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spk21: 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. If you do ask, you limit yourself to one question per trip to the queue. Please also note, today's event is being recorded. I would now like to turn the conference over to Leah Brady, Vice President, Investor Relations. Please go ahead.
spk16: Good afternoon. Thank you for joining us today for Federal Realty's fourth quarter 2023 earnings conference call. Joining me on the call are Don Wood, Federal Chief Executive Officer, Jeff Burkett, President and Chief Operating Officer, Dan Gee, Executive Vice President, Chief Financial Officer and Treasurer, Jan Sweetnam, Executive Vice President, Chief Investment Officer, and Wendy Sear, Executive Vice President, Eastern Region President, as well as other members of our executive team that are available to take your questions at the conclusion of our prepared remarks. A reminder that certain matters discussed on this call may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any annualized or projected information, as well as statements referring to expected or anticipated events or results, including guidance. Although federal realty believes 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 these expectations can be attained. The earnings release and supplemental reporting package that we issued tonight, 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 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 fourth quarter results. Don?
spk10: Thanks, Leah, and good afternoon, everybody. Well, 2023 is in the books with a strong $1.64 recorded in the fourth quarter. finish off what is an all-time record earnings year at $6.55 of FFO per share. That's happening despite over $600 million of construction and progress not yet contributing, and higher interest expense that costs the trust an additional $0.27 per share when compared with the average rate in 2022. Yep, with comparable money costs between 2022 and 2023, FFO growth per share would have been 8%, right up there with our best pre-COVID years. says a lot in terms of the power of the portfolio that has grown bottom line FFO per share at a compound annual growth rate of 4.5% over the last 20 years, in addition to an average uninterrupted dividend yield of roughly 3% or better. That includes the great financial crisis. It includes the global pandemic. It includes everything. No better portfolio to own for long-term investors, in our opinion. It also feels like we're getting closer to a time where accelerated acquisition activity, coupled with our redevelopment and re-merchandising expertise on new acquisitions, could boost that growth rate over the next few years. As far as today's environment, demand continues to exceed supply for the highest quality assets in the close-in suburbs, and with the impacts of the pandemic in the rearview mirror and lack of new supply coming on, I don't see this positive supply-demand dynamic changing anytime soon. Our average in-place rents, portfolio-wide, are $31.60 per foot. And the comparable retail deals we did in the fourth quarter were at $44.57 a foot and were at $36.75 for the entire year. I've been hearing that our rents are high and can't be pushed further for the better part of the last 20 years. And I guess on a relative basis, they are. Better properties have higher rents. Better properties have higher tenants. Sales and profitability, too. Frankly, it's obvious. Percentage rents are an interesting barometer on this topic. While we push for a strong fixed rent in nearly every lease, tenant sales above a threshold level equates to additional rent. Percentage rent and overage rent totaled $6 million in the fourth quarter and $19.3 million for the year, an all-time record, which broke the $18.8 million record from the year earlier. Fourth quarter retail leasing continued to crank with another 100 comparable retail deals done at 12% rollover on a cash basis, 23% on a straight line basis. These comparable retail deals account for virtually all, 98%, of the total retail deals done in the quarter, making them representative of the entire portfolio, not just a fraction. It was a great leasing year, the third in a row where we exceeded 2 million square feet, roughly 25% more than the five-year averages. between 2015 and 2019. Just to pound the point home, those cash basis rollover increases come on top of leases that have had what I believe to be the highest contractual rent bumps throughout their term in the sector, making that rollover all the more impressive. Contractual rent bumps for the deals done in the fourth quarter were roughly 2.5% blended, anchor and small shop, with new and renewal small shop at approximately 3%. The weighted average contractual rent bumps for the entire retail portfolio, anchor and small shop, not just one quarter's worth, but the whole thing approximates 2.25%, best in the business as far as we can tell. The sustained leasing volume and related economics bode well for the future, especially the contractual rent bumps. We ended the year with overall portfolio lease at 94.2, pretty strong but with room to grow. That breaks down between anchors at 96% lease and shop space at 90.7. When you look at occupancy possibilities going forward by looking at our past, it's reasonable to expect another 100 basis points of small shop occupancy and another 200 basis points of anchor occupancy improvement in the coming 12 to 18 months, depending, of course, on the extent of future bankruptcies that we are not seeing today. They're not at all obvious. The residential and office product at our mixed use properties continues to outperform competing supply in non-mixed-use environments and stood at 96% leased for both our comparable resi and comparable mixed-use office product at year-end while commanding premium rents. Progress leasing up our mixed-use office under development, 915 Meeting Street at Plank and Rose and Santana West has been measurably stronger with 215,000 square feet newly leased or in the final stages of the LOI assigned lease process. That includes the first signed deal at Santana West with Acroshore, the global fintech leader to the insurance sector. With those deals complete, 915 Meeting Street