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.

Thank you. We'll now be conducting a question and answer session. As a reminder, in the interest of time, we ask that you please limit yourselves to one question and one follow-up. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first question comes from the line of Craig Schmidt with Bank of America. Please proceed with your question.

Thank you. My question, I'm just wondering what federal can do in the short term to increase traffic and sort of remove the caution from shoppers. It seems like your centers were, you know, places that people wanted to congregate and now you have to fight against that. I'm just wondering in terms of new services, anything structural, marketing that you can do to get people to be more comfortable with shopping your centers.

I'll tell you, Craig, and I appreciate that question a lot, because if you could be around centers, certainly the mixed-use centers, and even the more lifestyle-y other centers that we have, you would be blown away by the traffic. And because they are open air, because they are part of the community in which people already are living in, and frankly, because of the markets that we're in, you see masks everywhere, people being extremely diligent with what they're doing. And, you know, specifically in California, you know, the markets that we're in, which were closed first and, you know, opened up really very recently in terms of that. What I'm most thrilled about is their comfort with our places. Now, we're also, I think, very early in putting out almost completely across the portfolio the pickup, which allowed for a landlord-coordinated effort for tenants to effectively or for consumers to pick up goods from merchants. That landlord-coordinated piece goes right to the heart of your question. That's what's necessary. And I can tell you, no matter how much it's being used or not being used based on any particular shopping center, you know what really helps? It really helps prospective tenants because those tenants say, this landlord gives a crap. and is in it with us. And that notion of partnership throughout this, I honestly think is going to be one of the most critical parts of who wins, if you will, on the other side of this. And that's what we're executing on.

Great. And then just maybe on the longer term focus, what are some of the tenets you would like to add that are new to the merchandise mix that

Well, that's a TBD. You know, one of the things that I think as you kind of think about longer term here, you know, and I made a point about the tenants who are really struggling and the fact that they want to stay in our centers generally. And that's the case. And in the short term, we're going to want them to stay in our centers. But failing tenants are not who we want over the long term to create value in our shopping centers. We do want to see who emerges here. You know, I can't give you specific names. If I gave you specific names, it would sound very much like, you know, the lifestyle type of tenants, the Warby's of the world that we've been talking about in the past. It's not about that. It's about over the next year or two, the opportunistic money... that gets behind new concepts or reinvigorates old concepts, that choose the best real estate in the marketplace. That's what we're seeing, Craig. The conversations that Wendy Sear or that Berkus and Sweetman on the West Coast or Stu Beal here on the East Coast are having are all about how do we – Get better real estate. And who's going to be in there with us? And what do you guys do to make this all work together? Frankly, they're playing right to our strengths. And so the combination of all those things, not one, you know, piece of it, is what, in our view, gives us the confidence that we will be a more differentiated company, not less differentiated on the other side of this.

Great. Thank you.

Thank you. Our next question comes from the line of Daniel Santos with Piper Sandler. Please proceed with your question.

Hey, good morning. Thanks for taking my questions. My first one is on the dividend. How does the increased dividend align with taxable income for the year?

So it is – I'll let Melissa add to this or Dan add to this if they want. The notion – and I'd like you to think about this first – Our dividend, okay, this was the last dividend for 2020 that counts in taxable income for 2020. Our November dividend will be paid in January. So that will be the first one for 2021. And that's a little bit different than other companies. So I want to give you that perspective. Certainly. Certainly. With respect, therefore, to the roughly $320 million of dividends that were paid this year, you know, fiscal 2020, that is in excess by something like, $40 million of our taxable income and what that would be, okay? Now, first of all, it's August 5th, and a lot has to happen between now and the end of the year from a taxable income perspective. Some of it could be a surprising good, some of it surprising bad, but we've got a lot of flexibility there. So did we pay more than we had to pay in 2020? Sure we did. And the reason for that, and I'm glad you asked because I really want to get into this a little bit, is that we built this company to be able to power through recessions. And when I say the company, not just the balance sheet, the quality of the assets, the diversity of the real estate. This is a recession, albeit a very unusual one. I got it. We went into this with one of the lowest payout ratios, dividend payout ratios going in. So certainly we can pay it. Then you've got to ask, well, why would we pay it if we don't have to? And at the end of the day, it's all about our belief in the outlook and where we're going. It's all about our belief in effectively not only being able to get back to not paying what we have to as we did in 2020, but more importantly, growing and creating value. And so there is – I would have to be a whole lot more pessimistic about the future than I am today for us to have cut that dividend. And, you know, everybody always says they're long-term in focus. Let me tell you, we're long-term in focus. We know what has to happen on the other side of this. And so sorry to be a little long-winded about that, Dan, but I'm pretty darn passionate about about this company's ability to come out of this crisis really strong. So that's why, and it's a little more than your tax and income question, but it all ties together.

