Earnings Call Transcript - REG Q3 2023

Christy McElroy, Senior Vice President, Capital Markets

Good morning, and welcome to Regency Centers' third quarter 2023 earnings conference call. Joining me today are Lisa Palmer, President and Chief Executive Officer; Mike Mas, Chief Financial Officer; Alan Roth, EVP National Property Operations and East Region President; and Nick Wibbenmeyer, EVP and West Region President. As a reminder, today's discussion may contain forward-looking statements about the company's views of future business and financial performance, including forward earnings guidance and future market conditions. These are based on management's current beliefs and expectations and are subject to various risks and uncertainties. It's possible that actual results may differ materially from those suggested by these forward-looking statements we may make. Factors and risks that could cause actual results to differ materially from these statements may be included in our presentation today and are described in more detail in our filings with the SEC, specifically our most recent Form 10-K and 10-Q filings. In our discussion today, we will also reference certain non-GAAP financial measures. The comparable GAAP financial measures are included in this quarter's earnings materials, which are posted on our Investor Relations website. Please note that we have also posted a presentation on our website with additional information, including disclosures related to forward earnings guidance. Our caution on forward-looking statements also applies to the presentation materials. Lisa?

Lisa Palmer, President and CEO

Thank you, Christy, and good morning, everyone. We had another strong quarter of operating results, supported by continued positive momentum in our business. Tenant demand remains really healthy and consistent, and this is evident in the strength of our rent growth and our ability to further increase leased occupancy despite elevated bankruptcies. And you're going to hear a lot more about this from Alan in just a few minutes. We continue to drive success within our development program as well. This is reflected in the leasing progress that we've made across our in-process pipeline as well as our significant volume of project starts year-to-date. Development is a core competency of our company. As you heard me say before, I believe we have the best national platform in the business. We have proven our ability to create meaningful value and earnings accretion over time and we remain well positioned to reach our targeted annual pace of $200 million to $250 million of redevelopment and development spend annually. On the transaction side, we were proud to close our merger with Urstadt Biddle in mid-August. Since then, we made significant headway integrating the assets into our platform and welcoming our new Regency team members. Our short time with the portfolio and the people has only served to reinforce our confidence in the combination of our two great companies. We also recently acquired two shopping centers. Nick will discuss these in more detail. Despite a pretty thin transaction market, I'm really proud that we were able to find some higher total return needles in the haystack. Turning to the macroeconomic environment, yes, we continue to see positive trends. We are seeing in real-time the spending power of the consumer in our trade areas. This is evident in the solid sales performance for our tenants and for traffic to our centers. And while a deceleration perhaps has been expected by many, we are not seeing it. We remain really encouraged by the structural supply-demand trends that are supporting our business today. Our tenants continue to invest in brick-and-mortar stores that are profitable as a last-mile distribution channel, and our suburban trade areas continue to thrive. While we continue to create value through ground-up development, overall, there is very little new retail space being added in the U.S., supporting the value and scarcity of existing space. That said, we do acknowledge that increased interest rates and significantly higher borrowing costs in recent months do create uncertainty. First is the future to our earnings from refinancing next year's debt maturities. Our intentional strategy of maintaining low leverage and a laddered debt maturity schedule do act as mitigants to changes in rates, but we still expect to see an impact in 2024. The bottom line, though, is that in today's uncertain world, the one thing that I am certain about is that Regency remains well positioned. This is a direct result of many attributes, one of which is our intentional portfolio composition. We believe the quality of our grocery-anchored neighborhood and community centers and the strength and demographics of our trade areas support durability of occupancy and create a wide buffer to insulate against potential economic impacts to our tenants and to our customers. Another attribute is our strong balance sheet and liquidity position, including our significant free cash flow. With this, we have flexibility in our capital allocation decision-making and an ability to self-fund and maintain consistency in our value creation pipeline through economic cycles. Importantly, we can also continue to play offense and be opportunistic. All of this has enabled us to maintain our dividend through the pandemic and raised it again this quarter by another 3%. We're now up 15% from 2019. Alan?

