Federal Realty Investment Trust

Good afternoon and welcome to the Federal Realty Investment Trust second quarter 2023 earnings conference call. All participants will be in a 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, Vice President of Investor Relations. Please go ahead.

Good afternoon. Thank you for joining us today for Federal Realty's second quarter 2023 earnings conference call. Joining me on the call are Don Wood, Federal Chief Executive Officer, Jeff Berkus, President and Chief Operating Officer, Dan Gee, Executive Vice President, Chief Financial Officer and Treasurer, Jan Sweetenum, Executive Vice President, Chief Investment Officer, Wendy Sear, Executive Vice President, Eastern Region President, and Dawn Becker, Executive Vice President, General Counsel and Secretary, as well as other members of our executive team that are 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 released in the supplemental reporting package that we issued yesterday, our annual report filed on Form 10-K, And our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and results operation. Given the number of participants on the call, we kindly ask that you limit yourself to one question during the Q&A portion of our call. If you have additional questions, 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. Good afternoon, everybody. Special thanks to David Simon for finishing his call more or less on time this afternoon. All-time record-setting quarter for Federal Realty this time with $1.67 second quarter FFO per share result ahead of consensus, ahead of internal expectations, and ahead of last year's second quarter. By the way, last year's second quarter was helped by a large termination fee from Amazon as they exited their brick-and-mortar bookstores, ex-termination fees, This quarter's bottom line FFO for share growth grew 5% despite significantly higher interest expense. It's a really strong quarter for us. Leasing velocity continues to be the highlight. We signed 107 comparable leases for 576,000 square feet at $35.34 a foot, 7% higher than the cash rent basis rent the previous tenant was paying in the final year of their lease, 19% on a straight line basis. Demand was exceptional. When you include non-comparable leases, which by the way for us, largely relates to newly built out space on our redevelopment and development projects, along with our office leasing, we executed 135 leases in the second quarter for a very robust 652,000 square feet, representing $23 million of newly contracted annual rent. These are production numbers that lie well outside the averages over a very long history, and will go a long way toward offsetting the lost Bed Bath and Beyond and Christmas Tree Shop income stream in 2024 until they're released and rent paying. In terms of Bed Bath, we lost one of our remaining nine Bed Bath leases during the quarter. That lease, a 25,000 square foot box at Mount Vernon Plaza in Northern Virginia, has been released to Burlington at a 57% rent increase. Three more bed-bath leases were rejected effective June 30th, and July rent was received on the remaining five. Two of the remaining five were buy-by-baby locations that were assumed by online baby retailer Dream On Me, and we therefore expect to continue to receive rent to the future. The remaining three leases were rejected in the third quarter, and accordingly, we'll have a hit to occupancy of about 1%, and lost rent of $2.5 million or so for the balance of 2023, all of which has been considered in our guidance. Deals are in the works for all of our bed-bath locations, and replacement rent will start to ramp up in late 2024. Both leased and physical occupancy continue to improve compared with the previous quarter and the previous year. 94.3% leased and 92.8% physical occupancy at quarter end are up 10 and 20 basis points, respectively, compared with the first quarter, and 20 and 80 basis points, respectively, year over year. Small shop occupancy gains, in particular, continued their trend during the quarter and increased 20 basis points on a leased basis and 40 on an occupied basis. That's a total increase in small shop occupancy of 310 basis points since Q1-22. The quality of our small shop tenants and the discerning way that we choose them at our properties is where we create a ton of value. All small shop vacancy, or tenancy rather, does not create equal. I've noted in the past couple of quarters that leasing productivity and rate that have occurred at the properties we've acquired over the past several years has significantly exceeded our underwriting, and that has continued. Similarly, leasing productivity at properties that have recently undergone redevelopment and or property improvement plans have outperformed our expectations, and we expect that to continue, things that maybe we can be a bit too conservative at times. The roughly 3,100 apartments that make up an important part of the revenue stream at our mixed-use and other properties remain a real differentiating bright spot for our portfolio and continue to add to both cash flow and to value. In the aggregate, our residential portfolio was 98% leased at June 30th, and provided 11% more property operating income this quarter than compared with last year's second quarter. Resi is a super important component of our mixed-use neighborhoods, as is the office component, which is also 98% leased outside Santana West and the Choice Headquarters building, which is under construction. We did, by the way, deliver the newly built office space to Choice Hotels this quarter and expect them to finish their work and occupy the building by year-end. Sodexo, in the same building, will follow right behind. I reported last quarter that inquiries and property tours have seen renewed life at Santana West, and that has certainly continued. Even the Northern California press is citing lower layoffs and dramatic new investment and hiring in areas like AI, electric vehicles, and related technologies.