Federal Realty Investment Trust Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 10, 2022

There are 13 speakers on the call.

Operator

Good afternoon. Thank you for joining us today for Federal Realty's 4th Quarter 2021 Earnings Conference Call. Joining me on the call are Don Wood, Dan Jeeb, Jeff Firkus, Wendy Seher, Dawn Becker and Melissa Bullis. They will be available to take your questions at the conclusion

Speaker 1

of our prepared remarks.

Operator

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 The information as well as statements referring to expected or anticipated events or results included in guidance including guidance. Although Federal Realty believes that expectations reflected in such forward looking statements are based on reasonable assumptions, Federal Realty's future 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 ks and our other These disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and results of operations. Our conference call tonight will be limited to 75 minutes.

Operator

We kindly ask that you limit yourself to one question during the Q and A portion of our call. If you have additional questions, please re queue. And with that, I will turn the call over to John Wood to begin the discussion of our Q4 results. John?

Speaker 1

Thank you, Leah, and congratulations to you on your promotion to Vice President of Investor Relations this month. We really well deserved and we're sure lucky to have you. Well, good afternoon everybody. What makes Federal's business plan so different is our multifaceted approach to capitalize on these best located, best tenanted retail properties with a laser focus on bottom line earnings growth. 104 individual assets with a proverbial toolbox filled with numerous ways of achieving that goal for years to come.

Speaker 1

It took a global pandemic to knock us off our horse for a time, but we're back up and we're riding high. 2021 was the first step. For each quarter throughout the year exceeded our constantly upwardly revised expectations. That trend continued in the Q4 with FFO per share of $1.47 handily beating our forecasts and of course last year. The shining star of the business continues to be leasing as it's been all year, but it was taken to new levels in the 4th quarter.

Speaker 1

I need to put this into context, so bear with me for a minute. 1st, on a company wide basis in the 4th quarter, We signed 149 commercial leases that is retail and office, but not including residential leases, which itself was really strong. For nearly 900,000 square feet of space that includes renewals of existing tenants along with space that sits vacant today is expected to be vacant in the coming months or is for new buildings currently under construction or just completed. That's an Annual base rent commitment of nearly $35,000,000 Consider that over the last 10 years An average quarter's output produced about 110,000 commercial leases and 500,000 square feet. That means that in this quarter we did 35% more deals or 80% more GLA than average.

Speaker 1

This is very strong quarterly volume even in a year where each previous quarter seemed to set some sort of record. And while I don't think that those 4th quarter levels are regularly repeatable, our leasing pipeline suggests that they will remain above historical averages for the foreseeable future. For the full year 2021, we did 573 commercial leases for 2,900,000 Square feet and an annual rent commitment of $116,000,000 These activity levels are unprecedented over the very long history of this company. But this leasing volume is particularly important because it provides strong validation that the very diversified product type that we own and are creating very highly sought after and the leasing is broad based. It's the single biggest reason that I believe Federal Realty is better positioned post COVID than we were before.

Speaker 1

Let me break down the quarter numbers a little bit more. I think you'll see what I mean. Of the 149 commercial leases signed, 116 of them or nearly 600,000 square feet were for comparable space, one where a tenant previously operated from. Those leases were written at an average rent of $34.34 6% higher than the tenants they replaced. Another 9 leases or 22,000 square feet were written for non comparable space at an average rent per foot of 4,353 at places like Assembly Road Phase 3, CocoWalk and Kennewet Colonnade in Phoenix.

Speaker 1

But it's the remaining 24 leases For 277,000 square feet at net rent of $48.52 that really is a strong positive differentiator to our business plan. It's the office leasing at our long established mixed use communities. In this quarter, primarily at Assembly Rowan Pike and Rhodes. Now look, I certainly realized that general office leasing does not involve right now for good reason given the macro levels of uncertainty surrounding back to work policies. But not all office space is created equal and it has become clearer and clearer with each quarter, Back each month with passes that the new Class A office product that we own or our building at 5 of our amenity rich mixed use communities is an extremely high demand and commanding rents that are clearly additive to both earnings and value.

Speaker 1

Each of those 5 are well established retail locations already and the office component is an expansion Building on the success of the retail, they are Assembly Row, Pike and Rose, Bethesda Row, Santana Row and CocoWalk. That's it. Deals with a myriad of companies and lots of different industries headlined by our lease with Choice Hotels For their new world headquarters at Pike and Rose are just the latest examples of company choosing our building as a product of choice, hope unintended for the future. Those companies are joining others like Puma, AvalonBay, NetApp, Bank of America and Splunk and helping to create long term sustainable communities in our portfolios in Somerville, Massachusetts, Montgomery County, Maryland, Silicon Valley and Miami. And check this out, while 197,000 feet of the 277,000 feet done in the quarter was primarily at newly constructed buildings at Assembly and Pike and Rose.

