Federal Realty Investment Trust

Greetings. Welcome to Federal Realty Investment Trust Fourth 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 from your telephone keypad. Please note that today's conference is being recorded. I will now turn the conference over to Leah Brady. Leah, please go ahead.

Hi, everyone. Thanks for joining us today for Federal Realty's fourth quarter 2020 earnings conference call. Joining me on the call are Don Wood, Dan Gee, Jeff Berkus, Wendy Sear, John 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. 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 operations. We do ask that given the number of participants that you limit your questions to one or two per person during the Q&A portion of the call. Feel free to jump back in the queue if you have additional questions. And with that, I will turn the call over to Don Wood to begin the discussion of our fourth quarter results. Don?

Thanks, Leah, and good evening, everyone. We closed out 2020 just about as we thought we would, with fourth quarter FFO per share of $1.14 and the total year at $4.52, roughly 29% off 2019's record results. The fourth quarter and total year number bonds, and as miserable as 2020 was, and it was pretty miserable, we're very clear as to our priorities and can see our path forward. There's no doubt that the second wave of government shutdowns in our coastal markets that ramped up around Thanksgiving last year and largely continued through today, so there are at least some encouraging signs of some loosening of late, have and continue to hurt us in terms of rent collection and the likely business failures that will come from them. Yet despite that, our growth prospects are really strong when the following three things happen. One, vaccinations are delivered to a large segment of the population in our markets. Number two, our coastal markets actually reopen. And number three, that consumer behavior reverts to uninhibited freedom and the spending that goes with it. Behavior that we are supremely confident will happen. And while that's certainly not the environment that we're living through or operating in yet, The sheer volume of leasing and other transactions that we executed at the end of last year, 103 retail deals for 469,000 square feet, coupled with the strong leasing demand environment that is evident by the many substantive discussions we're having today, and some very important management promotions and alignments that we've just announced, set us up extremely well for a strong post-COVID recovery as those conditions prevail. All right. So where do we go from here? Well, as previously announced, the sale of Sunset Place and two other shopping centers in December effectively generated $170 billion of proceeds in debt relief. We put out a press release in January that you should check out for more detail if you haven't seen it. Using that capital, along with cash on the balance sheet, we repaid $500 billion of senior unsecured notes, half of which were retired early, the result of which means that we have no public bonds maturing until June of 2023. So with little debt due in the next two and a half years, along with nearly $800 million in cash remaining on the balance sheet and a completely untapped billion-dollar credit facility, we've got something of a war chest on hand. Should we find retail opportunities that fit our business model in 21 and 22? And make no mistake, we're actively looking, including in markets with hot job and income growth where we haven't looked before. A little more geographic diversity in our income stream, carefully considered, is an objective of ours. But today, with a day trader's mentality so prevalent in so many corners of the investor and analyst worlds, it's hard to look past short-term results, particularly those of higher multiple companies who are far from immune from the economically devastating effects of government-imposed shutdowns, most notably seen in the heavily populated coastal markets. 85% of federal's property operating income comes from California, Massachusetts, particularly Somerville, New York, New Jersey, Metropolitan Philadelphia, Maryland, and Northern Virginia. These markets have the most restrictive government-imposed COVID laws in the country, by far. And they make 2021 more uncertain than at some of our peers. Nothing we can do about that. Serenity prayer comes to mind every day that I grapple with that. But those restrictions sure don't diminish the quality of the real estate that we own in these first-range suburbs of major metropolitan areas, nor the tenant demand for a spot in these properties in the future, as evidenced by the leasing volume we're doing, along with the conversations we're having with many retailers about their future real estate plans. So here's an interesting fact. When you bifurcate our entire portfolio, between the 75% or so of essential service type shopping centers that we own and the retail component of the 25% or so of our properties that are mixed use or lifestyle oriented, performance varies greatly as far as percentage of rent collected or percentage of operating income diminution from last year, pre-COVID. Predictably, it's what you would think. The mixed use and lifestyle tendency, heavy in restaurants, theaters, gyms, and the like, has been disproportionately hurt by the shutdowns. There's no real news there. You all know that. But the irony is that those assets represent not only some of the best real estate that federal realty owns, but arguably some of the best, most desirable retail real estate in the country. That's not changing. So in a nutshell, 75% of our properties, the necessity-based ones, are performing in line or arguably better than other necessity-based REITs despite being in government-restricted coastal markets. Think about that. In and of itself, that's pretty impressive to us. The remaining 25% of our properties, the mixed-use and lifestyle ones, have been disproportionately hurt because of their merchandising mix, but represent our best, most desirable real estate, and therefore naturally have superior growth prospects, particularly from the beaten-down levels they're currently performing at. That cash flow growth formula feels like a winning one to us when vaccinations are delivered to a large segment of the population in our markets, when our coastal markets reopen, and when consumer behavior reverts to uninhibited freedom in the spending that goes with it. Everything we see suggests that it should be a strong 2022. We'll talk more about that in Dan's comments. And on a celebratory note, I hope you'll join me in congratulating Jeff Berkus, and our other executives who've been promoted effective with our board meeting earlier this week. I hope you saw the press release that we just put out. Many of you have gotten to know Jeff over the years, and I'm sure you share my appreciation for his intelligence, for his real estate savvy, without question for his unimpeachable integrity. Jeff and I have been close partners for over 20 years now, and this elevation and responsibility comes at a crucial time given the expected post-COVID retail real estate environment. We need to be as tight and productive as humanly possible. Now, to head off the inevitable speculation, let me get it out there by saying that forming the position of company president and chief operating officer shouldn't be construed to mean that I have plans of going anywhere anytime soon. I don't. But as I've continually talked about and acted upon, career development and succession planning are always top of mind at every level in our company. This new position is a great training ground. I'm sure there will be lots of questions following our prepared remarks, so I'll cut it short today, end mine there, and turn it over to Dan for his comments on the quarter before we open the lines to your questions.

