Federal Realty Investment Trust

NYSE:FRT

Earnings Call Analysis

Company Records Strong Earnings, Upbeat 2024 Outlook

In a financially robust year, the company posted record earnings of $6.55 FFO per share despite a strong dollar and construction expenses not yet contributing, alongside an interest expense that cost an additional $0.27 per share compared to 2022. Year-over-year, FFO per share increased by 3.6%, and Property Operating Income (POI) rose by a notable 7.2%. The portfolio's overall lease rate reached 94.2%, backed by premium rental rates across mixed-use properties. Optimistic for the future, redevelopment initiatives added $18 million of incremental POI, with forecasted contributions of $9 to $12 million in 2024. Stabilizing costs of capital and a strong leasing environment underpin expectations of a 2.5% to 4% comparable growth and a FFO per share forecast of $6.65 to $6.87 for 2024, translating to over 3% growth at the midpoint.

Robust Financial Performance in 2023

Federal Realty Investment Trust reported a year of financial growth in 2023, with FFO per share reaching $6.55, a 3.6% increase from the previous year. This growth came despite significant construction in progress and an increased interest expense, signaling the strength of its portfolio. The company highlighted the success of its leasing activities with in-place rents averaging $31.60 per square foot, and notable retail deals driving the average fourth-quarter rents to $44.57 per square foot.

Operational Drivers of Success

The company's operations benefited from an almost 5% growth in comparable portfolio on a cash basis and an increase in average occupancy. Consumer traffic and sales, particularly at mixed-use assets, contributed to higher parking revenues and percentage rents, reinforcing the company's strategy of controlling property-level expenses and managing general and administrative (G&A) costs effectively.

Strong Leasing Momentum

The company maintained solid leasing momentum with 100 comparable retail deals closed in the quarter, resulting in a 12% rollover on a cash basis. Emphasizing the importance of quality, they reported sustained leasing volumes, with significant increases compared to the five-year average between 2015 and 2019.

Investment in Redefining Mixed-Use Spaces

Federal Realty continued to leverage its expertise in redevelopment and expansion, with $18 million of incremental property operating income (POI) coming online from its $750 million in-process pipeline, forecasting further contributions to growth as new projects are added and existing ones stabilize. Adding to this confidence, projects like the redevelopment in Connecticut and 915 Meeting Street at Pike & Rose have shown promising occupancy and revenue figures, enhancing the company's return on investment and underlining its ability to create valuable mixed-use spaces that attract residential and commercial tenants alike.

Healthy Financial Forward-Looking Guidance for 2024

Looking ahead, Federal Realty introduced a favorable FFO per share forecast for 2024, projecting $6.65 to $6.87 per share, which would signify over 3% growth at the midpoint. The guidance is based on expected occupancy increases and contributions from redevelopment activities. The company also highlighted its strong liquidity position, which stood above $1.3 billion, and its lack of significant debt maturities until 2026, indicative of financial stability and capacity for further growth.

Financial Strategy and Capital Allocation

Federal Realty is strategically managing its capital, planning to spend $100 million to $150 million on redevelopments and expansions. They forecast modestly lower collections and term fees, alongside a slight increase in money costs due to refinancing activities. The company expects to keep its G&A within the $48 million to $52 million range and has assumed a total credit reserve aligned with historical pre-pandemic averages, showcasing prudent financial management geared towards sustainable growth.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, and welcome to the Federal Realty Investment Trust Fourth Quarter 2023 Earnings Conference Call. [indiscernible] Please also note today's event is being recorded. I would now like to turn the conference over to Leah Brady, Vice President, Investor Relations. Please go ahead.

[Leah Andress Brady, executive]

Good afternoon. Thank you for joining us today for Federal Realty's Fourth Quarter 2023 Earnings Conference Call. Joining me on the call are Don Wood, Federal'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, there are available to take your questions at the conclusion of our prepared remarks. They 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 that follows statements referring to expected or anticipated events and results, including guidance.

Although Federal Realty believes the expectations reflected in such forward-looking statements are based on reasonable assumptions that are around our 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 condition and results of operations. Given the number of participants on the call, we kindly ask that you limit yourself to one question during the Q&A portion of our call. If you have additional questions, please requeue.

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

[Donald Wood, executive]

Thanks, Leah, and good afternoon, everybody. Well, 2023 is in the books with a strong dollar -- before recorded in the fourth quarter, finish off with what is an all-time record earnings year at $6.55 of FFO per share. That's happening despite over $600 million of construction progress not yet contributing. And higher interest expense that cost to trust an additional $0.27 per share when compared with the average rate in 2022.

With comparable money cost between '22 and '23, FFO growth per share would have been 8%, right up there with our best pre-COVID years. It says a lot in terms of the power of the portfolio that has grown bottom line FFO per share at a compound annual growth of 4.5% over the last 20 years in addition to an average uninterrupted dividend yield of roughly 3% or better. That includes the great financial crisis, it includes the global pandemic, it includes everything, a better portfolio to own for long-term investors in our opinion.