Speaker 1

The remaining 80,000 was for comparable space at a positive 23 That strong rollover was largely driven by our first renewal and expansion at 450 Artisan Way At Assembly Row, 100,000 square foot office building built as part of Phase 1. That rent went from a blended sub $30 triple net rent to the mid-40s triple net. Pretty good data point of a longer term office upside that exists at well executed, Well amenitized mixed use communities in 1st tier suburbs. As I said and firmly believe all office opportunities are not created equal. And while we don't have anything to announce on this call, Santana West, there is serious interest from a number of substantial tenants where we're making some very good progress.

Speaker 1

And by the way, take a look at the occupancy gains we're making on the retail portfolio, portfolio wide, which are equally impressed. At year end, we're 93.6% leased and 91.1% occupied. That's an 80 basis point leased and a 90 basis point occupied pickup in just 3 months. Impressive for sure, but still a ways to go to get to our 95% plus historical bogey. Okay.

Speaker 1

So what about the omicron impact? Well, as you would expect, there's little impact in the Q4 as the variance spread didn't take hold until late December January. And what the impact will be on 2022 has yet to play out. But thus far in 2022, it feels like across the board Shoppers, tenants and other constituents seem to be viewing Omicron as temporary and while wearing masks and being more careful in most of our markets are marching forward with typical winter shopping patterns. Requests for rent accommodations from tenants have been few and we've not agreed to anything significant at all at this time.

Speaker 1

Now from a capital allocation standpoint, which after all is really what we as management teams in this industry Due to add the most value, we're actively using all three levers, asset sales, Acquisitions and the continued expansion in our established properties, all in the name of bottom line earnings growth. You'll notice from our 8 ks that we closed on the sale of 2 shopping centers where we saw limited upside in the future. The combined proceeds of $113,000,000 in Jes Leesburg Plaza and Saga Shopping Center sold at a blended high 5% cap rate were used to reduce debt before year end. On the acquisitions front, we'd like to invest several $100,000,000 in 2022 Based on our identification from our hit list of targeted properties that feel like they may trade this year. Progress early in the year has been encouraging and soliciting serious conversations.

Speaker 1

Stay tuned. And certainly on the development front, We expect to be substantially done constructing our residential over retail neighborhood in Darien, Connecticut this year We're underway at our $190,000,000 office tower for Choice Hotels at Pike and Rose and we have more than a dozen property improvement redevelopments underway throughout for Polygon. By the way, Citi will be hosting a tour of our newly completed CocoWalk mixed use project during their conference in South Florida next month. It's pretty spectacular. It's created over $60,000,000 in value on our $200,000,000 investment and we'd love to see a wide variety of investments there.

Speaker 1

It's going to be an active year on all fronts at Federal. I've got to believe the visibility of this multiple year bottom line earnings growth plan is the most transparent in the sector. That's all about all I have for prepared comments. Let me turn it over to Dan and we'll be happy to Thank you, Don, and hello, everyone. Our reported FFO per share $1.47 was up 29% from the Q4 of last year and roughly $0.06 above the top of our guidance range.

Speaker 1

For the year, we reported FFO per share of $5.57 a 23% increase over 20 20's results. Both of those reported increases exclude the one time debt repayment charge from 4Q 2020 in order to show a meaningful apples to apples comparison. Primary drivers of that outperformance versus expectations were Higher percentage rent from COVID amended leases bolstering better collection rates, a faster acceleration in occupancy than expected, Stronger leasing at our residential assets including the Phase 3 residential assembly, lower real estate taxes than we had forecasted plus financing activity which occurred later in the quarter than expected. This was offset by higher G and A, Higher property level operating expenses, primarily one timers and lower term fees than we forecast. For those analysts that keep track, we had $1,700,000 of term fees for the quarter against a 4Q 2020 level of 3,600,000 Collections continue to improve with 97% of monthly bills rent being collected for the quarter, up from 96% reported on our Q3 call.

Speaker 1

Including abatements and deferrals, we are 99% resolved. Prior period collections were down to $5,000,000 versus $8,000,000 in 3Q. And as a result, our collectability adjustment Up modestly to $2,000,000 primarily driven by this prior period follow. Collection of deferrals continue to outperform our expectations For the $46,000,000 of total rent we deferred since the start of COVID, dollars 27,000,000 has been collected, which represents roughly 90% of the amounts that were scheduled to be repaid by year end. Todd already highlighted our record breaking quarter and year of leases, Let me add some additional color.

