Federal Realty Investment Trust

Greetings. Welcome to the Federal Realty Investment Trust second quarter 2021 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, Leah Brady. Thank you. You may begin.

Good afternoon. Thank you for joining us today for Federal Realty's second quarter 2021 earnings conference call. Joining me on the call are Don Wood, Dan Gee, Jeff Berkus, Wendy Seer, Dawn 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 Security Litigation Reform Act of 1995. Forward-looking statements include any annualized or rejected 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 Tonight, 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 operation. We kindly ask that you limit your questions to one question and a follow-up during the Q&A portion of our call. If you have additional questions, please feel free to jump back in the queue. And with that, I'll turn the call over to Don Wood to begin the discussion of our second quarter results.

Well, thank you, Leah, and good afternoon, everybody. You know, to quote Seinfeld's Frank Costanza, we're back, baby, and it seems to me we're the real estate of choice. Let me just cut to the chase here and summarize where we are in five easy points. We killed it in the second quarter at $1.41. We raised our 2021 total year guidance by over 10% at the midpoint. We raised our 22 guidance. the only retail real estate company to get 22 guidance, by the way, by 5% at the midpoint. We covered our dividend on a cash basis in the second quarter and raised it again for the 54th consecutive year. We had record leasing volume, more than we've ever done in any quarter in our 60-year history. So we'll put more meat on the bone for each of those points and others, but that's where this company is as we sit here in the first week of August of 2021, and we're feeling great about our market position. At $1.41 a share, we exceeded even our most optimistic internal forecast by 20 cents a share, and we're up 83% over last year's worst COVID-impacted quarter, which of course was the second quarter. In a nutshell, we didn't anticipate the bounce back in nearly all facets of our business to be so fast and so strong, and we didn't anticipate some of the one-time deals that we were working on to be executed so quickly. We talked about the pent-up demand on the last call in the form of strong traffic, and leasing demand, and that has continued unabated ever since, no pun intended. The quarterly financial impact of that optimistic consumer meant that we, one, collected more rent in the second quarter from prior periods than we thought. Two, we had significantly less unpaid rent in the quarter than we thought. Three, we had fewer tenant failures than we thought. And four, we have far higher percentage rent from COVID-modified deals than we thought. And as I said, we covered our dividend on an operating cash basis in the second quarter, way ahead of our expectations. Of course, all that means that we'll significantly raise 2021 earnings guidance and raise 2022 earnings guidance as well. As we've said all along, visibility toward 2022 earnings was ironically better than 2021. That has proven to be the case, and Dan will talk you through guidance details in a few minutes. While this quarter's earnings were as strong as they were in large part because of the collection of big rent dollars both past and present, the real story here is the unprecedented amount of leasing that was done and what it means for the value of our real estate into the future. Our properties are in demand across the board. We did 124 comparable deals in the quarter. more than we've ever done in any quarter in our 60-year history, for 558,000 square feet at an average rent of $37.34 per foot, 8% more rent than the deals they replaced. We signed another nine non-comparable deals, mostly in our new developments, at an average rent of $44.71 per foot. That's 570,000 square feet of space leased in one quarter alone 25% more than our pre-COVID quarterly average. You might remember that we did almost as much last quarter too. So when you put the two quarters together, the production in the first half of 2021 is both staggering and unprecedented for us. Big kudos here to our leasing, our legal, our support teams. Nearly 1.1 million square feet at an average rent of $37 a foot, 8% more than the previous leases, growing through annual rent bumps over the next eight plus years. That's really just the tip of the iceberg here. Another really interesting consideration is the breakdown of all that leasing between deals to renew tenants and deals with new tenants. Traditionally, two-thirds of the deals we do in any one period covers around two-thirds renewals and one-third new tenants, but not in these post-COVID six months. It's actually nearly flipped. roughly 40% renewals and 60% new tenants. So what does that mean and why is that important? Well, first it means that we lost a heck of a lot of tenants during COVID and since it costs more to put a new tenant in the space rather than renew an existing tenant, our current tenant capital is higher. On the face of it, that seems like bad news, but you got to dig deeper because what it also means is that our properties are in high demand from today's relevant and well-capitalized restaurants and retailers that are all trying to improve their sales productivity post-COVID through better real estate locations. We've always been pickier than most in terms of the tenants we choose to merchandise our centers. When you couple that with the execution of the broad post-COVID property improvement plans that we've talked about over the last several quarters, that higher capital outlay will result in significantly higher asset value tomorrow. I mean, think about it in a post-COVID world. Major market, first-tier, high-quality suburban shopping centers with more than a smattering of new post-COVID relevant tenants doing business in revitalized shopping centers and mixed-use properties focused more on outdoor seating, on a curbside pickup, on covered walkways, and improved placemaking than ever before. Places that are more fresh, more dominant, more relevant in a myriad of ways in the communities they serve for years and years to come. The value of our real estate