I appreciate the answer, the passionate answer. My second question is I was wondering if you could give some color on leasing demand in case of reopening and some of your traditional suburban shopping centers versus your more sort of in-sale assets.

Let me give you two people. Let's have Wendy talk about that from more of our traditional shopping centers and Berkus maybe on the West Coast in terms of some of the street retail stuff.

Thank you, Dan. As I look at our pipeline that we have, I look at a couple different things. And one of the things we're focused on, obviously, is what are the deals that were pre-COVID that we still have that are now picking up momentum and we see them coming to fruition through executed leases. So that seems very strong. What I'm also looking at, and this is what I'm encouraged by, is that we have a lot more deals in the pipeline and deals going to lease negotiations that were during COVID and now post-COVID. So that makes me feel... very good about our pipeline. When I look at the diversity of the deals and the properties that we have specifically on the East Coast, it's fairly distributed well between our traditional grocery anchors to our lifestyle to our mixed use.

Yeah, and, Dan, I'd echo that out here on the West Coast. I'm very impressed by kind of how tenants have behaved since – you know, getting through April and May when a lot of them were really trying to figure out where their business was headed. It seemed like a little bit of a corner was turned in June and the volume of serious discussions picked up and activity on LOI and lease negotiations picked up. As Wendy said, we have a pretty robust pipeline of those discussions and negotiations going on right now. And it is broad-based, you know, not only in our – more traditional community centers, but also in our mixed-use and lifestyle properties. And what we're seeing in the latter really is two things. One, you know, continued interest to expand their fleet within our portfolio from tenants that we've done deals with before, as well as a lot of new conversations about, from tenants that don't have a lot of legacy issues, but understand that if they are going to open a handful of stores, opening them in the best possible locations is critical. And discussions with those tenants in both groups have picked up and are progressing well over the last couple of months. too soon to tell. Obviously, if all the deals that are in the pipeline get done, I'm sure a few will drop out, but we're pretty impressed with the discussion so far, and hopefully that shows up in the results in a couple of quarters.

Thank you. I appreciate it. I want to add one thing to both of those comments. You know, I don't want you, and maybe I'll throw a little cold water on it, I don't want you to think we are Pollyannish and don't understand the severity of what's going on in the country, of course we do. Of course we don't have great predictability of when things turn and really what that means, obviously the timing of a vaccine, all the stuff that obviously we don't know. So all we can do is make business decisions today based on what it is that we know. And all that Wendy's conversation about, and just conversation and ours has been about is we see a path. We see a path forward. We know what to do to try to be able to execute to get there. There's enough raw material that suggests that there's a good probability that that can happen. Again, who knows? But today, which is why you see the results you see in the second quarter, you bookkeep based on what you know today, and then you work for tomorrow.

Got it. Thank you. I appreciate the thoughtful responses.

Thank you. Our next question comes from the line of Handel St. Just with Mizuho Securities. Please proceed with your question.

Hey there. Sorry, just getting myself off mute. I wanted to follow up on that a little bit, the last question by Daniel here. I wanted to get a bit more color on the conversations with the tenants you're having today, how they compare pre- versus pre-pandemic from a demand, willingness to sign deals, and deal terms perspective. And then what are you hearing in these conversations with tenants as they make space decisions? Are they seeking value? Are they more biased to the location, the first-ranked suburbs that you talked about, asset types? What are the things that seem to matter most as they think about space needs in a post-COVID world? Thanks.

