Greetings. Welcome to the Federal Realty Investment Trust Q1 2022 earnings call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Leah Brady. Thank you. You may begin.
Morning. Thank you for joining us today for Federal Realty's Q1 2022 earnings conference call. Joining me on the call are Don Wood, Dan Guglielmone, Jeff Berkes, Wendy Seher, Dawn Becker, Jan Sweetnam, and Melissa Solis. They'll be available to take your questions at the conclusion of our prepared remarks. A reminder that certain matters discussed on this call may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any annualized or projected information, as well as statements referring to expected or anticipated events or results, including guidance.
Although Federal Realty believes 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 yesterday, our annual report filed on Form 10-K and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and results of operations. Given the number of participants on the call, we kindly ask that you limit yourself to one question and an appropriate follow-up during the Q&A portion of the call. If you have additional questions, please re-queue. With that, I will turn our call over to Don Wood to begin our discussion of our Q1 results. Don?
Thanks, Leah. Good morning, everybody. You know, there's lots going right at Federal Realty these days. Demand for our products has outpaced even our raised expectations, and the 2022 Q1 was no exception. Yep, the reported FFO, the reported $1.50 per share beat both the Street and our internal forecast. Of course, last year's COVID impacted quarter by a stout 28%. It's really the contributions from all parts of this multifaceted business plan that's at the heart of our optimism, starting with the enduring strength of leasing. You know, over the last decade, average Q1 production for comparable properties at Federal Realty meant doing about 80 deals for roughly 375,000 sq ft.
In the 2022 Q1 , we did 119 deals for 444,000 sq ft, 50% more than the average. We've never come close to doing 119 deals in any quarter, never mind the normally weaker Q1 , before last year's record-setting COVID recovery demand. The fact that that demand has remained this season with a deal pipeline that looks to stay strong speaks volumes about our properties and the markets they're in, and naturally of our future earnings growth. It's one of the reasons Dan is raising annual earnings guidance $0.10 at the midpoint in the Q1 , something we rarely, if ever, do.
That leasing demand is growing and has resulted in a 130 basis point increase in small shop lease percentage to 88.7% sequentially over the Q4 , well ahead of expectations. That small shop lease rate is also a remarkable 490 basis points higher than a year ago. Now, we did lose 40 basis points of anchor occupancy since the Q4 . That's just typical Q1 expirations of a few boxes portfolio-wide. The portfolio was there for overall 93.7% leased at the top at the end of the Q1 . Importantly, there's plenty of room to go. We expect continued small shop occupancy gains throughout 2022. All of this commentary thus far relates to our core portfolio, and it doesn't speak to the multiple additional ways that we grow earnings and value.
Selective acquisitions, development, redevelopment all add incrementally to our best-in-class core portfolio. Here's a case in point. We did 10 deals, both new and renewals, in the Q1 at the four properties that we bought last year. Chesterbrook, Camelback Colonnade, Hilton Village, and Grossmont. The rent rolled up in every single one of those deals and overall up by 33%. Even though no redevelopment has started yet at any of those centers, the universal belief during those tenant negotiations was that Federal would improve the productivity of those shopping centers, enabling them to afford higher rents. That reputation and credibility grounded in a long-established track record is critical to all that we do, and in my view, one of our key differentiators.
When we tied up Fairfax County, Virginia's Kingstowne Towne Center for $200 million at a five cap some months back, we similarly expect to improve the productivity of that 410,000 sq ft destination through better merchandising and operations and finding the inevitable opportunities that always seem to accompany big land parcels. This one's 45 acres and densely populated in the affluent first ring suburbs. As I assume you read in our press release a couple of weeks back, we closed on the first half of that parcel in late April and expect to close on the second half in late July. Northern Virginia is an important and a growing market for us. Our stepped-up post-COVID redevelopment effort is another critical component to future growth.
It's no news to anyone on this call that the traditional generic and homogenous shopping center business is cyclical in nature and not a high growth business. You have to stand out to outperform over cycles. You do that by picking the right markets and positioning and merchandising in those markets, but you also have to reinvest in those assets to continually find the edge. Reinvesting is more important post-COVID than ever before. It's why we have nearly two dozen active and meaningful development projects in planning or underway, totaling over $100 million this year and next, which will likely yield double-digit unlevered yields over the ensuing years through higher customer traffic and rents, in line with our historically observed results following redevelopments. That reinvestment is one of the primary reasons we can continue to push rents. Now on to our development business.
At the Citi conference in March, we were able to tour live and in person CocoWalk, our fully leased mixed-use development. We had an impressive group of investors attend, and our team was proud to showcase the unique approach that we take to real estate development and value creation. Consider that in its first stabilized year, the project will generate in excess of $11 million of NOI on a $190 million investment with rents that are already under market. Our unlevered IRR is over 8%. CocoWalk is pretty special. Now at Santana West, while I don't have any specific announcement to make on this call as to the leasing of our newly constructed office building, interest in the project and negotiations are more active than they've been at any time during the COVID era.
