Federal Realty Investment Trust

Greetings. Welcome to the Federal Realty Investment Trust third 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, Mike Ennis. Thank you. You may begin.

Good afternoon. Thank you for joining us today for Federal Realty's third quarter 2021 earnings conference call. Joining me on the call are John Wood, Dan Gee, Jeff Berkus, Wendy Seer, Don Becker, and Melissa Solis. They will be available to take your questions at the conclusion of our prepared remarks. A reminder that certain matters discussed on this call may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any annualized or projected information, as well as statements referring to expected or anticipated events or results, including guidance. 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 today on our annual reported file on Form 10-K and our other financial disclosures documents provide a more in-depth discussion of risk factors that may affect our financial condition and results of operations. 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 will turn the call over to Don Wood to begin our discussion of our third quarter results. Don?

Thanks, Mike. Good afternoon, everybody. By the way, that was Mike Ennis studying for Leah Brady, organizing this call today. Leah just gave birth to her second child last week, a boy named Weston. Mom and baby are doing great. If you do get the chance, please reach out via email. Congratulations. So my prepared remarks today are going to sound a lot like last quarter. because the recovery continues unabated and ahead of schedule. The momentum that we took into the second quarter carried through and, in fact, strengthened in the third quarter, most evidently on the office leasing demand side at our mixed-use properties. Let me just cut to the chase here and summarize where we are in five easy points. For one, we killed it in the third quarter at $1.51 a share. Secondly, we raised our 2021 total year guidance by over 7% at the midpoint. Thirdly, we raised our 22 guidance, the only shopping center real estate company to give 22 guidance so far, by the way. Similarly, by over 6% at the midpoint. And Dan is going to talk about 2023 and 2024 also. We executed 119 retail leases for 430,000 feet of comparable space at 7% higher cash basis rents than the leases they replaced. And We ended up the quarter with our office product fully leased up at Cocoa Walk, 89% leased or under-executed LOI at Pike and Rose, 88% leased or under-executed LOI at Assembly Row. Heck, we're even having some consequential discussions with full-building users at Santana West. And then, after the quarter, you might have seen last week that we signed a 105,000-square-foot deal with Choice Hotels to be the lead tenant in the next phase at Pike and Rose. That's some serious office leasing progress for any three-month period, never mind one in which decision makers are still unsure of their future office space needs. Sure says a lot about many rich new construction in our markets. 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 November 2021. We're feeling great about our market position. With FFO at $1.51 per share, We exceeded even our most optimistic internal forecasts, or up 35% over last year's recovering third quarter. We didn't anticipate the bounce back in nearly all facets of our business to be so fast and so strong, even with the effects of the Delta variant surge. The quarterly positive impact of the fast recovery meant that we collected more rent in the third quarter from prior periods than we anticipated. Eight million collected versus a few million forecast. We had significantly less unpaid rent in the quarter than we anticipated. We collected 96% of what was due. We had far fewer tenant failures than we anticipated. And at $4.9 million, we had far higher percentage rent from COVID-modified and unmodified leases than we had anticipated. We also had less pollution from our new residential construction and assembly row because our lease up is well ahead of schedule at this point. Nearly half the new residential building is already leased. In fact, even the three hotels in our mixed-use properties are performing better than we thought that they would be at this point, with occupancy at all three back into the mid-60s and better. And of course, we more than covered our dividend on an operating cash basis in the third quarter, as we did last quarter. As a reminder, that's the dividend that was never cut during COVID. So all that means that we'll significantly raise earnings guidance and take a peek at the out years too. As we've said all along, visibility toward 2022 earnings was ironically better than 2021. That's proven to be the case. Dan will talk through guidance details in a few minutes. So on the retail leasing side, we continue to see strong demand across the board and see that continuing for the foreseeable future. Over the last four quarters, we've done 442 comparable deals for nearly 2 million square feet, not counting another couple of hundred thousand feet for non-comparable new development. To put that into context, that's 27% more deal volume, 25% more square footage than the annual average over the last decade, a decade that itself was very strong for us from a retail leasing standpoint. We've been saying all along, demand for federal realty properties, that's not the issue. They're 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 curate 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 today will result in significantly higher asset value tomorrow. 