I think that what we're hearing a lot of is that retailers, some retailers are going to make, fewer new openings, right? So they're going to make decisions based on, in my view, a criteria that is just doubled. So every box is going to have to be checked. So when we're thinking about, so when they're thinking about would they, do they need to be in strong centers that have great landlords that invest in their properties, that have co-tenants that are know meet who their customers are and then where they can ensure the ability to do stronger sales that is going to be a must and with that criteria we feel like we're very well positioned because of the ability to have strong occupancy strong sales and and a landlord that has a strong balance sheet that's going to continue to invest and look towards the future so That has been sort of the – we're not having as many discussions as I would like to have, but the ones that we are, they want to upgrade their real estate.

Are you getting the sense that you're losing any leases due to price to rent, or perhaps there's a search for value that may be making certain tenants more inclined to seek secondary locations as they think about the cost available?

That's a good question. I think based on what we just talked about, which is that it's so important that these locations come out strong, that what we've seen is that tenants are willing to pay more to have that insurance that they need, that the location that they either relocate or they open hits the gates strong right from opening. So we've found that they will pay more to be in the right location.

Imagine this. And I'll just think about this for a second, right? If you're looking to do deals right now, you're certainly looking for value, right, for deals. That's, frankly, not much different than it's ever been. But the big thing that Wendy's talking about that's so critical is you don't really know who your co-tenancy is going to be. You really don't know today if you're, you know, getting a cheap deal who you're going to be doing business next to, what that shopping center is going to feel like or look at. There is a big risk to signing for any anchor or even mini anchor, you know, a 15-year deal when you don't have that visibility. The additional rent to be in the dominant centers seems to pale in comparison to the sales – being able to underwrite what you think you're going to do in business.

Got it. Thanks, Don. And my second question is on the leasing spread. I'm going to look at indicator, a lagging indicator. You know, 10% of leasing spreads... Sorry, hand down.

Take your mask off.

I can't hear a word you're saying.

A question is on the leasing spread. The new leasing spreads have been consistently in a 10% range. I'm curious if your view is that would... Clearly, it's a lagging indicator, but What bottoms first, occupancy or moving from spread space? I don't know.

I think they kind of go together. You know, with us at least, and we're certainly a smaller company than... than some of the big guys in terms of GLA. And so, you know, a few deals make those leasing spreads be what they are. And so, you know, you'll see volatility in that. The strength in the second quarter was a couple of deals, and the single biggest one was taking very old Bed Bath & Beyond Bye Bye Baby space at Huntington, which is a great shopping center in terms of location, and trading up for Whole Foods. at a big rent. So, I mean, you know, that moved the needle in this quarter. Hopefully, every quarter, there's a few of those. Sometimes there are. Sometimes there's not. But what we're working hard to do is to maintain occupancy and maintain That does mean we'll defer or abate or change contracts more readily, certainly on the restaurant side. You know, the idea of a restaurant where you're going to, you know, defer your money and they're going to have to pay it back next year, I mean, that's a fool's errand in most situations, except for a large, well-capitalized company, right? I mean... If you were running a restaurant, would you take your last few hundred thousand dollars of savings and try to open back up only to know you're going to pay it all to your landlord next year? No. I mean, there has to be a realization, an honesty about assessing the current situation and then know that you'll make your money back. with that occupancy, with the deals that give you a chance to make it back, and with new deals because tenants are looking at well-occupied shopping centers. That's our M.O. in terms of how we're approaching this. So you're certainly going to see lower vacancy, or higher vacancy rather, you know, a lower number there, and you're certainly going to see pressure on rents in certain places, but overall... You've got to feel really good about the demand drivers of a portfolio like this. Thank you.

Thank you. Our next question comes in line of Christy McElroy with Citi. Please proceed with your question.

Hi. Thanks. Good morning. John, just a follow-up on those comments. You talked about your willingness to defer or be under potential pressure on rent. If I think about the categories where you're seeing those below 50% collection levels, and you talked about fitness, experiential, restaurants, full price apparel, you know, these categories comprise a good portion of your write-off. How should we think about sort of the rent levels that many of those tenants can now pay given their reduced revenues, right? Like, it seems like A lot of these problems aren't going away until we have a vaccine. How do, you know, collections rebound for those tenants without some sort of reset to their rent levels currently, right? Is it a matter of just releasing that space or is it working with them to get to the right rent level, you know, given that restaurants and experiential are part of what makes your centers what they are today?