I'm hopeful that we'll be able to provide a positive update in the coming months. Office demand is back in earnest in Silicon Valley, given the Google and Apple back-to-office announcements in the past month or two, and we have the only new fully amenitized state-of-the-art project in the market. We've updated costs and returns in the accompanying 8-K based on real negotiations and market conditions. In short, higher costs along with higher rents, thus maintaining yield expectations. With residential base rents comprising 11% of our total revenue base, the upward pressure on apartment rents in many U.S. markets is also benefiting our bottom line. A meaningful residential income stream in our fully amenitized properties is such a unique incremental benefit to Federal. At Assembly Row, lease-up of Miscela, our 500-unit apartment building, continues faster than forecast and at higher net effective rents.
We're currently 70% leased at 10% higher rents than forecast. Our office building, affectionately known as the PUMA Building, as you can see the PUMA sign from New Hampshire, is now 88% leased with another 5% at lease. Assembly Row has really outperformed all of our expectations coming out of COVID. Nothing yet to announce with respect to the next phase of expansion here as we've yet to lock down costs, but we are getting close to a go, no-go decision on a life science project here that complement the growing life science demand in adjacent Somerville projects. More to come. Pike & Rose and Darien construction both continue on time and on budget. You know, one thing that always strikes me about our mixed-use development pipeline is the extent to which we incorporate what we've learned over the years into our core portfolio.
While mixed-use development is certainly a different business than operating core shopping centers, much of what makes our big developments special can be seen throughout our portfolio. From a broader array of tenant relationships to state-of-the-art construction techniques relative to placemaking, storefronts, tenant coordination and environmental considerations to unseen but impactful operational efficiencies. Our 25-year experience building mixed-use communities has and continues to benefit our core shopping centers far greater than most people realize. Expect to see more of our showcasing that in the coming quarters and years. When you think Federal Realty, think about the multifaceted ways that we've got to grow. Just as we did between 2010 and 2019, and just as we plan to do from 2021 on with assets and team whose competence is proven and time-tested. Dan. Thank you, Don, and good morning, everyone.
As Don outlined, our $1.50 per share of reported FFO for the Q1 outperformed against every one of our benchmarks, last quarter, year-over-year, versus consensus, and versus our own forecast. That outperformance was broad-based. All aspects of our business model played a role in the results with drivers such as better than expected small shop occupancy, stronger residential performance, particularly in Boston and San Jose, better improvement in collections than forecast, both in the current and prior periods, growing parking revenues and percentage rent underscoring accelerating traffic and tenant sales, particularly at our large mixed-use assets. However, this was offset by higher than forecasted property expenses. Our GAAP-based comparable portfolio growth metric was exceptionally strong at 14.5% for the quarter, more than 3% above forecast. Comparable growth excluding prior period rent and term fees was 18.5%.
To emphasize the strength of these metrics relative to the broader sector, our cash basis same-store metric, as calculated in line with our peers, would have been 18% on an apples-to-apples basis and 18%+ excluding prior period rent and term fees. Term fees this quarter $1.5 million versus $2.8 million in 1Q 2021. Prior period rent this quarter was $5 million versus $8 million in 2021.
Year over year, occupancy results were also strong, with our overall occupied metric growing 170 basis points year over year from 89.5% to 91.2%, and our lease percentage increasing 190 basis points from 91.8% to 93.7%. More upside to come on both of those metrics in the coming years as we realistically target 94%-95% for occupied and 95%-96% for leased. Our signed not occupied spread in the comparable pool held steady at 250 basis points, representing over $24 million of incremental total rent, which should come online over the balance of this year and into 2023. In our non-comparable pool, our signed not occupied upside stands at $19 million of total rent.
New lease deals in our leasing pipeline for currently unoccupied space will drive another $12 million of incremental total rent, primarily in 2023 and 2024. This totals roughly $55 million of cumulative incremental rent, which will very visibly drive bottom line results over the next 2+ years, highlighting the diversity and strength of our multifaceted business plan. As a testament to our asset management and tenant coordination teams, we have not seen any material delays in getting tenants open and paying rent due to supply chain issues or labor issues to date, further enhancing the timeliness of that income coming online. Rollover for the quarter was solid at 7%, in line with our expectations and our trailing four-quarter average as we continue to take a long-term approach to leasing up our portfolio in the wake of COVID.
