Federal Realty Investment Trust

NYSE:FRT

Earnings Call Analysis

Record FFO and Leasing Volume; Raised 2024 Guidance

Federal Realty achieved its highest quarterly FFO per share of $1.69, exceeding expectations and setting new leasing volume records. Occupancy rates increased, reaching 95.3% leased and 93.1% occupied. The company acquired Virginia Gateway for $215 million and raised its 2024 FFO guidance to a range of $6.70 to $6.88 per share, anticipating 3.7% to 5% growth. Robust leasing and transactional activities are expected to drive continued performance improvements through the rest of the year.

Record Financial Performance

Federal Realty Investment Trust enjoyed a standout second quarter, achieving an all-time high quarterly funds from operations (FFO) per share at $1.69. This exceeds both internal and analyst expectations, marking impressive growth despite challenging year-over-year comparisons.

Strong Leasing Volumes and Occupancy Rates

The company saw record second-quarter leasing volumes of 594,000 square feet and notable occupancy improvements. Leased occupancy reached 95.3%, while actual occupancy hit 93.1%, both up over 100 basis points from the previous quarter. These levels are the highest seen since the 2017-2019 period, reflecting robust leasing activity and efficient space utilization.

Strategic Acquisitions and Sales

Federal Realty made significant moves with the $215 million acquisition of Virginia Gateway and the $12 million buyout of the minority interest in CocoWalk. Additionally, they sold their remaining assets on Third Street Promenade in Santa Monica for $103 million, reallocating resources into more promising assets. The momentum continued with the $60 million acquisition of Panola Vista Crossing in California.

Operational Improvements and Revenue Growth

The quarter also highlighted a 6.7% increase in residential operating income from stabilized properties, and a 9.5% rise when including new properties in Darien, Connecticut. Record leasing and strategic readjustments have positioned the company for continued operational success.

Financial Stability and Liquidity

Federal Realty's balance sheet remains strong with no significant debt maturities until 2026 and about $1.3 billion in available liquidity. The company’s net debt to EBITDA ratio improved to 5.8x, and fixed charge coverage increased to 3.6x, indicating healthy financial leverage and increased flexibility for future investments.

Upgraded Guidance

Due to the stronger-than-expected portfolio performance, Federal Realty raised its 2024 FFO guidance from $6.77 per share to $6.79 per share at the midpoint, with a refined range of $6.70 to $6.88. This upward revision aligns with the company’s projected occupancy gains and successful transactional activities.

Dividend Increase

Reaffirming its commitment to providing shareholder value, Federal Realty announced an increase in its quarterly common dividend per share to $1.10, or $4.40 on an annualized basis. This marks the 57th consecutive year of dividend increases, solidifying its status as a dividend king within the REIT sector.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and welcome to the Federal Realty Investment Trust Second Quarter 2024 Earnings Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Brenda Pomar, Senior Director of Corporate Communications. Please go ahead.

[Unknown Executive]

Good evening. Thank you for joining us today for Federal Realty's Second Quarter 2024 Earnings Conference Call. Joining me on the call are: Don Wood, Federal's Chief Executive Officer; Jeff Berkes, President and Chief Operating Officer; Dan G., Executive Vice President, Chief Financial Officer and Treasurer; Jan Sweetnam, Executive Vice President and Chief Investment Officer; and Wendy Seher, 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 that 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 conditions and results of operations. [Operator Instructions]

And with that, I will turn the call over to Don Wood to begin our discussion of our second quarter results. Don?

[Donald Wood, executive]

Thanks, Brenda, and good afternoon, everyone. So here are the highlights. All-time record quarterly FFO per share at $1.69, exceeding internal expectations, analyst consensus had a very tough comp 1 year ago.

All-time record second quarter comparable leasing volume at 594,000 square feet with a 4,000 square feet as the most comparable leasing volume ever in any quarter. Strong occupancy gains on both a lease and an occupied basis, to 95.3% and 93.1%, respectively, up 100 and 110 basis points, respectively, from the last quarter. Levels not seen since the 2017-2019 time period.

Quarterly residential operating income on our stabilized resi properties, up 6.7% versus last year. 9.5% when including the New Darien, Connecticut product. By the way, the apartments of Darien and Commons are 99% leased with a waiting list to get in.

Strong transactional activity in the quarter with the $215 million acquisition of Virginia Gateway, and the $12 million buyout of the minority interest in CocoWalk. Not to mention the sale of our remaining assets on Third Street Promenade in Santa Monica for $103 million. The momentum continued in July with our $60 million acquisition of Panola Vista Crossing in Panola, California.

Yes, this was a very strong quarter, top to bottom. And based on what we see with our deal pipeline, the leasing environment is expected to continue to at least the balance of the year. Let me give you a little more color on leasing and its impact on occupancy.

122 comparable deals at an average starting rent of $37.72 per foot compared with the final year of the previous lease of $34.49 more rent to start NetScreen. But by the way, those numbers include 98% of our deals, so they are truly representative of the entire company's results.