Thank you, Don, and hello, everyone. We are generally pleased with the progress we see in our portfolio as we close down a difficult year. While all of our centers remain open, with 98% of our retail tenants open and operating in some capacity as of February 1st, COVID-19-induced government restrictions continues to provide challenges to their businesses. We reported FFO per share of $1.14, up a couple of cents from third quarter. Now, trying to assess what specifically is the direct negative impact of COVID-19 is difficult. But let me walk you through some of the drivers of our results during the quarter. On the positive side, we continue to see and be encouraged by the resiliency of our tenant base overall, as collectability adjustments continue to shrink from $55 million in the second quarter to $29 million in the third quarter to just $19 million in the most recent. From a sequential perspective, this progress was offset by a number of items, many of which were one-timers. Four cents of impact several non-recurring items heading V&A, three cents of drag from higher property level expenses that were primarily seasonal in nature, as well as three cents of headwinds due to the timing of fourth quarter debt capital transactions that we executed. As a result, headline progress versus the third quarter was muted. Year over year, relative to the fourth quarter of 2019, we saw a direct negative net impact of COVID-19 for the quarter of 37 cents per share. Continued improvement over the second and third quarters direct negative COVID impact of 83 cents and 48 cents, respectively. Elections continue to improve from the 72% and 85% levels previously reported for 2Q and 3Q, respectively, and are now up to 89% for the fourth quarter. Solid progress despite weakness in December and January due to the second wave of government-mandated restrictions in place in the majority of our markets. As a reminder, our approach to reporting collections is very transparent and, in our view, the appropriate approach. The denominator is comprised of all monthly billed base rent plus charges for Camden real estate taxes and is not adjusted for deferrals and abatements. In our numerator, all deferrals and abatements are classified as uncollected. Also note that our denominator remained fairly consistent throughout 2020 at roughly $70 to $71 million per month. During the fourth quarter, we continued to take a tactical approach as we negotiate and work with our tenants through this unprecedented impact on our businesses. $36 million of deferrals were executed in total for 2020. Of that amount, $22 million is with higher credit accrual basis tenants. Abatement agreements now total $37 million as additional rent concessions were provided as government restrictions impacted our tenants' ability to operate at full capacity. Abatements will continue in 2021, primarily the result of temporary percentage rent arrangements as we have made the decision to partner with many of our tenants to get to the other side of the pandemic together with the objective of longer-term benefits and stronger, sustainable growth. As we did in the first six months of the pandemic, we took advantage of these negotiations to improve many qualitative lease provisions in exchange for that rent flexibility. Incremental percentage rent upside where we have abated rent, removal of development parking and use restrictions, Eliminating tenant lease termination and co-tenancy rights and the deletion of below-market tenant extension options all enhance the long-term value of our assets in exchange for these near-term concessions. Following the surge of productivity during the third quarter, we had another solid quarter of leasing. With almost 470,000 square feet of total retail deals, and then add in 33,000 square feet of office leasing, bringing our total to over a half a million square feet of fourth quarter deals signed. Combined with third quarter, that's over one million square feet of leasing to close out the second half of the year. We are also very encouraged by the level of activity in the leasing pipeline. As a result, our occupancy metrics have demonstrated surprising resiliency. with our least metric standing at 92.2% at year-end, flat versus the third quarter statistic, and our occupied metric remaining in the 90s at 90.2%. These levels are off 200 and 230 basis points respectively versus year-end 2019 levels. While we still expect continued pressure on our occupancy over the next few quarters and expect to dip into the upper 80s at the trough, As we have previously discussed, continued leasing activity at the volumes we achieved in the second half of 2020 will set us up for a more pronounced growth in 2022. We continue to see strength from the same leasing demand drivers we've talked about on prior calls. First, urban and CBD tenants migrating to top-tier first-ring suburban assets. top-tier tenants upgrading their real estate to the best-in-market open-air locations. And third, new-to-market lifestyle and digitally native tenants targeting our best-in-class open-air mixed-use and lifestyle properties. As Don highlighted, while our lifestyle and mixed-use-oriented assets have underperformed in the COVID environment, new demand from these best-in-class lifestyle tenants has been strong. as evidenced by lease deals and openings during the pandemic with brands such as Nike Live, Athleta, Sephora, Warby Parker, Room & Board, Serena & Lilly, Arc'teryx, Muori, Lovesac, Faraday, Blue Mercury, Nick & Zoe, Shake Shack, Sweetgreen, Levain Bakery, Salt & Straw, and Anchor restaurants such as Teleferic Barcelona, Nighthawk Pizza, Chico, Stellina, Spanish Diner, and Planta with two openings, to name more than just a few, plus many more under negotiation. Needless to say, our best-in-class mixed-use and lifestyle real estate is poised for a significant rebound in 2022. Our residential portfolio has held up reasonably well during the pandemic, with collection levels up towards 98%. The only exception being our 450 units at Assembly Row where the Montauk has felt some weakness as expected. Average comparable lease documents for our 2,700 comparable residential units stood at 95.1%, down only 60 basis points from year-end 2019. Our existing office portfolio has performed solidly during the pandemic as well, with collections averaging 97% and occupancy remaining stable. As we've discussed previously, however, lease up of office space in our development pipeline will be slower than we had expected pre-COVID, as corporate decision makers postpone space planning needs by at least a year to 18 months. That being said, pre-leasing at Cocoa Walk stands at 75%, with South Florida office demand remaining strong. At Assembly, Puma is building out its new headquarters space in 55% of Block 5B on Grand Union Boulevard, and Puma at this point plans to move all of their employees in this summer. Mike and Rose has 63% of 909 Rose Avenue spoken for. One Santana West lease up remains speculative. However, openings are not expected until 2022. Now to a quick discussion of the balance sheet and an update on our further enhanced liquidity position. The fourth quarter was an active one on the capital markets front. In early October, we raised $400 million of unsecured notes in a green bond. The second half of December, we replayed $500 million of unsecured notes. In December, we sold $170 million in assets at a blended in-place yield inside of 4%. This left us with $800 million of cash available and an undrawn $1 billion credit facility providing $1.8 billion of total liquidity at year end with no bonds maturing until 2023. With our $1.2 billion in process development pipeline continuing to be executed upon, we have just over $400 million left of that to spend. As Don mentioned, we find ourselves today sitting with significant dry powder. And with Don's and my remarks today, We hope we have conveyed to you the optimism that we have for the future of our business and the strength of our portfolio to truly thrive on the other side of the pandemic. Our ability to generate outsized cash flow growth is fairly clear when, as Don said, vaccinations are delivered to a large segment of the population in our markets, those coastal markets reopen, and consumer behavior reverts to uninhibited freedom and spending. But the timing for those three things to occur is far from clear and certainly not clear in 2021. As a result for 2021, we are not providing formal guidance at this time. The best we can do for you if you need a stake in the ground is that it's roughly going to be flat to 2020. With the first quarter of 2021 at roughly a dollar per share and build each quarter from there. We do, ironically, FEEL SIGNIFICANTLY MORE CONFIDENT IN PROVIDING AN OUTLOOK FOR 2022 THAN WE DO FOR THE CURRENT YEAR. BASED UPON THE LEASING ACTIVITY AND DEMAND WE SEE FOR OUR REAL ESTATE, THE STRENGTH OF OUR ESSENTIAL RETAIL PORTFOLIO, THE SIGNIFICANT UPSIDE IN OUR MIXED USE AND LIFESTYLE RETAIL ASSETS, THE RESILIENCY AND STABILITY OF OUR EXISTING RESIDENTIAL OFFICE, AND THE PHASING IN OF POI FROM OUR $1.2 BILLION DEVELOPMENT PIPELINE IN 2022, 23, AND INTO 24, we expect 2022 FFO per share will be in the low $5 range, representing double-digit FFO growth year over year. So stay tuned. With that, operator, please open the line for questions.