at Pike and Rose will be 80% leased, and Santana West will be nearly half leased up. I go through all this to really try to hammer home the obvious health of a business centered around leasing high-quality retail-centric properties in the close-in suburbs of America's greatest cities. While bottom line results are and will continue to be muted by the higher, but certainly historically reasonable, cost of capital that is stabilizing, rents will likely continue to adjust upward over time to that reality. This is especially true for tenants and locations in affluent areas where customers can absorb higher costs. I hope that higher interest rates don't cloud investors' appreciation of the strong underlying business fundamentals that exist today and likely tomorrow. With that backdrop, we're also really excited to add a substantial expansion to the 87-unit first phase of residential product that we built at Ballot Kenwood Shopping Center in suburban Philadelphia a few years back. The first phase opens strong and remains fully leased with growing rents. Strong supply and demand dynamics in this close-in part of Philadelphia's main line, along with construction costs moderating, means that we're able to build an additional 217 residential units, 16,000 feet of additional retail, and the covered parking spaces for service at all on the former Lord & Taylor site at Ballot Kinwood. The shopping center features an expansive tenant roster, including an LA Fitness gym, a full-service grocer, restaurants, and necessary services, which are often cited as the reason residents are choosing it. Projects should get underway later this year, beginning with a demo of the old Lord & Taylor building, It should yield a 7% cash-on-cost return when stabilized, drive a double-digit unlevered IRR based on the rent growth we've seen and expect, and be funded from free cash flow. Okay, on to 2024, where we certainly expect another record earnings year with an energized team and a strong sense of optimism. Dan will go into a bunch more detail, and I'll turn it over to him, and then open it up to your questions. Dan? Thank you, Don. Hello, everyone. Our reported FFO per share of $1.64 in the fourth quarter and $6.55 for the year were up 3.8 and 3.6, respectively, versus 2022. POI was up 6.5% in fourth quarter and a more impressive 7.2% for the year. Primary drivers for the strong performance in 2023. First, POI growth in our comparable portfolios. up almost 5% on a cash basis, excluding prior period rents and termities, driven by both higher rents and higher average occupancy over the course of the year, driven by continued strength in consumer traffic and tenant sales, particularly at our mixed-use assets, driving parking revenues and overage percentage rent higher, effectively controlling property-level expenses and having a lower credit reserve than we originally forecast. Second, contributions from our redevelopment and expansion pipeline, which came in at the upper end of our forecast. And lastly, continued focus on overall expense controls. The GNA came in below expectations. This was all set primarily by higher interest rate headings, totaling 27 cents. To reiterate Don's point earlier, with a consistent cost of debt versus 2022, FFO per share growth year over year would have been 8% in 2023, reflecting an exceptionally strong year of growth at the property level. Gap-based comparable POI growth came in at 4% for the fourth quarter and 3.2% for the year. On a comparable cash basis, excluding the impact of prior period rent and term fees, growth was 5.2% fourth quarter and 4.7% of the year. As a reminder, this information, including components of prior period rent, term fees, and gap to cash adjustments, can be found on page 12 of our quarterly 8K supplement. Our residential portfolio continues to be a source of strength, despite headwinds in the broader residential sector. Same-store residential POI growth 5.8% in 4Q, along with revenue growth for the quarter at 6%. And we expect this strength to continue into 2024. The value proposition of providing a premium residential offering on top of an attractive retail amenity base is driving out performance across our targeted residential portfolio. Also a big driver of our growth in 2023 with continued stabilization of a large portion of our redevelopment and expansion pipeline as $18 million of incremental POI came online from our $750 million in-process pipeline. And we expect that to be the case moving forward as well, as we add new projects to the lineup and maintain that part of our business as a continued driver of growth. The scale and skill set of our redevelopment program is a key differentiator for federal. Notable updates to our in-process pipeline, which will contribute an additional $9 to $12 million of POI in 2024, include $115 million Darien Common projects in Connecticut, where the residential is fully stabilized, 98.4%, occupancy with rents above $4 per foot per month, well above underwriting. tenant retention rates remain above 90%, and the retail component approaches 90% least, a testament to what a strong retail amenity base can bring to a residential project. At the $190 million 915 Meeting Street at Pike and Rose, Choice Hotels has fully moved in as they opened in 4Q, plus they've taken additional space. Sodexo's U.S. headquarters next on deck to open, with multiple other tenants actively negotiating leases. At Huntington Shopping Center on Long Island, this $85 million Whole Foods anchored redevelopment is over 90% leased, with new anchor REI opening during the fourth quarter, in addition to a number of small shops. We feel very good about the yield on this project, approaching the top end of our 7% to 8% return range. For those of you in the New York area, it's worth a trip out to Central Long Island later this year after Whole Foods opens to check it out, as well as the Melville asset a mile further south. Both are exceptional retail redevelopments which truly highlight federal skill set. Additionally, in 2023, we incrementally invested over $120 million in properties we only partially owned previously at an effective 8.1% cap rate. No better risk-adjusted investment than deploying capital credibly into assets we know extremely well.