It also feels like we're getting closer to a time where accelerated acquisition activity, coupled with our redevelopment and remerchandising expertise on new acquisitions could boost that growth rate over the next few years. As far as today's environment, demand continues to exceed supply for highest quality assets in the close-in suburbs, and with the impacts of the pandemic in the rearview mirror and lack of new supply coming on, I don't see this positive supply-demand dynamic change anytime soon. Our average in-place rents portfolio-wide are $31.60 per foot and the comparable retail deals we did in the fourth quarter were at $44.57 a foot and were $36.75 for the entire year.

I've been hearing that rents can't be pushed further for the better part of the last 20 years. And I guess, on a relative basis, they are. Better properties have higher rents, better properties have higher tenant sales and profitability, too. Frankly, it's obvious. Percentage rents are an interesting barometer on this topic. While we push for a strong fixed rent in nearly every lease, tenant sales above a threshold level points to additional rent. Percentage rent and overage rent totaled $6 million in the fourth quarter and $19.3 million for the year, an all-time record, which broke the $18.8 million record from the year earlier.

Fourth quarter retail leasing continued to rank with another 100 comparable retail deals done at 12% rollover on a cash basis, 23% on a straight-line basis. These comparable retail deals account for virtually all 98% of the total retail deals done in the quarter, making them representative of the entire portfolio, not just a fraction. It was a great leasing year, the third in a row where we exceeded 2 million square feet, roughly 25% more than the 5-year average between 2015 and 2019.

It's just a pound a point home. Those cash basis rollover increases come on top of leases that have had what I believe to be the highest contractual rent bumps throughout their term in the sector, making their rollover all the more impressive. Contractual rent bumps for the deals done in the fourth quarter were roughly 2.5% blended [indiscernible] small shop with new and renewal small shops at approximately 3%. The weighted average contractual rent bumps for the entire retail portfolio [indiscernible] small shop not just 1 quarter tour, but the whole thing approximates 2.25% best in the business as far as we can tell. The sustained leasing volume and related economics bode well in future, especially the contractual windfalls.

We ended the year with overall portfolio leased at 94.2%, pretty strong, but with room to grow. That breaks down between anchors at 96% leased and shop space at 9.7%. When you look at occupancy possibilities going forward by looking at our past, it's reasonable to expect another 100 basis points of small shelf occupancy and another 200 basis points of anchor occupancy improvement in the coming 12 to 18 months depending, of course, on the extent of future bankruptcies that we are not seeing today. They're not at all obvious.

The residential and office product and our mixed-use properties continues to outperform competing supply in non-mixed use environments and stood at 96% leased for both our comparable resi and comparable mixed-use office product at year-end while commanding premium rents. Progress leasing up our mixed-use office under development, 915 Meeting Street at Pike & Rose and Santana West has been measurably stronger with 215,000 square feet newly leased or in the final stages of the LOI to sign the lease process. That includes the first signed deal at Santana West with Acrisure, the global fintech leader to the insurance sector.

With those deals complete, 915 Meeting Street at Pike & Rose will be 80% leased and Santana West will be nearly half leased up.

I go through all this to really try to hammer on the obvious health of a business, centered around leasing high-quality retail-centric properties in the close-end suburbs of America's greatest cities. While bottom line results are and will continue to be muted by the higher but certainly reasonable cost of capital, that is stabilizing, rents will likely continue to adjust upward over time to that reality. This is especially true for tenants and locations in affluent areas where customers can absorb higher costs. I hope that higher interest rates don't cloud investors' appreciation, the strong underlying business fundamentals that exist today and likely tomorrow.

With that backdrop, we're also really excited to add a substantial expansion to the 87-unit first phase of residential product that we built at Bala Cynwyd Shopping Center in suburban Philadelphia a few years back. The first base open strong and remains fully leased with growing rents, strong supply and demand dynamics in this close-in part of Philadelphia's mainline along with construction costs moderating means that we're able to build an additional 217 residential units, 16,000 feet of additional retail and the covered partner spaces service at all on the former Lord + Taylor site at Bala Cynwyd.

The shopping center features an expansive tenant roster, including an LA Fitness Gym, a full-service grocery, restaurants and necessary services, which are often cited as the reason residents are choosing it. Projects should get underway later this year, begin with the demo of the old Lord + Taylor building, it should yield a 7% cash on cost return when stabilized, drive a double-digit unlevered IRR and based on the rent growth we've seen and expect and be funded from free cash flow.

Okay. On to 2024, where we certainly expect another record this year with an energized team and a strong set of optimism. Dan will go into a bunch more detail, and I'll turn it over to him and then open it up to your questions. Dan?

[Daniel Guglielmone, executive]

Thank you, Don. Hello, everyone. Our reported FFO per share of $1.64 for the fourth quarter and $6.55 for the year were up 3.8% and 3.6%, respectively, versus 2022. POI was up 6.5% in fourth quarter and a more impressive 7.2% for the year.