Thank you. We'll now be conducting the question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you would like to move your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question will be coming from the line of Alexander Goldfarb with Piper Sandler. Pleased to see you with your questions.

Oh, hey, good evening. First, Jeff, congratulations, though. Awesome, awesome. for you to get the new titles, business cards, and all the fun stuff. And then congrats to Barry and the rest of the folks who have gotten promotions. So two questions here. Don, just thinking big picture, you're not alone in traditional coastal REITs. We're now exploring other markets, presumably down south of Sunbelt. But it's interesting because for the past two decades, there's been this whole coastal, coastal, coastal, And then suddenly with COVID, everyone's looking elsewhere. So my question is, is it really COVID or you guys have been thinking for several years now about expanding to new markets? Maybe they are down the Sun Belt, but the COVID and what's happened was just sort of the catalyst, the expediter.

Yeah, Alex, that's a great question. It really is. First of all, I don't want my comments to be construed as not being positive with respect to the coastal markets. At the end of the day, it's jobs and good-paying jobs at that. And when you sit and you think about kind of where we are in those markets, in those first-tier suburbs, that looks really strong. Now, When you go forward, you say, okay, where would you like to put incremental capital? Doesn't mean we still won't look in the markets that we're in that we know, but it does mean that through COVID, it's pretty darn clear that there will be other job center growth places that were starting pre-COVID, but like almost everything, have accelerated as a result of it. So, you know, when you think about that, markets like Phoenix, when you think about markets more like Florida and what's happening in South Florida and a couple of others, I do think it would be wrong of us to not effectively understand the dynamics in them and to be able to act on it to the extent we can get comfortable with the highest quality stuff. in those markets, you'll never see us going down quality. And that's a really important point.

Okay. And then the second question is, it also seems like recently, there's a lot of demand from entrepreneurs, people starting up whether new restaurants or new concepts. And yet, at the same time, there's still tenants who are struggling. And I don't just mean like movie theater or gym, but some others. So can you sort of walk through what's happening? Why is it? Or how is it that we're seeing you know, these spurts of new tenants forming at the same time that you're still seeing a bunch of people struggle, it just seems to be this odd paradox. And just want to better understand, is it purely just the categories themselves and that's it? Or are there other dynamics at work that are driving some of these new leases that you're seeing?