Alan Roth, EVP National Property Operations and East Region President

Thank you, Lisa, and good morning, everyone. We continue to experience a very healthy retail environment as demonstrated by another quarter of strong operating results and demand for space in our centers remained robust. We increased our same-property lease rate by 20 basis points in the third quarter, even when factoring in roughly 25 basis points of impact from bankruptcy-related move-outs, primarily attributed to the remaining Bed Bath locations. Our shop leasing activity has been at a record pace over the last several quarters, including above-average retention rates, resulting in another 50 basis point increase in our shop lease rate in the third quarter to a near record high of 93.2%. We were also able to generate solid re-leasing spreads again this quarter, with a 9% cash spread on a blended basis, including spreads of more than 20% on new leasing. Our straight-line rent spreads were above 17%, reflecting our keen focus on sustainable annual growth and our ability to consistently achieve contractual rent steps in the majority of our leases with annual steps often at 3% or higher on our shop deals. Leasing progress continues to drive strength in our same-property base rent growth, which was more than 3% in the third quarter, and remains our largest and most important contributor to same-property NOI growth. We continue to replenish our executed SNO pipeline as tenants open today, representing more than $36 million of annual incremental base rent, and our leasing pipelines remain full, supported by continued depth and negotiation activity. We are seeing strength in tenant demand across all of our regions and from a range of categories, including grocers, off-price, medical, restaurants, fitness, and pet services. In fact, at our former Bed Bath location, we've had one of the fastest absorption rates in recent memory as it relates to a material anchor liquidation. While most of the new leases won't commence until the second half of 2024 or later, half of our vacated spaces have been executed with new tenants, and the remainder of the space is in active negotiation. Based on our activity backfilling the rejected leases, we now expect rent spreads above 30% on average, exceeding our original projections. Regarding the recent Rite Aid bankruptcy filing, we have 22 locations in total, representing 50 basis points of ABR. We had one store that was already dark, which was part of the initial rejection list, and one more on the going out of business sale list. We are early in the process of this bankruptcy proceeding, but we feel really good about our exposure and the quality of our locations as a result of productive sales or below-market rents. We know that tenant bankruptcies are a normal part of our business. Importantly, our high-quality shopping centers are well-positioned to grow through it with better merchants, often at higher rents and driving greater traffic to our centers. Lastly, as Lisa mentioned, the integration process with Urstadt Biddle has been progressing successfully. We're excited to welcome our new Regency team members in the Northeast and bring these high-quality assets into our portfolio where we are already having tremendous success on the leasing front. With this transaction, we further strengthened our best-in-class operating platform. Nick?