But what makes that particularly impressive is that the rent on many of the previous leases has likely been growing at 3% or so over the last 5 or 10 years. And there's still room to increase the new rent to start the next 5- to 10-year cycle.

It's actually 23% more on a straight-line basis because of those very important contractual months. Contractual rent bumps on all of our commercial deals done this quarter averaged 2.4% and sit at roughly 2.25% portfolio-wide are likely the best portfolio-wide in the business.

This is new for us. It's why in the last 20 years, this company has grown its bottom line earnings, 18 of them with only the great financial crisis and the global pandemic momentary setbacks. In this second quarter, 2Q year-over-year growth is muted largely due to the Bidvest stores that were all still open in the second quarter of last year. Yet we still expect the full year growth over 2023 to be right at the top of the second.

Compare FFO per share growth over the past 1, 3-year, 5-year, 10-year, 20-year period against any other large retail portfolio that has a long history, and you'll see why we're so committed to our way of doing this.

The impact on occupancy on both the leased and fiscal basis has been steady and impressive over the last 3 years, but never more so than this quarter. Both small shop and anchor occupancy growth stood out.

In the 2024 second quarter, we picked up 100 basis points in overall lease percentage, bringing in to 95.3%. Great results, thanks to recording setting -- record-setting leasing volumes, the acquisition of a well-leased Virginia Gateway the sale of a less well leased Third Street Promenade, and by the planned redevelopment of places like Enduro Shopping Center. Our anchor lease percentage gained 90 basis points alone since last quarter and sits at 96.7% and there's another 100-plus basis points to comment here.

Let me talk for a moment or 2 about the transactions this quarter, starting with the sale of Third Street Proman Santa mix. First of all, what a great investment this has been for the trust over the past 25 years, a 13% unlevered IRR over that period and a springboard for this company into relationships with a type of tenant that benefited every mixed-use and lifestyle-oriented project we did.

Over the past few years, we lost confidence in the future income growth there for a host of reasons and sold to a local developer for $103 million. $120 million when including a one-off sale there late last year. Reinvesting those proceeds in the dynamic asset like Virginia Gateway with 4 more future growth possibilities seem like a no-brainer.

We've spoken about Virginia Gateway at various events and meetings over the past couple of months, so don't use this time to repeat them. Suffice it to say, our Virginia management development team is all over it and excited to have the new role of material to create significant value over the next few years through re-leasing and selected placemaking and redevelopment.

And earlier this week, we closed on the acquisition of Canola Bisto Shopping Center in Northern California for $60 million, which will generate initial cash-on-cash return in the low 7s, and we'll grow from there. This dominant 216,000 square foot grocery-anchored regional shopping center sits on 19 acres and was purchased at $277 a foot. Not bad.

The center fits in nicely with our West Coast portfolio complementing Crow Canyon Commons and East Bay Bridge and the East Bay and will be managed from our West Coast headquarters at Santana Row. We're not done on the acquisition from either.

Lease-up at Santana West continues with a newly signed deal with an AI-powered cloud database provider for 24,000 square feet on the first floor of the state-of-the-art building, active negotiations with other prospective tenants for much of the remainder of the building, should enable us to continue to report on new deals.

And the Lower Merion Township outside Philadelphia, long-standing old Lord & Taylor building at our Belkinwood Shopping Center has been fully demolished, and construction is underway on our $95 million residential development of 217 apartments with ground floor retail.

That will be integrated with and complementary to one of Federal's most successful shopping centers. We expect a 7% stabilized yield here. It's nice to see that development economics could still work in the right locations.

It might be interested to know that in addition to Bellekeno, we have over 3,700 residential units with active design or entitlements in process at a dozen of our existing assets. as construction costs continue to stabilize as they've been doing and rents continue to rise with inflation as they've been doing, these projects are getting closer and closer to pencil. Stay tuned.

By the way, for those New Yorkers listening, who may have reason to be on Long Island around Huntington, please stop by our completely redeveloped and reimagined Huntington shopping center where the brand-new Whole Foods opened just last week and joined new cadre of tenants, including REI, Ulta, new dining alternatives and others set a beautifully landscaped comfortable setting really represents the best of Federal Realty thinking and execution.

The $85 million comprehensive redevelopment brought in on time and on budget. The before and after effect is pretty striking. Huntington Shopping Center is now a worthy grocery-anchored open-air complement to Simon's powerful Walt Woodman Mall next door.

As I was finishing up these prepared remarks earlier in the week, I was reading them to the senior team in preparation for this call. Our President, Jeff Berkes sat back reflectively and commented as to how significant the results of our capital allocation decisions have been over the past 90 to 120 days, given the relative size of this company. He's right.

Collectively, they're meaningful, and they move the needle in 102 property portfolio. I mean between Virginia Gateway and Plano, we've made nearly 900,000 square feet of acquisitions, deploying $275 million of capital at a 7-plus percent yield.

