Federal Realty Investment Trust Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2022

There are 15 speakers on the call.

Operator

Greetings. Welcome to the Federal Realty Investment Trust Second Quarter 2022 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

I will now turn the conference over to your host, Leah Brady, you may begin.

Speaker 1

Good morning. Thank you for joining us today for Federal Realty's Q2 2022 earnings conference call. Joining me on the call are Don Wood, Dan Gee, Jeff Burkus, Wendy Seher and Melissa Solis. They will be available to take your questions at the conclusion of our prepared 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.

Speaker 1

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 packets that we issued this morning, our annual report filed on Form 10 ks 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 and an appropriate follow-up during the Q and A portion of our call. If you have an additional question, please re queue. And with that, I will turn the call over to Don Wood to begin our discussion of our Q2 results.

Speaker 1

Don?

Speaker 2

Thanks, Leah, and good morning, everyone. On an all time record quarter for us in a number of important respects, none more important than bottom line earnings. At $1.65 per share of FFO, the 2022 Q2 handily beat our previous record of $1.60 posted 3 years ago in the Q2 Lots of things going very well here at Federal. We did more deals both on a comparable basis and overall in those 90 days than we've ever done in our company's 60 year history. We continue to lease up our development pipeline and increase our occupancy percentage.

Speaker 2

We ended the quarter at 94.1 percent leased. We've added multiple new strategic properties to our portfolio that have clear paths to future growth. Our balance sheet remains strong with $177,000,000 Cash on hand and 0 drawn on our $1,000,000,000 line of credit at quarter end. As we've been saying all along, The execution of our multifaceted business plan, which in these uncertain times does not rely on a big bet on any one particular income stream, Continues to set us up extremely well for the future. The quality of our assets combined with our sector leading demographics and high barrier markets tend to outperform through economic cycles as has been the case every time in the last 25 years.

Speaker 2

So check this out because we did just get new demographic data in as of August 1. So within 3 miles Of all centers, there are 175,000 people on average. That's 68,000 households, 68,000 households, right. Dollars 150,000 of average household income. That equates to $10,200,000,000 of spending power within 3 miles of our shopping centers and more than half of those people have a 4 year college degree or better.

Speaker 2

Who else can say that? It's about that spending power that's critical in uncertain times in my view. And cyclicality of the economy is far different than the unprecedented restricted market shutdown due to a global pandemic. They're different. Perhaps the best way we can demonstrate our confidence in the portfolio is by standing behind and in fact raising our dividend shareholders just as we have each and every year since 1967.

Speaker 2

1967, that's 55 years, A totally unprecedented track record among REITs and among most companies in any industry, one that speaks to the commitment to our owners and to the quality of the income stream. At an annualized rate of $4.32 a share, that's a 4.1% dividend yield at the current share price, Pretty darn strong for a company of this quality. Okay. Let's start with leasing during the quarter. Over the last decade, average second quarter production for comparable properties at Federal meant doing a little less than 100 deals for just over 400,000 square feet.

Speaker 2

In the 2022 Q2, we did 132 deals for 562,000 square feet, nearly 40% more than the average. And we've never come close to doing 132 deals in any quarter. But the fact that demand has remained this heated with a deal pipeline that looks to stay strong speaks volumes about our properties and the markets that they're in and naturally about future earnings growth. It's one of the reasons Dan is again raising annual earnings guidance $0.23 at the midpoint. So one of the more underappreciated phenomena of the strong demand is that we're able to be more proactive in terms of leasing space That's not yet vacant.

Speaker 2

While that leasing doesn't immediately show in the occupancy stats, it will mean less downtime in the future and shopping centers that are merchandised with more relevant tenants sooner than they would otherwise be. The portfolio was 94.1% leased 92% occupied at quarter's end with continued improvements expected by year end, particularly on the small shop side. At 89.3 percent leased, small shop space is a remarkable 580 basis points higher than the COVID low point. Our stepped up post COVID reinvestment effort is another critical component to future growth. It's no news to anyone on this call That's a traditional generic and homogeneous shopping center business is cyclical in nature and not a high growth business.

Speaker 2

So you have to stand out to outperform over cycles. You do that by picking the right markets and positioning in merchandising in those markets, but you also have to reinvest to continually find the edge. Reinvesting is more important now than ever before. It's why we have nearly 2 dozen active and meaningful development projects in planning or underway totaling over $100,000,000 this year and next, which will likely yield double digit unlevered deals over the ensuing years through higher customer traffic and rents in line with our historically observed results following property improvement projects. That reinvestment is one of the primary reasons we can continue to push rents.

Speaker 2

Leasing has been exceptionally strong at our newly development assets also. From the completion of CocoWalk To the office projects at Pike and Rose, to the residential over retail at Darianne, to the residential and office Phase 3 at Assembly Row, Each of these additions have exceeded our post COVID expectations in terms of lease up pace. In the case of the residential product at Now the one exception is Santana West and there is no question that the cooling of the technology sector During the last 90 days, both in terms of their stock prices and getting employees back into the office, has been a wet blanket on what had been strong leasing momentum. It has therefore been difficult to bring fully negotiated deals over the transom. Disappointing, yes.

Speaker 2

But when put in proper perspective, Having a brand new state of the art office building adjacent to one of the most successful amenity rich destinations in the tech capital of the country isn't so bad, Particularly since it only represents about 2% of federal's asset value and will be an important driver of future growth when it hits. It's a matter of time. Stay tuned. We've also remained active on the acquisition front. Following the end of the quarter, we completed the all cash acquisitions of 2 very special properties In 2 of the markets where we're focused on expansion, the shops at Pembroke Gardens, a 392,000 square foot dominant retail center On 41 Acres at the corner of I-seventy 5 and Pines Boulevard in Pembroke Pines, Florida, as an important asset to our portfolio, 8 miles south and west of our equally dominant tower shop center in Davie and 20 miles north of our newly completed and highly acclaimed CocoWalk mixed use destination In Coconut Grove, our ability to remerchandise and push rents potentially add density down the road and fortify federal as a must talk to player In South Florida, we're all considered in this important acquisition.

