Federal Realty Investment Trust

Greetings. Welcome to Federal Realty Investment Trust's third quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A 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. Please note this conference is being recorded. I will now turn the conference over to your host, Leigh Ann Brady, to begin.

Good morning. Thank you for joining us today for Federal Realty's third quarter 2020 earnings conference call. Joining me on the call are Don Wood, Dan Gee, Jeff Berkus, Wendy Sear, 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 that 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. Earnings released in supplemental reporting packets that we issued yesterday are an 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 operations. Given the number of participants on the call, we do 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, feel free to jump back in the queue. And with that, I will turn the call over to Don Wood to begin the discussion of our third quarter results. Don?

Thank you, Leah. Good morning, everyone. FFO per share of $1.12 in the quarter was right about where we thought it would be, and while pretty miserable compared to the pre-COVID past, pretty good when you consider the progress we've made over the second quarter, and this is important, that a full third of our tenants are now on a cash basis and therefore get no benefit from unpaid accrued rent or straight line rents. As an interesting point of reference, the last time federal realty was routinely putting up quarterly FFO in the dollar teens was was back in 2013 when the stock was trading at or above $100 a share. And while our two- and three-year growth prospects back then were pretty good, they were nowhere near as good as they are from today's quarterly level moving forward. Let me explain why I think that's the case. Firstly, we've solidified the monthly collection of rent as a percentage of the total rent. We've collected 84% of July billings, 85% of August, 86% of September, and so far, 85% of October. November has started out solid, too. Better in all months than we had expected at this point. And importantly, we're fast approaching sufficient cash generation to fund our dividend completely out of operating cash flow. Secondly, we're attracting lots of leasing interest in our properties, as exemplified by the volume of deals we did in the quarter, and even more so based on the high volume of tenant conversations we're having that will likely result in deals to come once occupancy troughs, which we believe will be in the first half of 2021. And thirdly, the lease-up of our development pipeline in five major markets will be added fuel to the core portfolio lease-up for which we're already seeing strong demand. Of course, there's plenty of uncertainty that remains. There's a lot of wood left to chop in the execution of this growth plan, especially in new development lease-up, but the initial signs toward a successful path are clear. That's the 50,000-foot view. Let's get a bit more granular. So the heart of the operational stress in our tenant base lies with the futures of a few business categories. As we all know, theater and gym businesses remain question marks as do some percentages sit down restaurants and full-priced apparel. Every one of these companies' management teams are searching and modifying their business plans to some extent to find a way to survive, thrive in not only today's but in tomorrow's world, whatever that may be. Obviously, the jury is still out. In our case, most of our tenants in these categories at our locations were strong performers coming into COVID. Therefore, when some percentage of these businesses inevitably fail in the coming months, the previously profitable and proven locations will either be in demand to successfully restructure by them or will be in demand by subsequent owners as they transition. Power a strong real estate, and that's what we're seeing already. Short-term disruption for sure, but proven desirable real estate nonetheless. Let me give you a couple of examples. No fewer than seven COVID-era restaurant deals from well-known downtown Washington, D.C. restaurateurs have been signed or are far down the road to either move or at another location in Bethesda Road, Village of Shirlington, in Pike and Rose, or in Patagonia Road. And in several health club locations in places like Hoboken, New Jersey, and others, we've received unsolicited offers from healthier rivals aiming to improve their real estate location. These are interesting times for sure, and we're encouraged by the demand we're seeing for our space. Let's talk about that. I hope that the volume of new and renewed leases that we did in the quarter is as encouraging to you as it is to us. 98 comparable deals was more than double the second quarter. and back to a normal quarterly run rate. 472,000 square feet was more than 70% higher than the second quarter. But ah, you say, the new rent on those deals was basically flat with the old rent, actually down 1%. Well, of course it was. That's a function of our negotiating and leasing philosophy and leverage in the middle of COVID. But note the average term, 5.6 years versus the normal average of roughly eight years, or 30% shorter on average. Basically, we're trying to lock in strong financially desirable deals for longer terms than usual and limiting terms on deals where we're trying to bridge a tenant to the other side of COVID to two or three years. But in all cases, we want the most desirable retailers and restaurants in our shopping destinations. The right tenancy is the single most important factor in attracting new class-leading retailers and restaurants to fill the inevitable vacancy. Why? because retailers and restaurants, considering new locations today, want to know who their neighboring tenants will be and how well leased up the center will be