We've completed a comprehensive and transformational $85 million redevelopment of Pizza New York, began a new $95 million misuse development in balance and freed up $103 million of underperforming capital with the Third Street Promenade sale. All while executing 124 total leases for over 600,000 square feet of commercial space cementing future growth. I'd say the future looks bright.

That's all I wanted to cover in my prepared remarks this afternoon. So I'll turn it over to Dan to provide more granularity before opening it up to your questions.

[Daniel Guglielmone, executive]

Thank you, Don, and hello, everyone. Our reported FFO per share of $1.69 for the second quarter came in at the top of our quarterly guidance range of $1.63 to $1.69. This result was against a tough second quarter 2023 comp, which was our previous record for quarterly FFO, highlighting the overall strength and operating fundamentals across the portfolio.

Primary drivers for the strong performance simply POI growth and our comparable portfolio, driven by strong property level expense controls, acceleration in our occupancy levels and continued strength in our residential portfolio. Comparable POI growth, excluding the impact of prior period rent term fees was 2.9%, and that's GAAP. It's 3.1% on a cash basis. Both numbers are above our expectations for the period, and you will see a revision upward guidance as a result.

Comparable total property revenues were up 3.1%, with comparable min rents of 2.7% on a GAAP basis and 2.9% on a cash basis. Solid results when you keep in mind that Bed Bath & Beyond was in perception and largely paying rent throughout the second quarter.

Portfolio occupancy increased in the quarter to 95.3% leased and 93.1% occupied. Both metrics over 100 basis points increase since March 31. As a result, rents from signed leases not yet occupied in the existing portfolio stayed elevated at $26 million with an additional $13 million of rent come online from leases signed in the noncomparable pipeline.

Also note that we continue to have a robust leasing pipeline with a significant amount of booties as be negotiated for currently vacant space. With the tenant watch list that is minimal, given our lack of exposure to troubled tenants and our proven ability to get tenants open and rent paying for a tenant coordination team that is second to none, we expect our current spread between leased and occupied to move toward our target of 125 basis points over the quarters ahead.

As we stood last quarter, we are extremely well positioned again, to drive our occupancy metrics over the balance of the year and have increased our targeted year-end occupancy level to roughly 93.5%. The strength in leasing from a rollover and contractual ramp-up perspective with 10% cash rollover and 2.4% blended increases from the combined anchor and small shop leases resulted in a straight-line lease rollover of 23% and net effective lease straight-line rollover after capital of 15%, which highlights our ongoing focus on controlling tenant capital.

Now to the balance sheet and an update on our liquidity position. Given roughly $700 million of successful refinancing activity to start 2024, we have no material maturities until 2026. We stand with about $1.3 billion of available liquidity from our $1.25 billion credit facility and net cash on hand.

This liquidity stands against redevelopment expansion spend remaining of only $65 million for the balance of 2024 and only $205 million remaining to spend on our needle-moving $850 million in-process redevelopment and expansion pipeline. With the completion of the sale of Third Street Promenade in Santa Monica for $103 million, access to the equity markets and the acquisition of Virginia Gateway and buyout of our partners at CocoWalk, along with meaningful growth in EBITDA this quarter, our leverage metrics at June 30 continue to show improvement.

Q2 annualized net debt to EBITDA has decreased to 5.8x. That metric targeted to improve over the course of 2024 and reach the mid-5s in 2025. Fixed charge coverage increased to 3.6x for the quarter. That metric should also improve as incremental EBITDA continues to come online.

And with respect to guidance, with a solid first 2 quarters behind us and tenant demand continuing at a stronger pace than expected, we are raising our 2024 FFO guidance from $6.77 per share at the midpoint to $6.79, with a range refined upwards to $6.70 to $6.88. This represents 3.7% bottom line FFO growth at the midpoint and 5% at the upper end of the range.

Strong growth in the face of a higher interest rate environment that faced us in both 2022 and again here in 2023, and again here in 2024. This upward revision implies over 5% FFO growth at the midpoint in the second half of 2024.

This upward revision is driven by stronger underlying portfolio performance than expected as occupancy metrics outperform expectation, as well the acquisition of Virginia Gateway and Old Vista Crossing, combined with the sale in Santa Monica, which provide -- which only provides modest net accretion this year, but will contribute more fully in 2025.

Our guidance reflects only these 3 transactions. As a reminder, prospective acquisitions and dispositions will be reflected in our guidance when completed. We are also revising our comparable growth outlook -- upward comparable growth, excluding prior period rent and term fees is revised to 3% to 4%, 3.5% at the midpoint.

We are leaving our comparable growth outlook as is at 2.25% to 3.5%, given term fees, year-to-date have lagged. As such, we are adjusting downward our assumption for term fees from $4 million to $7 million to $4 million to $6 million as well as our assumption for G&A expense down to $48 million to $51 million.

While leasing progress continues both at 1 Santana West and 915 Meeting Street, none of this incremental activity is expected to impact our forecast for 2024. We will see the benefit in 2025. More to come on that outlook overall as the year progresses, additional leases get signed and clarity on delivery dates becomes more evident.

