it's so important for us to get it down to 100 to 100 and a quarter basis points.
spk22: Yeah, agreed. And it looks like you have an option to purchase the remaining interest at Escondido. I was kind of curious if you could talk about the decision to get that option and what cap rate you would think you could purchase it at right now.
spk10: Yeah, it's Jeff.
spk05: We've had a partner in that asset for a very long time, approaching 30 years, that needed some flexibility on their exit from the asset. So we structured a deal that gave us the option, should we decide to exercise it 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. Escondido has been a great property for us over the years, one of the stronger growers in our West Coast portfolio.
spk10: So a little bit of a win-win for everybody there.
spk18: The next question comes from Juan Sanabria with BMO Capital Markets. Please go ahead.
spk21: Hi. Thanks for the time. Just curious on the guidance for BAME Store NOI and what has been delivered year-to-date and kind of what the exit implied is um for the x any term fees noise that that's caused there and i know you raised the guidance but just curious on what the fourth quarter implied expectation is with the upward loop authorized guidance to think about a number for 23. yeah the the the number that we report which is you know you know includes that the the headwinds from term piece
spk14: and prior period rent. In the fourth quarter, it should be about, call it 3% to 5%, in line with what we did this quarter at 3.7%. Our year-to-date number is 8.8%, which I mentioned. We provided 7% to 8% for the year. So the 3% to 5% is what is implied in the fourth quarter, is what is implied with the overall guidance. And obviously that will be higher, we expect, because of prior period rent continuing to be higher last year than we expect it to be this year. It should be higher in the fourth quarter than that 3% to 5% range, probably more in the something of around 5% to 6%.
spk21: Great. Thank you. And then just this has been asked a couple different ways, I guess, but For the small shop tenant space, you're basically at 90%. Could you just remind us what the prior peak was, how high that could go? And like out of that small shop tenant space, what is kind of local versus national or regional tenants and any color on that more local tenant kind of confidence in the credit behind that?
spk14: 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 pre-financial crisis, was up around 94%. I think that 92 is kind of a reasonable targeted level that we'll try and achieve. over time on the small shop side?
spk00: When I think about the small shops, we certainly had, like everyone did, failures throughout the pandemic. And what the result is post-pandemic is a pretty savvy and experienced small shop that knows how to get through a difficult time. So I think our small shops are pretty 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 tenant really brings the color and the vibrancy to the community that we need. So I'm bullish on the small shops.
spk13: Hey, Juan, I've got to add something to this. As I said, listen, the notion of the question means that there's a premise here that local tenants are poorer credits than regional tenants. 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 borrow money from families. They borrow money from other places that they have to do, and they keep it going. So if history is any indication here, we would expect to Wendy's point as to why the small shop, including and maybe especially the local tenant, should outperform here 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 there has been a complete influx in new money, in new tenancy, and effectively a robust and solidified small shop basin total.
spk18: The next question comes from Handel St. Just with Mizuho. Please go ahead.
spk10: Hey, good evening.
spk16: Don, I wanted to go back to some of the earlier accountments you made on capital allocation. I understand you're being somewhat opportunistic selling some assets here, which looks like they'll effectively fund your active redev. But looking ahead, and I know the macro is uncertain, you have a future pipeline you alluded to, and there's some projects in there with some pretty good return potential. Can you talk a bit about some of the 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.
spk13: Yeah, it's a great question. And, yes, I do expect dispositions to be a key funding source of it. You know, one of the things we're talking about and looking at now, and it's premature, is it's pretty incredible the value that we've created on some of the residential product that we have. And it is such a unique funding source. And again, that's at our big mixed use properties that such a critical part to getting these places established and moving them along. And now that they're established, we'll look hard at does harvesting that make any sense? And so that'll be a component that's in the consideration of how to fund. Secondly, when it gets to where to deploy the capital, that deploying of capital is very much dependent on a very localized look at demand. And making the case for the assembly, life science development building, obviously we want to see venture capital funding in a better place than it is today. Obviously we want to understand what the cost is. requirements of building that are. And so building by building, redevelopment by redevelopment, very localized in terms of that decision-making process. But again, the 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.