Speaker 1

As you mentioned, we were 91.1% occupied as of quarterend, a 90 basis point increase over both the 3rd quarter and year over year. Our lease rates stood at 93.6 percent, An 80 basis point increase over the 3rd quarter and 140 basis point increase year over year And the 2 50 basis point spread between leased and occupied should set us up for strong growth over the course of 2022. These significant gains were primarily driven by small shop leases. Our small shop lease percentage is up to 87.4 percent, a 130 basis points sequential increase in the quarter and a 280 basis Increased year over year. Solid progress in getting back to our targeted bogey of around 90% for small shop.

Speaker 1

Highlighting some of this small shop activity or deals for some of the most sought after tenants of today. Orby Parker with 3 new deals, Madewell with 2 new leases, Von Bet with 2, Oxtrot, aged denim, Oath Pizza, another Nike Live, another Glass Lab, just to name a few. Anchor Leasing was solidly up 50 basis points to 96.8 percent given broad based activity with 12 deals totaling 320,000 square feet of the almost 600,000 For the quarter, categories for new deals include grocers, discount apparel, sporting goods, home furnishings and healthcare. On the residential side, we saw a surge in leased occupancy of 240 basis points year over year to 97.2% and saw strong high single digit year over year new lease rent growth. We feel well positioned to drive incremental POI growth in 2022 given forecasted strength particularly in our Boston and Silicon Valley markets.

Speaker 1

Evidence of this plan evidence of this can also be seen where after just 7 months Our 500 Unit Marcella Residential Tower at Assembly is already 60% leased and rents which are 15% higher Then the pre COVID lease up rental rates of Montauk, its sister resi tower next to that assembly room. In terms of redevelopment, we now have roughly $400,000,000 of remaining spend on our $1,500,000,000 investment pipeline. Much of that pipeline has recently been placed into service. These projects will be a source of significant earnings growth in 2022 through 2025 as we continue to ramp up in POI contribution. In our 8 ks, we have reinserted disclosure Relating to the ramp up of POI at our large in process projects and also provided some detail on a footnote on the 99% leased Kokomo.

Speaker 1

Now to the balance sheet and an update on our liquidity position. The 4th quarter was an active one in the capital markets. We raised another $85,000,000 of common equity for our ATM on a forward basis at a blended gross price of 130.50. We repaid mortgages totaling $117,000,000 that encumbered the Avenue of White Marsh and Montrose Crossing, getting another $18,000,000 of POI to our unencumbered pool. And during the quarter, we sold $121,000,000 in assets including the Leesburg, Virginia and Saugus, Massachusetts assets Don mentioned, bringing our total for the year to $142,000,000 at a blended yield in the mid times.

Speaker 1

As a result, we ended the year with $162,000,000 of cash available, an undrawn $1,000,000,000 credit facility At $264,000,000 of forward equity to be taken down in 2022, leaving us with total liquidity of over 1,400,000,000 Our leverage metrics continue to improve. Net debt to EBITDA is now down into the high five times level For the Q4 annualized net of the forward equity and that metric is forecast to improve over the course of 2022 as development POI comes online And occupancy drives higher from leases that are already executed. Again, our targeted level is in the low five times range. Fixed charge coverage is back up to just under 4 times and we have no debt maturities until mid-twenty 23. Now on to guidance.

Speaker 1

For 2022, we are increasing our guidance range to 5.75 $5.95 per share, a $0.10 increase over our previous range. This represents 5% growth at the midpoint, 7% at the high end. And this is driven by occupancy levels Expecting to increase from 91% at year end up into the mid to upper 92% range by the end of 2022. An increased forecast for current period collections up from an average of 95% in 2021 to an average 98% over the course of 2022. Greater contribution from our redevelopment and expansion pipeline, Again for those modeling, let me direct you to our 8 ks where we're providing our forecast of stabilized POI ramp up by year as well as accretion from our 2021 acquisitions being online for the full year.

Speaker 1

Additionally, Of the $440,000,000 of 2021 acquisitions, they are really outperforming our original underwriting and are expected to yield a blended 6% in 2022 versus an initial 5.5 percent expectation. Please note that these deals We clearly sell at a blended sub-five cap rate in today's environment. Now this will be offset by Lower prior period collections for the net 2021 level is $22,000,000 and for 2022 is expected in the range of $5,000,000 to $8,000,000 We are expecting lower net term fees. We had $8,400,000 in 2021 and forecast $4,000,000 to $6,000,000 in $22,000,000 more in line with historical averages. Despite Over 300 basis points of headwinds from prior period collections and lower net term fees, our comparable growth forecast is 3% to 5% for 2022.

Speaker 1

Other assumptions include $300,000,000 to $400,000,000 of redevelopment and expansions at our existing properties, $300,000,000 to $400,000,000 of equity to be issued inclusive of the forward equity already sold. G and A is estimated in the $50,000,000 to $54,000,000 range for the year. We've set a credit reserve of roughly 2%, Also minus 50 basis points, dispositions made in 2021 contributed $8,000,000 of POI to 2021. That obviously won't be there in 2022. And we will have lower interest income given the repayments in mid-twenty 21 A $30,000,000 mortgage loan that yielded 10%.

