Federal Realty Investment Trust

Greetings.

Welcome to the Federal Realty Investment Trust second quarter 2022 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 that this conference is being recorded. I will now turn the conference over to your host, Leah Brady, and you may begin.

Good morning. Thank you for joining us today for Federal Realty's second quarter 2022 earnings conference call. Joining me on the call are Don Wood, Dan Gee, Jeff Berkus, Wendy Sierra, 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 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 this morning, 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. Given the number of participants on the call, we kindly ask that you limit yourself to one question and an appropriate follow-up during the Q&A portion of our call. If you have an additional question, please re-queue. And with that, I will turn the call over to Don Wood to begin our discussion of our second quarter results. Don?

Thanks, Leah, and good morning, everyone. An all-time record quarter for us in a number of important respects, none more important than bottom-line earnings. At $1.65 per share of FFO, the 2022 second quarter handily beat our previous record of $1.60 posted three years ago in the second quarter of 2019. Even when adjusting for COVID one-timers, second quarter FFO per share matched that previous high watermark. Lots of things going very well here at Federal. We did more deals, both on a comparable basis and overall, in those 90 days than we've ever done in our company's 60-year history. We continued to lease up our development pipeline and increase our occupancy percentage. We ended the quarter at 94.1% lease. We've added multiple new strategic properties to our portfolio. that have clear paths to future growth. Our balance sheet remains strong with $177 million of cash on hand and zero drawn on our billion-dollar line of credit at quarter end. As we've been saying all along, the execution of our multifaceted business plan, which in these uncertain times does not rely on a big bet on any one particular income stream, continues to set us up extremely well for the future. The quality of our assets combined with our sector-leading demographics and high barrier markets tend to outperform through economic cycles, as has been the case every time in the last 25 years. So check this out because we did just get new demographic data in as of August 1st. So within three miles of our centers, there are 175,000 people on average. That's 68,000 households, 68,000 households, right? $150,000 of average household income. That equates to $10.2 billion of spending power within three miles of our shopping centers. And more than half of those people have a four-year college degree or better. Who else can say that? It's about that spending power that's critical in uncertain times, in my view. And cyclicality of the economy is far different than the unprecedented restrictive market shutdown due to a global pandemic. They're different. Perhaps the best way we can demonstrate our confidence in the portfolio is by standing behind and, in fact, raising our dividend to shareholders just as we have each and every year since 1967. That's 55 years, a totally unprecedented track record among REITs and among most companies in any industry. one that speaks to the commitment to our owners and to the quality of the income stream. At an annualized rate of $4.32 a share, that's a 4.1% dividend yield at the current share price. Pretty darn strong for a company of this quality. Okay, let's start with leasing going to quarter. Over the last decade, average second quarter production for comparable properties at Federal meant doing a little less than 100 deals for just over 400,000 square feet. In the 2022 second quarter, we did 132 deals for 562,000 square feet, nearly 40% more than the average. And we've never come close to doing 132 deals in any quarter. But the fact that demand has remained this heated with a deal pipeline that looks to stay strong speaks volumes about our properties and the markets that they're in and naturally about future earnings growth. It's one of the reasons Dan is again raising annual earnings guidance 23 cents at the midpoint. So one of the more underappreciated phenomena of the strong demand is that we're able to be more proactive in terms of leasing space that's not yet vacant. While that leasing doesn't immediately show in the occupancy stats, it will mean less downtime in the future and shopping centers that are merchandised with more relevant tenants sooner than they would otherwise be. The portfolio was 94.1% leased, 92% occupied at quarter's end, with continued improvements expected by year-end, particularly on the small shop side. At 89.3% least, small shop space is a remarkable 580 basis points higher than the COVID low point. Our stepped-up post-COVID reinvestment effort is another critical component to future growth. It's no news to anyone on this call that the traditional generic and homogenous shopping center business is cyclical in nature and not a high-growth business. So you have to stand out to outperform over cycles. You do that by picking the right markets and positioning and merchandising in those markets, but you also have to reinvest to continually find the edge. Reinvesting is more important now than ever before. It's why we have nearly two dozen active and meaningful development projects in planning or underway, totaling over $100 million this year and next year. which will likely yield double-digit unlevered yields over the ensuing years through higher customer traffic and rents, in line with our historically observed results following property improvement projects. That reinvestment is one of the primary reasons we can continue to push rents. Leasing has been exceptionally strong at our newly development assets also. From the completion of Cocoa Walk, to the office projects at Pike and Rose, to the residential over retail at Darienne, To the residential and office phase three at Assembly Row, each of these additions have exceeded our post-COVID expectations in terms of lease-up pace. In the case of the residential product at Assembly, it's exceeded in both pace and rental rate. Now, the one exception is Santana West, and there's no question that the cooling of the technology sector in the last 90 days, both in terms of their stock prices and getting employees back into the office, has been a wet blanket on what had been strong leasing momentum. It has therefore been difficult to bring fully negotiated deals over the transom. Disappointing, yes, but when put in proper perspective, having a brand-new state-of-the-art office building adjacent to one of the most successful amenity-rich