No question about it, Christy. It's interesting. I'm going to start with the more obvious ones. Restaurants are not so obvious. Restaurants I'm feeling pretty good about, frankly, in terms of not only their importance to our centers, but their ability to generate business. and pay us rent on a percentage basis. It will be a number of them going forward. But, again, in our places, I think we can make money that way. I do think the harder ones are theaters and fitness centers. I do think that. And the reason I think that, in fact, I'm actually going to take a little tangent, as you would expect me to, Christy, but everybody keeps saying our second quarter was conservative. Even Dan said in his remarks, we're conservative. I've got to tell you, I don't see it that way. And let me tell you why. I mean, first of all, the punch in the gut ought to be book kept in the period that it's been incurred. That's the second quarter. And so if you sit there and say, you know, today that theaters or fitness operators have figured out what their business plan is on the other side of this, and what rent they can pay us, I would tell you, really? To your point, I'm not sure what a movie theater's ability to pay is. the rents that are in place or a fitness center's ability to pay the rents that are in place over the next decade, which is what you're being asked to say in accounting by straight lining that stuff. I don't think you can. I don't think that's conservative. I think that's realism. And so sitting and saying, okay, that piece of our income, which is a few percent, right? I don't know what theaters and – Fitness is four. Experiential is two. So there's 6% there that I agree with you. We do not have the visibility. Restaurants are so different, different. in terms of each one of them, what they are, what their owner's financial position looks like, what they're willing to do, et cetera, and frankly, so critical to how the entire place works. that we are absolutely working with those important restaurants. And we identified this on, you know, March 18th, that that was going to be a critical group for us to effectively go. So those are more individual answers to your questions. I'm sorry to tell you I'm not sure of the answer on the theaters and on fitness, but I think that's the only honest answer that's possible today.

Thank you. And then, you know, Dan, you talked about the drag associated with the liquidity that you're maintaining right now, you know, given the gut reasons that you did last quarter. Don, you talked about the $1.3 billion in cash and the importance of having that liquidity, you know, by February. I know that you don't know what will happen, right, with collections and occupancy, but as all of that plays out sort of over the next 6, 12, and longer months, How do you think about the balance sheet management aspect of that on a go-forward basis in maintaining that level of liquidity?

You know, hey, look, I think we've spent years and years, you know, building the credibility we have, and I think it's evident that we were able to, you know, in the midst of all the uncertainty of early May and was able to raise the capital that we did, over a billion dollars, from our banks, and so our access to capital continues. I think that we will, like we've done in the past, show balance, and I think we are going to be opportunistic with regards to keeping leverage kind of in line with kind of our long-term goals, our long-term metrics. Yeah, our metrics are going to be impacted. Our net debt EBITDA will go up. Our coverage ratios will go down as we work through over the next few quarters. But we will be opportunistic, whether it be through asset sales or joint venture capital or even issuing equity when we see opportunities in the market. We will keep a diversified source, the spectrum of capital sources available to us. And as we work through it, we'll avail ourselves to kind of the – all of those sources as we move forward. But our intention is to kind of take advantage of the market as it's available while keeping our long-term focus on, you know, our leverage profile in line with historic levels. I'll say one more thing to you, Chris, on this. You know, you know that a very, you know, long-term problem that we always have to deal with is – with asset sales is covering tax gain. And, you know, we have the 1031 everything, and it's hard. And the idea of looking at that as a potential source of a piece of our capital is on the table for us right now, which I think is an interesting additional tool in the toolbox that we didn't have as easily before.

Okay, thanks a lot.

Appreciate it. Thank you. Our next question comes from the line of Vince Timbone with Green Street Advisors. Please proceed with your question.

Hi, good morning. Could you discuss a little more, good morning, detail just what types of joint venture structures could you see most probable as a source of capital? I mean, I'm trying to get at it almost. How would you weigh selling an interest in an individual component of one of the big three projects where maybe you can get stronger pricing today than retail versus having interest aligned in an entire mixed-use property?