Speaker 1

As is our custom, this guidance does not reflect any acquisitions or dispositions in 2022. We will adjust for those as we go given our opportunistic approach to both. It also does not assume any tenants moving from cash basis to accrual basis. And please note the expanded disclosure in our 8 ks relating to guidance. With respect to our goalposts for 2023 2024, we continue to believe that 5% to 10% compounded growth From our upwardly revised 2022 FFO range is achievable.

Speaker 1

Timing in terms of the lease up at 1 Santana West We'll have a big influence on where we end up within that range. Now while we are not providing color on specific timing, $7 per share of FFO is a realistic target in the coming years. And with that, operator, please open the line for questions.

Speaker 2

Our first question comes from the line of Alexander Goldfarb with Piper Sandler. May proceed with your question.

Speaker 3

Hey, good afternoon. So two questions here. The first question is, obviously, on the apartment side, what we've seen all around is the rent rebounds and rent growth is tremendous. On the retail side, the sales recovery has been just off the charts. I mean, the mall companies have been saying It's well exceeded 2019.

Speaker 3

You guys are talking similar. It's hard to believe that this is all just a catch up of people staying in their homes During 2020 early 2021.

Speaker 1

So do

Speaker 3

you think there's something else at work or is this just like A one hit wonder, we all rebounded this year or 2021 and then sales are leveling out. Or do you think that people have sort of and retailers themselves Have rediscovered retail and therefore this accelerated sales pace is sustainable the next several years?

Speaker 1

Yes, Alex. I mean that is the I mean that's the question of the day. Everything we sit, we seem to see. And again, it's looking at it through our view, which is not a national view. It's really primarily a coastal view Suggests that the recovery of sales etcetera are here to stay.

Speaker 1

I do think there was something very interesting that happened through COVID in terms of people's realization of how important social It was. It's real important into how going out to eat and to play and to shop So I think a lot of that states. The other thing and you've kind of touched on it early in the first part of the question, I want to address it is the residential side. There is no doubt that places and again our residential outlook is on a Zola only on a few places, But it got hurt as you think about it going into COVID. The way it's recovering is pretty interesting to me.

Speaker 1

And we have a really interesting barometer. If you remember at assembly, pre COVID we were opening up a big 500 unit building that we called montage. And in that building, in the Q4 of 2018, October, November, December of 2018, before any COVID, that building, we had average rents of $3.35 Ironically, we're now opening the 2nd building, which is also 500 units and it's right next door. It's called Marcella. It's leasing up faster than we thought and it's leasing up at $3.85 in that 4th quarter, 15% more than pre COVID at Assembly Row.

Speaker 1

It's really interesting and if you look at the deals that are happening In January February, it's not a big sample size because January February in Boston, But those are well over $4 a foot. So there's something that's happening here with respect to lifestyle, with respect to shopping, with respect to Certainly the office piece in terms of what's to come there that is really that really feels to me like an energized Pre COVID time that to some level is here to stay. Okay. And then the second question is,

Speaker 3

With the recent the crime waves that have happened and stores that have been targeted, I mean, your portfolio has been hit. On the public earnings calls, all the companies that I've asked so far, everyone said there's a little bit more security costs, but no tenant Has changed their leasing plans or is moving stores and yet when we speak to people and some of the companies privately or Speak to others that are involved in retail in urban settings, it's a different story. So my question is, is it Just that in general, there's really been no fallout. There's increased lease expense and security costs. But in general, there's been no leasing fallout, tenants really aren't shifting portfolios or is it that yes, in certain markets, they're seeing a change, but it's not a change that is appearing Nationally as retailers look at their fleets?

Speaker 1

I can really only respond to our properties in our markets and I can tell you there has Been a change in any of the retailers' plans for moving forward because of price. Okay. Okay. Thank you, Don.

Speaker 2

Our next question comes from the line of Craig Schmidt with Bank of America. You may proceed with your question.

Speaker 4

Yes, thank you. You guys have come out of COVID being rather aggressive impressively so on your external growth. You're really Taking up your acquisitions and you continue to push on your redevelopment. I'm just wondering though with the continued pressure on cap rates, May you start to favor redevelopments over acquisitions just because it's tougher to buy and adding value when cap rates are so It's a compelling proposition.

Speaker 1

Great question, Greg. Let Jeff jump on that first, particularly from The acquisition side?

Speaker 5

Yes. Hey, Craig. Good evening. I mean, I think you're right on point. We were really happy with what we got done in 2021.