We are maintaining our expected credit reserve of 70 to 90 basis points and all other guidance assumptions can be found outlined on Page 27 of our 8-K.

Now before we go to Q&A, let me highlight that yet again, Federal Realty's Board of Directors has declared an increase in its quarterly common dividend per share to $1.10 or $4.40 per share on an annualized basis, which represents the 57th consecutive year we've increased the dividend.

The REIT industry record, we stand as the only REIT with the status as a dividend king, which signifies 50 or more consecutive years of annual dividend increases. 57-year record serves as a testament to our commitment to delivering a stable, growing cash flow stream for our common shareholders.

And with that, operator, we going to open up the line for questions.

[Operator]

[Operator Instructions] And our first question today will come from Juan Sanabria with BMO.

[Juan Sanabria, analyst]

Just hoping, John, you could talk a little bit more about the acquisition environment has the type of assets you're looking for changed? I think before you're focused on kind of larger assets with less competition and just general pricing expectations, great success year-to-date, but have cap rates come in at all or that low 7% still kind of the bogey that we should have in the back of our minds?

[Donald Wood, executive]

Yes. No, Juan. It's a very fair question. We took in the year about a window and being able to jump through the window when the arbitrage kind of makes sense. I can tell you that if we signed up Virginia Gateway today, it would be more expensive than what we bought it at. Crystal clear so that they have come in a little bit.

As you would expect, with assumptions of interest rates overall coming down, I mean, there's nothing more sensitive than that. Yet, still, we've got some things working in the hopper that look like they can make some sense.

Again, whether we close them or not, I don't know. But yes, you should absolutely -- you should assume that there's a direct correlation between the product that's available out there and what the cost of money is. So frankly, the ones that we've built made so far, where we hit that window right on.

I'm feeling great about those 2 in terms of the others that we were looking at now. Still assume around the same places, maybe inside it a little bit but let's see what happens with interest rates in the rest of the year with respect to how much product is available.

[Juan Sanabria, analyst]

Great. And then just you mentioned kind of incremental leasing at Santana. Just curious kind of where that is leased today, if there's been any update from Splunk and Cisco? And how we should think about capitalized interest in '25 with the leasing progress you've made to date for that specific asset?

[Donald Wood, executive]

Jan, do you want to take that?

[Jan Sweetnam, executive]

Yes, sure. So Juan, the leasing at Santana West with this new AI-based tech company. It's going to bring us well above 50%. We have letters of intent. We're working back and forth actually pretty rapidly right now. with about another 70,000 square feet of demand there.

We may not be able to sign all of them. We'll see. But I would think that we'll start to get pretty well leased up by the end of the year, beginning of the first quarter of next year. So seeing pretty good activity, smaller tenants. We're breaking floors. And that's where we're seeing really, really strong demand.

And no update whatsoever on Cisco or Splunker, what their plans are. That lease still ways off, and we'll have to see what comes with that.

[Daniel Guglielmone, executive]

And with regards to capitalized interest with regards to 2025, we have no change in terms of kind of the outlook. I think -- we're getting better clarity. But I think we still need more things to fall in place before we'll provide any guidance on that front.

[Operator]

And our next question will come from Dori Kesten with Wells Fargo.

[Dori Kesten, analyst]

You previously talked about adding about 100 basis points of small shop occupancy this year and I believe 200 on anchor. And I think you're already there on small shop and pretty close on anchor. Can you give us an update on your perspective about where you may end the year that I can see.

[Donald Wood, executive]

Yes. I expected this question, Dori, because yes, we blew through our assumptions that with respect to what we assumed. As I said, I still think there's another 100 basis points or so to go more on anchor. I don't think it's this year. I think it's between -- it's by the end of '25, effectively there.

On small shop, man, there might be a little bit more to go there, too, which I was not expecting to be able to say but the pipeline really looks very strong. So that's all good news. I don't know if I have a number for you.

[Daniel Guglielmone, executive]

No. I mean in my prepared remarks, I highlighted that we revised upward our targeted year-end occupancy level to roughly 93.5%. That's a ballpark estimate. And obviously, dependent upon how quickly we can get folks open in terms of what deals we've got already executed.

[Operator]

And our next question will come from Michael Goldsmith with UBS.

[Michael Goldsmith, analyst]

Same-property NOI slowed sequentially in the quarter, though presumably that reflects the more difficult comparison. Just given the guidance now implies like a return same property NOI growth back to that like mid- to high 3% range. Can you just talk a little bit about the assumptions on like how you get there? Is that right that we're getting back to kind of like that mid- to high 3% range? And just kind of like outline some of the expectations on how you get there through the back half of the year?

[Donald Wood, executive]

Sure. I think it's really going to be driven by occupancy. Got largely got -- it was a little back end of the quarter weighted in terms of the move-ins. So we didn't see, I think, fully the strength in occupancy growth during the quarter. And so we'll see that more fully in the third quarter.