Nicholas Wibbenmeyer, EVP and West Region President

Thank you, Alan. Good morning, everyone. We had another productive quarter for development and redevelopment activity, increasing our starts year-to-date to $210 million. One of our Q3 starts is the $15 million redevelopment of Circle Marina Center in Southern California. Acquired in 2019 with the intention of redeveloping the center, the project includes the replacement of the existing Staples box with the new Sprouts Farmers Market, in addition to extensive site improvements of the façade renovation, enhancements to the shop space in common areas. We continue to make great progress executing on our $440 million in-process pipeline and have seen tremendous activity on these projects, currently over 84% leased with blended returns of more than 8%. As an example, at our ground-up Glenwood Green project in Old Bridge, New Jersey, the target in ShopRite buildings are substantially complete and on schedule to open this coming spring. Leasing momentum has been strong; we are now 92% preleased with a great tenant lineup, including Wawa, Shake Shack, Duck Donuts, Paris Baguette, and Evolve Med Spa. Now turning to acquisitions. While private transaction market activity remains thin, we were able to source two unique opportunities to allocate capital and achieve higher IRRs within our targeted trade areas. In September, we acquired Old Town Square within one of our joint venture partnerships, a high-performing center in a dense Chicago neighborhood anchored by Jewel-Osco, the recent top grocer. This is a near-urban asset with a suburban layout located in a trade area with over 500,000 residents in a 3-mile radius. It is widely regarded as one of the premier grocery centers in the Chicago area. In October, we closed on the acquisition of Nohl Plaza in Orange County, California. This Vons-anchored center provides a near-term value-add opportunity after redevelopment, resulting in an estimated IRR that will exceed 10%. As we look ahead, our teams remain focused on building our value creation pipeline, and we see the opportunity to start more than $1 billion of development and redevelopment projects over the next 5 years. Demand is strong among grocers and other retailers looking to grow their footprints in high-quality centers within attractive trade areas, coupled with the relative lack of new supply. We have the best development team in the business, and we continue to see a compelling opportunity to capitalize on this incremental demand at a time when we are one of the only developers capable of funding projects and executing. As we've discussed many times before, we have the ability to self-fund our growth pipeline without raising any incremental equity with free cash flow north of $160 million annually. We are sourcing these projects through the redevelopment of our existing assets, we're acquiring redevelopment opportunities like Circle Marina and Nohl Plaza, and we're partnering with landowners and expanding grocers as we seek new ground-up development projects. It's important to note, especially in this environment, that as we evaluate investment opportunities, our teams remain cognizant of today's higher cost of capital, and we are focused on ensuring appropriate risk-adjusted returns. It also gives us comfort that for the type of assets we are building and redeveloping, we meaningfully derisk our projects ahead of putting a shovel in the ground with significant pre-leasing, entitlements, and bids for the majority of our costs in hand. Overall, we are excited about the investments we've made and by the opportunities we see ahead of us. Mike?

Michael Mas, CFO

Thank you, Nick, and good morning, everyone. I'll start with highlights from our third quarter results, walk through a few changes to our guidance for the balance of this year, provide some comments on 2024, and finish by touching base on our balance sheet position. We reported third quarter NAREIT FFO of $1.02 per share, which was impacted by $0.01 of EDP merger transition expenses and core operating earnings of $0.97 per share. We grew same-property NOI by 2.9% in the third quarter, excluding the impact of COVID-period reserve collections and termination fees. Importantly, as Alan mentioned, the largest component of growth continues to be base ramp, contributing 320 basis points to our NOI growth rate in the quarter, driven by the combination of embedded rent steps, higher commenced occupancy, and redevelopments coming online. Turning to our revised current year guidance, I'll refer you to the detail on Slides 5 through 7 in our earnings presentation. Driven by another strong quarter of new leasing and continued high tenant retention, we've eliminated the bottom end of our prior same-property NOI growth range and are now guiding to finish the year at about 3.5%, excluding COVID-period reserve collections and termination fees. We have also raised our per share core operating earnings guidance by $0.03 at the midpoint, driven primarily by the upward revision to same-property NOI, the expected accretion from the Urstadt Biddle transaction, and changes to our acquisition and disposition assumptions. Comparably, we only raised our NAREIT FFO per share range by $0.01 primarily due to the offsetting impact of forecasted merger transition costs. As we all start to plan for 2024 on Slide 8 of our earnings presentation, we provided some forward-looking considerations of certain nonrecurring items, including COVID-period reserve collections and noncash impacts as well as summary details on the Urstadt Biddle merger accretion and related continuing transition expenses. While I won't belabor the details on today's call, we trust you'll find this disclosure very helpful, and we highly recommend you review it as we recognize there are many moving pieces to consider heading into next year. Additionally, given the higher interest rate environment and potential future refinancing impact, we want to provide as much transparency as possible as to how we are thinking about our financing plans next year. These plans include an unsecured bond offering in the first half of 2024, sized in the $400 million to $450 million range with proceeds used to refinance scheduled debt maturities and to reduce our balances on our credit facility. We are proud of the strength of our balance sheet, which has been an intentional and foundational strategy of our company and is particularly important in times like today when for others, access to capital is more limited and pricing more volatile. Importantly, as Lisa mentioned, we are not immune to the adverse impact of higher rates, but our overall low leverage, combined with a well-laddered maturity schedule helps mitigate the financing impacts for Regency in any given year. We feature one of the strongest balance sheets in the REIT sector with our leverage remaining at the low end of our targeted range of 5x to 5.5x debt-to-EBITDA. We continue to generate significant free cash flow, expected to be north of $160 million this year, self-funding our growing investments pipeline, and we have access to meaningful liquidity through our $1.25 billion line of credit. Given this foundation, we remain confidently on our front foot as we move forward. With that, we're happy to take your questions.