Vince, I don't know. That's a hard one to answer because it depends on a specific deal and a specific circumstance. I mean, you know how much, I think you know how strongly I believe in the integration of those uses at the big mixed-use properties. It's important. Now, is that different for a stand-alone office building across the street from San Patero? Maybe, right? I mean, it's just it's not as integrated as the office buildings that then have retail under them and are part of it. So we could look at that differently, for example. I'm not saying we will, I'm not saying we are, but I'm trying to give you the level of detail and the considerations that have to be thought through because there's not a direct answer to your question. You know, I would really have a hard time and Assembly Row effectively selling off an office building or a residential building that was part and parcel of our project. I would much rather, if it came to that you needed to look at it, we would look at it as a passive partner that bought a percentage of the whole thing. So it depends. I don't know, J.D., if you want to add anything more to that. That's kind of how I see it, though.

Yeah, I don't think there's too much to add. Vince, one other thing, obviously, would be looking at a portfolio of our, you know, more stable, slower growth, non-mixed-use assets, and, you know, does it make sense to bring somebody into that in some sort of way? All things we're thinking about, like Don said, you know, not really to talk about this at this juncture and haven't made any decisions or, quite frankly, any real progress other than kicking it around internally here.

Thanks for that. And then shifting gears a little bit, I'm curious, how's the lease dynamic of leasing negotiated? Negotiation shifted at all in recent months with e-commerce getting another leg up with COVID. How much do four-wall occupancy cost ratios matter anymore given, you know, the benefits of having a brick-and-mortar store on online sales?

You're right on it, man, and I've been preaching on this for a while. I mean, does four-wall occupancy cost matter? Of course it matters. Does it matter to the level that it used to in a lot of businesses? Uh-uh. And so when you sit and think about it, all the stuff that Wendy talked about earlier on this call and Jeff talked about earlier on this call in terms of the considerations of what makes a business profitable, obviously including the online business, the ability to pick up goods, in uh in the store i'm telling you man this this notion of what we're doing with respect to the pickup and you know having having um a tenant coordinator sorry a landlord coordinated effort here is really big and it's big in what you're asking about and that is what are the tenants asking about in lease negotiations what are the differentiators that matter We always knew it was the location, obviously. But more and more, it's about the co-tenancy. It's about those other services. It's about that tenant being comfortable that the landlord is working part and parcel with them to make them successful in total for their businesses. It's a more holistic approach. Great. Thank you for that.

Thank you. Our next question comes from the line of Nick Ulica with Scotiabank. Please proceed with your question.

Hi, this is Greg McGinnis. I'm with Nick. I just had a few questions on the tenant bankruptcies. I understand the expectation is for the majority of those stores to remain open. I'm just curious with total exposure to those 15 bankrupt tenancies and if they've all been taken to a cash basis, and then also curious on how much of an impact those tenants had on Q2 collectability.

Yeah, roughly the exposure, you know, total exposure to all, you know, 15 names that we had on that list was roughly, you know, call it the 3%, a little over 3% of our total revenues. So not a huge number. All of the tenants on that list have been taken to cash basis with the exception of one because it just happened right at the end, and that's Men's Warehouse or Taylor Brands.

And then what was the impact on the collectability for Q2 from those tenants?

We don't know right here. We'd get back to you.

Okay. And then I guess just a follow-up question on kind of the restaurants. And, Don, I appreciate the comments you gave that, you know, can't really predict the percent rent trends, but I believe that you previously mentioned abating rents for your best restaurants. I think it was the top 60, if I recall correctly. We were just wondering how that abatement program may have evolved since you all spoke about it, what that impact was on Q2, and if all those tenants are on a percent rent basis now.