destinations in the tech capital of the country isn't so bad, particularly since it only represents about 2% of federal's asset value and will be an important driver of future growth when it hits. It's a matter of time. Stay tuned. We've also remained active on the acquisition front. Following the end of the quarter, we completed the all-cash acquisitions of two very special properties in two of the markets where we're focused on expansion. The shops at Pembroke Gardens, a 392,000-square-foot dominant retail center on 41 acres at the corner of I-75 and Pines Boulevard in Pembroke Pines, Florida, as an important asset to our portfolio eight miles south and west of our equally dominant tower shop center in Davie. and 20 miles north of our newly completed and highly acclaimed Cocoa Walk mixed-use destination in Coconut Grove. Our ability to re-merchandise and push rents, potentially add density down the road, and fortify federal as a must-talk-to player in South Florida were all considered in this important acquisition. The $180 million purchase will generate better than 5% return in year one, with a very strong going forward NOI growth that will produce an IRR well in excess of our cost of capital. Across the country in Scottsdale, Arizona, we were able to acquire the 214,000 square foot office building directly adjacent to our Hilton Village property, giving us over a third of a mile of continuous frontage on Scottsdale Road immediately across from the main entrance to Paradise Valley. the region's most affluent, in our view, underserved community. The integration and rebranding of these properties as one, along with the proximity of work, home, and retail and restaurant amenities in this post-COVID environment, is expected to allow us to create a seamless, modern environment that will support greater rents and higher long-term occupancy. This $54 million acquisition will yield 6% in year one, and like Pembroke, is expected to provide very strong NOI growth that will produce an IRR well in excess of our cost of capital. These two acquisitions, along with the previously announced 410,000 square foot Kingstown Shopping Center in Northern Virginia, represent a combined investment of $435 million at a 5.25% yield in year one 2020. and more importantly, very strong IRRs on three dominant retail destinations in three particularly fast-growing markets from a good jobs perspective. Okay. That's about it for my prepared remarks this morning, though I want to leave you with one final thought before turning it over to Dan. You know, investing decisions grow tougher as economic uncertainty increases, and real estate investing is clearly a cyclical business. It's why the underlying business plan of this company has always contemplated cycles in its investment strategy. These are the times when well-leased, well-located, dominant retail and mixed-use centers in supply-constrained, affluent, densely populated markets and sub-markets shine. Whatever it is to come economically over the next couple of years, Federal is well-positioned to outperform. Dan? Thank you, Don, and good morning, everyone. As Donna outlined, the record $1.65 per share reported FFO for this quarter blew away our expectations and consensus by over 10%. As in the first quarter, our outperformance was across all aspects of our business. Continued gains in small shop occupancy, stronger performance in our residential portfolio, surging parking revenues and gains in percentage rent, underscoring continued momentum in consumer traffic and tenant sales, higher collections than forecast both in the current and prior period, and larger term fees offset by higher G&A and interest expense. While some of these items can be considered timing-related or non-recurring, the lion's share of this outperformance is driven by continued strength in our in-place portfolio, which drove another increase in our guidance. Let me spend a little time here highlighting some metrics which demonstrate this strength. led by our dominant mixed-use properties near record parking revenues a strong indicator of consumer traffic at our mixed-use assets was a near record three million dollars for the quarter up 80 percent over second quarter 2021 levels and up 25 percent sequentially over the first quarter percentage rent an indicator of tenant sales strength was up over 90 percent on a comparable basis and up 18% sequentially on a rolling 12-month average. With respect to specific tenant sales metrics, at Assembly Row, reported tenant sales were up 13% over 2019 pre-COVID levels and are up 10% sequentially on a rolling 12-month basis versus first quarter. At Santana Row, tenant sales were up 13% over 2019, with traffic up despite the impact from work from home. At Bethesda Road, tenant sales were up 9% over 2019, and at Piken Road, reported sales are up over 5% versus 2019 levels, with consumer traffic up almost 10%. These data points all serve as a testament to the relative strength of the consumer in our high-income, highly educated, densely populated high-barrier markets. Again, markets that have demonstrated resilience over cycles, and the ability to outperform during cyclical downturns. Very different than a pandemic-related market-specific government shutdown. As a result, our comparable portfolio growth metric was again sector-leading at 8.2% for the quarter. Comparable growth excluding prior period rent and term fees was 9.5%. As we highlighted last quarter, a cash basis same-store metric would have been 9% and 10.5% excluding prior period rent and term fees. Term fees this quarter were actually up, up to $5.6 million versus $3.4 million in 2021. Prior period rent was down to $3 million versus $6 million in the second quarter of 21, as adjusted to reflect only COVID-19-related prior period rent payments. Year-over-year occupancy results were also strong as our overall occupied metric grew 240 basis points year-over-year from 89.6% to 92% and our least percentage increased 140 basis points from 92.7 to 94.1. We should continue to see upside in those metrics as we realistically target 94 to 95% for occupied and 95 to 96% for leased. As we have now had eight consecutive quarters of above average leasing activity, we are continuing to see strength and we're continuing to see strength in our leasing pipeline as it's never been this full. The volume of deals in process are up 15% versus pre-COVID 2019 levels and are as strong as they were last year at this time when we had a record year of leasing volume. While deals in the pipeline still need to be brought to completion, demand is broad-based across 10 categories as best-in-class retailers all look to expand and upgrade their real estate footprints within Federal's best-in-class portfolio.

