Federal Realty Investment Trust

Greetings and welcome to the Federal Realty Investment Trust second quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Mike Ennis, Senior Vice President. Thank you. You may begin.

Good morning. Good morning. Thank you for joining us today for Federal Realty's second quarter 2020 earnings conference call. Joining me on the call are Don Wood, Dan Gee, Jeff Berkus, Wendy Seer, Don Becker, and Melissa Solis. They will be available to take your questions at the conclusion of our prepared remarks. A reminder that certain matters discussed on this call may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any annualized or projected information, 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 our operations. 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 of our call. If you have additional questions, please feel free to jump back in the queue. And with that, I will turn the call over to Dan Gee to begin our discussion of our second quarter results. Dan?

Thank you, Mike, and good morning, everyone. We're going to change things up for this quarter's call, and I will kick things off before handing it off to Don. There's a first for everything. I will take you through the results for the quarter with an initial focus on the major impact facing federal and every company in the retail sector, collectability of rental income, and the reserves we are taking due to the impact of COVID-19. Our approach at Federal to collectability and revenue recognition has historically and consistently been more conservative than the balance of the retail sector. To provide clarity on that point, let me refer you to our most recent NQ, which includes our disclosed policies around revenue recognition and accounts receivable on pages eight and nine. And I'm reading, when collection of substantially all lease payments during the lease term is not considered probable, total lease revenue is limited to the lesser of revenue recognized under accrual accounting or cash received. If leases currently classified as probable are subsequently reclassified as not probable, any outstanding lease receivables, including straight-line rent receivables, would be written off with a corresponding decrease in rental income. Now what that means from a practical perspective is when we move a tenant from accrual accounting to cash accounting, we do not view the rent owed to us as necessarily uncollectible. It just means that the probability of collection of the contractual revenues under the entire term of the lease is below the threshold of what we deem as probable. We will continue to fight to collect every penny of rent due from that particular tenant for that particular space It is simply, based on our judgment, a decision to recognize revenue for those tenants when the cash is actually received in accordance with the relevant accounting standard, as opposed to recognizing the revenue on an accrual basis when the cash has yet to be received. So for the second quarter, our FFO of 77 cents per share was meaningfully impacted by a collectability adjustment for the quarter of $55.2 million. or 73 cents per share. This collectability adjustment can be broken down into two components. The first component, $45.8 million for uncollected rents from tenants that, one, we already have on a cash basis, primarily most of our restaurants, and two, tenants that we switched from accrual to cash accounting over the course of the second quarter due to the impact of COVID-19 on their business. The majority of that second group is comprised of tenants in the fitness and entertainment categories, but also includes tenants who have declared bankruptcy during the quarter or others who we deem to be below the probable threshold. Additionally, there was a $9.4 million write-off of the straight-line rent receivable essentially associated with tenants in that second group I just mentioned. Other drivers which impacted the quarter include $0.08 of drag due to the impact of COVID-19 on our hotel joint ventures, parking revenues, and percentage rent, and $0.07 of drag due to the higher interest expense given the incremental liquidity and balance sheet strength we are carrying during the pandemic. This was offset by $0.05 of positives from lower expenses at both the property and corporate level. As a result, including the collectability adjustments, This totals a net 83 cents of COVID-19 related impacts for the quarter. I'm going to stop here and hand the reins over to Don for his remarks. I will be back, however, to close things out before Q&A. Thanks, Dan. Good morning, everybody. I certainly hope all of you and your families are doing well on these crazy times. And I do hope that Dan's remarks were helpful in understanding the accounting conventions that we applied this quarter on a tenant-by-tenant and a category-by-category basis, as well as the in-depth and detailed supplemental statistical disclosures that we made in our 8K on our website. Dan said, you just have to keep in mind that no matter what the accounting, nothing changes with respect to the vigor that will go after the rent that's due to us by right. You know, I don't envy the jobs of the investment analyst community in parsing through the many judgmental decisions that every company needs to make. about their future income stream during this pandemic. Frankly, it all comes down to the estimated probability of a tenant being able and willing to honor its lease commitment over its remaining term, which often spans five, seven, even ten years. I mean, think about that. Making the judgment today that it is probable that a fitness tenant, big or small, will fulfill its obligations for the next ten years. Probable. Seventy-five, 80%. That's a high bar. Obviously, those judgments are made with the best information available today, which, as you all know, could not be more cloudy at this stage of the pandemic. But what I want to talk to you about this morning is the future, on what we see happening today and what we're betting on happening tomorrow. And let's start with liquidity and reiterate what we said on the May call and at the Nereid Investor Conference in June. we remain confident in our