Speaker 2

The $180,000,000 purchase will generate better than 5% return in year 1 with a very strong going forward NOI growth that will produce an IRR well in excess of our cost of capital. Across the country in Scottsdale, Arizona, we were able to acquire the 214,000 square foot office building directly adjacent To our Hilton Village property, giving us over a third of a mile of contiguous frontage on Scottsdale Road Immediately across from the main entrance to Paradise Valley, the region's most affluent, in our view, underserved community. The integration and rebranding of these properties as one, along with proximity of work, home and retail and restaurant amenities In this post COVID environment is expected to allow us to create a seamless modern environment that will support greater rents and higher long term occupancy. This $54,000,000 acquisition will yield 6% in year 1 and like Pembroke is expected to provide very strong NOI growth that will produce an IRR well in excess of our cost of capital. These two acquisitions along with the previously announced 410,000 Square Foot Kingstown Shopping Center in Northern Virginia represent a combined investment $435,000,000 at a 5.25 percent yield in year 1 And more importantly, very strong IRRs on 3 dominant retail destinations in 3 particularly fast growing markets From a good jobs perspective.

Speaker 2

Okay. That's about it from my prepared remarks this morning, though I want to leave you with one final thought before turning it over to Dan. Investing decisions grow tougher as economic uncertainty increases and real estate investing is clearly a cyclical business. It's why the underlying business plan of this company has always contemplated cycles in its investment strategy. These are the times when well leased, Well located dominant retail and mixed use centers in supply constrained affluent densely populated markets and submarkets shine.

Speaker 2

Whatever it is to come economically over the next couple of years, Federal is well positioned to outperform. Dan? Thank you, Don, and good morning, everyone. As Don outlined, the record $1.65 per share of reported FFO This quarter blew away our expectations and consensus by over 10%. As in the Q1, our outperformance It was across all aspects of our business.

Speaker 2

Continued gains in small shop occupancy, stronger performance in our residential portfolio, Surging parking revenues and gains in percentage rent underscoring continued momentum in consumer traffic and tenant sales, Higher collections than forecast both in the current and prior period and larger term fees offset by higher G and A and interest expense. While some of these items can be considered timing related or non recurring, the lion's share of this outperformance is driven by continued strength in our in place portfolio, which drove another increase in our guidance. Let me spend a little time here highlighting some metrics, which demonstrate this strength, led by our dominant mixed use properties. Near record parking revenues, a strong indicator of consumer traffic at our mixed use assets and up 25% sequentially over the Q1. Percentage rent, an indicator of tenant sales strength, was up over 90% on a comparable basis and up 18% sequentially on a rolling 12 month average.

Speaker 2

With respect to specific tenant sales metrics, At assembly row, reported tenant sales were up 13% over 2019 pre COVID levels and are up 10% sequentially on a rolling 12 month basis versus Q1. At Santana Row, tenant sales were up 13% over 2019 with traffic up despite the impact from work from home. At Bethesda Row tenant sales were up 9% over 2019 and at Pike and Rose reported sales are up over 5% versus 2019 levels with consumer traffic up almost 10%. These data Points all serve as a testament to the relative strength of the consumer in our high income, highly educated, densely populated high barrier markets. Again, markets that have demonstrated resilience over cycles and the ability to outperform during cyclical downturns, Very different than a pandemic related market specific government shutdown.

Speaker 2

As a result, Our comparable portfolio growth metric was again sector leading at 8.2% for the quarter. Comparable growth Excluding prior period rent and term fees was 9.5%. As we highlighted last quarter, a cash basis same store metric Would have been 9% and 10.5% excluding prior period rent and term fees. Term fees this quarter were actually up, up to $5,600,000 versus $3,400,000 in 2021. Prior period rent was down to $3,000,000 versus $6,000,000 in the Q2 of 2021 as adjusted This reflects only COVID-nineteen related prior period rent payments.

Speaker 2

Year over year, occupancy results were also strong As our overall occupied metric grew 240 basis points year over year from 89.6 percent to 92% and our lease percentage increased 140 basis points from 92.7 to 94.1. We should continue to see upside in those metrics as we realistically target 94% to 95% for occupied and 95% to 96% for leased. As we have now had 8 consecutive quarters of above average leasing activity, We are continuing to see strength and we're continuing to see strength in our leasing pipeline as it's never been this full. The volume of deals in process are up 15% versus pre COVID 2019 levels and are as strong as they were last year at this time when we had a record year of leasing volume. While deals in the pipeline still need to be brought to completion, demand is broad based across tenant categories as best in class retailers all look to expand and upgrade their real estate footprints within Federal's best in class portfolio.

Speaker 2

And again, we had strong solid quarter achieving sector leading rent bumps, and we continue to drive average annual contractual increases in the 2% to 2.5% range across all our leases, Anchor and Small Shop. Let's review the math once again. For every 1 percentage point more in annual rent bumps, The ending rents in year 10 will be 9 plus percent higher over a 10 year lease, plus you are collecting more rent along the way. Contractual rent increases do matter. With respect to our residential portfolio, It now stands at 98.5 percent leased on a comparable lease basis and 97% leased overall.

Speaker 2

When you include the new 500 Unit Marcella Building at Assembly Row, which we expect to stabilize this quarter. We hadn't expected Marcella to stabilize until late Q4 and it is now higher rents and lower concessions than we had underwritten. And despite this competition from the new 500 units next door, Our existing Montage residential tower at Assembly is almost 100% leased and saw a 23% rental increases during the 2nd quarter. Now on to the balance sheet and an update on our liquidity. At June's quarter end, We had $1,200,000,000 of total liquidity with an undrawn $1,000,000,000 revolver and $177,000,000 of cash.