Michael Goldsmith, Analyst

Can we just talk quickly about the moving pieces of the Urstadt Biddle transaction, any impact on the guidance next year, and then also next year? It seems like the deal is a headwind in NAREIT FFO this year. And so maybe the fourth quarter FFO number isn't the best run rate for next year, but it's also positive in core operating earnings this year and next year, it should be a tailwind to both FFO and core operating earnings. Is that right, Mike?

Michael Mas, CFO

I would encourage everyone to look at Page 8 of the supplement that we put out with our guidance considerations for next year. I think that would be very helpful. But I think you've actually outlined it pretty well in your question. It will be a positive contribution from a core perspective at the level of about 1.5% accretion. We've given those components there on the slide. It's basically worth an incremental $0.04 to $0.05 per share in '24 versus '23 and then the complexity that you're outlining would be in our NAREIT FFO line item as it relates to merger transition costs. We'll end this year, we estimate in the $5 million area, a large portion of that coming through in the fourth quarter of this year. We anticipate the trailing $7 million of those same expenses on a transition basis leaking into 2024. From a timing perspective there, I think it's fair to just pro-rata spread that $7 million through the year next year.

Lisa Palmer, President and CEO

And I can't help but take this opportunity. I think it's a great opportunity to just reiterate what I said in my prepared remarks. It's been a short time. I mean, we just closed in mid-August, but the integration and bringing the priorities and the people into Regency in that short period of time. It has just really validated that this is a great transaction and a combination of two really good companies, and we're excited about it.

Michael Mas, CFO

One last piece. Just to confirm, many have asked us about the noncash impacts from the purchase accounting; it's in our materials, but I just want to confirm that there is no impact in 2024 as the noncash revenues are offsetting the noncash expenses.

Michael Goldsmith, Analyst

And my follow-up is on the lease escalators. It seems as though that's the lease of our same property NOI algorithm, it seems like you're getting 3% plus. I guess how quickly can, in an elevated escalator environment, you've got the most exposure to small shop? How quickly can you kind of cycle through some of the older leases, which may have lower escalators and get these tenants on to higher escalators so that it slowly lifts your overall earnings growth or same-property NOI algorithm?

Alan Roth, EVP National Property Operations and East Region President

Yes, Michael, this is Alan. What I would say is that is a keen focus and has been for quite some time. As you noted, I don't think you said the number, but 75% of our shop deals did have 3% or higher escalators and approximately 95% of our deals had escalators. The team is constantly, when given the opportunity to have a rent step opportunity, we are implementing it. And so certainly, a keen focus.

Eric Borden, Analyst

It's Eric speaking on behalf of Juan. I’d like to begin with Old Town Square. Could you discuss the background and the potential opportunities within this asset? Also, does this suggest a possibility of expanding your presence in Illinois and potentially other Midwest markets?

Nicholas Wibbenmeyer, EVP and West Region President

Eric, this is Nick. I appreciate the question. So starting off with Old Town per your question, yes, it's an asset we've been targeting for quite some time to have the ability to have a suburban layout and a near urban environment with a really high-quality grocer. We have tracked that asset for probably over a decade and just seen it perform year after year. It was one we were excited to have the opportunity to participate in the bid process. It was ultimately owned by an institutional owner that did have an end of their life to that property, as our understanding, and so they were looking to liquidate it. On the flip side, once we got control of it, one of our long-standing institutional partners that we've been partnered with for nearly 20 years did have the opportunity through our rotation to take an 80% stake, and they exercised an opportunity given they were excited about the real estate as well. We were happy to get that one locked up and closed this quarter. In terms of your question on the Midwest, as you know, we're focused in all major markets where we have offices. We are looking for those needles in the haystack. I heard an analogy this week, and I kind of like it: instead of the normal deal flow, there are drips of water out there. We are evaluating each of the drips of water in the major markets we do business in. The ones that are equally accretive to our quality and growth, and accretive to earnings, we are going to act on. We have the ability to act on that in the Midwest or the coastal markets, focusing our capital where it makes sense.

