Federal Realty Investment Trust

Welcome to the Federal Realty Investment Trust third quarter 2023 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 from the question queue, 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 third quarter 2023 earnings conference call. Joining me on the call are Don Wood, Federal's Chief Executive Officer, Jeff Berkus, President and Chief Operating Officer, Dan Gee, Executive Vice President, Chief Financial Officer and Treasurer, John Sweetenum, Executive Vice President, Chief Investment Officer, and Wendy Sear, Executive Vice President, Eastern Region President, as well as other members of our executive team that are here 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 expectations reflected in such forward-looking statements are based on reasonable assumptions, federal realty's future operations and its actual performance may differ materially from the information in our forward-looking statements, and we can give no assurance that these expectations can be attained. The earnings release and supplemental reporting package that we issued Tonight, our annual report filed on Form 10-K and other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and the results of operations. 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 third quarter results. Don?

Thanks, Leah, and good afternoon, everyone. It's a good time to own high-quality retail-centric real estate. Demand exceeds supply for the best stuff, and this past quarter's results, and in fact the whole year thus far, has made that patently obvious. For the third consecutive quarter, we signed comparable leases. In other words, 95% of all the deals done during the quarter. The only deals we exclude in our definition of comparable relate to ground-up construction. For over a half a million square feet, 553,000 to be exact. For the nine months of 2023, that's over 1.6 million square feet of comparable deals, a mark we've never hit before. It's more than the first nine months of 22, which itself was a record, and more than the first nine months of 2021, which itself set a record. You can see it in the occupancy numbers, too. While the bed-bath closings were expected to, and did, reduce occupancy in the quarter versus last year by 100 basis points, our overall occupancy declined just 30 basis points on a lease basis and 50 basis points on an occupied basis. That says something about demand. If you dig deeper, small shop occupancy, the part of the business we hear the most consternation about, increased another 50 basis points to 90.7% on a lease basis and 80 basis points on an occupied basis. This trend has been a steady and powerful trend for two and a half years now. When you look at occupancy possibilities going forward, By looking at our past, it's reasonable to expect another 100 basis points of small shop occupancy and another 250 basis points of anchor occupancy due largely to bed-bath, roughly 200 basis points overall in the coming 18 months to two years, depending, of course, on the extent of future bankruptcies that are not obvious to us today. I go through all this to really try to hammer home the obvious health of a business centered around leasing high-quality, retail-centric properties in the first ranked suburbs of America's greatest cities. While bottom line results are and will continue to be muted by the higher but certainly historically reasonable cost of capital that's likely here to stay, rents will likely adjust upward over time to that reality, especially with tenants and in locations that are affluent. I hope that higher interest rates don't cloud investors' appreciation of the strong underlying business fundamentals that exist today and likely tomorrow. So let's talk about rents. 100 comparable deals, which again represents 95% of the deals done this quarter. So certainly representative of the total company. 553,000 square feet, starting new rent of $34.51. Final year of old rent, $31.17. That's plus 11% on a cash basis, 21% on a straight line basis. A weighted average lease term of 8.8 years excluding options. The average lease term with all options exercised is more like 16 years. An average CAGR of contractual rent bumps of this quarter's leases was 2.5%. TIs per foot of $31.19 when you don't consider this quarter's option exercises, $16.67 per foot when you do. Been hearing that our rents are high for the better part of the last 20 years. I guess on a relative basis, they are. Better properties have higher rents. Better properties have higher tenant sales and profitability, too. Frankly, it's obvious. That sustained leasing volume and those economics bode well for the future, especially the contractual rent bumps. Third quarter results benefit from that level of activity over the past six quarters. FFO per share of $1.65 in the third quarter. was ahead of consensus, was ahead of internal expectations, and ahead of last year's third quarter by 4%, despite far higher interest expense and lost mid-bath income. This is a really strong quarter for us. As you know, we were particularly active on the acquisition front during the COVID years of 2021 through 2022. In total, a billion dollars in new additions to the core portfolio during that time. whereby the post-acquisition leasing continues to exceed the acquisition underwriting. Similarly, leasing production in properties that have recently undergone redevelopment and or property improvement plans have also continued to outperform our expectations, and we also expect that to continue. And while big new acquisitions have slowed given the higher cost of capital, note that in 2023, we've been able to invest over $120 million at 8% with a blended IRR above 10. We did that through, number one, the acquisition of our partner's 22% interest in Escondido Shopping Center. Secondly, the acquisition of the fee and the portion of the Huntington Square Shopping Center that we didn't previously own. And number three, in October, the fee under Merceron 1 in Princeton, New Jersey, one of our best performing regional shopping centers over the last 20 years. SMART, a creative capital deployment of real estate very well known to us in each case. And as strong as the core shopping center business has been, the large mixed-use properties have been even stronger. Retail lease occupancy at 97%. Residential lease occupancy at 98%. Office lease occupancy at 97%, excluding buildings under development. Powerful traffic counts and tenant sales make these properties the center of the communities in which they operate. They draw customers from distances far more than the local neighborhood. And so as not to leave it out, and as I've mentioned on prior calls, our multi-tenant leasing strategy at Santana West has generated meaningful tenant interest that has progressed to advanced lease negotiations with multiple tenants for more than half the building. While leases are not executed yet, our progress here is noteworthy. Strength of our business is grounded in superior demographics. Always has been, always will be. More density, higher incomes, and real barriers to entry are always important in our business, but never more so than at uncertain times in the economy. Past cycles have proven this out time and time again. With 70,000 households with annual household incomes of over $150,000 sitting within three miles of federal centers, there's simply no large open-air portfolio available for the public investor to own than this one. Not one. Now, naturally, we're all on the lookout for changes in the strength of the American consumer and their spending habits because, as you know, it's remained surprisingly resilient. So we tried to dissect the limited tenant sales data that we have for the 2023 third quarter and compared it to the 2022 third quarter. As expected for us, sales were up portfolio-wide. Digging a little deeper, our property is with the highest average income surrounding them, so a quarter-over-quarter tenant sales that we're significantly better than our properties with the lowest average incomes surrounding them. No surprise, but an indicator worth keeping our eyes on in the months and the year ahead. As I said up front, it's a good time to own high-quality retail-centric real estate. Let me now turn it over to Dan before opening it up to your questions. Thank you, Don, and hello, everyone.