spk02: Home levered IRRs on these investments are in the double digits. Now to the balance sheet and an update on our liquidity position.
spk10: As you all saw, we refinanced our $600 million bond maturity, which came due on January 15th, for a combination of a $200 million secured loan on our Bethesda Row property at an effective 5% fixed rate for the first two years of the loan, plus two one-year extensions at our option, effectively a four-year loan, and a $485 million, 3.25% exchangeable notes offering due 2029, raised in early January, at an effective 3.9% interest rate all in. Part of that transaction, we call spread to increase the effective strike price on the convert of 40 percent up above 143 dollars per share so no incremental economic solution unless the common stock trades above that level is adjusted pro forma the most recent financings and dividends paid our liquidity stands above 1.3 billion with an undrawn 1.25 billion dollar credit facility and available cash on hand. Plus, we have no maturities remaining in 2024 and no material maturities until 2026. Our leverage metrics continue to be strong as fourth quarter annualized net debt to EBITDA stands at 5.9 times, and that metric should improve over the course of 2024 and hit our target of 5.5 times in 2025. Fixed charge coverage was 3.6 times a year end, and that metric should continue to improve as incremental EBITDA comes online and interest rates fall over the second half of 2024.
spk02: Now on to guidance.
spk10: For 2024, we are introducing an FFO per share forecast, 665 to 687 per share. This represents over 3% growth at the bid point of $6.76, and roughly 5% at the high end of the range. This is driven by comparable growth of 2.5% to 4% when excluding prior period rents and term fees, 3.25% at the midpoint. This assumes occupancy levels will increase from 92.2% at 12-31 up to roughly 93% by year-end 2024. Although expect a step back in the first quarter due to expected seasonality post-holiday. And then add in additional contributions from our redevelopment and expansion pipeline of $9 to $12 million. For those modeling, let me direct you to our 8K on page 16, where we provide our forecast of stabilized POI and timing by project. Now, this will be offset by modestly lower prior period collections, expected to be roughly $3 million in 2024 versus $5 million in 2023. modestly lowered net term fees forecasted in the $4 to $7 million range in 24 versus $7 million in 23, and continued drag from higher money costs. The recent $600 million of notes that we repaid last month had an effective rate of 3.7% versus the new blended costs on our two most recent refinancing of 4.3%.
spk02: Other assumptions include
spk10: $100 to $150 million of spend this year on redevelopment and expansions on our existing properties. G&A is forecast in the $48 to $52 million range for the year, and capitalized interest for 2024 is estimated at $18 to $21 million. We've assumed a total credit reserve consisting of bad debt expense, unexpected vacancy, and tenant rem relief of 70 to 90 basis points for 2024, more in line with pre-pandemic historical averages. And as is our custom, this guidance does not reflect any acquisitions or dispositions in 2024.
spk02: We will adjust likely upwards as we go given our opportunistic approach to both.
spk10: Quarterly FFO cadence for 2024 is forecast to have the first quarter being roughly in line with the fourth quarter of 2023 at a range of $1.60 to $1.65 with sequential growth each quarter thereafter. Please see the detailed summary of this guidance in our 8K on page 28 and in our press release. And with that, operator, please open the line for questions.
spk21: 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, we ask that you please pick up your handset before pressing the key. If at any time your question has been addressed and you'd like to withdraw your question, please press star then two. We ask that you limit yourself to one question. At this time, we will pause momentarily to assemble our roster. And today's first question comes from Juan Sanbrino with BMO Capital Markets. Please go ahead.
spk17: I was just hoping you guys could talk a little bit more about the office leasing, it sounded like it was the FinTech lease at Santana. Was there anything else in curious as to the momentum or prospects for assigning other tenants there and how you think that evolves in 24?
spk10: Yeah, no, Juan. I tried to, without mentioning a name or getting myself in trouble, I tried to indicate that there is a large tenant uh there that we are very close to lease signing on the loi is done we're in the last stages of lease signing i'm not going to name the tenant today uh which you certainly will know them and we would expect that lease uh something dramatic goes wrong done very very shortly from here on that uh along with that for sure um and a couple of other smaller things is what gets us to that half done on uh on that uh on that building in santana west and similarly Very close to signing on a couple of deals here at Pike and Rose for 915 meeting, which would get that building to 80% lease. So, been a very different last few months in terms of not just tours, but productivity in terms of turning LOIs into leases.