spk16: It's great. Appreciate that. Now, I'm going to follow up on Rita, but with the focus on the assembly row where you pause the life sciences project. Any update to share there? I see you have some additional entitlements for more resi. Could we see you or perhaps would you consider prioritizing that over life sciences or anything or office there given the growth and supply in the life sciences market in Boston? Thanks. Sure.
spk13: No update to talk about there at this point. I can tell you it's very important to us that the entitlement process, not just for that one building, but for the adjacencies to that is completed. We're working hard on that during this pause period that could give us a whole kind of leg up, if you will, when we are ready to move forward again. I also very much want to see What happens next to us with the Blackstone-financed life science project, to the extent 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're very, very much revenue-based and based on what's happening around us at that particular time. A bit more time to go to see what and when there, if you will.
spk18: The next question comes from Linda Tsai with Jefferies. Please go ahead.
spk11: Hi. How much leasing is completed for... You're cut out there, Linda.
spk01: Oh, sorry. I said how much leasing is completed for 2023 and what's that usually like this time of the year?
spk13: She's simply saying, you know, of the million six or so, million seven that we've done this year, much of that will start in 2023. I'm not sure how to give an estimate effectively of that, but that's the nature of it.
spk14: As of today, you know, we've got about 881,000 still expiring. an anchor, a million six or a million seven in total. And obviously we've got the leasing that we've got done. I don't have specifically that number. Probably makes sense. I could follow back up with you with regard to specifically how much of that specifically has been leased.
spk01: Got it. And then how much growth should we expect in property operating expenses like insurance, maintenance costs, utilities and repairs for next year?
spk14: Yeah, 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. We'll have that ready and done in January, and hopefully we'll provide some of that guidance when we provide more formal guidance on the February call.
spk10: Keep in mind, most of it is passed through the talents.
spk18: The next question comes from Tayo Oksana. with Credit Suisse. Please go ahead.
spk20: Hi, yes, good afternoon, everyone. Just kind of given the overall concern of moving into a slower economic cycle, wondering if you could give us any color in regards to what you are 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? Just kind of curious if you're just going to give us some color about, you know, tenant behavior at this point versus, say, six to 12 months ago.
spk13: Yeah, Ted, it's all good stuff that you're asking about. Let me go for a few things that I've noticed along the way. On the retail side, very little difference in behavior in terms of getting those, you know, the desirability of getting the space, and that's why the pipeline, looks as strong as it does. The question there is it always comes down to what's the construction of the space going to cost. And because that's uncertain now and in a period of inflation that flows down the process a little bit. And so so from a behavioral perspective you know does it will it take longer to get leases done. That's a potential effect of trying to underwrite construction costs primarily but not It's got nothing to do with demand. It's got everything to do with the math of getting that done. In terms of the apartment side, man, you're in a period of time here in the markets we're 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. It's incredible. 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, you know, for me, it always comes down to, does that consumer have 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, $75,000 of household income, there is no doubt in our mind that those shopping centers struggle more than the ones that have $150,000 and $160,000 of consumer, you know, of household income. So from our standpoint, you know, this is a portfolio that's very high quality. We certainly have a couple of shopping centers, a few shopping centers at the lower end, and there's a demonstrable difference. So that's how I kind of look at the consumer.
spk17: Anything on the apartment side?
spk10: Yeah, the whole last six minutes of the conversation. No, no, it's very strong to me. Okay. All right. Thank you. Yeah, thanks, Deb.
spk18: This concludes our question and answer session. I would like to turn the conference back over to Leah Brady for closing remarks.
spk12: We look forward to seeing many of you at NAERI. Please reach out to me with any meeting requests. Thanks for joining us today.
spk18: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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