Prepared remarks
Good day, and welcome to the Federal Realty Investment Trust Second Quarter 2026 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, to withdraw your question please press *2. Please note this event is being recorded. I would now like to turn the conference over to Jill Ryann Sawyer, Senior Vice President of Investor Relations.
Thanks, Debbie. Good morning. Thank you for joining us today for Federal Realty's Second Quarter 2026 Earnings Conference Call. Joining me on the call are Donald C. Wood, Federal's Chief Executive Officer; Daniel Guglielmone, Chief Financial Officer; Wendy A. Seher, Eastern Region President and Chief Operating Officer; and Jan W. Sweetnam, Chief Investment Officer, as well as other members of our executive team who 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. Forward-looking statements include any annualized objective information as well as statements referring to expected or anticipated events or results, including guidance. Although Federal Realty believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, Federal Realty's future operations and its actual performance may differ materially from the information in our forward-looking statements, and we can give no assurance that these expectations can be attained.
The earnings release and supplemental reporting package that we issued this morning, our annual report filed on Form 10-Ks, and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and operational results. Given the number of participants on the call, we kindly ask that you limit yourself to one question during the Q&A portion. If you have additional questions, please requeue. With that, I will turn the call over to Donald C. Wood.
Well, thank you, Jill, and good morning, everybody. Strong quarter. $1.88 a share, 7% year-over-year growth, 96% occupancy, record leasing volume, 59th consecutive annual dividend increase—another recent raise—all validating the optimism for the rest of the year and next. Daniel will get into the specifics for modeling purposes. After roughly four exceptionally strong leasing years, this quarter set records. Again, here we are in the second quarter of 2026 and are reporting 124 comparable deals for a staggering 819,000 square feet and average first-year cash rent of $33.68, which is 15% higher cash rent than the prior year and 28% higher on a straight-line basis. That sort of volume is record-setting. While contributions to that came from all of our markets, Southern California and Virginia were instrumental in signing a few anchor deals that will be transformational to the properties in those markets.
The first affects the market-dominant 860,000-square-foot Grossmont Shopping Center in suburban San Diego, where remerchandising this 2021 acquisition is now seriously underway. We signed our first deal ever with the hugely successful outdoor retailer Bass Pro Shops, a 20-year deal for 161,000 square feet, replacing an underperforming Macy's and adjacent small shop tenants with a national draw unlike most others. We also signed a new 53,000-square-foot deal with AMC at Grossmont for a new state-of-the-art theater where a shuttered smaller theater once was. An anchor system comprised of Bass Pro, AMC, Walmart and Target and 350,000 square feet of other space will feed off that system. Grossmont will be among the most productive assets in Federal's portfolio once a significant redevelopment has been completed. We are looking at a $56 million comprehensive redevelopment and an incremental 10% cash-on-cash return.
The second affects the market-dominant 500,000-square-foot Barracks Road Shopping Center in Charlottesville, Virginia, home of the University of Virginia, where we signed a 79,000-square-foot deal with Harris Teeter for an expanded flagship grocery store. Additional important merchandising improvements that will be announced very shortly will further solidify Barracks Road as the preeminent shopping center in the market as it has been since we bought it some 40 years ago. As we have talked about before, these large, market-leading dominant retail centers—not unlike most of the acquisitions we have made over the past few years—are a property type of choice in every major market we are in. They tend to provide opportunities for both continued cash-flow growth and value enhancement for decades. Stay tuned for more in the quarters ahead. Opportunities for additional accretive acquisitions, net of dispositions, continue to be a laser-like focus of the team and are expected to continue to improve our overall growth.
We are getting close on a couple of very important deals, though a bit too soon to announce on this call. Stay tuned in the weeks ahead. On the development side, let me give you a quick update on the status of our residential pipeline that, as you may remember, is only undertaken on excess land at our existing shopping centers. With little to no incremental land costs, and higher rents because of the proximity to our shopping center amenities, the math works in the right locations. Currently, we have allocated a total of $400 million for the residential development of the Blair at Ballard in Kenwood, which is already two-thirds leased and well ahead of projections for both timing and rate. By the way, that fast lease-up pace has reduced the earnings dilution that normally comes at this stage of residential development. 301 Washington Street in Hoboken is on time and on budget, preparing for a January 2027 delivery.