Look to balance driving occupancy, improving merchandising, enhancing tenant credit quality, increasing starting rents, and importantly, getting strong contractual rent bumps. Contractual rent bumps are an extremely important part of our business plan, one that is not always visible to our investors. We believe that we achieve sector leading average contractual rent bumps, anchor and small shop blended in the 2.25% range given the quality of our portfolio. In this quarter, the blended annual increase for leases signed was an exceptional 2.5%. From a pure math perspective, 2.5% compounded over 10 years results in a rent which is 9% higher in year ten than a lease which it compounds at a hundred basis points slower growth or 1.5% annually. It's not just about rollover. Contractual rent bumps do matter.
Now to the balance sheet and an update on liquidity. We ended the quarter with over $1.3 billion of total available liquidity comprised of an undrawn $1 billion revolver, $160 million of cash, and $175 million remaining on our forward equity contract. Additionally, we have roughly $150 million of non-core dispositions under consideration with pricing expectations at a blended cap rate below 5%. We have no maturities in 2022, with our only near-term maturity being $275 million of unsecured notes which mature mid-2023. We've reduced our encumbered pool to just 7 assets, increasing our unencumbered EBITDA to 93% of total EBITDA, or $600 million. With respect to our leverage metrics, our net debt to EBITDA is inside of 6x as adjusted for our forward equity.
We fully expect to be back to our pre-COVID target of low- to mid-5x by late 2023. Our fixed charge coverage ratio is over 4x already above our targeted level, and 93% of our outstanding debt is fixed rate. Additionally, we are targeting free cash flow after dividends and maintenance capital to return to pre-COVID levels by next year. As CocoWalk and the phase threes at both Assembly Row and Pike & Rose are largely complete from a spending perspective and are stabilizing, $700 million comes out of our in-process development pipeline. These three projects will yield roughly $48 million when stabilized versus their 2021 contribution of $12 million. As a result, our in-process pipeline of active development now stands at $800 million, with roughly $425 million remaining to spend.
As we always do, we sit with significant dry powder against our $1.3+ billion of liquidity. Now on to guidance. As Don said, even after such a strong start to the year, it is rare that we would raise guidance with just one quarter in the books. However, the steady momentum we're seeing in the business makes it really difficult not to. As a result, we are pushing our guidance range up 10 cents to $5.85-$6.05 from the prior range of $5.75-$5.95. 1-2 cents of the 10 cent increase is from our recent purchase of Kingstowne and its contribution to 2022. The balance is from the Q1 outperformance and a better than forecast outlook for the rest of the year in both the comparable and non-comparable pools.
We are also bumping up our guidance for comparable POI growth to 3.5%-5% from the prior range of 3%-5%. Excluding prior period rents and term fees, our forecast increases to 6.5%-8% from a prior range of 6%-8%. We still expect our occupied rate to climb from 91.2% today up into the 92.5%-93% range by year-end. As the SNO spread in our operating portfolio of 250 basis points begins to come online. In terms of FFO growth in 2023 and 2024, we are still comfortable with the 5%-10% growth guideposts we've given previously. The strength of our business model provides us with a diversity of avenues to grow sustainable sector-leading FFO growth.
Beyond driving portfolio occupancy levels back to our mid-90s targets, Federal has additional gears to propel growth. A proven track record and cost of capital to opportunistically acquire assets accretively over the near, middle, and long term. A completed redevelopment and expansion pipeline totaling $700 million. An in-process redevelopment and expansion pipeline totaling $800 million. Together, these redevelopments and expansions will drive an incremental $80-$85 million of POI over the coming years through 2025. As we have highlighted previously, this is not pioneering development in a proven location. This is redevelopment and de-risked expansions at established and highly successful properties that we already own and know extremely well. On a risk-adjusted basis, there is no better, more compelling business plan in the sector today. With that, operator, please open the line for questions.
Thank you. At this time, we will be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, we ask that you please limit to one question and one follow-up. Our first question comes from the line of Craig Schmidt with Bank of America. Please proceed with your question.
Great. On Kingstowne Towne Center, I'm just curious why is it being purchased in two phases? Then when we think about you being able to increase value here, obviously, it's remerchandising it upfront, but the incremental capital investment is that to take advantage of the 45 acres?
Hey, Craig, it's Jeff. Yeah, that was a seller requirement that we close in two phases. Something that the seller asked for to be accommodated. You know, just a little bit more color on that acquisition. We're really, really happy with it for a number of reasons. You know, we've talked about this a lot in the past. We've for a long time had a hit list, and we're very proactive about working our hit list. You know, in this case, that really paid off. Barry Carty team here has done a really good job at developing a relationship with the seller. We've been talking to the seller for a long time before the property came to market. Through that relationship and our credibility, we developed with the seller.