spk21: Thank you. And our next question today comes from Alexander Goldfarb with Piper Sandler. Please go ahead.
spk13: Hey, thank you for taking the question. Don, just, you know, going through your tenancy, you know, overall it's a pretty good list, you know, in the top tenants, but obviously there's some not rated, some not investment grade. But holistically, as you push the portfolio occupancy forward, and really upgrade tenancy, are there types of tenants that you're saying no to? Like, for example, the classic private equity, highly levered tenants, even if they're a great performer, you're saying, look, historically, these type of levered tenants are the ones that cause issues in the next downturn. And therefore, even though they may be promising, let's try to limit exposure. Just trying to think what ways that as the portfolio becomes increasingly in demand, that you may be gaining leverage to sort of push back on the types of tenants, even if they're a great performer, but just going, you know what? Great performer, but not great balance sheet. We're going to pass.
spk10: Yeah, Alex, it's really a good question. I mean, the bottom line is when you're trying to improve your portfolio, what you're effectively doing is taking all of that into consideration for not just next year or the year after that, but the term of the lease. So it includes the capital decisions that have to be made in terms of what's going in. I will tell you that to the extent a tenant, and this just I think makes sense to you, a tenant that we like a lot, but that has a riskier profile, to the extent we're limiting significantly the capital we'll give to them, we'll give them a shot. To the extent we're investing in that piece of real estate, that particular space in there, then there better be credit. There better be comfort. if you will, that we're going to get paid, we're very likely to get paid through the entire term of the lease. So, you know, as I started out, I mean, this is a very good time for supply and demand dynamics. And what that means in the better properties is choice. And to the extent you have that choice, you absolutely consider things like leverage level, like what the owners are planning to do with the asset or with their retailer, et cetera. So it's a good time to be able to continue to upgrade the portfolio.
spk21: Thank you. And our next question comes from Steve Sokwa with Evercore. Please go ahead.
spk19: Thanks. Good afternoon. Don, I guess just maybe following up on Alex's line of questioning, I just wanted to talk a little bit about pricing power. And given where the portfolio is and the potential uptick in occupancy, I guess how are you and Wendy and the team thinking about being able to push rents? And do you expect that to materially change in 2024, or is that a little bit longer-term kind of runway, just given that there's been no supply yet? in the space and demand seems to be very tight at good centers.
spk10: It does. It does, Steve. And look, at the end of the day, it's still a very local business. And you're having this conversation based on what the potential choices are for that particular piece of real estate. Where I love it, where I think the, and I just believe this is the most important thing, it is in the contract itself. And so the leverage generally, whether it comes out in better bumps i mean it you know how i feel about the the bumps that's a contractual increase in cash flow for a long period of time nothing beats that to me that's that's that's the first thing and the second thing is making sure that we have control of the space because the tenant wants control of uh of the rest of that shopping center not just the space but the shopping center and so i do think we're making and i've always kind of focus on this as a big thing for us to make sure that contract is as landlord friendly as it could be. But those are places where we have made pretty strong strides in the last 18 months in particular for, you know, strong leases with big bumps. So that's where I'd look for it. That's where I'd look for it most. And that's an insurance policy to know that the foundation of this company The basic shopping centers throughout this company are really strong with rents that, whether you believe it or not, are under market, as proven by each quarter that we go through. Now, you take that and you supplement that with rents. Things like the redevelopments that we're doing in places like Huntington with a new residential project that we're doing at Ballot Kinwood with potential stronger acquisition market as we move forward. That's where I get very excited and very positive about the future growth of the company.
spk21: Thank you. And our next question today comes from Jeff Spector with Bank of America. Please go ahead.
spk08: Great. Thank you. Don, can you elaborate on your opening remark comment on accretive acquisitions and opportunities? Seems like you're a bit more optimistic or maybe excited at some of the opportunities you're seeing. Is that correct? And if yes, you know, is it certain regions, again, type of centers? I know we talk about this all the time, but I think it seemed like you specifically highlighted that in the opening remarks.
spk10: Hey, Jeff, first of all, thanks for listening to the opening remarks. I appreciate that a ton. And yes, you are dead right in terms of the way I see it. But let's, let me turn it over to Jeff Berkus or Jan. Give us, guys, give us your thoughts on that question.
