Federal Realty Investment Trust

Good day and welcome to the Federal Realty Investment Trust first quarter of 2024 earnings call. At this time, all participants are in 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, this conference is being recorded. I would now like to turn the conference over to Leah Brady. Please go ahead, ma'am.

Good afternoon. Thank you for joining us today for Federal Realty's first quarter 2024 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 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 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 result 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 the discussion of our first quarter results. Don?

Thanks, Leigh Ann. Good afternoon, everyone. Well, it's a new year, and federal continues to charge forward. With a very solid $1.64 recorded in the first quarter, along with 3.8% same-center growth when excluding term fees and COVID repayments. And an all-time first quarter record 567,000 square feet of retail leads to 9% higher rents. The answer to the often-asked question of, do demographics matter post-pandemic, become quite evident. They sure do. The level of leasing activity in the quarter is particularly notable. Our record retail leasing was impressive, but maybe more so was the 190,000 square feet of office space leased at our mixed-use properties. Supplementing the long-awaited 141,000 square foot lease to accounting consulting firm PwC at 1 Santana West, bringing that building to nearly half lease, was an additional nearly 50,000 feet leased elsewhere in the mixed-use portfolio, including two deals at 915 Meeting Street at Pike and Rose, bringing that building to nearly 80% lease. The remaining vacancy at 915 Meeting Street at Pike and Rose and 1 Santana West represents considerably less than 2% of the value of the company. Tenant interest in the remaining space at both buildings remains solid. All in all for the quarter, we signed 117 commercial leases, retail plus mixed-use office, for over 775,000 square feet of space with strong economics, not including our residential portfolio, which itself generated record first quarter property operating income of over $17 million. Make no mistake, our product, primarily retail, but also including complimentary office and residential, is very desirable in the marketplace and a huge positive differentiator. Now, obviously, higher interest rates take away some of that operating positivity when you get down to the FFO line, but we still grew at over 3% in the quarter, and at $1.64, the higher end of our guidance rate. We did 104 comparable retail deals in the quarter that cumulatively were written at 9% higher cash basis rent than the final year of the previous tenant, or 20% on a straight line basis. And just to pound the point home one more time, those cash basis rollover increases come on top of leases that have had what we 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 first quarter were roughly 2.3% blended, anchor and small shop. The weighted average contractual rent bumps for the entire retail portfolio, not just one or two or three quarters were, approximates 2.25% and higher when considering the offices. 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. Now, I spoke last quarter about the upside in our occupancy, especially with respect to shop space, and felt that another 100 basis points over the 90.7% that we reported at year-end was doable. In the first quarter of 2024, we picked up 70 of those 100 basis points, bringing our small shop lease percentage to 91.4%. There's more to come here. Our anchored lease percentage is 95.8%. There's another 200 basis points to come there, too. Those two components combined a 94.3% lease overall. Pretty strong, but as we're demonstrating, room to grow. We take a very proactive approach to leasing and often lease space well in advance of an existing lease expiration or vacancy, all in the name of improved tenant health and merchandising mix and as an insurance policy towards potential gaps in future cash flow. We've got some impactful anchor renewals coming up later this year and early next that should continue the positive trajectory. In terms of a tenant watch list or other indications of a shift in demand, there is nothing out of the ordinary that we can point to. We have little exposure to those tenants that are most talked about these days, Express, Big Lots, Joann's, Family Dollar, 99 cents only, as they tend to cater to a lower income demographic. Our tenants have been largely been able to pass on cost of goods and labor increases to their customers. Those customers may grumble at the higher prices, but thus far, they've been both able and, more importantly, willing to pay them. In addition, our retail tenant base is very well diversified, both in terms of tenant concentration as well as property type. And while we'll always have one-off tenant failures as just part of the business, Portfolio-wide collectability issues haven't been and are not expected to be outside our historical experience or specific 2024 guidance. Business looks good. The last topic I want to address before turning it over to Dan relates to external growth. While we turned down the dial a bit on immediate development projects, the residential development at Ballot Kinwood Shopping Center notwithstanding, we turned up the dial and level of intensity on sourcing acquisitions. It's an interesting and unique time in the acquisition marketplace right now. While there's a limited supply of federal realty-type opportunities out there, there's also less viable competition for those centers than there has been historically. We look for shopping centers that are generally larger in size than the average center with opportunities for re-merchandising, redevelopment, higher rents, and, yup, potential site intensifications. We look for shopping centers in market that have strengthened significantly over the past 15 years, and especially post-pandemic. Markets like Phoenix, Central and South Florida, and Northern Virginia, among others. We look for shopping centers that are immediately accretive to earnings based on our cost of capital advantage, but even more importantly, produce returns meaningfully above our long-term cost of capital. We look for shopping centers that will be immediately financed through a combination of other asset sales and our largely undrawn $1.25 billion credit facility and then refinance for the long-term subsequent. We've begun our due diligence process on one such large asset currently and have a growing pipeline on others. Obviously, it remains to be seen if and how much success we'll have in this buy versus build cycle, but using both our operating strength and reputation, as well as our balance sheet strength and flexibility, is a specific focus of ours for the balance of this year and next. That's all I wanted to cover in prepared remarks this afternoon, so I'll turn it over to Dan to provide more granularity before opening it up to your questions. Thank you, Don, and hello, everyone.