We were able to step in and buy that even after it went to market at what we think are pretty good terms, you know, going in at a 5 cap and kind of a mid-sixes unlevered IRR. You know, that IRR does contemplate a lot of upgrading in the way of merchandising and some investments in the assets itself, so we can push rents. Real happy with that. You know, it goes into our Virginia portfolio. We opened an office in Northern Virginia a few years ago that has just been incredibly successful running our assets and adding value. Chesterbrook, Twinbrook, Fairfax Junction, Kingstowne all added to that portfolio in the last few years, so real happy about it.
Finally, I know you know this, but just as a reminder, buying Kingstowne helped us cover a pretty big gain that we created when we sold, under threat of condemnation, half of San Antonio Center out in Mountain View, California, for more than double what we paid for it five or six years ago. All around, just a really good deal, and we couldn't be more excited about it.
Great. Just as a follow-up, I noticed you mentioned in the call that Northern Virginia is kind of growing in importance to Federal. Could you talk about Pan Am? I'm understanding you're possibly planning to redevelop a mixed-use there, and then maybe some information also on the new parklet that's coming to Mount Vernon Plaza.
Yeah, Craig, you hit on something that's real important. You know, as you know, we've owned Pan Am, and we've owned an awful lot of assets in Northern Virginia for a long time. It really wasn't until we put the office over there, we're able to make inroads in the acquisition market that whether you're Fairfax County or Arlington County, that the leaders of those governments helped recognize Federal as a big player there. Accordingly, we've been able to make some strides. We're certainly not all the way there yet, but strides with the entitlement process in Fairfax County with at Pan Am.
We'll get through you know the rest of it, but we've made already more inroads than we would have, I believe, if we were still operating the portfolio somewhat remotely. It just proves again how important local knowledge is and local presence is to the portfolio. Don't have a lot to say yet about Pan Am, but I can tell you know where it is, right at the Nutley Street exit off Route 66. In the middle of Fairfax County on a big piece of land. There really is a common thread there with us because stuff happens on the big pieces of land much more easily.
You know, that will go on to our redevelopment pipeline list, I'm hopeful. I don't want to give you a timeframe, but in the not too distant future, I'm hopeful. Good stuff there. In terms of Mount Vernon, you got it, Wendy Seher?
Yeah. The parklet, Craig, that you had mentioned. As Don mentioned in his opening remarks, we have more than two dozen investments happening in our existing portfolios to strategically make them better and get them stronger coming out of COVID. This parklet is a good example of not a full redevelopment, but how we continue to invest in our properties to make them better for the communities that they serve. This parklet we've been working on for a while. It's gonna open shortly. We just got the building permit, and it's going to, you know, make kind of a center of gravity for Mount Vernon. As you know, it's a very large center, and it'll provide some opportunity not only for the community but the four to five tenants that circle the parklet.
Again, really just kind of doubling down on that outdoor amenity program and outdoor seating that we see was so valuable during COVID.
Thank you. Our next question comes from the line of Greg McGinniss with Scotiabank. Please proceed with your question.
Hey, good morning. Dan, I can understand your general hesitance to increase guidance of Q1 results, but even so, it feels maybe a bit underwhelming considering the outperformance versus our estimates and maybe even your own internal numbers, especially looking, you know, at percent rent reimbursement and other revenue contributions. You know, I guess I'm just trying to understand what can even push you to the lower end of the guidance range, even assuming that there's no more prior period rent contributions.
Hey, look, I think that there are massive macro storm clouds out, and I think it's just, you know, us being, you know, I think a little cautious in nature. I think it's, you know, the bump in guidance is, I think, reflective of strong Q1 . It's, you know, we'll see. I think we wanna be mindful of, you know, increased inflation, you know, and all the other things that, you know, we worry about every day when we go to sleep. I mean, that's. I don't know if Don, you have anything more to add? No, Greg. You know, Greg, gosh, I.
It's hard for us to argue with the premise of your question when over the last six quarters, each time we have outperformed and increased guidance, and it wasn't enough. I certainly understand your question. There is absolutely an inherent conservatism in the way we run this business. 2022 is looking real good. To your point, we're trying to reflect that in the guidance, but, you know, if it comes out better, it comes out better.
Okay. Don, I forget if you covered this, but have you talked about what kind of prior period rents are included in the guidance number?
Yeah. No, we had. We're actually increasing that number. We had in our original guidance that I mentioned on our last call in February, roughly about $5 million-$8 million. Obviously, we did very well in the fQ1 , increasing that range up from $5 million-$8 million to $9 million-$11 million. You know, the pool of potential rent to grab from is shrinking. We're doing a lot better at grabbing it as evident by a strong Q1 , and hence the increase there over the balance of the year.
Thank you. Our next question comes from the line of Michael Bilerman with Citi. Please proceed with your question.