spk15: Yeah, sure, Don. Hey, Jeff. It's Jeff Berkus. I'm here with Jan. He'll jump in in a minute on what he's seeing kind of day-to-day in the market. But yeah, you're right. We are looking forward to a good year in 24 for acquisitions. We didn't really see anything in 23 that excited us that much, other than the opportunities we had to invest within our own portfolio at very accretive rates. But we think the market's starting to heal. And we expect 24 to be a better year, certainly a good year for us for acquisitions. And I know you know as well, and you probably know what I'm going to say, but keep in mind that we've got a very compelling cost of capital. We are not constrained by any one sub-product type within retail. We're format agnostic. We're more focused on location and opportunity with a piece of dirt than exactly the improvements that sit on it today. We have a really well-developed team here that looks at highest and best use and ways to add value through releasing, re-merchandising, and improving the existing improvements, as well as knocking parts of the property down and going vertical and doing things like we're doing at Bala and other shopping centers in our portfolio where we add residential. We've got great relationships in the market. We're known as a closer, both with the sellers and the brokers. So I think we've got a lot of advantages and a really sort of clear eye towards growing the company through accretive acquisitions that are going to deliver long-term growth. to the company. And we hope the markets respond, and I think they will. But let me turn it over to Jan and kind of let him give you his thoughts on what we're seeing in the market today.
spk09: Hi, Jeff, Jan. So a lot of sellers have really been sitting on the sideline waiting for the cost of capital and cost of debt and their situation to kind of settle itself out. And I think 23 was a record year for, you know, sellers asking brokers for their broker opinion of values. I mean, it's just a massive BOV year. And the super majority of those sellers chose not to put their properties on the marketplace. And so now that cost of capital and cost of debt has started to settle in a lot, we're hearing a lot of rumbling about sellers now putting their, you know, properties on the market. And in areas and sometimes in some new markets that are of interest to us, that we think we're going to see. And so far as we're looking through here in early February, it seems like there's going to be a lot more interesting product for us to look at and try to acquire. So to me, I think 24 is going to be a big year for us.
spk15: Yeah, Jeff, you've heard us talk about this in the past. We are very creative in how we structure deals. We have been for a very long time and good at figuring out ways to solve sellers' issues, particularly private sellers and older sellers that have owned the properties for a long time. So a lot of tools in the toolbox here at Federal, and we expect to be putting them to good use this year.
spk21: Thank you. And our next question today comes from Greg McGinnis with SocialBank. Please go ahead.
spk11: Hey, good evening. So it was a great year overall for retail leasing, but Q4 leasing volumes fell about 25% compared to the first three quarters in 2023, and resi occupancy fell 190 basis points quarter over quarter. Could you just provide some details on the trends you're seeing in retail tenant demand as well as what happened on the resi side and expectations built into 2024 guidance for resi occupancy and rent growth?
spk10: I have to ask you to go, Danny, or somebody on the residency for a second. Before you do, though, on the retail, I can see in the fourth quarter, Greg, that's just timing. There's nothing in there from a trend perspective that we feel any different about. I know we had a couple of particular anchors that are released that went out in the fourth quarter and, you know, again, released good spreads going forward. going forward, but just timing in the quarter there. I don't know, Wendy, if there's more to say about that for Greg?
spk04: No, I think if you look at, you know, it's just timing is number one, and number two is our pipeline still remains strong. And when I look at where we are, specifically in small shop leasing, I do feel like there we have a runway there, probably another 100 basis points to grow off of. And also some of the timing is also attributed to several of the deals that we're doing are on spaces that are already occupied.
spk15: So there's some overlap there. Yeah, let me, Dan, go ahead on Resi if you want. But my comment, Greg, would be, you know, we have a couple of markets that are very seasonal, primarily out here in California and New England. So we do try and ramp up occupancy going into the slower winter season. So we can ride through, you know, first quarter of a little bit slower leasing in those seasonal markets and be in a position, you know, where we're not giving up a lot when the leasing season heats up again. So some of that's strategic in the way we build occupancy up in the prior quarter. But, Dan, if you've got more to add, please do so.
spk10: That's exactly right. On the residential portfolio, seasonality is really what's driving that move. I mean, we're up year over year from an occupancy perspective, and we fully expect, you know, occupancy to pull back in the fourth quarter relative to that exact reason. And we have a small portfolio. I think that, you know, it only takes, you know, a handful of units to kind of move things a little bit. So I would not read anything into that at all.
spk21: Thank you. And our next question comes from Craig Merriman with Citi. Please go ahead.
spk18: Thank you. Maybe I just want to go back to the question about acquisitions, and it sounded like maybe there could be some more P unit deals in there, but could you just give us a sense of magnitude at this point? Is it at the level where you would need to cap some of the equity in some of your trophy mixed-use projects, or can you guys fund this with kind of current liquidity?