And I think we expect to be kind of in the mid- to upper 3s in the second half of the year. I think it's not a big stretch, just assuming occupancy rates are relevant in the second half of the year.

[Operator]

And our next question will come from Steve Sakwa with Evercore.

[Steve Sakwa, analyst]

Dan, I guess as you sit here, August 1, you've got a lot of things that are kind of known and in the bag, and you don't really have any debt speaking of to mature this year. I guess just help us think through the swing factors of getting to the low end of the FFO range and kind of the high end of the FFO range.

[Daniel Guglielmone, executive]

Yes. Look, I think that we outlined on our guidance page, I think all the different factors that can get us to the upper end and the lower end. I think occupancy is a big driver to get us towards the top of the range. I think other things that are on there, whether the other revenue, whether it be parking or percentage rents are probably kind of more middle of the road in terms of what our expectations have been this year so far.

Our term fees will lag based upon where we are this year because tenants candidly really don't want to get space back. So that's going to end up coming in probably closer to the bottom of our range given where we sit today. And I think we also, look, we have a very conservative approach to revenue recognition in terms of -- and some of it is just timing. Timing of when cash these tenants pay and that can cause some swings between quarters and so forth. So that's part of it.

And it's also, I think, a big driver of getting us to the top of the range again is really how successful we can be in continuing to get tenants opening on time or ahead of time and beating our rent commencement date is going to be critical from that perspective.

And then to a certain degree, how many -- we do have some floating rate exposure to get us further up are we -- do we have one? Do we have 2? Do we have 3 rate cuts? I mean I think that's probably more going to be more impactful next year. But also, that's a little bit of a screen.

[Operator]

And our next question will come from Greg McGinniss with Scotiabank.

[Greg McGinniss, analyst]

Based on retailer guidance at peers tenant sales, growth is under some pressure. And there's plenty of anecdotes out there about challenges facing the lower-end consumer and potentially inching up the socioeconomic ladder as well. Are you seeing any of this leak into tenant conversations or willingness to be taking new space right now? Or do retailers just seeing either immune or they don't care that this is happening?

[Wendy Seher, executive]

Greg, it's Wendy. We are not seeing that diminish in any way the leasing demand that we're seeing over our various different product types. So I think if you look at the tenants that are in our portfolio, that lower end tenant that's sensitive, whether it's Dollar Tree or Party City or some of those tenants that are -- even McDonald's as they just came out with some some varied reports on the consumer and their impact on that lower end consumer.

So we are not seeing that. In fact, we were having discussions with Starbucks the other day, and they've had some mixed results that you saw come out. And I was looking at all of our 40-some locations that we have with them, and we're not seeing any impact on their sales because our demographic in our markets is more of that affluent, upper end demographic.

So there are -- there is some fatigue showing in the $6 latte, but not so much in our markets.

[Operator]

And our next question will come from Alexander Goldfarb with Piper Sandler.

[Alexander Goldfarb, analyst]

I'm not sure it's up in my name today, but it's Alexander still. Don, a question for you on new supply. We keep hearing the same thing, which is that rents would have to be 35%, 50% higher to justify new supply and mass. So I'm just curious, as you guys look at redevelopment and taking down portions of centers rebuilding, are you looking at the same rent math needed to do basic redevelopment? And if not, what explains the significant difference in rents needed to pencil between new supply and redevelopments?

[Donald Wood, executive]

Yes. No, Alex, you're -- and I'm not calling you Alexandra, by the way. You're Alex to me, buddy. You've got a couple of things to think about, including restructuring costs. And let me start with that because that is the first thing that -- it's been a long time since we've seen pressure on prices -- construction prices coming down, and we are starting to see that.

Now whether that's actually the cost of things like lumber, which is under pressure, certainly to come down given the lack of housing starts. Whether it's lack of work so that the developer's profit is they're more willing to take less profit. There are incremental changes there that are very important to this -- to the whole equation.

And then when you come to the rents and what rents are needed, it obviously not only depends on the starting rent, but it definitely depends on where you see your growth. And particularly, when we're talking about a number of the things that we would redevelop, in particular, we do a lot of residential stuff that would be added to our existing properties, like Bala.

And so you're -- we're sitting there saying there you clearly know that there's more housing needed throughout the country globally. And when you sit and you add them to mixed use -- or to shopping centers to create more of a mixed-use environment there, what we've seen is the ability to press up like I've told you on our residential rents.

So the combination of where those rents are going are today will be tomorrow and continue to grow, coupled with construction costs are really important. And as I'm talking to you, Jeff Berkes is putting up his finger, so he's got something else to say, Alex, going to add that. Go ahead, Jeff.

[Jeffrey Berkes, executive]

Hey, Alex, if you're thinking about this from a -- are we concerned about more competitive retail supply coming into our trade areas, I would definitely say now the vast, vast majority of the places where we're located single-store retail service parking is not the highest and best use of the land, which is what Don's getting to.