Yeah. Thanks for that. Don, in your opening remarks, you talked a little bit about Santana West and how you know, sort of the costs had gone up, but the rents went up as well, which we're able to maintain our yield. I was wondering if you can just sort of step back on the entirety of the redevelopment and development pipeline. You know, your commentary on the core portfolio and the leasing environment is so optimistic and strong, and clearly the numbers are coming in the leasing environment. Why isn't that translating more into the redevelopment and development pipeline? I would have thought at this point, especially, you know, during COVID, where you marked down a lot of those yields, that those would actually start seeing the other side.
Is it all just on construction costs that you're just finding that you're just not able to?
No
... to get those yields up?
You know, Mike, just let me make sure I have the premise or we agree on the premise of the question. We have not adjusted in any significant way the guidance that we've given kind of pre-COVID because we wanna make sure that we've got, you know, good numbers and the ability to be accurate when we change it, not do it in a death of a thousand cuts. In terms of the Santana West piece, I mean, what that—what this reflects is a real negotiation that gives us a much better window on what, you know, what rents really are today and what costs really are for the remaining piece in Santana West that's. It's basically just the TIs, which is a big number, but it's that and some other stuff.
We didn't wanna change part of it without doing the whole thing. That similarly applies throughout the development portfolio. As you know, much of our development stuff is baked and done under GMPs. You know, to the extent we're comfortable with that, and we are, that's what you see disclosed. You might have seen I also made a comment that we're not ready yet to talk about or announcing a life science building up at Assembly, specifically to your question. Specifically because I wanna make sure we are locked down on costs before we're able to do that. We're getting close, but we're not there yet.
What we do seem to see in all of our markets where we are developing is that the higher costs, which are clearly out there on new money relative to you know a year ago or two years ago, are being offset by higher rent expectations that seem to be able to be met. There's nothing on the development side yet that we've seen that has stopped as a result of higher costs, but no ability to push those rents to create a decent return on those costs. I don't know. There's a lot in there, and we'd have to go project by project, but that's the you know general landscape.
Yeah. I guess I was surprised that, you know, with all of this commentary and the commentary that you normally don't increase guidance at the beginning of the year, and how strong the leasing environment is, and record leasing, that somehow is not translating into better yields on the development and redevelopment. In fact, in Santana West, you know, if it wasn't for lifting the rents, you know, that yield would have gone down. You know, it's not inconsequential. You're talking about $130 a foot, you know, $50 million increase. That's not small, you know.
No, that's a fair point, Mike. Maybe like I'll give you a great example, right? With what's happening up in Assembly on the residential. We're gonna be at the upper end of that range, and we may even increase that guidance going forward based on the actual residential leasing that is happening on there relative to the costs. You know, is there an inherent conservatism in the way we try to do things? Absolutely. It kinda ties to the earlier call. It's a pretty. You know, there are headwinds out there in terms of the marketplace. So we try to take the most balanced approach we can.
I think you guys look at our history and can determine whether you believe, you know, we'll get there or we won't get there and act accordingly. No, there is an inherent conservatism in the way we report.
Thank you. Our next question comes from the line of Mike Mueller with JPMorgan. Please proceed with your question.
Yeah, hi. I guess given the commentary on strong demand and leasing volumes, is it your expectation that once we move into 2023 and 2024, we're gonna see rent spreads take a notable step up?
Oh, gosh, how do I answer that? You know, Mike, I would say it is so hard to answer a question about 2023 and 2024, as we sit here on May 5, 2022, right? I mean, the reason we originally gave guideposts going out was because, you'll remember, we had better visibility post-COVID than we did in the middle of COVID. That's why we started giving those guideposts out. Now as I sit here and you look at the macro issues affecting the economy, trying to figure out exactly what's gonna happen with lease negotiations in 2023 and 2024, I'm looking at Wendy here, and you know, I'm getting a little bit of a shrug. There.
That's not an indictment of the portfolio or an indictment of the way we do business. It's simply, you know, the market out there is uncertain. What we know is what we are seeing really good progress with is where we spend capital to be able to create a better placemaking asset, we get paid. I don't expect that on a relative basis to change one bit. But it is on a relative basis, based on what's going on in the more global economy, and there, you know, that's affecting real estate. As I sit here today, I am really bullish on all the facets of the way we're growing, including the basic leasing of shopping centers, especially those that have been redeveloped and invested in.
more of a crystal ball than that for 2023 and 2024, I don't think I can give you today.
Got it. Just a quick follow-up here. On the comments about rent bumps and escalators, was that a comment just on the retail portfolio, or does that cover the office portfolio as well?
It's the commercial portfolio, including office. Yes.
Thank you. Our next question comes from the line of Derek Johnston with Deutsche Bank. Please proceed with your question.
Hi, everybody. Thank you. Regarding acquisitions, with local retail cap rates, the spread to the ten-year treasury really historically tight right now, you know, what kind of cap rates are you seeing for quality assets? Or I guess more importantly, expecting to see in private market transactions in the next quarter or two. Are there currently fewer bidders for assets, or are cash buyers now really in the driver's seat given rising rates?
