Federal Realty Investment Trust

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020 Federal Realty Investment Trust Earnings Conference Call. At this time, our participants are in a listen-only mode. After this brief presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference Over to your speaker today, Ms. Leah Brady. Please go ahead.

Good morning. Thank you for joining us today for Federal Realty's first quarter 2020 earnings conference calls. Joining me on the call are Don Wood, Dan Gee, Jeff Furcus, Wendy Sear, Dawn Becker, and Melissa Solis. They will be available to take your questions to 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 security's Litigation Reform Act of 1995. Forward-looking statements include any annualized or projected information, as well as statements referring to expected or anticipated events or results. 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 yesterday, 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 operation. We've also posted on the website a slide deck that has more detailed information on the impact of the COVID-19 pandemic on our business to date and various actions we've taken in response to COVID-19. These documents are available on our website. Given the number of participants on the call, we kindly ask that you limit your questions to one or two per person during the Q&A portion, and you should feel free to jump back in the queue if you have any additional questions. And with that, I will turn the call over to Don Wood to begin our discussion of our first quarter results. Don?

Thank you, Leah, and good morning, everyone. You know, there's a certain comfort in the familiarity of the well-worn quarterly routine of the earnings call with each of you that's oddly reassuring to me as we battle through this mess each day in preparation for advantageous positioning coming out the other side. First, my heartfelt thoughts and prayers for good health to each of you and your families and friends in this crazy time, particularly those of you who hold up in small spaces in my favorite city, home to the 27-time world champion New York Yankees. Next, a shout-out of immense respect and appreciation for the unity and the work ethic of the federal realty team on the front lines over these past six to eight weeks, including our property management team who have taken care of our assets so that essential businesses could provide those services to the community, and also to those team members whose jobs weren't full-time anymore and who volunteered for the numerous new areas where their help was needed. Top to bottom, everything in between, thank you. This is one dedicated and talented team. Let me start with a few comments about the first quarter and then move on to today's situation and where we are headed from here. As you saw in our press release last night, we reported FFO of $1.50 a share in the first quarter compared with $1.56 in last year's first quarter. Even before the COVID-19 crisis, we're going to have a tough year-over-year comp because of the $5.4 million in lease termination fees in last year's quarter compared with $2.7 million this quarter were a difference of roughly 3 cents a share. But we were having a great start of the year up until the last two weeks in March and were on track to grow FFO per share extermination fees by 2 to 3 percent. That changed in a blink with mandated shutdowns and fear of the uncertain future. The states that we do business in were among the first to close. And by the second half of March, we were really feeling the heavy drop off in activity. Rent payment deficiencies, and increased bad debt provisions among other items directly attributed to COVID-19 totaled $4 million or six cents per share in the first quarter. Still, a pretty solid quarter which also included over 80 leases executed for nearly half a million square feet. So, we went into this whole mess in a strong position from both an operational and most certainly a balance sheet perspective. So I guess the real question is, will we make it through, and what will we look like on the other side? First things first, yes, we will make it through. Dan will spend considerable time going through our current cash position, cash flow projections, our development spending flexibility, and plans for additional financing. One comment from me in that regard, history and track record really matters at a time like this. A reminder that in 2009, in the depths of the recession, When markets were closed to many, many borrowers, we accessed the unsecured market. We secured bank debt from a consortium of lenders. We upsized our line of credit. We even issued a small amount of common equity. The point is that all of those markets were open to us then, and our balance sheet and competitive position is even stronger today. Again, the NG on our plans in a bit. Our development spend. which approximated $35 million a month coming into April, has been paired to about $10 million a month, with the Massachusetts and California shutdowns at Assembly Row and Santana West and a few other smaller projects saving cash currently. Construction at Cocoa Walk in Florida and 909 Rose at Pike and Rose in Maryland continue as both are nearly complete and, in fact, will be over the next few months. We have every intention to complete all of our... development projects that are partially constructed. The start of construction on all new development projects are, however, on hold until we have some better visibility on the length of the pandemic's effects. Okay, rent collection. It's obviously impossible for a simple tell-all statistic or metric to try to explain such a multifaceted and complicated phenomena as the virtual shutdown of the entire U.S. economy by pandemic. And April rent collections certainly are not that metric. But they're a relevant piece of data. They're easy to understand. They fit neatly on a matrix of comparative companies. But like same-store NOI, it's just not that simple, and it's such a small part of a company's post-COVID viability and growth prospects. More on that in a minute. For the record, we collected 53% of our contractual rent in April. which we expect to be better than the mall sector and a little bit less than the grocery-anchored shopping centers who have a tenant base more highly geared to essentials. Our portfolio is far more diversified, which we see as a major strength, not a weakness, for any period in history and any economy in history other than in the quarter or two that a global pandemic literally shuts down the world. All 104 of our shopping centers are open and operating with about 47% of the tenants open and trying to do some level of business. About a quarter of our rent comes from essential services, grocery, drug, banks, et cetera, and that was largely paid in April. Another 20% comes from our residential and office tenants, largely in our mixed-use communities. 