Speaker 5

As Dan mentioned in his prepared remarks, we got that Those deals done in the first half of the year generally speaking, which was great. All the properties we bought in 2021 have Great redevelopment and value add opportunities going forward, which as you know, we think is very important when you're buying something. The second half of the year in March, we've also tightened up. Yields Now whether you're talking about cap rate or IRR are lower than they were pre pandemic. And Where public equity trades in the teens on average, it's a real head scratcher as to how you make the numbers work For your normal grocery anchored neighborhood or community center, the numbers just don't work, especially when you look out a few years And what the growth of the property level needs to be to support the implied growth in the equity that's issued by the assets.

Speaker 5

I think you're spot on. And as you know, we're careful about that kind of stuff. We've always been really disciplined because we've never felt pressured To buy anything because we have, as Don said, so many tools in the tool bag. So we'll continue doing what we've done for Yes, the last two decades that most of us have been here and we'll be careful about what we buy and make sure it's got good go forward growth prospects, Densification opportunities, lease up releasing all that kind of stuff. But certainly, if you don't have the ability to source that stuff, if you don't have the ability to take advantage of those opportunities, just growing by buying something in today's market, it's not a very good idea in my view.

Speaker 1

Thank you.

Speaker 2

Our next question comes from the line of Katie Anna with Citi, you may proceed with your question.

Speaker 6

Hi, everyone. Thanks. Just wondering if you could walk us through some of the key swing factors that could Get you to the higher or below end of your updated FFO guidance range, since it's still a fairly wide range for this year. And what would need to happen for you to narrow that more throughout the year?

Speaker 1

This is Jeff. Hey, Katie. How are you? Look, I think that we've given a range of 3% to 5% for comparable property. I think that kind of what goes in that is just Collections for prior and prior period as well as kind of going forward current.

Speaker 1

Also kind of what we do with regards to term fees, which we've kind of reduced. Our prior period rents have also been reduced. We've given a range, I think you'll see on Page 33, in our guidance We give kind of a little bit of a range with regards to G and A expense $50,000,000 to 54,000,000 I think it's a little bit of a sense of the range of development, redevelopment capital that we can put to use. And then also, how much equity we raised. We've also How quickly some of the rents can come online at our developments as well as the rest of the year, how we can get things Brent started.

Speaker 1

So I think there's a whole host of those. I think we've given a range of credit reserve At around 2% plus or minus 50 basis points, that's another one. Obviously, that shows up will be reflected in the 3% to 5 Comparable to an extent, but those really I think kind of are levers that get us there with regards to that stated range of guidance. Again, it does not include dispositions, does not include acquisitions, Does not include any changes in our revenue recognition with regards to cash versus accrual.

Speaker 7

It's Michael Bilerman here with Katy. Don, I was wondering if you can maybe step back and just think about capital sources and uses. You have $300,000,000 to $100,000,000 of development and redevelopment plan that you have targeted for this year. And in your opening comments, It sounded like there was a number of transactions on the acquisition front that you have underway. You list here about $300,000,000 to $400,000,000 of equity, which is effectively I don't know if that equity is all common equity.

Speaker 7

I don't know if you're deeming that to be Equity selling assets, but just talk a little bit about how you think about funding that growth and how significant it could be?

Speaker 1

You bet, Michael. So the first thing you got to remember is that we've got forward equity contracts of 250 $264,000,000 $260,000,000 that has already been sold that will be taken down in 2022 at some point. That's important. Incremental equity in our budget is another $140,000,000 or so on top of that. We're also looking at selling a couple of assets that probably should think you should think about another 100,000,000 Dollars or so there.

Speaker 1

So what we're really certainly trying to do is be very balanced with respect The capital that we would use and again have raised a lot of it already that's important. We're not going to lever up the company, we're going the other way. And so the notion of new deals and how those deals would be financed, they'll stand on their own And we'll figure out the best way to finance those depending on what type of asset they are, where we're going. But with respect to The stuff that's committed, we're in really good shape because of the pre funded equity so far and The couple of dispositions that we would do.

Speaker 7

I guess from a volume perspective, how do you think about You have you added all the yields back to the supplemental. Thank you for that. Some pretty attractive yields relative to where the acquisition market is being priced and certainly relative to where you got those deals off. Markets being priced and certainly relative to where you got those deals off last year. So I guess why not Activate more of the stuff that's in your wheelhouse versus going out and paying lower cap rates For acquisitions and issuing equity at a discount to where your NAV is, right?

Speaker 7

Maybe

Speaker 1

you think the losing channels? First of all, fully agree with you, Michael, fully agree with you. What you have to first really make sure you get is all the capital that has been spent To date that has not that is not yet producing and that is automatic FFO growth, so automatic property level growth and it is the single biggest source of Growth in the next couple of years after plain old lease up of a portfolio that is still under lease in terms of where it goes. Those two things are huge. The other thing with respect Acquisitions and this is where I could not agree with you more.