Eric Borden, Analyst

Okay. That's helpful. And maybe one on the SNO pipeline. Of the $36 million, how much is that related to Bed Bath? And then how should we think about the cadence of that coming online through '23 and '24?

Michael Mas, CFO

Eric, $1.5 million of that $36 million is Bed Bath. I'll add to this. Interestingly, we did add $3 million of UBP portfolio SNO pipeline to that number as well in the quarter. From a cadence perspective, about 80% of that pipeline will come online through the end of next year.

Lizzy Doykan, Analyst

I just wanted to follow up on the cap rate that we closed on for the Chicago asset, and maybe if this is an indication for where you see cap rates trending for quality grocery-anchored centers today? And then separately, if you could confirm the pricing on Nohl Plaza. I know that deal is quite different, given the redevelopment opportunity, but would love to hear more of the backstory on that as well.

Lisa Palmer, President and CEO

I'll take the first part and then I'll pass it to Nick for Nohl Plaza. I love Nick's analogy. I actually didn't hear that this week, and we were together. So I'm not certain where he heard it. But there really are drips of water and not deal flow. It's really difficult to say that the cap rate on Chicago is a read-through to cap rates. The transaction market is still just really thin. We think of it as more of a needle in a haystack. The most important thing, and Mike said this, and you've heard me say it many times, we generate a significant amount of free cash flow, and we have that cash flow prioritized to go through our development and redevelopments. To the extent that we have excess cash flow not allocated to that, we have the ability to be opportunistic. That’s what you're seeing us do with the Chicago asset as well as Nohl Plaza. So I'll pass it to Nick for Nohl.

Nicholas Wibbenmeyer, EVP and West Region President

Great question regarding Nohl, very different profiles from Old Town. Nohl was owned by a TIC that had owned it for decades, ultimately got to the point where the TIC wanted to divest and take their money and move it elsewhere. Given it was owned by a TIC, there wasn’t much capital invested over those years. It was a great opportunity for us to use our platform in Southern California to come in. We love the real estate. We love the fundamentals of it, but it definitely needs a reinvestment, and that's an opportunity for us. Although you see the cap rate there, when you do the math, it is lower than a standard acquisition. Given the redevelopment we expect to do near term and the investment we expect to make, we do expect the IRR to be north of 10%. We are really excited about using our redevelopment expertise to enhance that asset and put it into the operating portfolio for a long time to come.

Lizzy Doykan, Analyst

Great. That's helpful. And second, just looking at your page on net effective rents from the supplement, it looks like the composition of new leases signed for small shop trended down quarter-to-quarter, closer in line with anchor leases signed. I guess, first, is that a function of moderating demand from small shop? What may be more of a fair composition to think about in signing new leases? And then second, what's more realistic as to how much further you can push on the small shop lease rate, given it's reached a near-record high?

Alan Roth, EVP National Property Operations and East Region President

Liz, this is Alan. Thank you for the follow-up question. No, it is not indicative of any market noise whatsoever. It can be a bit lumpy quarter-over-quarter, as you know. Yes, there were more anchor transactions in Q3 than we had in the prior quarter, and so that certainly is what drove that. Regarding shop lease rate, I was laughing, but dead serious when we were having a conversation amongst the company; records are meant to be broken. I believe in the team we have, in the portfolio that we've got. While we are certainly focused on the shop side, being able to do our best to continue to drive that at the 93% mark right now. I’m excited to watch and see what the team can do.

Lisa Palmer, President and CEO

The environment, as you've heard us say, and you've heard all of our peers, is really healthy today and the demand in our sector is really strong. We've reiterated the structural tailwinds we have; they’re still there. The post-pandemic, hybrid work environment, limited new supply, and just the renewed appreciation from both the customers and the retailers on the physical presence. We are still benefiting from those tailwinds. I believe that this record is there to be broken.