Well, first of all, there are certainly, you know, lots of dynamics. But one of the single most important things to remember is that Companies that are struggling at this point and continue to struggle in here, you know, I cannot say enough about the impact of the government restrictions. I mean, we're a business of contracts. And when, you know, government steps in and effectively doesn't allow the contract to be performed, it's the weirdest time I've ever been involved in. So absent that, you do have new businesses being formed with new bases. So legacy costs of old businesses and having to be able to figure out how they're going to make money going forward with all those legacy costs is sometimes much harder than a new business coming in. If you take a look at what's happening in the gym space, for example, you'll see new purchasers of gyms with packages of gyms at a fraction. of the cost that you thought that that gym company was worth 12 months ago. Now, when you come in with a new low basis, you've got a completely different P&L. You've got a completely different business plan, different balance sheet, and the ability to afford and to pay what you need to do to get some of that high-quality real estate. So it's a natural cleansing that won't just be a 2021. This is a phenomenon. That will take a number of years to work through, but you will see the single biggest thing from my perspective is businesses coming in with a lower cost basis to start versus their existing legacy competitors.

Okay. Okay. Thank you, Don.

Our next question is from the line of Steve Sakwa with Evercore. Please proceed with your questions.

Thanks. Good afternoon, everybody. Don, I guess on the leasing, you know, I was just wondering if you could provide a little bit more color. I appreciate what you and Dan talked about in terms of the activity in Q3 and Q4. And I'm just curious if the strength is concentrated by region, if it's concentrated more by product type or price point within the portfolio, just trying to get a sense for maybe where you're seeing the greatest demand and areas where you're maybe seeing less demand.

Well, let me start out this way. So on the call, Steve, are Wendy Sear, who, as you know, has the biggest part of our portfolio, and a lot of that is essential-based assets and some boxes, and let her speak to that. And then Berkus is also on the call. That can give you a much better idea on the mixed-use kind of stuff, if you will, in that. So listen to those two, and then I'll try to put it all together. Wendy?

Steve, thank you. On the eastern region, I've been looking at, as I've been looking at our pipeline, and if you look at our pipeline in January of this year versus January of last year before the pandemic happened, we actually have more activity on the east and more in our pipeline. And when I say pipeline, I mean new deals. So I'm very encouraged by what I'm seeing. I talk to retailers all the time, and I continue to see an interest in a flight to quality. They are, when you think about it, it's very logical, right? So a lot of the retailers coming into 21, maybe into 22, maybe they're going to make less new deals than they made before. So the deals that they make are important from a risk mitigation standpoint, that they go for properties that they know and have a history of strong sales, whether they're highly amenitized, whether they're general essential properties, because I have both on the East Coast, they want to mitigate that risk. They want to make the right choice. And where we're going to have the advantage is the history pre-COVID of a very strong sales, high-quality real estate, and people believe that that high-quality real estate is not forever changed because of COVID. So I'm very encouraged by what I'm seeing.

Yeah, and Steve, I'd add on to that by saying it's really no different here on the West Coast. The demand is very broad-based, you know, whether it be in our more traditional essential centers, including the Prime Store portfolio or Santana Row or, you know, quite frankly, our other lifestyle and mixed-use projects on the East Coast, which – I've had some involvement in over the last couple years as well. The list of tenants that Dan read off, that's from our entire lifestyle mixed-use portfolio, and all of those properties have active leasing and active negotiations going on right now. We've got two retailers under construction at Santana, a third to start shortly, three restaurants under construction at the moment. We're about to sign a lease with – a noteworthy operator out of San Francisco that's doing their first restaurant outside of San Francisco. So we're very encouraged by what we're seeing. And to key a little bit off of Alex's prior question, and thank you, Alex, by the way, for the congratulations. You know, we're not in necessarily a financial crisis this time around. So there seems to be plenty of capital for some of these newer concepts to get capitalized. We're seeing that very specifically in the restaurant business right now. So there doesn't seem to be a shortage of capital. And like Wendy said, everybody wants the best real estate. So whether you're kind of new and somewhat starting up or you've been around for a while and you can open fewer stores now than you could a few years ago, a lot of focus on our real estate and it is very broad-based.

Great. Thanks. Good color. Maybe second question, Don, just in terms of it sounds like, you know, you've got a lot of capacity on the balance sheet. Just what are you seeing in the transaction market? You know, what's happening in terms of distress? And, you know, how are you sort of weighing that against potential developments down the road, you know, when you're mixed use, you know, assets that you've got, you know, phase threes and fours?

Yeah. Well, listen, you know, first of all, the last part of your question first, Steve, we've got plenty of development to do. And, you know, so first of all, you are years away in terms of development product coming online. Let me now take it to the acquisition side. So we learned a real good lesson in 2008, 9, 10. And Jeff and I were just talking about it and lamenting about it last time. And that was how, in the end of the great financial crisis, are there not going to be a ton of distressed assets for us to acquire? And there weren't. There weren't at all because great assets are often not distressed and not distressed in terms of price. And so, so it wasn't about us going down quality and earning a lot and getting a lot of stuff, which is kind of why at this point in time, you know, we're looking for the best stuff around. We, we, there are people willing to talk to us about that. Uh, prices do seem to be firm, but a little bit better than they were certainly, uh, pre COVID, but those prices are not cap rate prices because, What NOI are you capping as you're looking? There are really great real estate prices. And that's kind of how we're looking at potentially using some of that. I mean, the cash that's on our balance sheet is insurance. The reason there's so much of it is insurance. That's why we did it that way. We believe going forward, given what we just told you, we need less insurance. And so accordingly, I don't have a treasure trove of transactional information on deals that have just happened that we could really talk to you about in terms of where we're trying to go. But suffice it to say, I do believe we'll find some opportunities in the markets we want to be in, including our existing markets and one or two new ones, that effectively let us get – get deals done in a way that will be accretive now and certainly accretive to value with more development opportunities associated with them going forward.