Lease-up begins later this year. Early renting inquiries spurred by the construction progress have been far in excess of our expectations. Lot 12 at Santana Row is well under construction, on time and on budget for a late 2027 delivery, as many of you saw at our June Investor Day. We hope you found the work we are doing there to be as impressive as we do. And an incremental 261 units at Willow Grove Shopping Center outside of Philadelphia—the site has been prepared and cleared and is now fully underway. Together, this densification of our shopping center assets will add nearly 800 units and $27 million of new operating income to the portfolio once stabilized over the next few years. Our experience with residential development at our retail-centric properties is a skill set developed over 25 years and is certainly a unique differentiator of our business. Incremental income in the form of parking revenues, sponsorship opportunities, and signage revenues are also benefiting from the high traffic counts at our large properties, including not only our mixed-use assets but the broader portfolio.
More upside to come here, too. We are firing on all cylinders: leasing operations, including a comprehensive technology-based efficiency program—we will introduce you to our Senior Vice President of Digital Innovation at some point in the future—the hunt for special acquisitions, and a modestly sized but impactful development and redevelopment program are all working. Enhanced internal and external growth using all the tools at our disposal is the name of the game. Results like this increase my confidence in our ability to do so, and a sincere and grateful thank you to all of you who gave us your time and attention at our Investor Day at Santana Row, either live or on the webcast. We are a proud and talented group of real estate executives who love to share our story. We hope you enjoyed it and found it useful. I believe these second quarter results help validate for you the focused path that we are on. Let me now turn it over to Wendy and then to Daniel Guglielmone to provide some additional color. Wendy?
Thank you, Donald. This quarter our leasing platform once again delivered record volume, signing 819,000 square feet—the most comparable square footage in a single quarter in company history. Rent spreads for these deals were 15% over prior in-place rents, and that 15% is not a one-quarter story. In fact, the trailing 12-month comparable rollover sits at 17%, the highest in any 12-month period in more than 10 years. This tells you everything you need to know about the desirability of high-quality shopping centers. What I am most proud of this quarter is occupancy. Despite the timing of expected anchor transitions, the strength of our small-shop leasing held occupancy neutral to last quarter. We delivered over 100,000 square feet of net small-shop occupancy this quarter, increasing our occupied rate by 100 basis points in just three months. Our small-shop portfolio is now 93.9% leased and 92.3% occupied—levels we have not seen since 2007.
Put that alongside a record leasing quarter and you get a clear picture: the demand for our centers is not slowing down. The natural question is how much upside is left, and I would say more—much more. At these occupancy levels, we can drive small-shop rents in the double-digit range on average, something we have done consistently for the past three years. Our current pipeline, which is always a good indicator of leasing momentum, remains strong with over 1.5 million square feet of space in lease negotiation. In addition to our pipeline, we have fully executed leases that will contribute an additional $31 million in revenue, delivering over the next 18 months. Just as important, our high leased rate lets us prelease well in advance of vacancy. This translates to less downtime from one tenant to the next, a metric we focus on quarter after quarter, with clear progress as highlighted by our 100-basis-point jump in small-shop occupancy this quarter.
Foot traffic across the portfolio is up, reinforcing the health of our consumer, and collections remain strong across the portfolio. Our retail redevelopment pipeline is delivering the same story. In Philadelphia, Giant just opened a brand-new prototypical 45,000-square-foot grocery store in our Andorra Shopping Center with small-shop leasing rents coming in 16% over underwriting. And Andorra is just one example. We have another half-dozen centers in various stages of reinvestment with many more in the pipeline. Historically, these reinvestments have produced 10%-plus returns on average with a single objective: drive productivity and rents at our centers, making our existing portfolio a continuous source of multiyear growth. Finally, our business development platform that we highlighted at Investor Day had a standout quarter, with our incremental income initiatives on track to be up 20% for the year over the prior year comparable pool.
That is extraordinary given the fact our occupancy continues to climb and improves. This program is much more than leasing temporary space; it is a sustainable source of revenue unique to our property set of large, dominant and/or mixed-use assets. Parking revenue alone, which is very unique to our portfolio, is expected to be up almost $3 million year-over-year, driven by higher rates, events, activations and partnerships. The true line across all of it is the same: dominant, durable, high-quality real estate creates value. In this K-shaped economy, our centers are thriving. Now let me turn it over to Daniel Guglielmone to dive into the numbers.