Greg McGinniss, Analyst

I want to go back to the transaction market. It's helpful, the 10% or north of 10% IRR on the asset you bought in the quarter. But I'm just trying to see kind of where your return requirements have trended with rates going higher on something that's more of a core asset versus a redevelopment opportunity like this? And your appetite for going into a lower initial cap rate knowing that there's upside, acknowledging the fact that you guys offer a good amount of free cash flow a year. So just thinking about your weighted average cost of capital and how you're kind of putting that all in the pot.

Lisa Palmer, President and CEO

Yes, and I'm just going to reiterate what I said before. We do look at our cost of capital, and it does inform and dictate what our required returns are. To the extent that we can invest our capital in something like Nohl Plaza, which is a redevelopment, just like our development pipelines. Yes, they take time to get to the total return, but we're looking at the total return IRR and to the extent that we can invest our capital on an accretive basis, ensuring that we are being adequately compensated for the risks involved, if it's core versus ground-up development, we look at all of it, and if it checks those boxes, then we're going to do it.

Craig Mailman, Analyst

And then just separately on the leasing, everyone is talking about really good demand across the board. And I'm just kind of curious from your viewpoint, having gone through cycles before. Are you feeling comfortable with the expansion plans of retailers? Do you think some of them are expanding too quickly, or does the lack of availability amplify how good things feel relative to the activity going on in your portfolio? Just kind of thoughts around that versus sort of the normal cycle.

Lisa Palmer, President and CEO

I'll take it from a higher-level perspective and to the extent you would like to color it up at the end. Generally speaking, there are higher borrowing costs for everyone, and that includes our tenants. I don't have a crystal ball. I'm not certain what the future holds. I can tell you, right now, we have not seen a slowdown in demand. Could higher borrowing costs and higher cost of capital for tenants slow their expansion plans? Possibly. But even if it does, we own high-quality real estate, some of the best real estate. Slowing it doesn't mean grinding to a halt; I am confident that we will continue to capture new stores and retailer expansion plans.

Michael Mas, CFO

I'm happy to take that one, and Alan can provide some color on the integration momentum within the portfolio in particular. The thesis of the merger is the same; this is a leasing exercise for us with a portfolio of very high-quality shopping centers in very high-quality trade areas. We saw an opportunity of a 200 basis points plus or minus differential in lease percentages between the two portfolios at the time of the merger announcement. Our eyes are set on closing that gap. We don't see any inherent reason that the assets themselves or the trade areas should experience that gap. We think the portfolio should slowly, over the next several years, come to the same lease rate as the legacy Regency portfolio. It won't be an overnight impact, but we've gotten off to a really good start.

Alan Roth, EVP National Property Operations and East Region President

Yes, I think Mike articulated it quite well. Our number one goal is a very intentional approach to leasing. We're also thinking about how some redevelopments in the future can be unlocked. In the near term, we recently executed a Dunkin ground lease where we're going to create a pad out in one of the parking lots of our shopping centers. There are certainly opportunities like that the team is focused on. In the medium to long term, there's also the opportunity to evaluate some redevelopment opportunities. For example, we had some interesting spaces around the closing of the merger; David's Bridal was in bankruptcy, and the team has already executed to replace that space. We had a large vacant former Barnes & Noble, and we brought in a phenomenal local multi-store operator with an illicit brewing craft beer concept that the community is really excited about. The team is hyper-focused on the shop leasing side. We're most excited about the great people integrated with our company; the platform will pay dividends long term.

Ronald Kamdem, Analyst

Just a couple of quick ones. Just staying on the development front, I see the $440 million, but in the presentation, you have another sort of $80 million at the midpoint in the next 12 to 18 months. Just on that $80 million, can you talk about whether those are pre-leased? Is there interest there? What would it take to start those maybe sooner rather than later on your thinking?

