Federal Realty Investment Trust

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. If you do ask, you limit yourself to one question per trip to the queue. Please also note, today's event is being recorded. I would now like to turn the conference over to Leah Brady, Vice President, Investor Relations. Please go ahead.

Good afternoon. Thank you for joining us today for Federal Realty's fourth quarter 2023 earnings conference call. Joining me on the call are Don Wood, Federal Chief Executive Officer, Jeff Burkett, President and Chief Operating Officer, Dan Gee, Executive Vice President, Chief Financial Officer and Treasurer, Jan Sweetnam, 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 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 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 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 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 fourth quarter results. Don?

Thanks, Leah, and good afternoon, everybody. Well, 2023 is in the books with a strong $1.64 recorded in the fourth quarter. finish off what is an all-time record earnings year at $6.55 of FFO per share. That's happening despite over $600 million of construction and progress not yet contributing, and higher interest expense that costs the trust an additional $0.27 per share when compared with the average rate in 2022. Yep, with comparable money costs between 2022 and 2023, FFO growth per share would have been 8%, right up there with our best pre-COVID years. says a lot in terms of the power of the portfolio that has grown bottom line FFO per share at a compound annual growth rate of 4.5% over the last 20 years, in addition to an average uninterrupted dividend yield of roughly 3% or better. That includes the great financial crisis. It includes the global pandemic. It includes everything. No better portfolio to own for long-term investors, in our opinion. It also feels like we're getting closer to a time where accelerated acquisition activity, coupled with our redevelopment and re-merchandising expertise on new acquisitions, could boost that growth rate over the next few years. As far as today's environment, demand continues to exceed supply for the highest quality assets in the close-in suburbs, and with the impacts of the pandemic in the rearview mirror and lack of new supply coming on, I don't see this positive supply-demand dynamic changing anytime soon. Our average in-place rents, portfolio-wide, are $31.60 per foot. And the comparable retail deals we did in the fourth quarter were at $44.57 a foot and were at $36.75 for the entire year. I've been hearing that our rents are high and can't be pushed further for the better part of the last 20 years. And I guess on a relative basis, they are. Better properties have higher rents. Better properties have higher tenants. Sales and profitability, too. Frankly, it's obvious. Percentage rents are an interesting barometer on this topic. While we push for a strong fixed rent in nearly every lease, tenant sales above a threshold level equates to additional rent. Percentage rent and overage rent totaled $6 million in the fourth quarter and $19.3 million for the year, an all-time record, which broke the $18.8 million record from the year earlier. Fourth quarter retail leasing continued to crank with another 100 comparable retail deals done at 12% rollover on a cash basis, 23% on a straight line basis. These comparable retail deals account for virtually all, 98%, of the total retail deals done in the quarter, making them representative of the entire portfolio, not just a fraction. It was a great leasing year, the third in a row where we exceeded 2 million square feet, roughly 25% more than the five-year averages. between 2015 and 2019. Just to pound the point home, those cash basis rollover increases come on top of leases that have had what I believe to be the highest contractual rent bumps throughout their term in the sector, making that rollover all the more impressive. Contractual rent bumps for the deals done in the fourth quarter were roughly 2.5% blended, anchor and small shop, with new and renewal small shop at approximately 3%. The weighted average contractual rent bumps for the entire retail portfolio, anchor and small shop, not just one quarter's worth, but the whole thing approximates 2.25%, best in the business as far as we can tell. The sustained leasing volume and related economics bode well for the future, especially the contractual rent bumps. We ended the year with overall portfolio lease at 94.2, pretty strong but with room to grow. That breaks down between anchors at 96% lease and shop space at 90.7. 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 200 basis points of anchor occupancy improvement in the coming 12 to 18 months, depending, of course, on the extent of future bankruptcies that we are not seeing today. They're not at all obvious. The residential and office product at our mixed use properties continues to outperform competing supply in non-mixed-use environments and stood at 96% leased for both our comparable resi and comparable mixed-use office product at year-end while commanding premium rents. Progress leasing up our mixed-use office under development, 915 Meeting Street at Plank and Rose and Santana West has been measurably stronger with 215,000 square feet newly leased or in the final stages of the LOI assigned lease process. That includes the first signed deal at Santana West with Acroshore, the global fintech leader to the insurance sector. With those deals complete, 915 Meeting Street at Pike and Rose will be 80% leased, and Santana West will be nearly half leased up. 