Federal Realty Investment Trust

earnings conference 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Leah Brady.

Good morning. Thank you for joining us today for Federal Realty's third quarter 2021 earnings conference call. Joining me on the call are Don Wood, Dan Gee, Jeff Berkus, Wendy Sear, Dawn Becker, and Melissa Sullivan. 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 including guidance. 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 operations. We've also provided some additional information for you in our investor presentation, which is 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, and feel free to jump back in the queue if you have additional questions. With that, I will turn the call over to Don Wood to begin the discussion of our first quarter results. Don?

Thanks, Leah. Good afternoon, everybody. Good morning. What a difference a couple of months make. You know, the natural positive annual sentiment of spring, fall, and winter, coupled with a productive vaccine rollout, stimulus money, and end-in-sight mentality, it's really gone a long way in validating our optimism for a strong 2022 and 2023. First quarter FFO per share of $1.17 was sequentially better than the 2024 quarter of $1.14. positive surprise for us and the result of far fewer tenant failures than anticipated during the quarter and far better cash recoveries than anticipated. As a result, we're confident enough to update our 2022 earnings guidance and provide some clarity on the next three quarters of 2021. Dan will cover that in a few minutes. Pent-up consumer demand is real. We see it in virtually all of our properties in all of our markets despite government-imposed restrictions that still persists in our market. And when coupled with government stimulus cash is really powerful. PPP and other COVID-related programs that many of our tenants have taken advantage of have served an important role in buying time and getting both current and deferred rent paid. The $29 billion Restaurant Revitalization Fund, earmarked specifically for restaurants in similar places of business, as part of the massive COVID relief bill, will undoubtedly also create a strong tailwind for that retail category. So will the GINS Act that, if authorized, will allow the Small Business Administration to make COVID-related grants to privately owned fitness facilities. These programs, among others, are particularly good news for federal lifestyle-oriented properties, which are recovering very nicely. It's quickly become a very optimistic time in our business. Now, as you would expect from me, a warning about over-exuberance this year is in order, as many retailers, particularly small owners, along with theaters and gyms, are in a weakened state, and while buoyed by temporary stimulus, need more growth in their sales than they're currently generating to be viable long-term businesses. Having said that, they'll certainly get the opportunity to succeed because traffic is back in large numbers across the board. Perhaps the greatest indication of a bright future is the continuation of exceptionally strong leasing volumes, including first quarter deals for over a half a million square feet of comparable space. 35% more deals than last year's largely pre-COVID first quarter for 9% more GLA. Actually, 24% more GLA than the average of our first quarter production over the last five years. By any measure, we're doing a lot of leasing. The fact that it was also done at 9% higher rents than the previous tenants were paying for the same space goes extremely well for 2022 and beyond when those deals are earnings contributors. The rate and volume of new deals, as opposed to renewals, was particularly impressive. 54 new deals for more than 220,000 square feet at 18% more rent than the previous tenant was paying. What's particularly encouraging to me is how broad-based our leasing continues to be. In the first quarter, we did grocery and drugstore deals with Giant, Whole Foods, and CVS. We did box deals with Dick's and Bed Bath. We did fitness deals with Crunch and Planet Fitness. We did lifestyle deals with CD2, American Eagle, Madewell, Athleta, Blue Model Cafe Coffee, and a couple of dozen restaurant and specialty service-oriented retailers. Strong demand all across the board, particularly in California. In fact, let me take some time today to focus in on California, because it really is a microcosm of our portfolio, particularly our nonessential lifestyle product and, in my opinion, a leading indicator into the future of the Bethesda Rose, the Pike and Roses, the Assembly Rose in our portfolio. Whether good or bad, things always seem to come first to this huge and complex market. First, the governor there has previously announced that all COVID restrictions will be removed next month. This is great news. We did 50% more new deals in California in the first quarter than we did in the fourth quarter, which itself was strong. As you know, we're heavily invested in and around Silicon Valley in the north and in the greater Los Angeles area in the south and are fully committed to investing in California in the future. Tenant demand and consumer traffic are among the strongest anywhere in our portfolio, and 2021 should be an all-time record for us in terms of the number of new retail leases we expect to do there. It's really hard to short great real estate in California despite the hesitancy. Let me start with San Jose and Silicon Valley, which has become a beneficiary of urban to suburban migration from San Francisco to the north. Centennial car traffic, as measured by our parking systems, rose 69% in April compared with January and is fast approaching pre-COVID levels. Residential occupancy is back up over 95% after dipping to a COVID low point of 91% in the middle of last year. And as you may have seen late last month, Santana Row was the recipient of the first large Silicon Valley COVID-era office lease sign. As Fortune 500 cloud-led software company NetApp decided to relocate their headquarters to Santana Row in 700 Santana Row, the 300,000-square-foot building not yet populated but previously leased to Splunk. Their stated reason? To better facilitate a winning employee experience in a more connected space. In other words, state-of-the-art facilities in a fully amenitized