Our locations lend themselves densification, maybe a little bit of ground for retail in an apartment building or something like that. And we are starting to see those economics become more viable. But in terms of us getting a lot of competitive new supply in the trade areas where we do business, we just don't see that. In fact, we see a lid on supply and maybe downward pressure on supply, which is giving us a lot of pricing power with retailers.

[Operator]

And our next question will come from Jeff Spector with Bank of America.

[Jeffrey Spector, analyst]

Great. Maybe just a follow-up on all the leasing that you've executed. Can you talk a little bit more about categories? And I know you talked -- you had a comment about lattes, but there are a lot of questions on restaurants. I guess can you talk a little bit more about, again, leasing demand by category, what you're trying to fill at this point? And then any other anecdotal comments you can share on what you're seeing throughout the portfolio in some of the categories like restaurants that people are concerned over?

[Wendy Seher, executive]

Yes. I think in terms of categories, it's still pretty wide spread in terms of what we see, again, in our different property types. So that remains strong. I was looking at sales from the first part of last year to the first part of this year because when we're looking at what we're concerned about, our sales growing is one metric to look at. And AI is another metric to look at as to who's visiting our shopping centers. There's multiple points to kind of check the health and the productivity of our tenants.

So I was looking, for example, fast casual restaurants is booming with us. And I think maybe what we're seeing is there's just more options out there. That's a big category that we've been focused on in many of our properties.

Full price apparel is doing quite well. Specialty Foods are doing quite well. So those -- all those and anything health and beauty-related off the chart. So anything in those categories, they're growing like at 8% to 12% per year. And so when those sales are growing, we're still being able to push those rents.

So -- and that doesn't even get into with some of the retailers. Sales is one metric and that e-commerce distribution is another metric that we don't always have full add on that can be quite productive from a retailer perspective.

[Donald Wood, executive]

Jeff, I feel like I always have to caveat whenever a question comes up about categories. I feel like I always have to qualify it by saying we -- you have to look at the operators. And you have to look at best-in-class operators in whatever the category is because as we see -- I mean I was just looking at sales numbers for our restaurants, for example, at Santana Row at Python Row, Assembly Row, extremely productive.

And part of the reason they're extremely productive is because they're some of the best operators in the space. If you've got the best properties, you've got the ability to be a little bit more choosy on who comes into those properties. And that applies whether you're talking about apparel operators, smaller shop apparel operators, restaurant operators, gym operators, all of it.

And when you look at a time where the consumer is -- there is worry about the consumer going forward. I can tell you, mediocre businesses go away. Strong businesses find their way through. And so that understanding of the strength of the operator has to be figured into the mix when you ask about categories. It's more than just categories.

[Operator]

And our next question will come from Mike Mueller with JPMorgan.

[Michael Mueller, analyst]

Going back to development, redevelopment, whenever you decide it's the right time to flex up again the program. Do you think it's going to be more retail focused or mixed-use resi focused at first?

[Donald Wood, executive]

I think it's going to -- so what we've learned on our mixed-use properties is absolutely that the integration of the users, and this actually applies to office too, that we'll be building office anytime soon. But it's that the integration of those units, whether you're talking about residential or whether you're talking about office or whatever you're talking about is clearly much more impactful if it's near all the other amenities.

It's the fully minimized environment. So when you look at our shopping centers, we -- you know that our shopping centers are in ready and good demographic areas where the rents for residential would largely be high enough or getting to be high enough to be able to make those numbers work.

So when I talked in my comments about 3,700 apartment units that are either entitled or being entitled or being designed, that's probably where we'll start as evidenced by ballot in terms of where kind of big development happens.

Now if you go out to Huntington, that's a complete retail redevelopment of a shopping center. And that opportunity came to us, frankly, before COVID, and we've worked through that. When I look now, I believe residential adding to our retail shopping centers is probably where you'll see us starting as evidenced by Bala.

[Operator]

And our next question will come from Craig Mailman with Citi.

[Craig Mailman, analyst]

Just maybe a quick two part here. One, have you guys disclosed yet the cap rate on Santa Monica. And then two, I noticed you guys did issue some equity during the quarter. And I'm just curious, as you continue to acquire assets potentially in the back half of this year into '25, kind of the sources of capital, whether it be equity or would you sell more assets into the potential strength here with the 10-year coming in a bit. Kind of what's the optimal mix as you guys look to redeploy capital the most accretive method?

[Daniel Guglielmone, executive]

What was the first part of the question? You got 2 part questions in there.

[Craig Mailman, analyst]

Probably I did. I did a cheat it. The first one was Santa Monica.

[Daniel Guglielmone, executive]

Yes. The cap rate on Santa Monica is kind of a little bit of a hard one. I mean kind of -- it's kind of mid to upper 6s kind of in place, but it quickly kind of goes down into the pies. -- in next year and the year after that to the low 5s. So the unlevered IRR that we kind of penciled as kind of has a low 6 handle on it. So it's a really attractive source of capital. Not as accretive this year as we would like, but very much accretive over the longer term.