spk10: Oh, that's a good question, Craig. Funding with the trophy assets at some point is something for the future. It's not something for today, given where the markets stand and the appetite and still the uncertainty on that stuff overseas in particular. With respect to boosting the acquisition portfolio now, that's what that line's for. So there's short-term financing, and then there'll be long-term financing. But there's a reason that powder is dry, and we'd like to use it.
spk21: Thank you. And our next question comes from Kevin Kim with Truist. Please go ahead.
spk14: Thank you. Don, can you just go back to some of the comments you made about the office decent demand you're seeing at the TennoWest and 915 meeting? Just curious if there's been any kind of commonalities for why some of these tenants, I'm guessing it's relocations, moving to these centers. And for 950 meeting, the NOI contribution, is it reasonable to expect that 50% contribution to be back-end weighted or more pro-rata-able?
spk10: Go ahead on that. Yeah, pro-rata, I would say, effectively in terms of contribution over the course of the year. And I got to tell you, man, the common thread through all of this is either It's funny. Either relocations from downtowns to these mixed-use properties, both of them basically in the first-ranked suburb, or out further and coming in looking for the full amenities that these properties provide. And that's been so darn consistent over the past three years. three and a half, four years with respect to what's happening there, I don't see that stopping. It's the demands of these tenants who are generally taking less space than they had, you know, wherever they were, West Coast, some kind of campus, the East Coast, East Coast, same type of thing potentially. But they are taking less space, but they demand more in terms of the amenity base. And that is so consistent. in basically the three places, the three big projects, whether, same in Boston, with respect to assembly.
spk02: So that's the common thread. Thank you.
spk21: And our next question today comes from Mike Moeller with J.P. Morgan. Please go ahead.
spk20: Yeah, hi. I just have two quick development questions. I guess first for Ballot Kinwood. Is there any meaningful NOI that's coming out of the run rate, you know, your 4Q NOI run rate? And then do you have a ballpark estimate of timing for the Santana office rent commencements?
spk10: Let me let you – can you do that? Yeah, on Bala, you know, I don't think there's any material. It's an empty Lord & Taylor, which is not the payment. So no impact. And then the timing, we'll let you know on the timing. Okay. You know, we'll start on Accra Shore, recognizing some revenue this year, 2024. And we'll let you know when we sign the leases, the timing of the leases that we have in the pipeline, kind of when those will look to come online.
spk21: Thank you. And our next question comes from Flores Van Jacob with Compass Point. Please go ahead.
spk07: Hey, good evening, guys. Thanks for taking my question. Following up a little bit on the office activity, obviously, congrats on, you know, obviously you haven't gotten it over the line yet, but certainly got the first leases going there, both Santana West as well as in Pike and Rose. Are those leases in your guidance? And maybe you can talk about what is happening to the negotiations in terms of the rents there. And, and Jeff, maybe I'd love to, cause you're on the, on the grounds at, at Santana West. Are you getting pushback from office tenants on, on rents or other things, or, or, or is it just, you know, talk a little bit about the competitive situation of, you know, and, and the balance between landlord and tenant, because clearly it's different in office than it is in, in, in retail. Go ahead, Jeff.
spk15: Yeah, I'm actually going to pass it to Jan. Floris, Jan handles all of our large office leasing, so let me turn it over to him. Hey, Floris.
spk09: I think just in terms of the rents, I would say two things, one of which is You know, both at Pike and Rose and at Santana West here and also at Assembly, really the tenants are looking for something, as Don said. They're looking for the amenities. They're looking for a better building. They're looking to upgrade their location. And so they have tended to be less price sensitive on rent, so rents feel like they're holding pretty well. But the tenant improvement packages have, in fact, gone up. So that's really the change that we've seen, and that's where the competitive piece comes in. But the rents have been really rock solid.
spk15: And just for us to remind you, and I think we've talked about this before, and Don alluded to it in his earlier comments, you know, most of the tenants that are moving into our state-of-the-art buildings in those three locations are coming from inferior buildings where they take more space and they're downsizing. So while they may be paying a higher rent per foot in our buildings than they were paying in Because they're taking less score footage, their overall occupancy costs are less, which again goes to them not being as sensitive about rent. I think that's important to understand.
spk21: Thank you. And our next question today comes from Doreen Keston with Wells Fargo. Please go ahead.
spk03: Thanks. Good evening. Can you walk through your thought process behind the mortgage on Bethesda Row and just addressing the size, maybe loan-to-value, why Bethesda specifically?