Primary driver to the strong performance in 2023, first, POI growth our comparable portfolio, up almost 5% on a cash basis, excluding prior period rents and terms and fees, driven by both higher rents and higher average occupancy over the course of the year. Driven by continued strength in consumer traffic and tenant sales, particularly at our mixed-use assets, driving parking revenues and average percentage rent higher. Effectively controlling property level expenses and having a lower credit reserve than we originally forecast.

Second, contributions from our redevelopment and expansion pipeline, which came in at the upper end of our forecast. And lastly, continued focus on overall expense controls, the G&A came in below expectations. This was offset primarily by higher interest rate headwinds totaling $0.27. To reiterate Don's point earlier, with a consistent cost of debt versus 2022, FFO per share growth year-over-year would have been 8% in 2023. Reflecting an exceptionally strong year of growth at the property levels.

GAAP-based comparable POI growth came in at 4% for the fourth quarter and 3.2% for the year and a comparable cash basis, excluding the impact of prior period rent and term fees, growth was 5.2% in the fourth quarter and 4.7% for the year. As a reminder, this information, including the components of prior period rent term fees and GAAP to cash adjustments can be found on Page 12, our quarterly 8-K supplement.

Our residential portfolio continues to be a source of strength despite headwinds in the broader residential sector. Same-store residential POI growth was 5.8% in 4Q along with revenue growth for the quarter at 6%, and we expect this strength to continue into 2024. The value proposition of providing a premium residential offering on top of an attractive retail amenity base is driving outperformance across our targeted residential portfolio.

Also a big driver of our growth in 2023 and was continued stabilization of a large portion of our redevelopment and expansion pipeline as $18 million of incremental POI came online from our $750 million in-process pipeline. And we expect that to be the case moving forward as well as we add new projects to the lineup and maintain that part of our business is a continued driver of growth. The scale and skill set of our redevelopment program is a key differentiator for Federal.

Notable updates to our in-process pipeline, which will contribute an additional $9 million to $12 million of POI in 2024 include $115 million debt income projects in Connecticut, where the residential is fully stabilized 98.4%; occupancy with rents above $4 per foot per month, well above underwriting. And our retention rates remain above 90%, and the retail component approaches 90% leased. A testament to what a strong retail amenity base can bring to a residential project.

At the $190 million, 915 Meeting Street at Pike & Rose, Choice hotels fully moved in as they open in 4Q, plus they've taken additional space. Sodexo's U.S. headquarters is next on deck to open with multiple other tenants actively negotiating leases. At Huntington Shopping Center on Long Island, this $85 million Whole Foods anchored redevelopment is over 90% leased with new anchor REI opening during the fourth quarter in addition to a number of small shops. We feel very good about the yield on this project approaching the top end of our 7% to 8% return range. For those of you in the New York area, it's worth a trip out to Central Long Island later this year after [indiscernible] opens to check it out as well as the Melville asset, a mile further south.

Both are exceptional retail redevelopments, which truly highlight Federal's skill set. Additionally, in 2023, we incrementally invested over $120 million in properties we only partially owned previously at an effective 8.1% cap rate. No better risk-adjusted investment in deploying capital, accretively into assets we know extremely well. Own levered IRRs on these investments in the double digits.

Now to the balance sheet and an update on our liquidity position. As you all saw, we refinanced our $600 million bond maturity, which came due on January 15, for a combination of a $200 million secured loan on our Bethesda Row property and an effective 5% fixed rate for the first 2 years of the loan, plus 2 1-year extensions at our [indiscernible] effectively a 4-year long and a $485 million, 3.25% exchangeable notes offering due 2029, raised in early January at an effective 3.9% interest rate all-in. Part of that transaction, we purchased a [indiscernible] spread to increase the effective strike price on the convert of 40%, up above $143 per share. So no incremental economic dilution unless the common stock freeze above that level as adjustment.

Pro forma for the most recent financing and dividend based, our liquidity stands above $1.3 billion with an undrawn $1.25 billion credit facility and available cash on hand. Plus we have no maturities remaining in 2024 and no material maturities until 2026. Our leverage metrics continue to be strong as fourth quarter annualized net debt-to-EBITDA stands at 5.9x and that metric should improve over the course of 2024 and hit our target of 5.5x in 2025. Fixed charge coverage was 3.6x at year-end and that metric should continue to improve as incremental EBITDA on online and interest rates fall over the second half of 2024.

Now on to guidance. For 2024, we are introducing an FFO per share forecast $6.65 to $6.87 per share. This represents over 3% growth at the midpoint of $6.76 or roughly 5% at the high end of the range. This is driven by comparable growth of 2.5% to 4% when excluding prior period rents and term fees, 3.25% at the midpoint. This assumes occupancy levels will increase from 92.2% at 12/31, up to roughly 93% by year-end 2024. Although expect a step back in the first quarter due to expected seasonality [indiscernible], I'm going to add in additional contributions from our redevelopment and expansion pipeline of $9 million to $12 million. For those modeling, let me direct you to our 8-K on Page 16, where we provide our forecast of stabilized POI and timing by project.