Thank you, Wendy. Hello, everyone. Our FFO per share of $1.88 for the second quarter reflects 7% growth versus last year and highlights another exceptionally strong quarter operationally. This result came in $0.03 above the midpoint of our guidance range, highlighting a business plan that is delivering across all of its components. Drivers for the outperformance this quarter include: $0.03 from higher rental income and recoveries; $0.02 from stronger percentage rent, parking revenues, and incremental income initiatives Wendy just referenced; almost $0.01 from better term fees than we had forecast; as well as another $0.05 further benefit from our capital recycling activity. This was essentially offset by $0.015 from a one-time investment write-off, $0.01 from straight-line write-offs, and $0.01 higher G&A than we had originally forecast. Net, a $0.03 beat on the shoulders of $0.05 of better-than-expected rents, recoveries and incremental income.
Adjusted comparable growth—our cash-basis comparable growth metric—was 4.2% for the quarter and stands at 4.6% year-to-date. Our GAAP metric was 2.8% for 2Q and 3.7% year-to-date, both outperforming the expectations we set out on our call in May. Same-store revenues increased 3.6% for the quarter, and all of these variations of same-store metrics were ahead of our expectations, highlighting the solid first half of the year. Now let's turn to our balance sheet. With the exception of $30 million maturing in August at a 7.5% interest rate, we currently have no debt maturing until mid-2027, while sitting with $1.2 billion of liquidity at quarter end. We continue to see strong free cash flow after dividends and maintenance capital, forecasting over $100 million for this year with that figure heading towards $150 million by 2028 as we convert straight-line rent to cash-paying rent. If you recall, we outlined these figures at our Investor Day in May.
This will also have a positive impact on AFFO through 2028 and beyond. During the second quarter, we closed on another $66 million of retail asset sales, bringing the year-to-date 2026 total to $225 million at a blended 5% cap rate. When combining 2025 and year-to-date 2026 asset sales, our total stands at $540 million at a blended initial cash yield of 5.4%. Note that the estimated foregone unleveraged IRRs on this pool blend to an average of less than 7% with no assumed terminal cap rate compression—all metrics which reflect a very attractively priced source of capital. Through this active and disciplined asset recycling program, our debt metrics remain solid. Second quarter annualized net debt to EBITDA has improved to 5.4x and fixed-charge coverage stands solid at 3.9x. Now on to guidance. As a result of another solid FFO beat for 2Q on the heels of a robust first quarter, along with an encouraging outlook for the balance of the year, we are raising guidance for both NAREIT and core FFO to $7.48 to $7.56 per share.
At the $7.52 midpoint, this increase represents 6.5% growth for core FFO when compared to 2025, with the range being roughly 6% to 7% at the low and high end of the range, respectively. Drivers for the guidance increase include our comparable GAAP-based POI growth outlook improving to 3.25% to 3.5% from the previous 3% to 3.5%. Our cash comparable growth, or adjusted comparable per our disclosure, is expected to be 75 basis points higher—so a range of roughly 4% to 4.5%—which is a 35- to 40-basis-point improvement. Small-shop momentum helped us maintain our occupied rate during the second quarter, and we continue to forecast a spike in our overall occupied rate to the mid- to upper-94% range by the end of the year, powered by leases that have already been signed. We continue to see stronger-than-expected contribution from the $750 million of dominant high-quality properties acquired in 2025.
Our outlook on term fees also moves higher to $10 million to $11 million as second quarter fees were roughly $600,000 to $700,000 higher than our forecast with better visibility into the second half of the year. This roughly $2 million increase is offset by the $2 million rise in our forecasted G&A as we make investments in our digital innovation and business development teams. Incremental development POI is up $500,000 to $14.5 to $15.5 million as we deliver space to tenants ahead of forecast. We are keeping our credit reserve as is at 60 to 85 basis points of rental income as we effectively run near the midpoint year-to-date. Lastly, we have adjusted our interest rate outlook to reflect more conservative current market expectations. Additional guidance assumptions remain unchanged and are outlined on page 27 of the 8-K. This updated guidance also reflects the $66 million of asset sales completed during the quarter with the foregone yields in that mid- to upper-5% range.