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 close-in 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 is stabilizing, rents will likely continue to adjust upward over time to that reality. This is especially true for tenants and locations in affluent areas where customers can absorb higher costs. I hope that higher interest rates don't cloud investors' appreciation of the strong underlying business fundamentals that exist today and likely tomorrow. With that backdrop, we're also really excited to add a substantial expansion to the 87-unit first phase of residential product that we built at Ballot Kenwood Shopping Center in suburban Philadelphia a few years back. The first phase opens strong and remains fully leased with growing rents. Strong supply and demand dynamics in this close-in part of Philadelphia's main line, along with construction costs moderating, means that we're able to build an additional 217 residential units, 16,000 feet of additional retail, and the covered parking spaces for service at all on the former Lord & Taylor site at Ballot Kinwood. The shopping center features an expansive tenant roster, including an LA Fitness gym, a full-service grocer, restaurants, and necessary services, which are often cited as the reason residents are choosing it. Projects should get underway later this year, beginning with a demo of the old Lord & Taylor building, It should yield a 7% cash-on-cost return when stabilized, drive a double-digit unlevered IRR based on the rent growth we've seen and expect, and be funded from free cash flow. Okay, on to 2024, where we certainly expect another record earnings year with an energized team and a strong sense of optimism. Dan will go into a bunch more detail, and I'll turn it over to him, and then open it up to your questions. Dan? Thank you, Don. Hello, everyone. Our reported FFO per share of $1.64 in the fourth quarter and $6.55 for the year were up 3.8 and 3.6, respectively, versus 2022. POI was up 6.5% in fourth quarter and a more impressive 7.2% for the year. Primary drivers for the strong performance in 2023. First, POI growth in our comparable portfolios. up almost 5% on a cash basis, excluding prior period rents and termities, driven by both higher rents and higher average occupancy over the course of the year, driven by continued strength in consumer traffic and tenant sales, particularly at our mixed-use assets, driving parking revenues and overage percentage rent higher, effectively controlling property-level expenses and having a lower credit reserve than we originally forecast. Second, contributions from our redevelopment and expansion pipeline, which came in at the upper end of our forecast. And lastly, continued focus on overall expense controls. The GNA came in below expectations. This was all set primarily by higher interest rate headings, totaling 27 cents. To reiterate Don's point earlier, with a consistent cost of debt versus 2022, FFO per share growth year over year would have been 8% in 2023, reflecting an exceptionally strong year of growth at the property level. Gap-based comparable POI growth came in at 4% for the fourth quarter and 3.2% for the year. On a comparable cash basis, excluding the impact of prior period rent and term fees, growth was 5.2% fourth quarter and 4.7% of the year. As a reminder, this information, including components of prior period rent, term fees, and gap to cash adjustments, can be found on page 12 of our quarterly 8K supplement. Our residential portfolio continues to be a source of strength, despite headwinds in the broader residential sector. Same-store residential POI growth 5.8% in 4Q, along with revenue growth for the quarter at 6%. And we expect this strength to continue into 2024. The value proposition of providing a premium residential offering on top of an attractive retail amenity base is driving out performance across our targeted residential portfolio. Also a big driver of our growth in 2023 with continued stabilization of a large portion of our redevelopment and expansion pipeline as $18 million of incremental POI came online from our $750 million in-process pipeline. And we expect that to be the case moving forward as well, as we add new projects to the lineup and maintain that part of our business as a continued driver of growth. The scale and skill set of our redevelopment program is a key differentiator for federal. Notable updates to our in-process pipeline, which will contribute an additional $9 to $12 million of POI in 2024, include $115 million Darien Common projects in Connecticut, where the residential is fully stabilized, 98.4%, occupancy with rents above $4 per foot per month, well above underwriting. tenant retention rates remain above 90%, and the retail component approaches 90% least, a testament to what a strong retail amenity base can bring to a residential project. At the $190 million 915 Meeting Street at Pike and Rose, Choice Hotels has fully moved in as they opened in 4Q, plus they've taken additional space. Sodexo's U.S. headquarters next on deck to open, with multiple other tenants actively negotiating leases. At Huntington Shopping Center on Long Island, this $85 million Whole Foods anchored redevelopment is over 90% leased, with new anchor REI opening during the fourth quarter, in addition to a number of small shops. We feel very good about the yield on this project, approaching the top end of our 7% to 8% return range. For those of you in the New York area, it's worth a trip out to Central Long Island later this year after Whole Foods opens to check it out, as well as the Melville asset a mile further south. Both are exceptional retail redevelopments which truly highlight federal skill set. Additionally, in 2023, we incrementally invested over $120 million in properties we only partially owned previously at an effective 8.1% cap rate. No better risk-adjusted investment than deploying capital credibly into assets we know extremely well.