Speaker 1

They've got to make a lot of sense. Now, I will tell you That there is one that we're looking at specifically in order to handle a 1033 Transaction that we had a couple of years back. So there are we will step up to be able to do a deal that Makes sense overall on a overall tax from a tax perspective. But beyond that, your point is 110% right. I couldn't agree with you more.

Speaker 7

Okay. Thanks. See you at COCO in a few weeks.

Speaker 2

Our next question comes from the line of Greg McGinniss with Scotiabank, you may proceed with your question.

Speaker 8

Hey, good evening. So I guess looking at Leasing. So leasing volumes are obviously quite strong.

Speaker 1

Rent spreads are slightly less exciting.

Speaker 8

Could you just talk about market rent growth that you're seeing relative 2019 and then in what regions you're either seeing more strength or recovery in rent growth?

Speaker 1

Yes, I can start on that. Wendy jump in wherever I screw this up. But the when we sit and we look at 6%, 8%, 9%, something like that, which is where we expect to be

Speaker 7

overall.

Speaker 1

That's about where we are overall compared to Not only 2019, but what is in place all the way through. When you look specifically to 2019 and I just did this to get comfortable with it, we are 3%, 4%, 5% or so percent higher than 2019 overall. That doesn't mean and I've said this a 100 times and it will always be the case That there aren't specific deals that will either drag that down or drag that way up. In this particular quarter, I got a there's a good example of that. We had a CVS in line at Barracks Road, one of our best shopping centers that we could not accommodate a drive through.

Speaker 1

They left the shopping center to go across the street for a drive through. Those things happen. That was a Big rent payer that wouldn't be able to be replaced without that deal. Those rollovers would have been 8 For the company, so there's always a couple of things like that and they go both ways throughout the company. But overall, you are talking about A level of demand.

Speaker 1

That's in excess of the supply of our particular product. So overall, you should expect That continued growth in rents. The other thing is though, you've got to translate that down to the bottom line. And when you hear big numbers of rollovers, but no growth at the bottom line, you got to sit there and say what? Because from my perspective, Taking being able to expand at properties that are fully settled as great retail destinations Like a Pike and Rose or like an assembly, like a Santana Row to be able to add buildings to expand what you have.

Speaker 1

My gosh, that's great risk adjusted growth. That really needs to be thought through and considered in terms of it. So both the leasing and the expansion And the PIPs, the property improvement plans, all of that when that happens winds up, I think we show you bottom line growth That is consistent and sustainable for a number of years.

Speaker 7

That's the name of the game.

Speaker 8

All right. Well, thank you. And then just regarding those potential acquisitions that you and Michael were referencing, what are you seeing in Market from a cap rate perspective, how do you

Speaker 1

think that impacts the value of your portfolio?

Speaker 8

I know Dan a few years ago gave us his NAV estimate, which I believe you weren't too pleased about him giving in the first place, but he convinced you otherwise, which we all

Speaker 1

First of all, Greg, that's just good cup, bad cup between Dan and I.

Speaker 5

We're on the same page

Speaker 1

In terms of that, look, I don't know. It's been it's so well publicized. It's so well clear That really strong shopping centers today are in the markets that we want to get or supply general. Yes. I mean that's where they are.

Speaker 1

When you take a look at the big projects that we have, when you look at What's the value of CocoWalk's got to be when you come and see it, when you take a look at what's being added in Pike and Rose and Assembly etcetera. I think you're going to I think it's pretty obvious that you're talking about sub-five across the board in this company, not at every shopping center, but Across the board in total. And so when you look at that, you can do the math. That's the way you think the NAV should be. But to me That NAV is critically important.

Speaker 1

The most important thing about that that ties obviously into the gap rate. Where's the growth man? How are you going to grow it? And what's that thing going to be like in a few years because that's what a buyer is paying for.

Speaker 8

Okay. And then just to follow-up on that, with the new structure in place, should we expect to see some Use of that structure in terms of OP units to help with on the acquisition side?

Speaker 1

Maybe yes, maybe no. That is That was an administrative change that was frankly we found a relatively simply the simple way and inexpensive way to do it or go and found it actually. That's a way to do it or going foundationally to be able to do that such that we so that we weren't at any disadvantage Should the opportunities come up. So I know it's not a bad thing in any way you look at it. And to the extent some of the deals we're talking about are looking at And utilize that and give the particular seller more comfort, great.

Speaker 1

But I couldn't handicap it with you is that, oh yes, that means we'll do 4 deals instead of 1 deal or that kind of thing, but it's generally a good thing.

Speaker 8

All right. Thanks,

Speaker 1

You bet.

