Federal Realty Investment Trust

Good day and welcome to the Federal Realty Investment Trust second quarter 2024 earnings 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 remarks, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. And please note that this event is being recorded. I would now like to turn the conference over to Brenda Pomar, Senior Director of Corporate Communications. Please go ahead.

Good evening. Thank you for joining us today for Federal Realty's second 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 are annual report files on Form 10-K, and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial conditions 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 re-queue. And with that, I will turn the call over to Don Wood to begin our discussion of our second report of results. Don?

Thanks, Brenda, and good afternoon, everyone. So here are the highlights. All-time record quarterly FFO per share at $1.69, exceeding internal expectations, analyst consensus, and a very tough comp one year ago. All-time record second quarter comparable leasing volume at 594,000 square feet, within 4,000 square feet of the most comparable leasing volume ever in any quarter. Strong occupancy gains on both a lease and an occupied basis, the 95.3 and 93.1 respectively. up 100 and 110 basis points, respectively, from the last quarter, levels not seen since the 2017-2019 time period. Quarterly residential operating income on our stabilized residency properties up 6.7% versus last year, 9.5% when including the new Darien, Connecticut product. By the way, the apartments at Darien Commons are 99% leased with a waiting list to get in. Strong transactional activity in the quarter, the 215 million dollar acquisition of virginia gateway and the 12 million dollar buyout of the minority interest in cocoa not to mention the sale of our remaining assets on third street promenade in santa monica for 103 million dollars the momentum continued in july with our 60 million dollar acquisition of panola vista crossing in panola california yeah this was a very strong quarter top to bottom And based on what we see with our deal pipeline, this leasing environment is expected to continue to at least the balance of the year. Let me give you a little more color on leasing and its impact on occupancy. 122 comparable deals at an average starting rent of $37.72 per foot compared with the final year of the previous lease of $34.29. 10% more rent to start, and that's great. By the way, those numbers include 98% of our deals so they are truly representative of the entire company's results. But what makes that particularly impressive is that the rent on many of the previous leases has likely been growing at 3% or so over the last 5 or 10 years, and there's still room to increase the new rent to start the next 5 to 10-year cycle. It's actually 23% more on a straight-line basis because of those very important contractual bumps. Contractual rent bumps on all of our commercial deals done this quarter averaged 2.4%, and sit at roughly 2.25% portfolio-wide, very likely the best portfolio-wide in the business. This isn't new for us. It's why in the last 20 years, this company has grown its bottom-line earnings, 18 of them, with only the great financial crisis and the global pandemic momentary setbacks. In this second quarter, 2Q year-over-year growth is muted, largely due to the bad stores that were all still open in the second quarter of last year, yet we still expect a full-year growth over 2023 to be right at the top of the sector. Compare FFO for share growth over the past one, three-year, five-year, 10-year, 20-year periods against any other large retail portfolio that has a long history, and you'll see why we're so committed to our way of doing things. The impact on occupancy on both the leased and fiscal basis has been steady and impressive over the last three years, but never more so than this quarter. both small shop and anchor occupancy growth stood out. In the 2024 second quarter, we picked up 100 basis points in overall lease percentage, bringing it to 95.3. Great result thanks to record-setting leasing volumes, the acquisition of a well-leased Virginia Gateway, the sale of a less well-leased 3rd Street Promenade, and by the planned redevelopment of places like Andover Shopping Center. Our anchor lease percentage gained 90 basis points alone, since last quarter and sits at 96.7%. There's another 100 plus basis points to come here. Let me talk for a moment or two about the transactions this quarter, starting with the sale of Third Street Promenade in Santa Monica. First of all, what a great investment this has been for the trust over the past 25 years. A 13% unlevered IRR over that period and a springboard for this company into relationships with a type of tenant that benefited every mixed use and lifestyle-oriented project we did. Over the past few years, we lost confidence in the future income growth there for a host of reasons and sold to a local developer for $103 million, on in $20 million when including a one-off sale there late last year. Reinvesting those proceeds in a dynamic asset like Virginia Gateway with far more future growth possibilities seemed like a no-brainer. We've spoken about Virginia Gateway at various events and meetings over the past couple of months, so I won't use this time to repeat them. Suffice it to say, our Virginia management and development team is all over it and excited to have the new raw material to create significant value over the next few years through releasing and selective placemaking and redevelopment. And earlier this week, we closed on the acquisition of Canole Vista Shopping Center in Northern California for $60 million, which will generate an initial cash-on-cash return in the low sevens and will grow from