environment that makes retaining employees and hiring great talent easier. No lost economics to us versus the Splunk deal, but two more years of term and a better diversified tenant base. By the way, another candidate for additional office space at Santana as their Silicon Valley footprint grows. Splunk, of course, remains fully committed to Santana Row at 500 Santana. Now, across the street at Santana West, our 375,000-square-foot back office building under construction remains unleased and has certainly been set back in terms of timing of lease-up with the pause in overall office leasing during COVID. But we remain, in fact, more optimistic about its leasing prospects than we've been since COVID hit and are encouraged by the office-centric back-to-work comments made by the Silicon Valley tone setters like Google, Amazon, Apple, Netflix, etc. These and others are all hiring in the South Bay and are showing a heightened desire for newly constructed office space with walkable amenities and ample parking. In Southern California, our Prime Store portfolio, which caters to a largely Latino population in Los Angeles, remains among the top performing group of shopping centers among all federal centers nationwide in terms of rent collection, property operating income compared with pre-COVID levels. Big assets like Plaza El Segundo and The Point are recovering nicely and serve the beach cities of Manhattan, Hermosa, and Redondo beaches, places which are even more attractive to live in than they were pre-COVID. So I guess the somewhat obvious conclusion here is that California is as big and complex an economy as any region can be, actually bigger and more complex than most countries. And as with every major market, varies greatly within the submarkets where the supply and demand characteristics of the specific real estate dictate performance. We've got some great real estate there. All right. A few other proactive comments before turning it over to Dan. While always a key part of our business plan, we've turned up the heat on the number and the scope of shopping center redevelopments and repositionings that are or are about to be underway. Combined capital budget in excess of $75 million over 17 projects aimed at ensuring relevant, best-in-class, community-centric centers in a post-COVID environment. More gathering areas, more outdoor seating, more designated curbside pickup spots, better landscaping, covered walkways. You get the idea. Everything aimed at ensuring our properties are the consolidators in their given sub-market. In terms of our developments, We're really looking forward to showing off the new Cocoa Walk when investors are back to traveling regularly. Today, tenants continue to open where the retail space is 98% and office space 82% under lease or executed LOI. The initial market acceptance of this revitalized center at Coconet Grove has been phenomenal. It should only get better over the next 12 months as more and more retailers open their doors. Heading north to Darien, Connecticut, We're very bullish about our mixed-use neighborhood that's well under construction here, especially given its perfect location for a hybrid New York City work model. For those of you who live near or are familiar with our project, you should start to be able to get a sense of what that mixed-use development is going to feel like as construction and leasing move forward as anticipated. Office leasing activity has picked up markedly this past quarter at 909 Roads, Viking Roads. where 75% of both POI and GLA and a 219,000-square-foot office building is either under lease or executed LOI. Not only activity, but deal-making feels so much more productive than it did just a few weeks ago. In an assembly row, Puma is just a couple of months away from opening their new U.S. headquarters and welcoming employees back to work and will begin to market our residential project there in earnest. THIS MONTH. LIKE IN POKE AND ROSE, OFFICE LEASING ACTIVITY IS PICKED UP HERE TOO, NOT TO THE SAME EXTENT. THE BOSTON METROPOLITAN AREA IS POISED FOR RECOVERY BUT CLEARLY LAGGED BEHIND WHAT FEELS THE OTHERS BY WHAT FEELS LIKE SEVERAL WEEKS OR A MONTH. OKAY. FROM DEVELOPMENTS AND REDEVELOPMENT TO ACQUISITIONS. CLOSED ON OUR FIRST ACQUISITION IN 2021 LAST WEEK IN THE FORM OF CHESTERBOOK SHOPPING CENTER in the affluent first-ring D.C. suburb of McLean, Virginia. We paid $26 million in initial 5-cap for an 80% controlling interest in this 83% leased Safeway Anchorage Center, and with a market repositioning plan and up-under market in-place rents, we expect strong short-term growth and significant value add. We're also under contract, in our due diligence period, several other acquisitions that, absent negative surprises, will close later in the year. not ready to talk further about them at this point but more to come here over the next few months okay that's about all i have for my prepared remarks today let me turn it over to dan and we'll be happy to entertain your questions after that thank you don and good morning everyone good afternoon everyone good evening to echo don's initial comments we have been the beneficiary of the broad-based recovery that the entire open-air retail real estate industry has experienced in the first quarter. We significantly outperformed the quarter, reporting FFO per share of $1.17, up 3% sequentially from 4Q, and well ahead of our internal expectations. We went from the dark days of December and January, where government-mandated shutdowns in our markets impacted over 90% of the federal's assets, and we experienced weaker consumer traffic and collections than prior months. To 90 days later, where after another round of PPP supporting our tenants, successful vaccine rollout, and reopening of our markets, all make things seem somewhat sustainable. Given this increased stability, we were able to beat our internal forecast by higher revenues and POI broadly from higher collections than forecast, both in the current period and from higher periods as well. Less fallout from small shop tenants than expected, higher term fees and percentage rent than forecast, offset by higher property level expenses, primarily due to snow. The positive trend in COVID-19 collectability reserves continues as we had just 14.8 million in the quarter, down 20% sequentially