No, certainly not all those tenants are on a percent rent basis. That's still the exception rather than the rule. Greg, I don't have a number for you all the way through here. As you correctly point out, the 60% The 60 restaurants that we had identified initially as critical to the property we worked with early, that has continued and grown through the portfolio. As in certain other situations, it's useless. And so, you know, we're not working with them. We're simply holding the line and trying to get paid contractually with whatever they've got left because they're not going to make it. So it really gets down to a one-by-one, you know, on a one-by-one basis. And, you know, the next time you can travel and we can move around, let me walk you through a Pike and Rose or Bethesda Rose or Santana Rose, certainly, and kind of just show you You know, the broader issue in terms of how this stuff works, I know you're trying to put numbers in a model and make percentages work and somehow tie to something in the second quarter that I could care less about any longer, but nonetheless, the real key is kind of understanding how those deals are going to financially work going forward, got it, and more importantly, what they're going to do for other tenants in that shopping center going forward. I don't know, Dan, if you've got anything specific for this question. Yeah, no, I think you answered that. Just to get back to your previous question, roughly of the $55 million adjustment, roughly about 10%, you know, $5 or $6 million was associated with the bankrupt tennis.

Okay. Thank you.

Thank you. Our next question comes from the line of Mike Mueller with J.P. Morgan. Please proceed with your question.

Yeah, hi. Hi. I guess where tenants haven't paid rent and you don't have deferral agreements in place, what portion are you in, you know, back and forth discussions with versus really having no clarity on a resolution?

Yeah, well, I think, yeah, call it, you know, 30% of our unpaid rent we have deferral agreements with. We probably have another 20% kind of in conversations with handshake agreements on you know even more with that so you know we're making progress negotiations are ongoing we're trying to be really really tactical and strategic with regards to those conversations and so it's a bit of a moving target but we feel good about the progress we're making and kind of resolving you know some of the unpaid rent and coming up with solutions and in some situations We're kind of viewing it as, hey, look, you have a contract. You need to pay it. And so we'll fight that out. But, you know, that's, I think, in process at the moment, Mike.

Got it. Okay. And out of curiosity, how is parking and hotel income been trending in the third quarter compared to the second quarter?

Yeah, that's a good question. I don't know the answer to that. The two hotels were closed for most of the second quarter, obviously, have opened up now or still trending at something like 20%. I can see 30% or so. I can see. So certainly not making any money. That's for sure. And parking revenue, interestingly, is coming back. and I'm using that based on what I know and visually see at Pike and Rose, at Santana Row, at Bethesda Row, et cetera, because the traffic is up. So back to where it was, of course not, but trending in the right direction.

Got it. Okay, that was it. Thank you.

Thank you. Our next question comes from the line of Keeban Kim with Truist. Please proceed with your question.

Thanks, Anne. Good morning. So in regards to the 21% of the reserves that you took, I'm sure there's quite a different varying range of that, meaning that 75% threshold or not. What percent do you think, roughly, were tenants that were already living on the ledge or kind of in structural decline pre-COVID that no matter how many referrals you give, probably won't come out of it okay? And I guess the remaining bucket of tenants that were probably pretty good were not paying rent for a few months. It really helps them, and they can come out of it. Okay.

Well, I don't think we have, you know, answers, specific answers where we've bifurcated kind of into those kind of buckets. Yeah, sure. There's a bunch that won't make it. There's a bunch that we think we can – work with to get them through it, but I don't have a percentage, specific percentage, of what fall into each of those buckets, I think. But keep in, you know, I mean, the bottom line is, this was from the beginning, we are not negotiating with tenants that we don't believe will make it. Right? If we don't think, we're looking at our best chance for success, and sometimes the best chance is is to simply default the tenant, you know, paraquit, try to evict. I mean, sometimes those are the best answers. And so we're using, you know, generally when you're talking about a tenant, you know, the 15 tenants that filed bankruptcy, there wasn't one surprise on those 15 tenants that filed for bankruptcy. So we didn't sit there and abate or defer rent with those tenants in any meaningful way. Why? Because it wouldn't help. with respect to what they're going to do. And the same applies to smaller tenants. So, you know, obviously I don't know the percentage differences, but I can tell you philosophically how we approach each of these, you know, each of those guys. So I don't know if that's helpful to you or not.

And how would you describe how private operators are behaving around your market? Because You can be very disciplined, you have great assets, and you have a great operating platform, but if the surrounding private operators aren't behaving kind of rationally and undercutting rents or getting more TIs, you know, some things are out of your control. So how do you think about that?

Are you talking about the small shop tenants and how they're behaving?