there. This dominant 216,000 square foot grocery anchored regional shopping center sits on 19 acres and was purchased at $277 a foot. Not bad. The center fits in nicely with our West Coast portfolio complementing Crow Canyon Commons and East Bay Bridge in the East Bay and will be managed from our West Coast headquarters at Santana Road. We're not done on the acquisition front either. Lease up at Santana West continues. with a newly signed deal with an AI-powered cloud database provider for 24,000 square feet on the first floor of the state-of-the-art building. Active negotiations with other prospective tenants for much of the remainder of the building should enable us to continue to report on new deals. In the Lower Merion Township outside Philadelphia, the long-standing old Lord & Taylor building at our Bella Kinwood Shopping Center has been fully demolished, and construction is underway on our $95 million residential development of 217 apartments with ground floor retail that will be integrated with and complementary to one of federal's most successful shopping centers. We expect a 7% stabilized yield here. It's nice to see that development economics can still work in the right locations. You might be interested to know that in addition to Ballot Kenwood, we have over 3,700 residential units with active design or entitlements in process at a dozen of our existing assets. As construction costs continue to stabilize, as they've been doing, and rents continue to rise with inflation, as they've been doing, these projects are getting closer and closer to pencil. Stay tuned. By the way, for those New Yorkers listening who may have reason to be out on Long Island around Huntington, please stop by our completely redeveloped and reimagined Huntington Shopping Center, where the brand-new Whole Foods opened just last week and joined a new cadre of tenants, including REI, Ulta, new dining alternatives, and others set in a beautifully landscaped, comfortable setting really represents the best of federal realty thinking and execution. The $85 million comprehensive redevelopment brought in on time and on budget. The before and after effect is pretty striking. Huntington Shopping Center is now a worthy grocery-anchored open-air complement to Simon's powerful Walt Whitman Mall next door. You know, as I was finishing up these prepared remarks earlier in the week, I was reading them to the senior team in preparation for this call. Our president, Jeff Berkus, sat back reflectively and commented as to how significant the results of our capital allocation decisions have been over the past 90 to 120 days, given the relative size of this company. He's right. Collectively, they're meaningful and they move the needle in 102 property portfolios. I mean, between Virginia Gateway and Pinole, we've made nearly 900,000 square feet of acquisitions, deploying $275 million of capital at a 7-plus percent yield. We've completed a comprehensive and transformational $85 million redevelopment in Huntington, New York, began a new $95 million mixed-use development in Bella, and freed up $103 million of underperforming capital with a third-street promenade sale, all while executing 124 total leases for over 600,000 square feet of commercial space cementing future growth. I'd say the future looks bright. That's all I wanted to cover in my 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. Our reported FFO per share, $1.69 for the second quarter, came in at the top of our quarterly guidance range of $1.63 to $1.69. This result was against a tough second quarter 2023 comp, which was our previous record for quarterly FFO. Highlighting the overall strength and operating fundamentals across the portfolio. Primary drivers for the strong performance, simply POI growth in our comparable portfolio driven by strong property level expense controls, acceleration in our occupancy levels, and continued strength in our residential portfolio. Comparable POI growth including the impact of prior period rent and term fees, was 2.9%. Now that's GAAP. It's 3.1% on a cash basis. Both numbers are above our expectation for the period, and you will see a revision upward in guidance as a result. Comparable total property revenues were up 3.1%, with comparable min rents up 2.7% on a GAAP basis and 2.9% on a cash basis. Solid results when you keep in mind that Bed Bath & Beyond was in possession and largely paying rent throughout the second quarter in 23. Portfolio occupancy increased in the quarter to 95.3% leased and 93.1% occupied. Both metrics over 100 basis points increased since March 31. As a result, rents from signed leases not yet occupied in the existing portfolio stayed elevated at $26 million. with an additional $13 million of rent come online from leases signed in the non-comparable pipeline. Also note that we continue to have a robust leasing pipeline with a significant amount of new leases being negotiated for currently vacant space. With a tenant watch list that is minimal given our lack of exposure to troubled tenants and our proven ability to get tenants open and rent paying for a tenant coordination team that is second to none, we expect our current spread between leased and occupied to move toward our target of 125 basis points over the quarters ahead. As we stood last quarter, we are extremely well positioned, again, to drive our occupancy metrics over the balance of the year and have increased our targeted year-end occupancy level to roughly 93.5%. The strength in leasing from a rollover and contractual rent bug perspective with 10% cash rollover and 2.4% blended increases from combined anchor and small shop leases resulted in a straight line lease rollover of 23% and net effective straight line rollover after capital of 15%, which highlights our ongoing focus on controlling tenant capital.