net of capital is going up, and the prospects appear to be better than they were before COVID. Also, consider that at quarter end, our portfolio was 92.7% leased, yet only 89.6% occupied. That 310 basis point spread or nearly 780,000 square feet of space representing roughly $30 million in rent, is the largest spread we've had since 2005. You might remember how 2006 and 2007 turned out, which obviously bodes well for the future, assuming inevitable tenant fallout occurs at historical levels. And by the way, just three years ago, we were 95%. Okay, Congress. I hope you all saw the major acquisition announcements that we made in a press release on June 7th that laid out the four deals that we closed during the quarter. Overall, we have an 80% interest in the combined income stream of Grossmont Shopping Center in Greater San Diego, Camelback Colonnade and Hilton Village in Greater Phoenix, and Chesterbrook Shopping Center in McLean, Virginia. Gross asset value of $407 million for 1.7 million square feet on 125 acres of land in prime locations in these markets, and we strongly believe that pricing today would far exceed what we negotiated in the middle of COVID. A presentation that we put out ahead of NAREID and our NAREID investor meetings in June focused on these acquisitions in depth, including the very unique potential redevelopment opportunity at Grossmont, since we control virtually the entire 63-acre parcel from a tenant perspective, and less than five years from now. Separately, we have another deal under contract currently that we hope to close on in the quarter, this quarter. On the development side, residential and office leasing activity is also picking up on both coasts. It's really gratifying to see Pike and Rose quickly maturing, coming into its own, and becoming the go-to place for lots of things in the region. In Montgomery County, Maryland, a county that's not doing a lot of office leasing these days, our phase three office building, 909 Rose, is 77% leased with another 11% under executed LOIs. So nearly 90% committed at the point at rents in line with pro forma. That's strong in this office environment with mostly 2022 rent starts there. Big quarter up at assembly row. and now we received our certificate of occupancy for the retail portion and half of the units in Masella, the 500-unit residential building that's part of the Phase 3 development. Tenants began moving in in July, and initial leasing pace is exceeding our expectations. 145 units are already currently leased at rates that approximate our lease-up underwriting, and that seems to be getting stronger with each week that passes. You know, Assembly Row is the mixed-use project in our portfolio that got hurt the most during COVID and took the longest to begin to bounce back, but now feels like it's recovering as fast as the others. Office leasing of the Puma Anchored Building is also picking up, with serious negotiations underway for the first time in over a year for a large portion of the remaining space. Nothing tangible yet, but a good sign nonetheless. Similar situation in San Jose with our 375,000 square foot spec office building under construction and nearing completion. Remains unleased, time being. And at Cocoa Walk in Miami, it's all about getting tenants open as we're fully leased on the retail side, mostly leased on the office side. Tenant openings will continue through the remainder of this year. We look forward to hosting an investor tour in Coconut Grove early next March. More to come on that. In Darien, Connecticut, construction and leasing are moving forward on time and on budget, with a newly built Walgreens opening during the second quarter ahead of schedule. That's important because it makes way for the remainder of the demolition of the old shopping center and started the residential over retail component of the project. Good stuff happening up there, too. Let me pause there, stop. That's about all I have for the prepared comments. I'll turn it over to Dan, and we'll be happy to entertain your questions after that. Thank you, Don, and good afternoon, everyone. The unexpectedly strong results, $1.41 per share in the quarter, not only blew away 2020's year-over-year comparison, but was a 20-plus percent sequential gain over first quarter and more than 20 percent above our forecast and consensus. Given the big beat of the quarter, let me take a little time to put some color around the broad categories of outperformance that Don outlined. 13 cents of outperformance was driven by collection-related items. Six cents of upside was from improved operations, with five cents from one-timers that were above our forecast, which collectively totaled the 24-cent beat versus our previous quarterly guidance. First, some detail on the 13 cents of upside from collection. Rent collection for the quarter, net of percentage rent, was almost 200 basis points ahead of expectation. Prior period rent collection was $7 million versus $4 million in our forecast. Our percentage rent for the quarter was almost $3 million above forecast, highlighting the strength in consumer traffic across the portfolio. Second, the sixth sense of operational outperformance was driven by our occupancy essentially staying flat. which was roughly 50 to 100 basis points better than we had expected. And improved hotel, parking, and specialty leasing revenues all exceeded forecasts. The third category of $0.05 of one-time items above forecast were attributable to term fees, bankruptcy payments, loan reserve reversals, and other miscellaneous payments all collectively exceeding our expectations. Please note that we do not expect the 141 to be the run rate for the ballot. Given 9 cents of the results are not expected to be recurring, and as Don mentioned, we are in the midst of delivering 500 units of residential and assembly row, which will be dilutable over the next few quarters, amongst other items, but we'll address that later when we get to guidance. Let's take some time and revisit collections. Our collectability impact was more than cut in half million versus the 14.8 million we had in the first quarter on the strength of prior and current period collections net of abatements. Rent collection in the quarter surged to 94% of 4% from the 