No, no, no. I think the other shop tenants that are owned by private owners.

Oh, okay. Yeah, I think, you know, as we get post-COVID, we've always been, we were over-retailed before, and we are definitely going to be more over-retailed now, so there's going to be a lot of low-cost options out there. But again, as to my prior point, I think you'll have a very small subset of tenants that just go for a low-cost option, and the majority of the tenants who really need to be opening stores that are productive and robust in terms of sales are going to the critical factors of creating that successful operation is going to be what we have to offer in terms of occupancy, in terms of co-tenancy, in terms of convenience, in terms of the location and our investing in the property. So I think that there will be, there's always been lower cost options, but I don't see that as a deterrent in our going forward.

The one thing I would say to you, I'm sorry, man. The one thing I would say to you, Keith, Ben, is, you know, it's hard to imagine from my perspective that that has not been priced in your stock. We're off 40%, right, from six months ago. And if you look going forward, will there be rent pressures? Of course there will be rent pressures. We're off 40%. Do you think these properties are worth 40% less than they were six months ago? Would a billion-dollar, you know, assembly row be sold for $600 million today because of those concerns? Not at all. It's been over, you know, it's been overpriced. I get it. I understand the uncertainty and why, but I kind of think that's priced in even if there is and there will be pricing pressure from lower-cost operators going forward. Okay, thanks, Doc.

Thank you. Our next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.

Hi, thanks. The 3% revenue impact from the 15 bankruptcies, what would be the occupancy impact from that?

Yeah, the occupancy – well, we don't think that we're going to lose that many of them, candidly. We said 28 of the 110 in the first – Right. Right, so it's probably 1%, 1% from the closures that we kind of expect and know. And most of those haven't happened yet.

Sorry, go ahead. No, no, no, you go. Okay, and then to the comment that, you know, the first half of 2020 may reach high 80% occupancy, You know, the merchandising categories that end up going away, would you look to backfill with retail users or look to pivot and diversify away to the extent that some of those spaces are flexible enough to do so?

You know, Linda, one of the things I think that's one of our strengths is that we really look at stuff from a real estate perspective. And so having the expertise to be able to convert and redevelop and repurpose is something that takes a real benefit to us. So we don't look at it – we look at it economically. And – try to figure out what the highest and best use of that piece of real estate is. So whether it's a second floor theater, you know, the amount of fitness and other second floor space that we've already taken out and created a high-value office in is pretty interesting, certainly at Santana. And, you know, with respect to the ability to have properties that now, but with more vacancy can be turned into residential and retail, more of mixed-use properties. We look at that stuff that way. So it very much, you know, very much depends on the property, but we can do all of those things.

Thanks. Thank you. Our next question comes from the line of Floris Van Dykem with Benning and Scattergood. Please proceed with your question.

Hey, morning, guys. Actually, a compass point, but just wanted to – one question, I guess. On the – some of the opportunities that you're going to get as a result of bankruptcies, and you mentioned this, Don, I think earlier in your comments about the Lord & Taylor at Ballot Kenwood. How will you balance the incremental capital spend that that will require – with the potential to create value and to grow your NOI going forward? Do you think about that differently today than you would six months ago?

Yes, that's a very good question, Florence. I mean, look, the uncertainty of capital means that the bar is higher. You know, you happen to pick one in Lord & Taylor at BALA, where, I mean, I've been dying to do something on that piece of land for the better part of 15 years there. It's just an underutilized great piece of land. Now, what COVID just did was made Lower Merion Township more important than Lower Merion Township was pre-COVID. So, you know, I'm – so the answer is always going to start with the real estate. It's always going to start with the ability to create value. on that real estate, that's an easier one. For some of them that are less easier, yeah, they have a higher hurdle that they've got to fight for. But, you know, for us, it's not only that initial ability to redevelop, it's what is it that we see from the long-term growth. And, you know, and I think I know you're familiar with Darianne. I think you'll see what we're doing at Darianne and has been enhanced by COVID, not hurt by COVID, because of where we are. So I think we start with a leg up on that stuff.

Thanks, Doc.

Thank you. Our final question comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.