And again, we had strong solids

achieving sector-leading rent bumps. And we continue to drive average annual contractual increases in the 2% to 2.5% range across all our leases, Anchor and Small Shop. Now, let's review the math once again. For every one percentage point more in annual rent bumps, the ending rent in year 10 will be 9% plus higher over a 10-year lease. Plus, you are collecting more rent along the way. Contractual rent increases do matter. With respect to our residential portfolio, it now stands at 98.5% leased on a comparable lease basis and 97% leased overall when you include the new 500-unit Masella building at Assembly Row, which we expect to stabilize this quarter. We hadn't expected Masella to stabilize until late fourth quarter, and it is now achieving higher rents and lower concessions than we had underwritten. And despite this competition from the new 500 units next door, our existing montage residential tower at assembly is almost 100% leased and saw 23% rental increases during the second quarter. Now onto the balance sheet and an update on our liquidity. At June's quarter end, we had 1.2 billion of total liquidity with an undrawn billion-dollar revolver and $177 million of cash. Additionally, we have over $400 million of non-core dispositions under consideration with pricing expectations at a blended cap rate in the sub-5% cap range. We closed out our remaining forward equity this quarter, issuing $177 million of common stock at a net price of $120 per share, further bolstering our liquidity. With respect to our leverage metrics at quarter end, our net debt to EBITDA ratio is now down to 5.8 times annualized for the quarter as we continue to target a ratio in the low to mid five times range over time. Our fixed charge coverage ratio increased to 4.3 times, comfortably above our targeted level. And 93% of our outstanding debt remains fixed rate. Our significantly de-risked $700 million of in-process pipeline of active redevelopments has $340 million remaining to spend, much of that being tenant improvement dollars tied to tenant leases. Now on to guidance. Given the comprehensive outperformance during the quarter across all aspects of our business, we are increasing our guidance by roughly 4%. $0.23 of the midpoint to a tightened range of $0.610 to $0.625. One to two cents of the $0.23 increase is from our recent purchase of Scottsdale Forum in Phoenix and Pembroke Gardens in South Florida and their roughly half-year contribution to 2022. The balance is from another quarter's outperformance and a better-than-forecast outlook for the rest of the year in both the comparable and non-comparable pools. This guidance assumes ranges of $1.48 to $1.55 of FFO per share for both the third and fourth quarters, which reflects an increase over our previous guidance for those quarters. We are also bumping our forecast for comparable POI growth to 5.5% to 7% in the prior range of 3.5% to 5%, a 200 basis point increase for the metric. Excluding prior period rents and term fees, our comparable POI forecast increases to 7.5% to 9% from the prior range of 6.5% to 8%. While the cadence may be a little choppy, we continue to expect our occupied rate to climb from 92% where it is today up into the 92.5% to 93% range by year-end as we continue to get tenants open on time and on budget overall. A testament to the capability of our legal leasing, tenant coordination, and property operating teams. Now, I don't want to just highlight those specific groups at Federal. Let me take a little bit of time to thank and to congratulate all 320 employees at Federal for the tremendous effort over the last two-plus years working intelligently, creatively, and tirelessly through the unprecedented challenges of COVID. but also for driving to achieve a record quarter in funds from operations for the company. For many of us here at Federal, it really means something to be part of a company that stands alone in the REIT sector with a 60-year public history coupled with a 55-year track record of increasing dividends. In celebration of both of those milestones, members of the Federal team will be ringing the closing bell at the New York Stock Exchange this afternoon. And lastly, during the quarter, we released our annual corporate responsibility report. It's available on our website. I encourage all to give it a read to appreciate the longstanding and established commitment to sustainability, our communities, our corporate culture, and our strong governance practices that we have at Federal. And with that, operator, please open up the line for questions.

At this time, we will be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. In addition, we ask that you please limit to one question with one follow up. For participants 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. Our first question is from Alexander Goldberg with Piper Sandler. Please proceed with your question.

Hey, morning, Goldberg. First, enjoy the bell ringing today. And, Sean, I have to say your decision during the pandemic to not cut the dividend certainly paid off. So that's the decision on your part, but I guess, you know, well done. So two questions here. First, as you guys are looking, you know, certainly you've expanded into Arizona, into Florida. What's going on with the tenants as far as are there regional tenants, which you would have normally seen in like your home bases in New York or Bethesda, Mid-Atlantic or San Francisco, et cetera, that really aren't down in Florida or Phoenix and you see an opportunity to bring tenants down where, people who used to live in your home markets have moved down or is your view that because the country's become so sort of homogenous that there's less opportunity and as people move to new markets it's not as though they're really missing that many of their home stores or home restaurants or whatever it is listen Alex first of all I got a really thank you for that comment on the dividend because we in this company believe what you just said in terms of its importance and

More than a lot of people for whatever reason. So, yeah, we're real proud to have, you know, be able to raise the dividend every year since 1967. That includes COVID. With respect to the question on, you know, demand and regionalization of tenancies, there are absolutely tenants that are looking for new markets to expand into and, you know, particularly the well-capitalized companies to be able to do so. What is always important to us, and I know you've heard this before, but it's so true, is the merchandising of those centers. So when you look at Cocoa Walk and you look at the mix of regional tenants but also really important local tenants that make the place special, the secret sauce is the mix. That happens. And, yes, we will have success effectively getting any particular tenant with the wherewithal to be able to expand to the extent we can show them a profitable opportunity in a new market. And I think we can do that. I think we do that well. Jeff?

Yeah, you know, Alex, it's a bit of a two-way street, particularly between Arizona and California. And what we've found – during the last year or so since we've been in Arizona, that there are relationships our leasing people in California can bring to the leasing team that's running our Arizona properties. And in addition, particularly in the food space, whether it's quick serve or sit down or some other type of specialty food, there are some really good operators in the Phoenix Scottsdale market

we're now exposing to our california portfolio so it is a it is a two-way street some real advantages there to uh the expansion okay and the second question is uh don you mentioned you know santana west looks to be sort of on pause as far as the leasing and what's going on with tech elsewhere in your portfolio where you're where you have office Are you seeing a similar slowdown or an acceleration as, you know, more people look to work remotely or work in suburban settings? Just curious if Santana West is a read-through to the entire portfolio or stands in contrast to the portfolio.