90% level as reported on our first quarter call. With abatements and deferral agreements totaling 4% of billed rent, our unresolved rent now stands at just 2%. Of the $39 million of deferral agreements negotiated to date, $17 million have been repaid, representing about 90% of the scheduled deferral payments. The remaining repayments of $22 million are set to be paid back over the next few years. Elections for cash basis tenants improved substantially to roughly 80% for the quarter, up from 66% in the first quarter, a very strong signal. For occupancy, the continued pressure that we expected during the second quarter never really materialized as our tenants remained resilient. With the record-breaking leasing volumes across the portfolio, economic occupancy should steadily climb higher from this point, driven by 310 basis points of spread between leased and occupied that is embedded within the portfolio. Other strong leasing metrics to note include our small shop lease occupancy grew almost 200 basis points to 85.7% from 83.8, a huge movement for that metric in a single quarter. And with respect to our lifestyle-oriented retail assets, whose performance was hardest hit during COVID, the spread between leased and occupied has grown to 440 basis points, driven by strong tenant demand and signaling a sustainable, in this segment's recovery. Comparable property growth rebounded in a big way for the quarter, up 39%, an unprecedented result and obviously a record for federal. But also no better evidence of the lack of relevance for this metric in the current environment, whether it's positive or negative. Now let me move to guidance. We increased our guidance for both 2021 2022, taking 2021 up over 10% from a prior range of $4.54 to $4.70 up to a new range of $5.05 to $5.15 per share. This implies 13% year-over-year growth versus 2020 at the midpoint. And we are taking 2022 of 5% from a prior range of $5.05 to $5.25 to a new range of $5.30 Let's review some of the assumptions behind the improved outlook. For 2021, as I mentioned, the 141 per share result of the second quarter will not be a run rate for the balance of the year. As I mentioned, $0.09 of that 2Q result is one time in nature. Term fees and bankruptcy-related income will not recur at the same level. And note that we have very few term fees in the pipeline currently. While current period collections should continue to climb modestly higher, prior period collections are forecasted to trail off for the remainder of the year. Also consider the previously mentioned dilution of roughly $0.03 per quarter from the residential and assembly and other developments that we'll be delivering in the second half. We also expect increased G&A and property level expenses of $0.02 per quarter as the cost of doing business has increased post-COVID. However, we do expect accretion from the second quarter acquisitions of roughly two cents per quarter. So this revised guidance implies an increase in our FFO forecast for the second half of the year of 21 of almost 10%. For 2022, the improvement in outlook is driven by one, a faster return to pre-COVID collection levels, Two, a stronger occupancy due to the record leasing activity we've seen. Three, a full year contribution for Grossmont, Chesterbrook, and Phoenix. And then continued improvements and contributions from our development pipeline. Although we continue to await tangible leasing at Santana West, it feels like that will not contribute to FFO until 2023. Also note, that there is a level of pragmatism in these numbers. By all reports, the COVID variants are keeping the virus with us longer than we would like. And we are still anticipating some level of tenant fallout as PPP money and other government subsidies fall away and impact selected tenants' ability to operate profitably. And lastly, getting rent started on our record levels of new leasing activity will be a paramount focus for the operating teams here at Federal. Please note there is no benefit assumed in our guidance in either year from switching tenants back from cash basis to accrual basis account. Finally, let's move to the balance sheet and an update on liquidity and leverage. On the heels of deploying over $325 million on acquisitions and over $100 million on in-process development during the quarter, we continue to have ample total available liquidity of $1.3 billion, comprised of $300 million of cash, and an undrawn $1 million revolver. With $125 million of mortgage debt scheduled to be paid over the next 90 days, we will then have no maturing debt until 2023. And lastly, we continue to be opportunistic, selling tactical amounts of common equity through our ATM program. We sold $140 million at a blended share price of about $117.50 per quarter under forward sales agreement in order to manage of liquidity over the next year. Our remaining spend on our $1.2 billion in process development pipeline is down to $270 million, with an additional $60 million remaining on our product improvement initiatives across the portfolio. Given the surge in our EBITDA, our leverage metrics return to significantly stronger levels as well. Pro forma for our TrueQ acquisitions and $175 million of forward equity under contract, our run rate net debt to EBITDA is down to 6.2 times our fixed charge coverage is back up to 3.7 times and our total liquidity climbs pro forma to 1.5 billion our targeted leverage ratios remain in the mid five times for net debt to EBITDA and above four times for fixed charge coverage now before we get to Q&A let me quickly mention in the wake of covering the dividend this quarter from AFFO Yesterday, our board declared an increased quarterly dividend per share of $1.07. Given the surge in traffic across the asset base, the resilience and quality of our sector-leading real estate portfolio, the strength of our balance sheet, and the sound, forward-looking decision-making and management, maintaining the dividend through another challenging economic cycle now looks likely. This should provide federal shareholders with further peace of mind that with an investment in FRT comes a reliable, uninterrupted, steady, stable stream of current income as part of their total return. And with that, operator, please open up the line for questions.