over the term of their lease. Providing clarity relating to that tendency is paramount. Here's the big point. COVID has accelerated everything. The consolidation of retail to the best centers in the trade area that began pre-COVID has and will continue to accelerate during and after COVID. If you believe that, as I do, then you know how important it is to have the best-in-class tenants and not just any tenant in those centers. Accordingly, as we've said since our first quarter call, we're willing to structure deals with those successful and important retailers and restaurants, allowing them contractual flexibility so that they remain the attraction for new class-leading tenancy on the other side of COVID. That means some deferrals, some abatements, some percentage rent deals that convert to the old rent, with time or unnatural breakpoints, et cetera, all negotiated one-on-one based on a tenant's importance to the center and their financial viability. Dan will provide more details on this in a few minutes. So let me move to our construction in progress, where the completed lease-up timing of the office portion of our large mixed-use developments 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 earlier stages of construction and won't be ready for occupancy until 2022, the 212,000 square foot Pike and Rose office building is complete today. 45,000 square feet serves as Federal Realty's new headquarters. Benefits Advisor One Digital took most of another floor and moved in next week. We just signed a deal with co-working leader Industrious for two full floors for 40,000 square feet. leaving about 110,000 square feet to be leased. And an assembly row where Puma will anchor that 275,000 square foot office building beginning in late 21, 110,000 remains to be leased. And while the long-term impact of the pandemic's work-from-home mandates have created uncertainty in office leasing, and so timing is hard to predict, there's clearly a growing sentiment as to the necessity of in-office collaboration for most business plans. And in our view, we have the best and most desirable product in the market. Come see for yourself at our new headquarters at Pike and Rose. All of these new buildings are expected to achieve LEED Gold status. They're state-of-the-art buildings with enhanced clean air system and affluent suburban communities, hosted job centers that have both access to public transportation but are also drivable with convenient parking. Most importantly, they're integrated into fully amenitized mixed-use environments that business leaders say is essential. So what else gives us confidence to continue to operate as we have? Frankly, it all comes down to our convictions, not only in that first-range suburban location of our real estate, the sweet spot in our view, but also in the dominant, open-air, heavily amenitized product type and environment that we've created in those locations over the last decade or more. Evidence of the desirability of those first-range suburbs comes not only from our leasing volumes and relocation and expansion, of downtown central business district retailers and restaurant store properties, but also from single-family home sales data. In the third quarter, U.S. home sales volume was up 12%, according to Redfin's residential database. Yet the number of homes sold in Bethesda, Maryland, were up 26%. Falls Church, Virginia, up 18%. Ballot Kinwood, Pennsylvania, up 38%. Downers Grove, Illinois, up 39%. Los Gatos, California, up 60%. All first-tier suburbs that are home to big federal properties. It really feels like this migratory trend from downtown CBDs to first-tier suburbs is going to stick for a while. 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 that provide future growth is not one of them. I know that our property's positioning in those first-rank 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 reliability. Consider that nearly every discussion we've had or are having with brokers and prospective tenants in every major market that we do business, the prospective deal is premised around tenants improving their real estate, their location, their co-tenants, their environment, and importantly, 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 your coordinated customer pickup program matter today 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 that. And before I turn it over to Dan, let me address the unset place impairment loss that we recorded this quarter. It's no secret that we've struggled realizing our vision of a redeveloped mixed-use community since we bought it back in 2015. First, the fits and starts of the entitlement process with the city resulted in precious time loss securing existing tenants and setting up new ones in the strong retail market of 2015, 16, and 17. By the time those entitlements were received, box rents were under more pressure, construction costs continued to rise, skidding down value creation estimates. But even with all that, we were hopeful that we had a viable project with some reconfiguration of the master plan. Then came COVID. The previous strength of the anchor system, a full-size gym in L.A. Fitness, a big AMC theater, and two large entertainment tenants named Splitsville and Game Time, along with the required hotel component as part of the intensified site, became obvious weaknesses that are likely to continue to remain so for some time. Accordingly, our partnership didn't pay at maturity our $60 million non-recourse note in September, and the lender has declared it to fall. Given the other opportunities within our existing portfolio to invest capital, we've decided not to pursue redevelopment any longer there. Accordingly, we're evaluating all of our disposition options. Okay, that's about all I have for my prepared comments. Let me turn it over to Dan for some final remarks, and we'll be happy to entertain your questions after that.