Now this will be offset by modestly lower prior period collections expected to be roughly $3 million in 2024 versus $5 million in '23, modestly lower net term fees forecasted in the $4 million to $7 million range in '24 versus $7 million in '23 and a continued drag from higher money costs. The recent $600 million of notes that we repaid last month at an effective rate of 3.7% versus the new blended cost on our 2 most recent refinancing of 4.3%. Other assumptions include $100 million to $150 million of spend this year on redevelopment and expansions on our existing properties. G&A is forecast in the $48 million to $52 million range for the year and capitalized interest for 2024 is estimated at $18 million to $21 million. We've assumed a total credit reserve consisting of bad debt expense, unexpected vacancy incentive rent relief of 70 to 90 basis points for 2024, more in line with pre-pandemic historical averages.

And as is our custom, this guidance does not reflect any acquisitions or dispositions in 2024. We will adjust likely upwards as we go, given our opportunistic approach to build. Quarterly FFO cadence for 2024 is forecast to have the first quarter being roughly in line with the fourth quarter of 2023 at a range of $1.60 to $1.65 and with sequential growth each quarter thereafter. We see the detailed summary of this guidance in our 8-K on Page 28 and in our presses.

And with that, operator, please open the line for questions.

[Operator]

[Operator Instructions]. And today's first question comes from Juan Sanabria with BMO Capital Markets.

[Juan Sanabria, analyst]

I was just hoping you, guys, could talk a little bit more about the office routine. It sounded like there was the fintech lease at Santana. Was there anything else in curious as to the momentum or prospects for signing other tenants there and how you think that evolves in '24.

[Donald Wood, executive]

Yes. No, Juan. I tried to -- without mentioning a name, or getting myself in trouble, I try to indicate that there is a large tenant there that we are very close to lease signing on. The LOI is done. We're in the last stages of lease signing. I'm not going to name the tenant today, because you certainly will know them. And we would expect that lease, something dramatic goes on done very, very shortly from here on. That, along with that, for sure, and a couple of other smaller things, what gets us to that half done. On that building in Santana West. And similarly, very close to signing on a couple of deals here at Pike & Rose 950 Meeting, which would get that building to 80% leased. So it's been a very different last few months in terms of not just tours, but productivity in terms of turning LOIs into leases.

[Operator]

Thank you. And our next question today has from Alexander Goldfarb with Piper Sandler.

[Alexander Goldfarb, analyst]

Don, just going through the -- your tenancy, overall, it's a pretty good list in the top tenants, but obviously, there's some not rated, some not investment grade. But holistically, as you push the portfolio occupancy and really upgrade tenancy, are there types of tenants that you're seeing no to like, for example, the classic private equity, highly levered tenants, even if they're a great performer, you're saying, look, historically, these type of levered tenants are the ones that cause issues in the next downturn and therefore, even though they may be promising, let's try to limit exposure. Just trying to think what ways that as the portfolio becomes increasingly in demand that you may be gaining leverage to sort of push back on the types of tenants even if they're a great performer but just going, you know what, great performer, but not great balance sheet, we're going to pass.

[Donald Wood, executive]

Yes, Alex, it's really a good question. I mean the bottom line is when you're trying to improve your portfolio, what you're effectively doing is taking all of that into consideration for not just next year or the year after that, but the term of the lease. So it includes the capital decisions that have to be made in terms of what's going in. I will tell you that to the extent a tenant, and this just I think, makes sense to you, the tenant that we like a lot but that has a riskier profile.

To the extent we're limiting significantly the capital will give them a bit of a shock. To the extent we're investing in that piece of real estate in that particular space in there, then the better be credit, they're better be comfort, if you will, that we're going to get paid. We're very likely to pay to the entire term of the lease. So as I started out, I mean, this is a very good time for supply and demand dynamics. And what that means in the better properties is choice. And to the extent you have that choice, you absolutely consider things like leverage level, like what the owners are planning to do with the asset or with the retailers, et cetera. So it's a good time to be able to continue to upgrade the portfolio.

[Operator]

Thank you. And our next in comes from Steve Sakwa with Evercore. Please go ahead.

[Steve Sakwa, analyst]

Don, I guess, just maybe following up on Alex's line of questioning. Just wanted to talk a little bit about pricing power. And given where the portfolio is and the potential uptick in occupancy, I guess how are you and Wendy and the team thinking about being able to push rents. And do you expect that to materially change in '24? Or is that a little bit longer term kind of runway just given that there's been no supply in the space and demand seems to be very tight at good centers.

[Donald Wood, executive]

It does. It does, Steve. And look, at the end of the day, it's still a very local business, and you're having this conversation based on what the potential choice are for that particular piece of real estate, where I think the -- and I just believe this is the most important thing. It is in the contract itself. And so the leverage generally whether it comes out in better bumps. I mean you know how I feel about the bumps. That's a contractual increase in cash flow for a long period of time. Nothing beats that to me. That's the first thing.

And the second thing is making sure that we have control of the space because the tenant wants control of the rest of that shopping center, not just the space but the shopping center. And so I do think we're making, and I've always kind of focused on this as a big thing for us to make sure that contract is as landlord-friendly as it could be. But those are places where we have made pretty strong strides in the last 18 months in particular for strong leases with big bumps. So that's where I look for it most.