95% of our resi rent for April was collected, as was 87% of office rent. Restaurants make up 15% of our rental base, about half full-service, and half QSRs and fast food. About a quarter of that rent was paid in April. Fitness and experiential tenants, like theaters and bowling concepts, comprised another 6 percent, and very little April rent was collected in that category. Payment was sporadic on the balance of the portfolio. So, our first response for non-payers was, of course, to communicate with clarity that we expect existing contracts to be honored. and in many cases they were. Others did not pay, have been put in default, and no active conversations are underway between the parties for a whole host of reasons. These are largely small tenants who were struggling pre-COVID-19 and will have a hard time reemerging on the other side. Vacancy will clearly be higher on the other side of this crisis, no good prediction on how much higher at this point. The remainder are those tenants who have the wherewithal to pay, but who are looking for deferrals for the periods that they're closed and some for a couple of months after. These negotiations are complex and consider many factors, including the easing of lease restrictions that may impair our ability to redevelop down the road. We don't have a blanket policy for handling these negotiations. This is a really important point. One of the many advantages of our platform is that we're small enough to have senior level experienced executives handle each of these conversations on a one-off individual basis. We believe that that individualized approach will lead to the best result for federal as a whole as we look to the coming years and not just months. So I think all of that is a pretty good summary of what's happening right now. You can find additional information in a presentation available On our investor website, check it out. It's thorough if you haven't already. Let me move on to give you a few thoughts about where we see ourselves on the other side of this. And as you would expect from me, let me start with the short-term negatives. First, geography. No surprise here. The states we do business in will largely be the last to reopen and likely with the most stringent conditions. California, Massachusetts, Pennsylvania, Maryland, et cetera, you know the list. clearly a negative relative to the middle of the country in terms of the second quarter and probably the third quarter activity. Second are tenant makeup, more lifestyle and entertainment-oriented restaurants and retailers that are not essential for consumers during a pandemic, as I laid out in the percentages above. So those two things, geography and tenant mix, are not conducive to outperformance or accurately predicting performance at all in the second or third quarters of 2020, perhaps longer. Accordingly, we're in no position to offer earnings guidance for any period at this point. What we can do, however, is share our thoughts as to a pretty compelling plan and vision for our properties enhanced growth on the other side of this, first from the demand side. We see the geography negative in the short term as a huge positive on the other side of this. At the end of the day, real estate needs to be near high-paying job centers to be able to grow in value. Ours are. They're in densely populated and affluent first-tier suburbs to major coastal cities, but not in the central business districts of those cities. Plus, they're open air. Think Bethesda and North Bethesda, Maryland relative to downtown D.C. Coconut Grove to downtown Miami. Hoboken to Manhattan. San Jose to San Francisco. El Segundo to downtown Los Angeles. Somerville, Massachusetts to downtown Boston, Ballakinwood, Pennsylvania to downtown Philly. You get the idea. Open-air places, not enclosed buildings that are easily accessible by car with convenient parking, close enough to high-wage job centers that are able to attract the latest tenants and, and this is really important, provide a full array of services. The luxuries and conveniences. that both city and suburban people have grown accustomed to, and in fact demand, aren't likely to be given up on easily. It's kind of a Goldilocks scenario here. Not too close, not too far, just right in terms of those locations. Might what we've always believed to be the sweet spot, those close-in first-year suburbs, be even sweeter in a post-COVID-19 world? We think so. Second, Landlord-organized and integrated curbside delivery programs. That's landlord-organized and integrated curbside delivery programs at shopping centers and mixed-use communities in densely populated first-tier suburbs need to be, in our view, a permanent component of a property's toolkit for attracting customers, and not just for food. Face it, delivering goods and services to the end user profitably has not been broadly solved. Customer pickup in an attractive, convenient, safe environment is the most important piece to economically delivering goods that last mile. We'll be a leader in landlord-integrated curbside delivery on the other side of this. And third, it's not hard to see how the steady drumbeat of enclosed mall tenants who have been moving at least partly to open-air shopping centers over the past several years doesn't accelerate meaningfully. in the wake of COVID-19. When you think about which open-air properties are most likely to garner a disproportionate share of that movement, federal formats, tenant mix, and locations are pretty darn well positioned. We think this is one of the most important sources of where new tenant demand comes from that's necessary to replace the COVID-19 retail failures. There's also a fourth and a fifth and a sixth set of initiatives that we're working on that are too premature to talk about at this point, but they all relate directly to why all of us at Federal are, while patiently working through this awful pandemic today, extremely excited about what awaits as we work into the other side later this year and next and for many years after that. So as you sit back and take a break from compiling April rent collection stats and think about the future of the 25 or so publicly-traded retail-oriented real estate companies, and business today. I think you'd agree with me that our locations, our formats, our diversity, and innovative team should put us at the top of that list. Let me now turn it over to Dan before addressing your questions.