Great. Thanks. That's it for me.

The next question comes from the line of Derek Johnson with Deutsche Bank. Please proceed with your questions.

Hi, everyone. Good evening. Thank you. um how how have development yield expectations changed um for the current projects or even the entitled projects can we you know get an update on some of the key inputs like land prices maybe construction labor materials and of course importantly rents so do you expect the compression and yield of say 100 to 100 125 basis points possibly

Eric, we don't see it as that much. There will be some compression. And I think if you look at the 8K that we put out, we did get more conservative on a couple of those assumptions. There's still a lot to figure out yet. And, again, it depends on the product. It's certainly hard to figure out on the office side today. But it's not in construction costs. It's certainly in a holding period. So you're carried. you can certainly expect it to add to a longer period of time. It's most likely in build-out costs from a TI perspective, if you will, for office space there. And then, you know, and then in terms of rents, you know, man, I got to tell you, it's anybody's guess to some extent, but our office and residential development, which is most of what our development is, are all in mixed-use properties that are well-established and effectively are the best product that is available coming out of COVID. So you shouldn't expect us, you know, dropping rents in any significant way because I don't think we'll need to do that. There may be some, there'll be some extra carry costs associated with it, maybe a little bit more P.I., But everything we still see still says that the developments that we are completing will be accretive to value and accretive to earnings.

Okay, thank you. That's pretty helpful. Just, I guess, changing from office over to maybe the watch list, like how does it stand today post the pandemic? To me, I mean, it seems like a lot of companies previously on watch lists, you know, have gone dark. So the question is, is the wash list pretty washed out at this point? And, you know, if so, are we, you know, a couple of quarters away, maybe, you know, third or fourth quarter this year of trough occupancy, and then, of course, growing, albeit from a lower base?

Well, let me go first, and anybody else, you know, who's got a perspective, please add into this here. But, you know, I do think there's truth to the way you phrased that question with a couple of exceptions. And the biggest exception really is in terms of small business. And when you look at small shop and small business, and I could not tell you, you'll never talk to anybody more frustrated than I am with respect to some of the restrictions that are extremely severe uh on our uh on our our properties and you know it's not only restaurants it's it's other other uh uses also from you know government entities and so to the extent that i don't know when they'll be lifted i don't know when uh you know how long those businesses can last i suspect stimulus is coming soon but it's february whatever it is 11th or something and been talking about it for months and months and months so On the small business side, those are the people who are being hurt the most. And, you know, that's different than the big companies that are national chains. But frankly, we make our money on the small businesses that effectively turn over, become successful, and can pay more rent. So I do see that being a very positive catalyst as we look out going forward. I just don't think it's right now. And that's where... Maybe it's a good time for me to say the silly thing that we put out there today, and that is in all my years, I've never been able to say that I'm more comfortable with a forecast, with a view to the future one year out than I am today. But I am, which is why we're not giving 2021 guidance, which is why we're effectively talking about 2022 with more specificity. That's kind of crazy in my history of kind of doing this job, but it is the way it is today. And so we thought we'd get out there and try to get both the sell side and the buy side to realistically start looking, at least from Federal Realty's perspective, at our growth profile, which to us inside, to our board of directors, looks extremely positive, but certainly not in February of 2021.

Good stuff, Don. Thank you.

Our next question is from the line of Nick Uliko with Scotiabank. Please proceed with your questions.

Hi, this is Greg McGinnis. I'm with Nick. Jan, I just wanted to confirm your comment on the not actually guidance numbers. Did you say around $1 flat for Q1 21? Seems like a fairly significant drop versus Q4, so just wanted to get some clarity there.

Yeah, no, I think that's fair. You heard me right. You know, roughly a dollar. I think that, look, the government restrictions, that second wave that came on in December has impacted kind of our momentum on collections and so forth. And we expect to impact our business, business of our tenants. in the first quarter.

Heck, Nick, I just gave this whole big impassioned speech about 22, and you took me back to February of 21. Go ahead, Danny.

I think we will, you know, likely take a bit of a step back, but I think you can build off of that and get back to, you know, where we, you know, look, we don't have a lot of visibility, and that's why we're not providing guidance on 21. Okay, that's fair.

I'll let you be a little more impassioned about 22 here on the next question. So rent collection right now is trending near the bottom of the peer group, which, as you've mentioned, is kind of a product of portfolio geography. But as we have the vaccine gets disseminated and restrictions are lifted, is there any reason that, you know, by the end of the year, rent collection shouldn't be, you know, in line with everyone else?

Assuming those three things that... That I talked about? No. But, again, if you kind of go back to the conversation, right, 75% of the company is right there now. Right? Go back to the comments I'm making. So understand that. Certainly the same thing or better with respect to the residential and the office. So it leaves the retail of 25% of the company, which is the mixed use and lifestyle side. That is really dependent upon stuff that is out of our control. And so, you know, as an investor, an investor's going to decide whether he believes in that real estate and that growth that's coming or not, dependent not on me, but dependent on what he believes about vaccinations, what he believes about openings from government restrictions, and what he believes about the consumer. So that's kind of where I would leave it.

Yeah. Are essential-based assets, basically are at or better than our peers, 92% collection levels, only down basically at about 92%, 93% of last year's numbers. They have performed as well in worse and more restricted markets. So we feel as though their performance is at or as good as anyone else. And it's really the lifestyle mixed use where we felt that impact. Great, thank you.