And that's an insurance policy to know that the foundation of this company the basic shopping centers throughout this company are really strong with rents that whether you believe it or not, are under market as proven by each quarter that we go through. Now you take that and you supplement that with things like the redevelopments that we're doing in places like Huntington, with a new residential project that we're doing at Bala Cynwyd, with potential stronger acquisition market as we move forward. That's where I get very excited and very positive about the future [indiscernible].

[Operator]

Thank you. And our next question today comes from Jeff Spector with Bank of America.

[Jeffrey Spector, analyst]

Don, can you elaborate on your opening remarks comment on accretive acquisitions and opportunities? It seems like you're a bit more optimistic or maybe excited at some of the opportunities you're seeing. Is that correct? And if yes, is it certain regions, again, type of centers? I know we talk about this all the time, but I think it seemed like you specifically highlighted that in the opening remarks.

[Donald Wood, executive]

Hi, Jeff, first of all, thanks for listening to the opening remarks. I appreciate that a ton. And yes, you are dead right in terms of where I see it. But let's -- let me turn it over to Jeff Berkes or Juan. Give us guys, give us your thoughts on that question?

[Jeffrey Berkes, executive]

Yes. Sure, Don. Hi, Jeff, it's Jeff Berkes. I'm here with Juan. He'll jump in a minute on what he's seeing kind of day-to-day in the market. But yes, you're right. We are looking forward to a good year in '24 for acquisitions. We didn't really see anything in '23 that excited us that much other than the opportunities we had to invest within our own portfolio at very accretive rates. But we think the market is starting to heal, and we expect '24 to be a better year or certainly a good year for us for acquisitions. And I know you know as well, and you probably know what I'm going to say, but keep in mind that, look, we've got a very compelling cost of capital.

We are not constrained by any one sub product type within retail. We're format agnostic. We're more focused on location and opportunity with the piece of dirt than exactly the improvements that sit on it today. We have a really well-developed team here that looks at highest and best use and ways to add value through re-leasing, remerchandising and improving the existing improvements as well as knocking parts of the property down and going vertical and doing things like we're doing at Bala and other shopping centers in our portfolio where we add residential.

We've got great relationships in the market. We're known as a closer, both with the sellers and the brokers. So I think we've got a lot of advantages and a really sort of a clear eye towards growing the company through accretive acquisitions that are going to deliver long-term growth. to the company, and we hope the markets respond, and I think they will. But let me turn it over to Jan and kind of let him give you his thoughts on what we're seeing in the market today.

[Jan Sweetnam, executive]

Hi, Jeff, it's Jan. So a lot of sellers have really been sitting on the sideline, waiting for the cost of capital and cost of debt in their situation to kind of settle itself out and I think '23 was a record year for sellers asking brokers for their broker opinion of values. I mean it's just a massive BOB year and a supermajority of those sellers chose not to put their properties on the marketplace. And so now that cost of capital and cost of debt has started to settle on a lot. We're hearing a lot of rumbling about sellers now putting their properties on the market. And in areas and sometimes in some new markets that are of interest to us, that we think we're going to see. And so far, as we're looking through here in early February, it seems like there's going to be a lot more interesting product for us to look at and try to acquire. So to me, I think '24 is going to be a big year for us.

[Jeffrey Berkes, executive]

Yes. Jeff, you've heard us talk about this in the past. We are very creative in how we structure deals. We have been for a very long time and good at figuring out ways to solve sellers' issues, particularly private sellers and older sellers that have owned the properties for a long time. So a lot of tools in the toolbox here at Federal, and we expect to be putting them to good use this year.

[Operator]

Thank you. And our next question today comes from Greg McGinniss with Scotiabank.

[Greg McGinniss, analyst]

So it was a great year overall for retail leasing. But Q4 leasing volumes fell about 25% compared to the first 3 quarters in 2023 and resi occupancy fell 190 basis points quarter-over-quarter. Could you just provide some details on the trends you're seeing in retail tenant demand, as well as what happened on the resi side and expectations built into 2024 guidance for resi occupancy and rent growth?

[Donald Wood, executive]

I have to ask you Daniel or somebody on occupancy for a second. Before you do, though, on the retail occupancy in the fourth quarter, Greg, that's just timing. There's nothing in there from a trend perspective that we feel any different about when, I know with a couple of particular anchors that are re-leased, that went out in the fourth quarter and again, re-leased good spreads going forward. But just timing in the quarter there. I don't know, Wendy, if there's more to say about that for Greg.

[Wendy Seher, executive]

No. I think if you look at -- it's just timing is number one. And number two is our pipeline still remains strong. And when I look at where we are, specifically in small shop leasing, I do feel like there we have a runway there, probably another 100 basis points to grow off of. And also some of the timing is also attributed to several of the deals that we're doing on spaces that are already occupied. So there's some [indiscernible] lot there.