Yeah.
Derek, it's Jeff. Let me take a shot at that. I mean, you know, we've been pretty active for the last 12-18 months, you know, coming out of the pandemic and bidding on stuff and being successful in several cases and buying properties. You know, in this most recent round of deals, we've still seen a very active bidder pool and a very well-capitalized bidder pool. There's at least, you know, in this last round of deals, been a lot of capital in the market.
You know, a lot of people think big picture, that's because the yields in retail are better than they are in multifamily and better than they are in industrial, which is why you've seen a lot of low- to mid-4 cap rate purchases by institutions the last couple of quarters. There's some deals in the market priced like that that are gonna close in the next couple of quarters as well. You know that not every buyer is a leverage buyer. A lot of institutional capital out there that needs to be placed.
Going forward, I think it's not just interest rates that are gonna drive cap rates, it's what are returns on other product types and does that wall of capital stay in the market or does it not? To be determined, but a lot of money for high-quality retail right now. Competitive market. As always, there's a big spread between A and B quality property, right? We're looking at stuff that we think we can add value to over time. Really focused on value add opportunities, identification opportunities, and more the IRR than the cap rate. Kind of keep that in mind as you think through maybe where pricing might go to.
Okay, that's helpful. Thank you. Then kind of, you know, where Mike was headed, but not so long term, you know, clearly healthy retail leasing activity this quarter, you know, built on strength of last year, which clearly is positive. You know, investors have focused on the high ABR versus peers in the post-pandemic era as being a possible headwind or perhaps led to year-to-date underperformance. You know, but when you look at it, cash basis rollover this quarter was again positive at 7%. I guess the question is: What may investors be missing when focused on Federal's ABR? You know, how do you view the in-place rents versus market rents at your centers and the opportunity set?
Yeah, this is a perennial question, right, Derek? I mean, no doubt. I want you to focus on something that Dan said in his comments. Check this out. A 7% cash-on-cash rollover. If you did the math and considered our, what I believe are superior contractual bumps, if it's 100 basis points, if we're growing at 2.5, somebody else is growing at 1.5, typical shopping center business, right? 7% bumps equals 16% rollovers, 9 more. That's an amazing thing that we have not, frankly, done a good job educating people about. You know, look, part of that is we don't know what everybody's bumps are, but you can consider the following things. This portfolio is two-thirds anchors and a third small shop, right?
The opportunity for bumps is easier in the small shop, obviously, than convincing TJX or Ross, you know, to have annual bumps, obvious stuff. In our small shop, the notion of being able to have those bumps, I would bet more regularly than others, but I don't know that for sure. I do know that WARs are very strong. You have to consider that when looking at rollovers also. You know, small shop, not only it may be a third of the GLA, but it's half of our rent in total. Think about that, number one. Number two, I made this.
You know what, it's such an interesting point, I think, when you looked at the acquisitions we made, and even before we do any redevelopment or do investing, we were able, on 10 deals, not the smallest thing, 10 deals this quarter, get 33% more rent than when somebody else owned it on the reputation that we're gonna make you more productive. At the end of the day, Derek, it's the productivity of the retailer, not the ABR. Put those two things together, and that's why we're confident with respect how we run our business.
Thank you. Our next question comes from the line of Steve Sakwa with Evercore ISI. Please proceed with your question.
Thanks. Good morning. Don, I was hoping you could just spend a little time on the potential life science deal up in Boston. Just how are you thinking about pre-leasing and credit underwriting and tenant underwriting for that project?
Yeah, it's very fair. Steve, there are a couple of things to think about there. The business is not a pre-leasable business in large measures. There's no question that as we underwrite the risk, as we underwrite the, you know, the dollars, the cost of capital, we will expect a higher return
To compensate for the likely inability to prelease the building. You never know. What we're thinking about with respect to that opportunity is what is pretty demonstrably a pocket of much more than one building. Could be more than one building for Federal in time. We would expect it to be. Already, as you know, BioMed Realty has begun construction, and RayStar right there has begun construction. The notion that Assembly is likely to be a cluster of life science has grown dramatically over the past year or two. That's a really important component in terms of who's gonna wind up there.
Actually, one of the interesting things would be when you look at the number of companies that have been developed on the life science side over the past few years, it's pretty dramatic. Demand is just off the charts relative to the supply, even though there's supply coming on in other parts of the Boston market. Together, the short answer to your question, Steve, is the return has to be able to compensate for the spec nature of it, as well as the undeterminable, at this point, of credit quality of the tenants that are coming.
As a follow-up, would you contemplate sort of joint venturing with a more established life science player, or ground lease it, or you're pretty much committed to going it alone and keeping it for yourself?