Speaker 2

Additionally, we have over $400,000,000 of non core dispositions under consideration with pricing expectations at a blended cap rate in the sub 5% cap range. We closed out our remaining forward equity this quarter, Issuing $177,000,000 of common stock at a net price of $120 per share further bolstering our liquidity. With respect to our leverage metrics at quarter end, our net debt to EBITDA ratio is now down to 5.8 times annualized for the quarter as we continue to target a ratio in the low to mid 5 times range over time. Our fixed charge coverage ratio increased to 4.3 times, comfortably above our targeted level, and 93% of our outstanding debt remains fixed rate. Our significantly de risked $700,000,000 of in process pipeline of active redevelopments Has $340,000,000 remaining to spend, much of that being tenant improvement dollars tied to tenant leases.

Speaker 2

Now on to guidance. Given the comprehensive outperformance during the quarter across all aspects of our business, We are increasing our guidance by roughly 4%, that's $0.23 in the midpoint to a tightened range of $6.10 to 6.25 $0.01 to $0.02 of the $0.23 increase is from our recent purchase of Scottsdale Forum in Phoenix and Pembroke Gardens in South Florida and their roughly half year contribution to 2022. The balance is from another quarter's outperformance and a better than forecast outlook for the rest of the year in both the comparable and non comparable pools. This guidance assumes ranges of $1.48 to 1 $0.55 of FFO per share for both the 3rd and 4th quarters, which reflects an increase over our previous guidance for those quarters. We are also bumping our forecast for comparable POI growth to 5.5% to 7% from the prior range of 3.5% to 5%, a 200 basis point increase for the metric.

Speaker 2

Excluding prior period rents and term fees, our comparable POI forecast increases to 7.5 to 9% from the prior range of 6.5% to 8%. While the cadence may be a little choppy, we continue to expect our occupied Rate declined from 92% where it is today up into the 92.5% to 93% range by year end. As we continue to get tenants open, on time and on budget overall, a testament to the capability of our legal leasing, Tenant coordination and property operating teams. Now I don't want to just highlight those specific groups at Federal. Let me take a little bit of time To thank and to congratulate all 320 employees at Federal for the tremendous effort over the last 2 plus years working intelligently, creatively and tirelessly through an unprecedented the unprecedented challenges of COVID, but also for driving to achieve a record quarter in funds from operations for the company.

Speaker 2

For many of us here at Federal, It really means something to be part of a company that stands alone in the REIT sector with a 60 year public history coupled with a 55 year track record of increasing dividends. In celebration of both of those milestones, members of the federal team We're ringing the closing bell at the New York Stock Exchange this afternoon. And lastly, during the quarter, we released our annual corporate responsibility report. It's available on our website. I encourage all to give it a read to appreciate the long standing and established commitment to sustainability, our communities, our corporate culture and our strong governance practices that we have at Federal.

Speaker 2

And with that operator, please open up the line for questions.

Operator

At this time, we will be conducting a question and answer Our first question is from Alexander Goldberg with Piper Sandler. Please proceed with your question.

Speaker 3

Hey, good morning Goldfarb. First, enjoy the bell ringing today. And John, I have to say your decision During the pandemic, cannot cut the dividend, certainly paid off. So that's the decision on your part, but I guess, well done. So two questions here.

Speaker 3

First, as you guys are looking certainly you've expanded into Arizona, into Florida. What's going on with the tenants as far as are there regional tenants which you would have normally seen in like your home base is in New York For Bethesda, Mid Atlantic or San Francisco, etcetera, that really aren't down in Florida or Phoenix and you see an opportunity to bring tenants down Where people who used to live in your home markets have moved down? Or is your view that because the country has become so sort of homogeneous That there's less opportunity and as people move to new markets, it's not as though they're really missing that many of their home stores or home restaurants or whatever it is.

Speaker 2

Listen, Alex, first of all, I got to really thank you for that comment on the dividend, because we in this company believe what you just said In terms of its importance, more than a lot of people, for whatever reason. So yes, we're real proud to have Be able to raise the dividend every year since 1967, that includes COVID. With respect to your question Demand and regionalization of tenancies, there are absolutely tenants that are Looking for new markets to expand into and particularly the well capitalized companies to be able to do so. What is always important to us and I know you've heard this before, but it's so true is the merchandising of low centers. So when you look at CocoWalk and you look at the mix of regional tenants, but also really important local tenants that make the place special, The secret sauce is the mix that happens.

Speaker 2

And yes, we will have success effectively getting Any particular tenant with the wherewithal to be able to expand to the extent we can show them a profitable opportunity in a new market. And I think we can do that. I think we do that well. Jeff? Yes.

Speaker 2

Alex, it's a bit of a

Speaker 4

two way street, particularly between Arizona and California. And what we found during the last year or so since we've been in Arizona that there are relationships on leasing People in California can bring to the leasing team that's running our Arizona properties. And in addition, particularly in the food space, whether it's quick serve or sit down Or some other type of specialty food, there are some really good operators in the Phoenix Scottsdale market that we're now exposing to our So it is a two way street, some real advantages there to the expansion.

Speaker 3

Okay. And the second question is, Don, you mentioned Santana West looks to be sort of on pause as Far as the leasing and what's going on with tech, elsewhere in your portfolio where you have office, are you seeing a similar slowdown or On acceleration as more people look to work remotely or work in suburban settings. Just curious if Santana West is a read through to the entire portfolio or stands in contrast to the portfolio?

Speaker 2

Yes, it's a great question. And The two places in particular where we continue to lease up office product both at Pike and Rose and at Assembly, Nothing has changed. They are there is still that strong demand and we're running out of blocks. At the Choice building, which is the one that Choice has taken about 40% of the building for, we've got really good activity Moving along in the rest of that building and that feels great. And just one other comment on Santana Westman.