[Jeffrey Berkes, executive]

Yes. Let me -- Dan, go ahead on resi, if you want, but my comment, Greg, would be we have a couple of markets that are very seasonal, primarily out here in California and New England. So we do try and ramp up occupancy going into the slower winter season. So we can ride through first quarter of a little bit slower leasing in those seasonal markets and be in a position where we're not giving up a lot when the leasing season heats up again. So some of that's strategic in the way we build occupancy up in the prior quarter. But Dan, if you got more to add, please do so.

[Daniel Guglielmone, executive]

Yes, that's exactly right. On the residential portfolio, seasonality is really what's driving that move. I mean, we're up year-over-year from an occupancy perspective, and we fully expect occupancy to pull back in the fourth quarter relative to -- due to that exact reason. And we have a small portfolio. I think that it only takes a handful of units to kind of move things a little bit. So I would not read anything into that at all.

[Operator]

Thank you. And our next question today comes from Craig Mailman with Citi.

[Craig Mailman, analyst]

Maybe I just want to go back to the question about acquisitions. And it sounded like maybe there could be some [ OP ] unit deals in there. But could you just give us a sense of magnitude at this point, is it at the level where you would need to cap some of the equity in some of your trophy mixed-use projects? Or can you, guys, fund this with kind of current liquidity?

[Donald Wood, executive]

That's a good question, Craig. The funding with the trophy assets at someone is something for the future. It's not something for today, given where the market stands and the appetite and kind of still the uncertainty on that stuff overseas in particular. With respect to boosting the acquisition portfolio now, that's what that line's for. So there's short-term financing, and then there will be long-term financing. But there's a reason that powder is dry. And we'd like to use it.

[Operator]

Thank you. And our next question comes from Ki Bin Kim with Truist.

[Ki Bin Kim, analyst]

Don, can you just go back to some of the comments you made about the office leasing demand you're seeing at Santana West and 915 Meeting. Just curious if there's been any commonalities for why some of you see, I'm guessing as relocations moving to these centers. And for 915 Meeting, the NOI contributions, is it reasonable to expect that 50% contribution to be back-end weighted or more pro-rata?

[Daniel Guglielmone, executive]

Yes. Well, pro rata, I would say, effectively in terms of the contribution over the course of the year.

[Donald Wood, executive]

And I got to tell you, Kim, the common thread through all of this is either it's funny, either relocations from downtowns to these mixed-use properties and both of them basically in the first ranked suburb or out further and coming in looking for the full amenities that these properties provide. And that's been so darn consistent over the past 3, 3.5, 4 years with respect to what's happening there, I don't see that stopping. It's -- the demands of these tenants who are generally taking less space than they had wherever they were West Coast, some kind of campus, the East Coast, these same type of things potentially. But they are taking less space, but they demand more in terms of the amenity base. And that is so consistent in basically the 3 places, the 3 big projects, whether it's same in Boston with respect to assembly. So that's the common threat.

[Operator]

Thank you. And our next question today comes from Mike Mueller with JPMorgan.

[Michael Mueller, analyst]

I just have 2 quick development questions. I guess first for Bala Cynwyd. Is there any meaningful NOI that's coming out of the run rate, your 4Q NOI run rate? And then do you have a ballpark estimate of timing for the Santana office rent commencements?

[Daniel Guglielmone, executive]

Yes. On Bala, I don't think there's any material.

[Donald Wood, executive]

It's an empty [indiscernible] retailer which is [indiscernible].

[Daniel Guglielmone, executive]

There's no impact. And then the timing -- we'll let you know on the timing. We'll start on Acrisure, recognizing some revenue this year, 2024. And we'll let you know when we sign the leases, the timing of the leases that we have in the pipeline, kind of when those will look to come online.

[Operator]

And our next question comes from Floris Gerbrand Van Dijkum with Compass Point.

[Floris Gerbrand van Dijkum, analyst]

Following up a little bit on the office activity. Obviously, congrats on, obviously, you haven't gotten over the line yet, but certainly got the first leases going there, both Santana West as well as in Pike & Rose. Are those leases in your guidance. And maybe you can talk about what is happening to the negotiations in terms of the rents there? And Jeff, maybe I'd look to -- because you're on the ground at Santana West, are you getting pushback from office tenants on rents or other things? Or is it just -- talk a little bit about the competitive situation and the balance between landlord and tenant because clearly, it's different in office than it is in retail.

[Donald Wood, executive]

Go ahead, Jeff.

[Jeffrey Berkes, executive]

Yes. I mean, I'm actually going to pass it to Jan. Floris Jan, handles all of our large office leasing. So let me turn it over to him.

[Jan Sweetnam, executive]

Hi, Floris, I think just in terms of the rents, I would say 2 things, one of which is both at Pike & Rose and at Santana West here and also at assembly, really the tenants are looking for something, as Don said, they're looking for the amenities. They're looking for a better building. They're looking to upgrade their location. And so they have tended to be less price sensitive on rents. So rents feel like they're holding pretty well, but the tenant improvement packages have, in fact, gone up. So that's really the change that we've seen, and that's where the competitive piece comes in, but the rents have been really rock solid.