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. But a signed lease does not equal a rent start, and the well-publicized supply chain issues affecting most U.S. businesses will have to be managed thoughtfully and deftly in the next 18 months to move all those tenants from signed lease commitments to build out operating stores in the shortest possible time frame at a reasonable cost. Whether we're talking about a shortage of rooftop air conditioning units or production shortages for kitchen equipment from overseas or materials stuck on boats weighing offload, supply chain issues are broad and to some extent unpredictable. As a company, we're all over it, and we have been for months. Early ordering, stockpiling, Problem-solving and leveraging long-standing relationships are all tools that we're using to mitigate build-out delays. At quarter's end, our portfolio was 92.8% leased and 90.2% occupied, both improvements over last quarter and the quarter before that, but a long way from being 95% leased, which we were just three years ago. The earnings upside from not only getting rent started in all the leasing we've done today, But the continuation of occupancy gains to historic levels, maybe higher, over the next couple of years, provides a visible and low-risk window into strong future growth. And that's before considering the inevitable earnings growth coming from the lease-up of our billion-dollar-plus development and redevelopment pipeline, the costs of which are largely locked in, and our very active acquisition program also will add to that. By the way, we did close on the $34 million acquisition of Quinbrook Shopping Center in Fairfax, Virginia, in another off-market transaction during the third quarter, marking the fifth deal that we closed in 2021 and the second in Northern Virginia. Very excited about the re-merchandising and rent upside at this under-invested shopping center staple in the middle of Fairfax County. I've got to believe that the visibility of this company's bottom-line earnings growth Coming out of COVID is, on a risk-adjusted basis, one of the, if not the, most transparent in the sector. That's about all I have for my prepared comments. Let me turn it over to Dan, who will be happy to entertain your questions after that. Thank you, Don. Good afternoon, everyone. Feels really good to be here discussing another quarter where we blew away expectations. A $1.51 per share of FFO represented a 7% sequential gain over a strong second quarter, 35% above 3Q last year, and was 23 cents above our expectations, which represents an 18% beat. As Don highlighted, the outperformance was broad-based, with upside coming from continued progress on collections, occupancy and leasing gains, better than forecasted contributions from hotel, parking, and percentage rent, faster lease up at our developments, and another accretive off-market transaction. While collections climbed higher to 96% in the current period, up from 94% last quarter, plus another $8 million of prior period collection, leasing is what continues to command center stage for yet another quarter at Federal. Momentum that started during the second half of 2020, continues with a fifth consecutive quarter of well above average leasing volumes across the portfolio. We saw our occupied percentage surge 60 basis points in the quarter, 89.6 to 90.2%. Other strong leasing metrics to note, our small shop lease occupancy metric continued its climb upward as it grew another 40 basis points to 86.1%. coming on top of the nearly 200 basis point gain in the second quarter. Overall, small shop is up 260 basis points year over year. Leasing momentum continues to be driven by strength in our lifestyle portfolio as we sign leases with such relevant tenants of tomorrow, names such as Bullbirds, Jenny Kane, American Giant, Herman Miller, Peloton, Gloss Lab, Purple, another Faraday location, another Nike location are fourth this year, and restaurants such as Salt Line, Molto, Sprezzatura, Astro Beer Hall, Gregory's Coffee, and Van Leeuwen, just to name a few. Some of these names you may not be familiar with, but trust me, you will. Office leasing continues to be a bright spot, with 224,000 square feet of leases signed during the quarter and subsequent to quarter end, including the investment-grade Choice Hotel deal with Don Hyland. Comparable property growth, again, while not particularly relevant this year, continued its resurgence of 16%. Please note, for those that keep track, as we expected, term fees in the quarter were down significantly to $500,000, versus $6.1 million in the third quarter of last year. A headwind of a minus 4.2%. Without it, our comparable metric would have been 20%. Our remaining spend on our $1.2 billion in process development pipeline stands at 215 million with another 50 million remaining on our property improvement initiatives across the portfolio. You may have noticed that we added a new project to our redevelopment schedule in our 8K, a complete repositioning of Huntington Shopping Center on the island, an $80 million project which will transform a physically obsolete power center on a great piece of land into a re-merchandised Whole Foods anchored center. The project is expected to achieve an incremental yield of 7%. Now on to the balance sheet and an update on liquidity and leverage. With $125 million of mortgage debt having been repaid over the last 60 days, we have no debt maturing until