We've considered all of those opportunities, and we've decided to do it ourselves. We've decided to do it ourselves in large measure based on the team that we were able to compile in terms of not only the general contractor, but the designer, but the operator and all of the individual components of it, as well as our team up there. You know, we've created a lot of value at Assembly and over 15 years in that project. We want that value fully recognized in our incremental investment.
Thank you. Our next question comes from the line of Connor Mitchell with Piper Sandler. Please proceed with your question.
Hi, thanks for taking my question. With an appreciation of the strong balance sheet, how can rising rates impact, if at all, the developments going forward?
Well, I'm not sure I understand the question. Could you repeat it?
Yeah. I think a better way to ask the question might be whether you see rising rates within the development and then also or material cost and inflation as a bigger issue for impacting developments.
We expect, and I think before we go forward, we lock in prices to the extent we can with a GMP before we start. I think what we've seen is 'cause of the strength of the markets that we're in, we've benefited from increasing rents, which have kind of offset costs as it relates to rising TIs, tenant improvement dollars, and that's why we've been able to maintain the yields and deliver the yields that we set out to achieve. We won't start something unless we've got those costs locked down, you know, to a large extent. There's an important follow-up in that. It is.
While we kind of globally talk about our development pipeline, every project has to stand on its own. Certainly a higher cost of capital to your question, right? A long-term cost of capital is the way we look at it. A higher cost of capital has to be supported by costs that work in there and rents that we're confident we can achieve. You know, when you think about the primary markets where we're doing that, Boston, Massachusetts, San Jose, California, Montgomery County, Maryland. You're talking about markets that heretofore, and I don't expect it to change based on job projections and economic projections in those markets, we're able to push the rents to be able to compensate. Does that continue forever?
Your guess is as good as mine, because we make those decisions on a one-off basis. Right now, everything we see in those markets suggests that rent will compensate for the higher costs.
All right. That's helpful. Thank you.
Our next question comes from the line of Juan Sanabria with BMO Capital Markets. Please proceed with your question.
Hi. Thank you. Just wanted to touch on the funding side of the equation for acquisitions and how you guys are contemplating that given your cost of capital, and if you can give us a sense of where debt costs are today, relative to still the strong pricing for acquisitions and how you think about kind of your mixed cost of funding or weighted average cost of capital.
Yeah. Look, I think in the last 90 days, certainly in the last 90 days, you know, cost of debt capital has kind of gone up. So obviously that pushes up our weighted average cost of capital. You know, I think with regards to. Hold on.
Juan, can you repeat the question? We're struggling with the last part of it there.
Yeah.
Sure. Just curious on how you plan to fund what seems like a still very active acquisition pipeline, given where leverage is today, and just get a sense of how you're thinking about where you could raise debt at today. We think about match funding.
Yeah. Well, look, I don't think debt is a big component of what we're looking to, you know, fund growth going forward. We've got $175 million of forward equity still ready to be taken down. We've got in process and under consideration, $150 million of dispositions that were sub-5 cap. On deck after that, another $100-$150 million of dispositions we are thinking about to take advantage of a strong environment. I think that, yeah, that balance with a higher cost of debt capital currently is something we will take into consideration. Jeff, you want to add?
Yeah. One other thing to keep in mind here too, whether it's, you know, an acquisition, a redevelopment or a development, you know, we've never been a spot capital pricer of our investment opportunities. We've always looked at our long-term weighted average cost of capital. When interest rates were really low, you know, we weren't chasing acquisitions, for example, down into a low 4 cap range simply because they were still accretive. With increasing interest rates and increasing debt costs, we don't really expect that to impact our ability to perform in the market for that reason. You know, we always have maintained a very strong discipline on looking at kind of the long-term cost, not the spot cost.
Just as a follow-up question, just curious on the small shop side, if you're thinking about merchandising space in the centers, but also thinking about maybe we see a potential recession, we'll see. Does your strategy change about the types of tenants may be more national with regards to the small shop space?
I would say that the short answer is no. We really take a balanced approach, sort of like what we were talking about before. Our overall business plan is growth in various areas, from our core to developments, to redevelopments, to acquisitions. I like to apply that same philosophy to our leasing, where we're talking about growth, whether it's through merchandising, whether it's through investing in the properties, whether it's through selecting tenants that also want to invest in themselves. We're seeing a huge amount of investment with tenants and us together, and that creates a better result. We like the balance, again, intertwining with the community, that local player, mom and pop, best in class, as well as the regional and national as well. I think we'll continue to take that balanced approach.
We're sticklers too, you know, on working through a tenant's business plan and looking at their credit and also securing the lease in the right way, regardless of what's going on in the economy. We don't relax our standards when things are good, so I wouldn't expect us to do anything any differently, like Wendy just said.