[Jeffrey Berkes, executive]

And just, Floris, to remind you, and I think we've talked about this before and Don alluded to it in his earlier comments. Most of the tenants that are moving into our state-of-the-art buildings in those 3 locations are coming from inferior buildings where they take more space and they're downsizing. So while they may be paying a higher rent per foot in our buildings than they were paying, because they're taking less square footage, their overall occupancy costs are less, which again, goes to them not being as sensitive about rent. I think that's important to understand.

[Operator]

And our next question today comes from Dori Kesten with Wells Fargo.

[Dori Kesten, analyst]

Can you walk through your thought process behind the mortgage Bethesda Row and just addressing the size, maybe loan to value, why Bethesda specifically?

[Daniel Guglielmone, executive]

Look, I think the debt markets have been extremely and interest rates have lacked direction to say the least. I think back in October when we committed to doing that transaction. The 10-year was at 5%. And the -- our stock was at $85, and we saw this as a unique opportunity for us to lock in a spread on a secured loan on one of our best properties and get attractive financing. The leverage is lower than we typically would. It's a little bit structured.

But today, mortgage rates on retail product today at a normalized leverage level are probably 200 basis points over the treasury, probably 175 to 200 basis points on a floating rate basis above SOFR. We were able to get 95 basis points through the structuring that we did with our lender. We felt like that was a really, really attractive credit spread that was certainly more attractive than the 150 to 160 basis points we're looking at back in October to do a 5-year loan. And so it was just a, I think, a unique opportunistic financing. That really demonstrates Federal's historic ability to access different parts of the capital markets at more difficult times in the cycle. And I think that our access to the convertible market is another example of that.

Don, did you want to add anything?

[Donald Wood, executive]

No, I wanted to ask you, Dan, too. I mean from a tax perspective, a tax basis perspective, putting $200 million on Bethesda Row, frees up some flexibility with respect to the tax planning. And so I think having the leverage on there, having dead on Bethesda, aware we created significant value over our ownership created a ton of value above where if we do want to bring a joint venture partner, this brings and gives us that optionality and that flexibility to do a tax efficient

[Operator]

Thank you. And our next question today comes from Linda Tsai with Jefferies.

[Linda Yu Tsai, analyst]

I think you said earnings growth in '23 would have been 8%, absent higher money cost for level of earnings growth, does this mean for '24, if you look at it the same way.

[Daniel Guglielmone, executive]

Well, 8%, we had significant headwinds, '27. We have less headwinds heading into 2024, although they're still there. I haven't done the calculation, but it's probably a couple of hundred basis points of incremental -- if you back out the cost of that. So the 3% probably goes up to something north of 5%, the less money cost, at least from my perspective. I haven't done the exact calculation, Linda, but that's roughly where I would see it.

[Operator]

And our next question today comes from Anthony Powell with Barclays.

[Anthony Powell, analyst]

I think in the prepared remarks, you talked about how construction costs were going lower, which helps with your decision to duty of Philadelphia residential. Can you maybe expand more on what's going on with construction costs and do more of your products and your future redevelopment pipeline look attractive given lower construction costs.

[Donald Wood, executive]

That's a good question. When -- it's not dramatic in terms of a reduction in construction costs. I mean when you think about the components of it, particularly the labor component of it. When business slows down, as it obviously has in the past couple of years, you've got better leverage to get labor rates that makes some more sense.

And when you compare that to really, gosh, the last 5 or 6 years, in particular, before that, it's a dramatic difference in terms of being able to forecast. And that's really the most important thing here is anytime you want to do redevelopment or development itself, it's about productivity of costs in addition to growth in the rent.

So what's happening now is we're finding much better predictability in construction costs, primarily on the labor side. We're going to tie these [indiscernible] things down to GMPs, maxim price contracts. And so when you're able to do that, then you can focus more on what the rent growth is, the timing does it make sense to do. In the case of Bala, it was really a case where supply and demand finally made some sense without new product being added in that particular section of the main line, which is very attractive. So we really liked that. Now we couldn't make sense of that a year ago or 2 years ago or 3 years ago. But we can make sense of it now.

I would hope to see more of those possibilities going forward. And remember, this is land that Federal's owned for a very long time. And that gives a huge advantage because the land costs there aren't incremental land costs associated with it. So that's why that makes sense. So when you look at construction, I wouldn't look at it as you know, costs are going to be dramatically lower than they were, but they've certainly stabilized and coming down a few percentage points because of the labor side -- it's an important consideration when you're deciding where to go or not.

[Operator]

Thank you. And our next question today comes from Paulina Rojas-Schmidt with Green Street.

[Paulina Rojas Schmidt, analyst]

Dan, my question is related to the prior one. And you reported for the Bala project and ROIC [indiscernble]. And I think you mentioned in your prepared remarks the unlevered IRR as well. But more broadly speaking, what kind of profit margins you need to be in when thinking about this project to come to a new pool for the risk, whether it's cost or leasing?

[Daniel Guglielmone, executive]

Not quite following your question, Paulina. Are you asking kind of what kind of premium we need to get to kind of have those -- to have the IRRs get up until the double digits?