Speaker 2

Short Silicon Valley gets their own pulse. There's no question that a pause caused by getting people back to work and what's that going to be and what our space needs are going to be at the same time. Although stocks have been hammered, I mean, you as a CEO, any of us as a CEO would sit back and take pause about that. But when you think about that particular product in that particular place and what is likely to happen, you have to be positive about that. Jeff, you got anything really to say further on that?

Speaker 4

Yes. Let me add a little bit to that, Alex. And let me also maybe clean up a bit where Started too. You mentioned San Francisco is one of the markets we're in. We're not in San Francisco.

Speaker 4

We're in Silicon Valley And there's a big difference between the 2. And a lot of people read headlines and watch the news and hear about things that are happening in San Francisco Attributed to the whole Bay Area, and it's just not accurate, if you will. San Francisco is still struggling mightily through some social And are making a return to office and office leasing very difficult and that's not really the case in Silicon Valley. And we are not taking a pause on leasing, if you will. We're out there working as hard as we can to lease a building as quickly as we can.

Speaker 4

Year to date, the Silicon Valley Class A office market has absorbed 2,800,000 square feet of space. Vacancy is 12%, if you include sublease space, I think it goes up to 14%, which historically for Valley is not great, but nationally, those aren't bad numbers. And last quarter, there was 1,800,000 square feet of Positive net absorption and 4 big leases, between 150,000 and 380,000 square feet that accounted 1,100,000 square feet of that positive net absorption. So I think what's happening now is it's going to be choppy For a few quarters and I think we're probably going to see more sublease space come to market. But companies are really struggling with a way to get their employees back And figure out what the appropriate locations and space needs are for those employees.

Speaker 4

And I think we're going to see some downsizing. And perversely, that might work to our advantage in Santana Row. You remember NetApp took 700 Santana Row because they downsized out of multiple buildings that We're not state of the art and not fully amenitized. And there's other tenants in the market right now that are thinking about doing the same thing. And when you look at 1 Santana West, it is the only fully amenitized Class A building of size in Silicon Valley.

Speaker 4

So, well, I think it's like Don said, disappointing that we're not leased yet. We're working hard on it and we're confident about it. And when you step back and look at the rest of our portfolio, excluding when Santana was in 915 Meeting Street, which is still under construction, Our Class A office space and our other office space in our mixed use properties is 95% plus leased. There is a very, very strong positive reaction, whether you're a small tenant or a large tenant To office in properties that offer a full range of amenities close to where you live, which is why we bought Forum down in Scottsdale. We can talk about that further if you want, but I just wanted to make sure you got the full kind of detail on the What's going on in the portfolio and our thinking going forward on One Santana list.

Operator

Thank you. Our next question is from Craig Schmidt with GFA. Please proceed with your question.

Speaker 5

Okay. Thank you. And good morning, Phil. I'm just wondering if the second quarter results Are really highlighting the difference in dealing with the COVID market pressure Versus dealing with the challenging interest rate and inflationary market pressure. The former, you Very little control, but the latter would seem like whether it's your first ring demographics or the qualities of your center, You're able to put up more of a challenge to it.

Speaker 2

Thanks, Craig, for the question. And look, man, Consumers have to be able to consume. And at the end of the day, that means you got to have money to spend. That means there's got to be great products out there. What I think is really and obviously, I think this about federal is that we don't go all in On any one particular format, we don't go all in on any one particular market.

Speaker 2

And so the notion of these sector leading demos, I mean, I've said in the prepared remarks, Think about this, dollars 10,200,000,000 worth of spending power within 3 miles of this portfolio's assets. That's a crazy big number. And so Does that help you work through good times and bad times and higher interest rates and inflationary pressures? Of course, it does. It's not a leap and I think that's got more to do with this performance and the performance of that whatever that might be over the next Few quarters and a few years than anything else.

Speaker 5

And what are you hearing from your tenants that You're taking space now. The challenge being there's a possible recession soft or otherwise. We still haven't solved inflation and yet they're taking space. So what are they telling you that they're seeing that gives them the confidence?

Speaker 6

Thanks,

Speaker 7

Craig. Basically, during COVID and post COVID, the retailers confirmed that their greatest customer acquisition tool is The right locations. And so they are focused on that to set the stage for growth continuing, especially the more relevant Tenants and savvy tenants, and there's a sense of urgency in getting the right real estate. And we're seeing that in our performance. We're seeing that in our pipeline.

Speaker 7

And we're seeing it On our varied shopping center opportunities that we have with all it's not just value based, it's not just service based, It's all across the sector, full pace apparel and value as well. So we are Seeing that sense of urgency on setting their fleet in the right direction for the growth and being able to go through what is normal cycles And being able to mitigate that downside.

Operator

Thank you. Our next question is from Craig Mailman with Citi. Please proceed with your question.

Speaker 6

Hey, good morning. I just wanted to go back to the leasing during the quarter and the pipeline. Looking at the stats, You guys had a healthy amount of renewals there. And I'm just kind of curious, from a tenant perspective, How much of that is being pulled forward as tenants want to lock in rates today in anticipation of maybe higher rents In the future and how you're balancing that and potential tenant mix and credit versus kind of downtime of re tenanting.

Speaker 7

Yes. I think what you're I don't know that I focus 100% from quarter to quarter on Renewal rates and whether they're slightly up or slightly down because they all have a way of working themselves out throughout the year. But what I will say that we are seeing a tremendous amount of retailers within our portfolio that want to have those Discussion is a little bit earlier because they want to invest in their store. They want to make sure that they have the term because they see the value of the real estate long term. They want to invest and that's we're seeing as a very positive momentum and we're also investing in a big way in our shopping centers.

Speaker 7

So the partnership together has been very strong.

Speaker 4

It is a robust discussion. There's obviously tension, particularly in an inflationary environment We're pushing hard to get the kind of increases during the term that Dan talked about in his prepared remarks and Not give an excessive amount of term when we're in an environment like this. So it's a healthy conversation. It's not unusual. Every lease negotiation is tense.