Yeah, it's a great question. And, you know, the two places in particular where we continue to lease up office product, both at Pike and Rose, and at assembly. Nothing has changed. There is still that strong demand, and we're running out of products. You know, at the Choice building, which is the one that Choice has taken about 40% of the building for, we've got really good activity moving along in the rest of that building, and that feels great. And, you know, just one other comment on Santana West, man. Short Silicon Valley gets her own pearl. You know, there's no question that a pause caused by getting people back to work and what's that going to be and what our space needs are going to be at the same time. Those stocks have been hammered. I mean, you as a CEO, any of us as a CEO would sit back and take pause about that. But when you think about that particular product, in that particular place and what is likely to happen, you have to be positive about that. I don't know whether, Jeff, you've got anything really to say further on that.

Yeah, let me add a little bit to that, Alex, and let me also maybe clean up a bit where you started, too. You know, you mentioned San Francisco as one of the markets. We're not in San Francisco. We're in Silicon Valley, and there's a big difference between the two. And, you know, a lot of people – read headlines or watch the news and hear about things that are happening in San Francisco and attribute it to the whole Bay Area. It's just not accurate, if you will. San Francisco is still struggling mightily through some social issues that are making a return to office and office leasing very difficult. That's not really the case in Silicon Valley. We're not taking a pause on leasing, if you will. We're out there working as hard as we can to lease a building as quickly as we can. um you know year to date uh the silicon valley class a office market has absorbed 2.8 million square feet of space vacancies 12 if you include sublease space i think it goes up to 14 which historically for silicon valley is not great but nationally those aren't bad numbers and last quarter there was 1.8 million square feet of positive net absorption and four big leases between 150 and 380,000 square feet that accounted for 1.1 million square feet of that positive net absorption. So I think what's happening now is it's going to be choppy for a few quarters, and I think we're probably going to see more subway space come to market. But companies are really struggling with a way to get their employees back to work and figure out what the appropriate locations and space needs are for those employees. and I think we're going to see some downsizing. And perversely, that might work to our advantage in Santana Row. You remember NetApp took 700 Santana Row because they downsized out of multiple buildings that were not state-of-the-art and not fully amenitized, and there's other tenants in the market right now that are thinking about doing the same thing. And when you look at one Santana West, it is the only fully amenitized Class A building of size in Silicon Valley. So I think it's, like Don said, disappointing that we're not leased yet. We're working hard on it, and we're confident about it. And when you step back and look at the rest of our portfolio, excluding one Santana West and 915 Meeting Street, which is still under construction, our Class A office space and our other office space and our mixed-use properties is 95% plus leased. there is a very, very strong positive reaction, whether you're a small tenant or a large tenant, to officing in properties that offer a full range of amenities close to where you live, which is why we bought Forum down in Scottsdale. We can talk about that further if you want, but I just wanted to make sure you got the full kind of detail on the... you know, what's going on in the portfolio and our thinking going forward on one Santana West.

Thank you. Our next question is from Craig Schmidt with GSA. Please proceed with your question.

Okay, thank you. And good morning still. I'm just wondering if the second quarter results are really highlighting the difference in dealing with the COVID market. you know, pressure versus dealing with a challenging, you know, interest rate and inflationary market pressure. The former, you have very little control, but the latter would seem like whether it's your first ring demographics or the qualities of your center, you're able to put up, you know, more of a challenge to it.

Thanks, Craig, for the question. And look, man, consumers have to be able to consume. And at the end of the day, that means you've got to have money to spend. That means there's got to be great product out there. What I think is really good, and obviously I think this about federal, is that we don't go all in on any one particular format. We don't go all in on any one particular market. And so the notion of these sector-leading demos – I mean, I said in the prepared remarks, think about this, $10.2 billion worth of spending power within three miles of this portfolio's assets. That's a crazy big number. And so does that help you work through good times and bad times and higher interest rates and inflationary pressures? Of course it does. It's not a leap. And I think that's got more to do with this performance and the performance of that, whatever that might be, over the next few quarters and a few years than anything else.

And what are you hearing from your tenants that are taking space now? You know, the challenge being, you know, there's a possible recession, soft or otherwise. You know, we still haven't solved inflation yet. and yet they're taking space. So what are they telling you that they're seeing that gives them the confidence? Do you want to do that?

Sure. Thanks, Craig. Basically, during COVID and post-COVID, the retailers confirmed that their greatest customer acquisition tool is the right location. And So they are focused on that to set the stage for growth continuing, especially the more relevant tenants and the savvy tenants. And there's a sense of urgency in getting the right real estate. And we're seeing that in our performance. We're seeing that in our pipeline. And we're seeing it on our varied shopping center opportunities that we have. with all, it's not just value-based, it's not just service-based, it's all across the sector, full-paced apparel and value as well. So we are seeing that sense of urgency on setting their fleet in the right direction for the growth and being able to go through what is normal cycles and being able to mitigate that downside.

Thank you. Our next question is from Craig Mailman with Citi.

Please proceed with your question.

Hey, good morning. I just wanted to go back to the leasing during the quarter and the pipeline. Looking at the stats, you guys had a healthy amount of renewals there. I'm just kind of curious from a tenant perspective, how much of that is being pulled forward as tenants want to lock in rates today in anticipation of maybe higher rents? in the future and how you're balancing that against, you know, potential tenant mix and credit versus kind of downtime of re-tenanting.

Yeah, I think what you're, I don't know that I focus 100% from quarter to quarter on renewal rates and whether they're slightly up or slightly down because they all have a way of working themselves out throughout the year. But what I will say that we are seeing a tremendous amount of retailers within our portfolio that want to have those discussions a little bit earlier because they want to invest in their store. They want to make sure that they have the term because they see the value of the real estate long term. They want to invest. And we're seeing it as a very positive momentum. And we're also investing in a big way in our shopping center. So the partnership together has been very strong.

