Operator: Thank you. And our next question comes from Linda Tsai with Jefferies. Please go ahead.
Linda Tsai: Hi. Thank you. I think you said earnings growth in 2023 with an 8% apps entire money costs will level of earnings growth does this mean for 2024, if you look at it the same way.
Dan Guglielmone: Well, 8% — we had significant headwinds 2027 — 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 100 basis points of incremental, if you back out the cost of that. So the 3% probably goes up to something north of 5%, less money costs at least from my perspective. I haven’t done the exact calculation, but that’s roughly where I would say.
Operator: Thank you. And our next question today comes from Anthony Powell with Barclays. Please go ahead.
Anthony Powell: Hi. Thank you. I think in the prepared remarks, you talked about how construction costs were going lower, which helps with your decision to do the Philadelphia residential, can you maybe expand more on what’s going on with construction cost, and do more of your projects in your future redevelopment pipeline look attractive given lower construction cost.
Dan Guglielmone: Yes, it’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 passed a couple of years, you’ve got better leverage to get labor rates that makes them more sense. And when you compare that to really last five or six 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 a redevelopment or development itself, it’s about predictability of costs in addition to growth on the rents. 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 things down to GMP’s a maximum price contracts.
And so when you’re able to do that, then you can then 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 could make sense of that, a year ago or two years ago or three 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 owns for a very long-time, and that gives you a huge advantage because the land costs are aren’t incremental landlords, 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. Please go ahead.
Paulina Rojas Schmidt: Hello, everyone. And my question is related to the prior one. And you reported for the Bala project an ROIC of 7, and I think you mentioned in your prepared remarks, the unlevered IRR as well. But more broadly speaking, what kind of profit margin we need to see when thinking about this project to [indiscernible] risks, whether it’s cost or leasing.
Dan Guglielmone: Not quite following your question, Paulina, you asking kind of what kind of huge premium we need to get to kind of have those — to have the IRRs get up into the double digit?
Paulina Rojas Schmidt: Yes, when we think about comparing your tax rate or —
Dan Guglielmone: I think that developing this towards — 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, as well north of 100 basis points, 150 basis points and 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 amenitize adjacent to great retail and we’ve been able to grow rents very attractively overtime. So as we grow rents, obviously the POI, it’s going to be a big driver of those unlevered returns as well. So those are the — those are the inputs that go in there that get us very comfortable, get a double digit IRR unlevered something that’s achievable, developing this to a 7 initially, and having a growth from there.
Jeff Berkes: Hey, 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 $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 Bethesda Row, Santana Row, Pike and 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, 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: Thank you. And our next question today is a follow-up from Alexander Goldfarb from Piper Sandler. Please go ahead.
Alexander Goldfarb: Hey. Good evening. 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 their 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 in in favor of the tenant that yes, at some point, they can get good economics, but may be a longer timeline than they actually are willing to underwrite and invest, just sort of curious what’s going on the private side as you talked to possible partners.
Donald Wood: Well, a couple of things. Alex. And Jeff, I’d love you to add a to this if you need to. But first of all, I’m — don’t use me as a proxy for what’s happening among the — the private side. In terms of their appetite because we have not seriously gone down the road with — with any of them in terms of serious negotiations because we don’t believe this is the right time. It’s effectively do a deal like that on the mixed use assets. When we looked at ourselves and where we see the growth in the portfolio, I think I’ve said this for the last four or five, five 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, I would like to see over the next year or two the capital markets, yeah, solidify themselves.
Obviously, we’re just in the very early stages of figuring out what the — what that means in terms of capital markets with the country. And so, I don’t have much more to add with respect to any specific group of private joint venture, investors because we really haven’t had in-depth conversations with them at this point. I don’t know. Jeff, anything?
Jeff Berkes: Yeah, Don. I don’t really have anything meaningful to add to that. Sorry.
Donald Wood: All good.
Operator: Thank you. And our next question today comes from Steve Sakwa of Evercore. Please go ahead.
Steve Sakwa: Yeah. Thanks. Just wanted to quick follow-up maybe with Dan G. 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, it’s about 100 basis points slower around three and a quarter versus the four, three, so maybe just kind of walk us through there. Is that really all kind of bad debt driven. Or is there something else kind of pulling that growth rate down? Thanks.
Donald Wood: Yeah. It is guidance. And I think there are a lot of things that go into now in particular that go into the FFO guidance. I mean as it relates to specifically, the comparable y-o-y growth with 2.5% to 4% occupancy levels and how aggressively and how quickly we can up towards 93%. I think, how much percentage rent. And 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 that’s going to drive FFO. Although it will necessarily drive the of POI metric excluding that, how quickly and how we can get development POI up. And I think one of the things that going to be a big driver as we look we purposely have $600 million of floating rate debt, quickly SOFR comes down.
I think we’re 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 drive some of the POI growth is just getting tenants open sooner, keeping tenants inpossession. Longer — keeping tenants in that would be expected to leave. I think that’s a — that’s a another driver. I think they all contribute throughout the range.
Operator: Thank you. And this concludes our question-and-answer session. I like to turn the conference back over Leah Brady for closing remarks.
Leah Brady: 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, y’all. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.
