Federal Realty Investment Trust

Hello and welcome to the Federal Realty Investment Trust Third Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Leah Brady. Please go ahead.

Good afternoon. Thank you for joining us today for Federal Realty's third quarter 2022 earnings conference call. Joining me on the call are Don Wood, Dan Gee, Jeff Berkus, Wendy Sear, and Melissa Solis. They will be available to take your questions at the conclusion of our prepared remarks. A reminder that certain matters discussed Sets 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 afternoon, 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 additional questions, please recue. And with that, I will turn the call over to Don Wood to begin our discussion of our third quarter results. Don?

Well, thanks, Leah, and hello, everyone. Well, consumer spending remains very strong in the major submarkets where federal operates, particularly in our mixed-use properties, and has resulted in another quarter of outperformance in terms of both executing long-term leases as well as bottom-line earnings. 126 executed long-term leases for 585,000 square feet of space and FFO per share of $1.59 were both above external and internal expectations and continued to signal strong demand for high-quality retail and mixed-use real estate. The future pipeline of deals not yet executed also remains robust, and as such, we'll be raising 2022 guidance again. Demographics matter. especially in times of economic uncertainty. Past cycles have convinced us that families simply have to have money to spend for retail real estate cash flow to grow. 68,000 households with annual average household incomes of $150,000 sit within three miles of federal realty centers. That's $10.2 billion of family income generated within a three-mile radius, and more than half of those people have a four-year college degree or better. I know of no other significantly sized retail portfolio that can say that. It's manifesting itself in a myriad of ways, including a wide variety of tenants who are seeing their sales exceed the overage rent threshold in the lease. While not a huge absolute number since we strive for strong fixed rent in our leases, the broad-based overage rent contribution in the quarter, particularly among our restaurants and soft goods tenants, Over and above the fixed rent is notable and contributed an additional two cents per share compared with last year's third quarter. As I said, strong core leasing remains the engine that drives us. Over the last decade pre-COVID, that's 2010 through 2019, average third quarter production for comparable properties at Federal meant doing 88 deals for just over 400,000 square feet. In the 2022 third quarter, we did 119 deals for 563,000 square feet, 40% more than the average. Annual rent bumps of our retail leases average about 2.25% overall and higher when including office leases. That's a powerful advantage over the typical shopping center portfolio. The fact that demand has remained this heated with a deal pipeline that looks to stay strong speaks volume about our properties and the markets they're in and naturally about future property level operating income growth. It's one of the reasons Dan is again raising annual earnings guidance 12 cents at the midpoint. The solid tenant performance also manifests itself in continued occupancy gains as tenant failures remain low. Our current year lease rate is now at 94.3% and occupied rent rate now at 92.1%. Those leased and occupied rates are 150 and 190 basis points, respectively, better than a year ago, and there's obviously still room to grow there, particularly on the small shop side. At 89.9% leased, small shop space is a remarkable 640 basis points higher than the COVID low point, with further gains expected by year end. I referred earlier to the outsized demand that we see at our mixed use properties. Note that the retail component of our four large ones, Assembly, Pike and Rose, Bethesda, and Santana, are 98% leased at quarter's end. In addition, we continue overall to hit or beat targeted delivery dates, one of our key corporate goals for 2022, and a real tribute to our tenant coordination and construction teams. I'm as convinced as I've ever been that we have the right product, in the right locations with the right demographics for the inflationary economy that we're in. And by the way, with a well-demonstrated 55-year respect for the dividend component of our total return. A dividend yield of 4.3% for a portfolio of this quality seems awfully compelling to us. And against that backdrop, we've also been able to sell a couple of non-core assets at good pricing and refinance and upsize our term loan and line of credit to be sure that we have plenty of balance sheet flexibility and dry powder for whatever the economic environment feels like in 2023. In terms of capital needed for our large development projects, we have less than an incremental $225 million to go, about $100 million to complete the Choice Hotel headquarters building at Pike and Rose, $100 million largely for tenants' build-out and commissions at Santana West, and $20 million to complete Darien Commons. By the way, after the quarter just last week, we just signed a 52,000 square foot lease with a credit tenant, bringing that building at Pike and Rose to over 60% pre-lease. Those projects alone will be contributing an incremental $40 million in operating income in years to come. Investing in these and other projects, both large and small, with fixed-rate debt and equity before the recent rise in rates will serve us well in the coming years as these state-of-the-art buildings begin cash flowing. Similar to development, our pro rata share of the acquisitions that we've made since the beginning of COVID through today total $850 million. Those acquisitions, from Grossmont to Cam Back Colonnade to Pembroke Gardens and so forth, are performing well ahead of our expectations in the aggregate and are expected to yield in the mid-sixes in 2023. In that same time period, we generated over $400 million in proceeds from non-core asset sales at a sub-five cap. That capital recycling was not only immediately accretive, but the medium and long-term growth rates of our acquisitions' net of dispositions are clearly superior. Okay, that's about it for my prepared remarks this morning, though I'd like to leave you with one final thought before turning it over to Dan. In our view, the recent run-up in interest rates was inevitable, though not necessarily at the pace we're seeing. While sure to pressure everybody's earnings to some extent in the years ahead, how much so, and for how long, remains to be seen. So the real question is, will property-level operating income more than compensate? 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. We're in a cyclical business, no news to anyone, and it's why our business plan has always included multiple ways to counter the rise in money costs and the effects of inflation. The combination of best-in-class shopping centers, along with acquisition and development property-level income contributions, financed with money from an earlier time, along with the potential sale of certain assets, including discrete residential buildings within our portfolio, gives us more flexibility and more tools with which to handle cyclical pressures than most. We look forward to the challenge. Dan?