And it is a robust discussion. You know, there's obviously tension, particularly in an inflationary environment where we're pushing hard to get the kind of increases during the term that Dan talked about in his prepared remarks and not give an excessive amount of term when we're in an environment like this. So it's a healthy conversation. You know, it's not unusual conversation. Every lease negotiation is tense, and Wendy and her team and the folks on the West Coast do a really good job of balancing everything they need to balance to make sure we have the right people in our properties that are investing in their operations and we're getting the best economic deal possible.

I guess, Craig, the only thing I would add to that, and I do think this is such an important component of the negotiations, are the bumps during the term of the lease. And, you know, I mean, I know Dan goes through the math of what it means, but when you think about inflationary time and being able to push three and sometimes four and sometimes better annual bumps into the lease, getting that along the way is a whole lot better than sitting there and looking at a flat lease and maybe getting – getting 7% after five years or something like that. So I don't know the best way that you can understand that or compare that. I don't think we've found a good way that that can be compared, but I know it's a critical focus of the company. And because the real estate is really good, we have probably more success that way than you would otherwise think.

That's helpful. And then just a guidance question, the lease term fees in the quarter look like they added a, a couple pennies on a sequential basis. What's the impact of that in the full year guidance? Ray, what are you expecting back half of the year?

The back half of the year, I think, is probably looking back to last year in line with our last year's performance in the second half of the year. uh we're ahead uh we're probably two to three cents ahead in term term fees um and that's reflected in the guidance great thank you our next question is from samir connell with evercourt isi please proceed with your question hey uh hey dan um can you help us walk through sort of uh

23 growth at this time. On the one side, you know, on the one side, you've done a great job on the leasing front, right? The lease versus occupied, that pipeline is pretty solid here. But on the other hand, you have, you know, potential headwinds from closures. You know, Santana West may, you know, seems like maybe getting pushed out a little bit here on the timing perspective. I guess, how are you thinking about growth today versus a few months ago?

Look, I think that, you know, we've I've been really pleasantly surprised with how strong the performance has been. This is the first time I've been here in my six years of federal where we've increased guidance to this magnitude in consecutive quarters. We've increased it 10 cents one quarter and then 23 cents the next. The five to 10 cent guideposts that we provided previously were off of previously lower guidance. Feel comfortable with that guidance with kind of where 2023 is off of that. I think we're going to take a step back with regards to 2023 and provide formal guidance at the normal timing. We still expect to see strong internal growth in our portfolio, but we'll provide more detailed formal guidance at the appropriate time in line with the industry in February.

okay thanks for that and i guess don just on the acquisition of pembroke gardens and you know with the 41 acres that comes with that property just curious is the near-term goal more of a merchandising play at this point just trying to figure out the near term and maybe kind of what the long-term focus is on that just you know initial views yeah there is uh this this piece of land

is what made us so darn interested in this thing. If you kind of see where Pines Boulevard and I-75 come together, there's no good product out there. There are amazing traffic counts, and so we love what we've got in place, albeit you will see re-merchandising as the primary product. way we create value over the next few years. Having said that, you know as well as I do, big pieces of land, things happen that you can't underwrite initially. And I know if you go and spend some time at the property and the surrounds and you look at housing stock around there, you understand the traffic patterns, I think you'd be salivating for the possibilities over the mid and longer term, even beyond the re-merchandising of the assets.

But that's what it would be for now, Samir. Thank you. Our next question is from Juan Sanabria with BMO Capital Markets. Please proceed with your question. Hi, thanks for the time.

Just wanted to touch, go back and apologies if I missed this. Is there any update in terms of the rent bumps you are getting? in the strong leasing environment with regards to what you have kind of on the books and if historically achieved?

I don't know if I'm allowed to say this or not, so I'm looking at Dan and Melissa because we do try to take an accounting, if you will, of how many of our leases have 3% bumps, 4% bumps, flat, whatever is happening internally in the leases. And I can tell you that over the past two years, basically, with what's happened coming out of COVID, not the beginning part of COVID, but coming out of COVID, that the percentage of our deals that now have stronger than 3% bumps is up about 20% from where it was. So the notion of being able to do more of those deals, which is bringing up the overall portfolio to over 2% annual bumps, as Dan said before. The trend is in the right direction, and it's been a major focus.

Great, thanks. And then just on the Phoenix office acquisition, just hoping you could maybe spend a little bit more time on outlining the plan there and how that's integral to retail and if that's going to be redeveloped as well potentially down the track.

Yeah, Juan, let me give you a couple of things. I'm sure Jeff will have more on this, but I personally couldn't be more excited about this. First of all, Hilton Village, which we bought last year, I guess a little more than that now at this point, we just see – very strong releasing potential to make it much more of a specialty shopping center with a higher end tenant because of where it is. Our first 12 months of leasing or so there has kind of validated that, that that's what's happening. So, so with respect to that first acquisition, we are more than pleased with, you know, the basic thesis for buying it when this, this office building adjacent to it, which is a very attractive office building, but frankly leased in a very pedestrian way. We think we can do the same thing on the office side to make it way cooler, you know, the right type of tenant base that's the same tenant base that we're aiming for in the adjacent retail property. Putting those two things together, especially in a post-COVID environment where individuals and companies in the area are looking to be closer to home with an amenitized environment, we feel like there's great upside all while we're you know, yielding over a 6% yield while we do that. So I love the idea of being able to not only take our vision for the retail and effectively expand and integrate what it is with the office building, which is a really nice building, directly adjacent to it. That's the thesis for what we're trying to do here.