Speaker 4

And Wendy And her team and the folks on the West Coast do a really good job of balancing everything they need to balance to make sure we have the right people in our properties that are investing in their operations and We're getting the best economic deal possible.

Speaker 2

I guess, Craig, the only thing I would add to that, and I do think this is such an important component of The negotiations are the bumps during the terminal lease. And I mean, I know Dan goes to the math of what it means, but when you think about inflationary Time and being able to push 3 and sometimes 4 and sometimes better, annual bumps into the lease that Getting that along the way is a whole lot better than sitting there and looking at a flat lease and maybe Getting 7% after 5 years or something like that. So I don't know the best way that you can understand that or compare that. I don't think we found a good way That can be compared, but I know it's a critical focus to the company. And because the real estate is really good, we have probably more success That way then you would otherwise think.

Speaker 6

That's helpful. And then just Guidance question, the lease term fees in the quarter look like they added a couple of pennies on a sequential basis. Kind of what's the impact of that in the full year guidance raise? I mean, what are you expecting back half of the year?

Speaker 2

The back half of the year, I think, is probably back Looking back to last year in line with our last year's performance in the second half of the year, We're ahead. We're probably $0.02 to $0.03 ahead in term fees, and that's reflected in the guidance.

Speaker 6

Great. Thank you.

Operator

Our next question is from Sameer Konal with Evercore ISI, please proceed with your question.

Speaker 8

Hey, Dan. Can you help us walk through sort of 23 growth at this time. On the one side, you've done a great job on the leasing front, right? The lease versus occupied, that pipeline is Pretty solid here. But on the other hand, you have potential headwinds from closures, Santana West may it seems like maybe getting pushed out A little bit here on the timing perspective.

Speaker 8

I guess, how are you thinking about growth today versus a few months ago?

Speaker 2

Look, I think that We've been really pleasantly surprised with how strong the performance has been. This is the first time I've been here since my 6 years at federal where we increased guidance to this magnitude in consecutive quarters. We've increased to $0.10 1 quarter and then $0.23 the next. The $0.05 to $0.10 Guideposts that we provided previously were off of previously lower guidance. I feel comfortable with that guidance with kind of where 2023 is off of that.

Speaker 2

I think we're going to take a step back with regards to 2023 and provide formal guidance at the normal timing. We still expect to see strong Internal growth in our portfolio, but we'll provide more detailed formal guidance at the appropriate time in line with the industry in February.

Speaker 8

Okay. Thanks for that. And I guess, Don, Just on the acquisition of Pembroke Gardens and with the 41 acres that comes with that property, just curious, Is the near term goal more of a remerchandising play at this point? Just trying to figure out the near term and maybe kind of what the long term focus is on that, just initial views.

Speaker 2

Yes. There is this piece of land is what made us so darn interested in this thing. If you You can kind of see where Pines Boulevard and I-seventy five come together. There's no good product out there. There is there are amazing traffic counts and so we love what we've got in place, albeit you will see Remurchandising as a the primary way we create value over the next few years.

Speaker 2

Having said that, and you know as well as I do, big pieces of land, things happen that you can't underwrite initially. And I know if You go and spend some time at the property and the surrounds and you look at housing stock around there, you understand the traffic patterns. I think you'd be salivating for the possibilities over the mid and longer term even beyond the remerchandising of the asset. That's what it would be for now, Sameer.

Operator

Thank you. Our next question is from Juan Sanabria with BMO Capital Markets, please proceed with your question.

Speaker 6

Hi. Thanks for the time. Just wanted to touch go back and apologies if I missed this. Is there Any update in terms of the rent bumps you are getting in the strong leasing environment with regards to what you have kind of on the books and have historically achieved?

Speaker 2

I don't know if I'm allowed to say this or not. So I'm looking at Dan and Melissa because we do Try to take an accounting, if you will, of how many of our leases have 3% bumps, 4% bumps, flat, Whatever is happening internally in the leases and I can tell you that over the past 2 years What's happened coming out of COVID, not the beginning part of COVID, but coming out of COVID, that the percentage of our deals That are that now have stronger than 3% bumps is up about 20% from where it was. So the notion of being able to do more of those deals, which is bringing up the overall Portfolio to over 2% annual bumps as Dan said before. So the trend is in the right direction and it's been a major focus.

Speaker 6

Great. Thanks. And then just on the Phoenix office acquisition, Just hoping you could maybe spend a little bit more time on outlining the plan there and how that's integral to retail and if that's Going to be redeveloped as well potentially down the track.

Speaker 2

Yes, Juan, let me give you a couple of things. I'm sure Jeff will have more on this, but I personally couldn't be more excited about this. First of all, Hill and Village, which we bought last year, I guess, handle more than that now at this point, We just see very strong re leasing potential to make it much more of a specialty shopping center With a higher end tenant because of where it is, our first 12 months of leasing or so there has kind of validated That's what's happening. So with respect to that first acquisition, we are more than pleased with the basic thesis for buying it. When this office building adjacent to it, which is a very attractive office building, but frankly, Leased in a very pedestrian way, we think we can do the same thing on the office side to make it way cooler The right type of tenant base that would that's the same tenant base that we're aiming for in the adjacent retail property.

Speaker 2

Putting those two things together, Especially in a post COVID environment where individuals and companies in the area are looking to be closer At home, with an amenitized environment, we feel like there's great upside all while Yielding over a 6% yield while we do that. So I love the idea of being able to not only to take our vision for the retail and effectively expand and integrate what it is with the office building, which is really not a building, directly adjacent to it. That's the thesis for what we're trying to do here.

Speaker 4

Yes. Ron, it's Jeff. And I'd just add a couple of things. One, owning both properties together is Synergistic in both directions. So we can certainly offer the office tenant The amenities of Hilton Village as we make the project look and feel like one project and market them together and Upgrade the merchandising and food offering at Hilton Village like Don mentioned.