The second piece in terms of -- look, we acquired and put to work in the quarter, $287 million of capital in CocoWalk, Bala at Virginia Gateway, Panola Crossing I think raising capital, which we always do in a balanced approach that we fund the business.

We have a multiple premium and an attractive multiple that even though it's not where we'd like it to be from an NAV perspective, it's still accretive capital. Where we deployed it, that $287 million, and it was in a modest amount at a quarter the capital needed there to fund it. So I think it was very prudent in terms of how we approach it.

With regards to going forward and future acquisitions, we'll be opportunistic. We have a big full pipeline of assets under consideration for sale. That will be a component of it. I don't think it necessarily means we will sell. And then we'll look to, I think, opportunistically half the equity market as we see it so it's accretive. If we can accretively deploy that capital and grow FFO from. So that's kind of how we look at that.

[Operator]

And our next question will come from Floris Van Dijkum with Compass Point.

[Floris Gerbrand van Dijkum, analyst]

Guys, just one thing...

[Donald Wood, executive]

Floris, one question, not a 3-quarter.

[Floris Gerbrand van Dijkum, analyst]

I'm not going to cheat. I'm not I just -- you guys have historically always focused on the software aspects around leases in terms of rent bumps and et cetera. A lot of your peers are counting the fact that they're now driving 3% rent bumps annually, et cetera as well as less renewal options.

Maybe if you could talk about what are the improvements that you're seeing in your lease terms. Are you able to drive what percentage of your leases that you're signing, for example, on your shop tenants or having rent books of 4%? And maybe some more detail behind that? And also maybe talk about some of the other -- the terms, are you -- for anchors, are you able to shorten the lease terms there? Or is there at market upside at certain levels?

[Donald Wood, executive]

Yes. Floris, we announced kind of blended anchor and small shop. That was 2.4%, really, really strong. Nobody else, I think, is even close. And that's driven by significant percentage of our leases at 3% or better on the small shop side, and we get better rent bumps on our anchors, probably kind of in the mid- to upper 1s. I think that was about where we were this last quarter.

So that blended gets us there. We continue to push that. It's an important component, but we also look to push other components. The starting rent is an important part of it as well. And so the more qualitative aspects, I'll hand over to Wendy in terms of what other things are we getting from tenants in this environment where we're getting better negotiating leverage.

The other thing that I'd like to highlight to you is just also we had a good quarter, and we've had a good couple of quarters in terms of TIs and we're starting to -- I mentioned that in my prepared remarks. We're focused on kind of controlling those TI dollars and limiting that. And that's why I highlighted the net effect of straight-line rents in the mid-teens is an impressive number and something I'd like to highlight but...

[Wendy Seher, executive]

I think the only thing that I would add to that is the different components of that contract, whether it be options, whether it be increases, whether it be control rights, exclusivity, there are so many components that really hasn't changed with this high demand that we're going after them any differently than we've always treated them, which is every component is separate and every component needs to make sense on that particular asset.

So I would say we are having some success in getting some more flexibility on options, for example, which we don't like options. We just don't. So we rarely give them if there's a -- if we have to and if there's a capital allocation that's heavy from the tenant, we have to, we'll try to see if we can do that at fair market value with a base and try -- maybe we've done several -- many, actually, where you tie it to a sales volume that they can't exercise it unless they're reaching a certain level of production within the center.

So yes, we are diving deep into all those like we always do and having more success, and it's a balanced approach, right? We're doing a lot of business with these national and regional tenants. So we want to make sure that we have a balanced approach.

[Donald Wood, executive]

The only thing I'm going to add to that, Floris, is I've always added that I felt that our contracts were among the strongest, if not the strongest in the industry. And when I say contracts, you know what I'm talking about, not only lease bumps, which we can quantify. But certainly, the qualitative things like redevelopment rights, like lack of sales takeouts, like lack of co-tenancy. All of that, I think our contracts are stronger today than they were a few years ago, even and a few years ago, I think there was in the sector. Hard to prove it. Better locations give us more leverage, that's where I think we are.

[Operator]

And our next question will come from Haendel St. Juste with Mizuho.

[Ravi Vaidya, analyst]

This is Ravi Vaidya the line for Haendel. I hope you guys are doing well. I had a quick follow-up to the guide here. Why maintain the 70 to 90 bps of bad debt at this point? The portfolio seems as minimal tenant credit issues. What's on your watches right now for the back half of the year?

[Daniel Guglielmone, executive]

Look, I think 70 to 90 is still operative. I mean I think we were at the lower end of that range in the first half of the year, the way we look at it. And I think that it's prudent to kind of keep that same leverage. I'm hoping we'll end up towards the bottom end. And certainly, if we can end up towards the -- obviously, that enhances our ability to outperform and get towards the upper end of our range of guidance.

But I'm fine given where we were. I think the first half of the year, we ended up kind of at the lower end of that range, and I don't think it's -- we don't see a reason at this point to change that out.