ability to weather this pandemic and come out the other side an even stronger and further differentiating company. That is the key premise to every decision we're making. We project having approximately $1.3 billion in cash and unused credit line available to us six months from now, on February 1st, 2021, even when and assuming that the declaration and payment of our next two full quarterly dividends, which could be declared in August and November and paid in October and January, even assuming the continued and unabated construction at the partially completed projects at Santana West, Assembly Row, Pike and Rose, and Cocoa Walk, even assuming the collection of rents only marginally better than the 76% plus that we collected in the last month of July, and assuming no asset sales or equity issuance during that period. With all of those assumptions, we still wind up with $1.3 billion worth of cash on February 1, 2021. And obviously, we're going to look at these and other ways to improve on that liquidity position in the second half of this year, but the point is simply that we have great flexibility even if we can't. So let me move to our construction process. where the completed lease-up timing of the office portion of the large mixed-use development is less clear than the retail or residential components because of the pandemic. While the 375,000 square foot Santana West office building is in the early stages of construction and won't be ready for occupation until 2022, the 212,000 square foot Pike and Rose office building is nearly complete today. 40,000 square feet will serve as Federal Realty's new headquarters beginning next Monday, And Benefits Advisor One Digital took most of another floor with a lease signed in March, as did a couple of smaller tenants. We still have 150,000 feet to be leased there. And in Assembly Row, where Puma will anchor that 275,000 square foot office building beginning in late 2021, 125,000 square feet remains to be leased. The long-term impacts of the pandemic's work-from-home mandates have created uncertainty in office leasing, and so timing is hard to predict. Yet, having said that, it's our view it's the best and most desirable product on the market. All three of these buildings are state-of-the-art new construction with enhanced clean air systems in affluent suburban communities, close to job centers, and most importantly, are reintegrated into the fully amenitized mixed-use environments that business leaders say is essential. And by the way, During this incredibly uncertain time, we signed nearly 100,000 square feet of new and renewed office deals in the second quarter. That's in addition to the 277,000 feet of retail deals that I'll talk about in a bit. Okay, where? Well, at Willow Lawn Shopping Center in Richmond, where security company Simply Safe took all of the 58,000 feet of available office space that Virginia Commonwealth University previously vacated at 28% more rent. At Cocoa Walk, where our office component is now 84% leased with the latest signing for 13,000 square feet by Florida law firm Weinberg Wheeler Hudgens at Proforma Rents. And at Bethesda Row, where our comprehensive retail amenity base assures a historically low office turnover rate in that community for us. Basically, we think that our office offerings, all of which are an integral part of our mixed-use communities, have been and will be the product of choice among business leaders on the other side of this pandemic. So, what else gives us the confidence to continue to operate as we have? Frankly, it all comes down to our conviction. Not only in that first-ring suburban location of our real estate, the sweet spot in our view, but also in the dominant open-air, heavily amenitized product type and environments that we created in these locations over the last decade or more. Consider that during the most disruptive quarter in this country's history, we still signed 47 leases for 277,000 square feet of space for 11% more rent than the previous tenant was paying in the same space. And three of those deals were for strong credit grocers at really well-located, non-grocery-anchored shopping centers. Lidl for Steinmark at 29th Place in Charlottesville, Virginia. Whole Foods for Bed Bath & Beyond and Bye Bye Baby at Huntington Shopping Center in Long Island. And a third great credit grocer for Barnes & Noble at Willow Grove in suburban Philly. Consider further that there have been 15 notable Chapter 11 bankruptcies filings between April and July of the pandemic that have affected us. They are J. Crew, Neiman Marcus, True Religion, Creative Hairdressers, that's hair cuttery and related brands. Tuesday morning, LaPanca Pity Inn, 24 Hour Fitness, GNC, Chuck E. Cheese, Lucky, Brooks Brothers, Sur La Table, Muji, Ascena, and Taylor Brands, Men's Warehouse. Combined, They represent nearly 650,000 square feet of space in 110 locations. Yet only 110,000 square feet and 28 of those locations have been identified by those firms for closure on their initial list. That means that 83% of that square footage and 75% of those stores are at this point expected to remain open by those merchants on the other side of bankruptcy. Heck, Of the 11 J.Crew concepts that we have in our portfolio, none were on the closure list. None. Now, who knows how that all ultimately turns out and under what terms, but it sure is a pretty strong indicator of the obvious desirability of our real estate. Since then, Lord & Taylor filed, and as many of you know, occupied the east side of our mannequin with Shopping Center in suburban Philadelphia. getting this store back unlocks one of the best six-acre future development sites in our entire portfolio. And, you know, future desirability of retail space is really the most pertinent question that needs to be asked and analyzed today. Demand simply has to exceed supply to create value in this business, and yet we entered this country, crisis, as a country in an over-retail position, and we're definitely exacerbating that over-supply position because of the pandemic. Obviously, not everybody can come out of winter here. Vacancy is going up, and I expect it's a peak in the first half of next year. We're likely to be in the 80s