versus 4Q. We expect that progress to continue over the course of the year. $10 million of that amount is driven by our strategic decision to be more accommodative with our tenants. More on that in a moment. We continue to improve on collections, achieving 90% for the quarter, steady progress despite weakness in January due to the aforementioned shutdowns. Our strategic decision to be more accommodative to our tenants differentiates us from many of our peers. In our disclosure, you'll see negotiated abatements in the form of temporary percentage rent and other arrangements totaling $10 million or about 5% of billed rent for the court. That accounts for roughly 50% of our uncollected rent. Those agreements are scheduled to burn off over the balance of the year and into 2022. Combined collections, deferrals, and abatements total 96%. leaving about 4% of our billed monthly rents unresolved relative to the steady state pre-COVID 1% to 2% level. Another area where we outperformed our forecast is occupancy. Our tenants have demonstrated surprising resiliency for a combination of better-than-expected renewal activity and fewer tenant failures. Our least occupancy metric stands at 91.8% at quarter end, and our occupied metric dipped below 90% to 89.5%. both stronger levels than we predicted to start the year. Our lease-to-occupied spread has increased to 230 basis points and represents roughly $20 million of ER upside in the future. Given the strong pace of leasing activity, my gut tells me that spread should grow in the coming quarters. While we still expect continued pressure on our occupancy over the next quarter or two, we do not expect the trough to be as deep as previously feared as continued leasing activity at volumes we have achieved over the last three quarters plus our strong forward leasing pipeline should set us up for a more pronounced growth in 22. Now to the balance sheet and an update on liquidity. We ended the first quarter with $1.8 billion of total available capital comprised of $780 million of cash and an undrawn $1 billion revolving. We amended our term loan in April, pushing the maturity out to 2024, with the option to extend through 2026. We reduced the spread from 135 to 80 basis points over LIBOR and paid down the loan balance to leave $300 million at stand. We completed the sale for $20 million of our Graham Park Plaza land parcel for a regionally-based townhome developer. Please note that we do have a participation interest here, which could provide some additional upside given the strength of the Surveillance D.C. housing market. We have further solidified our well-laddered maturity schedule with only $125 million of debt maturing between now and mid-2023, all which is secured and is year-marked for repayment from cash on hand. This will increase our unencumbered pool to 92% of U.S. dollars. And lastly, as we have done programmatically every year since 2011, we sold common equity through our APM program. 124 million at a blended share price of 105 start the year. Our remaining to spend on our $1.2 billion in process development pipeline stands at just over 360 million. As we have throughout the past year, we sit with significant dry pattern. Now onto guidance for 21 and 22. Now please keep in mind before I start that there is still a high degree of uncertainty in our forecast, given the continued impact of the pandemic on our business. But with that being said, we are providing 2021 guidance in the range of $4.54 to $4.70 per share. Despite a strong first quarter, some of that outperformance is not expected to be recurring. Let me be a bit more helpful. Think of two Q roughly flat to one Q at 115 to 120 per share. Now the second half of the year will be negatively impacted primarily from the delivery of our large residential project at assembly row due to the negative POI during lease up as well as reduced capitalized interest. As a result, figure the third quarter at roughly 110 to 115 and the fourth quarter back towards the first half's run rate of 115 to 120, which gets you to the midpoint of our range at 462 per share, a 10-cent increase to the 2021 guidepost we provided on last quarter's call. Assumptions behind this guidance, comparable growth of roughly 2%, as we expect some choppiness over the next quarter or two, but we do not expect to have term fees in 2021 at the same levels of 2020 or 2019, which were both north of 14 million. Please note that comparable growth as a metric continues to have limited utility in this environment. Collectability metrics should improve over the course of the year, but will not return to COVID levels until sometime in 22. As discussed, we expect lower occupancy levels in the next quarter or two before stabilizing later in the year, but remain optimistic that it will not be as bad as previously viewed, targeting a trough in the 88% range for our occupied percentage, with the least percentage remaining above 90%. G&A will average roughly $11 to $12 million per quarter. On the capital side, we project spend on development and redevelopment of roughly $350 to $400 million. And contributions from our large development projects will be modestly negative in 2021, as POI from Cocoa Walks Lisa will be more than offset by bringing online the base threes of both Pike and Rose and Assembly Row, including the aforementioned Resi Building, which, as I mentioned, are initially diluted during Lisa. We project another $150 million of opportunistic equity issuance on our ATM over the course of the year, and it is our custom that guidance assumes no acquisitions or dispositions over the balance of 21. We will adjust those as we go. However, a recently acquired Chesterbrook Shopping Center, demographically strong with Lane, Virginia, is included in these numbers. For 2022, we are providing a range of $5.05 to $5.25, which represents explicit double-digit FFO growth in 2022. This is being driven by lower COVID-19 collection challenges as deferrals are repaid and abatement agreements turn off, the expectation of growing occupancy levels back into the low 90s, and stronger contributions from our development pipeline as leasing activity more meaningfully translates to POI. More detail on 2022 as we get further into the year. And with that, operator, please open up the line for questions.