Please also note that we issued $61 million of equity during the quarter through our ATM program, further enhancing our capital base. We continue to be active on capital recycling, with additional acquisition and disposition opportunities targeted for the second half of the year and we will adjust guidance likely upwards as we go. To summarize, our guidance increase is driven by the following puts and takes: $0.03 of forecasted operational outperformance driven by parking, percentage rent and incremental income and stronger occupancy than we forecast; plus $0.02 from term fees; offset by $0.02 of higher G&A for the aforementioned investments in digital innovation and business development; and $0.01 to $0.02 from a more conservative interest rate outlook. With respect to our expected quarterly FFO cadence over the remainder of 2026, we have set the third quarter at $1.82 to $1.86 per share, and the fourth quarter at $1.91 to $1.95 per share—primarily driven by the aforementioned contractual occupancy growth.
As a result of the strong year-to-date and our bullish outlook, Federal will continue to lead the REIT sector as its only Dividend King, a distinction of 50-plus consecutive years of annual dividend growth. We once again increased our dividend for the 59th consecutive year to $1.16 per share per quarter, or $4.64 annually. You have heard me say since I joined the company a decade ago: for every year I have been alive, Federal Realty has increased its annual dividend. Think about that. Since 1970 at roughly a 6.5% cap, that is a record the Federal team continues to be tremendously proud of. With that, operator, please open the line for questions.
Questions and answers
We will now begin the question-and-answer session. If at any time your question has been addressed and you would like to withdraw, we ask that you limit questions to one. You can then reenter the queue for any follow-up questions. At this time, we will pause momentarily to assemble our roster. The first question is from Michael Goldsmith with UBS. Please go ahead.
Good morning. Thanks a lot for taking my question. You had previously spoken about NOI growth accelerating in the second half of the year after the lower second quarter results. Is that still the case? And then can you provide some color on what is driving that? Is that occupancy growth? Is it increasing rent growth or any other factors? Thanks.
Yeah. I think consistent with what we shared on the May call, the second and third quarters will continue to have some occupancy churn in the third quarter, so that will keep a lid on things until an acceleration in the fourth quarter, which we really will not see the full benefit of probably until next year, as those tenants get open and operating and rent-paying. But yes, it is consistent with what we shared at Investor Day.
Yeah, Michael, I would just add to that: think about the anchor progress that we have been making and the timing of the openings of those stores—very heavily weighted to 4Q—which should bring occupancy on the anchor side up into the 98% plus range after that.
The next question is from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey, morning down there, Donald. The robustness of the leasing obviously against the economy and everything else in the macro, do you get a sense that all the tenants are leasing on full offense, or do you feel increasingly tenants are leasing because there is not enough space left, and therefore they feel more compelled to lease? I am just trying to understand the robustness—if it is all 100% offense for growth, or some tenants are increasingly feeling like they need to take the space because if they do not there will not be anything left for them as space winnows.
Yeah, I think that is a great question, Alexander. The answer is a balance of both. It is hard to paint with a broad brush. Clearly, in large measure, business plans are long term in nature; expansion plans are long term in nature. Accordingly, the offensive nature of growing your portfolio is a driver. Having said that, it is no secret that because there has been no new supply added over the last 15 or 20 years, making sure that retailers are in the places they need to be is important. Anytime a great piece of real estate comes available, there is always ample demand. I do not know if you define that as defensive or offensive; I personally do not care. It is about making sure great space is occupied and that demand exceeds supply. That is the case, it has been the case, and everything we see suggests that should continue to be the case. So offense is the real answer to your question.
The next question is from Haendel St-Juste with Mizuho. Please go ahead.
Good morning. Hey, Donald. I wanted to ask about acquisitions. You guys have obviously been more active the last couple years, and there is a lot more that we are hearing is on the market today for various reasons. Could you add some color broadly on your appetite here? Kind of what inning are we in, the sort of portfolio moves you have been making in recycling some assets? Are you seeing more deals that are passing your screening? Maybe some color on target returns and if equity could play a role here. Thanks.