Speaker 4

But owning the office building is also good for Hilton Village because we Just picked up a ton of parking, that we can use nights in the weekends to support more intensive, uses at Hilton Village. So that's great. And then second, just kind of on a standalone basis, when you think about Forum, we bought Forum for roughly 60%, 65% of replacement cost, 85% leased, at rents that are probably 10% to 15 below market, with a weighted average lease term of less than 5 years. So by upgrading the building And applying creative intensive leasing effort to it, we think we could really bring those numbers up and Make the return much, much better than it is today. So on its own, we think we made a real great real estate deal.

Speaker 4

There's A couple of buildings in that market that traded recently where a local developer had done something similar, Yes, kind of Class B, B- buildings and much, much lesser location than Scottsdale Road across the street from Paradise Valley and those buildings sold basically replacement cost of sub-five caps recently. So we think the institutional investment market appreciates real estate like this. And we think we made a very good buy and really happy And like I said when I was answering Alex's question, we've

Speaker 2

proved multiple

Speaker 4

times now that amenitizing office space, making a great space and having it in close proximity to decision Maker housing is a real win for us. So just real happy with the deal.

Operator

Our next question is from Haendel St. Juste with Mizuho. Please proceed with your question.

Speaker 9

Hi there. Good morning. Don, I was hoping you could talk a little bit about how being an all cash Acquirer has given you maybe an edge in the acquisition market here in terms of maybe time to close. And is that something you expect to be able to continue To use your advantage near term, and I noticed that there aren't any acquisitions contemplated in the second half guide here at Keyurics. What if anything is interesting or perhaps under discussion out there?

Speaker 9

Thanks.

Speaker 2

Yes. Hey, Haendel, it's Jeff again.

Speaker 4

Yes, we are obviously in a market where there's less certainty than there used to be. So Having the ability to close all cash and not have to tap the secured mortgage markets is definitely an advantage as a buyer. That combined with really a 2 decade track record here of being very transparent with an An intermediary and an owner about what we'll do and what we won't do and how things are going along the way and Ultimately, doing what we say we will do, gets us deals, and gets us deals at better prices than other people have to pay. So, we kind of like the type of market we're in right now. We think there's going to be more opportunities, but I'll let Dan answer Questions about our go forward guidance on that?

Speaker 2

Before you do, I want to add one thing to that, Haendel, and I really do think this is important. We've talked about this in the past. When you look when you have multiple ways to grow and you don't want to rely on any one thing, you don't turn those switches on and off. And when it comes to acquisitions, this is one of those examples where, yes, you can turn it down when there's uncertainty of the pricing or Turning up when effectively you think you can get a good deal, but it is that ability to be in the markets regularly, Not just on the publicly marketed stuff, in fact, hardly in the publicly marketed stuff, but the ability to do what you said you were going to do. When you turn that off for a couple of years and turn it back on, it's not much different than the dividend in our view.

Speaker 2

Then you are looked at differently Then when a seller knows you're going to be there and do what you say you're going to do. So I think that is as much of an advantage As being an all cash buyer is in fact, I think it's more important. Sorry, Danny, go ahead. No. And with respect to guidance, we do have a pipeline and we do to be active on the acquisition front, but be disciplined.

Speaker 2

But we don't provide guidance for speculative acquisitions or dispositions. When they happen, we update guidance to reflect that. So yes, there's no forward looking acquisition or disposition Impact on the guidance we have.

Speaker 9

Got it, got it. Thanks. And maybe one more just on the snow rents. You've been able to get them, I guess, the stores open on time, get the snow rents in. I guess I'm curious if you're seeing any signs of delays from labor shortage, supply concerns and on restaurants in particular, some concerns in certain quarters about Getting some of the equipment in place, which could be impacting the timing of certain openings.

Speaker 9

Thanks.

Speaker 2

Haendel, it's a great question and it's been A critical focus and frankly a worry of mine for the past year and a half or a little bit more. I don't exactly know Beyond more, beyond our approach to it, why it has not been the problem that I worry that it was going to be, but it has not been. We found alternate solutions in a number of cases. It's Been job number 1 for the operating team, the tenant coordination team, the ability to effectively Do things different than the least contemplated in order to get a restaurant open or a store open have been critically important tools. And that again is the relationship part of our business.

Speaker 2

It's a critical part to it. And so when I look at Have we been hitting our opening dates? The answer to that is yes, we have. And it was the single biggest thing I was worried about Coming into 2022. So it's being handled, I think, pretty darn well, even though the specter of Delays, kitchen equipment and other things are certainly still out there.

Speaker 2

Yes. I think it's evident in our metrics. The fact that with record leasing volume, we're tightening our Spread between leased and occupied. So we're getting tenants open. And I think that's again in my Prepared remarks, I mentioned and give a shout out to the strength of our legal leasing, tenant coordination and property operating teams.

Speaker 2

They've been really

Operator

Our next question is from Michael Goldsmith with UBS. Please proceed with

Speaker 6

your question. Good morning. Thanks a lot for taking my questions. You called out the strength of parking revenues and percentage rate About percentage rent, has that continued into August? And how sustainable is the run rate achieved in the second quarter?

Speaker 2

Look, we would expect kind of given traffic in July was strong as well, Where we have parking revenues coming in, we hope that it continues to be sustainable. I mean, I think the traffic volumes at Our big mixed use properties where we can charge parking revenues, we see that being a consistent source at least through the balance of the year. Michael, I think the only thing I would add to that is, so where it comes from, As Dan just said, are only a few of our properties and they're the big ones. And if you think about those properties, particularly Pike and Rose and Assembly Row. Those properties have matured into critical places in their communities.

Speaker 2

So it's not just about coming out of COVID. It's about these are now community centers, if you will. And so I would expect the traffic comparisons period over period to continue to increase. As we've seen in July too, obviously, we're in the beginning of August. So we've seen that same thing at Pike and Rose and Assembly In July relative to the July of 2019.