Thank you. Our next question comes from the line of Haendel St. Juste with Mizuho. Please proceed with your question.
Hey, good morning. Got another question on redevelopment here. Don, the enthusiasm in your tone, it's clear demand is strong, rents are rising, and you're adding to the redevelopment pipeline. I guess I'm curious, how close are you to maybe getting back to the pre-COVID game plan of, you know, $300 million-$400 million of annual redev spend, funded by free cash flow as well as incremental debt and opportunistic sales here? What's the right way to think about redev spending as we move into this higher cost and higher interest rate but higher rent backdrop?
Yeah. No, Haendel, I love the question. It is. The answer is driven by opportunity. One of the things that has become pretty clear to us post-COVID, and I think Wendy talks about this all the time to me, so it's kind of stuck in my head. The demand and the conversations with tenants has, in our view, what we've seen is they are more important in terms of who the landlord is than ever before. So to the extent that landlord is investing, not only in the asset alongside that tenant, to be able to create a better, and placemaking is a big part of it, no question. Convenience is a big part of it, no question. To create a better environment, that's a here to stay.
You know what'll stop that, Haendel? If we can't get paid for it. Effectively, everywhere we've seen so far, where we are laying out an aggressive redevelopment plan, improvements to the property, the impact on the leasing has been very clear. When I say the impact on the leasing, I'm talking if you're interviewing leasing agents and understanding from their point of view what the deals look like, what those bumps look like. You know when Dan talked about higher bumps, that's not an accident. That has to happen commensurate with a tenant conversation that where they are confident they're gonna be able to afford that and continue to pay that. A key part of that is what are you doing, landlord, to the shopping center post-COVID? I don't.
You know, the days of kind of just kind of milking the shopping center or milking the cash flow from the shopping center without a significant investment. I'm not sure this industry goes back to that. To the extent you do that, the differentiation between great properties and not so great properties gets wider and wider. As you think about the next few years and, you know, a return to normalcy from a demand and a supply perspective, ask yourself where you're likely to be able to push rents and get paid if your shopping center is materially better than the competition. That's kind of the way we think about it.
Okay. Fair enough. Any desire to perhaps provide some guideposts for how we should think about redev spend here as we move into the next few years? Can you remind us what estimated value of the assets in your, I'm sorry, in your portfolio that can be sold on a maybe tax neutral basis to fund acquisitions development? I think a few years back that number was close to $400 million. Obviously, you've sold some. Just curious on where you think that is today.
I think that the last part of your question that's about the same. I wouldn't see that very differently. Yeah, no, that's kinda all I got to say on it.
Thank you. Our next question comes from the line of Chris Lucas with Capital One. Please proceed with your question.
Hey, good morning, guys. Just one quick one from me. Dan, on the percentage rents number for the quarter, it was roughly almost 2x what it was, you know, in pre-COVID in the Q1 . Just curious as to whether that growth came from more leases running into the, you know, over the break point and generating percentage rent or those that have been in percentage rent continuing to sort of just add to the contribution to percentage rent. Just trying to understand where that increase is coming from.
Yeah. Look, the increase is partially being, you know, driven by just better tenant sales, you know, across the portfolio. It's you know, there's two different parts. You know, we have the leases that were restructured where we're collecting percentage rent, and that shows up in the collectibility adjustment. The percentage rent that's in that line item that outperformed pretty significantly is really just, I think, a combination of, you know, a few more deals that are percentage rent deals, as well as just higher performance from those leases over time. I would expect that Q1 number not to be. Typically, we're around 1-1.25%.
We're at 1.5% today of revenues. You know, I think that it's in that 1%-1.5% over time.
Thank you. Our next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.
Hi. In past presentations, you've shown retail format by the % of 2019 POI contribution. Just wondering if, you know, as this trend line has normalized and demand is higher now, have those contributions changed at all materially?
Yeah, there's really been no material change to those figures.
Got it. You have a few tenants that have chosen your assets, your office assets like NetApp, Splunk, and PUMA, as their headquarters. Was this the strategy you had in mind when you developed these office spaces, or was it just more byproduct of having, you know, new and desirable amenities?
Yeah. Well, I mean, look, we always hope that we have the best credit tenant take the entire building, and we're done in five minutes. That's always the hope and the strategy. The more likely result is what has happened. Now, those are great companies. All of those companies, all of them look to the amenitized base, look to the ability to retain the tech workers as critical to their decisions. That's not a surprise. That's been in the strategy from the beginning. That will continue to be, and I think you'll see that that's where we'll end up with the other stuff that's not leased up yet today.
Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to Leah Brady for closing remarks.
We look forward to seeing many of you at NAREIT. Please reach out with any meeting requests. Thank you for joining us today.
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.