Yeah, I am on the West Coast—hi, Haendel. That is a loaded question, so I will do my best. Let me start with what we are seeing and how big the pipeline is. At Investor Day, we were looking at about $1.4 billion of opportunities we thought were interesting that provided some of the large centers we are looking at for returns. As we progressed, that pipeline is still pretty robust and is actually a little bigger than $1.4 billion today. So I think the deal flow is looking and feeling really good for us as we progress through the balance of the year. Our appetite to acquire assets is still very strong. It is gotten a little bit more competitive out there. Cap rates have come down a little bit, particularly for the best of the best properties. This cuts both ways as we are recycling capital—lower cap rates make acquisitions more expensive but make dispositions more valuable. For acquisitions, it is more competitive; I will give an example where there are a couple of properties we like, really good properties with good mark-to-market on in-place rents, but they are set to trade at cap rates lower than 5%.
Breathtaking, really, to get to an 8% unlevered IRR—you just could not get there. It is competitive, but we remain optimistic there are properties where we can deliver our returns. We will look at opportunities in the mid-sixes cap rates and maybe even a little less than a 6% cap rate if the growth is really good—4% to 5% CAGRs over the first five years should get us to better than 8% tenured unlevered IRRs. As Donald said earlier, it is about whether there is material unmet demand and the ability to push rents and get to stabilized performance in a reasonable time frame. That is how we drive revenue. As we look at opportunities, Wendy and her team are laser-focused on understanding demand and our ability to drive rent or not.
I'll just jump in: it is really all about revenue growth and getting comfortable with our mark-to-market underwriting assumptions. Our due diligence process goes very deep—we are format-agnostic and have a wide lens of retailers we do business with. The secret sauce of our due diligence is those tenant relationships and getting unfiltered, in-depth feedback from tenants who are not in a particular shopping center. That helps with underwriting and understanding what is working at the property, what is not, whether the property is on their list for expansion, and if not, why not. We saw that example in Kansas City: we bought that property a year ago and have already done over 20 deals, making strategic moves with tenants before we even bought the property. That is why some projects open and are under construction so quickly. Lastly, our operating platform—knowing how to operate properties efficiently and scale local operators—matters. When you are setting up in a market that might have a fixed TAM like Kansas City or Annapolis, that goes straight to our bottom line and is very productive.
The next question is from Greg McGinniss with Scotiabank. Please go ahead.
Hey, good morning. So you finished acquiring the entire Kingstowne assemblage. It is not in the redevelopment pipeline. Is this a simple lease-up strategy and doing more in the same space, or is there a different long-term plan there? And not to get you too far over your skis, but on the potential two deals you talked about, Donald, are those considered market-dominant centers in new markets or more of a clustering opportunity? Thanks.
Thanks, Greg. Couple of things: Kingstowne is just good real estate—it's a piece of land in the middle of our two shopping centers that we believe is better in our hands than anyone else's. It is a stay-the-course strategy for the near term, but because of where it is and the due diligence we did on alternatives, we have a good plan should there be any issue with current tenancy. In some respects it is defensive to fill out the square of the two shopping centers, but also offensive because of what we think we have going on there. Regarding the properties we are looking at, I cannot comment until we are all done, but I will say we have been clear over the last year that we would like to be in three to five new markets and that filling in existing markets remains a priority. It is a combination of both. I will not comment on the two particular properties I referenced, but that is the business plan of the company and what we are doing. We have had more success than I thought at the beginning of the year, so things have changed. I hope to provide more complete news as the year continues.
The next question is from Andrew Reale with Bank of America. Please go ahead.
Hi, good morning. Thanks for taking my question. Maybe just to hit on guidance, could you provide a little more color on some of the tenants driving the term fee higher this year? And then on the higher G&A, Daniel, I know you mentioned that might be investments in digital initiatives—could you speak a bit more about those? Thanks.
Thanks, Andrew. Let me tell you about one particular term fee situation and why it is important. I can't give you specifics about the tenant, but imagine a really strong lease at a good shopping center where the tenant has a go-dark right—they can go dark but remain obligated to pay rent. They were paying rent regularly, so while accepting the ongoing rent, the ability to release the space was there. We have a new tenant coming in, paying better rent, and that tenant will be better for the shopping center. By the way, the old tenant paid us seven years of rent—so the math works all day long. That was a $3 million term fee. That is why the change in our assumption for the year matters. I will take that all day and hope that helps you understand the strength of our leases and the reason for doing deals with high-credit tenants where we can backfill and essentially double-dip.