Speaker 2

Our next question comes from the line of Juan Sanabria with BMO Capital, you may proceed with your question.

Speaker 9

Hi, thanks for the time. I think you mentioned about 150 basis points of growth in the prepared remarks from year end to year end, but just curious if you can give us any sense of the cadence throughout the year, Typically, seasonality in the Q1, but that seems to have gone out the window with COVID here and the recovery today. So just curious if you Have any wisdom to share on how we should think about occupancy for 2022?

Speaker 1

Yes. I think that growth And it's a range. We're trying to get up into that 92.5% to high 90% range. I think you should just model it pro rata By quarter, I don't think there's a particular cadence in terms of where how that increase will occur on the occupied

Speaker 9

Okay, great. And then just on Santana West, hoping you could give us a little color on how those leasing Discussions are progressing. Any expectation for signing a lease here in the near term To give us more confidence and maybe adding that incremental NOI to like a 23 Property NOIs as that development comes on or how should we think of the timing of that potentially?

Speaker 1

On this particular issue, I have never been so Born in my life, about talking more than I should or less than I should on this. I know what I'm very comfortable with is That the conversations that are happening are a bit of a horse race right now. And the notion of Kind of helping one versus the other. I don't want to signal anything on that more than To tell you that we're making some good progress. I'm not going to put a time on it and I can't give a little bit more Given the nature of the negotiations at this point.

Speaker 1

Sorry.

Speaker 9

Understood. Thank you very much.

Speaker 2

Our next question comes from the line of Haendel Ste Juste with Mizuho. You may proceed with your question.

Speaker 10

Hey, Don. Hope you guys are well. I wanted to ask you about the cash basis tenants, Still pretty elevated here. I don't think there's a change versus last quarter. I guess I'm curious why we aren't seeing more progress on that given the backdrop.

Speaker 10

You're doing tons of leases, rents are going up. How do we square that versus the optimism that's fairly obvious in your voice and your outlook?

Speaker 1

What are you referring to with regards to your question regarding the cash basis tenants?

Speaker 10

The percentage I'm looking here at 26%

Speaker 1

Let's see. There's no plans for us to switch them back From a cash basis to an accrual basis, there's likely to be some fairly high hurdles For us to do that and look even pre COVID we had a big chunk most of our restaurants on a cash basis to begin with already. So, yes, I wouldn't anticipate, it's not as though there's any progress, but you'd see kind of repayment of deferrals, we need to see other Progress with regards to consistency of payments and then we'll make those decisions. But I wouldn't anticipate anything in and that's why We have nothing in our guidance with regards to making that change from cash to accrual.

Speaker 10

Got it. Got it. And comparative, but what was that pre COVID? What was the range relative?

Speaker 1

Probably around kind of the mid teens as a percentage of ABR. Just a Big chunk of that was restaurants and then our normal cash basis tenants, both lower rent quality, lower quality tenants At any one point in time.

Speaker 10

Got it. Okay. Thanks for that. And question on rent commencements. Last year, certainly, the focus on rent Collection this year more so on rent commencement.

Speaker 10

And I just guess I'm curious to a question of supply chain and labor constraints, any risk of Perhaps not meeting some of the rent commencement timelines and risks to decide, but not yet opened rents and any sense of anything you're able to do to perhaps Compress some of those timelines or work with tenants in any way? Thanks.

Speaker 1

Yes. The answer is yes to all the questions you just asked about the Haendel. I mean, that's look, Supply chain is a big deal. And are we able to do stuff about it? You bet we are.

Speaker 1

From the standpoint of Certainly the components of it, whether you're talking about HVAC equipment, whether you're talking about some of the provisions in the lease where that tenant will work with us. There are things that we have done and continue to do. And as Wendy loves to say and boy, I can't argue with this is Great relationships with tenants means that there's a partnership there in trying to get a store open. And that partnership means there is more likely To have a give and take in that in the build out process of where you can find the right equipment to be able to get stuff in. We've had some real good success getting started with that.

Speaker 1

Does that mean there's no risk on the supply chain side, the store opening? Of course not. Anybody that tells you differently is you look them square in the eye because that's what's going on in the country right now. But we're all over it and frankly have been all over it for quite some time, including staffing up, they are including helping As best we can with relationships in the cities on the permitting side, which is always the least predictable Part of this. So all hands on making sure that the 3,000,000 square feet of leasing that has been done at this company in the past It's able to have its best chance for starting before or on the dates that we've got forecast.