spk10: Look, I think the debt markets have been extremely volatile and interest rates have lacked direction, to say the least. I think back in October when we committed to doing that transaction, the 10-year was at 5%. The Our stock was at $85, and we saw this as a unique opportunity for us to lock in a spread on a secured loan on one of our best properties and get to attractive financing. You know, the leverage is lower than we typically would. It's a little bit structured. But, you know, today, mortgage rates on retail product today at normalized leverage levels or probably 200 basis points over the treasury, probably 175 to 200 basis points on a floating rate basis above SOFR. We were able to get 95 basis points through the structuring that we did with our lender. We felt like that was a really, really attractive credit spread. It was certainly more attractive than the 150 to 160 basis points we were looking at back in October. to do a five-year loan. And so it was just a, you know, I think a unique opportunistic financing that really demonstrates federal's historic ability to access different parts of the capital markets at more difficult times in the cycle. And, you know, I think that in, you know, our access to the convertible market is another example of that. Don, did you want to add anything? No, I wanted to ask you, Dan, too. I mean, from a tax perspective, a tax basis perspective, putting $200 million on Bethesda Row frees up some flexibility with respect to... For tax planning. And so, you know, I think having the leverage on there and having debt on Bethesda, where we've created significant value over our ownership, created a ton of value above where... you know, if we do want to bring in a joint venture partner, this brings and gives us that optionality and that flexibility to do it tax efficiently.
spk21: Thank you. And our next question today comes from Linda with Jefferies. Please go ahead.
spk01: Hi, thank you. I think you said earnings growth in 23 was an 8% absent higher money cost. What level of earnings growth does this mean for 24 if you look at it the same way?
spk10: Well, you know, 8%, you know, we had significant headwinds, 27. We have less headwinds heading into 2024, although they're still there. I haven't done the calculation, but it's probably a couple hundred basis points of incremental, you know, if you back out the cost of that. So the, you know, the 3% probably goes up to something north of 5%, less money costs, at least, from my perspective. I haven't done the exact calculation, Linda, but that's roughly where I would see it.
spk21: Thank you. And our next question today comes from Anthony Powell with Barclays. Please go ahead.
spk12: Hi, thank you. I think in the prepared remarks you talked about how construction costs were going lower, which helped with your decision to do the Philadelphia residential. Can you maybe expand more on what's going on with construction costs and do more of your projects in your future redevelopment pipeline look attractive given lower construction costs?
spk10: That's a good question. It's not dramatic in terms of a reduction in construction costs. I mean, when you think about the components of it, particularly the labor component of it, when business slows down, as it obviously has in the past couple of years, you've got better leverage to get labor rates that makes more sense. And when you compare that to really, gosh, the last five or six years in particular before that, it's a dramatic difference in terms of being able to forecast. And that's really the most important thing here is anytime you want to do a redevelopment or development itself, it's about predictability of costs in addition to growth in the rent. So what's happening now is we're finding much better predictability in in construction costs, primarily on the labor side. We're going to tie these things down to GMPs, you know, maximum price contracts. And so, when you're able to do that, then you can focus more on, you know, what the rent growth is, the timing, does it make sense to do. In the case of Bala, it was really a case where supply and demand finally, made some sense without new product being added in that particular section of the main line, which is very attractive. So we really liked that. Now, we couldn't make sense of that a year ago or two years ago or three years ago, but we can make sense of it now. I would hope to see more of those possibilities going forward. And remember, this is land that Federal's owned for a very long time, and that gives you a huge advantage. because the land costs aren't incremental land costs associated with it. So that's why that makes sense. So when you look at construction, I wouldn't look at it as, you know, costs are going to be dramatically lower than they were, but they've certainly stabilized and coming down a few percentage points because of the labor side. It's an important consideration when you're deciding whether to go or not.
spk21: Thank you. And our next question today comes from Paulina Rojas-Schmidt with Grant Street. Please go ahead.
spk05: Hello, everyone. My question is related to the prior one. We reported for the BALA project and our OIC of seven. And I think you mentioned in your prepared remarks that I never got your RR as well. But more broadly speaking, what kind of profit margin do you need to see when thinking about this project to compensate you for the risk, whether it's cost or leasing?
spk02: I'm not quite following your question, Polina. Are you asking kind of what kind of...
spk10: Yield premium we need to get to kind of have those, to have the IRRs get up into the double digits?
spk06: Yeah, when you think about comparing your cap rates.
spk10: Look, I think that developing this to a seven is clearly higher than it would be in today's market. And as interest rates come down, and stabilize. Obviously, the spread is well north of 100 basis points, 150, 200 basis points. And look, we are going to expect to be able to grow rents residentially in line with kind of what we've done. And our residential portfolio is amenitized. It's adjacent to great retail. And we've been able to grow rents very attractively over time. So As we grow rents, obviously the POI is going to be a big driver of those unlevered returns as well. So, you know, those are the inputs that go in there that get us very comfortable with a double-digit IRR unlevered, something that's achievable, you know, developing this to a seven initially and having it grow from there.