by then. And yet, of all the things that worry me as a result of this pandemic, and there are plenty, filling that space with great retailers and restaurants and good economics is not one of them. I know that our property's positioning in those first-ranked suburbs of major metropolitan areas will be more desirable post-COVID. I know that the decades of focus on creating comfortable and attractive open-air places at those centers will further enhance their desirability. Consider that in nearly every discussion we've had or are having with brokers and prospective tenants in every major market we do business in, The prospective deal is apprenticed around the tenant improving their real estate locations, improving not only the location but their co-tenancies, improving their environment, and most importantly in some respects, improving their landlord. Tenants want to be with landlords that have money, investable financial wherewithal, vision, execution prowess, and a pedigree of partnership with them. Long-term customer-friendly service improvements like a coordinated customer pickup program matter today. They matter a lot. All of these considerations are more important now and will certainly be on the other side of this than ever before, and we're set up for it. So that's all I have for my prepared remarks. Let me turn it back over to Dan for some final remarks, and we'll be happy to entertain the questions after that. Thank you, Don. Thank you, Don. Just jumping back into details from the quarter. With respect to our tenant activity across the portfolio, we made great progress in light of the fact that most of markets in which we operate were the first to shut down and effectively the last to begin reopening. Due to this fact, the percentage of tenants that were open as a percentage of AVR was only 47% at May 1st and 54% As reopenings accelerated in June and July, as of July 31, 92% of our retail tenants are now open. As a result, our cash collection has shown strong momentum tracking those reopenings. Cash collection for the second quarter finished at 68%, as we made continued progress with our tenants on unpaid rent. Collected rent for April ended up at 65%, up from 53% at May 1. May was 66%, up from 54% at June 1. And June was 72% for a blended collection rate of 68% for the quarter. July collections further accelerated to stand at 76% at July 31st. And August collections are off to a promising start. While only one day Of collections, August 1st, 2020 collections were roughly 85% of August 1st, 2019 levels and were 60% higher than July 1st, 2020 levels. Of the 32% of uncollected rent for the second quarter, roughly $68 million, our $46 million collectability adjustment accounted for two-thirds of that amount. With respect to executed deferral agreements, we've taken a very tactical approach. With a portfolio of only roughly 100 properties, we are able to treat every negotiation on a tenant-by-tenant and a space-by-space basis. $21 million of rent have been deferred for the second quarter under executed agreements with our tenants. This represents 31% of uncollected second quarter rent and 10% of total bills 2Q rent. Of that amount, almost two-thirds of $13 million is with accrual-based or probable tenants. And negotiations continue. As we did last quarter, we have provided new and additional disclosure relating to the impact of COVID-19. A summary of collectability and accounts receivable is provided on page 10 of our 8K financial supplement and a new investor presentation which incorporates an update for COVID-19 can be found through a link on our investor website. Now just to revisit the balance sheet and liquidity. During last quarter's call in May, we had just closed on a $400 million unsecured term loan with a one-year maturity and a one-year extension option into 2022. This provides us with pro forma liquidity of 1.4%. This provided us with pro-form liquidity of $1.4 billion in cash on hand and available credit capacity at that moment. Following the May call, we immediately raised an additional $700 million in the bond market in two tranches with seven plus years of blended maturity and a 3.3% effective yield. As a result, at June 30th, we have almost $2 billion in liquidity, with $980 million of available cash and an undrawn billion-dollar credit facility. We remain well-positioned to manage through the challenging environment we currently face, like we have done time and time again over our 58-year history. Deleveraging the balance sheet will continue to be a priority as we look to opportunistically issue equity, as well as sell assets and or raise joint venture capital leveraging the quality of our best-in-class asset base. As you saw yesterday, our board made the decision to declare a regular cash dividend of $1.06 per share payable on October 15th. Given decades of maintaining a fortress balance sheet and having the ability to build a significant liquidity position, And even in the most challenging of capital markets, we felt it was appropriate to lean into this strength in capital position and declare a modestly increased dividend this quarter and extend our increasing annual dividend record for a consecutive 53rd year. Given our high margins at the property level, cash collections and store openings showing great momentum, and collections comfortably in excess of our break-even collection levels, coupled with the quality and productivity of current leasing discussions with our tenants and the implicit demand for our real estate that that provides, all drove the confidence and the strength of our portfolio performance coming out of this environment. As a result, based on the information we have today, we believe we should be able to support an annualized $4.24 dividend from adjusted FFO on an ongoing basis post-COVID. However, as we stated previously, that perspective could change in the coming quarters as the length and the ultimate impact of the pandemic on our business and our tenants' business become more visible. And know that the management team and our board of directors will be extremely disciplined in setting our dividend policy moving forward. And with that, operator, please open the line for questions.