Speaker 10

Did you guys give an updated number for the Simonette yet rents? I think last quarter that figure was like $25,000,000 We expect a 90% to hit this year. Can you give us a link for

Speaker 1

that? Yes. We're signed non occupied that Yes. What's identified in a difference between our lease and occupied is about $23,000,000 We've also got a big chunk That is effectively about $17,000,000 that is in our non comparable pool or Basically currently in our redevelopment pipeline as well as what's in our current pipeline of kind of 2022 deals that have been Fine so far and going forward, gets you up into the $50 plus 1,000,000 of total rent starts potentially. So we feel good about where we stand and we see that as a big driver of some upside in over 2022 and into 2023.

Speaker 1

Wonderful. Thank you, guys.

Speaker 2

Our next question comes from the line of Laurence Van Dykem with Compass Point, you may proceed with your question.

Speaker 11

Thanks guys for taking my question. Actually following up on what Haendel asked about as well. I mean, if I do the math, I see excluding The NOI coming online from the development pipeline, which could be up to 75,000,000 You've got more than $10,000,000 of NOI growth sort of identified here If I add up all of these pieces, so if we start factoring this out and obviously not all of it's going to come online in 2022, but significant amount It will be probably back end into 2022 into 2023, but we're looking here at double digit NOI growth Going into by the end of 2023 comfortably double digits, that seems pretty attractive.

Speaker 10

Are we

Speaker 11

missing something here?

Speaker 1

Well, keep in mind, I mean, look, we'll have strong growth as the developments come online. And I think you can look at our additional disclosure On the big projects to kind of get a sense of that. Keep in mind though also there's the offset of capitalized interest going away as we deliver those buildings. We have signed leases there as we deliver those spaces to the tenants. Obviously, we shut off and capitalize interest.

Speaker 1

So that's a bit of an offset. So Obviously, that's what flows down to the bottom line. It's not kind of how quickly we grow the NOI up top. Obviously, there's capital associated with some of The redevelopment and expansions that we've got.

Speaker 11

And then, as Don sort of alluded to in some of your residential leasing, presumably having a building that signing rents 15% higher than next door. That suggests that the existing rents have some significant potential upside here as well. How long will it take do you think in your view to harvest some of that residential rental upside as well?

Speaker 1

Yes, that's a great question Haendel. And that should be a source of positivity for 2022, Particularly through the spring season, it's a later in the year. A little bit of luck will have that big building up in Up at assembly all leased up by the end of the year, which would be great, which would be good stuff for 2023 and really based on what's going on in Boston right now that is a real bright spot from a life sciences perspective and Back to work perspective and a job creation perspective, that is one of our, if not our strongest markets, Which is interesting because it was one of the market that was hurt the most during COVID. Got you.

Speaker 11

That's it for me.

Speaker 2

Our next question comes from the line of Linda Tsai with Jefferies. You may proceed with your question.

Speaker 12

Hi. Can you discuss expectations embedded in your POI growth of 3% to 5%? What's the balance between growth in revenues and

Speaker 1

I think that the Yes, we would expect expenses. We've had a good year with regards to real estate taxes and keeping them low this year. So They should have be grow from this level. I would expect that there should be kind of modest kind of figure 3% rent expense growth Kind of ordinary course from that perspective. And then obviously just occupancy growing with collections growing With the offset of some prior period and lower term fees so forth, all factor in and obviously some of the credit reserve is embedded in there beyond just the collection impact.

Speaker 1

So all of those, but with regards to expenses, I would forecast kind of a traditional Got a 3% increase on both OpEx and real estate taxes And maybe a little bit higher on the OpEx just got to get inflationary pressure. So that's all embedded in that 3 to 5.

Speaker 12

And then what are you forecasting for bad debt in 2022?

Speaker 1

It's yes, like I said, our credit reserve Is the call it 2% plus or minus 50 basis points. I think there's a bunch of traditionally we're kind of in the 50 basis points of bad debt as a component of that credit reserve. It's going to be elevated, I would expect. We're Probably going to be at least north of 1%. And that's what's and there's a range that's reflected in that 3% to 5%.

Speaker 1

But it will be elevated in 2022, Even above kind of the question, Max.

Speaker 12

Thanks. And then in the Earlier comments you mentioned that lease up at Mesilla is getting 15% higher rents. Is there anything in particular driving that maybe in terms of the demographics that are moving in?

Speaker 1

No, it's job growth. It's job growth in Boston. I mean, life science is absolutely on fire. It's returned Yes. To work, it's just a powerful job creating market.

Speaker 1

A lot of relocations into the

Speaker 5

market from other parts of the country.

Speaker 1

Yes.

Speaker 5

Very impressive.

Operator

Thanks.

Speaker 2

We have reached the end of today's question and answer session. I would like to turn this call back over to Ms. Leah Brady for closing remarks.

Operator

Thanks for joining us today. We look forward to seeing everybody at Citi Conference in a couple of weeks.

Speaker 2

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.

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Earnings Conference Call
Federal Realty Investment Trust Q4 2021
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