spk15: Hey, Dan, if I can just add on. Paulina, it's Jeff. One thing to think about, too, as it relates to federal and the residential that we develop, and we've got about a $900 million pipeline of projects in the design and entitlement phase right now, is almost all of those are at places where we already operate residential property. That's the case at VALA. The case if we do anything at Bethesda Row, Santana Row, Pike and Rose, Assembly Row, other places in Montgomery County, Maryland, where we own real estate. So the risk adjusted return for us is really, really strong. We understand the rental market very well. We operate units where we're adding units. So we understand the operating costs very well. And as Don mentioned in the prior question, When we contract for the construction, we're doing that with full construction drawings, great bid coverage, and a guaranteed maximum price contract. So the risk-adjusted returns for us are exceptionally strong when we add residential to our portfolio.
spk21: Thank you. And our next question today is a follow-up from Alexander Goldfarb from Piper Sandler. Please go ahead.
spk13: Hey, evening. Going back to the Bethesda row, I think you guys had spoken previously about possibly joint venturing that asset, or maybe there was institutional interest. But I guess bigger picture, historically, Federal hasn't been a JV platform, but you talked about it with the potential on Bethesda. So in your view, Don, as you guys talk to joint venture capital, what's their appetite for shopping centers and Do they believe that truly this burgeoning growth that we all talk about will actually come to fruition? Or is there a view that the leases are so locked and in favor of the tenant that, yes, at some point, they can get good economics, but it may be a longer timeline than they actually are willing to underwrite and invest? Just sort of curious what's going on in the private side as you talk to possible partners.
spk10: Well, a couple of things, Alex. Jeff, I'd love you to add to this if you need to. But first of all, don't use me as a proxy for what's happening among the private side in terms of their appetite, because we have not seriously gone down the road with any of them in terms of serious negotiations, because we don't believe this is the right time to effectively do a deal. uh like that uh on on the you know the mixed use uh assets when we look at our stuff and where we see the growth uh in the portfolio i think i've said this uh for the last four or five five quarters our mixed use stuff is outperforming the other stuff and it's growing and it's growing fast so we'd like to get this stuff uh you know to have that trajectory continue i'd like to see over the next year or two or three the capital markets solidify themselves. Obviously, we're just in the very early stages of figuring out what that means in terms of capital markets in the country. And so, you know, I don't have much more to add with respect to any specific, you know, group of private joint venture investors, because we really haven't had in-depth conversations with them at this point. I don't know, Jeff, anything?
spk15: Yeah, Don, I don't really have anything meaningful to add to that. Sorry.
spk02: Oh, all good.
spk21: Thank you. And our next question today comes from Steve Sacqua at Evercore. Please go ahead.
spk19: Yeah, thanks. Just wanted a quick follow-up maybe with Dan G on the guidance. You know, when you kind of look through the building blocks, you know, just maybe help us think through which ones have kind of the most leverage maybe to the upside and the downside and Maybe just a little bit more color on the POI growth, you know, X prior period rents and term fees. You know, it's about 100 basis points slower, around three and a quarter versus the four three. So maybe just kind of walk us through there. Is that really all kind of bad debt driven or is there something else kind of pulling that growth rate down? Thanks.
spk10: Yeah, look, it is guidance, and I think there are a lot of things that go into, in particular, that go into the FFO guidance. I mean, as it relates to specifically the comparable POI growth, which is 2.5% to 4%, you know, occupancy levels and how aggressively and how quickly we can push levels up towards 93%. I think how much percentage rent can we continue to collect parking revenues how we control property-level expenses the way we have, which has been a big help. Term fees, you know, I guess don't apply to that metric, but that's going to drive FFO, although it won't necessarily drive the POI metric, excluding that. How quickly and how we can get development POI up And I think one of the things that's going to be a big driver is if we purposely have $600 million in floating rate debt, how quickly SOFR comes down. I think we've been pretty conservative in terms of our assumptions for where interest rates will go, and so that will have an impact. And then I think what we've done an exceptional job at, which probably drives some of the POI growth, is just getting tenants open sooner, keeping tenants in possession longer, keeping tenants in, that we expected to leave, I think that's another driver.
spk02: I think they all contribute throughout the range.
spk21: Thank you. And this concludes our question and answer session. I'd like to turn the conference back over to Leah Brady for closing remarks.
spk16: I look forward to seeing many of you in the next few weeks. Thanks for joining us today.
spk21: Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
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