Our next question comes from the line of Michael Billerman with Citigroup. Please proceed with your question.

Hey, it's me. I want to come back to the guidance as much as you don't want to talk about guidance. Who is this? Who is this?

Michael Billerman. I mean, you know, we're not on Zoom. Hi, Michael.

You said my name. I guess I'm having a real hard time trying to put your pieces together because you sound, Don, confident, and you can make assumptions for what things could be this year. You don't have that much of a complicated business. Your balance sheet's in good shape. You've locked all these things away. You have confidence on the leasing front. I guess I'd like you guys to be a little bit more specific. You have almost an 11 million FFO drop that you're communicating between the quarter that just ended and we're a month and a half into the first quarter. Can you detail if there were things in the fourth quarter that are not recurring that would cause that variance? What else is happening to drop from one 14 to one? And then I get it. What you're saying, Don, like you have more confidence in 2022. A lot of 2022 is the, is where you're coming from in 21. And you know, you, you're embarking on a $5 number, that's almost $40 million of NOI, of FFO. What are the components of that? How much of it is NOI? How much of it's investment? How much of it's development? How much of it's G&A? How much of it's interest expense? Give us the pieces that give you the confidence to get there.

Michael, Michael, we're not providing formal guidance. We provided, typically on our November call, we provide preliminary goalposts. okay, where we don't provide any assumptions behind it. Given today, we've provided a goalpost, okay, for 2021. That's what we've provided to you. We're not providing assumptions. I think in light of COVID, I think that we're comfortable providing what we're providing, and the assumptions will hopefully come at some point later this year in 2021 when we have better clarity on kind of the environment and when those things are going to happen that will allow us to have the visibility to provide the level of detail and assumptions that you're asking for.

You know, Mike, let me just say something to Dan. You know, when you, what I don't want to do is go down the rabbit hole you want me to go. And let me be very specific about that. When you go line item by line item, as you do, You put a specific amount of exactness or credibility or false understanding that that's actually what's going to happen. We don't know that, Mike. You know the components of this business. You know the development that is underway that we give updates on on every single call. You know the amount of rent that we're collecting. Effectively, we just broke it out between 75% of the company, the essential component, and the lifestyle component of the company. The notion of how we grow earnings and what we've been able to do is definitely a question for an investor to decide, do you believe in this business plan to be able to get there? But if I do it your way, Mike, what I'm winding up with are billions of questions on individual line-by-line items that suggest that they are more accurate than we are able to provide at this So we're not going to do that.

I respect that, Don, but at the same time, every one of your competitors is taking their best shot at numbers. That's up to them, Mike.

No, no, I get that. That's up to them.

But you put out, like, my view is you teased people by saying, we're going to get to five bucks in 22, and it's going to be a buck in the first quarter of 21, without giving the context of how you get there. I think we've given you tons of context on it, Mike.

I think we've given you tons of context. To the extent it's not enough, then certainly buy another stock or recommend another stock. That's what's been happening anyway. But when you sit and you think about the quality of this real estate and where it's going, I think our investors understand how they're going to get there because everybody, including you, has a model and can certainly figure out and make assumptions in that model. in terms of how that would happen. It's not so crazy to do. It takes some work, but it's not so crazy to do.

You know, we can, and we know where the street is. The street's at $1.14 for the first quarter. You did $1.14 this quarter, and you're saying it's a dollar. All I'm asking is that in a narrowly focused way.

Michael, on that, the assumptions, broad assumptions behind the dollar relative to the $1.14 in the fourth quarter, We've started collections in January are down and behind December's collections. December collections were a little bit weaker. We had $3.5 million of term fees in the fourth quarter, another strong year of term fees. We're not projecting that. Our occupancy is projected to go down in the first quarter. Like I had indicated, we expect it to head into the 80s. Percentage rent is down, and plus we sold a number of assets, and we're sitting with significant cash on the balance sheet, Relative to where we're putting those proceeds to work immediately, we're building capacity and financial capacity and flexibility, but it will be diluted in the quarter before we deploy that cash. That is the rough roadmap from $1.14 to roughly $1.

That's what I'd like. Thank you very much.

Our next question is from the line of Juan Zampia with BMO Capital Markets. Please share with your questions.

Hi, thanks for the time. I enjoyed listening to that prior exchange. Just on the acquisition front, I was curious on, you know, the target of assets you're looking at, if it's more the essential grocery anchored type of assets or more the lifestyle mixed use type of assets and And if those assets that you're looking at to acquire are more stabilized or maybe redevelopment opportunities where you could see some value. So just curious on kind of the target of what you're looking at and maybe any sense of how you're looking to remix or reship the portfolio as part of that discussion.

Yeah, that's a fair question. You know, I hope with a little bit of luck you see both. And because to us, and this is kind of the way it's, We really believe in it. It's not about a particular format or a particular, you know, type of shopping center. It's about the growth prospects. And if we think the growth prospects are in a more stabilized asset that has rent upside because it should be re-merchandised and kind of, I don't want to say federalised, but federalised effectively, then we like that a lot. If it's one that's been mishandled and mismanaged and could be redeveloped, and maybe there's some vertical, you know, investment there. We like that, too. It depends. So the first thing we're aiming for is, you know, the right markets with the right barriers to entry with the right demographics so that we can get comfortable and job growth so that we can get comfortable that we've got a pretty good chance with doing what we do of creating overall higher sales from the tenants and higher rents, therefore. So you'll see, I hope you'll see. I mean, who knows what gets done, what can't get done. But we're looking at both opportunities for mixed-use development with some kind of stabilized piece there first and then, you know, a development down the road and a more stabilized asset where we think there's some rent growth possibilities and, you know, other ways to create value. I hope that's helpful.