Speaker 2

So I very much positive or hopeful that it will continue.

Speaker 6

That's helpful. And my follow-up is just given the strength of all these factors that you've noted, how should we pair that with The implied same store property NOI growth guidance for low single digits in the back half?

Speaker 2

Well, I think the comparison or kind of the implied slowdown in the second half of the year is really Difficult comps in the second half of the year, plus the weight of prior period rent and kind of Pretty modest forecast for term fees in the second half of the year. Hopefully, we can outperform that, but I think that those are the big headwinds, Particularly prior period, Brent, we've got some pretty tough comps in the Q3 and even Q4 of last year.

Operator

Our next question is from Derek Johnston with Deutsche Bank. Please proceed with your question.

Speaker 10

Hi, everyone. Thank you. I'll try to get creative. Most of what I wrote down was asked. So

Speaker 2

So your

Speaker 10

2022 exe issuance guidance, I think it moved back to $350,000,000 at the midpoint From $450,000,000 last quarter, just wondering if anything drove that? I mean, is it the share price related? Or should we read through that maybe 2022 acquisitions are pretty baked in at this point?

Speaker 2

I think with regards to we are making progress and we've kind of pivoted and I think elevated our discussions and our activity on the disposition front. And given the visibility we have kind of as the year goes along, I think that Dispositions can serve as a surrogate for kind of raising equity. And given that visibility, we are tempering Kind of the expectation of raising equity, plus given where our equity has been traded. So, we've raised the lion's share of what we expected, at a very strong blended price. We Basically contracted for that all last year in 2021 when our stock price was obviously at a different time.

Speaker 2

Really pleased that we did and I think it positions us. We look to be very balanced in how we approach financing the business and feel very, very fortunate that we're as well Physicians continue through with the equity that we raised over there throughout COVID.

Speaker 10

Okay, great. Thanks, Dan. So some investor pushback I hear on federal, It has always been the high ABR, right? But despite the economic backdrop, right? And really even more importantly elevated vacancies across your peer Across your peer set, you've continued to grow rents.

Speaker 10

So how do you kind of respond to that? What is it really attributable

Speaker 2

Tenants need to make money. Rent is one component of their expense structure to the extent they're doing the volumes and Trading value, they'll pay the rent. And with us, it's not just about Beaten on that tenant for rent, we are partners. And so the notion of making that shopping center or mixed use property The best place, the go to place is just a critical part to what we do. I mean, If you think about it, Derek, the 580 basis points increase since the bottom of COVID In terms of small shop occupancy, up almost 600 basis points, That is only because there is demand from people who have a chance to get into a federal center who could not get into it before because of the high occupancy.

Speaker 2

And are willing to pay that because they're going to make money when they pay that. It's really not much more than that. And I know there's always focus on our ABR. I've been here 25 years. It was focused on our ABR 25 years ago.

Speaker 2

They're better assets, man. And those tenants can make money at those levels.

Operator

Our next question is from Ki Bin Kim with Churrus Securities. Please proceed with your question.

Speaker 2

Thanks, and good morning. A quick one first. What has your retention ratio been historically? And where do you see that for the remainder of the year. Yes.

Speaker 2

I mean, historically, it's kind of been in and around 65%, 70%. But we have seen better this year, better retention rates, north of 80%. So we're pleased with that. Tenants have been successful at our centers. They want to stay.

Speaker 2

They want to renew. They want to exercise options and they want to continue to make money. And going back to that previous question about profitability, I mean, that makes sense, right? The Santo sales, you have to be profitable. Any high level metrics you can share in terms of how much more profitable you think tenants can be at your centers versus some other centers on a deep just low rent basis.

Speaker 2

Yes, just trying to get a sense of what how much No mode of safety there is for tenants to continue to pay these higher rents. Well, Ki Bin, I'm just looking at Wendy's here because I don't have a metric that I can give you. What do you think, Lynn?

Speaker 7

It's the consumer spending power. It's the demographics that Don mentioned In his opening remarks, which is the quality of the real estate in the demographic markets with high Average household incomes that have the ability to spend. So that's a critical component when they're looking at these markets. The other piece of it is The history, if you can go into a center, as Don said, you haven't been able to get into a Federal Realty Center as always. And they have a history of And there's value in that and that's recognized.

Speaker 7

So that's why we've been able to keep up this leasing demand is partly because there's That need to get they might be doing less locations, but they need those locations to perform and they're willing to make A higher spend in order to make sure that there's confidence that that store will be profitable.

Operator

Our next question is from Linda Tsai with Jefferies. Please proceed with your question.

Speaker 11

Hi. Thanks for taking my question. Just going back to the quarter's leasing strength, I know you discussed the philosophical event of tenants being able to make money at your centers, but Where are you seeing the outsized demand? Is it a certain tenant type or regionally based?

Speaker 2

No, Linda, it's broad. It's broad. I mean, we see it at the mixed use centers in particular because they were hurt the most During COVID, but it's everywhere throughout the portfolio. I I don't have a better market or a worse market for you in terms of the ones we're operating in. Just please always remember, this is still a very local business, And it comes down to the specific shopping center and specific tenant base in that shopping center.

Speaker 2

And I think I'd leave it at that, it's broad based.

Speaker 11

Thanks. And then in terms of BioMed Realty, getting construction financing for the first phase at Assembly Innovation Park, Does this give you more conviction towards a large lease for life science tenant assembly row? What would you be looking forward to proceed with more confidence?

Speaker 2

But please, let me just correct the premise. We could not be more confident in Assembly Row as a life science destination for many, many years decades We're just at the beginning of that. All we've done at this particular time, given the uncertainty in the venture capital market and what's happening there Is to hold back and see where things become a little more certain. Certainly, great for Biomet In terms of being able to raise that capital, I wouldn't be I'd be surprised if they couldn't, frankly, Given the Blackstone involvement too, and we will be I mean, there will be a life science building Done by Federal Realty on that site at some point, but prudence and capital allocation at this point suggests that we sit On the sidelines, let me

Operator

This is from Mike Mueller with JPMorgan. Please proceed with your question.