Yeah, Ron, it's Jeff, and I just added a couple things. One, You know, owning both properties together is synergistic in both directions. So we can certainly offer the office tenants the amenities of Hilton Village as we, you know, make the project look and feel like one project and market them together and, you know, upgrade the merchandising and food offering at Hilton Village like Don mentioned. But owning the office building is also good for Hilton Village because we just picked up a ton of parking that we can use nights and weekends to support more intensive uses at Hilton Village. So that's great. And then second, just kind of on a standalone basis, when you think about Forum, we bought Forum for roughly 60%, 65% of replacement cost, 85% leased at rents that are probably 10% to 15% below market. with a weighted average lease term of less than five years. So by upgrading the building and applying, you know, creative, intensive leasing effort to it, we think we could really bring those numbers up and make the return much, much better than it is today. So, you know, on its own, we think we made a real great real estate deal. There's a a couple of buildings in that market that traded recently were a local developer that had done something similar to, you know, kind of Class B, B-minus buildings in much, much lesser location than Scottsdale Road across the street from Paradise Valley. And those buildings sold basically a replacement cost at sub-five caps recently. So we think the institutional investment market appreciates real estate like this, and we think we made a very good buy and really happy to have it. And like I said when I was answering Alex's question, we've proved multiple times now that amenitizing office space, making it great space, and having it in close proximity to decision-maker housing is a real win for us. So just real, real happy with the deal.

Our next question is from Hendel St. Joost with Mizuho. Please proceed with your question.

Hi there. Hi. Good morning. Don, I was hoping you could talk a little bit about how being an all-cash acquirer has given you maybe an edge in the acquisition market here in terms of maybe trying to keep closed. And is that something you expect to be able to continue to use for advantage near term? And I noticed that there aren't any acquisitions contemplated in the second half guide here. Curious what, if anything, is interesting or perhaps under discussion out there. Thanks.

Yeah. Hey, Handel. It's Jeff again. You know, we are obviously in a market where there's less certainty than there used to be. So having the ability to close all cash and not have to tap the secured mortgage markets is definitely an advantage as a buyer. That combined with really a two-decade track record here of being very transparent with an intermediary and an owner about what we'll do and what we won't do and how things are going along the way and ultimately doing what we say we will do gets us deals and gets us deals at better prices than other people have to pay. So, you know, we kind of like the type of market we're in right now. We think there's going to be more opportunities, but I'll let Dan answer questions about our go-forward guidance on that.

Before you do, I want to add one thing to that, Handel, and I really do think this is important. We've talked about this in the past. When you have multiple ways to grow and you don't want to rely on any one thing, you don't turn those switches on and off. And when it comes to acquisitions, this is one of those examples where, yes, you can turn it down when there's uncertainty of the pricing or turn it up when effectively you think you can get a good deal. But it is that ability to be in the markets regularly, not just on the publicly marketed stuff. In fact, hardly. in the publicly marketed stuff, but the ability to do what you said you were going to do. When you turn that off for a couple of years and turn it back on, it's not much different than the dividend in our view. Then you are looked at differently than when a seller knows you're going to be there and do what you say you're going to do. So I think that is as much of an advantage as being an all-cash buyer is, in fact, I think it's more important. Sorry, Danny, go ahead. No, and with respect to guidance, we do have a pipeline, and we do expect to be active on the acquisition front, but be disciplined. But we don't provide guidance for speculative acquisitions or dispositions. When they happen, we update guidance to reflect that. So, yes, there's no forward-looking acquisition or disposition impact on the guidance we have.

Got it, got it. Thanks. And maybe one more just on the snow rents. You've been able to get them, I guess the stores open on time, get the snow rents in. I guess I'm curious if you're seeing any signs of delays from labor shortage, supply concerns, and on restaurants in particular, some concerns in certain corners about getting some of the equipment in place, which could be impacting the timing of certain openings. Thanks.

Handel, it's a great question, and it's been... a critical focus and frankly a worry of mine for the past year and a half or a little bit more. I don't exactly know beyond our approach to it why it has not been the problem that I worried it was going to be, but it has not been. We found alternate solutions in a number of cases. It's been job number one for the operating team, the tenant coordination team, The ability to effectively do things different than the least contemplated in order to get a restaurant open or a store open have been critically important tools. And that, again, is a relationship part of our business. It's a critical part to it. And so when I look at have we been hitting our opening dates, the answer to that is yes, we have. It was the single biggest thing I was worried about coming into 2022. So it's being handled, I think, pretty darn well, even though the specter of delays, kitchen equipment and other things, is certainly still out there. I think it's evident in our metrics, the fact that with record leasing volume, we're tightening our spread between leased and occupied. So we're getting tenants open. And I think that's, again, in my prepared remarks I mentioned and gave a shout out to the strength of our legal leasing, tenant coordination, and property operating teams. They've been really successful, on average, getting tenants open on time and, in many cases, ahead of time and on budget.

Our next question is from Michael Goldsmith with UBS.

Please proceed with your questions.

Good morning. Thanks a lot for taking my questions. You called out the strength of parking revenues and percentage rate or percentage rent. Has that continued into August and how sustainable is the run rate achieved in the second quarter?

We would expect kind of given traffic in July was strong as well where we have parking revenues coming in. We hope that it continues to be sustainable. I mean, I think the traffic volumes at our big mixed-use properties where we can charge parking revenues, we see that being a consistent source, at least through the balance of the year. Michael, I think the only thing I would add to that is, so where it comes from, as Dan just said, are only a few of our properties, and they're the big ones. And if you think about those properties, particularly Pike and Rose and Assembly Row, those properties have matured into critical places in their communities. So it's not just about coming out of COVID. It's about these are now community centers, if you will. And so I would expect the traffic comparisons period over period to continue. to increase, as we've seen in July, too. Obviously, we're in the beginning of August. So we've seen that same thing at Pike and Rose and Assembly in July relative to the July of 2019. So I'm very much positive or hopeful that it will continue.