[Operator]

And our next question will come from Linda Tsai with Jefferies.

[Linda Yu Tsai, analyst]

Dan, you mentioned earlier you're doing a better job of controlling TI dollars. What does that process look like? And what are those conversations? How do those go?

[Wendy Seher, executive]

I guess I will start with the anchors. Many of these anchors we have long-standing relationships with and they're eager to figure out how to make more deals. So it's not -- we're getting into the details of the space and really digging deep and they're getting creative on how they'll take that space. So -- and we'll condition that space needs to end. So that speaks to the demand and the quality of the real estate.

On the smaller shops, we have probably the most ability to influence that conversation. So yes, we are using that to the maximum. And we also want to understand how much capital they're putting into the space as well. So many discussions and having some good progress.

[Donald Wood, executive]

Just to make that really clear. I think the biggest thing there is the -- what a tenant and what we as a landlord are willing to do to be able to get that tenant in the space and operating, whether that means hanging on to an HVAC unit that you would have wanted to replace ideally. No, let's give that 5 years, not see how that goes, whether it looks at whether it works on a storefront that a tenant particularly wants that we'll put a limit on and so they'll pick up the incremental cost of a particular storefront to get and things like that.

What it is, is a willingness to work together because of the heavy supply demand, where we are in demand supply of this space to accept space differently than they were before.

[Operator]

And our next question will come from Paulina Rojas with Green Street.

[Paulina Rojas Schmidt, analyst]

Even the retail environment is clearly very solid. So what do you think this environment will translate in terms of market rent growth in your markets for the next 12 to 14 months? It seems to me that investors are generally very hesitant to forecast market rent growth above, let's say, 3%, 4%. And I wonder if you agree or disagree with this.

[Donald Wood, executive]

What I would say, first, Paulina, about that is taking back to the tenant. That tenant is pushing through -- is doing 2 things in order to be profitable in their business. One is they're trying to push through the inflationary costs that are obviously 35% higher than they were pre-COVID. So they're trying to push that through.

The more successful they are, the more willing they are to be able to pay more rent. I have an obvious thing there. What's a little less obvious is the work that they're doing on their margins to try to make their businesses more efficient.

So that even to the extent they're unable to push all the cost increases through, they're trying to increase their profitability. That goes into what they're willing to do for space. So if you take a tenant that is having success with the consumer and you take a lack of choices that, that tenant has as to where they're able to move, that's where you can get some pretty good size rent increases.

Importantly in that absolutely is the contractual bump. And I know you hear us say it every single day, but we have to say it every single day because it's an important part of the economics. So I don't know that I have a percentage for you. When I -- when you see us able to move overall tenant increases to 10% from the new stuff versus the last year of what was in there on top of those bumps, let me tell you, that's really strong, and that's why it's 23% with a -- on a straight-line basis.

So I don't see that changing over the next 12 to 14 months. And that's where I think you should expect this.

[Operator]

And our next question will come from Tayo Okusanya with Deutsche Bank.

[Omotayo Okusanya, analyst]

Congrats on the great quarter and the outlook. Don, curious -- and I'm not sure if this is a fair question, but curious what your thoughts are on this news out there of Blackstone potentially buying ROIC? And specifically, just what you think the implications are for the broader shopping center group and maybe FRC in particular, if any?

[Donald Wood, executive]

Of course, no, Tayo, it's a very fair question. And what you're going to hear is an opinion because I have no inside knowledge of it. But when you sit you think about looking forward at the demand for retail space over the next 5 years. I think you should feel pretty good about that. And I think Blackstone feels pretty good about that. And there wouldn't be negotiations that way.

I think that is all about the -- not only the supply-demand characteristics that we've all been talking about here, but also the valuations and the choices in other sectors, which are not as robust as maybe they were over the last couple of years. So when you put all that together, it doesn't surprise me.

You know that there are, whatever we've got 17 companies in the shopping center index or something like that. Many of them are smaller cap companies. I think you should always expect that to -- companies like that to be under pressure of sale. Now whether those deals happen or not, we'll have to see. But I've never thought of Blackstone as being a company that really stretched. So I suspect they see a lot of value there.

[Operator]

And our next question will come from Greg McGinniss with Scotiabank.

[Greg McGinniss, analyst]

Dan, just I apologize if you had addressed this in the opening remarks, just can't remember, but what's the expectation on bad debt embedded in same-store? And has that changed at all?

[Daniel Guglielmone, executive]

Still the same 70 to 90 basis points we had originally, and that's kind of outlined in our guidance and in the prepared remarks. I don't think we're shifting it around. We ended up in the first half of the year in the lower end of that range. And hopefully, we can remain in that lower end of that range.

[Donald Wood, executive]

And that's reflected in the same-store outlook.

[Operator]

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Brenda Pomar for any closing remarks.

[Unknown Executive]

We look forward to seeing many of you in the next few weeks. Thanks for joining us today.

[Operator]

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect your lines at this time.