Speaker 12

Yes. Hi. Dan, I think you were talking about cash collections in the Quarter running at a higher level. Can you talk about what the level was in Q2? Maybe how it compared to Q3 Q1?

Speaker 12

And Is the higher level continuing into the Q3?

Speaker 2

Yes. We're essentially back to normal, back to pre COVID collection levels On the current period collections, we're effectively above 99% overall on collections In the Q2, so I think that is faster than we expected, faster than we had forecasted, And we expect that to continue. There's a normalization in that part of the business with the added benefit of continuing to collect Brent from prior periods. We're back. Okay.

Speaker 2

Got it. Okay. That was it. Thank you.

Operator

Our next question is from Chris Lucas with Capital One Securities. Please proceed with your question.

Speaker 2

Hi, good afternoon everybody. Talked a lot about the leasing strength on the retail side. Just curious as to How you described the leasing strength on the residential side and what the sort of rent growth has been in your portfolio on a year over year basis? Let me go on the 3 big properties or actually 4 big properties if you throw in Bethesda, Chris. Let me go in order.

Speaker 2

Unbelievable at Assembly Row, 20% plus? Yes. 23% Increases in rents, just what's happening at Assembly Row, not just on resi, but on office, on retail as Such a critical place in the marketplace, it's really impressive. And so you should be very Optimistic about the future, including rent growth future rent growth at Assembly. Santana Row, equally.

Speaker 2

Again, that's the place you want to live and I don't know where we are on rent growth there. Mid teens. Mid teens On there and looking extremely strong. At Pike and Rose, the demand is there, but we're still just about out of This COVID cap on the amount of rent increases that there can be. So it's artificially Been kept down, but you could see it from the occupancy and we know in terms of demand to be able to move into the space is that once that cap It is lifted, which should be hopefully later on this year.

Speaker 2

You'll see similar demand there. These are the type of properties people want to live in. And it's the same as on the office side. It's you got to make the money after you spent all that time and effort on creating the street and the place by getting it done upstairs too. Okay, great.

Speaker 2

Thank you. And then just on the Plaza El Segundo sort of consolidating your ownership position there. I guess just curious, is there anything operationally that improves? What drove

Speaker 4

Yes. Hey, Chris, it's Jeff. So we had 2 individuals that When we acquired the asset, I guess, the very last day of 2011, decided to stay in the deal And they've been in the property with us as partners since that point in time up to a few weeks ago. They both decided they wanted to exit for their own personal financial reasons. They had no day to day involvement In the running of the asset, we reported to them on a regular basis and that was about the extent of it.

Speaker 4

Yes, nothing changes at Paz El Segundo or it's how that's run or leased.

Speaker 2

And we got it at an attractive return.

Operator

Our next question is from Paulina Rojas with Green Street. Please proceed with your question.

Speaker 13

Good morning. You talked about the dynamism you're seeing in Westy. Is it possible to have a notion even a range For Huawei, same property NOI trending on a same property basis, not for your Office and Resty segment. Is it all in the fight, my team?

Speaker 1

Paulina, we're having a hard time understanding you. Can you try to send your question again?

Speaker 13

Yes. Can you hear me now?

Speaker 2

Yes. That's better.

Speaker 13

Okay. Yes. I was saying that is it possible to have a notion of how is Same property NOI trending for your office and resi segments?

Speaker 2

Same property NOI for office and resi? They're trending up. We don't have those and we don't publish those, but we can But they're certainly heading and they're modeled and forecasted to continue to trend up.

Speaker 9

And we can talk offline

Speaker 2

about that Paulina. We can get A little more granular on that, would you?

Speaker 13

Okay. Thank you. And then the other thing is, have you provided Any reference for how much of your signed but not open leases are scheduled to come online in 2023?

Speaker 2

Yes. I think what we have in our existing kind of comparable pool It's about $23,000,000 of incremental rent, which should have come online over about half over the balance of this year and half In 2023, we have another $15,000,000 of cyanide occupied in our non comparable pool, which should come online probably similarly. And Yes. So I think most the lion's share of that will be over the next 6 quarters in terms of

Operator

Our next Question is from Tayo Okusanya with Credit Suisse. Please proceed with your question.

Speaker 14

Yes. Good afternoon. First question, thank you for the update on just life sciences at 70 row.

Speaker 2

As you know, when I think about that market, I don't think that market is as advanced in terms of demand and supply as, Somerville, Massachusetts is, but it sure is on everybody's radar screen, including ours As to what it is that we can do there. So we're having conversations with a number of people. They are none of which are far enough for us to really say anything more about it. But when you think about life sciences as another use as a component At a place like Pike and Rose, I mean, it's a distinct possibility.

Speaker 9

It's going to come down to economics.

Speaker 2

And will the incremental rent enough to support the construction of that product type At like and Rose, we don't know the answer to that yet, but we're certainly in the heavily exploratory phases to find out.

Speaker 14

Got you. And then second of all, some of the mall REITs and Open Air Center guys are kind of at that point where They are renegotiating a lot of the short term percentage rent deals back to kind of more traditional leases. Are you guys kind of running up against any of that at this point? And does it kind of change the dynamics of what the retail component of your income could look like in

Speaker 7

So I would say that most of our percentage deals that we were working on During COVID have all burned off and we have established new deals moving forward. So we are Not still working on a tremendous amount of renegotiating post COVID. This is more kind of looking forward and doing new deals based on the environment that we're in.

Operator

We have reached the end of the question and answer session. I will now turn the call over to Leah Brady for closing remarks.

Speaker 1

We look forward to seeing everyone this fall. Have a great rest of the summer and thank you for joining us today.

Operator

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Federal Realty Investment Trust Q2 2022
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