That's helpful. And my follow-up is, just given the strength of all these factors that you've noted and How should we pair that with the implied same-store property NOI growth guidance for low single digits in the back half?

Well, I think the comparison or kind of the implied slowdown in the second half of the year is really difficult comps in the second half of the year, plus the weight of prior period rent and kind of a period pretty modest forecast for turnpiece in the second half of the year. Hopefully we can outperform that, but, uh, you know, I think that those are the big headwinds, particularly prior period rent. We've got some pretty tough comps in the third quarter and even fourth quarter of last year.

Our next question is from Derek Johnston with Deutsche Bank. Please proceed with your question.

Hi everyone. Thank you. Um, I'll try to get creative. Most of what I wrote down was asked. So your 2022 equity issuance guidance, I think it moved back to $350 million at the midpoint from $450 million last quarter. Just wondering if anything drove that. I mean, is it the share price related, or should we read through that maybe 2022 acquisitions are pretty baked in at this point?

I think with regards to, you know, we are making progress and we've kind of, you know, pivoted and I think elevated our discussions and our activity on the disposition front. And given the visibility we have kind of as the year goes along, I think that, you know, dispositions can serve as a surrogate for kind of raising equity. And given that visibility, we are, you know, we're tempering kind of the expectation of raising equity, plus given where our equity has been traded. So, yeah, we've raised a lion's share of what we expected at a very strong blended price. We basically contracted for that all last year in 2021 when our stock price was obviously at a different time. Really pleased that we did, and I think it positions us We look to be very balanced in how we approach financing the business and feel very, very fortunate that we're as well positioned to continue through with the equity that we raised throughout COVID.

Okay, great. Thanks, Dan. So some investor pushback I hear on federal, it has always been the high ABR, right? But despite the economic backdrop, right, and really, even more importantly, elevated vacancies, you know, across your peer set, you know, you've continued to grow rents. So, you know, how do you kind of respond to that? You know, what is it really attributable to? And anything, any thoughts there I think are helpful.

Tenants need to make money. Rent is one component of their expense structure. to the extent they're doing the volumes and, you know, um, trading value, they'll pay the rent. And with us, it's not just about, you know, beaten on that tenant for rent. We are partners. And so the notion of making that shopping center, uh, or a mixed use properly property, the best place, the go to place is, is just a critical part to what we do. I mean, If you think about it, Derek, the 580 basis points increase since the bottom of COVID in terms of small shop occupancy up almost 600 basis points, that is only because there is demand from people who have a chance to get into a federal center who could not get into it before because of the high occupancy and are willing to pay that because they're going to make money when they pay that. It's really not much more than that. And I know there's always focus on our ABR. I've been here 25 years. There was focus on our ABR 25 years ago. They're better assets, man.

And, you know, those tenants can make money at those levels. Our next question is from Ki Bin Kim with Truist Securities.

Please proceed with your question.

Thanks, man. Good morning. A quick one first, what has your retention ratio been historically, and where do you see that for the remainder of the year?

Historically, it's been in and around 65%, 70%, but we have seen better this year, better retention rates north of 80%. We're pleased with that. Tenants have been successful at our centers. They want to stay. They want to renew. They want to exercise options.

they want to continue to make money and going back to that previous question about profitability i mean that makes sense right it's not just sales you have to be profitable any high level metrics you can share in terms of how much more profitable you think tenants can be at your centers uh versus some other centers that might be just low rent basis um yeah just trying to get a sense of what how much um you know, mode of safety there is for tenants to continue to pay these higher rents. Boy, keep it in. I'm just looking at Wendy's here because I don't have a metric that I can give you. What do you think, Gwen?

It's the consumer spending power. It's the demographics that Don mentioned in his opening remarks, which is the quality of the real estate in the demographic markets with high average household incomes that have the ability to spend. So that's a critical component when they're looking at these markets. The other piece of it is the history. If you can go into a center, as Don said, you haven't been able to get into federal realty centers always, and they have a history of performing, and there's value in that, and that's recognized. So that's why we've been able to keep up this leasing demand is partly because there's this need to get – they might be doing less locations, but they need those locations to perform, and they're willing to make a higher spend in order to make sure that there's confidence that that store will be profitable.

Our next question is from Linda Tsai with Jefferies.

Please proceed with your question.

Hi, thanks for taking my question. I'm just going back to the quarters leasing strength. I know you discussed the philosophical men of tenants being able to make money at your centers, but where are you seeing the outsized demand? Is it a certain tenant type or regionally based?

No, Linda, it's broad. It's broad. I mean, we see it at the mixed use centers in particular because they were hurt the most during COVID. But it's everywhere throughout the portfolio. I don't have a better market or a worse market for you in terms of the ones we're operating in. You know, just please always remember, this is still a very local business, and it comes down to the specific shopping center and the specific tenant base in that shopping center. And I think I'd leave it at that. It's broad-based.

Thanks. And then in terms of biomed realty, getting construction financing for the first phase at Assembly Innovation Park. Does this give you more conviction towards a large lease for a life science tenant at Assembly Row? What would you be looking for to proceed with more confidence?

Oh, but please, let me just correct the premise. We could not be more confident in Assembly Row as a life science destination for many, many years and decades to come. We're just at the beginning of that. All we've done at this particular time, given the uncertainty in the venture capital market and what's happening there, is to hold back and see where things become a little more certain. Certainly great for Biomet in terms of being able to raise that capital. I'd be surprised if they couldn't, frankly, given the uncertainty. you know, given the Blackstone involvement, too. And we will be, I mean, there will be a life science building done by Federal Realty on that site at some point. But prudence and capital allocation at this point suggests that we sit on the sideline.