Nicholas Wibbenmeyer, EVP and West Region President

Appreciate the question, Ron. This is Nick. You're absolutely right. We are hyper-focused, as Lisa has said, and we've been vocal about continuing to lean into our development and redevelopment pipeline. The teams are actively doing exactly what you laid out in your question: derisking these as much as possible before we put a shovel in the ground. There is great tenant demand out there. Some of these deals are finalizing leases to get them released appropriately. We are being very thoughtful of costs and on some of these deals finalizing costs. Others are in the last legs of entitlements that we're finalizing. Once we check those boxes, that's when we put a shovel in the ground, and we are excited about what we're seeing in our continued pipeline of opportunities. You can expect great opportunities quarter in and quarter out.

Michael Mas, CFO

Ron, really, first, I appreciate the comments you made on the disclosure; the team did a phenomenal job with that, and I'm glad you appreciate it. Let me speak a little bit to those two line items from a '24 outlook perspective, happy to give some color. I want to be sure to say there's more to come when we put out our full suite of guidance and the package you're accustomed to, which we'll do when we guide in February. From a credit loss perspective, our outlook hasn't changed for the balance of this year, right? From a full year perspective, we've affirmed the 60 to 90 basis point impact for full credit loss, which includes both bad debt expense or uncollectible lease income, together with the lost rents associated with bankruptcies. Our historical run rate is about 50 basis points. We will do better than that in '23, largely due to the first quarter of the year, as talked about in that call, where we had an unusually high collection rate where they were paying some very late billings in that quarter. All of this is translating to a lower than average historical run rate. So, as for the second half of the year, it’s actually trending back to historical averages. Our eyesight looking into '24 is going to probably start in that area of our historical averages of 50 basis points. I'm also happy you mentioned interest expense in my remarks. I laid out what our plans include looking into next year, but let me just go through them again. Roughly $400 million to $450 million of planned financing activity. We need to refinance the $250 million bond that matures in June, currently at a 3.75% interest rate. We have some mortgages that are maturing next year, with one larger mortgage at roughly $80 million. We'll add that to our financing plan. Recall that we have the transaction expenses from the merger with UBP that we will also fold into that transaction activity. All in all, that's $400 million to $450 million in needs, and we see where the treasury is running at the moment, which is running in our favor. To give you an indicative spread, we're probably looking at mid-6s. This will depend on where base rates go from here and how our spreads have contracted or expanded. We feel really good about our ability to execute efficiently in the capital markets; it will just be a matter of timing and selection based on where rates end up.

Samir Khanal, Analyst

So my question is more on the anchor side. You talked a lot about limited supply; demand is still strong. But is there an opportunity to even push rents higher here upon renewals with anchors, perhaps from a mark-to-market opportunity or even higher rent bumps? Clearly, that's not happening overnight. How are those conversations going with anchors today?

Alan Roth, EVP National Property Operations and East Region President

Samir, this is Alan. The answer is yes. We have north of 50 anchor leases that do expire without options over the next three years. The team is hyper aware of those that need to stay, making sure we're getting the appropriate market rent for those, and where we can upgrade tenancy, we will certainly do that. Demand remains strong, largely driven by the lack of supply. As we look at our Bed Bath resolutions, the speed to get those executed was faster than we anticipated, with great retailers like REI, Restoration Hardware Outlet, and Burlington. There is a pretty deep pool right now, making the supply and demand scenario work to our advantage.

Samir Khanal, Analyst

Right. When thinking about anchors, they usually pay lower rents, right? Is the industry ready to reach a point where they start paying market rents that are even higher than where they are today? That's sort of my question.

Alan Roth, EVP National Property Operations and East Region President

Yes, Samir, the answer is yes. I would just take you back again using real-time examples like Bed Bath, where we're exceeding 30% mark-to-market on the deals we've signed. From that perspective, I believe that is definitive evidence that as we sit today, we can drive those spaces to a much higher market rent than what is currently in place.

Craig Mailman, Analyst

Your next question is coming from Craig Mailman of Citi. I want to reiterate the transaction market. It's helpful to note the 10% or north of 10% IRR on the asset you bought in the quarter. Where have your return requirements trended with rates going higher for core assets versus redevelopment opportunities like this? What's your appetite for lower initial cap rates knowing that there’s upside?