Thank you. Our next question is from the line of Craig Schmidt with Bank of America. Please proceed with your questions.

Great. First of all, I just want to congratulate Jeff and Jan and the others that got promotions. So congratulations. I wanted to just talk about occupancy and where it might cross. I'm assuming that the fourth to first quarter includes the seasonality that would usually come with a lower occupancy number. But it seems like there may be an impact from this second wave of government-mandating closings, which could also weigh on the occupancy number maybe extending into the second quarter. I just wondered if you had any thoughts on that.

Greg, that's right. for our business. But the other point, you know, again, kind of goes back to the small business comment. And yeah, the longer the government closures are mandated, the harder it is for those small businesses to continue because they're depleting resources, you know, day by day as it goes through here. So while I don't have an exact number, I cannot give you a, you know, a line for the for the model with respect to how many businesses go out and what that means to the overall occupancy perspective. It is reasonable to assume that they'll be a hit. I don't know if you want to put a number out there at all of what it is, but we always thought, frankly, for a year now, which I think is pretty cool, we thought that our first quarter and maybe into the second quarter, we'll see, we'll be in the high 80s, certainly on the small shop space. it will be. The anchors are hanging real tough.

Great. And then I just, what are the retailers telling you about your assets? I mean, they're definitely unique. What are the ones saying to you that are kind of struggling to get by and get to the other side of COVID? And what are the new tenants saying about your properties?

Wendy, can I hand that to you?

Yeah. I think that... In terms of the existing tenants that we have there in our centers, what they love about the – so two things. Let me back up. When we have restaurants, for example, that have multiple locations, what we're seeing is because of our highly amenitized projects and our focus on not only the curbside pickup and outdoor dining and a controlled environment that we can help with – we are there focusing more on getting up and operating in our centers versus other choices that they may have. So from the existing tenant standpoint, we were seeing, frankly, a big uptick in the restaurants until we had that second wave of shutdowns again. So our highly amenitized projects where we can influence what's happening to help their businesses has been critical. On new tenants coming in, what we're seeing, and one of the things that I want to mention is we have ability to have like a reset button, right? So the retailers are going, hey, I have the ability to look potentially at some other opportunities that I never could get into before because historically we've never had the vacancy, where now we have some opportunities. On the flip side, and I don't want to lose this point, is that we're, federal realty, having the ability to reset as well. and look at how we want to upgrade our real estate. So when I was saying that we have a disproportionate activity on those higher-end lifestyle projects from New Deal standpoint, which shows the strength of, oh, my gosh, we now have vacancy in these centers that we never had vacancy in before, and we have a host of relevant tenants that want to get an opportunity in these centers. So it's been positive.

Yeah, I'd tag onto that, Craig, by saying, you know, and I think this was true coming out of the GFC as well, it's never been more important to be a good landlord, and the good tenants know that. And by that I mean, you know, somebody that's going to invest in the property, somebody that's going to be there to pay the leasing commission and the tenant improvement check when it's due, somebody that, you know, is going to continue to operate and invest in the asset and merchandise it the way that particular retailer needs it to be merchandised and managed to maximize their business. That's never been more important. And not having a secured loan or lender to deal with that dictates some of those decisions. The savvy tenants are very aware of all that, and I think all of that plays to our strength.

Great. Thank you for that.

Our next question is from the line of Mike Muller with JP Morgan. Please proceed with your questions.

Yeah. Hi. First of all, quick clarification. When you talked about occupancy going into the high 80s, were you talking about the 92% lease level or the 90% occupied level? The 90% occupied level.

Got it. Okay.

And then for the new restaurant deals you're talking about, is it primarily sit-down full service? And I guess, you know, where do you see the dynamic going a couple years down the road versus where it was pre-pandemic?

Yeah, it's interesting. You know, so we are doing – we're all over the place on, you know, on the restaurant alternatives that we'd like to offer in any particular property. One of the things that we're really doing a bunch of is trying to – reconfigure outdoor space and create more of it. We're using, you know, as part of our property improvement plans, as part of the stuff that we're doing, we're using more pergola, we're using more furniture and areas and landscaping to create those places, which restaurants are asking for. And what, you know, maybe we put you in touch, Mike, because it's a long and complicated answer, actually. to kind of the business plans of new food uses, but put you in touch with like a Stu Beal in our shop who's got a lot of these type of properties. And so while the quick service stuff that we're still doing and will continue to do is pretty much as it was, but again, even there, looking for outside seating wherever possible in either common areas or specific to them, it is also the sit-down restaurant. And the sit-down restaurants that have the ability to be inside-outside, I see that not to the extent it is today, but some piece of that comfort with eating outside to continue. That was happening in a bigger way for us pre-COVID, and like everything else, was accelerated through the COVID process. So big variety in terms of what's going on, but definitely more of a focus of outside.

Got it. Okay. Thank you.

You bet, Michael.

Our next question comes from the line of Chris Lucas with Capital One Securities. Please proceed with your questions.

Hey, good afternoon, everybody. Hey, Don, just a simple question. Your board's been committed to the dividend through this whole process, looks like, so they're going to continue to be. Do you have a sense as to when you might be able to cover the dividend with just your operating cash flow?