My file might get a little further. Our next question is from Mike Muller with J.P. Morgan. Please proceed with your question.

Yeah, hi. Dan, I think you were talking about cash collections in the quarter running at a higher level. Can you talk about what the level was in Q2, maybe how it compared to Q1, and is the higher level continuing into the third quarter?

Yeah, we're essentially back to normal, back to pre-COVID collection levels on the current period collections. We're effectively above 99%. overall in collections in the second quarter. So I think that is faster than we expected, faster than we had forecasted, and we expect that to continue. There's a normalization in that part of the business with the added benefit of continuing to collect rent from prior periods.

But we're back. Got it. Okay. That was it. Thank you.

Our next question is from Chris Lucas with Capital One Securities. Please proceed with your question.

Hi, good afternoon everybody. Talk a lot about the leasing strength on the retail side. Just curious as to how you describe the leasing strength on the residential side and what the sort of rent growth has been in your portfolio on a year-over-year basis. Let me go on the three big properties. or actually four big properties, if you throw in Bethesda, Chris, let me go in order. Unbelievable at Assembly Row. 20% plus? Increases in rents. What's happening at Assembly Row, not just on resi, but on office, on retail, as such a critical place in the marketplace, it's really impressive. And so you should be very... optimistic about the future, including rent growth, future rent growth at Assembly. Santana Row, equally. Again, that's the place you want to live, and I don't know where we are on rent growth there, but mid-teens on there and looking extremely strong. Pike and Rose, the demand is there, but we're still just about out of this COVID cap on the amount of rent increases that there can be. So it's artificially, uh, been kept down, but you can see it from the occupancy. And we know in terms of the demand to be able to move into the spaces that once that cap is, uh, is, uh, lifted, which should be hopefully later on this year, uh, you'll see similar demand there. These are the type of properties people want to live in. And, uh, you know, it's the same as on, on, on the office side. It's, uh, You've got to make the money after you've spent all that time and effort on creating the street and the place by getting it done upstairs, too. Okay, great. Thank you. And just on the Plaza El Segundo sort of consolidating your ownership position there, I guess just curious, is there anything operationally that improves? What drove the timing?

Just a little bit of background on that. Okay. Yeah, Chris, it's Jeff. So we had two individuals that when we acquired the asset, I guess the very last day of 2011, decided to stay in the deal. And they've been in the property with us as partners since that point in time up to a few weeks ago. They both decided they wanted to exit for their own personal financial reasons. They had no day-to-day involvement in the running of the asset. You know, we reported to them on a regular basis, and that was about the extent of it. So, you know, nothing changes at Plaza del Segundo as it relates to how that's run or leased.

We got it at an attractive return. Our next question is from Paulina Rojas with Green Street.

Please proceed with your question.

Good morning. You talked about the dynamism you're seeing in RECI. Is it possible to have a notion, even a range, for how is same property and why trending on the same property basis for your office and RECI segment? Is it also in the high teens?

Paulina, we're having a hard time understanding you. Can you try to hear me again?

Yes, can you hear me now? Yes, that's better. Okay. Yes, I was saying that is it possible to have a notion of how is same property NOI trending for your office and resi segments?

Same property NOI for office and resi? They're trending up. We don't have those, and we don't publish those. But they're certainly heading, and they're modeled and forecasted to continue to trend up. And we can talk offline about that, Paulina. We can get a little more granular on that with you.

Okay, thank you. And then the other thing is, have you provided any reference for how much of your signed but not open projects leases are scheduled to come online in 2023?

Yeah, I think what we have, you know, in our existing kind of comparable pool is about, you know, 23 million of incremental rent, which should come online over about half over the balance of this year and half in 2023. We have another 15 million of signed not occupied in our non-comparable pool. which should come online probably similarly. And then, you know, so I think most of the lion's share of that will be over the next six quarters in terms of contribution to our POI line item.

Our next question is from Tayo Okusanya with Credit Suisse.

Please proceed with your question.

Yes, good afternoon. First question, you know, thank you for the update on just life sciences at Assembly Row. Curious if you could also give an update on life science potential at Pike and Rose at this point.

Yeah, you know, as you know, when I think about that market, I don't think that market is as advanced in terms of demand as and supply as Somerville, Massachusetts is, but it sure is on everybody's radar screen, including ours, as to what it is that we can do there. So we're having conversations with a number of people there, none of which are far enough for us to really say anything more about it. But, you know, when you think about life sciences as another use of the component, at a place like Pike and Rose? I mean, it's a distinct possibility. It's going to come down to economics. And will the incremental rent be enough to support, you know, the construction of that product type at Pike and Rose? And we don't know the answer to that yet, but we're certainly in the heavily exploratory phases to find out.

Gotcha. And then second of all, some of the mall REITs and open air center guys are kind of at that point where they are renegotiating a lot of their short-term percentage rent deals back to kind of, you know, more traditional leases. Are you guys kind of running up against any of that at this point? And does it kind of change the dynamics of what the retail component of your income could look like in 2023?

So I would say that most of our percentage deals that we were working on during COVID have all burned off, and we have established new deals moving forward. So we are not still working on a tremendous amount of renegotiating post-COVID. This is more kind of looking forward and doing new deals based on the environment that we're in.

We have reached the end of the question and answer session and I now turn the call over to Leah Brady for closing remarks.

We look forward to seeing everyone this fall. Have a great rest of the summer and thank you for joining us today.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.