I'll add a little color: the anchor tenant was not leaving for credit issues; it is a strong investment-grade-backed tenant who made a strategic decision to exit a particular market. Of our $8.6 million of term fees year-to-date, over two-thirds were from investment-grade-rated or investment-grade-backed tenants. Regarding guidance, we increased the guide driven by a $600,000 to $700,000 beat in the second quarter plus greater visibility into the second half, which implies roughly $1 million per quarter on average in Q3 and Q4. On G&A: yes, we are making investments in digital innovation and business development. We expect to get strong returns—some immediate on business development, and a bit longer term on digital innovation. We have a strong group of professionals who have joined us and we feel good about making these investments; they will impact the G&A line item in the second half of the year.
The next question is from Juan Sanabria with BMO Capital Markets. Please go ahead.
Hi, thanks for the time. Just a question for Daniel. Same-store NOI implies a bit of a deceleration from the first half into the second half. Curious on what is driving that, and maybe how the built-in-place occupancy should trend for the balance of the year as a subset of that.
Yes. We had indicated previously lower numbers in the second and third quarters and a stronger fourth quarter. You should expect low twos on our GAAP-based metric for comparable, and probably in the low threes range on a blended basis—so that gets us into the low threes in the second half of the year. Hopefully we can do better than that. Occupancy is driving a lot of that and getting tenants open. We will see a nice resurgence in the fourth quarter on that comparable metric. I feel good about the comparable metric entering 2027.
The next question is from Samir Feldman with Wells Fargo. Please go ahead.
Hi, thank you. Can you talk about where yields are today on your entitled multifamily pipeline? How should we think about potential start activity over the next 12 to 24 months, and which locations are closest to penciling?
Yeah, Samir. On a cash-on-cash basis, we'd love to be in the mid-6s to 7% on the residential projects we do. If it does not pencil—if it's below a 6% cash-on-cash return—we are just not going to do it. Opportunities we have include Pembroke in Florida, which we are getting close on, and potentially a site at Assembly. Those two are closest to the next stage after Willow Grove. Remember, we have things squared away now for 2026, 2027, and 2028 and effectively what will hit 2029. Over the next 12 months we're focused on getting the next one or two or three projects teed up; those are our best guesses at the moment.
The next question is from Michael Griffin with Evercore. Please go ahead.
Great, thanks. Jan, I want to go back to your comments on cap rate compression and as it relates to opportunities in expansion markets. Town Center and Village Point were in the high sixes; if you are talking about deals in the low sixes that feels like a decent amount of cap rate compression over the past year. Is it increased competition for operationally complex assets, or is it a mix of the more coastal core markets you highlighted versus expansion markets?
Hi, Michael. Good question. One factor is there is just more capital chasing retail right now, which creates more competition and pushes yields down. A lot of that capital focuses on some of the best properties available, and that has pushed yields lower across geographies. On the other hand, by owning assets like Kansas City and Village Point in Omaha and spending time underwriting and talking to retailers, we've seen the performance we can deliver. Even though yields are a little lower going in, we can still drive 8% or better IRRs. So from our perspective, even though yields are lower, it feels neutral to our ability to execute.
Let me add: it's not an asset-by-asset cookie-cutter approach. You can't say all grocery-anchored centers trade at X; it's the underwriting over the next five years. There's a limit to how low we will go on a going-in cap rate—we will not start deals that are dilutive. These are specialty assets, often the biggest, best assets in their communities, and the priority is whether we can underwrite the IRR based on lease-up and mark-to-market potential over the next five years.
And I would add, Michael, that the type of assets we look for are unique. When you get one of these larger properties that has been under-managed and has significant lease-up potential you can get to meaningful IRRs even with a tighter going-in cap rate. These are specialty, often transformational assets, not generic small shopping centers.
The next question is from Floris van Dijkum with Ladenburg. Please go ahead.
Hey, thanks. I note you have a $200 million mortgage coming due on Bethesda Row next year and you have an option to extend that. Is that potentially an asset you could sell a JV interest in? Can you talk about your thought process on partially selling an asset like that versus keeping 100% interest?