[Paulina Rojas Schmidt, analyst]

Yes. When you think about comparing your cap rate [indiscernible].

[Daniel Guglielmone, executive]

I think that developing this to developing this to a 7 is clearly higher than it would be in today's market. And as interest rates come down and stabilize, obviously, what we -- what the spread is well north of 100 basis points, 150, 200 basis points. And look, we are going to expect to be able to grow rents residentially in line with kind of what we've done in our residential portfolio, is amenitized. It's adjacent to great retail, and we've been able to grow rents very attractively over time. So as we grow rents, obviously, the POI is going to be a big driver of those unlevered returns as well. So those are the inputs that go in there. They get us very comfortable at a double-digit IRR unlevered is something that's achievable developing this to a 7 initially and having it grow from there.

[Jeffrey Berkes, executive]

Dan, if I can just add on Paulina, it's Jeff. One thing to think about, too, as it relates to federal and the residential that we develop and we've got about a $900 million pipeline of projects in the design and entitlement phase right now is almost all of those are at places where we already operate residential property. That's the case at Bala, the case if we do anything of [indiscernible] & Rose, Santana Row, Pike & Rose Assembly Row, other places in Montgomery County, Maryland, where we own real estate. So the risk adjusted return for us is really, really strong. We understand the rental market very well. We operate units where we're adding units. So we understand the operating costs very well. And as Don mentioned in the prior question when we contract for the construction, we're doing that with full construction drawings, great bid coverage and a guaranteed maximum price contract. So the risk-adjusted returns for us are exceptionally strong when we add residential to our portfolio.

[Operator]

And our next question today is from Alexander Goldfarb from Piper Sandler.

[Alexander Goldfarb, analyst]

Just -- going back to the Bethesda Row, I think you, guys, had spoken previously about possibly joint venturing that asset or maybe there was institutional interest. But I guess, bigger picture, historically, federal hasn't been a JV platform, but you talked about it with the potential on Bethesda. So in your view, Don, as you guys talk to joint venture capital, what's your appetite for shopping centers? And do they believe that truly this burgeoning growth that we all talk about will actually come to fruition? Or is there a view that the leases are so locked and in favor of the tenant that, yes, at some point, they can get good economics, but it may be a longer time line than they actually are willing to underwrite and invest. Just sort of curious what's going on in the private time as you talk to possible partners.

[Donald Wood, executive]

Well, a couple of things, Alex. And Jeff, I'd love you to add after this if you need to. But first of all, don't use me as a proxy for what's happening among the private side in terms of their appetite because we have not seriously gone down the road with any of them in terms of serious negotiations because we don't believe this is the right time to effectively do a deal like that on the mixed-use assets. When we look at ourself and where we see the growth in the portfolio, I think I've said this for the last 4 or 5 quarters, our mixed-use stuff is outperforming the other stuff. And it's growing, and it's growing fast.

So we'd like to get this stuff to have that trajectory continue. We'd like to see over the next year or 2 or 3, the capital markets solidify themselves. Obviously, we're just in the very early stages of figuring out what that means in terms of capital markets in the country. And so I don't have much more to add with respect to any specific. I don't know, Jeff, anything?

[Jeffrey Berkes, executive]

Yes. Don, I don't really have anything meaningful to add to that. Sorry.

[Operator]

Thank you. And our next question today comes from Steve Sakwa of Evercore.

[Steve Sakwa, analyst]

Just wanted a quick follow-up maybe with Dan Guglielmone on the guidance. When you kind of look through the building blocks, just maybe help us think through which ones have kind of the most leverage maybe to the upside and the downside and maybe just a little bit more color on the POI growth ex prior period rents and term fees, is about 100 basis points slower around 3.25% versus the 4.3%. Maybe just kind of walk us through there. Is that really all kind of bad driven? Or is there something else kind of pulling that growth rate down?

[Daniel Guglielmone, executive]

Yes. Look, it is guidance. And I think there are a lot of things that go into, in particular, that go into the FFO guidance. I mean, as it relates to specifically the comparable POI growth was 2.5% - 4%. We have occupancy levels and how aggressively and how quickly we can push levels up towards 93%. I think how much percentage rent can we continue to collect parking revenues and we control property level expenses the way we have, which has been a big help. Term fees, I guess, don't apply to that metric. But look, that's going to drive FFO although it won't necessarily drive the POI metric, excluding that.

How quickly and how we can get development POI up. And I think one of the things that's going to be a big driver is look, we purposefully have $600 million of floating rate debt. How quickly SOFR comes down. I think we've been pretty conservative in terms of our assumptions for where interest rates will go. And so that's -- that will have an impact. And then I think what we've done an exceptional job at, which probably drives some of the POI growth is just getting tenants open sooner, keeping tenants in possession longer, keeping tenants in that we expected to leave. I think that's another driver. I think they all contribute throughout the range.

[Operator]

Thank you. And this concludes our question-and-answer session. I'd like to turn the conference back over to Leah Brady for closing remarks.

[Leah Andress Brady, executive]

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

[Operator]

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.