Yes. Hopefully by the second part of 2022, we'd be there, and then all of 2023. Okay.

Okay. Thank you. That's all I had.

Our next question is from the line of Linda Tsai with Jefferies. Please proceed with your questions.

Hi. For these younger retailers seeking space, what parameters do they have in terms of occupancy costs? Is it different from legacy retailers? And, you know, what flexibility do you provide to help them in their path to sustainable growth?

Well, what we're doing, Linda, to start is a lot of these deals have a low fixed rent and a high percentage to effectively figure out the question that you're asking. Because while there are, you know, lower bases going in, the question of how much volume they're going to be able to do, where their price points are going to be able to be two years from now are different than what they will be first 12 months when they open up. So I love your question. And I spend a lot of time thinking about that and talking about how those business models are going to work. And the bottom line is there's uncertainty with it. And so in sharing that risk with them from a percentage rent basis, but to the extent they work, being able to actually earn more rent than we used to earn is our objective. Whether we get there or not will depend upon the first 12 to 18 months of the opening. So

That makes sense. And then, you know, the 4Q blended leasing spread of plus 1% versus minus 1%, 3Q is an improvement, but not where you want to be. You know, in the vein of expecting clarity next year, what sort of average blended leasing spreads are possible in 2022?

Yeah, that's a good question. I hope to be in the high single digits at that point. And, again, with us, always it'll depend upon the mix of – you know, a big deal here versus smaller deals, et cetera. But that's where I hope to be. Also, you know, the one thing about what I did just say on the restaurant side, every deal we do, there's a landlord right to terminate after two or three years, depending on sales level. So we're kind of going in this with you, but you don't have 10 years to figure it out, if you know what I mean. So it's a pretty good balance, if you will, of sharing the risk.

Thank you.

Our next question comes from the line of Melina Rojas Schmidt with Green Tree. Pleased to see you with your questions.

Hello. As you think about expanding your geographic footprint, how do you describe your appetite for lifestyle centers, community centers, or even power centers? I think you have mostly talked about lifestyle centers, but I wanted to have a general idea if you have at all thought about the others, the property type.

Yeah, well, what we should do, and I think you're new to the retail side of Green Street, is covering or no? I'd like to spend more time with you offline to kind of go through what our business plan, because we are pretty agnostic, if you will, in terms of the retail format. Everything from community-based grocery anchor shopping centers to more of a power center, to more of the lifestyle center and obviously the mixed use component. So really what we're open to is, I mean, we're real estate people first and foremost. And so looking at the format of the center is not the first thing we're looking at because we're open to all of it. The first thing we're looking at is the ability with that piece of land and that shopping environment that they have for us to be able to create value either through raising rents or through redevelopment or even then further going vertical.

That makes sense. And then do you give any credit at all to the idea that the rise of work from home will facilitate Americans' migration from expensive cities to more affordable cities, potentially harming at the margin cities like San Jose and California and some of their assets? Or do you think that you will not suffer at all from this potential trend?

Oh, no. I very much believe in those trends will change the office environment dramatically in the country. I think the most important thing is the product you have, wherever that product is, is the best in the market. There's always going to be demand in the markets in which we do business in, certainly. or office, it just better be what employers want. And if you kind of look at where our office product is in terms of the mixed-use communities that we are in with being fully amenitized, with being brand-new buildings, which is really important with respect to air and HVAC movement, et cetera, I think we're in the right places with the right product. And so, you know, office is not generic, right? And, you know, that's what has to be viewed very carefully post-COVID.

Okay. So you believe in the trend, but your assets will be just okay.

That's our, yes, that's our business plan. That's what we believe.

Okay. Perfect. Thank you.

Our next question is from the line of Floris Van Dyke with Compass Point. Please proceed with your questions.

Thanks for taking the questions. I'll be brief. By the way, Jeff, congrats on the promotion. It's great. Don, I know I sense a little bit of frustration on your part about, you know, these questions about, you know, guidance, et cetera. And you do have a pretty big development pipeline that should produce, you know, call it 60 million of NOI, you know, over the next couple of years. Have you, I mean, You have done it in the past, but how about putting out an NOI bridge, you know, three years hence or something like that to get people more comfortable? Is that something that you would consider doing?

Certainly take it under consideration, Floris. And just to respond to the frustration, the frustration is with the, you know, the bullying of the line by line. This is what you should do. You're right. I don't take that well at all because we're running the company. best way we can, communicating the best way that we can, and certainly we'll take suggestions, but we won't be bullied.

And then maybe a follow-up, a little bit about some of the newer markets. I mean, aren't you already in one of those markets that is seeing some heady growth as people go to warmer climates? I'm particularly referring to Miami. And do you see I know you just walked away from an asset there or sold an asset, but do you see yourself re-upping in that market over the next 12 to 24 months?

Very possibly. Very possibly, Flores. Yeah, no, look, we made a bad deal with that one. But that doesn't change the fact that job growth, migration, business-friendly markets, environment could be good for us going forward. I think you're going to love Cocoa Walk when you see that completed. I know you love Tower Shops, which is completed. Those are going to be two of our best assets in the company. So, yeah, you betcha we're open to more.

Great. Thanks. That's it for me, guys.

Thank you. At this time, we've reached the end of our question and answer session, and I'll turn the call over to Leah Brady for closing remarks.

Thanks for joining us today. We look forward to speaking with you over the coming weeks. Thanks.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.