mid-2023. We continue to be opportunistic, selling tactical amounts of common equity for our ATM program under forward sales agreements. And as a result, we maintain ample available liquidity of $1.45 billion as of quarter end, comprised of Our undrawn $1 billion revolver, roughly $180 million of cash, and $270 million of equity to be issued under forward agreements. Additionally, our leverage metrics continue to show marked improvement. Pro forma for our 2021 acquisitions and forward equity under contract, our run rate for net debt to EBITDA is down to 6.0 times. Pro forma for leases signed, yet not open, the figure is 5.8 times. Fixed charge coverage is back up to 3.9 times. Our targeted leverage ratios remain in the low to mid five times for net debt EBITDA and above 4X for fixed charge coverage. We are almost there. Finally, let's turn to guidance. Given the strong recovery we are experiencing in 2021, we will be meaningfully increasing guidance again for both this year and 2022. taking 2021 up 7.4% from a prior range of $5.05 to $5.15 to $5.45 to $5.50 per share. This implies 21% year-over-year growth versus 2020 at the midpoint, and are taking 2022 up 6.5% from a prior range of $5.30 to $5.50 to a revised range of $5.65 to $5.85 per share. And while maybe premature, preliminary targets from our model show FFO growth in 2023 and 2024 in the 5% to 10% range. The drivers behind the improved outlook for 2021, first, a significantly stronger third quarter than previously expected. And this should continue in the fourth quarter as we increase our fourth quarter estimate to 136 to 141 per share. a 10% improvement versus previous guidance, but down from this quarter. While we again collected more rent than expected from prior periods in the third quarter, we don't expect that to repeat. Repairs and maintenance, demo, and other expenses are all expected at elevated levels as we continue to drive the quality of our existing portfolio, and G&A will be higher in the fourth quarter as well, given higher compensation expense. In addition, we forecast issuing 150 to 200 million of common equity under our forward agreements before year end. For 2022, the improvement and outlook is driven by strength across all facets of our business. Stronger occupancy growth driven by the continued momentum and leasing activity. Contributions from our in-process $1.2 billion development pipeline. A full year contribution for all of our 2021 acquisitions. and higher collections as we return to pre-COVID levels. Let me try to add some color to each of these areas to provide greater transparency to a multi-year path of outsized growth. The first driver of growth, occupancy and leasing, which I would like to break into two components. First, what deals are already executed? With physical occupancy at 90.2% and our lease rate at 92.8%, our sign-not-open spread 260 basis points for our in-place portfolio. This represents roughly $25 million of incremental total rent. The second component, what leasing demand will drive going forward? Given the strength of our leasing pipeline, getting back to 95% lease, a level we were at just three years ago, is certainly achievable. If you look at our current pipeline of new leasing activity for currently unoccupied space, This could add another approximately 115 basis points to the current lease percentage for $12 million of total rent upside when executed. Please note, for every 100 basis points of occupancy gain, we see roughly $10 million in additional total rent on average. The third driver of growth, our development pipeline. That $1.2 billion of spend will throw off just over $10 million of POI in 2020. for about 1%. With a stabilized projected yield in the mid to low 6% range, it should produce $70 to $75 million of POI when stabilized. This $60 to $65 million of incremental POI should begin to deliver more pulleys in 2022, but will also be a meaningful driver of POI growth in 2023 and 2024. Please note, as we did before COVID, next quarter we plan to re-include in our 8K supplement the disclosure detailing the ramp-up of POI for each of the projects in our pipeline. The fourth driver of growth in 2022, acquisitions. As Don mentioned, the closing of Twinbrook Shopping Center, our fifth off-market deal of the year, brings our consolidated investment to $440 million, or $360 million on a pro-rata basis. With a blended going-in yield of 5.5% plus a full year of contribution, these purchases are very accretive. Lastly, collections. Current period collections for 2021 are forecasted to finish at 95% on average for the entire year. We are expecting that to be higher in 2022 with pre-COVID levels returning in 2023. This is expected to more than offset any fall-off in prior rent collection next year. Keep in mind, for every 100 basis points of collection percentage improvement, it represents almost $9 million annually. Please note that similar to last quarter, there is no benefit assumed to our guidance in either 2021 or 2022 from switching tenants from cash back to accrual basis accounts. The combination of these primary drivers of growth supplemented by forecasted upside in other parts of our business, such as parking, hotel investments, and percentage rent, gives us a clear and transparent path of growth, not only in 2022, but beyond into 2023 and 2024. We couldn't be happier with our market position and expect to have sector-leading FFO growth over the next few years. And with that, operator, please open the line for questions.