Lisa Palmer, President and CEO

Yes. I'm reiterating we consider our cost of capital for all deals based on our risk-adjusted returns. If we see a redevelopment, like Nohl Plaza or any of our developments, we're looking for those total return IRRs. As long as it exceeds our cost of capital, we find good prospects.

Ki Bin Kim, Analyst

Certain retailers have highlighted potential consumer weakness trends even among grocers. From your vantage point, do you see any discernible trends from your consumers?

Lisa Palmer, President and CEO

We have not seen anything to date. I believe our sector, while not completely immune, is more resistant. I hear from grocers that they have been experiencing pretty strong comp sales across the board, so they're still growing. We are not seeing that weakness yet and I expect, given the property type and value convenience we are positioned well to withstand adverse economic impacts.

Michael Mas, CFO

Regarding the bond we might raise next year, that is based on yesterday's estimates. Our indicative spreads are around 180 basis points. It's been moving rapidly, but we are actively monitoring the markets. We're going to execute when we see a good opportunity, and we can be patient. We have a relatively manageable debt maturing over the next two years.

Linda Tsai, Analyst

I know you don't usually disclose retention ratios, but just wondering if you're at peak or have even exceeded peak retention?

Michael Mas, CFO

We're basically at slightly above-average retention rates. I think we're in the 80% area, marking a slight increase on top of our historical average.

Linda Tsai, Analyst

In terms of the purchase accounting impact, that you outlined, how would those impacts flow through in 2025 and beyond?

Michael Mas, CFO

For 2025, it will continue to balance out in the same way. The weighted average life of that debt mark-to-market is significantly shorter than the leases, but this won't happen in the next 2 years.

Mike Mueller, Analyst

Two questions. First, for small shops at 93.2% leased, where is that on a commenced basis? Second, how is the leasing in the smaller centers performing from an efficiency standpoint compared to what you thought heading into the transaction?

Alan Roth, EVP National Property Operations and East Region President

For the second question, Mike, this is Alan. It's working well. A lot of that is back to Lisa's comment of not just the integration of the portfolio, but the integration of a lot of great people who had intimate knowledge of some of these smaller assets. We have felt great about activity and the integration process; there are no differentiation of challenges or successes based on the asset. Just in general, I think the rising tide is visible across the totality of the portfolio.

Michael Mas, CFO

From the stats department, the commenced shop rate is 89.5% at the end of the quarter.

Paulina Rojas, Analyst

As you highlighted, you have muted exposure to Rite Aid, but pharmacies are a material tenant of yours. What is your strategy looking forward for the industry as a whole? Given the size, what tenant categories come to mind for backfilling the space?

Lisa Palmer, President and CEO

I'll start, then let Alan finish, addressing the latter part of that question. When we think about pharmacy exposure, I know some of you have heard me say this before, I was with Regency when drug stores moved out of line into outparcels, and we were able to replace them at better rents. Now, most are on outparcels, which represents some of the best real estate in our shopping centers. While we have fewer retail locations when retailers close stores, it still provides opportunities to re-lease. We have some of the highest quality locations for re-leasing opportunities.

Alan Roth, EVP National Property Operations and East Region President

Paulina, we have been very proactive. We are aware of the locations we have, and we are executing leases with significant rent spreads. There are various retailers keen on taking these spaces due to their attractive locations.

Lisa Palmer, President and CEO

Regarding the transaction market, while it appears there is no significant deal flow, I'm proud of the total return opportunities we've identified, as we have opportunities that reallocate capital into a value-add redevelopment market. There still lies a disconnect between public market pricing and private market pricing. As we see today, the market is still a drip.

Operator, Operator

We reached the end of our question-and-answer session. I'd like to turn the floor back over to Lisa for any further or closing comments.

Lisa Palmer, President and CEO

Kevin, I appreciate that. Thank you all for your interest. Have a good weekend, and enjoy your extra hour of sleep or however you intend to use it. Thanks, all.

Operator, Operator

Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.