Hey, morning, and thank you for taking the question. On the restaurant front, certainly, I hope Lebanese Saverna is one of the restaurants that survives.

That place is great. So, Don, just a question on the dividend and how you think about it. In answering a bunch of the questions, you know, there's obviously a lot of unknown. You guys have a lot of capital that you want to spend on projects like Marion or like Darien, places that you think will really reward investors.

So the decision to increase the dividend, was that based more on just the strength of federal's balance sheet or the real-time improvements that you're seeing, or is it just your general belief that, you know, there will be a vaccine, that 2021 will be a much better year, and therefore don't look at this year and what's happening. Look forward.

And with all that said, you guys feel comfortable that you can maintain that above-taxable income payout?

Well, first of all, Alex, I'm so glad you got a question in as the last question because I was worried for this call. I was missing you greatly, so it's good to talk to you. With respect to, and I don't have an answer on Lebanese Taberna exactly yet, except we've gotten two new concepts from them that have just opened, so that's good. Getting that aside. I spent a lot of time on the dividend because it's not just one or two or three things. It really is the myriad of everything. And so, you know, when the question came down about capital raising a little bit earlier, and Dan was answering... how we look at the balance sheet going forward and how we're going to effectively finance. I'd be lying to you if I didn't say to you that we have a level of confidence in our ability to raise money from a wide variety of sources, whether that's equity or debt or joint ventures or asset sales or whatever, because that all comes not only from our history of being able to do that, But at the end of the day, the condition that this real estate is the best real estate out there is just real. So we're going to have, in our view, more opportunities than most to be able to raise capital. That's an important component of what's happening here. Also, there's no doubt, as I talked about, at the property level, if you were with us and you were working at Federal and you were meeting, as I do, with Wendy every day or every other day at the least, and with Jeff and with Jan, you would have a good hands-on sense. for the desirability of that real estate and the deals that are coming through and can come through on a long-term basis to be able to get that done. And that would give you another level of confidence. So, you know, there will be equity raises on the other side of this. This company has effectively been built to be able to provide an equity investor a return that comes from appreciation as well as a dividend. And it's a critical component to it in our estimation for the type of investors that we want because those are long-term investors. And so the combination of those and five or six or seven other things suggest to us that at this point in time, we should continue the dividend. Now, the raise, the $3 million incremental cost that it cost us by going up a penny, that's everything. That's the record. I mean, gosh, if we're going to pay $80 million, the notion of ruining the record, we shouldn't do that. So the incremental three, that's based on our history.

But that's it.

It's the three in terms of the raise. The actual payment It's on everything I was talking about previously. Okay. And then the second question, Don, next to the point in El Segundo, BXP announced a JV for that triangle.

Was that something that you had considered that maybe would be a good, you know, something that you would consider? I don't know if you were involved in that at all, but was that something that you guys ever looked at or given everything else that was on your plate, you're like, look, it's across the train tracks, it's

or, you know, separated, whatever, and it's just, you know, we have more that we don't need to get involved in that.

Yeah, it's a real complicated one, and Jeff is on the phone. He can certainly answer, but we've talked about that. I've stood on the point, I don't know, at least a half a dozen times with Perkins, and we've stood there, and he said, how are we going to figure out what to do on that? And every time we looked at it, the costs and moving tracks and time and all that is just –

Yeah, actually, just to weigh in quickly, Don and Alex, it's on the air product site, which is just east of the point on Rosecrans, where all the tanks used to be when we originally opened the point. So we talked a lot to Continental Development about doing stuff with them. So that project, when it's built, and they're not ready to build it yet, given what's going on in the market, but when it's built, we'll integrate very nicely with the point. And actually, we think, you know, drive a lot of daytime demand for our restaurants and shops and services at the point. So we're happy to see them do it. But it is 100% office, and I think there is, and I alluded to a little bit in the presentation in the release a longer-term, bigger view from both of those parties on how they work together that we just didn't really fit into. So great relationship with them, great developer, really happy to see what they're doing, but just no fit for federal. Okay. Thank you.

Thank you. We have reached the end of our question and answer session. I'd like to turn the call back over to Mike Ennis for any closing remarks.

Thank you for joining us today.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.