Thanks, Floris. When we look at how we fund our business plan, it's beneficial to have many options. Assets that are important to the company, where we've done good work over many years, we do not want to lose control of. But they can be a source of low-cost capital, so we will look at options including selling a partial interest as part of the overall capital structure and plan. Wholesale joint ventures on big assets are not the default, but selective joint-venture activity is a useful, incremental tool to expand the business, and we will be looking at that in the coming months and years.
The next question is from Craig Mailman with Citi. Please go ahead.
Hey, good morning everyone. Just on the acquisition side: institutional capital is pushing cap rates down in a space where rent growth has been harder given fragmented ownership and anchor importance. When you talk to brokers underwriting for new capital sources, are they compressing cap rates because they expect rent growth to accelerate, or is it a hedge on inflation, or because debt is more accessible? Just trying to understand how these numbers pencil on an IRR basis unless people are accepting lower returns.
Craig, good macro question. I tend to get to the micro—particular assets and underwriting. Historically, grocery-anchored shopping centers were a risk-off move and served as a hedge. With more capital focusing on bigger, high-quality, operationally complex assets, there's recognition that these larger assets often require reinvestment and active management to unlock growth. Putting capital into shopping centers with better credit tenants, better opportunity for growth, and in affluent areas can be a very good use of capital. So it's a combination of factors you mentioned: more capital, views on growth, inflation hedging, and access to debt. There are core-plus and opportunistic opportunities out there, and certain operators—ourselves included—can extract that value.
The next question is from Richard Hightower with Barclays. Please go ahead.
Hey, good morning. You have a deep menu of redevelopment projects in the portfolio. Given the strength and underlying trends discussed on the call, does that open up or allow other assets in the portfolio to pass the hurdle to spend capital that you were not considering six or 12 months ago? Does it change the math on that expenditure?
I think it does, Richard. Portfolios have periods when math works better and periods when it does not. While inflation can be challenging broadly, it isn't necessarily bad for retail if controlled and if you can push rents in a supply-constrained marketplace. That does open up other opportunities we may not have looked at because the math previously did not work. I'm bullish that some of those opportunities will find their way into the business plan over the next 12 months.
The next question is from Michael Mueller with JPMorgan. Please go ahead.
Hi, sorry, I was muted. Following up on the redevelopment question, how do you think annual spend will trend over the next three to five years compared to where you are this year? Do you think we are closer to a material pivot to the upside?
Good question. We have been analyzing the pipeline and what is ready to move forward. Over the next 6, 12, to 24 months, you could see us continue to add more projects—residential-over-retail and retail-oriented redevelopments. In the neighborhood of $400 million to $500 million of projects could get started in the next 12 to 24 months, but we will be disciplined and only pull the trigger if they make sense from a return perspective.
All these questions are about how to accelerate growth. One area not directly asked about is operating margins—digital innovation, business process improvements, and other tools will make us more profitable as well. Add that to the list of reasons why we expect good growth going forward.
The next question is from Paulina Rojas-Schmidt with Green Street. Please go ahead.
Good morning. You talked about targeting properties with specific high standards. What tends to be the hardest characteristic to meet that makes a center good but not quite good enough to meet your bar? Sometimes I see properties transact in affluent pockets at materially higher cap rates than you quoted. Is the breaking point that the market is not large enough, lack of flexibility for densification, or something else?
Good question. I'll start: it is about the details in the leases and the ability to drive growth. Even in an affluent area, if a property has been fully exploited and there is no growth available through remerchandising or redevelopment, it will trade at a higher cap rate. The single biggest thing is where the in-place rents are and what opportunities exist to change that cash-flow stream. That is determined locally by job creation, market dynamics, and the ability to improve merchandising. It's a local business, and that local detail is the biggest driver.
Position within the market matters. We target the best assets in those markets. Sometimes you may see a property that is positioned as the third or fourth best asset in a market—that will not command the tenant demand we underwrite. You will see us pass on assets like that because we do not see the long-term opportunity, and that is reflected in the higher cap rate.
This concludes our question-and-answer session. I would like to turn the conference back over to Jill Ryann Sawyer for any closing remarks.
Thanks for joining us today, and have a great rest of the summer.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.